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Challenges and Opportunities in

International Business v. 1.0

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This is the book Challenges and Opportunities in International Business (v. 1.0).

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Table of Contents About the Authors................................................................................................................. 1 Acknowledgements ............................................................................................................... 3 Dedications ............................................................................................................................. 4 Preface..................................................................................................................................... 5 Chapter 1: Introduction ....................................................................................................... 9

What Is International Business?................................................................................................................. 18 Who Is Interested in International Business? ........................................................................................... 23 What Forms Do International Businesses Take?....................................................................................... 28 The Globalization Debate ............................................................................................................................ 32 Ethics and International Business.............................................................................................................. 42 End-of-Chapter Questions and Exercises................................................................................................... 47

Chapter 2: International Trade and Foreign Direct Investment .............................. 50 What Is International Trade Theory? ........................................................................................................ 56 Political and Legal Factors That Impact International Trade ................................................................. 67 Foreign Direct Investment .......................................................................................................................... 82 Tips in Your Entrepreneurial Walkabout Toolkit..................................................................................... 92 End-of-Chapter Questions and Exercises................................................................................................... 94

Chapter 3: Culture and Business...................................................................................... 96 What Is Culture, Anyhow? Values, Customs, and Language.................................................................. 103 What Are the Key Methods Used to Describe Cultures? ........................................................................ 110 Understanding How Culture Impacts Local Business Practices ............................................................ 124 Global Business Ethics ............................................................................................................................... 132 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 146 End-of-Chapter Questions and Exercises................................................................................................. 150 Additional References ............................................................................................................................... 154

Chapter 4: World Economies........................................................................................... 155 Classifying World Economies.................................................................................................................... 167 Understanding the Developed World ...................................................................................................... 181 Developing World ...................................................................................................................................... 191 Emerging Markets...................................................................................................................................... 207 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 230 End-of-Chapter Questions and Exercises................................................................................................. 235

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Chapter 5: Global and Regional Economic Cooperation and Integration ............. 237 International Economic Cooperation among Nations............................................................................ 248 Regional Economic Integration ................................................................................................................ 257 The United Nations and the Impact on Trade......................................................................................... 280 End-of-Chapter Questions and Exercises................................................................................................. 293

Chapter 6: International Monetary System................................................................. 295 What Is the International Monetary System?......................................................................................... 301 What Is the Role of the IMF and the World Bank?.................................................................................. 321 Understanding How International Monetary Policy, the IMF, and the World Bank Impact Business Practices...................................................................................................................................................... 340 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 345 End-of-Chapter Questions and Exercises................................................................................................. 346

Chapter 7: Foreign Exchange and the Global Capital Markets................................ 348 What Do We Mean by Currency and Foreign Exchange?....................................................................... 353 Understanding International Capital Markets ....................................................................................... 364 Venture Capital and the Global Capital Markets .................................................................................... 380 Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 386 End-of-Chapter Questions and Exercises................................................................................................. 391

Chapter 8: International Expansion and Global Market Opportunity Assessment ......................................................................................................................... 393

Global Strategic Choices ............................................................................................................................ 400 PESTEL, Globalization, and Importing ..................................................................................................... 410 International-Expansion Entry Modes .................................................................................................... 423 CAGE Analysis ............................................................................................................................................. 433 Scenario Planning and Analysis ............................................................................................................... 442 End-of-Chapter Questions and Exercises................................................................................................. 449

Chapter 9: Exporting, Importing, and Global Sourcing ............................................ 451 What is Importing and Exporting?........................................................................................................... 456 Countertrade .............................................................................................................................................. 471 Global Sourcing and Its Role in Business................................................................................................. 475 Managing Export and Import ................................................................................................................... 483 What Options Do Companies Have for Export and Import Financing? ................................................ 491 Tips in Your Walkabout Toolkit ............................................................................................................... 498 End-of-Chapter Questions and Exercises................................................................................................. 502

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Chapter 10: Strategy and International Business ...................................................... 506 Business and Corporate Strategy ............................................................................................................. 512 Generic Strategies ...................................................................................................................................... 519 International Strategy ............................................................................................................................... 530 The Five Elements of Strategy .................................................................................................................. 539 Managing the International Business with the P-O-L-C Framework.................................................... 546 End-of-Chapter Questions and Exercises................................................................................................. 552

Chapter 11: Global Entrepreneurship and Intrapreneurship ................................. 554 Entrepreneurship....................................................................................................................................... 562 What Do Entrepreneurs Do? ..................................................................................................................... 571 Business Entrepreneurship across Borders............................................................................................. 585 From Entrepreneurship to Born-Global Firms........................................................................................ 595 From Entrepreneurship to Intrapreneurship ......................................................................................... 601 End-of-Chapter Questions and Exercises................................................................................................. 609

Chapter 12: Winning through Effective, Global Talent Management .................... 612 The Changing Role of Strategic Human Resources Management in International Business.............620 The Global War for Talent ......................................................................................................................... 631 Effective Selection and Placement Strategies ......................................................................................... 639 The Roles of Pay Structure and Pay for Performance ............................................................................ 649 Tying It All Together—Using the HRM Balanced Scorecard to Gauge and Manage Human Capital, Including Your Own................................................................................................................................... 659 Tips in Your Walkabout Toolkit ............................................................................................................... 667 End-of-Chapter Questions and Exercises................................................................................................. 668

Chapter 13: Harnessing the Engine of Global Innovation ........................................ 671 An Introduction to Research and Development (R&D) .......................................................................... 676 Intellectual Property Rights around the Globe....................................................................................... 684 How to Organize and Where to Locate Research and Development Activities ...................................691 Increasing Speed and Effectiveness of International Innovation......................................................... 699 Innovation for the Bottom of the Pyramid ............................................................................................. 706 End-of-Chapter Questions and Exercises................................................................................................. 711

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Chapter 14: Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management ............................................................................................. 714

Fundamentals of Global Marketing.......................................................................................................... 720 Critical Decision Points in Global Marketing .......................................................................................... 734 Standardized or Customized Products .................................................................................................... 739 Global Sourcing and Distribution ............................................................................................................. 746 Global Production and Supply-Chain Management ............................................................................... 753 End-of-Chapter Questions and Exercises................................................................................................. 762

Chapter 15: Understanding the Roles of Finance and Accounting in Global Competitive Advantage.................................................................................................... 764

International Accounting Standards ....................................................................................................... 773 Accounting in International Business...................................................................................................... 778 Fundamentals of Finance .......................................................................................................................... 783 Financial Management in International Business .................................................................................. 794 Global Money Management: Moving Money across Borders ................................................................ 803 End-of-Chapter Questions and Exercises................................................................................................. 810

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About the Authors

Mason A. Carpenter

Mason (PhD, 1997, University of Texas at Austin) is the M. Keith Weikel professor of leadership at the Univeristy of Wisconsin Madison’s Wisconsin School of Business. His research in strategic management concerns corporate governance, top management teams, social networks, and the strategic management of global startups and is published widely in leading management and strategy journals. He is also author of numerous books used in leading undergraduate, MBA, and educutive education courses around the world, including Principles of Management published by Unnamed Publisher. He is associate editor of the Academy of Management Review and serves on the editorial board of the Strategic Management Journal. At the University of Wisconsin, he is responsible for the undergraduate, MBA, and ExecMBA courses in business, corporate, and global strategy. With others, he has also advised the top management teams and business unit leaders of Fiskars, SABMiller, GE, Harley Davidson, Rockwell International, Vivendi, Kerry Ingredients, Covance, Danisco, Badger Meter, and Banta in the areas of strategy formulation, strategy implementation, and strategic change. His teaching accomplishments include MBA Professor of the Year, notoriety as one of the two most popular professors in several BusinessWeek MBA program polls, the Larson Excellence in Teaching award from the Wisconsin School of Business, and, most recently, a Distinguished Teaching award from the University of Wisconsin-Madison. He also works to integrate experiential and behavioral perspectives of strategic management into the classroom through positions on the BPS and SMS Executive Committees, Doctoral and New Faculty BPS consortia, and the widely-used BPS Strategy Teaching Toolkit.

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Sanjyot P. Dunung

Sanjyot is president of Atma Global (www.atmaglobal.com), a publisher of innovative learning products and solutions for the corporate, higher education, and K-12 markets. The company’s mission is to create engaging, best-of-class, global learning products and solutions focusing on countries, cultures, and global business issues. Sanjyot is a recognized leader in the field of cross-cultural learning and has more than fifteen years of extensive experience in developing leading-edge, multimedia learning solutions. Notably, she is the author of Doing Business in Asia: The Complete Guide, focusing on the cultural issues of conducting business in twenty Asian countries (1995 and 1998 by Simon & Schuster). Sanjyot periodically authors articles on doing business internationally. Further, she has appeared on CNBC-TV, CNN International, Bloomberg TV, and various radio programs and is often a guest speaker at conferences and seminars addressing international business and entrepreneurship. Her book, Straight Talk About Starting and Growing Your Own Business, was released in November 2005 by McGraw Hill; she has two entrepreneurship books, Starting Your Business and Growing Your Business with Business Expert Press. Sanjyot also worked as a banker in New York with American and Japanese banks. Sanjyot was selected as a protégé member of the Committee of 200. She’s cofounder and president of the Dunung-Singh Foundation, committed to providing educational opportunities and hope to underprivileged children. She also served as a member of the board of directors of the US Committee for UNICEF (United Nations Children’s Fund). Sanjyot mentors Afghan women entrepreneurs through Project Artemis. Sanjyot’s academic history includes a BA from Northwestern University and an MBA, with an emphasis in international finance, from Thunderbird, School of Global Management. She is the school’s 1997 recipient of the Distinguished Alumni award. Sanjyot was born in India; was raised in Liverpool, England and Chicago, and now lives in New York with her three sons.

About the Authors

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Acknowledgements

This book would not have been possible without our combined eagerness to be innovative and creative inspired by our publisher and friend Jeff Shelstad, the gentle but persistent chiding of Jenn Yee, and the helpful gap filling of Melissa Yu, Andrea Meyer, Claire Hunter, and Sailaja Kattubadi. We also thank Margaret Lannamann for doing such a great job keeping all the balls in the air.

We also like to thank the following colleagues whose comprehensive feedback and suggestions for improving the material helped us make a better text:

W. Todd Brotherson, Southern Virginia University

Rezaul Karim, Des Moines Area Community College

James Laurie, Penn State Berks

Phyllis Shafer, Brookdale Community College

C. Warren Ferguson, Schreiner University

Thomas Voigt, Judson University

John Capela, St. Joseph’s College

Jeff Bruns, Bacone College

B. Barbara Boerner, Brevard College

Helena Hannonen, Brigham Young University Hawaii

Katherine Whitman, Mt. Saint Mary’s College

Verl Anderson, Dixie State College

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Dedications

Mason

I dedicate my work on our book to my wife, Lisa, and my kinetically active boys, Zachary and Wesley.

Sanjyot

To my boys—Yash, Anand, and Shanth—for making sure the sun always rises in my world.

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Preface

Thank you for using Carpenter and Dunung’s International Business! If you are an instructor or a student, by using this book, you are part of an exciting revolution in the college textbook industry spurred by Unnamed Publisher. Why is that? Well, international business is concerned with business transactions and relationships that cross borders. And due to the fact that technology and institutions make it easier to make business happen across borders more quickly and effectively than ever before, your Flat World textbook is published by a company leading the wave of new global business start-ups in the publishing industry.

But is the world really flat? Well, no, not in a geographic sense. We learned that many years ago (right?). And despite some business prognostications about the business world being flat, it still takes quite a bit of planning and care to conduct international business as optimally as possible, which is why you have this book and why you are in an international business course.

Traditionally, international business textbooks have relied on academic theory to educate students. We’re offering a new novel approach—a blend of the academic and the practitioner.

Most international business books are like global maps in a book, coupled with encyclopedias of international business terms and concepts. That is to say, they provide information but don’t help you understand what is really relevant in today’s constantly changing global business arena or how to apply concepts to real- life business scenarios and decisions. Moreover, many aspects of doing business globally are evolving and don’t remain static. By teaming Carpenter, the academic, and Dunung, the practitioner, our international business textbook is different. We not only provide access to maps and essential concepts and information but also focus on the tips and tools that allow you to best exploit such information (and knowledge + information = power) in an ever-chpranging global business arena.

Strategy and entrepreneurship form the cornerstones of our approach—offering students Tips in the Walkabout Toolkit to enable tangible application of complex concepts. Our orientation is both strategic and entrepreneurial where we speak to technologically savvy students who see national borders as bridges and not barriers. Moreover, while we use the lexicon of international business, through our strategic and entrepreneurial orientation, we develop students’ knowledge of international contexts with the aim that they may launch, run, and work in any

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organization that is global in scope (or is wrestling with global competition or other global threats).

Strategy is concerned with competition and competitive advantage, while entrepreneurship is concerned with creating new opportunities where none previously existed. These areas are important to you in an international business course because more and more organizations conduct at least some of their business across borders. If you are a budding entrepreneur then international business increases your entrepreneurial playground.

As revolutionary as the technology delivery behind this book and our unique academic-practitioner authorship approach is—we’ve made sure to cover all of the fundamental basics required in a high-quality, solid international business textbook.

Organization

The overarching logic of the book is intuitive—organized around answers to the what, where, why, and how of international business.

WHAT? Section one introduces what is international business and who has an interest in it. Students will sift through the globalization debate and understanding the impact of ethics on global businesses. Additionally, students will explore the evolution of international trade from past to present, with a focus on how firms and professionals can better understand today’s complex global business arena by understanding the impact of political and legal factors. The section concludes with a chapter on understanding how cultures are defined and the impact on business interactions and practices with tangible tips for negotiating across cultures.

WHERE? Section two develops student knowledge about key facets of the global business environment and the key elements of trade and cooperation between nations and global organizations. Today, with increasing numbers of companies of all sizes operating internationally, no business or country can remain an island. Rather, the interconnections between countries, businesses, and institutions are inextricable. Even how we define the world is changing. No longer classified into simple and neat categories, the rapid changes within countries are redefining how global businesses think about developed, developing, and emerging markets. This section addresses the evolving nature of country classifications and helps develop a student’s ability to comprehend the rationale of how to analyze a specific country’s stage of development—rather than just memorize which countries are emerging. Further, this section provides a unique approach and takes country-related “deep

Preface

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dives” that give greater detail about specific key countries. This section ends with chapters devoted to providing accessible discussions of complex financial concepts within the global monetary system and the global capital markets, including currency and global venture capital.

WHY? Section three develops knowledge about how a student or organization can exploit opportunities in that global environment. Students will learn about the fundamental choices they have in terms of international expansion and why such choices matter. Using different models of internationalization and global market assessment, they will also learn why international business opportunities vary in their promise and complexity. In this section, students also do a deeper dive into the topics of exporting, importing, and global sourcing since these are likely to be the first forms of international business a student will encounter.

HOW? Section four is devoted to strategy and entrepreneurship in a flattening world and how key organizational activities can be managed for global effectiveness. This part of the book shifts gears from the perspective of existing businesses to that of new business possibilities. Our objective is to highlight strategy, entrepreneurship, and strategic and entrepreneurial opportunities in a flat and flattening world. Beyond the basics of international strategy and entrepreneurship, students will be exposed to international human resource management so that they can better understand the global war for talent. They will also develop good fundamental knowledge of international research and development, marketing, distribution, finance, and accounting.

Features

Each chapter contains several staple and innovative features as follows:

• opening cases—cases that are relatively timeless from an international business perspective and current and topical

• sidebars titled “Did You Know”—factoids about international business • sidebars titled “Amusing Anecdote”—factoids about global marketing

snafus and other mistakes coupled with related key international business facts

• sidebars titled “An Eye on Ethics,” which provide examples of the ethical issues that arise in international business

• chapter summaries • end of chapter exercises based on AACSB learning standards—these

exercises include review questions, experiential exercises, ethical dilemmas, and exercises related to the opening chapter case

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• a closing section titled “Tools in Your Walkabout Kit” with specific and practical tools related to international business

• supplemental support materials by chapter

As you’d expect, our textbook also provides a set of end-of-chprapter questions that are mapped to AACSB learning standards, such that the instructor will be able to measure how well students are grasping course content while ensuring alignment with the AACSB guidelines.

We recognize that you have choices on textbooks for your course, but hope that our innovative approach to both essential global business content and technology delivery options will encourage you to join our revolution.

With thanks,

Mason and Sanjyot

Preface

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Chapter 1

Introduction

WHAT’S IN IT FOR ME?

1. What is international business? 2. Who has an interest in international business? 3. What forms do international businesses take? 4. What is the globalization debate? 5. What is the relationship between international business and ethics?

This chapter introduces you to the study of international business. After reading a short case study on Google Inc., the Internet search-engine company, you’ll begin to learn what makes international business such an essential subject for students around the world. Because international business is a vital ingredient in strategic management and entrepreneurship, this book uses these complementary perspectives to help you understand international business. Managers, entrepreneurs, workers, for-profit and nonprofit organizations, and governments all have a vested interest in understanding and shaping global business practices and trends. Section 1.1 "What Is International Business?" gives you a working definition of international business; Section 1.2 "Who Is Interested in International Business?" helps you see which actors are likely to have a direct and indirect interest in it. You’ll then learn about some of the different forms international businesses take; you’ll also gain a general understanding of the globalization debate. This debate centers on (1) whether the world is flat, in the sense that all

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markets are interconnected and competing unfettered with each other, or (2) whether differences across countries and markets are more significant than the commonalities. In fact, some critics negatively describe the “world is flat” perspective as globaloney! What you’ll discover from the discussion of this debate is that the world may not be flat in the purest sense, but there are powerful forces, also called flatteners, at work in the world’s economies. Section 1.5 "Ethics and International Business" concludes with an introductory discussion of the relationship between international business and ethics.

Chapter 1 Introduction

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Opening Case: Google’s Steep Learning Curve in China

Image courtesy of Kit Eaton.

Of all the changes going on in the world, the Internet is the one development that many people believe makes our world a smaller place—a flat or flattening world, according to Thomas Friedman, Pulitzer Prize–winning author of The World Is Flat: A Brief History of the Twenty-First Century and The Lexus and the Olive Tree: Understanding Globalization. Because of this flattening effect, Internet businesses should be able to cross borders easily and profitably with little constraint. However, with few exceptions, cross-border business ventures always seem to challenge even the most able of competitors, Internet-based or not. Some new international ventures succeed, while many others fail. But in every venture the managers involved can and do learn something new. Google Inc.’s learning curve in China is a case in point.

In 2006, Google announced the opening of its Chinese-language website amid great fanfare. While Google had access to the Chinese market through Google.com at the time, the new site, Google.cn, gave the company a more powerful, direct vehicle to further penetrate the approximately 94 million households with Internet access in China. As company founders Larry Page and Sergey Brin said at the time, “Unfortunately, access for Chinese users to the Google service outside of China was slow and unreliable, and some content was restricted by complex filtering within each Chinese ISP. Ironically, we were unable to get much public or governmental attention paid to the issue. Although we dislike altering our search results in any way, we ultimately decided that staying out of China simply meant diminishing service and influence there. Building a real operation in China should increase our influence on market practices and certainly will enhance our service to the Chinese people.”Larry Page and Sergey Brin, “2005 Founders’ Letter,” Google