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4.2Introduction

Regardless of location and industry, nearly every organization feels the influence of international competition, international suppliers, international consumers, and the global workforce. This increase in globalization is due to an increase in communication and technology, such as the Internet and email, as well the collapse of communism in the Soviet Union and Eastern Europe and the continuation of global investment and immigration throughout the world. Organizations today must face an important question: Should we, as an organization, embrace globalization or ignore it?

The above question may seem quite simple to someone studying management but, unfortunately, many managers today are intimidated and lack the understanding and knowledge of how to use globalization to their organization's benefit. Globalization describes the extent to which international trade, communication, knowledge, social and cultural ideas and political and financial investment flow between countries. In more simple terms, globalization is the broadening interdependence among people from all parts of the world.

4.3International Trade

While globalization is the broadening interdependence among people from all parts of the world, international business is simply used to describe the process by which a business or organization engages in international economic activities. Firms from different nations engage in international business to lower cost, acquire resources, expand markets and minimize risk. At times, organizations may want to enter an international market for defensive reasons or to counter advantages that their competitors have.

When a firm sells a product abroad it is known as an export . On the other hand, when a firm buys a product from abroad it is known as an import . Taken to the national level, a trade deficit occurs when a nation (or the sum total of all firms within that nation) import, or consume, more than they export. The term trade deficit has become a very popular term over the last few decades as many of the nations in the Western world have run a trade deficit with other nations. A trade surplus occurs when a nation exports more than it imports. For example, China has a trade surplus with the United States, meaning that it exports more to the United States than it imports from the United States.

Figure 4-1: Trade Surplus

Populations from all parts of the world benefit from international trade because international trade provides the means by which goods and services from one country are made available to individuals in another country. Imagine what the world would be like if international trade never occurred? Individuals in the United States wouldn't have access to Chilean avocados, French wine, Italian tile, or Persian rugs. As a whole, international trade is a win-win situation, especially over the long term. However, some industries, especially at the local level, suffer as a result of international trade. In order to protect these local industries governments will often engage in protectionism. Protectionism is the idea that governments should protect domestic industries from international forces. Under protectionism, governments actively promote exports and limit imports. One of the most popular ways in which governments engage in protectionism is through tariffs. A tariff is a tax that is imposed on goods brought in from one country to another. Protectionism and tariffs, as well as who should share the gains from international trade, are often the topic of heated policy debate between governments.

In order to facilitate trade, various nations have created free trade agreements to allow integration and limit tariffs and protectionism. The first of these agreements, the General Agreement on Tariffs and Trade (GATT) , was created after World War II. Since GATT was created, trade has consistently outpaced GDP growth in participating nations, creating additional wealth.

On January 1, 1995, GATT formally became the World Trade Organization (WTO). While GATT was only an agreement between nations and not a formal organization, the World Trade Organization is a formal institution with the ability to govern international trade, intellectual property rights, and trade disputes. In 2008, more than 150 countries belonged to the World Trade Organization, including nations such as China and Vietnam.

While the World Trade Organization is a global institution with participating members from all parts of the world, there are a number of important regional trade alliances including the European Union (EU), the North American Free Trade Agreement (NAFTA), and the China - ASEAN Free Trade Area.

European Union

In 1951, various nations in Europe created the European Coal and Steel Community (ECSC) Treaty to facilitate the trade of coal, steel and other raw materials. In 1957, several member countries from the ECSC created the Treaty of Rome, which later created the European Economic Community (EEC). Over time, the European Economic Community formalized into the European Community (EC). The European Community eventually became a common market and, over time, additional countries joined. Finally in 1991, 12 member countries signed the Treaty on European Union in Maastricht, Netherlands to create a single market and establishment of a complete economic union. This new treaty, also known as the "Maastricht Treaty," went into effect in 1993. As this new treaty went into effect, the official title of European Union was given, providing the name by which the European Union is known today.

The European Union is headquartered in Brussels, Belgium and has 27 member countries. The objective of the European Union is to create a single market for all Europeans. The European Union now accounts for more than 20% of the world's GDP allowing it to more easily compete with the United States and China as a major economic force. Citizens of the EU are allowed to travel passport-free, much like citizens inside the United States are free to travel from state to state. In the fifteen original European Union countries, citizens are free to live and work where they want without a visiting visa.

The European Union also has it's own currency known as the Euro. The Euro has created various benefits for participating countries including direct and transparent price comparisons, a reduction in currency conversion costs, and strong economic restrictions and incentives for participating national economies. However, integration of a common currency has also been challenging for many nations in the European Union, especially since the economic downturn of 2008, which brought additional financial challenges for Greece, Portugal, Italy, Ireland, and Spain. Because of the integration of these countries with other European Union nations, several nations, including Germany and France, have had to provide financial assistance to keep the Euro from experiencing significant devaluation. Such financial assistance has caused political frustration and other problems for European Union members.

North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement, or NAFTA, provided the basis for Canada, the United States, and Mexico to become a single market. Over the first ten years of the agreement, trade between the United States and Canada occurred at rates two times faster than it did before the agreement. At the same time, U.S. exports to Mexico also rose. For the most part, NAFTA has been considered a great success for all countries involved. While NAFTA has created economic growth it Mexico, Mexico still faces difficult economic pressures. In fact, pressure from China has stagnated real wages in Mexican manufacturing plants and replaced Mexico as the second largest exporter to the United States behind Canada.

China-ASEAN Free Trade Area

The Association of Southeast Asian Nations (ASEAN) was formally established in 1967. The group, however, did not engage in free trade until 1992 when it received pressure from the European Union to do so. In 2010, China joined the ASEAN Free Trade Area providing a major benefit for all ASEAN nations as it was previously isolated from major trading partners such as the United States, the European Union and China. Today, international trade between China and ASEAN nations has soared, creating benefits for all member countries.

While the European Union, NAFTA and the China-ASEAN Free Trade Area are the three of the most significant regional trading blocks in the world, various other regional trade alliances exists such as MERCOSUR and the Andean Community in South America, the Australian-New Zealand Closer Economic Relations Trade Agreement, and the Asia-Pacific Economic Cooperation, among others.

4.4Going International

The basic idea of business management is the same whether a company chooses to operate in the domestic or the international marketplace. However, when operating internationally, the risks, rewards, challenges and difficulties can be much greater. Some of the common ways in which organizations choose to engage in international economic activities include outsourcing, exporting, licensing, and direct investing.

Outsourcing

Global outsourcing is simply the process by which organizations engage in the international division of labor. In other words, firms engage in outsourcing so that they can take advantage of the cheapest sources of labor and supplies wherever they can be found. Alternatively, organizations may engage in outsourcing to gain access to the best technology or skills available. For example, India has become a major destination for companies looking to outsource their call center services. Because of low wages, companies save millions of dollars a year by outsourcing this service to India. The Global Higher Education Alliance, who helped publish this textbook, also engages in outsourcing by using editing services in India, programming services in China, and translation services in Mexico. While the Global Higher Education Alliance outsources its editing and programming functions to India and China for cost advantages, the Global Higher Education Alliance outsources its translations services to Mexico because of their trust in the skill and ability of their Mexican partner.

Exporting

When corporations engage in exporting, they maintain their production facilities within their home nation and then sell their products or services in foreign countries. By selling their products in foreign markets, organizations can greatly increase their revenues, market share, and brand name. For example, historically a United States organization, Ford now exports vehicles to nations throughout the world. When companies export their products they may face issues such as government rules and regulations, physical distances, foreign currencies, and cultural differences. For example, in response to Hummer's success in exporting their products to Central and South America, Hugo Chavez recently criticized the local population for becoming too "Americanized".

Licensing

Very similar to franchising, licensing refers to when a corporation in one country makes certain resources available to companies in another country. Under the licensing agreement, the licensee organization is usually able to use the brand name, technology, and patents of the licensor. For example, Mail Box, Etc., licenses its brand name, distribution channels, and technology to local partners throughout the world. Because Mail Box, Etc. does not have to be directly involved with the management of these stores, the company has been able to experience substantial growth with stores now present in major cities throughout Europe. Such growth would not have been possible if Mail Box, Etc. had chosen to directly invest in its stores instead of licensing them.

Direct Investing

When direct investing takes place, it means that the company is involved in directly managing the productive assets of its firm, regardless of location. For example, IKEA, whose headquarters are located in Sweden, does not license or franchise its stores. Rather, IKEA chooses to be involved in the direct ownership and management of the store - regardless of the country in which the store may reside.

Some organizations engage in a combination of both direct investing and licensing. For example, while GAP, the clothing retailer, directly invests in the majority of their stores by hiring and managing its employees at each location, they also license their brand name, technology, distribution and other services to international firms so that they can be more successful in each international market in which they operate.

When organizations become international either through outsourcing, exporting, licensing, or direct investing they must be aware of the political risk that is associated with doing international business. Political risk is the term that is used to describe the risk that is associated with political changes that may negatively affect an organization. For example, over the last few decades, organizations involved in both Cuba and Zimbabwe have had to make major adjustments. For the most part, Fidel Castro has almost completely limited any United States-based organization from doing business in Cuba. At the same time, Robert Mugabe greatly changed the political landscape and rules of doing business in Zimbabwe.

Unfortunately, the government and the general public of a nation may view any foreign organization as outsiders or even invaders. These perceptions can be greatly enhanced when war, high tariffs, or other political issues arise. Below is a picture that one of the authors of this book took while walking out of a metro system in Vienna, Austria during the height of the Iraqi war. The picture illustrates the sentiment that citizens of one nation may have towards the leadership of another nation.

4.5Foreign Exchange

Different nations throughout the world use different currencies. For example, the currency in the United States is the dollar, in Chile it is the peso, in Japan it is the yen, in England the currency is the pound, and in China it is the yuan. Earlier in the chapter, we discussed the Euro, the currency used in the European Union. A foreign exchange rate is the price of one currency in terms of another. For example, the foreign exchange rate for Chilean pesos is roughly 1 United States dollar for 500 Chilean pesos. A country's exchange rate, just like any asset, is subject to the laws of supply and demand. For example, when there is an increase in the demand for the United States dollar and a decrease in demand for the British pound, the value of the dollar increases and the value of the pound decreases.

Fluctuations in the value of a country's currency can have a huge impact on international business, because fluctuations in currency directly affect the price of goods and services within that country. Such currency fluctuations can make a product extremely expensive or inexpensive, affecting both sales and profits. Over the last decade, the Chinese yuan has consistently come under attack from both political and business leaders in Europe and the United States. These critics suggest that the Chinese government intentionally keeps the value of the yuan artificially low in order to increase exports and limit imports. When a country's currency is artificially low, international organizations are more likely to purchase goods and services from that country because the goods and services are much cheaper than they would be otherwise, creating an unfair advantage for that country.

Some nations, such as Switzerland, Norway and Denmark, have historically had expensive prices when compared to other countries. Other countries, such as Malaysia, China, Mexico and the Philippines seem to have consistently low prices. In order to determine how much goods and services cost within a country, managers should look at the purchasing power parity (PPP) of that nation's currency. Purchasing power parity uses a conversion to determine how much goods and services different currencies can purchase. In other words, purchasing power parity is the "law of the price".

To better understand purchasing power parity, we can turn to the Big Mac Index published by the Economist. The Big Mac Index provides the relative cost of a Big Mac in a number of countries, both in the countries local currency as well as in US dollars. The Economist then uses the official exchange rate between the US dollar the country where the Big Mac is being sold to decide if there is an under/over valuation against the US dollar. For example, in 2008 it cost roughly $1.71 (US dollar) to buy a Big Mac, compared to the $7.88 (US dollar) to purchase a Big Mac in Norway. For more information about this index, see www.economist.com.

4.6Legal Systems

The legal system describes the way in which laws and regulations are developed and enforced within a country. While the legal systems of most countries are somewhat different, national legal systems are typically classified into three categories including common law, civil law, and theocratic law.

Spread by the British colonization movement, common law is now practiced in most English speaking countries throughout the world. Historically, under the common law system, there were very few rules or statutes. As such, courts were often required to write opinions to explain the reasons for their decisions. These opinions later became precedent for decisions in future cases, allowing the law to continually develop and progress. Even today, under the common law system, judges have the flexibility to interpret the law as they see fit, creating a continual development of how laws are applied. As a result, plaintiffs and defendants have the opportunity to persuade judges to favorably interpret the law to their benefit.

Derived from Roman law and later spread by Napoleon, civil law is used by the majority of countries throughout the world. Civil law uses statutes to form legal judgments. Because civil law is based on statutes instead of previous judicial decisions, there is much less flexibility and interpretation for judges under a civil law legal system.

The third legal system is known as theocratic law. Theocratic law is based on religious teachings such as the Islamic-based law systems in Saudi Arabia and Iran. While Islamic based law is the only surviving theocratic law system in the world, history has had countless nations that were originally based upon theocratic law.

4.7International Management

International Management is the term that is used to describe how managers engage in planning, organizing, leading and controlling across nations, cultures and the international environment. A very international organization today is the National Basketball Association (NBA) with players from all over the world. In order to succeed, NBA coaches and trainers must be familiar with the backgrounds and preferences of each player. Furthermore, the way that one player is influenced to reach the teams goals - that of winning - may be very different than another player. Language and cultural barriers, including the ability to help players feel welcome and at home in the United States, are now a very real part of nearly every NBA basketball team. A key part of every international player's transition and corresponding success in the NBA depends upon how that player adapts to the culture in the United States.

In the following sections we will discuss international management as a lens to better understand the challenges and opportunities associated with globalization.

4.8Culture

Culture includes the collective set of norms, ideas, beliefs and ways of thinking of a group of individuals. Culture encompasses various aspects including the social structures, communication, traditions, customs, languages and practices of a group. Culture is often transmitted from parent to child, teacher to pupil, peer to peer, and social leader to follower. Parent to child is especially important, as most psychologies believe that by age 10 most children will have their basic value systems firmly in place. After this initial development, children do not make changes easily.

Culture is an umbrella term that often encompasses various sub-cultures. As a result, there is no one set culture for any group of individuals or people. For example, we may refer to the Spanish as having the same culture. However, various parts of Spain include very different communities such as the Basque in the north and the Catalonians in the East. Each of these groups is quite different from the typical Spanish culture with each group having a different language, food preferences, set of customs, and beliefs. However, each of these communities also shares similar characteristics with greater Spain such as the majority of the population that believes in Catholicism and love for the national soccer team as well as their common understanding of the Spanish language. Because culture encompasses so many elements about a group of people, we can study culture through various lenses. However, three of the most common ways to identify culture include nationality, language and religion.

Hofstede's Cultural Dimensions

One of the world's foremost experts on culture is Geert Hofstede . A Dutch professor, Dr. Hofstede, proposed a way to examine the influence that national culture has on individual behavior by examining the belief systems of roughly 116,000 IBM employees in forty nations across the globei. Based upon these beliefs, he was able to create a typology of culture with four dimensions including power distance, uncertainty avoidance, individualism and masculinity. After the initial research was conducted, a final dimension, known as long-term orientation, was added to the typology.

Figure 4-3: Hofestede's Cultural Dimensions

The Power Distance Dimension

Power distance refers to the extent to which less powerful members within a country expect and accept that power is distributed unequally. To better understand this concept, consider that in the United States it is becoming increasingly common for students to address their professors on a first name basis. While the professor still has power in that he or she can fail the student, the distance in power is much smaller than if the student were required to call the professor by his or her formal name.

Applied to the national setting, we can see that countries that are rated with a small power distance dimension have qualities such as the belief that inequality in society should be minimized, superiors are accessible, superiors consider subordinates to be "people just like me", all should have equal rights, and latent harmony exists between the powerful and the powerless. Countries rated as low power distance include Denmark, Austria, Sweden, and Israel.

On the other hand, we can see that in countries rated with a large power distance dimension, cooperation among the powerless is difficult to attain because of their low-faith-in-the-people norm, superiors are inaccessible, power is a basic fact of society, power holders are entitled to privileges, other people are a threat to one's power and can rarely be trusted, and superiors consider subordinates to be a different kind of people. Countries rated as high power distance include the Philippines, Panama, and Brazil.

The Uncertainty Avoidance Dimension

Uncertainty avoidance refers to the extent to which members in a culture accept or avoid ambiguous situations and uncertainty. Low uncertainty avoidance means that people have tolerance for the unstructured, the unclear, and the unpredictable. Countries that are rated with weak uncertainty avoidance tend to have populations who are willing to take risks in life, believe in as few as rules as possible, believe that time is free, experience lower stress, and take each day as it comes. Furthermore, these countries tend to have populations that frown upon aggressive behavior and believe that if rules cannot be kept, that the rules should be changed. Countries rated with weak uncertainty avoidance include Singapore and Jamaica.

High uncertainty avoidance, on the other hand, suggests that members of a society feel uncomfortable with uncertainty and thus, support beliefs that promise certainty and conformity. Countries that are rated with strong uncertainty avoidance tend to have populations that believe that time is money, have an inner urge to work hard, experience higher anxiety and stress, have great concern with security in life, have a need for written rules and regulations and believe that if rules cannot be kept, we are sinners and should repent. Furthermore, these countries tend to have populations that place belief in experts and their knowledge and search for ultimate, absolute truths and values. High uncertainty avoidance countries include Greece, Portugal, and Uruguay.

Applied to the managerial setting, countries with populations of high uncertainty avoidance are concerned with job security and benefits, while low uncertainty avoidance populations experience a greater willingness to take risks and have less resistance to change.

The Individualism Dimension

Individualism refers to the idea that an individual's identity is fundamentally his or her own. Individualism reflects a value for a loosely knit social framework in which individuals are expected to take care of themselves. Collectivism, on the other hand, refers to the idea that an individual's identity is fundamentally tied to the identity of his or her collective group. Such a group may include family, religion, nationality, community or even an organization. Collectivism suggests a preference for a tightly knit social framework in which individuals look after one another and organizations protect their members' interest.

In an individualist society, everybody is responsible to take care of himself/herself and his/her immediate family, identity is based in the individual, there is emotional independence and separation of individuals from institutions, and everybody has the right to a private life. Furthermore, autonomy, variety, pleasure, and individual financial security are sought in the system and there is a need for a universal standard of values that should be applied to all. Individualist countries include the United States, Canada, and England.

Often, in a collectivist society, members feel that people are born into extended families or clans who protect them in exchange for loyalty. Furthermore, collectivism suggests that identity is based on the social system, there is emotional dependence on institutions, belief is placed in-group decisions, and involvement within organizations is moral. Collectivist countries include Guatemala, Norway and Ecuador.

The Masculine Dimension

The masculinity and femininity dimension refers to sex role differentiation. Masculinity stands for preference for achievement, heroism, assertiveness, and material success. Femininity, on the other hand, reflects the values of relationships, cooperation, group decision-making and quality of life. Applied to the organizational setting, in high-masculinity societies men tend to have traditional occupations such as doctors, lawyers, politicians and executives while women continue to have traditionally feminine occupations such as nursing, homemakers, nurturers and teachers. However, in low-masculinity societies, men and women are increasingly likely to assume the same types of occupations.

In masculine societies, the population believes that men should be assertive while women should be nurturing. The sex roles within these societies are clearly differentiated. Furthermore, in high-masculine societies people believe that you live in order to work, that money and material possessions are important, independence is ideal and that men should dominate society. High masculine societies include Japan, Austria, Mexico, and Germany.

In feminine societies, men needn't be assertive and can assume nurturing roles. In these types of societies sex roles are much more fluid, quality of life is what is most important and an individual should work in order to live. High feministic societies include France, Sweden, Denmark and Norway.

GLOBE Studies

Since Hofstede's original work in the 1970s and 1980s, various studies have validated his work (as well as criticized). Furthermore, there have been a number of additional studies on culture that have helped us to better understand national culture. Probably the single largest of these studies is the Global Leadership and Organizational Behavior Effectiveness (GLOBE) study conducted by Robert House and colleagues. The GLOBE study includes data from more than 18,000 managers in 62 different countries and identifies nine different dimensions on which national cultures differ. The following table summarizes those differences.

Figure 4-4: GLOBE Studies

It should be noted that the GLOBE studies validate and extend Hofstede's original work rather than replace it. There are currently a number of important research studies that are being conducted using both the GLOBE and Hofstede dimensions by researchers throughout the world that will help us better understand national culture in the years to come.

4.9Language

When people from different areas of the world speak the same language, culture spreads more easily. Applied to the organizational setting, international business occurs more easily with other nations when they share the same language because expensive, time-consuming translation is not necessary.

While there are roughly 6,000 different languages in the world today, more than 40% of global output is conducted in English. Such output is a strong incentive for people throughout the world to learn English. As such, in most developed and developing economies, children start to learn English at a very young age. In fact, in most Northern European countries such as Norway, Sweden, the Netherlands, Denmark and Finland, young children choose to watch television in English and watch many of the same cartoons and children's programs that are seen in other parts of the world such as Sesame Street, Saved by the Bell, The Simpsons, and SpongeBob Square Pants. Exposure to English at such a young age is one reason these countries have some of the highest percentages of English speaking populations in the world. English is now the most widely taught foreign language with nearly a quarter of the world's population already fluent. No other language, including Mandarin, is even close to this level of growth.

While English is the most common language used in business, Chinese has the most native speakers with more than 20% of the world's population who speak Chinese. After Chinese, English (6%) is the second most common language followed by Hindi (5%) and Spanish (5%). Other common languages include Bengali, Portuguese, Russian, Japanese, and German. The remaining 6,000 languages make up nearly 55% of the world's remaining native speakers.