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GLOBAL BUSINESS

Third Edition

Mike W. Peng, Ph.D. Jindal Chair of Global Business Strategy

Executive Director, Center for Global Business Jindal School of Management University of Texas at Dallas

Fellow, Academy of International Business

Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

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Global Business, Third Edition Mike W. Peng

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To Agnes, Grace, and James

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Preface ix

About the Author xix

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics 32

Chapter 3: Emphasizing Informal Institutions: Cultures, Ethics, and Norms 62

Chapter 4: Leveraging Resources and Capabilities 92

PengAtlas 1 118

Integrative Cases 124

Part 2 Acquiring Tools 139

Chapter 5: Trading Internationally 140

Chapter 6: Investing Abroad Directly 174

Chapter 7: Dealing With Foreign Exchange 204

Chapter 8: Capitalizing on Global and Regional Integration 232

PengAtlas 2 264

Integrative Cases 270

Part 3 Strategizing around the Globe 285

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 286

Chapter 10: Entering Foreign Markets 310

Chapter 11: Managing Global Competitive Dynamics 336

Chapter 12: Making Alliances and Acquisitions Work 364

Chapter 13: Strategizing, Structuring, and Learning around the World 394

PengAtlas 3 424

Integrative Cases 428

Part 4 Building Functional Excellence 465

Chapter 14: Competing on Marketing and Supply Chain Management 466

Chapter 15: Managing Human Resources Globally 492

Brief Contents

iv

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Brief Contents v

Chapter 16: Financing and Governing the Corporation Globally 522

Chapter 17: Managing Corporate Social Responsibility Globally 552

PengAtlas 4 578

Integrative Cases 582

Glossary 598

Name Index 607

Organization Index 617

Subject Index 621

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Preface ix

About the Author xix

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

What Is Global Business? 4

Why Study Global Business? 10

A Unified Framework 14

What Is Globalization? 18

Global Business and Globalization at a Crossroads 21

Organization of the Book 25

Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics 32

Understanding Institutions 35

What Do Institutions Do? 36

An Institution-Based View of Global Business 38

Political Systems 40

Legal Systems 43

Economic Systems 47

Debates and Extensions 48

Management Savvy 54

Chapter 3: Emphasizing Informal Institutions: Cultures, Ethics, and Norms 62

Where Do Informal Institutions Come From? 64

Culture 65

Cultural Differences 70

Ethics 78

Norms and Ethical Challenges 80

Debates and Extensions 81

Management Savvy 84

Chapter 4: Leveraging Resources and Capabilities 92

Understanding Resources and Capabilities 94

Resources, Capabilities, and the Value Chain 96

From SWOT to VRIO 100

Debates and Extensions 104

Management Savvy 109

Part 1 Integrative Cases 124

1.1 Coca-Cola in Africa 124

1.2 Whose Law Is Bigger: Arbitrating Government-Firm Disputes in the EU 126

1.3 Fighting Counterfeit Motion Pictures 128

1.4 Brazil’s Embraer: From State-Owned Enterprise to Global Leader 131

1.5 Microsoft in China 136

Part 2 Acquiring Tools 139

Chapter 5: Trading Internationally 140

Why Do Nations Trade? 143

Theories of International Trade 145

Realities of International Trade 158

Debates and Extensions 163

Management Savvy 166

Chapter 6: Investing Abroad Directly 174

Understanding the FDI Vocabulary 176

Why Do Firms Become MNEs by Engaging in FDI? 180

Realities of FDI 186

How MNEs and Host Governments Bargain 190

Debates and Extensions 192

Management Savvy 195

Chapter 7: Dealing with Foreign Exchange 204

What Determines Foreign Exchange Rates? 206

Evolution of the International Monetary System 214

Strategic Responses to Foreign Exchange Movements 218

Debates and Extensions 221

Management Savvy 225

Table of Contents

vi

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Chapter 11: Managing Global Competitive Dynamics 336

Competition, Cooperation, and Collusion 339

Institutions Governing Domestic and International Competition 343

Resources Influencing Competitive Dynamics 346

Attacks, Counterattacks, and Signaling 350

Local Firms versus Multinational Enterprises 351

Debates and Extensions 352

Management Savvy 356

Chapter 12: Making Alliances and Acquisitions Work 364

Defining Alliances and Acquisitions 367

Institutions, Resources, Alliances, and Acquisitions 368

Formation of Alliances 374

Evolution and Dissolution of Alliances 376

Performance of Alliances 378

Motives for Acquisitions 379

Performance of Acquisitions 383

Debates and Extensions 384

Management Savvy 386

Chapter 13: Strategizing, Structuring, and Learning around the World 394

Multinational Strategies and Structures 396

How Institutions and Resources Affect Multinational Strategies, Structures, and Learning 404

Worldwide Learning, Innovation, and Knowledge Management 408

Debates and Extensions 412

Management Savvy 415

Part 3 Integrative Cases 428

3.1 Wikimart: Building a Russian Version of Amazon 428

3.2 Private Military Companies 431

3.3 Amazon, Bookoff, and the Japanese Bookselling Industry 435

3.4 Huawei’s Intellectual Property War 438

3.5 Is A Diamond (Cartel) Forever? 446

3.6 The TNK-BP Joint Venture 452

Chapter 8: Capitalizing on Global and Regional Integration 232

Global Economic Integration 234

Organizing World Trade 237

Regional Economic Integration 240

Regional Economic Integration in Europe 242

Regional Economic Integration in the Americas 248

Regional Economic Integration in the Asia Pacific 250

Regional Economic Integration in Africa 252

Debates and Extensions 253

Management Savvy 256

Part 2 Integrative Cases 270

2.1 Canada and the United States Fight Over Pigs 270

2.2 Foreign Direct Investment in the Indian Retail Industry 272

2.3 The Fate of Opel 274

2.4 Jobek do Brasil’s Foreign Exchange Challenges 276

2.5 The EU–Korea Free Trade Agreement 279

Part 3 Strategizing around the Globe 285

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 286

Entrepreneurship and Entrepreneurial Firms 289

Institutions, Resources, and Entrepreneurship 289

Growing the Entrepreneurial Firm 293

Internationalizing the Entrepreneurial Firm 298

Debates and Extensions 301

Management Savvy 303

Chapter 10: Entering Foreign Markets 310

Overcoming the Liability of Foreignness 312

Where to Enter? 315

When to Enter? 318

How to Enter? 320

Debates and Extensions 326

Management Savvy 329

Contents vii

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3.7 Geely’s Acquisition of Volvo 455

3.8 Hilton Welcomes Chinese Travelers at Home and Abroad 459

Part 4 Building Functional Excellence 465

Chapter 14: Competing on Marketing and Supply Chain Management 466

Three of the Four Ps in Marketing 468

From Distribution Channel to Supply Chain Management 474

The Triple As in Supply Chain Management 475

How Institutions and Resources Affect Marketing and Supply Chain Management 478

Debates and Extensions 481

Management Savvy 483

Chapter 15: Managing Human Resources Globally 492

Staffing 495

Training and Development 500

Compensation and Performance Appraisal 502

Labor Relations 505

Institutions, Resources, and Human Resource Management 506

Debates and Extensions 511

Management Savvy 513

Chapter 16: Financing and Governing the Corporation Globally 522

Financing Decisions 525

Owners 526

Managers 528

Board of Directors 532

Governance Mechanisms as a Package 534

A Global Perspective 536

Institutions, Resources, and Corporate Finance and Governance 538

Debates and Extensions 543

Management Savvy 544

Chapter 17: Managing Corporate Social Responsibility Globally 552

A Stakeholder View of the Firm 555

Institutions, Resources, and Corporate Social Responsibility 561

Debates and Extensions 568

Management Savvy 569

Part 4 Integrative Cases 582

4.1 ESET: From a “Living-Room” Firm to a Global Player in the Antivirus Software Industry 582

4.2 Dallas Versus Delhi 586

4.3 Microfinance: Macro Success or Global Mess? 587

4.4 Sino Iron: Engaging Stakeholders in Australia 589

4.5 Foxconn 595

Glossary 598

Name Index 607

Organization Index 617

Subject Index 621

viii Contents

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Preface

The first two editions of Global Business aspired to set a new standard for interna- tional business (IB) textbooks. Based on the enthusiastic support from students and instructors in Australia, Brazil, Britain, Canada, China, Egypt, France, Hong Kong, India, Indonesia, Ireland, Israel, Lithuania, Malaysia, Puerto Rico, Russia, Slovenia, South Africa, South Korea, Taiwan, Thailand, and the United States, the first two editions achieved unprecedented success. A Chinese translation is now available and a European adaptation (coauthored with Klaus Meyer) has been suc- cessfully launched. In short, Global Business is global.

The third edition aspires to do even better. It continues the market-winning framework centered on one big question and two core perspectives pioneered in the first edition, and has been thoroughly updated to capture the rapidly moving research and events of the past few years. Written for undergraduate and MBA students around the world, the third edition will continue to make IB teaching and learning more (1) engaging, (2) comprehensive, (3) fun, and (4) relevant.

More Engaging As an innovation in IB textbooks, a unified framework integrates all chapters. Given the wide range of topics in IB, most textbooks present the discipline in a fashion that “Today is Tuesday, it must be Luxembourg.” Very rarely do authors address: “Why Luxembourg today?” More important, why IB? What is the big ques- tion in IB? Our unified framework suggests that the discipline can be united by one big question and two core perspectives. The big question is: What deter- mines the success and failure of firms around the globe? To address this question, Global Business introduces two core perspectives, (1) the institution-based view and (2) the resource-based view, in all chapters. It is this relentless focus on our big question and core perspectives that enables this book to engage a variety of IB topics in an integrated fashion. This provides unparalleled continuity in the learning process.

Global Business further engages readers through an evidence-based approach. I have endeavored to draw on the latest research rather than the latest fads. As an active researcher myself, I have developed the unified framework not because it just popped up in my head when I wrote the book. Rather, this is an extension of my own research that consistently takes on the big question and leverages the two core perspectives.1

1 For the big question, see M. W. Peng, 2004, Identifying the big question in international business research, Journal of International Business Studies, 35: 99–108. For the institution-based view, see M. W. Peng, S. L. Sun, B. Pinkham, & H. Chen, 2009, The institution-based view as a third leg for a strategy tripod, Academy of Management Perspectives, 23(3): 63–81; M. W. Peng, D. Wang, & Y. Jiang, 2008, An institution-based view of international business strategy: A focus on emerging economies, Journal of International Business Studies, 39: 920–936. For the resource-based view, see M. W. Peng, 2001, The resource-based view and international business, Journal of Management, 27: 803–829.

ix

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x Preface

Another vehicle to engage students is debates. Most textbooks present knowledge “as is” and ignore debates. But obviously our field has no shortage of debates. It is the responsibility of textbook authors to engage students by introducing cutting- edge debates. Thus, I have written a beefy “Debates and Extensions” section for every chapter.

Finally, this book engages students by packing rigor with accessibility. There is no “dumbing down.” No other competing IB textbook exposes students to an article on how to save Europe by the Managing Director of the International Monetary Fund (In Focus 8.1), a commentary on China’s ten years in the World Trade Organization by the US Ambassador to China (Emerging Markets 8.1), and a Harvard Business Review article on China’s outward foreign direct investment (authored by me—Emerging Markets 6.1). These are not excerpts but full-blown, original articles—the first in an IB (and, in fact, in any management) textbook. These highly readable short pieces directly give students a flavor of the original insights.

More Comprehensive Global Business offers the most comprehensive and innovative coverage of IB topics available on the market. Unique chapters not found in other IB textbooks are:

Chapter 9 on entrepreneurship and small firms’ internationalization. Chapter 11 on global competitive dynamics. Chapter 16 on corporate finance and governance. Chapter 17 on corporate social responsibility (in addition to one full-blown

chapter on ethics, cultures, and norms, Chapter 3). Half of Chapter 12 (alliances and acquisitions) deals with the inadequately

covered topic of acquisitions. Approximately 70% of market entries based on foreign direct investment (FDI) around the world use acquisitions. Yet, none of the other IB textbooks has a chapter on acquisitions—clearly, a missing gap.

The most comprehensive topical coverage is made possible by drawing on the latest and most comprehensive range of the research literature. Specifically, I have accelerated my own research, publishing a total of 30 articles since 2010 after I finished the second edition.2 I have drawn on such latest research to inject cutting- edge thinking into the third edition.

In addition, I have also endeavored to consult numerous specialty journals. For example, the trade and finance chapters (Chapters 5–7) draw on the American Eco- nomic Review, Journal of Economic Literature, and Quarterly Journal of Economics. The entrepreneurship chapter (Chapter 9) consults with the Journal of Business Venturing and Entrepreneurship Theory and Practice. The marketing and supply chain chapter (Chapter 14) draws heavily from the Journal of Marketing, Journal of International Mar- keting, and Journal of Operations Management. The corporate finance and governance chapter (Chapter 16) is visibly guided by research published in the Journal of Finance and Journal of Financial Economics.

The end result is the unparalleled, most comprehensive set of evidence-based insights on the IB market. While citing every article is not possible, I am confident

2 All my articles are listed at www.mikepeng.com and www.utdallas.edu/~mikepeng. Go to “Journal Articles.”

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Preface xi

that I have left no major streams of research untouched. Feel free to check the Name Index to verify this claim.

Finally, the third edition of Global Business continues to have a global set of cases contributed by scholars around the world—an innovation on the IB market. Virtually all other IB textbooks have cases written by book authors. In comparison, this book has been blessed by a global community of case contributors who are based in Austria, Brazil, China, France, Germany, Hong Kong, India, and the United States. Many are experts who are located in, or are from, the countries in which the cases take place. For example, we now have a Brazil case penned by a Brazil-based author (see the Integrative Case on Jobek do Brasil), and two China cases written by China-based authors (see the Integrative Cases on Geely’s acquisition of Volvo and Sino Iron in Australia). This edition also features a Russia case contributed by the world’s top two leading experts on Russian management (see the Integrative Case on Wikimart). The end result is an unparalleled, diverse collection of case materials that will significantly enhance IB teaching and learning around the world.

More Fun If you fear that this book must be very boring because it draws so heavily on cur- rent research, you are wrong. I have used a clear, engaging, conversational style to tell the “story.” Relative to rival books, my chapters are generally more lively and shorter. Some reviewers have commented that reading Global Business is like read- ing a “good magazine.” A large number of interesting anecdotes have been woven into the text. In addition to examples from the business world, non-traditional (“outside-the-box”) examples range from ancient Chinese military writings to mu- tually assured destruction (MAD) strategy during the Cold War, from Shakespeare’s The Merchant of Venice to Tolstoy’s Anna Karenina. Popular movies such as A Few Good Men, Devil’s Advocate, and Legally Blonde are also featured. In addition, numerous Opening Cases, Closing Cases, and In Focus boxes spice up the book. Check out the following fun-filled features:

Partying in Saudi Arabia (Chapter 3 Opening Case) Adding value to the dirtiest job online (In Focus 4.2) Why are US exports so competitive? (Chapter 5 Opening Case) A sticky business in Singapore (In Focus 5.1) Cry for me, Argentina (Chapter 6 Closing Case) The Greek tragedy (Chapter 8 Closing Case) The world’s best place to make Viagra (In Focus 10.1) A fox in the hen house (In Focus 11.2) Brazil’s Whopper deal (Emerging Markets 12.2) Mickey goes to Shanghai (Chapter 13 Opening Case) Wolf wars (Chapter 17 Closing Case) Milton Friedman goes global (Emerging Markets 17.1)

There is one Video Case from BBC News to support every chapter. While vir- tually all competing books have some videos, none has a video package that is so integrated with the learning objectives of every chapter.

Finally, as a new feature introduced since the second edition, PengAtlas allows you to conduct IB research using informative maps and other geographic and cultural literacy tools to enhance your learning.

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xii Preface

More Relevant So what? Chapters in most textbooks leave students to figure out the crucial “So what?” question for themselves. In contrast, I conclude every chapter with an action-packed section titled “Management Savvy.” Each section has at least one table (or one teachable slide) that clearly summarizes the key learning points from a practical standpoint. No other competing IB book is so savvy and so relevant.

Further, ethics is a theme that cuts through the book, with at least one “Ethical Dilemma” feature and a series of Critical Discussion Questions on ethics in each chapter. Finally, many chapters offer career advice for students. For example:

Chapter 1 In Focus 1.3 directly addresses a question many students would ask: What language and what fields should I study?

Chapter 4 develops a resource-based view of the individual—that is, about you, the student. The upshot? You want to make yourself into an “untouch- able” who adds valuable, rare, and hard-to-imitate capabilities indispensable to an organization. In other words, you want to make sure your job cannot be outsourced.

Chapter 15 offers tips on how to strategically and proactively invest in your career now—as a student—for future international career opportunities.

What’s New in the Third Edition? Most importantly, the third edition has (1) highlighted the executive voice by draw- ing more heavily from CEOs and other business leaders, (2) dedicated more space to emerging economies, and (3) enhanced the quantity and variety of cases.

First, since Global Business aims to train a new generation of global business lead- ers, the third edition has featured more extensive quotes and perspectives from global business leaders. These are longer and more visibly prominent break-out quotes—not merely single quotes typically embedded (or “buried”) in paragraphs. In Chapter 1 alone, you will enjoy such insightful quotes from (1) GE’s current chairman and CEO and (2) GE’s former chairman and CEO. In later chapters, the following global business leaders will share their thoughts with you:

Applied Materials’ human resource executive Argentina’s president Bayer North America’s CEO Dow Chemical’s CEO IBM’s CEO IBM’s chief procurement officer IMF’s managing director—a full article TNK-BP’s chairman and CEO and Alfa Group’s founder US Ambassador to China—a full article US Secretary of Justice (representing the Department of Justice’s challenge of AT&T’s proposed merger with T- Mobile) US Secretary of Treasury (on the US-China Strategic and Economic Dialogue) Whole Foods’ co-founder and CEO WTO’s director-general

Second, this edition builds on Global Business’s previous strengths by more prom- inently highlighting global business challenges in and out of emerging economies. This is both a reflection of the global realities in which emerging economies have

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Preface xiii

played a more prominent role and a reflection of my own strong research interest in emerging economies. Specifically, in the third edition, (1) a new Emerging Markets in- chapter feature is launched in every chapter, and (2) 18 out of 23 (78%) of the longer Integrative Cases deal with emerging economies (including one case on Central and Eastern Europe, two cases each on Africa, Brazil, Russia, and India, and six on China).

Third, in response to students’ and professors’ enthusiasm about the wide- ranging and globally relevant cases in previous editions, the third edition has fur- ther enhanced the quantity and variety of cases. The number of Integrative Cases has increased from 15 to 23—a 53% increase. The variety has also been enhanced not only in terms of the geographic diversity noted above, but also in terms of the mix of longer cases and shorter cases. In addition, I have pushed myself to partici- pate more actively in case writing. Therefore, I am very proud to report that of the 23 Integrative Cases in the third edition, I personally wrote 10 (43%). This com- pares very favorably to the one Integrative Case out of a total of 15 that I personally authored in the second edition (representing a mere 7%).

Of course, in addition to these new features, every chapter has been thoroughly updated. Of the 23 Integrative Cases, 19 (83%) are new to this edition. PengAtlas maps have also been updated to capture the latest statistics.

The new BBC News Video Cases provide current, real-world examples of key course topics. The set covers such diverse countries as Brazil, China, Cuba, Dubai, India, Thailand, and Uruguay, and features a broad array of industries from high- tech manufacturing to goat farming.

Support Materials A full set of supplements is available for students and adopting instructors, all de- signed to facilitate ease of learning, teaching, and testing.

Global Business CourseMate. Cengage Learning’s Global Business CourseMate brings course concepts to life with interactive learning, study, and exam prepara- tion tools that support the printed textbook. Through this website, available for an additional fee, students will have access to their own set of PowerPoint® slides, flashcards, and games, as well as the Learning Objectives and Glossary for quick reviews. A set of auto-gradable, interactive quizzes (prepared by Timothy R. Muth of Florida Institute of Technology) will allow students to instantly gauge their comprehension of the material. The quizzes are all tagged to the book’s Learn- ing Objectives, Bloom’s taxonomy, and national standards. Finally, Global Business CourseMate includes interactive maps that delve more deeply into key concepts presented in the book.

Product Support Website. The flashcards, Learning Objectives, and Glossary are available for quick reference on our complimentary student product support website.

Webtutor on BlackBoard® and Webtutor on WebCT.™ Available on two differ- ent platforms, Global Business Webtutor enhances students’ understanding of the material by featuring the Opening Cases and Video Cases, as well as the Glossary, study flashcards, and interactive maps that delve more deeply into key concepts presented in the book.

CengageNOW™ Course Management System. Designed by instructors for instructors, CengageNOW™ mirrors the natural teaching workflow with an

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xiv Preface

easy-to-use online suite of services and resources, all in one program. With this system, instructors can easily plan their courses, manage student assignments, automatically grade, teach with dynamic technology, and assess student progress with pre- and post-tests tagged to course outcomes and national standards. For students, study tools include flashcards, PowerPoint® slides, media quizzes, guided cases, and a set of quizzes based on interactive maps that enhance comprehen- sion of the material and develop cultural and geographic literacy. Diagnostic tools create a personalized study plan for each student that focuses their study efforts. CengageNOW™ operates seamlessly with WebCT™, Blackboard®, and other course management tools.

Global Economic Watch. Cengage Learning’s Global Economic Watch helps instructors bring these pivotal current events into the classroom through a powerful, continuously updated online suite of content, discussion forums, testing tools, and more. The Watch, a first-of-its-kind resource, stimulates discussion and understanding of the global downturn with easily integrated teaching solutions:

A thorough overview and timeline of events leading up to the global economic crisis are included in the ebook module, Impact of the Global Economic Crisis on Small Business

A content-rich blog of breaking news, expert analysis, and commentary— updated multiple times daily—plus links to many other blogs

A powerful real-time database of hundreds of relevant and vetted journal, newspaper, and periodical articles, videos, and podcasts—updated four times every day

Discussion and testing content, PowerPoint® slides on key topics, sample syllabi, and other teaching resources

History is happening now, so bring it into the classroom with The Watch at www.cengage.com/thewatch.

Instructor’s Resource CD (IRCD). Instructors will find all of the teaching resources they need to plan, teach, grade, and assess student understanding and progress at their fingertips with this all-in-one resource for Global Business. The IRCD contains:

Instructor’s Manual—This valuable, time-saving Instructor’s Manual in- cludes comprehensive resources to streamline course preparation, including teaching suggestions, lecture notes, answers to all chapter questions, and Integrative Case discussion guides. Also included are discussion guidelines and answers for the Video Cases, prepared by Carol Decker.

Test Bank—The Global Business Test Bank in ExamView® software allows instructors to create customized texts by choosing from 35 True/False, 35 Multiple Choice, and at least 8 short answer/essay questions for each of the 17 chapters. Ranging in difficulty, all questions have been tagged to the text’s Learning Objectives, Bloom’s taxonomy, and other national standards to ensure that students are meeting the course criteria.

PowerPoint® Slides—This comprehensive set of more than 250 Powerpoint® slides will assist instructors in the presentation of the chapter material, en- abling students to synthesize key global concepts.