Transcript of International business __ charles_w._l._hill
- 1. 8E International Business COMPETING IN THE GLOBAL
MARKETPLACE
- 2. 8E
- 3. International Business COMPETING IN THE GLOBAL MARKETPLACE
Charles W. L. Hill UNIVERSITY OF WASHINGTON
- 4. INTERNATIONAL BUSINESS: COMPETING IN THE GLOBAL MARKETPLACE
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill
Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020.
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5 4 3 2 1 0 ISBN 978-0-07-813719-8 MHID 0-07-813719-5 Vice
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Data
- 5. Hill, Charles W. L. International business: competing in the
global marketplace/Charles W. L. Hill.8th ed. p. cm. Includes
index. ISBN-13: 978-0-07-813719-8 (alk. paper) ISBN-10:
0-07-813719-5 (alk. paper) 1. International business
enterprisesManagement. 2. Competition, International. I. Title.
HD62.4.H55 2011 658.049dc22 2009033378 www.mhhe.com
- 6. For June & Mike Hill, my parents
- 7. about the AUTHOR Charles W. L. Hill University of Washington
Charles W. L. Hill is the Hughes M. Blake Professor of
International Business at the School of Business, University of
Washington. Professor Hill received his Ph.D. from the University
of Manchesters Institute of Science and Technology (UMIST) in
Britain. In addition to the University of Washington, he has served
on the faculties of UMIST, Texas A&M University, and Michigan
State University. Professor Hill has published over 50 articles in
peer-reviewed academic journals, including the Academy of
Management Journal, Academy of Management Review, Strategic
Management Journal, and Organization Science. He has also published
two college texts: one on strategic management and the other on
international business. Professor Hill has served on the editorial
boards of several academic journals, including the Strategic
Management Journal and Organization Science. Between 1993 and 1996
he was consulting editor at the Academy of Management Review.
Professor Hill teaches in the MBA, Executive MBA, Management, and
Ph.D. programs at the University of Washington. He has received
awards for teaching excellence in the MBA, Executive MBA, and
Management programs. He has also taught customized executive
programs.
- 8. Professor Hill works on a consulting basis with a number of
organizations. His clients have included ATL, Boeing, BF Goodrich,
Hexcel, House of Fraser, Microsoft, Seattle City Light, Tacoma City
Light, Thompson Financial Services, and Wizards of the Coast.
- 9. brief CONTENTS part one Introduction and Overview Chapter 1
Globalization part two Country Differences Chapter 2 National
Differences in Political Economy Chapter 3 Differences in Culture
Chapter 4 Ethics in International Business Cases: Google in China
Mired in CorruptionKellogg, Brown & Root in Nigeria part three
The Global Trade and Investment Environment Chapter 5 International
Trade Theory Chapter 6 The Political Economy of International Trade
Chapter 7 Foreign Direct Investment Chapter 8 Regional Economic
Integration Cases NAFTA and the U.S. Textile Industry Martins
Textiles Agricultural Subsidies and Development Boeing versus
Airbus Starbucks Foreign Direct Investment
- 10. part four The Global Monetary System Chapter 9 The Foreign
Exchange Market Chapter 10 The International Monetary System
Chapter 11 The Global Capital Market Case Argentinas Monetary
Crisis part five The Strategy and Structure of International
Business Chapter 12 The Strategy of International Business Chapter
13 The Organization of International Business Chapter 14 Entry
Strategy and Strategic Alliances Cases The Global Automobile
Industry in 2009 IKEA: Furniture Retailer to the World Downeys Soup
part six International Business Operations Chapter 15 Exporting,
Importing, and Countertrade Chapter 16 Global Production,
Outsourcing, and Logistics Chapter 17 Global Marketing and R&D
Chapter 18 Global Human Resource Management Chapter 19 Accounting
in the International Business Chapter 20 Financial Management in
the International Business Cases Li & Fung Castrol Oil in
Vietnam
- 11. China Mobile Glossary Photo Credits Index
- 12. CONTENTS part one Introduction and Overview CHAPTER 1
Globalization Opening Case The Globalization of Health Care
Introduction What Is Globalization? The Globalization of Markets
The Globalization of Production Management Focus Vizio and the
Market for Flat Panel TVs The Emergence of Global Institutions
Drivers of Globalization Declining Trade and Investment Barriers
The Role of Technological Change Microprocessors and
Telecommunications The Changing Demographics of the Global Economy
The Changing World Output and World Trade Picture Country Focus
Indias Software Sector The Changing Foreign Direct Investment
Picture The Changing Nature of the Multinational Enterprise
Management Focus Chinas HisenseAn Emerging Multinational The
Changing World Order The Global Economy of the 21st Century The
Globalization Debate Antiglobalization Protests Globalization,
Jobs, and Income Country Focus
- 13. Protesting Globalization in France Globalization, Labor
Policies, and the Environment Globalization and National
Sovereignty Globalization and the Worlds Poor Managing in the
Global Marketplace Chapter Summary Critical Thinking and Discussion
Questions Research Task Closing Case Globalization at General
Electric part two Country Differences CHAPTER 2 National
Differences in Political Economy Opening Case Egypt, the Troubled
Giant Introduction Political Systems Collectivism and Individualism
Democracy and Totalitarianism Country Focus Chavezs Venezuela
Economic Systems Market Economy Command Economy Mixed Economy Legal
Systems Different Legal Systems Differences in Contract Law
Property Rights and Corruption Country Focus Corruption in Nigeria
The Protection of Intellectual Property Product Safety and
Liability Management Focus
- 14. Starbucks Wins Key Trademark Case in China The Determinants
of Economic Development Differences in Economic Development Broader
Conceptions of Development: Amartya Sen Political Economy and
Economic Progress Country Focus Emerging Property Rights in China
Geography, Education, and Economic Development States in Transition
The Spread of Democracy The New World Order and Global Terrorism
The Spread of Market-Based Systems The Nature of Economic
Transformation Deregulation Privatization Legal Systems
Implications of Changing Political Economy Implications for
Managers Chapter Summary Critical Thinking and Discussion Questions
Research Task Closing Case Indias Transformation CHAPTER 3
Differences in Culture Opening Case McDonalds in India Introduction
What Is Culture? Values and Norms Culture, Society, and the
Nation-State The Determinants of Culture Social Structure
Individuals and Groups Social Stratification Country Focus
- 15. Breaking Indias Caste System Religious and Ethical Systems
Christianity Islam Country Focus Islamic Capitalism in Turkey
Hinduism Buddhism Confucianism Management Focus DMG-Shanghai
Language Spoken Language Unspoken Language Education Culture and
the Workplace Cultural Change Implications for Managers Chapter
Summary Critical Thinking and Discussion Questions Research Task
Closing Case Wal-Marts Foreign Expansion CHAPTER 4 Ethics in
International Business Opening Case Siemens Bribery Scandal
Introduction Ethical Issues in International Business Employment
Practices Human Rights Management Focus Making Apples iPod
Environmental Pollution Corruption
- 16. Management Focus Unocal in Myanmar Moral Obligations
Ethical Dilemmas The Roots of Unethical Behavior Personal Ethics
Decision-Making Processes Organization Culture Unrealistic
Performance Expectations Management Focus Pfizers Drug-Testing
Strategy in Nigeria Leadership Philosophical Approaches to Ethics
Straw Men Utilitarian and Kantian Ethics Rights Theories Justice
Theories Implications for Managers Chapter Summary Critical
Thinking and Discussion Questions Research Task Closing Case
Wal-Marts Chinese Suppliers Part Two Cases Google in China Mired in
CorruptionKellogg, Brown & Root in Nigeria part three The
Global Trade and Investment Environment CHAPTER 5 International
Trade Theory Opening Case Bangladeshs Textile Trade Introduction An
Overview of Trade Theory The Benefits of Trade
- 17. The Pattern of International Trade Trade Theory and
Government Policy Mercantilism Absolute Advantage Country Focus Is
China a Neo-Mercantilist Nation? Comparative Advantage The Gains
from Trade Qualifications and Assumptions Extensions of the
Ricardian Model Country Focus Moving U.S. White-Collar Jobs
Offshore Heckscher-Ohlin Theory The Leontief Paradox The Product
Life-Cycle Theory Evaluating the Product Life-Cycle Theory New
Trade Theory Increasing Product Variety and Reducing Costs
Economies of Scale, First-Mover Advantages, and the Pattern of
Trade Implications of New Trade Theory National Competitive
Advantage: Porters Diamond Factor Endowments Demand Conditions
Related and Supporting Industries Firm Strategy, Structure, and
Rivalry Evaluating Porters Theory Management Focus The Rise of
Finlands Nokia Implications for Managers Chapter Summary Critical
Thinking and Discussion Questions Research Task Closing Case The
Ecuadoran Rose Industry
- 18. Appendix International Trade and the Balance of Payments
CHAPTER 6 The Political Economy of International Trade Opening Case
The Global Financial Crisis and Protectionism Introduction
Instruments of Trade Policy Tariffs Subsidies Country Focus
Subsidized Wheat Production in Japan Import Quotas and Voluntary
Export Restraints Local Content Requirements Administrative
Policies Management Focus U.S. Magnesium Seeks Protection
Antidumping Policies The Case for Government Intervention Political
Arguments for Intervention Economic Arguments for Intervention
Country Focus Trade in Hormone-Treated Beef The Revised Case for
Free Trade Retaliation and Trade War Domestic Policies Development
of the World Trading System From Smith to the Great Depression
19471979: GATT, Trade Liberalization, and Economic Growth 19801993:
Protectionist Trends The Uruguay Round and the World Trade
Organization WTO: Experience to Date The Future of the WTO:
Unresolved Issues and the Doha Round Country Focus Estimating the
Gains from Trade for America Implications for Managers Chapter
Summary
- 19. Critical Thinking and Discussion Questions Research Task
Closing Case Why Did Global Food Prices Rise? CHAPTER 7 Foreign
Direct Investment Opening Case Spains Telefonica Introduction
Foreign Direct Investment in the World Economy Trends in FDI The
Direction of FDI Country Focus Foreign Direct Investment in China
The Source of FDI The Form of FDI: Acquisitions versus Greenfield
Investments The Shift to Services Theories of Foreign Direct
Investment Why Foreign Direct Investment? Management Focus Foreign
Direct Investment by Cemex The Pattern of Foreign Direct Investment
The Eclectic Paradigm Political Ideology and Foreign Direct
Investment The Radical View The Free Market View Pragmatic
Nationalism Shifting Ideology Management Focus DP World and the
United States Benefits and Costs of FDI Host-Country Benefits
Host-Country Costs Home-Country Benefits Home-Country Costs
International Trade Theory and FDI Government Policy Instruments
and FDI Home-Country Policies Host-Country Policies
- 20. International Institutions and the Liberalization of FDI
Implications for Managers Chapter Summary Critical Thinking and
Discussion Questions Research Task Closing Case Lakshmi Mittal and
the Growth of Mittal Steel CHAPTER 8 Regional Economic Integration
Opening Case NAFTA and Mexican Trucking Introduction Levels of
Economic Integration The Case for Regional Integration The Economic
Case for Integration The Political Case for Integration Impediments
to Integration The Case against Regional Integration Regional
Economic Integration in Europe Evolution of the European Union
Political Structure of the European Union Management Focus The
European Commission and Media Industry Mergers The Single European
Act Country Focus Creating a Single European Market in Financial
Services The Establishment of the Euro Enlargement of the European
Union Regional Economic Integration in the Americas The North
American Free Trade Agreement The Andean Community MERCOSUR Central
American Common Market, CAFTA, and CARICOM Free Trade Area of the
Americas Regional Economic Integration Elsewhere Association of
Southeast Asian Nations
- 21. Asia-Pacific Economic Cooperation Regional Trade Blocs in
Africa Implications for Managers Chapter Summary Critical Thinking
and Discussion Questions Research Task Closing Case The Euro Energy
Market Part Three Cases NAFTA and the U.S. Textile Industry Martins
Textiles Agricultural Subsidies and Development Boeing versus
Airbus Starbucks Foreign Direct Investment part four The Global
Monetary System CHAPTER 9 The Foreign Exchange Market Opening Case
Caterpillar Tractor Introduction The Function of the Foreign
Exchange Market Currency Conversion Insuring against Foreign
Exchange Risk Management Focus Volkswagens Hedging Strategy The
Nature of the Foreign Exchange Market Economic Theories of Exchange
Rate Determination Prices and Exchange Rates Country Focus Anatomy
of a Currency Crisis Summary Exchange Rate Forecasting The
Efficient Market School
- 22. The Inefficient Market School Approaches to Forecasting
Currency Convertibility Implications for Managers Management Focus
Dealing with the Rising Euro Reducing Economic Exposure Other Steps
for Managing Foreign Exchange Risk Chapter Summary Critical
Thinking and Discussion Questions Research Task Closing Case
Hyundai and Kia CHAPTER 10 The International Monetary System
Opening Case Economic Turmoil in Latvia Introduction The Gold
Standard Mechanics of the Gold Standard Strength of the Gold
Standard The Period between the Wars, 19181939 The Bretton Woods
System The Role of the IMF The Role of the World Bank The Collapse
of the Fixed Exchange Rate System The Floating Exchange Rate Regime
The Jamaica Agreement Exchange Rates since 1973 Fixed versus
Floating Exchange Rates Country Focus The U.S. Dollar, Oil Prices,
and Recycling Petrodollars The Case for Floating Exchange Rates The
Case for Fixed Exchange Rates Who Is Right?
- 23. Exchange Rate Regimes in Practice Pegged Exchange Rates
Currency Boards IMF Crisis Management Financial Crises in the
PostBretton Woods Era Mexican Currency Crisis of 1995 The Asian
Crisis Evaluating the IMFs Policy Prescriptions Country Focus
Turkey and the IMF Implications for Managers Management Focus
Airbus and the Euro Chapter Summary Critical Thinking and
Discussion Questions Research Task Closing Case Chinas Managed
Float CHAPTER 11 The Global Capital Market Opening Case Global
Capital Markets in Crisis Introduction Benefits of the Global
Capital Market Functions of a Generic Capital Market Attractions of
the Global Capital Market Management Focus Deutsche Telekom Taps
the Global Capital Market Growth of the Global Capital Market
Global Capital Market Risks Country Focus Did the Global Capital
Markets Fail Mexico? The Eurocurrency Market Genesis and Growth of
the Market Attractions of the Eurocurrency Market Drawbacks of the
Eurocurrency Market
- 24. The Global Bond Market Attractions of the Eurobond Market
The Global Equity Market Foreign Exchange Risk and the Cost of
Capital Country Focus The Search for Capital in the Czech Republic
Implications for Managers Chapter Summary Critical Thinking and
Discussion Questions Research Task Closing Case Industrial and
Commercial Bank of China Part Four Case Argentinas Monetary Crisis
part five The Strategy and Structure of International Business
CHAPTER 12 The Strategy of International Business Opening Case The
Evolving Strategy of IBM Introduction Strategy and the Firm Value
Creation Strategic Positioning Operations: The Firm as a Value
Chain Global Expansion, Profitability, and Profit Growth Expanding
the Market: Leveraging Products and Competencies Location Economies
Experience Effects Leveraging Subsidiary Skills Summary Cost
Pressures and Pressures for Local Responsiveness Pressures for Cost
Reductions Pressures for Local Responsiveness
- 25. Management Focus Local Responsiveness at MTV Networks
Choosing a Strategy Global Standardization Strategy Management
Focus Vodaphone in Japan Localization Strategy Transnational
Strategy International Strategy Management Focus Evolution of
Strategy at Procter & Gamble The Evolution of Strategy Chapter
Summary Critical Thinking and Discussion Questions Research Task
Closing Case Coca Cola Appendix Profitability, Growth, and
Valuation CHAPTER 13 The Organization of International Business
Opening Case Nestl Introduction Organizational Architecture
Organizational Structure Vertical Differentiation: Centralization
and Decentralization Management Focus The International Division at
Wal-Mart Horizontal Differentiation: The Design of Structure
Management Focus The Rise and Fall of Dow Chemicals Matrix
Structure Integrating Mechanisms Control Systems and Incentives
Types of Control Systems Incentive Systems Control Systems,
Incentives, and Strategy in the International Business
- 26. Processes Organizational Culture Creating and Maintaining
Organizational Culture Organizational Culture and Performance in
the International Business Management Focus Culture and Incentives
at Lincoln Electric Synthesis: Strategy and Architecture
Localization Strategy International Strategy Global Standardization
Strategy Transnational Strategy Environment, Strategy,
Architecture, and Performance Organizational Change Organizational
Inertia Implementing Organizational Change Chapter Summary Critical
Thinking and Discussion Questions Research Task Closing Case A
Decade of Organizational Change at Unilever CHAPTER 14 Entry
Strategy and Strategic Alliances Opening Case General Electrics
Joint Ventures Introduction Basic Entry Decisions Which Foreign
Markets? Timing of Entry Management Focus Tescos International
Growth Strategy Scale of Entry and Strategic Commitments Summary
Entry Modes Exporting Management Focus The Jollibee PhenomenonA
Philippine Multinational Turnkey Projects
- 27. Licensing Franchising Joint Ventures Wholly Owned
Subsidiaries Selecting an Entry Mode Core Competencies and Entry
Mode Pressures for Cost Reductions and Entry Mode Greenfield
Ventures or Acquisition? Pros and Cons of Acquisitions Pros and
Cons of Greenfield Ventures Greenfield or Acquisition? Strategic
Alliances The Advantages of Strategic Alliances The Disadvantages
of Strategic Alliances Management Focus Cisco and Fujitsu Making
Alliances Work Chapter Summary Critical Thinking and Discussion
Questions Research Task Closing Case JCB in India Part Five Cases
The Global Automobile Industry in 2009 IKEA: Furniture Retailer to
the World Downeys Soup part six International Business Operations
CHAPTER 15 Exporting, Importing, and Countertrade Opening Case MD
International Introduction The Promise and Pitfalls of Exporting
Improving Export Performance
- 28. An International Comparison Management Focus FCX Systems
Information Sources Utilizing Export Management Companies
Management Focus Exporting with a Little Government Help Export
Strategy Export and Import Financing Management Focus Export
Strategy at 3M Lack of Trust Management Focus Red Spot Paint &
Varnish Letter of Credit Draft Bill of Lading A Typical
International Trade Transaction Export Assistance ExportImport Bank
Export Credit Insurance Countertrade The Incidence of Countertrade
Types of Countertrade The Pros and Cons of Countertrade Chapter
Summary Critical Thinking and Discussion Questions Research Task
Closing Case Exporting and Growth for Small Businesses CHAPTER 16
Global Production, Outsourcing, and Logistics Opening Case The Rise
of the Indian Automobile Industry Introduction Strategy,
Production, and Logistics
- 29. Where to Produce Country Factors Management Focus Philips
in China Technological Factors Product Factors Locating Production
Facilities The Strategic Role of Foreign Factories Management Focus
Hewlett-Packard in Singapore Outsourcing Production: Make-or-Buy
Decisions The Advantages of Make The Advantages of Buy Trade-offs
Strategic Alliances with Suppliers Managing a Global Supply Chain
The Role of Just-in-Time Inventory The Role of Information
Technology and the Internet Chapter Summary Critical Thinking and
Discussion Questions Research Task Closing Case Building the Boeing
787 CHAPTER 17 Global Marketing and R&D Opening Case Microsoft
in India Introduction The Globalization of Markets and Brands
Market Segmentation Product Attributes Management Focus Marketing
to Black Brazil Cultural Differences Economic Development Product
and Technical Standards
- 30. Distribution Strategy Differences between Countries
Choosing a Distribution Strategy Communication Strategy Barriers to
International Communication Management Focus Overcoming Cultural
Barriers to Selling Tampons Push versus Pull Strategies Management
Focus UnileverSelling to Indias Poor Global Advertising Pricing
Strategy Price Discrimination Strategic Pricing Regulatory
Influences on Prices Configuring the Marketing Mix Management Focus
Levi Strauss Goes Local New-Product Development The Location of
R&D Integrating R&D, Marketing, and Production
Cross-Functional Teams Building Global R&D Capabilities Chapter
Summary Critical Thinking and Discussion Questions Research Task
Closing Case DoveBuilding a Global Brand CHAPTER 18 Global Human
Resource Management Opening Case AstraZeneca Introduction The
Strategic Role of International HRM Staffing Policy Types of
Staffing Policy
- 31. Expatriate Managers Management Focus Managing Expatriates
at Royal Dutch/Shell The Global Mind-Set Training and Management
Development Training for Expatriate Managers Repatriation of
Expatriates Management Development and Strategy Management Focus
Monsantos Repatriation Program Performance Appraisal Performance
Appraisal Problems Guidelines for Performance Appraisal
Compensation National Differences in Compensation Expatriate Pay
Management Focus Global Compensation Practices at McDonalds
International Labor Relations The Concerns of Organized Labor The
Strategy of Organized Labor Approaches to Labor Relations Chapter
Summary Critical Thinking and Discussion Questions Research Task
Closing Case Lenovo CHAPTER 19 Accounting in the International
Business Opening Case Chinese Accounting Introduction Country
Differences in Accounting Standards Relationship between Business
and Providers of Capital Political and Economic Ties with Other
Countries Inflation Accounting Level of Development
- 32. Culture National and International Standards Lack of
Comparability International Standards Management Focus The
Consequences of Different Accounting Standards Multinational
Consolidation and Currency Translation Management Focus Novartis
Joins the International Accounting Club Consolidated Financial
Statements Currency Translation Current U.S. Practice Accounting
Aspects of Control Systems Exchange Rate Changes and Control
Systems Transfer Pricing and Control Systems Separation of
Subsidiary and Manager Performance Chapter Summary Critical
Thinking and Discussion Questions Research Task Closing Case
Adopting International Accounting Standards CHAPTER 20 Financial
Management in the International Business Opening Case Global
Treasury Management at Procter & Gamble Introduction Investment
Decisions Capital Budgeting Project and Parent Cash Flows Adjusting
for Political and Economic Risk Management Focus Black Sea Energy
Ltd. Risk and Capital Budgeting Financing Decisions Source of
Financing Financial Structure
- 33. Global Money Management: The Efficiency Objective
Minimizing Cash Balances Reducing Transaction Costs Global Money
Management: The Tax Objective Moving Money across Borders:
Attaining Efficiencies and Reducing Taxes Dividend Remittances
Royalty Payments and Fees Transfer Prices Fronting Loans Techniques
for Global Money Management Centralized Depositories Multilateral
Netting Chapter Summary Critical Thinking and Discussion Questions
Research Task Closing Case Brazils Gol Part Six Cases Li & Fung
Castrol Oil in Vietnam China Mobile Glossary Photo Credits
Index
- 34. list of MAPS Map 2.1 GNI per Capita, 2007 Map 2.2 GNI
Purchasing Power Parity per Capita, 2007 Map 2.3 Growth Rate in GDP
per Capita, 19982007 Map 2.4 The Human Development Index, 2006 Map
2.5 Political Freedom, 2006 Map 2.6 Distribution of Economic
Freedom in 2007 Map 3.1 World Religions Map 8.1 Member States of
the European Union in 2009 Map 8.2 Economic Integration in the
Americas Map 8.3 ASEAN countries Map 8.4 APEC Members
- 35. PREFACE It is now two decades since I began work on the
first edition of International Business: Competing in the Global
Marketplace. By the third edition the book was the most widely used
international business text in the world. Since then its market
share has only increased. I attribute the success of the book to a
number of goals I set out for myself when I embarked on the first
edition of the book. Specifically, I wanted to write a book that
(1) was comprehensive and up-to-date, (2) went beyond an uncritical
presentation and shallow explanation of the body of knowledge, (3)
maintained a tight, integrated flow between chapters, (4) focused
on managerial implications, and (5) made important theories
accessible and interesting to students. Over the years, and through
eight editions, I have worked hard to adhere to these goals. It has
not always been easy. An enormous amount has happened over the last
two decades, both in the real world of economics, politics and
business, and in the academic world of theory and empirical
research. Often I have had to significantly rewrite chapters, scrap
old examples, bring in new ones, incorporate new theory and
evidence into the book, and phase out older theories that are
increasingly less relevant to the modern and dynamic world of
international business. That process continues in the current
edition. As noted below, there have been significant changes in
this edition, and that will no doubt continue to be the case in the
future. In deciding what changes to make, I have been guided not
only by my own reading, teaching and research, but also by the
invaluable feedback I receive from professors and students around
the world who use the book, from reviewers, and from the editorial
staff at McGraw Hill. My thanks go out to all of them.
COMPREHENSIVE AND UP-TO-DATE To be comprehensive, an international
business textbook must: Explain how and why the worlds countries
differ. Present a thorough review of the economics and politics of
international trade and investment. Explain the functions and form
of the global monetary system. Examine the strategies and
structures of international businesses. Assess the special roles of
an international businesss various functions. I have always
endeavored to do all of these things in International Business. In
my view, many other texts paid insufficient attention to the
strategies and structures of international businesses and to the
implications of international business for firms various functions.
This omission has been a serious deficiency. Many of the students
in these international business courses will soon be working in
international businesses, and they will be expected to understand
the implications of international business for their organizations
strategy, structure, and functions. This book pays close attention
to these issues. Comprehensiveness and relevance also require
coverage of the major theories. It has always been my goal to
incorporate the insights gleaned from recent academic work into the
text. Consistent with this goal,
- 36. over the last six editions I have added insights from the
following research: The new trade theory and strategic trade
policy. The work of Nobel Prizewinning economist Amartya Sen on
economic development. The work of Hernando de Soto on the link
between property rights and economic development. Samuel
Huntingtons influential thesis on the clash of civilizations. The
new growth theory of economic development championed by Paul Romer
and Gene Grossman. Empirical work by Jeffery Sachs and others on
the relationship between international trade and economic growth.
Michael Porters theory of the competitive advantage of nations.
Robert Reichs work on national competitive advantage. The work of
Nobel Prizewinner Douglas North and others on national
institutional structures and the protection of property rights. The
market imperfections approach to foreign direct investment that has
grown out of Ronald Coase and Oliver Williamsons work on
transaction cost economics. Bartlett and Ghoshals research on the
transnational corporation. The writings of C. K. Prahalad and Gary
Hamel on core competencies, global competition, and global
strategic alliances. Insights for international business strategy
that can be derived from the resource based view of the firm. In
addition to including leading edge theory, in light of the
fast-changing nature of the international business environment,
every effort is being made to ensure that the book is as up-to-date
as possible when it goes to press. Much has happened in the world
since the first edition of this book was published in 1993. The
Uruguay Round of GATT negotiations was successfully concluded and
the World Trade Organization was established. In 2001 the WTO
embarked upon another major round of talks aimed to reduce barriers
to trader, the Doha Round. The European Union moved forward with
its post-1992 agenda to achieve a closer economic and monetary
union, including the establishment of a common currency in January
1999. The North American Free Trade Agreement passed into law. The
former Communist states of Eastern Europe and Asia continued on the
road to economic and political reform. As they did, the euphoric
mood that followed the collapse of communism in 1989 was slowly
replaced with a growing sense of realism about the hard path ahead
for many of these countries. The global money market continued its
meteoric growth. By 2009 over $2 trillion per day was flowing
across national borders. The size of such flows fueled concern
about the ability of short-term speculative shifts in global
capital markets to destabilize the world economy. The World Wide
Web emerged from nowhere to become the backbone of an emerging
global network for electronic commerce. The world continued to
- 37. become more global. Several Asian Pacific economies,
including most notably China, continued to grow their economies at
a rapid rate. Outsourcing of service functions to places like China
and India emerged as a major issue in developed Western nations.
New multinationals continued to emerge from developing nations in
addition to the worlds established industrial powers. Increasingly,
the globalization of the world economy affected a wide range of
firms of all sizes, from the very large to the very small. Also,
unfortunately, in the wake of the terrorist attacks on the United
States that took place on September 11, 2001, global terrorism and
the attendant geopolitical risks emerged as a threat to global
economic integration and activity. Reflecting this rapid pace of
change, in this edition of the book I have tried to ensure that all
material and statistics are as up-to-date as possible as of 2009.
However, being absolutely up-to-date is impossible since change is
always with us. What is current today may be outdated tomorrow.
Accordingly, I have established a home page for this book on the
World Wide Web at www.mhhe.com/hill. From this home page the reader
can access regular updates of chapter material and reports on
topical developments that are relevant to students of international
business. I hope readers find this a useful addition to the support
material for this book. BEYOND UNCRITICAL PRESENTATION AND SHALLOW
EXPLANATION Many issues in international business are complex and
thus necessitate considerations of pros and cons. To demonstrate
both sides of issues to students, I have adopted a critical
approach that presents the arguments for and against economic
theories, government policies, business strategies, organizational
structures, and so on. Therefore, I have attempted to explain the
complexities of the many theories and phenomena unique to
international business so the student might fully comprehend the
statements of a theory or the reasons a phenomenon is the way it
is. I believe these theories and phenomena are explained in more
depth in this book than they are in competing textbooks, the
rationale being that a shallow explanation is little better than no
explanation. In international business, a little knowledge is
indeed a dangerous thing. INTEGRATED PROGRESSION OF TOPICS A
weakness of many texts is that they lack a tight, integrated flow
of topics from chapter to chapter. This book explains to students
in Chapter 1 how the books topics are related to each other.
Integration has been achieved by organizing the material so that
each chapter builds on the material of the previous ones in a
logical fashion. Part One Chapter 1 provides an overview of the key
issues to be addressed and explains the plan of the book. Part Two
Chapters 2 and 3 focus on national differences in political economy
and culture, and Chapter 4 on ethical issues in international
business. Most international business textbooks place this material
at a later point, but I believe it is vital to discuss national
differences first. After all, many of the central issues in
international trade and investment, the global monetary system,
international business strategy and structure, and international
business operations arise out of national differences in political
economy and culture. To fully understand these issues, students
must first appreciate the differences in countries and
- 38. cultures. We discuss ethical issues at this juncture
primarily because many ethical dilemmas flow out of national
differences in political systems, economic systems, and culture.
Part Three Chapters 5 through 8 investigate the political economy
of international trade and investment. The purpose of this part is
to describe and explain the trade and investment environment in
which international business occurs. Part Four Chapters 9 through
11 describe and explain the global monetary system, laying out in
detail the monetary framework in which international business
transactions are conducted. Part Five In Chapters 12 through 14
attention shifts from the environment to the firm. Here the book
examines the strategies and structures that firms adopt to compete
effectively in the international business environment. Part Six In
Chapters 15 through 20 the focus narrows further to investigate
business operations. These chapters explain how firms can perform
their key functionsmanufacturing, marketing, R&D, human
resource management, accounting, and financein order to compete and
succeed in the international business environment. Throughout the
book, the relationship of new material to topics discussed in
earlier chapters is pointed out to the students to reinforce their
understanding of how the material comprises an integrated whole.
FOCUS ON MANAGERIAL IMPLICATIONS I have always believed that it is
important to show students how the material covered in the text is
relevant to the actual practice of international business. This is
explicit in the later chapters of the book, which focus on the
practice of international business, but it is not always obvious in
the first half of the book, which considers many macroeconomic and
political issues, from international trade theory and foreign
direct investment flows to the IMF and the influence of inflation
rates on foreign exchange quotations. Accordingly, at the end of
each chapter in Parts Two, Three, and Fourwhere the focus is on the
environment of international business, as opposed to particular
firmsa section titled Implications for Business clearly explains
the managerial implications of the material discussed in the
chapter. For example, Chapter 4, International Trade Theory, ends
with a detailed discussion of the various trade theories
implications for international business management. In addition,
each chapter begins with a case that illustrates the relevance of
chapter material for the practice of international business.
Chapter 2, Country Differences in Political Economy, for example,
opens with a case that profiles the economy of Egypt. I have also
added a closing case to each chapter. These cases are also designed
to illustrate the relevance of chapter material for the practice of
international business. The closing case for Chapter 2, for
example, looks at the transformation of Indias economy.
- 39. Another tool that I have used to focus on managerial
implications is a Management Focus box. There is at least one
Management Focus in each chapter. Like the opening case, the
purpose of these boxes is to illustrate the relevance of chapter
material for the practice of international business. The Management
Focus in Chapter 2, for example, looks at how Starbucks has been
able to enforce its trademark in China. This box illustrates the
important role that national differences in the protection of
intellectual property rights can play in international business.
Accessible and Interesting The international business arena is
fascinating and exciting, and I have tried to communicate my
enthusiasm for it to the student. Learning is easier and better if
the subject matter is communicated in an interesting, informative,
and accessible manner. One technique I have used to achieve this is
weaving interesting anecdotes into the narrative of the
text-stories that illustrate theory. The opening cases and focus
boxes are also used to make the theory being discussed in the text
both accessible and interesting. Each chapter has two kinds of
focus boxesa Management Focus box (described above) and a Country
Focus box. Country Focus boxes provide background on the political,
economic, social, or cultural aspects of countries grappling with
an international business issue. In Chapter 2, for example, one
Country Focus box discusses how the economy of Venezuela has
performed under the leadership of Hugo Chavez. WHATS NEW IN THE 8TH
EDITION The success of the first seven editions of International
Business was based in part upon the incorporation of leading edge
research into the text, the use of the up-to-date examples and
statistics to illustrate global trends and enterprise strategy, and
the discussion of current events within the context of the
appropriate theory. Building on these strengths, my goals for this
revision have been threefold: 1. To incorporate new insights from
recent scholarly research wherever appropriate. 2. To make sure the
content of the text covers all appropriate issues. 3. To make sure
the text is as up-to-date as possible with regard to current
events, statistics, and examples. As part of the overall revision
process, changes have been made to every chapter in the book. All
statistics have been updated to incorporate the most recently
available data. New examples, cases, and boxes have been added and
older examples updated to reflect new developments. Almost all of
the chapter opening and closing cases are new to this edition. New
material has been inserted wherever appropriate to reflect recent
academic work or important current events. Most notably for this
edition, detailed discussion of the global financial crisis that
occurred in 2008 and 2009, and its implications for international
business, has been added to many chapters. For example, Chapter 6
opens with a case that discusses the impact of the global financial
crisis on attitudes towards protectionism in many countries.
Similarly, Chapter 10 opens with a case that profiles how the
global financial crisis triggered economic turmoil and a currency
crisis in Latvia. Elsewhere, Chapter 6 has been updated to discuss
progress on the current round of talks sponsored by the WTO aimed
at reducing barriers to trade, particularly in agriculture (the
Doha Round). Chapter 7 now discusses the slump in foreign direct
investment flows that took place in 2008 and 2009, and
explains
- 40. how the global financial crisis of 2008 contributed to it.
Chapter 9 discusses the weakness in the U.S. dollar between 2004
and 2008, and its paradoxical rebound in late 2008 in the midst of
a severe financial crisis in the United States and elsewhere. And
so on.
- 41. ACKNOWLEDGMENTS Numerous people deserve to be thanked for
their assistance in preparing this book. First, thank you to all
the people at McGraw-Hill/Irwin who have worked with me on this
project: Paul Ducham, Publisher John Weimeister, Executive Editor
Megan Richter, Developmental Editor Anke Weekes, Marketing Manager
Ann Ferro, Marketing Coordinator Bruce Gin, Project Manager Allison
Souter, Media Project Manager Debra Sylvester, Production
Supervisor Cara Hawthorne, Designer Jeremy Cheshareck, Senior Photo
Research Coordinator Second, my thanks go to the reviewers who
provided good feedback that helped shape this book. Ron Abernathy,
University of North Carolina, Greensboro Kevin Cabe, Indiana
Wesleyan University Linda L. Calderone, Farmingdale State College
Donna Davisson, Cleveland State University Betty J. Diener, Barry
University Andrew Charles Gross, Cleveland State University Ralph
Jagodka, Mt. San Antonio College Jeffrey Kulick, George Mason
University Kirpalani, V. H. Manek, Bloomsburg University Alan
Muller, University of Washington
- 42. Dr. Ann Langlois, Palm Beach Atlantic University Tomasz
Lenartowicz, Florida Atlantic University Eydis Olsen, Drexel
University Hoon Park, University of Central Florida Carol Reade,
San Jose State University Jane Ross, University of Maryland Robert
J. Rustic, University of Findlay Charlie Shi, Diablo Valley College
Karen J. Smith, Ph.D., Columbia Southern University Donald S. Vest,
Jr., Clark Atlanta University
- 43. Guided Tour Cases, focus boxes, and exercises throughout
the book make theories accessible and interesting and show how
theory relates to the practice of international business. Opening
Case
- 44. Cases Closing Case Each chapter concludes with a closing
case demonstrating the relevance of the chapter material to the
practice of international business. End-of-Part Cases Longer,
end-of-part cases allow for more in-depth study of international
companies such as IKEA.
- 45. Focus Boxes and Exercises Country Focus Each Country Focus
example provides background on the political, economic, social, or
cultural aspects of countries grappling with an international
business issue. Management Focus Management Focus examples further
illustrate the relevance of chapter material for the practice of
international business.
- 46. Implications for Managers At the end of each chapter in
Parts 2, 3, and 4where the focus is on the environment of
international business, as opposed to particular firmssections
titled Implications for Managers clearly explain the managerial
implications of material discussed in the chapter.
- 47. globalEDGE Research Task Using the text and the globalEDGE
Web site, http://globaledge.msu.edu, students solve realistic
international business problems related to each chapter. These
exercises expose students to the types of tools and data sources
international managers use to make informed business
decisions.
- 48. Supplements for the Instructor Instructors Resource CD An
updated Instructors Manual and Video Guide (prepared by Veronica
Horton) includes course outlines, chapter overviews and teaching
suggestions, lecture outlines, ideas for student exercises and
projects, teaching notes for all cases in the book, and video
notes. Test Bank The Test Bank contains over 100 true/false,
multiple choice and essay questions per chapter, each tagged to the
Learning Objectives, page number, level of difficulty, AACSB and
Blooms Taxonomy standards. Videos A new Video collection features
recent news footage. Videos correspond to video teaching notes
accessible on the instructors side of the Online Learning Center.
PowerPoint One set of slides per chapter (prepared by Veronica
Horton) feature original materials not found in the text in
addition to reproductions of key text figures, tables and maps.
Online Learning Center (OLC)www.mhhe.com/hill A password-protected
portion of the books Web site will be available to adopters of
International Business, featuring online access to the instructors
manual, PowerPoints, video cases and globalEDGE answers.
Instructors can also view student resources to make more effective
supplementary assignments. For students, this Web site also
provides rich interactive resources to help them learn how to
practice international business; including chapter quizzes and
interactive modules.
- 49. part one Introduction and Overview
- 50. 1 Globalization LEARNING OBJECTIVES After you have read
this chapter you should be able to: LO1 Understand what is meant by
the term globalization. LO2 Be familiar with the main drivers of
globalization. LO3 Appreciate the changing nature of the global
economy. LO4 Understand the main arguments in the debate over the
impact of globalization. LO5 Appreciate how the process of
globalization is creating opportunities and challenges for business
managers. Opening Case: The Globalization of Health Care Health
care has long been considered one of the industries least
vulnerable to dislocation from globalization. After all, like many
service businesses, health care is normally delivered where it is
purchased. However, for some activities and procedures, this
assumption is now changing. The trend began with certain diagnostic
procedures, such as MRI scans. The United States has a shortage of
radiologists, the doctors who specialize in reading and
interpreting diagnostic medical images, including X-rays, CT scans,
MRI scans, and ultrasounds. Demand for radiologists has been
growing twice as fast as the rate at which medical schools are
graduating radiologists with the skills and qualifications required
to read medical images. This imbalance between supply and demand
means that radiologists are expensive; an American radiologist can
earn as much as $400,000 a year. In the early 2000s, an Indian
radiologist working at Massachusetts General Hospital, Dr. Sanjay
Saini, found a way to deal with the shortage and expensesend images
over the Internet to India where radiologists could interpret them.
This would reduce the workload on Americas radiologists and also
cut costs. A radiologist in India might earn one- tenth of his or
her U.S. counterpart. Plus, because India is on the opposite side
of the globe, the images could be interpreted while it was
nighttime in the United States and be ready for the attending
physician when he or she arrived for work the following morning.
The globalization trend has now spilled over into surgery. In the
fall of 2008, for example, Adrienne de
- 51. Forrest of Colorado had hip surgery in Chennai, India,
while Texan David Jones had triple bypass surgery in New Delhi.
Both patients were uninsured. De Forrests surgery cost $8,000, and
Joness cost $16,000 including travel expenses. Had those operations
been done in the United States, they would have cost $45,000 and
$250,000 respectively. Forrest and Jones are not alone; in 2007
some 750,000 Americans traveled abroad for medical treatment. The
consulting company Deloitte forecasts that those numbers will reach
10 million by 2012, which would be worth about $21 billion to those
nations where the procedures are performed. Some might be worried
about the quality of medical care in other countries, but medical
tourists typically go to new hospitals, most of which are private,
where highly skilled physicians treat them, many of whom trained in
places like the United States or Britain. The three largest
recipient countries of American patients are Mexico (due to its
proximity), India (where 450,000 were treated in 2007), and
Singapore (where over 400,000 were treated in 2007, and where the
local medical schools are considered to be among the very best in
the world). Costs in these countries generally run from 20 to 35
percent of costs for the same procedure in the United States. A
number of factors are driving the globalization trend. First is the
high cost of medical care in the United States, which is the source
of the largest number of patients. Then is the fact that over 45
million Americans are uninsured and many more are underinsured and
face high co-payments for expensive procedures. Many of these
people find it far cheaper to fly abroad to get treatment. Third,
is the emergence of high-quality private hospital chains in places
like India and Singapore. Fourth, the rising costs of insuring
their workforces are starting to persuade some large American
companies to look abroad. And finally, some insurance companies are
starting to experiment with payment for foreign treatment at
internationally accredited hospitals. In 2008, for example, Aetna,
a large insurer, launched a pilot scheme in partnership with
Singaporean hospitals. Aetna started to give Americans the option
to have procedures costing $20,000 or more in the United States
performed in Singapore, where the company reckons that the quality
of care is better than at the average American hospital.1
Introduction Over the last three decades a fundamental shift has
been occurring in the world economy. We have been moving away from
a world in which national economies were relatively self-contained
entities, isolated from each other by barriers to cross-border
trade and investment; by distance, time zones, and language; and by
national differences in government regulation, culture, and
business systems. And we are moving toward a world in which
barriers to cross-border trade and investment are declining;
perceived distance is shrinking due to advances in transportation
and telecommunications technology; material culture is starting to
look similar the world over; and national economies are merging
into an interdependent, integrated global economic system. The
process by which this is occurring is commonly referred to as
globalization. In todays interdependent global economy, an American
might drive to work in a car designed in Germany that was assembled
in Mexico by Ford from components made in the United States and
Japan that were fabricated from Korean steel and Malaysian rubber.
She may have filled the car with gasoline at a BP service station
owned by a British multinational company. The gasoline could have
been made from oil pumped out of a well off the coast of Africa by
a French oil company that transported it to the United States in a
ship owned by a Greek shipping line. While driving to work, the
American might talk to her stockbroker on a Nokia cell phone that
was designed in Finland and assembled in Texas using chip sets
- 52. produced in Taiwan that were designed by Indian engineers
working for Texas Instruments. She could tell the stockbroker to
purchase shares in Deutsche Telekom, a German telecommunications
firm that was transformed from a former state-owned monopoly into a
global company by an energetic Israeli CEO. She may turn on the car
radio, which was made in Malaysia by a Japanese firm, to hear a
popular hip-hop song composed by a Swede and sung by a group of
Danes in English who signed a record contract with a French music
company to promote their record in America. The driver might pull
into a drive-through coffee shop run by a Korean immigrant and
order a single, tall, nonfat latte and chocolate-covered biscotti.
The coffee beans came from Brazil and the chocolate from Peru,
while the biscotti was made locally using an old Italian recipe.
After the song ends, a news announcer might inform the American
listener that antiglobalization protests at a meeting of the World
Economic Forum in Davos, Switzerland, have turned violent. One
protester has been killed. The announcer then turns to the next
item, a story about how financial crisis that started in the United
States banking sector may trigger a global recession and is sending
stock markets down all over the world. This is the world in which
we live. It is a world where the volume of goods, services, and
investment crossing national borders has expanded faster than world
output for more than half a century. It is a world where over $4
trillion in foreign exchange transactions are made every day, where
more than $15 trillion of goods and $3.7 trillion of services are
sold across national borders.2 It is a world in which international
institutions such as the World Trade Organization and gatherings of
leaders from the worlds most powerful economies have repeatedly
called for even lower barriers to cross-border trade and
investment. It is a world where the symbols of material and popular
culture are increasingly global: from Coca-Cola and Starbucks to
Sony PlayStations, Nokia cell phones, MTV shows, Disney films, IKEA
stores, and Apple iPods and iPhones. It is a world in which
products are made from inputs that come from all over the world. It
is a world in which a financial crisis in America can trigger a
global economic recession, which is exactly what occurred in 2008
and 2009. It is also a world in which vigorous and vocal groups
protest against globalization, which they blame for a list of ills,
from unemployment in developed nations to environmental degradation
and the Americanization of popular culture. And yes, these protests
have on occasion turned violent. For businesses, this process has
produced many opportunities. Firms can expand their revenues by
selling around the world and/or reduce their costs by producing in
nations where key inputs, including labor, are cheap. The global
expansion of enterprises has been facilitated by favorable
political and economic trends. Since the collapse of communism at
the end of the 1980s, the pendulum of public policy in nation after
nation has swung toward the free market end of the economic
spectrum. Regulatory and administrative barriers to doing business
in foreign nations have come down, while those nations have often
transformed their economies, privatizing state-owned enterprises,
deregulating markets, increasing competition, and welcoming
investment by foreign businesses. This has allowed businesses both
large and small, from both advanced nations and developing nations,
to expand internationally. What is now starting to happen in the
health care industry exemplifies the changes now taking place (see
the Opening Case). Health care has long been thought to be immune
from the effects of globalization, but this is now no longer true.
Medical tourism is becoming a significant business, with Americans
in particular traveling to places like India and Singapore to have
surgical procedures performed because the costs of surgery are
lower and the quality of care often comparable to what they would
receive in the United States. Obviously this creates opportunities
for health care providers in India and Singapore to grow their
businesses, for U.S. insurance companies to lower their costs by
agreeing to pay for treatment in accredited hospitals overseas, and
for health brokers in the United States, who make money by
arranging for U.S. citizens to have treatment overseas. The trend
also clearly benefits some health care consumers. At the same time,
globalization has created new threats for businesses accustomed to
dominating their
- 53. domestic markets. Foreign companies have entered many
formerly protected industries in developing nations, increasing
competition and driving down prices. For three decades, U.S.
automobile companies have been battling foreign enterprises, as
Japanese, European, and now Korean companies have taken business
from them. General Motors has seen its U.S. market share decline
from more than 50 percent to around 20 percent, while Japans Toyota
has surpassed first Ford, and now GM, to become the largest
automobile company in the world. As globalization unfolds, it is
transforming industries and creating anxiety among those who
believed their jobs were protected from foreign competition.
Historically, while many workers in manufacturing industries
worried about the impact foreign competition might have on their
jobs, workers in service industries felt more secure. Now this too
is changing. Advances in technology, lower transportation costs,
and the rise of skilled workers in developing countries imply that
many services no longer need to be performed where they are
delivered, as the example of health care clearly indicates (see the
Opening Case). For example, accounting work is being outsourced
from America to India. In 2005, some 400,000 individual tax returns
were compiled in India. Indian accountants, trained in U.S. tax
rules, perform work for U.S. accounting firms.3 They access
individual tax returns stored on computers in the United States,
perform routine calculations, and save their work so that it can be
inspected by a U.S. accountant, who then bills clients. As the
best-selling author Thomas Friedman has argued, the world is
becoming flat.4 People living in developed nations no longer have
the playing field tilted in their favor. Increasingly, enterprising
individuals based in India, China, or Brazil have the same
opportunities to better themselves as those living in Western
Europe, the United States, or Canada. In this book we will take a
close look at the issues introduced here, and at many more besides.
We will explore how changes in regulations governing international
trade and investment, when coupled with changes in political
systems and technology, have dramatically altered the competitive
playing field confronting many businesses. We will discuss the
resulting opportunities and threats and review the different
strategies that managers can pursue to exploit the opportunities
and counter the threats. We will consider whether globalization
benefits or harms national economies. We will look at what economic
theory has to say about outsourcing manufacturing and service jobs
to places such as India and China, and at the benefits and costs of
outsourcing, not just to business firms and their employees, but
also to entire economies. First, though, we need to get a better
overview of the nature and process of globalization, and that is
the function of the current chapter. What is Globalization? As used
in this book, globalization refers to the shift toward a more
integrated and interdependent world economy. Globalization has
several facets, including the globalization of markets and the
globalization of production. THE GLOBALIZATION OF MARKETS The
globalization of markets refers to the merging of historically
distinct and separate national markets into one huge global
marketplace. Falling barriers to cross-border trade have made it
easier to sell internationally. It has been argued for some time
that the tastes and preferences of consumers in different nations
are beginning to converge on some global norm, thereby helping to
create a global market.5 Consumer products such as Citigroup credit
cards, Coca-Cola soft drinks, Sony PlayStation
- 54. video games, McDonalds hamburgers, Starbucks coffee, and
IKEA furniture are frequently held up as prototypical examples of
this trend. Firms such as those just cited are more than just
benefactors of this trend; they are also facilitators of it. By
offering the same basic product worldwide, they help to create a
global market. A company does not have to be the size of these
multinational giants to facilitate, and benefit from, the
globalization of markets. In the United States, for example, nearly
90 percent of firms that export are small businesses employing less
than 100 people, and their share of total U.S. exports has grown
steadily over the last decade to now exceed 20 percent.6 Firms with
fewer than 500 employees account for 97 percent of all U.S.
exporters and almost 30 percent of all exports by value.7 Typical
of these is Hytech, a New Yorkbased manufacturer of solar panels
that generates 40 percent of its $3 million in annual sales from
exports to five countries, or B&S Aircraft Alloys, another New
York company whose exports account for 40 percent of its $8 million
annual revenues.8 The situation is similar in several other
nations. In Germany, for example, which is the worlds largest
exporter, a staggering 98 percent of small and midsized companies
have exposure to international markets, either via exports or
international production.9 Despite the global prevalence of
Citigroup credit cards, McDonalds hamburgers, Starbucks coffee, and
IKEA stores, it is important not to push too far the view that
national markets are giving way to the global market. As we shall
see in later chapters, significant differences still exist among
national markets along many relevant dimensions, including consumer
tastes and preferences, distribution channels, culturally embedded
value systems, business systems, and legal regulations. These
differences frequently require companies to customize marketing
strategies, product features, and operating practices to best match
conditions in a particular country. The most global markets
currently are not markets for consumer productswhere national
differences in tastes and preferences are still often important
enough to act as a brake on globalizationbut markets for industrial
goods and materials that serve a universal need the world over.
These include the markets for commodities such as aluminum, oil,
and wheat; for industrial products such as microprocessors, DRAMs
(computer memory chips), and commercial jet aircraft; for computer
software; and for financial assets from U.S. Treasury bills to
eurobonds and futures on the Nikkei index or the Mexican peso.
Beijing, China: Chinese shoppers walk through Beijings main
downtown shopping promenade past a Kentucky Fried Chicken (KFC)
franchise. KFC is one of the most successful international
businesses in China due to its adaptation and appeal to the Chinese
market. In many global markets, the same firms frequently confront
each other as competitors in nation after nation. Coca-Colas
rivalry with PepsiCo is a global one, as are the rivalries between
Ford and Toyota,
- 55. Boeing and Airbus, Caterpillar and Komatsu in earthmoving
equipment, General Electric and Rolls Royce in aero engines, and
Sony, Nintendo, and Microsoft in video games. If a firm moves into
a nation not currently served by its rivals, many of those rivals
are sure to follow to prevent their competitor from gaining an
advantage.10 As firms follow each other around the world, they
bring with them many of the assets that served them well in other
national marketsincluding their products, operating strategies,
marketing strategies, and brand namescreating some homogeneity
across markets. Thus, greater uniformity replaces diversity. In an
increasing number of industries, it is no longer meaningful to talk
about the German market, the American market, the Brazilian market,
or the Japanese market; for many firms there is only the global
market. THE GLOBALIZATION OF PRODUCTION The globalization of
production refers to sourcing goods and services from locations
around the globe to take advantage of national differences in the
cost and quality of factors of production (such as labor, energy,
land, and capital). By using global sourcing, companies hope to
lower their overall cost structure or improve the quality or
functionality of their product offering, thereby allowing them to
compete more effectively. Consider the Boeings 777, a commercial
jet airliner. Eight Japanese suppliers make parts for the fuselage,
doors, and wings; a supplier in Singapore makes the doors for the
nose landing gear; three suppliers in Italy manufacture wing flaps;
and so on.11 In total, foreign companies build about 30 percent of
the 777, by value. For its most recent jet airliner, the 787,
Boeing has pushed this trend even further, with some 65 percent of
the total value of the aircraft scheduled to be outsourced to
foreign companies, 35 percent of which will go to three major
Japanese companies.12 Part of Boeings rationale for outsourcing so
much production to foreign suppliers is that these suppliers are
the best in the world at their particular activity. A global web of
suppliers yields a better final product, which enhances the chances
of Boeing winning a greater share of total orders for aircraft than
its global rival Airbus Industrie. Boeing also outsources some
production to foreign countries to increase the chance that it will
win significant orders from airlines based in that country. For
another example of a global web of activities, consider the example
of Vizio profiled in the Management Focus feature. Boeings new
global product, the 787, rolls out.
- 56. MANAGEMENT FOCUS Vizio and the Market for Flat Panel TVs
They begin as glass panels that are manufactured in high-tech
fabrication centers in South Korean, Taiwan, and Japan. Operating
sophisticated tooling in environments that must be kept absolutely
clean, these factories produce sheets of glass twice as large as
king size beds to exacting specifications. From there, the glass
panels travel to Mexican plants located alongside the U.S. border.
There they are cut to size, combined with electronic components
shipped in from Asia and the United States, assembled into finished
TVs, and loaded onto trucks bound for retail stores in the United
States. Its a huge business. U.S. consumers spend over $35 billion
a year on flat panel TVs. The underlying technology for flat panel
displays was invented in the United States in the late 1960s by
RCA. But after RCA and rivals Westinghouse and Xerox opted not to
pursue the technology, the Japanese company Sharp made aggressive
investments in flat panel displays. By the early 1990s Sharp was
selling the first flat panel screens, but as the Japanese economy
plunged into a decade-long recession, investment leadership shifted
to South Korean companies such as Samsung. Then the 1997 Asian
crisis hit Korea hard, and Taiwanese companies seized leadership.
Today, Chinese companies are starting to elbow their way into the
flat panel display manufacturing business. As production for flat
panel displays migrates its way around the globe to low cost
locations, there are clear winners and losers. U.S. consumers, who
have benefited from the falling prices of flat panel TVs and are
snapping them up. Efficient manufacturers have taken advantage of
globally dispersed supply chains to make and sell low-cost,
high-quality flat panel TVs. Foremost among these has been the
California-based company, Vizio. Founded by a Taiwanese immigrant,
in just six years sales of Vizio flat panel TVs ballooned from
nothing to over $2 billion in 2008, and in early 2009, the company
was the largest provider to the United States market with a 21.7
percent share. Vizio, however, has less than 100 employees. They
focus on final product design, sales, and customer service. Vizio
outsources most of its engineering work, all of its manufacturing
and much of its logistics. For each of its models, Vizio assembles
a team of supplier partners strung across the globe. Its 42-inch
flat panel TV, for example, contains a panel from South Korea,
electronic components from China, and processors from the United
States, and it is assembled in Mexico. Vizios managers scour the
globe continually for the cheapest manufacturers of flat panel
displays and electronic components. They sell most of their TVs to
large discount retailers such as Costco and Sams Club. Good order
visibility from retailers, coupled with tight management of global
logistics, allows Vizio to turn over its inventory every three
weeks, twice as fast as many of its competitors, which is a major
source of cost saving in a business where prices are falling
continually. On the other hand, the shift to flat panel TVs has
caused pain in certain sectors of the economy, such as those firms
that make traditional cathode ray TVs in high-cost locations. In
2006, for example, Japanese electronics manufacturers Sanyo laid
off 300 employees at its U.S. factory, and Hitachi closed its TV
manufacturing plant in South Carolina, laying off 200 employees.
Both Sony and Hitachi of course both make still make TVs, but they
are flat panel TVs assembled in Mexico from components manufactured
in Asia.13 Early outsourcing efforts were primarily confined to
manufacturing activities, such as those undertaken by Boeing and
Vizio; increasingly, however, companies are taking advantage of
modern communications
- 57. technology, particularly the Internet, to outsource service
activities to low-cost producers in other nations. As described in
the opening discussion of health care, the Internet has allowed
hospitals to outsource some radiology work to India, where images
from MRI scans and the like are read at night while U.S. physicians
sleep and the results are ready for them in the morning. Many
software companies, including IBM, now use Indian engineers to
perform maintenance functions on software designed in the United
States. The time difference allows Indian engineers to run
debugging tests on software written in the United States when U.S.
engineers sleep, transmitting the corrected code back to the United
States over secure Internet connections so it is ready for U.S.
engineers to work on the following day. Dispersing value-creation
activities in this way can compress the time and lower the costs
required to develop new software programs. Other companies, from
computer makers to banks, are outsourcing customer service
functions, such as customer call centers, to developing nations
where labor is cheaper. In another example from health care, in
2008 some 34,000 Filipinos were employed in the business of
transcribing American medical files (such as audio files from
doctors seeking approval from insurance companies for performing a
procedure). More generally, some estimates suggest that the
outsourcing of many administrative procedures in health care, such
as customer service and claims processing, could reduce health care
costs in America by as much as $70 billion.14 Robert Reich, who
served as secretary of labor in the Clinton administration, has
argued that as a consequence of the trend exemplified by companies
such as Boeing, IBM, and Vizio, in many cases it is becoming
irrelevant to talk about American products, Japanese products,
German products, or Korean products. Increasingly, according to
Reich, outsourcing productive activities to different suppliers
results in the creation of products that are global in nature, that
is, global products.15 But as with the globalization of markets,
companies must be careful not to push the globalization of
production too far. As we will see in later chapters, substantial
impediments still make it difficult for firms to achieve the
optimal dispersion of their productive activities to locations
around the globe. These impediments include formal and informal
barriers to trade between countries, barriers to foreign direct
investment, transportation costs, and issues associated with
economic and political risk. For example, government regulations
ultimately limit the ability of hospitals to outsource the process
of interpreting MRI scans to developing nations where radiologists
are cheaper. Nevertheless, the globalization of markets and
production will continue. Modern firms are important actors in this
trend, their very actions fostering increased globalization. These
firms, however, are merely responding in an efficient manner to
changing conditions in their operating environmentas well they
should. The Emergence of Global Institutions As markets globalize
and an increasing proportion of business activity transcends
national borders, institutions are needed to help manage, regulate,
and police the global marketplace, and to promote the establishment
of multinational treaties to govern the global business system.
Over the past half century, a number of important global
institutions have been created to help perform these functions,
including the General Agreement on Tariffs and Trade (GATT) and its
successor, the World Trade Organization (WTO); the International
Monetary Fund (IMF) and its sister institution, the World Bank; and
the United Nations (UN). All these institutions were created by
voluntary agreement between individual nation- states, and their
functions are enshrined in international treaties. The World Trade
Organization (like the GATT before it) is primarily responsible for
policing the
- 58. world trading system and making sure nation-states adhere
to the rules laid down in trade treaties signed by WTO member
states. As of 2009, 153 nations that collectively accounted for 97
percent of world trade were WTO members, thereby giving the
organization enormous scope and influence. The WTO is also
responsible for facilitating the establishment of additional
multinational agreements between WTO member states. Over its entire
history, and that of the GATT before it, the WTO has promoted
lowering barriers to cross-border trade and investment. In doing
so, the WTO has been the instrument of its member states, which
have sought to create a more open global business system
unencumbered by barriers to trade and investment between countries.
Without an institution such as the WTO, it is unlikely that the
globalization of markets and production could have proceeded as far
as it has. However, as we shall see in this chapter and in Chapter
6 when we look closely at the WTO, critics charge that the
organization is usurping the national sovereignty of individual
nation-states. The International Monetary Fund and the World Bank
were both created in 1944 by 44 nations that met at Bretton Woods,
New Hampshire. The IMF was established to maintain order in the
international monetary system; the World Bank was set up to promote
economic development. In the 65 years since their creation, both
institutions have emerged as significant players in the global
economy. The World Bank is the less controversial of the two sister
institutions. It has focused on making low-interest loans to
cash-strapped governments in poor nations that wish to undertake
significant infrastructure investments (such as building dams or
roads). The IMF is often seen as the lender of last resort to
nation-states whose economies are in turmoil and currencies are
losing value against those of other nations. During the past two
decades, for example, the IMF has lent money to the governments of
troubled states, including Argentina, Indonesia, Mexico, Russia,
South Korea, Thailand, and Turkey. More recently, the IMF has taken
a very proactive role in helping countries to cope with some of the
effects of the 20082009 global financial crises. IMF loans come
with strings attached, however; in return for loans, the IMF
requires nation-states to adopt specific economic policies aimed at
returning their troubled economies to stability and growth. These
requirements have sparked controversy. Some critics charge that the
IMFs policy recommendations are often inappropriate; others
maintain that by telling national governments what economic
policies they must adopt, the IMF, like the WTO, is usurping the
sovereignty of nation-states. We will look at the debate over the
role of the IMF in Chapter 10. The United Nations was established
October 24, 1945, by 51 countries committed to preserving peace
through international cooperation and collective security. Today
nearly every nation in the world belongs to the United Nations;
membership now totals 191 countries. When states become members of
the United Nations, they agree to accept the obligations of the UN
Charter, an international treaty that establishes basic principles
of international relations. According to the charter, the UN has
four purposes: to maintain international peace and security, to
develop friendly relations among nations, to cooperate in solving
international problems and in promoting respect for human rights,
and to be a center for harmonizing the actions of nations. Although
the UN is perhaps best known for its peace-keeping role, one of the
organizations central mandates is the promotion of higher standards
of living, full employment, and conditions of economic and social
progress and developmentall issues that are central to the creation
of a vibrant global economy. As much as 70 percent of the work of
the UN system is devoted to accomplishing this mandate. To do so,
the UN works closely with other international institutions such as
the World Bank. Guiding the work is the belief that eradicating
poverty and improving the well-being of people everywhere are
necessary steps in creating conditions for lasting world peace.16
The United Nations has the important goal of improving the
well-being of people around the world.
- 59. Another institution that has been in the news of late is
the G20. Established in 1999, the G20 comprises the finance
ministers and central bank governors of the 19 largest economies in
the world, plus representatives from the European Union and the
European Central Bank. Originally established to formulate a
coordinated policy response to financial crises in developing
nations, in 2008 and 2009, G20 became the forum through which major
nations attempted to launch a coordinated policy response to the
global financial crisis that started in America and then rapidly
spread around the world, ushering in the first serious global
economic recession since 1981. Drivers of Globalization Two macro
factors underlie the trend toward greater globalization.17 The
first is the decline in barriers to the free flow of goods,
services, and capital that has occurred since the end of World War
II. The second factor is technological change, particularly the
dramatic developments in recent years in communication, information
processing, and transportation technologies. DECLINING TRADE AND
INVESTMENT BARRIERS During the 1920s and 30s many of the worlds
nation-states erected formidable barriers to international trade
and foreign direct investment. International trade occurs when a
firm exports goods or services to consumers in another country.
Foreign direct investment (FDI) occurs when a firm invests
resources in business activities outside its home country. Many of
the barriers to international trade took the form of high tariffs
on imports of manufactured goods. The typical aim of such tariffs
was to protect domestic industries from foreign competition. One
consequence, however, was beggar thy neighbor retaliatory trade
policies, with countries progressively raising trade barriers
against each other. Ultimately, this depressed world demand and
contributed to the Great Depression of the 1930s. Having learned
from this experience, the advanced industrial nations of the West
committed themselves after World War II to removing barriers to the
free flow of goods, services, and capital between nations.18 This
goal was enshrined in the General Agreement on Tariffs and Trade.
Under the umbrella of GATT, eight rounds of negotiations among
member states (now numbering 153) have worked to lower barriers to
the free flow of goods and services. The most recent round of
negotiations to be completed, known as the Uruguay Round, were
finalized in December 1993. The Uruguay Round further reduced trade
barriers; extended GATT to cover services as well as manufactured
goods; provided enhanced protection for patents, trademarks, and
copyrights; and established the World Trade Organization to