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8E InternationalBusiness
C O M P E T I N G IN T H EG L O B A L M A R K E T P L A G E
Char les W. L. HillU N I V E R S I T Y O E W A S H I N G T O N
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part oneIntroduction and Overview Country Differences
CHAPTER 1Globalization 2Opening CaseThe Globalization of Health Care 2
Introduction 4
What Is Globalization? 6The Globalization of Markets 6The Globalization of Production 7
Management Focus
Vizio and the Market for Flat Panel TVs 8
The Emergence of Global Institutions 9
Drivers of Globalization 11Declining Trade and Investment Barriers J JThe Role of Technological Change 14Microprocessors and Telecommunications 14
The Changing Demographics of the Global Economy 16The Changing World Output and World Trade Picture 16
Country FocusIndia's Software Sector 18
The Changing Foreign Direct Investment Picture 18The Changing Nature of the Multinational Enterprise 20
Management FocusChina's Hisense—An Emerging Multinational 22
The Changing World Order 22The Global Economy of the 2 1 st Century 24
The Globalization Debate 24Antiglobalization Protests 25Globalization, jobs, and Income 26
Country FocusProtesting Globalization in France 27
Globalization, Labor Policies, and the EnvironmentGlobalization and National Sovereignty 3 JGlobalization and the World's Poor 31
Managing in the Global Marketplace 33
Chapter Summary 34
Critical Thinking and Discussion Questions 35
Research Task 36
29
Closing CaseGlobalization at General Electric
National Differences in Political Economy 40Opening CaseEgypt, the Troubled Giant 40
Introduction 42
Political Systems 42Collectivism and Individualism 43Democracy and Totalitarianism 45
Country FocusChavez's Venezuela 46
Economic Systems 48Market Economy 48Command Economy 48Mixed Economy 49
Legal Systems 49Different Legal Systems 50Differences in Contract Law 51Property Rights and Corruption 51
Country FocusCorruption in Nigeria 54
The Protection of Intellectual PropertyProduct Safety and Liability 56
55
Management FocusStarbucks Wins Key Trademark Case in China
The Determinants of Economic DevelopmentDifferences in Economic Development 57Broader Conceptions of Development: Amartya SenPolitical Economy and Economic Progress 61
Country FocusEmerging Property Rights in China 66
Geography, Education, and EconomicDevelopment 67
States in Transition 68The Spread of Democracy 68The New World Order and GlobalTerrorism 70The Spread of Market-Based Systems
57
57
61
71
36
The Nature of Economic TransformationDeregulation 73Privatization 73Legal Systems 74
73
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iftkft) Contents
Implications of Changing PoliticalEconomy 75
Implications for Managers 76
Chapter Summary 80
Critical Thinking and DiscussionQuestions 80
Research Task 81
Closing CaseIndia's Transformation 81
CHAPTER 3Differences in Culture 86Opening CaseMcDonald's in India 86
Introduction 88
What Is Culture? 89Values and Norms 89Culture, Society, and theNation-State 90The Determinants of Culture 91
Social Structure 92Individuals and Groups 92Social Stratification 94
Country FocusBreaking India's CasteSystem 95
Religious and EthicalSystems 97
Christianity 97Islam 99
Country FocusIslamic Capitalism in Turkey 102
Hinduism 103Buddhism 104Confucianism 104
Management FocusDMG-Shanghai 106
Language 107Spoken Language 107Unspoken Language 108
Education 108
Culture and the Workplace 109
Cultural Change 111
Implications for Managers 113
Chapter Summary 116
Critical Thinking and DiscussionQuestions 117
Research Task 117
Closing CaseWal-Mart's Foreign Expansion 118
Ethics in International Business 122Opening CaseSiemens Bribery Scandal 122
Introduction 124
Ethical Issues in InternationalBusiness 124
Employment Practices 124Human Rights 125
Management FocusMaking Apple's iPod 126
Environmental Pollution 128Corruption 128
Management FocusUnocal in Myanmar 129
Moral Obligations 131
Ethical Dilemmas 131
The Roots of UnethicalBehavior 132
Personal Ethics 132Decision-Making Processes 133Organization Culture 133Unrealistic PerformanceExpectations 134
Management FocusPfizer's Drug-Testing Strategyin Nigeria 135
Leadership 135
Philosophical Approaches toEthics 136
Straw Men 136Utilitarian and KantianEthics 138Rights Theories 139
justice Theories 141
Implications for Managers 142
Chapter Summary 146
Critical Thinking and DiscussionQuestions 147
Research Task 148
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Contents xi
Closing CaseWal-Mart's Chinese Suppliers 148
Part Two CasesGoogle in China 154Mired in Corruption —Kellogg, Brown & Root inNigeria 155
The Global Trade and InvestmentEnvironment
CHAPTER 5International Trade Theory 158Opening CaseBangladesh's Textile Trade 158
Introduction 160
An Overview of Trade Theory 160The Benefits of Trade 161The Pattern of International TradeTrade Theory and GovernmentPolicy 162
161
Mercantilism 162
Absolute Advantage 163
Country FocusIs China a Neo-MercantilistNation? 164
Comparative Advantage 166The Gains from Trade 167Qualifications and Assumptions 168Extensions of the Ricardian Model 169
Country FocusMoving U.S. White-Collar Jobs Offshore
Heckscher-Ohlin Theory 174The Leontief Paradox 174
The Product Life-Cycle Theory 175Evaluating the Product Life-Cycle Theory
173
176
New Trade Theory 178Increasing Product Variety and Reducing Costs 178Economies of Scale, First-Mover Advantages, and the Patternof Trade 179Implications of New Trade Theory 179
National Competitive Advantage: Porter's DiamondFactor Endowments 182Demand Conditions 182Related and Supporting Industries 182
181
Firm Strategy, Structure, and Rivalry 183Evaluating Porter's Theory 183
Management Focus
The Rise of Finland's Nokia 184
Implications for Managers 185
Chapter Summary 187
CriticalThinking and DiscussionQuestions 188
Research Task 189
Closing CaseThe Ecuadoran Rose Industry 189
AppendixInternational Trade and the Balanceof Payments 190
CHAPTER §The Political Economy of InternationalTrade 196Opening CaseThe Global Financial Crisis and Protectionism 196
Introduction 198
Instruments of Trade Policy 198Tariffs 199Subsidies 200
Country FocusSubsidized Wheat Production in Japan 201
Import Quotas and Voluntary Export Restraints 201Local Content Requirements 203Administrative Policies 203
Management FocusU.S. Magnesium Seeks Protection 204
The Case for Government Intervention 205Political Arguments for Intervention 205Economic Arguments for Intervention 208
Country FocusTrade in Hormone-Treated Beef 209
The Revised Case for Free Trade 211Retaliation and Trade War 211Domestic Policies 211
Development of the World Trading System 212From Smith to the Great Depression 2121947-1979: GATT, Trade Liberalization, andEconomic Growth 2131980-1993: Protectionist Trends 213The Uruguay Round and the World TradeOrganization 214
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xii !cfct?)) Contents
WTO: Experience to Date 215The Future of the WTO: Unresolved Issues and the DohaRound 218
Country Focus
Estimating the Gains from Trade for America 222
Implications for Managers 224
Chapter Summary 225
Critical Thinking and DiscussionQuestions 226
Research Task 227
Closing CaseWhy Did Global Food Prices Rise? 227
Home-Country Costs 253International Trade Theory and FD1 253
Government Policy Instruments and FDI 254Home-Country Policies 254Host-Country Policies 255International Institutions and the Liberalizationof FDI 256
Implications for Managers 257
Chapter Summary 259
Critical Thinking and Discussion Questions 260
Research Task 260
Closing CaseLakshmi Mitt a I and the Growth of Mittal Steel 261
CHAPTER 7Foreign Direct InvestmentOpening CaseSpain's Telefonica
230
230
Introduction 232
Foreign Direct Investment in the WorldEconomy 232
Trends in FDI 232The Direction of FDI 234
Country FocusForeign Direct Investment in China 236
The Source of FDI 237The Form of FDI: Acquisitions versus GreenfieldInvestments 237The Shift to Services 238
Theories of Foreign Direct Investment 239Why Foreign Direct Investment.7 239
Management FocusForeign Direct Investment by Cemex 240
The Pattern of Foreign Direct Investment 242The Eclectic Paradigm 244
Political Ideology and Foreign DirectInvestment 245
The Radical View 245The Free Market View 246Pragmatic Nationalism 247Shifting Ideology 247
Management FocusDP World and the United States
Benefits and Costs of FDI 249Host-Country Benefits 249Host-Country Costs 251Home-Country Benefits 253
248
Regional Economic Integration 264Opening Case
NAFTA and Mexican Trucking 264
Introduction 266
Levels of Economic Integration 267
The Case for Regional Integration 268The Economic Case for Integration 269The Political Case for Integration 269Impediments to Integration 270
The Case against Regional Integration 270
Regional Economic Integrationin Europe 271
Evolution of the European Union 271Political Structure of the European Union 271
Management FocusThe European Commission and Media IndustryMergers 274
The Single European Act 274
Country FocusCreating a Single European Market in FinancialServices 276
The Establishment of the Euro 277Enlargement of the European Union 279
Regional Economic Integration inthe Americas 280
The North American Free Trade Agreement 280The Andean Community 283
MERCOSUR 284Central American Common Market, CAFTA, andCARICOM 285Free Trade Area of the Americas 285
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Contents i^k xiii
Regional Economic Integration Elsewhere 286Association of Southeast Asian Nations 286Asia-Pacific Economic Cooperation 286Regional Trade Blocs in Africa 288
Implications for Managers 289
Chapter Summary 291
Critical Thinking and DiscussionQuestions 292
Research Task 292
Closing CaseThe Euro Energy Market 293
Part Three CasesNAFTA and the U.S.Textile Industry 298Martin's Textiles 299Agricultural Subsidies andDevelopment 300Boeing versus Airbus 302Starbucks Foreign Direct Investment 308
The Global Monetary System
The Foreign Exchange Market 310Opening CaseCaterpillar Tractor
Introduction 312
310
The Function of the ForeignExchange Market 313
Currency Conversion 313Insuring against Foreign Exchange Risk 315
Management FocusVolkswagen's Hedging Strategy 317
The Nature of the Foreign Exchange Market 318
Economic Theories of Exchange RateDetermination 319
Prices and Exchange Rates 319
Country FocusAnatomy of a Currency Crisis
Summary 328326
Exchange Rate Forecasting 328The Efficient Market School 328The Inefficient Market School 328Approaches to Forecasting 329
Currency Convertibility 330
Implications for Managers 331
Management FocusDealing with the Rising Euro 333
Chapter Summary 335
CriticalThinking and DiscussionQuestions 336
Research Task 336
Closing CaseHyundai and Kia 337
CHAPTER 10The International Monetary SystemOpening Case
Economic Turmoil in Latvia 340
Introduction 342
The Gold Standard 343Mechanics of the Gold Standard 343Strength of the Gold Standard 344The Period between the Wars, 1918-1939
340
344
345The Bretton Woods SystemThe Role of the IMF 345The Role of the World Bank 347
The Collapse of the Fixed ExchangeRate System 347
The Floating Exchange Rate Regime 348The Jamaica Agreement 348Exchange Rates since 1973 349
Fixed versus Floating Exchange Rates 351
Country FocusThe U.S. Dollar, Oil Prices, and RecyclingPetrodollars 352
The Case for Floating Exchange Rates 352The Case for Fixed Exchange Rates 353Who Is Right? 354
Exchange Rate Regimes in PracticePegged Exchange Rates 355Currency Boards 356
355
IMF Crisis Management 357Financial Crises in the Post-Bretton Woods EraMexican Currency Crisis of 1995 358The Asian Crisis 359Evaluating the IMF's Policy Prescriptions 363
Country FocusTurkey and the IMF 364
357
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xiv Contents
Implications for Managers 366
Management FocusAirbus and the Euro 368
Chapter Summary 369
Critical Thinking and DiscussionQuestions 370
Research Task 370
Closing CaseChina's Managed Float 371
CHAPTER I IThe Global Capital Market 374Opening CaseGlobal Capital Markets in Crisis 374
Introduction 376
Benefits of the Global Capital Market 376Functions of a Generic Capital Market 376Attractions of the Global Capital Market 377
Management FocusDeutsche Telekom Taps the GlobalCapital Market 379
Growth of the Global CapitalMarket 382
Global Capital Market Risks 384
Country FocusDid the Global Capital MarketsFail Mexico? 385
The Eurocurrency Market 386Genesis and Growth of the Market 386Attractions of the Eurocurrency Market 386Drawbacks of the Eurocurrency Market 388
The Global Bond Market 388Attractions of the Eurobond Market 389
The Global Equity Market 389
Foreign Exchange Risk and the Cost ofCapital 390
Country FocusThe Search for Capital in the
Czech Republic 391
Implications for Managers 392
Chapter Summary 393
Critical Thinking and DiscussionQuestions 394
Research Task 394
Closing CaseIndustrial and CommercialBank of China 395
Part Four CaseArgentina's Monetary Crisis 399
The Strategy and Structure ofInternational Business
The Strategy of International Business 400Opening CaseThe Evolving Strategy of IBM
Introduction 402
400
Strategy and the Firm 402Value Creation 403Strategic Positioning 404Operations: The Firm as a Value Chain 405
Global Expansion, Profitability, and ProfitGrowth 408
Expanding the Market: Leveraging Products andCompetencies 408Location Economies 409Experience Effects 411Leveraging Subsidiary Skills 414Summary 414
Cost Pressures and Pressures for LocalResponsiveness 415
Pressures for Cost Reductions 415Pressures for Local Responsiveness 416
Management FocusLocal Responsiveness atMTV Networks 417
Choosing a Strategy 419Global Standardization Strategy 419
Management FocusVodaphone in Japan 420
Localization Strategy 420Transnational Strategy 421International Strategy 422
Management FocusEvolution of Strategy atProcter & Gamble 423
The Evolution of Strategy 423
Chapter Summary 424
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Contents i/HJ xv
CriticalThinking and Discussion Questions 425
Research Task 425
Closing CaseCoca Cola 426
AppendixProfitability, Growth, and Valuation 428
CHAPTER 113The Organization of International BusinessOpening Case
Nestle 430
Introduction 432
Organizational Architecture 433
Organizational Structure 434
Vertical Differentiation: Centralization andDecentralization 434
430
Management FocusThe International Division at Wal-Mart
Horizontal Differentiation: The Designof Structure 437
436
Management FocusThe Rise and Fall of Dow Chemical's Matrix Structure
Integrating Mechanisms 444
442
Control Systems and Incentives' 448Types of Control Systems 448Incentive Systems 449Control Systems, Incentives, and Strategy in the InternationalBusiness 451
Processes 452
Organizational Culture 454Creating and Maintaining Organizational Culture 454Organizational Culture and Performance in the InternationalBusiness 455
Management FocusCulture and Incentives at Lincoln Electric 456
Synthesis: Strategy and Architecture 458Localisation Strategy 458International Strategy 459Global Standardization Strategy 459Transnational Strategy 459Environment, Strategy, Architecture,and Performance 460
Organizational Change 460Organisational Inertia 461Implementing Organizational Change 462
CriticalThinking and Discussion Questions 464
Research Task 464
Closing CaseA Decade of Organizational Change at Unilever 465
Entry Strategy and Strategic Alliances 468Opening CaseGeneral Electric's Joint Ventures 468
Introduction 470
Basic Entry Decisions 470Which Foreign Markets? 470Timing of Entry 471
Management FocusTesco's International Growth Strategy 472
Scale of Entry and Strategic Commitments 472Summary 474
Entry Modes 475Exporting 475
Management FocusThe Jollibee Phenomenon—A PhilippineMultinational 476
Turnkey Projects 477Licensing 478Franchising 480joint Ventures 481Wholly Owned Subsidiaries 482
Selecting an Entry Mode 483Core Competencies and Entry ModePressures for Cost Reductions andEntry Mode 484
484
485Greenfield Ventures or Acquisition?Pros and Cons of Acquisitions 485Pros and Cons of Greenfield Ventures 487Greenfield or Acquisition? 488
Strategic Alliances 488The Advantages of Strategic Alliances 489The Disadvantages of Strategic Alliances
Management FocusCisco and Fujitsu 490
Making Alliances Work 490
Chapter Summary 493
CriticalThinking and DiscussionQuestions 494
Chapter Summary 463 Research Task 495
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xvi Contents
Closing CaseJCB in India 495
Part Five CasesThe Global Automobile Industryin 2009 502IKEA: Furniture Retailer tothe World 512Downey's Soup 518
Chapter Summary 538
CriticalThinking and DiscussionQuestions 539
Research Task 539
Closing CaseExporting and Growth for SmallBusinesses 539
part sixInternational Business Operations
CHAPTER 15Exporting, Importing, andCountertrade 520Opening CaseMD International 520
Introduction 522
The Promise and Pitfalls of Exporting 522Improving Export Performance 523
A n International Comparison 523
Management FocusFCX Systems 524
Information Sources 525Utilizing Export Management Companies 525
Management FocusExporting with a Little Government Help 526
Export Strategy 527
Export and Import Financing 527
Management FocusExport Strategy at 3M 528
Lack of Trust 528
Management FocusRed Spot Paint & Varnish 529
Letter of Credit 530Draft 531Bill of Lading 532A Typical International TradeTransaction 532
Export Assistance 534Export-Import Bank 534Export Credit Insurance 535
Countertrade 535The Incidence of Countertrade 535Types of Countertrade 536The Pros and Cons of Countertrade 537
CHAPTER H©Global Production, Outsourcing, andLogistics 542Opening CaseThe Rise of the Indian AutomobileIndustry 542
Introduction 544
Strategy, Production,and Logistics 544
Where to Produce 547Country Factors 547
Management FocusPhilips in China 548
Technological Factors 548Product Factors 552Locating ProductionFacilities 552
The Strategic Role of ForeignFactories 554
Management FocusHewlett-Packard in Singapore 555
Outsourcing Production: Make-or-BuyDecisions 556
The Advantages of Make 557The Advantages of Buy 558Trade-offs 560
Strategic Alliances with Suppliers 560
Managing a Global Supply Chain 561The Role of just-in-Time Inventory 561The Role of Information Technology and theInternet 562
Chapter Summary 562
CriticalThinking and DiscussionQuestions 563
Research Task 564
Closing CaseBuilding the Boeing 787 564
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Contents xvii
CHAPTER 11Global Marketing and R&D 568Opening CaseMicrosoft in India 568
Introduction 570
The Globalization of Markets and Brands 570
Market Segmentation 571
Product Attributes 572
Management FocusMarketing to Black Brazil 573
Cultural Differences 573Economic Development 574Product and Technical Standards 575
Distribution Strategy 575Differences between Countries 576Choosing a Distribution Strategy 578
Communication Strategy 579Barriers to InternationalCommunication 579
Management FocusOvercoming Cultural Barriers to SellingTampons 581
Push versus Pull Strategies 582
Management FocusUnilever—Selling to India's Poor 583
Global Advertising 584
Pricing Strategy 585Price Discrimination 585Sti'ategic Pricing 587Regulatory Influences on Prices 588
Configuring the Marketing Mix 589
Management FocusLevi Strauss Goes Local 590
New-Product Development 590The Location of R&D 591Integrating R&D, Marketing,and Production 592Cross-Functional Teams 593Building Global R(S?DCapabilities 594
Chapter Summary 595
CriticalThinking and DiscussionQuestions 596
Research Task 597
Closing CaseDove—Building a Global Brand 597
CHAPTER 118Global Human ResourceManagement 602Opening Case
AstraZeneca 602
Introduction 604
The Strategic Role of International HRM 604
Staffing Policy 606Types of S taffing Policy 606Expatriate Managers 609
Management FocusManaging Expatriates at Royal Dutch/Shell 612
The Global Mind-Set 613
Training and ManagementDevelopment 613
Training for Expatriate Managers 614Repatriation of Expatriates 615Management Development and Strategy 615
Management FocusMonsanto's Repatriation Program 616
Performance Appraisal 617Performance Appraisal Problems 617Guidelines for Performance Appraisal 617
Compensation 618National Differences in Compensation 618Expatriate Pay 619
Management FocusGlobal Compensation Practicesat McDonald's 620
International Labor Relations 622The Concerns of Organized Labor 622The Strategy of Organized Labor 622Approaches to Labor Relations 623
Chapter Summary 624
CriticalThinking and DiscussionQuestions 625
Research Task 625
Closing CaseLenovo 626
CHAPTER IBAccounting in the International Business 630Opening CaseChinese Accounting 630
Introduction 632
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xviii Contents
Country Differences in Accounting Standards 632Relationship between Business and Providers of Capital 633Political and Economic Ties with Other Countries 635Inflation Accounting 635Level of Development 635Culture 636
National and International StandardsLack of Comparability 636International Standards 637
636
Management FocusThe Consequences of Different AccountingStandards 638
Multinational Consolidation and Currency Translation 639
Management FocusNovartis Joins the International Accounting Club 640
Consolidated Financial Statements 640Currency Translation 642Current U.S. Practice 643
Accounting Aspects of Control Systems 644Exchange Rate Changes and Control Systems 644Transfer Pricing and Control Systems 646Separation of Subsidiary and Manager Performance 646
Chapter Summary 647
CriticalThinking and Discussion Questions 648
Research Task 649
Closing CaseAdopting International Accounting Standards 649
Financial Management in the InternationalBusiness 652Opening CaseGlobal Treasury Management at Procter & Gamble 652
Introduction 654
Investment Decisions 655Capital Budgeting 655Project and Parent Cash Flows 656Adjusting for Political and Economic Risk 656
Management FocusBlack Sea Energy Ltd. 657
Risk and Capital Budgeting 658
Financing Decisions 658Source of Financing 659Financial Structure 659
Global Money Management: The EfficiencyObjective 660
Minimizing Cash Balances 660Reducing Transaction Costs 660
Global Money Management: TheTax Objective 661
Moving Money across Borders: Attaining Efficienciesand Reducing Taxes 662
Dividend Remittances 662Royalty Payments and Fees 662Transfer Prices 663Fronting Loans 664
Techniques for Global Money Management 666Centralized Depositories 666Multilateral Netting 667
Chapter Summary 669
CriticalThinking and Discussion Questions 670
Research Task 670
Closing CaseBrazil's Gol 670
Part Six CasesLi & Fung 676Castrol Oil in VietnamChina Mobile 678
Glossary 680
Photo Credits 692
Index 694
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