Tokyo ghoul re call to exist all accomplishments

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GLOBAL BUSINESS

Fourth Edition

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

University of Texas at Dallas Fellow, Academy of International Business (2012)

Decade Award Winner, Journal of International Business Studies (2015) The Only International Business Textbook Author Listed in

The World’s Most Influential Scientific Minds (2015)

Australia ● Brazil ● Mexico ● Singapore ● United Kingdom ● United States

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest.

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Printed in the United States of America Print Number: 01 Print Year: 2015

Global Business, Fourth Edition Mike W. Peng

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WCN: 02-200-203

To Agnes, Grace, and James

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

iv

Preface ix

About the Author xiv

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics 34

Chapter 3: Emphasizing Informal Institutions: Cultures, Ethics, and Norms 64

Chapter 4: Leveraging Resources and Capabilities 96

Part 1 PengAtlas 120

Part 1 Integrative Cases 126

Part 2 Acquiring Tools 147

Chapter 5: Trading Internationally 148

Chapter 6: Investing Abroad Directly 180

Chapter 7: Dealing with Foreign Exchange 208

Chapter 8: Capitalizing on Global and Regional Integration 236

Part 2 PengAtlas 266

Part 2 Integrative Cases 272

Part 3 Strategizing Around the Globe 295

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 296

Chapter 10: Entering Foreign Markets 318

Chapter 11: Managing Global Competitive Dynamics 342

Chapter 12: Making Alliances and Acquisitions Work 372

Chapter 13: Strategizing, Structuring, and Learning Around the World 402

Part 3 PengAtlas 432

Part 3 Integrative Cases 436

Part 4 Building Functional Excellence 455

Chapter 14: Competing on Marketing and Supply Chain Management 456

Chapter 15: Managing Human Resources Globally 482

Brief Contents

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Brief Contents v

Chapter 16: Financing and Governing the Corporation Globally 508

Chapter 17: Managing Corporate Social Responsibility Globally 536

Part 4 PengAtlas 562

Part 4 Integrative Cases 566

Glossary 585

Name Index 595

Organization Index 604

Subject Index 607

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

vi

Preface ix

About the Author xiv

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

What Is Global Business? 4

Why Study Global Business? 10

A Unified Framework 13

What Is Globalization? 18

Global Business and Globalization at a Crossroads 22

Organization of the Content 25

Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics 34

Understanding Institutions 37

What Do Institutions Do? 39

An Institution-Based View of Global Business 40

Political Systems 44

Legal Systems 46

Economic Systems 50

Debates and Extensions 51

Management Savvy 55

Chapter 3: Emphasizing Informal Institutions: Cultures, Ethics, and Norms 64

Where Do Informal Institutions Come From? 66

Culture 67

Cultural Differences 71

Ethics 78

Norms and Ethical Challenges 82

Debates and Extensions 83

Management Savvy 86

Chapter 4: Leveraging Resources and Capabilities 96

Understanding Resources and Capabilities 98

Resources, Capabilities, and the Value Chain 101

From SWOT to VRIO 105

Debates and Extensions 108

Management Savvy 112

Part 1 PengAtlas 120

Part 1 Integrative Cases 126

1.1 Indigenous Reverse Innovation from the Base of the Pyramid 126

1.2 The Future of Cuba 130

1.3 Political Risk of Doing Business in Thailand 132

1.4 An Institution-Based View of IPR Protection 134

1.5 Bank Scandals: Bad Apples versus Bad Barrels 138

1.6 Occidental Petroleum (Oxy): From Also-Ran to Segment Leader 140

1.7 Ostnor’s Offshoring and Reshoring 145

Part 2 Acquiring Tools 147

Chapter 5: Trading Internationally 148

Why Do Nations Trade? 150

Theories of International Trade 153

Realities of International Trade 164

Debates and Extensions 171

Management Savvy 173

Chapter 6: Investing Abroad Directly 180

Understanding the FDI Vocabulary 182

Why Do Firms Become MNEs by Engaging in FDI? 186

Table of Contents

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Table of Contents vii

Ownership Advantages 188

Location Advantages 189

Internalization Advantages 192

Realities of FDI 194

How MNES and Host Governments Bargain 197

Debates and Extensions 198

Management Savvy 201

Chapter 7: Dealing with Foreign Exchange 208

What Determines Foreign Exchange Rates? 210

Evolution of the International Monetary System 219

Strategic Responses to Foreign Exchange Movements 223

Debates and Extensions 225

Management Savvy 229

Chapter 8: Capitalizing on Global and Regional Integration 236

Global Economic Integration 238

Organizing World Trade 240

Regional Economic Integration 244

Regional Economic Integration in Europe 246

Regional Economic Integration in the Americas 252

Regional Economic Integration in the Asia Pacific 254

Regional Economic Integration in Africa 257

Debates and Extensions 257

Management Savvy 259

Part 2 PengAtlas 266

Part 2 Integrative Cases 272

2.1 Brazil’s Quest for Comparative Advantage 272

2.2 Twelve Recommendations to Enhance UK Export Competitiveness 274

2.3 Would You Invest in Turkey? 281

2.4 The Myth Behind China’s Outward Foreign Direct Investment 284

2.5 The Korea-US Free Trade Agreement (KORUS) 288

Part 3 Strategizing Around the Globe 295

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 296

Entrepreneurship and Entrepreneurial Firms 298

Institutions, Resources, and Entrepreneurship 299

Growing the Entrepreneurial Firm 303

Internationalizing the Entrepreneurial Firm 305

Debates and Extensions 309

Management Savvy 312

Chapter 10: Entering Foreign Markets 318

Overcoming the Liability of Foreignness 320

Where to Enter? 321

When to Enter? 325

How to Enter? 327

Debates and Extensions 334

Management Savvy 336

Chapter 11: Managing Global Competitive Dynamics 342

Competition, Cooperation, and Collusion 345

Institutions Governing Domestic and International Competition 350

Resources Influencing Competitive Dynamics 353

Attack, Counterattack, and Signaling 356

Local Firms versus Multinational Enterprises 358

Debates and Extensions 360

Management Savvy 364

Chapter 12: Making Alliances and Acquisitions Work 372

Defining Alliances and Acquisitions 374

Institutions, Resources, Alliances, and Acquisitions 376

Formation of Alliances 383

Evolution and Dissolution of Alliances 385

Performance of Alliances 387

Motives for Acquisitions 388

Performance of Acquisitions 389

Debates and Extensions 392

Management Savvy 393

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viii Table of Contents

Chapter 13: Strategizing, Structuring, and Learning Around the World 402

Multinational Strategies and Structures 404

How Institutions and Resources Affect Multinational Strategies, Structures, and Learning 412

Worldwide Learning, Innovation, and Knowledge Management 417

Debates and Extensions 422

Management Savvy 424

Part 3 PengAtlas 432

Part 3 Integrative Cases 436

3.1 Farmacias Similares: Innovating in the Mexican Healthcare Industry 436

3.2 Wikimart: Building a Russian Version of Amazon 441

3.3 Business Jet Makers Eye China 444

3.4 The Antitrust Case on the AT&T– T-Mobile Merger 446

3.5 Teliasonera’s Alliances and Acquisitions in Eurasia 449

3.6 China Merchants Group’s Acquisition of the Newcastle Port 451

3.7 Japanese Multinationals in Emerging Economies 453

Part 4 Building Functional Excellence 455

Chapter 14: Competing on Marketing and Supply Chain Management 456

Three of the Four Ps in Marketing 459

From Distribution Channel to Supply Chain Management 464

Triple As in Supply Chain Management 465

How Institutions and Resources Affect Marketing and Supply Chain Management 468

Debates and Extensions 471

Management Savvy 473

Chapter 15: Managing Human Resources Globally 482

Staffing 484

Training and Development 488

Compensation and Performance Appraisal 490

Labor Relations 494

Institutions, Resources, and Human Resource Management 495

Debates and Extensions 499

Management Savvy 500

Chapter 16: Financing and Governing the Corporation Globally 508

Financing Decisions 511

Owners 512

Managers 514

Board of Directors 517

Governance Mechanisms As a Package 519

A Global Perspective 522

Institutions, Resources, and Corporate Finance and Governance 523

Debates and Extensions 526

Management Savvy 527

Chapter 17: Managing Corporate Social Responsibility Globally 536

A Stakeholder View of the Firm 539

Institutions, Resources, and Corporate Social Responsibility 546

Debates and Extensions 553

Management Savvy 554

Part 4 PengAtlas 562

Part 4 Integrative Cases 566

4.1 ESET: From a “Living-Room” Firm to a Global Player in the Antivirus Software Industry 566

4.2 Employee Retention and Institutional Change at PIGAMU 570

4.3 Sino Iron: Engaging Stakeholders in Australia 578

Glossary 585

Name Index 595

Organization Index 604

Subject Index 607

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ix

Preface

The first three editions of Global Business aspired to set a new standard for international business (IB) textbooks. They have been widely used in Australia, Austria, Brazil, Britain, Canada, China, Denmark, Egypt, France, Hong Kong, India, Indonesia, Ireland, Israel, Lithuania, Macau, Malaysia, Mexico, the Netherlands, Nether- lands Antilles, New Zealand, Puerto Rico, Russia, Slove- nia, South Africa, South Korea, Spain, Sweden, Switzer- land, Taiwan, Thailand, and the United States. Based on the enthusiastic support from more than 30 coun- tries, the first three editions achieved unprecedented success. Available in Chinese and Spanish, Global Busi- ness has also launched a European adaptation (with Klaus Meyer) and an Indian adaptation (with Deepak Srivastava). In short, Global Business is global.

The fourth edition endeavors to achieve even more. It continues the market-winning framework centered on one big question and two core perspectives, and has been thoroughly updated to capture the rapidly mov- ing recent research and events. Written for undergrad- uate and MBA students around the world, the fourth edition will continue to make IB teaching and learning (1) more engaging, (2) more comprehensive, (3) more fun, and (4) more relevant.

More Engaging As an innovation in IB textbooks, a unified frame- work 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 Luxem- bourg.” Very rarely do authors address: “Why Luxem- bourg today?” More important, why IB? What is the big question 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 determines 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.1 It is this relentless focus on our big question and core perspectives that enables this book to engage a variety of topics in an integrated fashion. This pro- vides 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, as opposed to 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 ques- tion and leverages the two core perspectives.2

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.

More Comprehensive Global Business offers the most comprehensive and inno vative coverage of IB topics available on the market. Unique chapters not found in other IB textbooks are: Chapter 9 (entrepreneurship and small firms’ interna- tionalization), Chapter 11 (global competitive dynamics), and Chapter 16 (corporate finance and governance).

The most comprehensive topical coverage is made possible by drawing on the latest and most comprehensive range of the research literature. I have accelerated my own

1 On the integration of these two perspectives, see K. Meyer, S. Estrin, S. Bhaumik, & M. W. Peng, 2009, Institutions, resources, and entry strategies in emerging economies, Strategic Management Journal, 30(1): 61–80; D. Zoogah, M. W. Peng, & H. Woldu, 2015, Institutions, resources, and organizational effec- tiveness in Africa, Academy of Management Perspectives, 29(1): 7–31. 2 For the big question, see M. W. Peng, 2004, Identifying the big question in international business research, Journal of International Business Studies, 35(2): 99–108. For the institution-based view, see M. W. Peng, D. Wang, and Y. Jiang, 2008, An institution-based view of international business strategy: A focus on emerging economies, Journal of International Business Studies, 39(5): 920–936. For the resource-based view, see M. W. Peng, 2001, The resource- based view and international business, Journal of Management, 27(6): 803–829.

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x Preface

research, publishing a total of 30 articles after I finished the third edition.3 Some of these recent articles appear in top-tier outlets in IB, such as the Academy of Management Journal (2012), Journal of International Business Studies (2014 and 2016), Journal of Management Studies (2012, 2013, and 2015), Journal of World Business (2012, 2014, and 2015), and Strategic Management Journal (2013, 2015, and 2016). Writ- ing Global Business has also enabled me to broaden the scope of my research, publishing recently in top-tier jour- nals in operations (Journal of Operations Management), eth- ics (Journal of Business Ethics), entrepreneurship (Journal of Business Venturing and Entrepreneurship Theory and Prac- tice), and human resources (International Journal of Human Resource Management). In addition to my own work, I have also drawn on the latest research of numerous colleagues. 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 that I have left no major streams of research untouched. Feel free to check the Name Index to verify this claim. (Unfor- tunately, a number of older references have to be deleted to make room for more recent research.)

Finally, the fourth edition of Global Business contin- ues 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 Australia, Austria, Canada, China, Mexico, 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 Mexico case penned by two Mexico-based authors (see Integrative Case on Farmacias Similares), and a China case written by a China-based author (see Integrative Case on Ostnor). This edition also features a Russia case contributed by the world’s top two leading experts on Russian manage- ment (see Integrative Case on Wikimart).

More Fun If you fear this book must be boring because it draws so heavily on latest research, you are wrong. I have used a clear, engaging, conversational style to tell the “story.” Relative to rival books, my chapters are shorter and more lively. Some earlier users commented that read- ing Global Business is like reading a “good magazine.” A large number of interesting anecdotes have been woven

into the text. Non-traditional (“outside-the-box”) ex- amples range from ancient Chinese military writings to mutually assured destruction (MAD) strategy during the Cold War, from LEGO toys to Tolstoy’s Anna Kar- enina. Check out the following fun-filled features that spice up the book:

The rebirth of the East India Company (Chapter 1 Opening Case)

Testing the Dell theory of peace in East Asia (Emerg- ing Markets 2.2)

LEGO’s secrets (Chapter 4 Opening Case) ANA: Refreshing the parts other airlines cannot

reach (In Focus 4.1) Why are US exports so competitive? (Chapter 5

Closing Case) One multinational versus many national companies

(In Focus 6.1) Sriracha spices up American food (Chapter 9 Open-

ing Case) Mickey goes to Shanghai (Chapter 10 Closing Case) Patent wars and shark attacks (Chapter 11

Opening Case) Is a diamond (cartel) forever? (In Focus 11.1) Can mergers of equals work? (In Focus 12.2) Marketing Aflac in the United States and Japan

(Chapter 14 Opening Case) Dallas versus Delhi (Chapter 15 Closing Case) High drama at Hewlett-Packard (HP) (Chapter 16

Opening Case) Professor Michael Jensen as an outside director

(In Focus 16.2) Global warming and Arctic boom (In Focus 17.1)

Finally, the PengAtlas allows you to conduct IB research using informative maps and other geographic tools to enhance your learning. In addition, a series of new videos enhance the multi-media, fun aspects of learning (see below).

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

As a theme, ethics cuts through the book, with at least one “Ethical Dilemma” feature and a series of Critical

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

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Preface xi

Discussion Questions on ethics in each chapter. Finally, many chapters offer career advice for students. For example, 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 “untouchable,” some- one who adds valuable, rare, and hard-to-imitate capa- bilities indispensable to an organization. In other words, you want to make sure your job cannot be outsourced.

What’s New in the Fourth Edition? In addition to the completely updated content, the fourth edition has (1) created a new video package, (2) dedicated more space to emerging economies, (3) enhanced the quantity and variety of cases, and (4) drawn directly on the author’s consulting experience.

First, a new video package has been created that is tightly coupled with the content of the Opening and Closing Cases for every chapter. Instructors can ask students to watch such videos before class and answer questions online, or to watch videos as a way to open or close class sessions. In short, students can “watch TV” and gain knowledge.

Second, this edition builds on Global Business’ previ- ous strengths by more prominently highlighting emerg- ing economies. At least one Emerging Markets feature is launched in every chapter. Many of the Integrative Cases deal with emerging economies, such as Brazil, China, Cuba, Mexico, Russia, Slovakia, Thailand, and Turkey. Numerous in-chapter features (Opening/Closing Cases, In Focus, and Emerging Markets) deal with emerg- ing economies other than those mentioned previously, such as the Czech Republic, Greenland, Guinea, India, Kenya, Liberia, Nigeria, Poland, Senegal, Sierra Leone, South Africa, Taiwan, Tanzania, and the United Arab Emirates.

Third, in response to students’ and instructors’ enthu siasm about the wide-ranging and globally relevant cases in previous editions, the fourth edition has further enhanced the quantity and variety of cases. The variety has also been enhanced not only in terms of the geo- graphic diversity noted above, but also in terms of the mix of longer cases and shorter cases. In addition, I have pushed myself to more actively participate in case writ- ing. Finally, users of the online MindTap version of the product will have access to Media Cases that pair the Opening and Closing chapter cases with news articles from sources such as the New York Times, The Economist,

and other leading publications, as well as videos from sources such as the BBC and CBS and access to additional information from Business Insights. More information on the MindTap product is discussed later in this Preface.

Finally, I have directly drawn on my recent consult- ing experience to inject new insights. Chapter 1 Clos- ing Case (“Two Scenarios of the Global Economy in 2050”) is adapted from a major consulting engagement I completed for the UK Government Office for Science as part of its two-year Future of Manufacturing project. Integrative Case 2.2 (“Twelve Recommendations to Enhance UK Export Competitiveness”) is a direct excerpt from the final report submitted (coauthored with Klaus Meyer). Table 3.4 (“Texas Instruments Guidelines on Gifts in China,” which is in the public domain) is shared with me by a consulting client at TI. Overall, I am confident that students can directly bene- fit from such new insights gained from my consulting engagements with multinationals and governments.

MindTap Online resources are transforming many aspects of everyday life and learning is not immune to the impact of technology. Rather than simply take the book pages of Global Business and place them on a screen to be accessed via a PC, tablet, or smartphone, we have reset the con- tent and have adapted it to fully utilize the potential that the medium allows. Students can highlight passages, take notes in the MindTap content, and compile their notes for review in the EverNotes app. We have embedded assess- ments for each chapter as well as provide Flash Cards for all of the key terms that provide feedback to students and provide guidance so that they can address gaps in the course requirements. Faculty can use the results from the quizzes as well as using the Media Cases for assign- ments (see above) and utilize the assigned student work outside the classroom to benefit from a “flipped learn- ing” approach that can result in more favorable outcomes and more rewarding experiences for students and faculty. Additional apps such as ConnectYard allow faculty to integrate social media capabilities into their course and are especially useful in online and hybrid course delivery.

As part of the MindTap product, we are not limit ed to the page length limitation of a physical book. Students certainly don’t enjoy carrying 1,000-page vol- umes, and are also frustrated when material included in the book is not assigned by the instructor. Since we are not limited by length online, faculty will also have

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xii Preface

access to numerous additional cases that they can select and add to their course. We have also included additional homework assessments and unique pre- and postcourse Global Literacy assessments that can be used to demonstrate student awareness of global busi- ness knowledge. We want to thank Anne Magi of the University of Illinois at Chicago for her work on the homework and Global Literacy assessments.

Finally, users of MindTap will also have access to Business Insights: Global from Gale, which provides a rich online research tool.

Support Materials A full set of support materials is available for students and adopting instructors:

●● Product Support Website ●● Instructor’s Manual ●● Test Bank ●● PowerPoint Slides ●● MindTap (see above) ●● Peng DVD

Acknowledgments As Global Business celebrates the launch of its fourth edi- tion, I first want to thank all the customers—instructors and students around the world who have made the book’s success possible. A special thank you goes to Klaus Meyer (China Europe International Business School, China) and Deepak Srivastava (Nirma Univer- sity, India), who respectively spearheaded the adapta- tion of the European, Middle Eastern, and African (EMEA) edition and the Indian edition. In China, a big thanks goes to Liu Yi (Shanghai Jiao Tong University), Xie En and Wang Longwei (Xi’an Jiaotong University), and Yi Jingtao (Renmin University of China). In Mexico, my heart-felt appreciation goes to two groups of colleagues: (1) professional translators Ma. del Pilar Carril Villarreal and Magda Elizabeth Treviño Rosales and (2) faculty colleagues who engaged in some tech- nical revisions Claudia P. Gutiérrez Rojas (Tecnológico de Monterrey, Campus Estado de México), Mercedes Muñoz (Tecnológico de Monterrey, Campus Santa Fe y Estado de México), and Enrique Benjamín Franklin Fincowski (Facultad de Contaduría y Administración, Universidad Nacional Autónoma de México). They loved the book so much that they were willing to endure the pain of translating it into Chinese and Spanish. My

kudos to these colleagues who have made Global Business more global.

At the Jindal School at UT Dallas, I appreciate Naveen Jindal’s generous support to fund the Jindal Chair. I thank my colleagues Shawn Carraher, Larry Chasteen, Emily Choi, Tev Dalgic, Van Dam, Greg Dess, Dave Ford, Richard Harrison, Maria Hasenhuttl, Charlie Hazzard, Jeff Hicks, Shalonda Hill, Seung-Hyun Lee, Sheen Levin, John Lin, Ginny Lopez-Kidwell, Livia Markóczy, Toyah Miller, Joe Picken, Orlando Richard, Jane Salk, Rajiv Shah, Eric Tsang, Habte Woldu, and Jun Xia—as well as Hasan Pirkul (dean) and Varghese Jacob (associate dean). I also thank my PhD students (Sergey Lebedev, Canan Mutlu, and Cristina Vlas) for their assistance. One colleague (Charlie Hazzard), three PhD students (Pawinee Changphao, Sergey Lebedev, and Canan Mutlu), and an EMBA student (Nagaraj Savithri) contributed excellent case materials.

At Cengage Learning, I thank the “Peng team” that not only publishes Global Business, but also Global Strategy: Erin Joyner, Vice President, Social Sciences and Qualitative Business; Jason Fremder, Product Director; Mike Roche, Senior Product Manager; John Sarantakis, Content and Media Developer; Kristen Hurd, Marketing Director; Emily Horowitz, Market- ing Manager; Chris Walz, Marketing Coordinator; Kim Kusnerak, Senior Content Production Manager.

In the academic community, I appreciate the metic- ulous and excellent comments from the reviewers and many colleagues and students who provided informal feedback to me on the book. It is especially gratifying to receive unsolicited correspondence from students. Space constraints force me to only acknowledge those who wrote me since the third edition, since those who wrote me earlier were thanked in earlier editions. (If you wrote me but I failed to mention your name here, my apologies—blame this on the volume of such emails.)

Rosemary Bernal (Del Mar College, USA) Santanu Borah (University of North Alabama, USA) Thierry Brusselle (Chaffey Community College, USA) Lauren Carey (University of Miami, USA) Limin Chen (Wuhan University, China) John Clarry (Rutgers University, USA) Ping Deng (Cleveland State University, USA) Robert Eberhart (Santa Clara University, USA) Gwyneth Edwards (HEC Montréal, Canada) Felipe Fiuza (Florida Gulf Coast University, USA) Kenneth Fox (The Citadel, USA)

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Preface xiii

Mike Geringer (Ohio University, USA) C. Gopinath (O. P. Jindal Global University, India) Steve Hurst (Mount Hood Community College, USA) Anisul Islam (University of Houston, USA) Michael Jacobsen (Copenhagen Business School,

Denmark) Sajal Kabiraj (Dongbei University of Finance and

Economics, China) Ann Langlois (Palm Beach Atlantic University, USA) Yumei Li (Southwest University, China) Lianlian Lin (California State Polytechnic University,

USA) Leonid Lisenco (University of Southern Denmark,

Denmark) Dong Liu (Georgia Institute of Technology, USA) David Liu (George Fox University, USA) Donna Lubrano (Newbury College, USA) David Lucero (Yantai University, China) Charles Mambula (Langston University, USA) Asmat Nizam (Universiti Utara, Malaysia) Eydis Olsen (Drexel University, USA) Jung-Min Park (University of Ulsan, South Korea) Gongming Qian (Chinese University of Hong Kong,

China) Surekha Rao (Indiana University Northwest, USA) Pradeep Ray (University of New South Wales,

Australia) Daniel Rottig (Florida Gulf Coast University, USA) Henryk Sterniczuk (University of New Brunswick,

Canada) David Stiles (University of Canterbury, New Zealand) Anne Smith (University of Tennessee, USA) Clyde Stoltenberg (Wichita State University, USA) Steve Strombeck (Azusa Pacific University, USA) Vas Taras (University of North Carolina at Greens-

boro, USA) Rajaram Veliyath (Kennesaw State University, USA) Jose Vargas-Hernandez (Universidad de Guadala-

jara, Mexico) Loren Vickery (Western Oregon University, USA) George White (University of Michigan at Flint, USA) Phil Wilton (University of Liverpool, UK) Xiaohua Yang (University of San Francisco, USA) Andrey Yukhanaev (Northumbria University, UK) Wu Zhan (University of Sydney, Australia) Man Zhang (Bowling Green State University, USA)

For the fourth edition, my gratitude goes to 23 colleagues who graciously contributed excellent case materials:

Ruth Ann Althaus (Ohio University, USA) Dirk Michael Boehe (University of Adelaide, Australia) Charles Byles (Virginia Commonwealth Univer-

sity, USA) Mauricio Cervantes (Tecnológico de Monterrey,

Mexico) Pawinee Changphao (University of Texas at Dallas,

USA) Zhu Chen (SIA Energy, China) Charles Hazzard (University of Texas at Dallas, USA) Sergey Lebedev (University of Texas at Dallas, USA) Daniel McCarthy (Northeastern University, USA) Klaus Meyer (China Europe International Business

School, China)—two cases Miguel Montoya (Tecnológico de Monterrey, Mexico) Canan Mutlu (Kennesaw State University, USA) Sheila Puffer (Northeastern University, USA) Alfred Rosenbloom (Dominican University, USA) Nagaraj Savithri (University of Texas at Dallas, USA) Arnold Schuh (Vienna University of Economics and

Business, Austria) Weilei (Stone) Shi (Baruch College, City University

of New York, USA) Pek-Hooi Soh (Simon Fraser University, Canada) Sunny Li Sun (University of Missouri at Kansas City,

USA) Hao Tan (University of Newcastle, Australia) Yanli Zhang (Montclair State University, USA) Yanmei Zhu (Tongji University, China) David Zoogah (Morgan State University, USA)

Last, but by no means least, I thank my wife Agnes, my daughter Grace, and my son James—to whom this book is dedicated. When the first edition was conceived, Grace was three and James one. Now my 13-year-old Grace is already a voracious reader and a prolific writer of young-adult novels, and my 11-year-old James can beat me in chess. Both are competitive swimmers and world travelers, having been to more than 30 countries. As a third- generation professor in my family, I can’t help but wonder whether one (or both) of them will become a fourth- generation professor. To all of you, my thanks and my love.

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xiv

About the Author

Mike W. Peng is the Jindal Chair of Global Business Strategy at the Jindal School of Manage- ment, University of Texas at Dallas. He is also a Na- tional Science Foundation (NSF) CAREER Award winner and a Fellow of the Academy of International Business (AIB). At UT Dallas, he has been the

number-one contributor to the list of 45 top journals tracked by Financial Times, which consistently ranks UT Dallas as a top 20 school in research worldwide.

Professor Peng holds a bachelor’s degree from Winona State University, Minnesota, and a PhD degree from the University of Washington, Seattle. He had pre- viously served on the faculty at the Ohio State University, University of Hawaii, and Chinese University of Hong Kong. He has taught in five states in the United States (Hawaii, Ohio, Tennessee, Texas, and Washington), as well as in China, Hong Kong, and Vietnam. He has also held visiting or courtesy appointments in Australia, Britain, China, Denmark, Hong Kong, and the United States, and lectured around the world.

Professor Peng is one of the most-prolific and most- influential scholars in international business (IB). Both the United Nations and the World Bank have cited his work. During the decade 1996–2006, he was the top seven contributor to IB’s number-one premier outlet: Journal of International Business Studies. In 2015, he received the Journal of International Business Studies Decade Award. A Journal of Management article found him to be among the top 65 most widely cited manage- ment scholars, and an Academy of Management Perspectives study reported that he is the fourth most-influential management scholar among professors who obtained their PhD since 1991. Overall, Professor Peng has pub- lished more than 120 articles in leading journals, more

than 30 pieces in nonrefereed outlets, and five books. Since the launch of Global Business’ third edition, he has not only published in top IB journals, such as the Academy of Management Journal, Journal of International Business Studies, Journal of World Business, and Strate- gic Management Journal, but also in leading outlets in entrepreneurship (Entrepreneurship Theory and Practice), ethics (Journal of Business Ethics), and human resources (International Journal of Human Resource Management).

Used in more than 30 countries, Professor Peng’s best-selling textbooks, Global Business, Global Strategy, and GLOBAL, are global market leaders that have been translated into Chinese, Portuguese, and Spanish. A European adaptation (with Klaus Meyer) and an Indian adaptation (with Deepak Srivastava) have been successfully launched.

Truly global in scope, Professor Peng’s research has investigated firm strategies in Africa, Asia Pacific, Central and Eastern Europe, and North America. He is best known for his development of the institution- based view of strategy and his insights about the rise of emerging economies such as China in global business. With more than 18,000 Google citations and an H-index of 57, he is listed among The World’s Most Influential Scientific Minds (compiled by Thomson Reuters based on citations covering 21 fields)—in the field of eco- nomics and business, he is one of the only 95 world-class scholars listed and the only IB textbook author listed.

Professor Peng is active in leadership positions. He has served on the editorial boards of the AMJ, AMP, AMR, JIBS, JMS, JWB, and SMJ; and guest-edited a spe- cial issue for the JMS. At AIB, he co-chaired the AIB/ JIBS Frontiers Conference in San Diego (2006), guest- edited a JIBS special issue (2010), chaired the Emerging and Transition Economies track for the Nagoya confer- ence (2011), and chaired the Richard Farmer Best Dis- sertation Award Committee for the Washington con- ference (2012). At the Strategic Management Society (SMS), he was elected to be the Global Strategy Interest Group Chair (2008). He also co-chaired the SMS Special

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About the Author xv

Conferences in Shanghai (2007) and in Sydney (2014). He served one term as Editor-in-Chief of the Asia Pacific Journal of Management. He managed the successful bid to enter the Social Sciences Citation Index (SSCI), which reported APJM’s first citation impact to be 3.4 and rated it as the top 18 among 140 management journals (by citation impact factor) for 2010. In recognition of his sig- nificant contributions, APJM has named its best paper award the Mike Peng Best Paper Award. Currently, he is a Senior Editor at the Journal of World Business.

Professor Peng is also an active consultant, trainer, and keynote speaker. He has provided on-the-job training to more than 400 professors. He has con- sulted and been a keynote speaker for multinational enterprises (such as AstraZeneca, Berlitz, Nationwide, SAFRAN, and Texas Instruments), nonprofit organi- zations (such as World Affairs Council of Dallas-Fort Worth), educational and funding organizations (such as Canada Research Chair, Harvard Kennedy School

of Government, National Science Foundation of the United States, and Natural Science Foundation of China), and national and international organizations (such as the UK Government Office for Science, US- China Business Council, US Navy, and World Bank).

Professor Peng has received numerous honors, including an NSF CAREER Grant ($423,000), a US Small Business Administration Best Paper Award, a JIBS Decade Award, a (lifetime) Distinguished Scholar Award from the Southwestern Academy of Manage- ment, a (lifetime) Scholarly Contribution Award from the International Association for Chinese Management Research (IACMR), and a Best Paper Award named after him. He has been quoted by The Economist, News- week, Dallas Morning News, Smart Business Dallas, Atlanta Journal-Constitution, The Exporter Magazine, The World Journal, Business Times (Singapore), CEO-CIO (Beijing), Sing Tao Daily (Vancouver), and Brasil Econômico (São Paulo), as well as on the Voice of America.

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© Lonely/Shutterstock.com

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1 Laying Foundations

Chapters 1 Globalizing Business

2 Understanding Formal Institutions: Politics, Laws, and Economics

3 Emphasizing Informal Institutions: Cultures, Ethics, and Norms

4 Leveraging Resources and Capabilities

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Learning Objectives

After studying this chapter, you should be able to

●● explain the concepts of international business and global business, with a focus on emerging economies.

●● give three reasons why it is important to study global business.

●● articulate one fundamental question and two core perspectives in the study of global business.

●● identify three ways of understanding what globalization is.

●● state the size of the global economy and its broad trends, and understand your likely bias in the globalization debate.

Chapter

1

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Ethical Dilemma

Globalizing Business

Before picking up this book, the majority of readers are likely to have already heard of the East India Company. Yes, we are talking about the East India Company, the colonial trading company that created British India, founded Hong Kong and Singapore, and introduced tea, coffee, and chocolate to Britain and large parts of the world. Wait a minute—as you scratch your head over your rusty memory from history books—wasn’t the company dead? Yes, it was dead—or, technically, dissolved or nationalized in 1874 by the British govern- ment. But, no, it was not dead.

After a hiatus of more than 130 years, the East India Company was reborn and relaunched in 2005 by a visionary and entrepreneurial Indian businessman, Sanjiv Mehta. With permissions granted by the UK Treasury for an undisclosed sum of money, Mumbai- born Mehta became the sole owner, chairman, and CEO of the new East India Company, with the rights to use the name and original trademarks. His goals were to unlock and strengthen the potential value of the world’s first multinational and the world’s first global brand. In 2010, with much fanfare, the East India Com- pany launched its first luxury fine foods store in the prestigious Mayfair district of London. In 2014, the East India Company set up a new boutique inside London’s most prestigious department store, Harrods—a format called “store in store.” The initial products included

premium coffees and teas, artisan sweet and savory biscuits, an exquisite range of chocolates, and gour- met salts and sugars. While the old company obviously never had a website, the new one proudly announced on its website:

We see our role as bringing together the best the world has to offer; to create unique goods that help people to explore and experience what’s out there. Products that help people see their world in a different and better light. Products that have the power to amaze and astonish . . . The East India Company made a wide range of elusive, exclusive, and exotic ingredients familiar, affordable, and avail- able to the world; ingredients which today form part of our daily and national cuisines. Today we continue to develop and market unique and innova- tive products that breathe life into the history of the Company. We trade foods crafted by artisans and specialists from around the world, with care- fully sourced ingredients, unique recipes, and dis- tinguished provenances.

Just like the old East India Company, the new company is a “born global” enterprise, which immedi- ately declared its intention to expand globally upon its launch. By 2014, it had expanded throughout Europe (Austria, Finland, France, Germany, the Netherlands, Norway, and Spain), Asia Pacific (Australia, China,

O p e n i n g C a s e

EmErging markEts: The Rebirth of the east india Company

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4 Part One Laying Foundations

Hong Kong, Japan, Malaysia, and South Korea), and the Middle East (Kuwait and Qatar). Its online store can deliver anywhere worldwide. Overall, in the first five years since 2005, the East India Company spent US$15 million to develop its new business. In 2011, the Mahindra Group, one of India’s most respected business houses, acquired a minority stake in the East India Company. After receiving capital injection from Mahindra, the East India Company announced that it would invest US$100 million in the next five years to grow the iconic brand.

What had made the (old) East India Company such a household name? Obviously, the products it traded had to deliver value to be appreciated by customers around the world. At its peak, the com- pany employed a third of the British labor force, con- trolled half of the world’s trade, issued its own coins, managed an army of 200,000, and ruled 90 million Indians. Its organizational capabilities were awe- some. Equally important were its political abilities to leverage and control the rules of the game around the world, ranging from managing politicians back home in the UK to manipulating political intrigues in

India. Granted a royal charter by Queen Elizabeth I in 1600, the old East India Company certainly benefitted from formal backing of the state. Informally, the brand still resonates with the 2.5 billion people in the British Commonwealth, especially Indians. Mehta was tremendously moved by the more than 14,000 e-mails from Indians all over the world wishing him well when he announced the acquisition. In his own words: “I have not created the brand, history has cre- ated it. I am just the curator of it.”

Blending continuity and change, the saga of the East India Company continues. Mehta said he believed the East India Company was the Google of its time. But one reporter suggested, “Google is in fact the East India Company of its modern era. Let’s see if Google is still around and having the same impact in 400 years’ time.”

Sources: Based on (1) Arabian Business, 2014, The empire strikes back, October 4, www.arabianbusiness.com; (2) East India Company, 2014, EIC today, www.theeastindiacompany.com; (3) East India Company, 2014, History, www.theeastindiacompany.com; (4) East India Company, 2014, Press, www.theeastindiacompany.com; (5) East India Company, 2014, History of fine foods, www.eicfinefoods.com; (6) Economist, 2011, The Company that ruled the waves, December 17; (7) Economist, 2014, Hidden gems, April 12.

How do firms such as the old and the new East India Company compete around the world? How do they deal with the various rules of the game? What capabilities do they have? How do they enter new markets? What determines their success and failure? This book will address these and other important questions.

1-1 What Is Global Business? 1-1a Defining International Business and Global Business Traditionally, international business (IB) is defined as a business (firm) that engages in international (cross-border) economic activities. It can also refer to the action of doing business abroad. The previous generation of IB textbooks almost always takes the foreign entrant’s perspective. Consequently, such books deal with issues such as how to enter foreign markets and how to select alliance partners. The most frequently discussed foreign entrant is the multinational enterprise (MNE), defined as a firm that engages in foreign direct investment (FDI) by directly investing in, control- ling, and managing value-added activities in other countries.1 Of course, MNEs and their cross-border activities are important. But they only cover one aspect of IB—the foreign side. Students educated by these books often come away with the impression that the other aspect of IB—namely, domestic firms—does not exist. Obviously, this is not true. Domestic firms do not just sit around in the face of foreign entrants. They often actively compete and/or collaborate with foreign entrants in their markets.

Learning Objective Explain the concepts of international business and global business, with a focus on emerging economies.

International business (IB)

(1) A business (firm) that engages in international (cross- border) economic activities, and/or (2) the action of doing business abroad.

Multinational enterprise (MNE)

A firm that engages in foreign direct investment.

Foreign direct investment (FDI)

Investment in, controlling, and managing value-added activities in other countries.

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Chapter 1 Globalizing Business 5

Sometimes, strong domestic firms have also gone overseas themselves. Overall, focus- ing on the foreign entrant side captures only one side of the coin at best.2

There are two key words in IB: international (I) and business (B).3 However, many previous textbooks focus on the international aspect (the foreign entrant) to such an extent that the business part (which also includes domestic business) almost disappears. This is unfortunate, because IB is fundamentally about B (busi- ness) in addition to being I. To put it differently, the IB course in the undergradu- ate and MBA curricula at numerous business schools is probably the only one with the word “business” in its title. All other courses are labeled management, mar- keting, finance, and so on, representing one functional area but not the overall picture of business. Does it matter? Of course! It means that your IB course is an integrative course that can provide you with an overall business perspective (rather than a functional view) grounded in a global environment. Therefore, it makes sense that your textbook should give you both the I and B parts, not just the I part.

To cover both the I and the B parts, global business is defined in this book as business around the globe—thus, the title of this book is Global Business (not IB). In other words, global business includes both (1) international (cross-border) busi- ness activities covered by traditional IB books and (2) domestic business activities. Such deliberate blurring of the traditional boundaries separating international and domestic business is increasingly important today, because many previously domestic markets are now globalized.

Consider the competition in college textbooks, such as this Global Business book you are studying now. Not long ago, competition among college business textbook publishers was primarily on a nation-by-nation basis. The Big Three—Cengage Learning (our publisher, which is the biggest in the college business textbook mar- ket), Prentice Hall, and McGraw-Hill—primarily competed in the United States. A different set of publishers competed in other countries. As a result, most text- books studied by British students would be authored by British professors and pub- lished by British publishers, most textbooks studied by Brazilian students would be authored by Brazilian professors and published by Brazilian publishers, and so on. Now Cengage Learning (under British and Canadian ownership), Pearson Prentice Hall (under British ownership), and McGraw-Hill (under US ownership) have sig- nificantly globalized their competition, thanks to the rising demand for high-quality business textbooks in English. Around the globe, they are competing against each other in many markets, publishing in multiple languages and versions. For instance, Global Business and its sister books, Global Strategy, Global (paperback), and Interna- tional Business (an adaptation for the European market), are published by different subsidiaries in Chinese, Spanish, and Portuguese in addition to English, reaching customers in more than 30 countries. Despite such worldwide spread of competition, in each market—down to each school—textbook publishers have to compete locally. Since no professor teaches globally and all students study locally, this means Global Business has to win adoption every class, every semester. Overall, it becomes difficult to tell in this competition what is international and what is domestic. Thus, “global” seems to be a better word to capture the essence of this competition.

1-1b Global Business and Emerging Economies Global Business also differs from other books on IB because most of them focus on competition in developed economies. Here, by contrast, we devote extensive space to competitive battles waged throughout emerging economies, a term that

Global business

Business around the globe.

Emerging economy

A term that has gradually replaced the term “developing country” since the 1990s.

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6 Part One Laying Foundations

has gradually replaced the term “developing countries” since the 1990s. Another commonly used term is emerging markets (see PengAtlas Map 1). How important are emerging economies? Collectively, they command 48% of world trade, attract 60% of FDI inflows, and generate 40% FDI outflows. Overall, emerging econo- mies contribute approximately 50% of the global gross domestic product (GDP).4 In 1990, they accounted for less than one-third of a much smaller world GDP. Note that this percentage is adjusted for purchasing power parity (PPP), which is an adjustment to reflect the differences in cost of living (see In Focus 1.1). Using official (nominal) exchange rates without adjusting for PPP, emerging economies contribute about 30% of the global GDP. Why is there such a huge difference

GDP, GNP, GNI, PPP—there is a bewildering vari- ety of acronyms that are used to measure economic development. It is useful to set these terms straight before proceeding. Gross domestic product (GDP) is measured as the sum of value added by resident firms, households, and governments operating in an economy. For example, the value added by foreign- owned firms operating in Mexico would be counted as part of Mexico’s GDP. However, the earnings of non-resident sources that are sent back to Mexico (such as earnings of Mexicans who do not live and work in Mexico, and dividends received by Mexicans who own non-Mexican stocks) are not included in Mexico’s GDP. One measure that captures this is gross national product (GNP). Recently, the World Bank and other international organizations have used a new term, gross national income (GNI), to supersede GNP. Conceptually, there is no difference between GNI and GNP. What exactly is GNI/GNP? It comprises GDP plus income from non-resident sources abroad.

While GDP, GNP, and now GNI are often used as yardsticks of economic development, differences in cost of living make such a direct comparison less meaningful. A dollar of spending in Thailand can buy a lot more than in Japan. Therefore, conversion based on purchasing power parity (PPP) is often necessary. The PPP between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country’s currency will purchase the same volume of goods and services in the second country