The borderfree option going global simplified

•  Enhanced eText—Keeps students engaged in learning on their own time, while helping them achieve greater conceptual understanding of course material. The worked examples bring learning to life, and algorithmic practice allows students to apply the very concepts they are reading about. Combining resources that illuminate content with accessible self-assessment, MyLab with Enhanced eText provides students with a complete digital learning experience—all in one place.

•  MediaShare for Business—Consisting of a curated collection of business videos tagged to learning outcomes and customizable, auto-scored assignments, MediaShare for Business helps students understand why they are learning key concepts and how they will apply those in their careers. Instructors can also assign favorite YouTube clips or original content and employ MediaShare’s powerful repository of tools to maximize student accountability and interactive learning, and provide contextualized feedback for students and teams who upload presentations, media, or business plans.

• Writing Space—Better writers make great learners who perform better in their courses. Designed to help you develop and assess concept mastery and critical thinking, the Writing Space offers a single place to create, track, and grade writing assignments, provide resources, and exchange meaningful, personalized feedback with

students, quickly and easily. Thanks to auto-graded, assisted-graded, and create-your-own assignments, you decide your level of involvement in evaluating students’ work. The auto-graded option allows you to assign writing in large classes without having to grade essays by hand. And because of integration with Turnitin®, Writing Space can check students’ work for improper citation or plagiarism.

•  Branching, Decision-Making Simulations—Put your students in the role of manager as they make a series of decisions based on a realistic business challenge. The simulations change and branch based on their decisions, creating various scenario paths. At the end of each simulation, students receive a grade and a detailed report of the choices they made with the associated consequences included.

Engage, Assess, Apply

•  Learning Catalytics™—Is an interactive, student response tool that uses students’ smartphones, tablets, or laptops to engage them in more sophisticated tasks and thinking. Now included with MyLab with eText, Learning Catalytics enables you to generate classroom discussion, guide your lecture, and promote peer-to-peer learning with real-time analytics.

•  LMS Integration—You can now link from Blackboard Learn, Brightspace by D2L, Canvas, or Moodle to MyManagementLab. Access assignments, rosters, and resources, and synchronize grades with your LMS gradebook.

For students, single sign-on provides access to all the personalized learning resources that make studying more efficient and effective.

•  Reporting Dashboard—View, analyze, and report learning outcomes clearly and easily, and get the information you need to keep your students on track throughout the course with the new Reporting Dashboard. Available via the MyLab Gradebook and fully mobile-ready, the Reporting Dashboard presents student performance data at the class, section, and program levels in an accessible, visual manner.

•  Accessibility (ADA)—Pearson works continuously to ensure our products are as accessible as possible to all students. The platform team for our Business MyLab products is working toward achieving WCAG 2.0 Level AA and Section 508 standards, as expressed in the Pearson Guidelines for Accessible Educational Web Media. Moreover, our products support customers in meeting their obligation to comply with the Americans with Disabilities Act (ADA) by providing access to learning technology programs for users with disabilities.

The following information provides tips and answers to frequently asked questions for those using assistive technologies to access the Business MyLab products. As product accessibility evolves continuously, please email our Accessibility Team at disability.support@pearson.com for the most up-to-date information.

A L W A Y S L E A R N I N G

with MyManagementLab®

mailto:disability.support@pearson.com
International Business

Environments & Operations

New York, NY

John D. Daniels

University of Miami

Lee H. Radebaugh

Brigham Young University

Daniel P. Sullivan

University of Delaware

Sixteenth Edition

Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Stephanie Wall Portfolio Manager: Daniel Tylman Editorial Coordinator: Linda Albelli Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Becky Brown Field Marketing Manager: Lenny Ann Kucenski Product Marketing Assistant: Jessica Quazza Vice President, Production and Digital Studio,

Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Ashley Santora Operations Specialist: Carol Melville

Creative Director: Blair Brown Manager, Learning Tools: Brian Surette Content Developer, Learning Tools: Lindsey Sloan Managing Producer, Digital Studio, Arts

and Business: Diane Lombardo Digital Studio Project Manager: Darren Cormier Digital Studio Project Manager: Alana Coles Full-Service Project Management and Composition: Integra

Software Services Pvt. Ltd. Interior Designer: Integra Software Services Pvt. Ltd. Cover Designer: Integra Software Services Pvt. Ltd. Cover Art: Maksim Pasko/Fotolia Printer/Binder: RRD Willard Cover Printer: Phoenix

Copyright © 2018, 2015, 2013 by Pearson Education, Inc. or its affiliates. All Rights Reserved. Manufactured in the United States of America. This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/.

Acknowledgments of third-party content appear on the appropriate page within the text.

PEARSON, ALWAYS LEARNING, and MYMANAGEMENTLAB® are exclusive trademarks owned by Pearson Education, Inc. or its affili- ates in the U.S. and/or other countries.

Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s prod- ucts by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.

Library of Congress Cataloging-in-Publication Data Is Available On Request

10 9 8 7 6 5 4 3 2 1

ISBN 10: 0-13-420005-5 ISBN 13: 978-0-13-420005-7

http://www.pearsoned.com/permissions/
Preface xxii About the Authors xxix

Part one: Background for International Business 1 1 Globalization and International Business 1

Part two: Comparative Environmental Frameworks 25 2 The Cultural Environments Facing Business 25 3 The Political and Legal Environments Facing Business 57 4 The Economic Environments Facing Business 93 5 Globalization and Society 129

Part three: Theories and Institutions: Trade and Investment 153 6 International Trade and Factor Mobility Theory 153 7 Governmental Influence on Trade 183 8 Cross-National Cooperation and Agreements 207

Part Four: World Financial Environment 235 9 Global Foreign-Exchange Markets 235 10 The Determination of Exchange Rates 257 11 Global Capital Markets 279

Part Five: Global Strategy, Structure, and Implementation 301 12 The Strategy of International Business 301 13 Country Evaluation and Selection 335 14 Export and Import 361 15 Direct Investment and Collaborative Strategies 397 16 The Organization of International Business 427

Part Six: Managing International Operations 461 17 Marketing Globally 461 18 Global Operations and Supply-Chain Management 493 19 International Accounting

and Finance Issues 517 20 International Human Resource Management 545

Brief Contents

iii

Contents

Preface xxii About the Authors xxix

• Part one: Background For international BuSineSS 1

1 Globalization and International Business 1 CASE: The Globalized Business of Sports 2

Introduction 4

Why Study About Globalization, IB, and Their Relationship? 5 How Does IB Fit In? 5 The Study of IB 5

The Forces Driving Globalization and IB 6 Factors in Increased Globalization 7

The Criticisms of Globalization 10 Threats to National Sovereignty 10 Environmental Stress 11 Growing Income Inequality and Personal Stress 11

Point-Counterpoint Is Offshoring of Production a Good Strategy? 12

Why Companies Engage in IB 14 Sales Expansion 14 Resource Acquisition 14 Risk Reduction 14

IB Operating Modes 15 Merchandise Exports and Imports 15 Service Exports and Imports 15 Investments 16 Types of International Organizations 16

Why do Companies’ External Environments Affect How they May Best Operate Abroad? 16

Physical Factors 17 Institutional Factors 17 The Competitive Environment 18

Looking to the Future Three Major Scenarios on Globalization’s Future 19

CASE: Carnival Cruise Lines 21

Endnotes 23

iv

Contents v

• Part two: comParative environmental FrameworkS 25

2 The Cultural Environments Facing Business 25 CASE: Saudi Arabia’s Dynamic Culture 26

Culture’s Importance in IB and Trickiness To Assess 29 National Cultures as a Point of Reference 29 The People Factor 30 Building Cultural Awareness 31 Shortcomings in Cultural Assessments 31

Influences on Cultural Formation and Change 32 Sources of Change 32 Language as Both a Diffuser and Stabilizer of Culture 32 Religion as a Cultural Stabilizer 34

Major Behavioral Practices Affecting Business 35 Issues in Social Stratification 35 Work Motivation 37 Relationship Preferences 40 Risk-Taking Behavior 40 Information and Task Processing 41

Problems in Communicating Across Cultures 42 Translation of Spoken and Written Language 42 Silent Language 43

Guidelines For Cultural Adjustment 45 Host Society Acceptance 45 Degree of Cultural Differences 45 Ability to Adjust: Culture Shock 46 Company and Management Orientations 46 Strategies for Instituting Change 47

Point-Counterpoint Does IB Lead To Cultural Imperialism? 48

Looking to the Future Scenarios on The Evolvement of National Cultures 50

CASE: Tesco PLC: Leveraging Global Knowledge 52

Endnotes 55

3 The Political and Legal Environments Facing Business 57 CASE: China: Big Opportunities, Complicated Risks 58

Politics, Laws, and Operating Internationally 60

The Political Environment 62 Individualism 62

vi Contents

Collectivism 62 Political Ideology 63 Democracy 64 Totalitarianism 65

The State of Political Freedom 67 The Prevalence of Political Freedom 68 The Struggles of Political Freedom 68 The Allure of Authoritarianism 71

Looking to the Future Political Ideology and MNEs’ Actions 72

Political Risk 74 Classifying Political Risk 74

Point-Counterpoint Proactive Political Risk Management: The Superior Approach 76

The Legal Environment 78 Types of Legal Systems 79 The Foundation of Legality 80 Mapping the Basis of Law 81 Which Rule When? 82 Implications to Managers 84

Legal Issues Facing International Companies 84 Operational Concerns 85 Strategic Concerns 86

Politics, Law, and the Business Environment 88

CASE: It’s a Knockoff World 89

Endnotes 91

4 The Economic Environments Facing Businesses 93 CASE: Emerging Economies: Comeback or Collapse? 94

International Economic Analysis 95 Navigating Challenges 96

Who’s Who in the Global Business Environment 97 Developed Economies 97 Developing Economies 98 Economies in Transition 100 The Issue of Different Degrees of Development 101

Economic Freedom 103 The Value of Economic Freedom 105 The Prevalence of Economic Freedom 106 Economic Freedom and Type of Economic Environment 107 The Paradox of Promise Versus Prevalence 107

Contents vii

Looking to the Future State Capitalism: Detour or Destination? 110

Types of Economic Systems 111 The Market Economy 111 The Command Economy 112 Mixed Economy 113

Assessing Economic Development, Performance, and Potential 114 Monetary Measures 114 Improving Economic Analytics 116 The Wildcard: The Shadow Economy 118 Sustainability and Stability 119 Sustainability 119 Stability 120

Point-Counterpoint Growth: Positive and Productive? 121

Elements of Economic Analysis 123 Integrating Economic Analysis 123 Economic Freedom, Innovation, and Competitiveness 125

CASE: Economic Environments of the West: Problems, Puzzles, and the 4th Industrial Revolution 126

Endnotes 128

5 Globalization and Society 129 CASE: Ecomagination and the Global Greening

of GE 130

Introduction 132

Stakeholder Trade-Offs 132

The Economic Impact of the MNE 133 Balance-of-Payments Effects 134 Growth and Employment Effects 135

The Foundations of Ethical Behavior 136 Why Do Companies Care About Ethical Behavior? 137

The Cultural Foundations of Ethical Behavior 137 Relativism Versus Normativism 137

The Legal Foundations of Ethical Behavior 138 Legal Justification: Pro and Con 138

Corruption and Bribery 139 Petrobras: Corruption in Brazil with a Global Twist 140 The Consequences of Corruption 140 What’s Being Done About Corruption? 141

viii Contents

Ethics and the Environment 142 What Is “Sustainability”? 142 Global Warming and The Paris Agreement on Climate Change 143

Ethical Dilemmas of Labor Conditions 144

Point-Counterpoint Should MNEs Accept Full Responsibility for the Unethical Behavior of Their Employees? 144

The Problem of Child Labor 146 What MNEs Can and Can’t Do 147

Corporate Codes of Ethics: How Should a Company Behave? 147 Motivations for Corporate Responsibility 147 Developing a Code of Conduct 147

Looking to the Future Dealing with Ethical Dilemmas in the Global Economy 148

CASE: Anglo American PLC in South Africa: What Do You Do When Costs Reach Epidemic Proportions? 149

Endnotes 151

• Part three: theorieS and inStitutionS: trade and inveStment 153

6 International Trade and Factor Mobility Theory 153 CASE: The Evolution of Taiwan’s International Trade 154

Introduction: Why Do Policymakers Rely on International Trade and Factor Mobility Theories? 156

Interventionist and Free Trade Theories 158 Mercantilism 158 Neomercantilism 158 Free Trade Theories 159 Theory of Absolute Advantage 159 Theory of Comparative Advantage 161 Theories of Specialization: Some Assumptions and Limitations 162

Theories to Explain National Trade Patterns 164 How Much Does A Country Trade? 164 What Types of Products Does A Country Trade? 166 With Whom Do Countries Trade? 167

The Dynamics of Export Capabilities 168 Product Life Cycle (PLC) Theory 168 The Diamond of National Competitive Advantage 170

The Theory and Major Effects of Factor Mobility 172

Contents ix

Point-Counterpoint Should Nations Use Strategic Trade Policies? 172

Why Production Factors Move 174 Effects of Factor Movements 175

The Relationship between Trade and Factor Mobility 176 Substitution 176 Complementarity 176

Looking to the Future Scenarios That May Change Trade Patterns 177

CASE: Ecuador: A Rosy Export Future? 179

Endnotes 182

7 Governmental Influence on Trade 183 CASE: The U.S.–Vietnamese Catfish Dispute 184

Conflicting Outcomes of Trade Protectionism 186 The Role of Stakeholders 187

Economic Rationales for Governmental Trade Intervention and Outcome Uncertainties 187

Fighting Unemployment 187 Protecting “Infant Industries” 188 Developing an Industrial Base 189 Economic Relationships with Other Countries 190

Governments’ Noneconomic Rationales and Outcome for Trade Intervention 192

Maintaining Essential Industries 192 Promoting Acceptable Practices Abroad 193

Point-Counterpoint Should Governments Impose Trade Sanctions? 193

Maintaining or Extending Spheres of Influence 195 Preserving National Culture 195

Major Instruments of Trade Control 195 Tariffs: Direct Price Influences 195 Nontariff Barriers: Direct Price Influences 196 Nontariff Barriers: Quantity Controls 198

How Companies Deal With Governmental Trade Influences 201

Tactics for Dealing with Import Competition 201 Convincing Decision-Makers 201 Involving the Industry and Stakeholders 201 Preparing for Changes in the Competitive Environment 202

Looking to the Future Dynamics and Complexity of Future World Trade 202

x Contents

CASE: Should U.S. Imports of Prescription Drugs from Canada Be Widened? 203

Endnotes 205

8 Cross-National Cooperation and Agreements 207 CASE: Toyota’s European Drive 208

Forms of Economic Integration 209

The World Trade Organization—Global Integration 210 GATT: Predecessor to the WTO 210 What Does the WTO Do? 210

Regional Economic Integration 211 Bilateral Agreements 211 Geography Matters 211 The Effects of Integration 212

Major Regional Trading Groups 213 The European Union 214 The North American Free Trade Agreement (NAFTA) 218 Regional Economic Integration in the Americas 221 Regional Economic Integration in Asia 223 Regional Economic Integration in Africa 225

Point-Counterpoint Is Regional Economic Integration a Good Idea? 226

The United Nations and Other NGOs 227

Commodity Agreements 229 Commodities and the World Economy 229 Consumers and Producers 229 The Organization of the Petroleum Exporting Countries (OPEC) 230

Looking to the Future Will the WTO Overcome Bilateral and Regional Integration Efforts? 231

CASE: Walmart Goes South 232

Endnotes 234

• Part Four: world Financial environment 235

9 Global Foreign-Exchange Markets 235 CASE: Going Down to the Wire in the Money-Transfer

Market 236

What is Foreign Exchange and Who are The Major Players in The Market? 237

Contents xi

Some Aspects of The Foreign-Exchange Market 238 How to Trade Foreign Exchange 238 Global OTC Foreign-Exchange Instruments 239 Size, Composition, and Location of the Foreign-Exchange Market 239 Foreign-Exchange Trades and Time Zones 241

Major Foreign-Exchange Markets 243 The Spot Market 243 The Forward Market 244 Options 244 Futures 245

The Foreign-Exchange Trading Process 245 Banks and Exchanges 245 Top Exchanges for Trading Foreign Exchange 246

How Companies Use Foreign Exchange 247 Cash Flow Aspects of Imports and Exports 247 Other Financial Flows 248

Point-Counterpoint Is It OK to Speculate on Currency? 249

Looking to the Future Where Are Foreign-Exchange Markets Headed? 251

CASE: Do Yuan to Buy Some Renminbi? 252

Endnotes 255

10 The Determination of Exchange Rates 257 CASE Venezuela’s Rapidly Changing Currency 258

Introduction 259

The International Monetary Fund 260 Origin and Objectives 260 The IMF Today 260 The Role of the IMF in Global Financial Crises 261 Evolution to Floating Exchange Rates 261

Exchange-Rate Arrangements 262 Three Choices: Hard Peg, Soft Peg, or Floating Arrangement 262 Hard Peg 263 Soft Peg 263 Floating Arrangement 263 The Euro 263

Point-Counterpoint Should Africa Develop a Common Currency? 265

Determining Exchange Rates 266 Nonintervention: Currency in a Floating-Rate World 266

xii Contents

Intervention: Currency in a Fixed-Rate or Managed Floating-Rate World 267 Black Markets 268 Foreign-Exchange Convertibility and Controls 268 Exchange Rates and Purchasing Power Parity 269 Exchange Rates and Interest Rates 271 Other Factors in Exchange-Rate Determination 272

Forecasting Exchange-Rate Movements 272 Fundamental and Technical Forecasting 272 Fundamental Factors to Monitor 272

Business Implications of Exchange-Rate Changes 273 Marketing Decisions 273 Production Decisions 274 Financial Decisions 274

Looking to the Future Changes in the Relative Strength of Global Currencies 274

Case: Welcome to the World of Sony—Unless the Falling Yen Rises (or Falls) Again 275

Endnotes 278

11 Global Capital Markets 279 CASE: Tax Wars: Pfizer Versus the U.S. Government 280

The Finance Function 281 The Role of the CFO 281

Capital Structure 282 Leveraging Debt Financing 282 Factors Affecting the Choice of Capital Structure 282

Global Debt Markets 284 Eurocurrencies and the Eurocurrency Market 284 International Bonds 285 Global Equity Markets 286 The Size of Global Stock Markets 287

Taxation of Foreign-Source Income 289 International Tax Practices 289 Taxing Branches and Subsidiaries 290 Transfer Prices 292 Double Taxation and Tax Credit 293 Dodging Taxes 294

Offshore Financing and Offshore Financial Centers 294 What is an OFC? 294

Contents xiii

Point-Counterpoint Should Offshore Financial Centers and Aggressive Tax Practices Be Eliminated? 296

Looking to the Future The Growth of Capital Markets and the Drive by Governments to Capture More Tax Revenues by MNEs 297

CASE: Does the Devil Really Wear Prada? 298

Endnotes 300

• Part Five: gloBal Strategy, Structure, and imPlementation 301

12 The Strategy of International Business 301 CASE: Zara’s Disruptive Vision: Data-Driven Fast-Fashion 302

Strategy in the MNE 304 Getting Started: Vision and Mission 305 Moving Onward: Strategic Planning 307

Making Sense to Make Strategy 307

The Role of Resources, Capabilities, and Competencies 308

The Quest to Create Value 310 The Cost Leadership Strategy 310 The Differentiation Strategy 311 The Integrated Cost Leadership/Differentiation Strategy 312

Point-Counterpoint Is Strategic Planning Productive? 313

Organizing Value Creation: The Value Chain 314 Configuring the Value Chain 315

Looking to the Future Digits, Widgets, and Changing Location Advantages 319

Global Integration Versus Local Responsiveness 321 The Potential for Standardization 322 The Characteristics of Consumer Preferences 323 The Effect of Institutional Agents 324 Global Integration and Local Responsiveness: Mapping their Interaction 324

International Corporate-Level Strategies 326 The International Strategy 326 The Localization Strategy 328 Global Strategy 329 Transnational Strategy 330

xiv Contents

CASE: The Multinational Enterprise of the Future: Leading Scenarios 332

Endnotes 334

13 Country Evaluation and Selection 335 CASE Burger King® 336

The Importance of Location 338

Comparing Countries Through Scanning 338 Why Is Scanning Important? 338 Scanning Versus Detailed Analysis 339

Opportuniity and Risk Variables 340 Opportunities: Sales Expansion 340 Opportunities: Resource Acquisition 341 Risks 343 Analyzing and Relating the Opportunity and Risk Variables 348

Sources and Shortcomings of Comparative Country Information 350

Some Problems with Research Results and Data 350 External Sources of Information 351 Internally Generated Data 352

Point-Counterpoint Should Companies Operate in and Send Employees to Violent Areas? 352

Alternatives for Allocating Resources among Locations 353 Alternative Gradual Commitments 353 Geographic Diversification Versus Concentration 354 Reinvestment and Harvesting 355

Noncomparative Location Decisions 356

Looking to the Future Conditions That May Cause Prime Locations to Change 356

CASE: Carrefour 357

Endnotes 360

14 Export and Import 361 CASE: SpinCent: The Decision to Export 362

Introduction 364

Exporting: Principles and Practices 365 Who are Exporters? 366 The Matter of Advantages 366 Characteristics of Exporters 367

Contents xv

Exporting: Motivation and Methods 368 Profitability 368 Productivity 369 Diversification 369

Export: Start-Up and Expansion 370 Incremental Internationalization 370 The Born-Global Phenomenon 371 The Influence of Time and Place 371 The Wildcard of Serendipity 372 Approaches to Exporting 372 Which Approach When? 373

Point-Counterpoint Exporting E-waste: A Fair Solution? 374

Importing: Principles and Practices 378 Characteristics of Importers 378

Importing: Motivation and Methods 379 Import Drivers 379 Who Are Importers? 380

Importing and Exporting: Problems and Pitfalls 380

Financial Risks 381 Customer Management 381 International Business Expertise 382 Marketing Challenges 382 Top Management Commitment 382 Government Regulation 383 Trade Documentation 384

Importing and Exporting: Resources and Assistance 385

Public Agencies 386 Private Agents 387

Reconciling Opportunity and Challenge: An Export Plan 390

Looking to the Future Technology Transforms International Trade 391

Countertrade 393 Costs 393 Benefits 394

CASE: The Borderfree Option: Going Global—Simplified 394

Endnotes 396

xvi Contents

15 Direct Investment and Collaborative Strategies 397 CASE: Meliá Hotels International 398

Introduction 401

Why Export and Import May Not Suffice 402 When It’s Cheaper to Produce Abroad 403 When Transportation Costs Too Much 403 When Domestic Capacity Isn’t Enough 403 When Products and Services Need Altering 403 When Trade Restrictions Hinder Imports 403 When Country of Origin Becomes an Issue 404

Why and How do Companies Make Wholly Owned FDI 404 Reasons for Wholly Owned Foreign Direct Investment 404 Acquisition Versus Greenfield 405

Why Companies Collaborate 406 General Motives for Collaborative Arrangements 406 International Motives for Collaborative Arrangements 408

Forms of and Choice of Collaborative Arrangements 409 Some Considerations in Choosing a Form 409

Point-Counterpoint Should Countries Limit Foreign Control of Key Industries? 410

Licensing 411 Franchising 412 Management Contracts 413 Turnkey Operations 413 Joint Ventures (JVs) 414 Equity Alliances 415

Why Collaborative Arrangements Fail or Succeed 415 Reasons for Failure 416 Helping Collaborative Operations Succeed 417

Looking to the Future Growth in Project Size and Complexity 420

CASE: The oneworld Airline Alliance 421

Endnotes 425

16 The Organization of International Business 427 CASE: Organizing Global Operations: The “Gore

Way” 428

Introduction 430

Contents xvii

Changing Times, Changing Organizations 430 Expanding Scope of IB 431 The Internet as a Design Standard 431 Managerial Standards 431 Social Contract 432 Change and Challenge: MNEs Respond 432

Classical Organization Structures 433 Vertical Differentiation 433 Horizontal Differentiation 435 The Functional Structure 435 Divisional Structures 436 Global Matrix Structure 439 Mixed Structure 440

Neoclassical Structures 440 The Challenge of Boundaries 440 The Goal of Boundarylessness 441 The Network Structure 442 Virtual Organization 443 Neoclassical Structures in Action 444 Pitfalls of Neoclassical Structures 444

Point-Counterpoint The Hierarchical Structure: The Superior Format 445

Coordination Systems 447 Coordination by Standardization 448 Coordination by Plan 449 Coordination by Mutual Adjustment 450

Control Systems 451 Bureaucratic Control 451 Market Control 451 Clan Control 452 Control Mechanisms 452 Which Control System When? 453

Organizational Culture 453 A Key Piece of the Performance Puzzle 453 The Power of Common Cause 454 Developing an Organizational Culture 455

Looking to the Future The Rise of Corporate Universities 456

CASE: Building a Magical Organization at Johnson & Johnson 458

Endnotes 460

xviii Contents

• Part Six: managing international oPerationS 461

17 Marketing Globally 461 CASE: Tommy Hilfiger 462

International Marketing Strategies: Orientations, Segmentation, and Targeting 463

Marketing Orientations 464 Segmenting and Targeting Markets 466

Product Policies: Country Adaptation Versus Global Standardization 467

Why Firms Adapt Products 467 Alteration Costs 468 The Product Line: Extent and Mix 469

International Pricing Complexities 469 Potential Obstacles in International Pricing 469

Should Promotion Differ Among Countries? 472 The Push–Pull Mix 472 Some Problems in International Promotion 473

International Branding Strategies 475 Global Brand Versus Local Brands 476

Point-Counterpoint Should Home Governments Regulate Their Companies’ Marketing in Developing Countries? 477

Distribution Practices and Complications 479 Deciding Whether to Standardize 479 Internalization or Not? 480 Distribution Partnership 480 Distribution Challenges and Opportunities 481

Gap Analysis: A Tool for Helping to Manage the International Marketing Mix 482

Usage Gaps 483 Product-Line Gaps 484 Distribution and Competitive Gaps 484 Aggregating Countries’ Programs 484

Looking to the Future How Might International Market Segmentation Evolve? 485

CASE: Grameen Danone Foods in Bangladesh 486

Endnotes 491

Contents xix

18 Global Operations and Supply-Chain Management 493 CASE: Apple’s Global Supply Chain 494

Global Supply-Chain Management 496 What is Supply-Chain Management? 496

Global Supply-Chain and Operations Management Strategies 497 Operations Management Strategy 497

Global Sourcing 499 Why Global Sourcing? 501 Major Sourcing Configurations 501 The Make-or-Buy Decision 502

Point-Counterpoint Should Firms Outsource Innovation? 502

Supplier Relations 504 Conflict Minerals 504 The Purchasing Function 504

Information Technology and Global Supply-Chain Management 505

Electronic Data Interchange (EDI) 505 Enterprise Resource Planning/Material Requirements Planning 505 Radio Frequency ID (RFID) 505 E-commerce 506

Quality 507 Zero Defects 507 Lean Manufacturing and Total Quality Management (TQM) 508 Six Sigma 509 Quality Standards 509

Looking to the Future Uncertainty and the Global Supply Chain 511

CASE: Nokero: Lighting the World 511

Endnotes 516

19 International Accounting and Finance Issues 517 CASE: GPS Capital Markets: In the Market for an Effective

Hedging Strategy? 518

The Crossroads of Accounting and Finance 520 What Does the Controller Control? 520

xx Contents

Differences in Financial Statements Internationally 521 Differences in the Content of Financial Information 521

Factors Affecting Accounting Objectives, Standards, and Practices 522 Cultural Differences in Accounting 523

International Standards and Global Convergence 524 Mutual Recognition Versus Reconciliation 524 The First Steps in Establishing IFRS 525 The International Accounting Standards Board 525

Point-Counterpoint Should U.S. Companies Be Allowed to Use IFRS? 526

Transactions in Foreign Currencies 527 Recording Transactions 527 Correct Procedures for U.S. Companies 528

Translating Foreign-Currency Financial Statements 528 Translation Methods 529

International Financial Issues 531 Capital Budgeting in a Global Context 531 Internal Sources of Funds 533 Global Cash Management 534

Foreign-Exchange Risk Management 536 Types of Exposure 536 Exposure-Management Strategy 537

Looking to the Future Will IFRS Become the Global Accounting Standard? 539

CASE: H&M: The Challenges of Global Expansion and the Move to Adopt International Financial Reporting Standards 541

Endnotes 543

20 International Human Resource Management 545 CASE: Globalizing Your Career 546

International Human Resource Management 548 The Strategic Role of IHRM 550 IHRM’s Mission 551

The Perspective of the Expatriate 551 Who’s Who? 551 Trends in Expatriate Assignments 552 The Economics of Expatriates 554 The Enduring Constant 554

Staffing Frameworks in the MNE 554 The Ethnocentric Framework 555

Contents xxi

The Polycentric Staffing Framework 556 The Geocentric Staffing Framework 558 Which Staffing Framework When? 559

Expatriate Selection 560 Technical Competence 560 Self-Orientation 560 Others-Orientation 561 Resourcefulness 561 Global Mindset 561

Expatriate Preparation and Development 562 Pre-Departure Preparation Programs 563 In-Country Development Programs 564 Family Matters 564

Point-Counterpoint English: Destined to Be the Global Language? 565

Expatriate Compensation 567 Types of Compensation Plans 568 Components of Expatriate Compensation 569 Compensation Complications 570

Expatriate Repatriation 570 Repatriation Challenges 571 Improving Repatriation 571

Expatriate Failure 572 The Costs of Failure 572 The Wildcard 573

Looking to the Future I’m Going Where? The Changing Locations of International Assignments 573

CASE: Tel-Comm-Tek: Selecting the Managing Director of its Indian Subsidiary 574

Endnotes 577

glossary 579 company index 589

name index 595

Subject index 614

This textbook is one of the best-selling U.S. and worldwide international business (IB) textbooks. Widely used in both undergraduate and MBA level courses, this text has had authorized translations into Albanian, Chinese, Macedonian, Russian, Spanish, Korean, and Thai. Its first edition in 1976, according to many professors, defined the IB field. Its subsequent 14 editions have set the global standard for studying IB’s environments and operations. Students, faculty, and managers have praised our text for its compelling balance between rigorous, authoritative theory and meaningful practice within the context of a fresh, current analysis of IB. The elements of success that have driven this performance anchor our efforts to make this 16th edition the best version yet. We believe these efforts result in a textbook that provides you and your students the best possible understanding of what is happen- ing and is likely to happen in the world of business.

WHAT’S NEW TO THE SixTEENTH EdiTiON? Ongoing trends and new development in the global business environment called for us to rethink and revise our interpretations of the environments of operations of inter- national business. Incorporating the corresponding changes convinced the publishers and the authors of the usefulness of publishing a 16th edition.

• Global Changes IB, probably more so than any other subject, needs updating because of the number of and rapidity of global changes. The period since our last edition was no exception. Among the many changes we have referenced in our text are the spread of mosquito- borne epidemics (Zika, Ebola, dengue fever, and yellow fever); changes in national borders (e.g., Crimea now a part of Russia rather than the Ukraine); the rise of ISIS and its extended terrorism; the expanding scale and scope of technology; oil technol- ogy that has altered global supply locations and prices; the evolving role of Bitcoins for international currency exchange and investment opportunities; the emergence of disruptive technologies such 3-D printers, robotics, and artificial intelligence; the opening of U.S.–Cuban diplomatic exchanges; the advent of negative interest-rate policies in many Western markets; the termination of an embargo on Iran; the near breakup of certain countries (e.g., the United Kingdom and Spain); the use of cor- porate inversions to reduce taxes; ongoing ups and downs by prominent emerging markets; accelerating sophistication of communication systems; decreasing degrees of political and economic freedom throughout the world; greater agreement that the global climate is warming; the game changing implications of social media; an almost unprecedented refugee movement into Europe; and greater support in many coun- tries for more national sovereignty leading to the possible breakup of regional eco- nomic groups.

• Theories and Evidence to Explain IB and Globalization It is now over 40 years since we started writing this text’s first edition. We can remem- ber when the Academy of International Business (AIB), the main IB academic orga- nization, attracted fewer than 40 attendees for its annual meeting; now it routinely

Preface

xxii

PrefaCe xxiii

draws more than a thousand. Journals with an emphasis on international business were virtually nonexistent; thus the few people working directly in the field had to depend on discipline- and functional-based journals as outlets for their research. We all know how this has changed, which has, on the one hand, helped us to under- stand the global business environment in innovative, exciting ways. Nevertheless, the expanding scale of globalization and IB growth fuels such an abundance of published materials that academicians have had to specialize in narrower areas to stay abreast of relevant research. The growth has also created a challenge for authors, such as us, to keep sufficiently up to date on the breadth of research being published on all the functional and disciplinary topics we cover in an introductory text. We are the first to admit that we cannot, but, at the same time, when we have revised for each new edi- tion, we have discovered work that goes well beyond a slight movement in existing knowledge frontiers. It is gratifying for us to delve deeper into emerging trends such as those we described above, and thus we have added significant new material to the 16th edition.

• Reduced Length Over the years, we received sporadic objections to the length of our text. And com- plicating matters was the sense that as the text expanded, students increasingly preferred learning in shorter, focused bursts. Hence, we set a goal of reducing the text length by 200 pages without sacrificing content, coverage, or quality; we more than met our goal. We did this partially by shifting end notes to an easily-accessed online location, removing all cartoons because they did not sufficiently enhance students’ learning, and reducing tables of data that quickly became obsolete. How- ever, to our surprise, our biggest reduction by far was from tightening our prose. Completing chapters very quickly to reach a deadline for a two-year cycle had caused us to be much too wordy and to lead us to undue redundancy among our chapters. We quickly learned that reducing 200 pages was more time consuming than adding 200, but we feel that the text is now far more engaging, interesting, and readable.

• Improved In-Text Learning Aids

1. We aligned our objectives at each chapter’s opening with major headings within the chapters. This meant, in many cases, reorganizing the materi- als within the chapter. However, this should help students master materials more effectively and efficiently. Further, the change has permitted the gen- erators of the corresponding test bank to key questions better with learning objectives.

2. We already had marginal notes to refer back to previous chapters. We expanded those considerably and now refer to the specific pages where students can find earlier materials.

3. We dropped the “Geography and International Business” feature. It had not appeared in all the chapters, and we incorporated the coverage into specific parts of the chapters.

4. We dropped the “Summary” and “Key Terms” sections from the end of our chapters. Our reasoning is that our marginal notes cover all the summary points in greater detail and next to the material being covered. All key terms are shown in bold and included in the glossary, thus we eliminated this redundancy.

xxiv PrefaCe

5. We updated all of our cases. In addition, we replaced seven cases with new ones as follows:

Chapter 4: Economic Environments of the West: Problems, Puzzles, and the 4th Industrial Revolution Chapter 6: The Evolution of Taiwan’s International Trade Chapter 7: Should U.S. Imports of Prescription Drugs from Canada be Widened? Chapter 10: Venezuela’s Rapidly Changing Currency Chapter 11: Tax Wars: Pfizer Versus the U.S. Government Chapter 14: The Borderfree Option: Going Global—Simplified Chapter 16: Organizing Global Operations: The “Gore Way”

• Improved Chapter Placements Adopter feedback led to adjusting the sequence of chapters. Specifically, we repo- sitioned Chapter 11, Globalization and Society. Its new slot is Chapter 5, thereby effectively expanding our coverage of the environments of IB.

• Limiting Authors’ Names Early on, we observed that students too often thought that they needed to memorize the names of all the authors who were cited. Thus, we have made it a point to cite only classic authors, such as Adam Smith. If students (or instructors) want to know the origin of materials, they can find this information in the end note section.

Building on SucceSS For the record, fewer than one percent of textbooks reach 16 editions. The longevity of this text signifies its successful adaptation to the changing domain of globalization and IB. Indeed, sustainability has become a byword within the global economy. Sus- tainability, such as for a text, calls for building on what works well and eliminating what does not. Here are some highlights of the 16th edition building blocks.

FOcuSiNg ON BOTH MAcrO ANd MicrO PErFOrMANcE We have always, and steadfastly continue to present materials from a broader per- spective than company performance. First, although IB affects nearly all business, many students will be only tangentially involved. Second, knowledge of IB supports good citizenship, helping students interpret macro policies that affect their personal lives and career ambitions.

rESPONdiNg TO uPdATEd LiTErATurE From the beginning, we have constantly assessed academic and practitioner pub- lications to stay abreast of relevant issues and events. We have made no exception for this edition. A review of our exhaustive endnotes shows a citation mix of classic treatises along with significant IB materials that have been published since the pre- ceding edition. Further, the companies cited in the “Company Index and Trademarks” section come from a variety of industries—large and small, U.S. and non-U.S.—and the list continues to be comprehensive and contemporary.

PrefaCe xxv

rELAyiNg PErSONAL ExPEriENcES We regularly interact with IB stakeholders—managers, students, professors, and people affected by trade and other international events—through our teaching of degree-earning and executive students, attendance at academic and civic meetings, and foreign travel. For example, since the 15th text edition was published, we have traveled collectively to 25 countries, largely dealing with IB managers in each. These exchanges, taking place in every region of the world, provide insights and anecdotes that develop new materials and prioritize coverage via chapter content and cases. We believe no other textbook comes as close to effectively blending a comprehensive review of international business theory with exhaustive attention to what happens in the many parts of the world.

iNcOrPOrATiNg cASES We maintain the inclusion of a case to open and close each chapter. With few excep- tions, we wrote the cases ourselves. When we did not, we worked closely with the authors to assure that the focus of each fit precisely with chapters’ materials. These cases span the globe and engage an extensive range of topics from environmen- tal, institutional, country, industry, company, and individual perspectives. They also include a wide range of company perspectives, from large MNEs to small exporters, from old-line manufacturers to emergent cyber businesses, and from product manu- facturers to service providers.

The opening cases set the stage for the chapters’ major issues, highlighting themes and ideas that are then covered throughout the chapter. These also include questions to guide students to real situations as they read the chapters. The closing cases, also anchored with questions, integrate the ideas and tools presented in the chapter and call upon the students to analyze issues and propose actions.

POiNT-cOuNTErPOiNT To reinforce our strong applications orientation, we carry on a feature in every chapter that brings to life a major debate in contemporary IB and globalization. We use a point-counterpoint style to highlight opposing viewpoints that managers and poli- cymakers face when trying to make sense of vital issues. The give and take between two sides reinforces this textbook’s effort to link theory and practice.

LOOkiNg TO THE FuTurE As in previous editions, each chapter offers future scenarios that are important to managers, companies, or the world. The topic of each Looking to the Future feature alludes to the ideas discussed in the chapter in a way that prompts students to engage their imagination about the future of the world.

MAPS Geographic literacy is essential in international business. Thus, we have maintained an Atlas, now located immediately after this Preface. Not only does it show loca- tions, it includes the almost equally important pronunciations of the countries and

xxvi PrefaCe

territories that are included. In addition to the Atlas, we have an abundance of maps throughout that are visual presentations of materials, such as the major locations of a country’s export markets.

ENgAgiNg iN-TExT LEArNiNg AidS To support students’ concentration on fundamental information and lessons, we introduce each new major term in bold. These terms are also included in a Glos- sary to help them recall definitions when they see these terms in later chapters. We use marginal notes to summarize discussions, and we include marginal chapter review notes to lead students back to earlier material that helps them fathom later discussions.

iNSTrucTOr SuPPLEMENTS Instructors can access the following downloadable supplemental resources by sign- ing into the Instructor Resource Center at www.pearsonhighered.com/educator.