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Global Business Management v2.0 Sanjyot P. Dunung
CHAPTER 1
Introduction to Global Business Management
What’s in It for Me?
1. What is international business?
2. Who has an interest in international business?
3. What forms do international businesses take?
4. What is the globalization debate?
5. What is the relationship between international business and ethics?
6. What is the role of a global manager?
This chapter introduces you to the study of international business and global management. While international business generally focuses on the policies, regulations, and processes that a firm encounters globally, global management focuses on the professional roles that lead and operate these international businesses. After reading a short case study on Google Inc., an American multinational technology company, you’ll begin to learn what makes global management such an essential subject for students around the world.
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Because global management is a vital ingredient in strategic management and entrepreneurship, this book uses these complementary perspectives to help you understand international business. Managers, entrepreneurs, workers, for-profit and nonprofit organizations, and governments all have a vested interest in understanding and shaping global business practices and trends. Chapter 1, Section 1 “What Is International Business and Global Management?” gives you a working definition of international business and helps you see which actors are likely to have a direct and indirect interest in it. You’ll then learn about some of the different forms international businesses take. Chapter 1, Section 2 “Who Is Interested in International Business?” explores the various stakeholders who have an interest in global business. Chapter 1, Section 3 “Debate on Globalization” provides an understanding of the current and evolving globalization debate. This debate centers on interconnected and competitive markets and whether differences across countries and markets are more significant than the commonalities. We’ll also review how the debate on globalization is giving rise to populist governments challenging the notions of global trade. What you’ll discover from the discussion of this debate is that countries and companies have always traded with each other, and global trade has been a key factor in achieving peace between countries and improving the economic and social well-being of the greatest number of people in a single century. While still ripe for improvement, global trade offers the best prospects. As we’ll begin to review in this chapter, ethical, responsible, and capable global managers are key drivers for the success of globalization. Chapter 1, Section 4 “Navigating Ethics and International Business” provides an introductory discussion of the relationship between international business and ethics. We’ll conclude the chapter in Chapter 1, Section 5 “Understanding the Roles and Function of a Global Manager” by looking at the evolving roles of global managers around the world.
Opening Case: Google’s Steep
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Learning Curve in China
Of all the changes going on in the world, the internet is the one development that many people believe makes our world a smaller place—a flat or flattening world, according to Thomas Friedman, Pulitzer Prize–winning author of The World Is Flat: A Brief History of the Twenty-First Century and The Lexus and the Olive Tree: Understanding Globalization. Because of this flattening effect, internet- focused businesses should be able to cross borders easily and profitably with little constraint. However, with few exceptions, cross-border business ventures always seem to challenge even the most able of competitors, internet- based or not. Some new international ventures succeed, while many others fail. But in every venture the managers involved can and do learn something new. Google Inc.’s learning curve in China is a case in point. Google is technically a unit of Alphabet Inc., an American multinational technology conglomerate holding company which was created through a restructuring of Google in 2015. Alphabet is the world's third-largest technology company by revenue and one of the world's most valuable
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companies. To understand why Google has not been available in China, it’s helpful to review the company’s complicated history in China.
In 2006, Google announced the opening of its Chinese- language website amid great fanfare. While Google had access to the Chinese market through Google.com at the time, the new site, Google.cn, gave the company a more powerful, direct vehicle to further reach the then approximately 137 million individuals with internet access in China, enabling Google to grow to a 36.2 percent market share of the Chinese market by 2009. Fast forward a decade-plus later to 2023—there were almost one billion internet users in China, but Google’s market share was less than 1 percent. What happened? Let’s look at Google’s cautionary tale for global managers on balancing growth with global business ethics.
Initially, the hopeful company founders Larry Page and Sergey Brin said at the time in support of the new site, “Unfortunately, access for Chinese users to the Google service outside of China was slow and unreliable, and some content was restricted by complex filtering within each Chinese ISP. Ironically, we were unable to get much public or governmental attention paid to the issue. Although we dislike altering our search results in any way, we ultimately decided that staying out of China simply meant diminishing service and influence there. Building a real operation in China should increase our influence on market practices and certainly will enhance our service to the Chinese people.”
A Big Market, Bigger Concerns
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Fast-growing China represents a large market.
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Google’s move into China gave it access to a very large market, but it also raised some ethical issues. Chinese authorities are notorious for their hard-line censorship rules regarding the internet. They take a firm stance against risqué content and, for example, objected to the computer game The Sims, fearing it would corrupt their nation’s youth. Any content that was judged as possibly threatening “state security, damaging the nation’s glory, disturbing social order, and infringing on others’ legitimate rights” was also banned. When asked how working in this kind of environment fit with Google’s informal motto of “Don’t be evil” and its code-of-conduct aspiration of striving toward the “highest possible standard of ethical business,” Google’s executives stressed that the license was just to set up a representative office in Beijing and no more than that—although they did concede that Google was keenly interested in the market. As reported to the business press, “For the time being, [we] will be using the [China] office as a base from which to conduct market research and learn more about the market.” Google likewise sidestepped the ethical questions by stating it
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couldn’t address the issues until it was fully operational in China and knew exactly what the situation was.
Google appointed Dr. Kai-Fu Lee to lead the company’s new China effort. He had grown up in Taiwan, earned BS and PhD degrees from Columbia and Carnegie Mellon, respectively, and was fluent in both English and Mandarin. Before joining Google in 2005, he worked for Apple in California and then for Microsoft in China; he set up Microsoft Research Asia, the company’s research-and- development lab in Beijing. When asked by a New York Times reporter about the cultural challenges of doing business in China, Lee responded, “The ideals that we uphold here are really just so important and noble. How to build stuff that users like, and figure out how to make money later. And ‘Don’t Do Evil’ [referring to the motto ‘Don’t be evil’]. All of those things. I think I’ve always been an idealist in my heart.”
Google in China
Despite Lee’s support of Google’s utopian motto, the
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Source: © Google Inc.
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company’s conduct in China during its first year seemed less than idealistic. In January, a few months after Lee opened the Beijing office, the company announced it would be introducing a new version of its search engine for the Chinese market. Google’s representatives explained that in order to obey China’s censorship laws, the company had agreed to remove any websites disapproved of by the Chinese government from the search results it would display. For example, any site that promoted the Falun Gong, a government-banned spiritual movement, would not be displayed. Similarly (and ironically), sites promoting free speech in China would not be displayed, and there would be no mention of the 1989 Tiananmen Square massacre. As one Western reporter noted, “If you search for ‘Tibet’ or ‘Falun Gong’ most anywhere in the world on google.com, you’ll find thousands of blog entries, news items, and chat rooms on Chinese repression. Do the same search inside China on google.cn, and most, if not all, of these links will be gone. Google will have erased them completely.”
Google’s decision didn’t go over well in the United States. In February 2006, company executives were called into congressional hearings and compared to Nazi collaborators. The company’s stock fell, and protesters waved placards outside the company’s headquarters in Mountain View, California. Google wasn’t the only American technology company to run aground in China during those months, nor was it the worst offender. However, Google’s executives were supposed to be different; given their lofty motto, they were supposed to be a cut above the rest. Google’s management was facing the business challenges of trying to meet investor expectations for the stock alongside the public’s
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expectations for corporate ethical behavior.
When the company went public in 2004, its founders wrote in the company’s official filing for the U.S. Securities and Exchange Commission that Google is “a company that is trustworthy and interested in the public good.” Now, politicians and the public were asking how Google could balance that with making nice with a repressive Chinese regime and the Communist Party behind it. At a 2006 Congressional Hearing, Rep. Tom Lantos (D-CA) and Google vice president Elliot Schrage exchanged sharp words. At the hearing, Schrage, then vice president for corporate communications and public affairs, discusses Google’s competitive situation in China. Rep. James Leach (R-IA) subsequently accused Google of becoming a servant of the Chinese government.
Google Ends Censorship in China
In 2010, Google announced that it was no longer willing to censor search results on its Chinese service. The world’s leading search engine said the decision followed a cyberattack that it believes was aimed at gathering information on Chinese human rights activists. Google also cited the Chinese government’s restrictions on the internet in China during 2009. Google’s announcement led to speculation about whether Google would close its offices in China or would close Google.cn. Human rights activists cheered Google’s move, while business pundits speculated on the possibly huge financial costs that would result from losing access to one of the world’s largest and fastest-growing consumer markets—reflecting the at times contradictory global business ethics challenge facing global executives.
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The Chinese government’s first response to Google’s announcement was simply that it was “seeking more information.” In the interim, Google “shut down its censored Chinese version and gave mainlanders an uncensored search engine in simplified Chinese, delivered from its servers in Hong Kong.” These actions led to a sharp decrease in Google's market share and gave further rise to the Chinese web services giant, Baidu—which has now become the second-largest search engine in the world, and holds a 76 percent market share in China’s search engine market.
Google Blocked in China
The Chinese government often adds or removes restrictions on global firms at its political and economic discretion. Today, the Chinese government blocks access to Google’s search engine and a number of other Western media sites to both censor
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Google is one of several websites banned in China.
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information and promote Chinese companies, like Baidu. The position of the Chinese government remains that all companies in China must operate according to Chinese law. But for Google’s management, abiding by Chinese rules risks potentially harming the firm’s own global operational rules and its image as a fair and open platform. We’ll talk further about these operational challenges throughout the chapter and book.
Like most firms that venture out of their home markets, Google’s experiences in China and other foreign markets have driven the company’s management to reassess how it does business in countries with distinctly different laws. Reflecting the constantly changing business environment and the fact that China is the world’s largest internet market with nearly one billion users, Google is once again in talks with the Chinese government to reenter the mainland Chinese market, an objective that has no clear timetable or guarantee of success. The Chinese crackdown in Hong Kong in 2020 further complicated and limited access to Google by mainland Chinese users.
Case Questions
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. Can Google afford not to do business in China?
2. Which stakeholders would be affected by Google’s managers’ possible decision to shut down its China
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operations? How would they be affected? What trade- offs would Google be making?
3. Should Google’s managers be surprised by the China predicament?
‹ Previous Next ›
Footnotes
1. Larry Page and Sergey Brin, “2005 Founders’ Letter,” Google Investor Relations, December 31, 2005, http://investor.google.com/corporate/2005/founders-letter.html. ↑
2. John Oates, “Chinese Government Censors Online Games,” Register, June 1, 2004, http://www.theregister.co.uk/2004/06/01/china_bans_games. ↑
3. Lucy Sherriff, “Google Goes to China,” Register, May 11, 2005, http://www.theregister.co.uk/2005/05/11/google_china. ↑
4. Clive Thompson, “Google’s China Problem (and China’s Google Problem),” New York Times, April 23, 2006, http://www.nytimes.com/2006/04/23/magazine/23google.html. ↑
5. Clive Thompson, “Google’s China Problem (and China’s Google Problem),” New York Times, April 23, 2006, http://www.nytimes.com/2006/04/23/magazine/23google.html. ↑
6. Larry Page and Sergey Brin, “2004 Founders’ IPO Letter,” Google Investor Relations, August 18, 2004,http://investor.google.com/corporate/2004/ipo- founders-letter.html. ↑
7. Jessica E. Vascellaro, Jason Dean, and Siobhan Gorman, “Google Warns of China Exit over Hacking,” January 13, 2010, http://online.wsj.com/article/SB126333757451026659.html#ixzz157TXi4FV. ↑
8. Tania Branigan, “Google to End Censorship in China over Cyber Attacks,”
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Guardian, January 13, 2010, http://www.guardian.co.uk/technology/2010/jan/12/google-china- ends-censorship. ↑
9. Tania Branigan, “Google Challenge to China over Censorship,” Guardian, January 13, 2010, http://www.guardian.co.uk/technology/2010/jan/13/google-china- censorship-battle. ↑
10. Harry McCracken, “Google’s Bold China Move,” PCWorld, March 23, 2010, http://www.pcworld.com/article/192130/googles_bold_china_move.html. ↑
10/31/26, 8:03 AM1.2 Who Is Interested in International Business? | Global Business Management
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Global Business Management v2.0 Sanjyot P. Dunung
1.2 Who Is Interested in International Business?
Learning Objectives
1. Know who has an interest in international business.
2. Understand what a stakeholder is and why stakeholder analysis might be important in the study of international business.
3. Recognize that an organization’s stakeholders include more than its suppliers and customers.
The Stakeholders
As you now know, international business refers to a broad set of entities and activities. But who cares about international business in the first place? To answer this question, let’s discuss stakeholders and stakeholder analysis. A stakeholder is an individual or organization whose interests may be affected as the result of what another individual or organization does. Stakeholder analysis is a technique you use to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of your activity, project, or business. In the context of what you are learning here, individuals or organizations will have an interest in international business if it affects them in some way—positively or negatively. That is, they have something
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important at stake as a result of some aspect of international business. As global managers, you’ll need to pay close attention to stakeholders, domestic and international.
Obviously, Google and its managers need to understand international business because they do business in many countries outside their home country. A little more than half the company’s revenues come from outside the United States. Does this mean that international business wouldn’t be relevant to Google if it only produced and sold its products in one country? Absolutely not! Factors of international business would still affect Google—through any supplies it buys from foreign suppliers, as well as the possible impact of foreign competitors that threaten to take business from Google in its home markets. Even if these factors were not present, Google could still be affected by tariffs or price swings—for instance, in the international prices of computer parts, even if they bought those parts from U.S. suppliers. After all, the prices of some of the commodities used to make those parts are determined globally, not locally. Beyond its involvement in web advertising, which requires massive investments in computer-server farms around the world, Google is increasingly active in other products and services—for example, cell phones and the operating systems they use.
So far, this chapter has covered only how a business and its managers should understand international business, regardless of whether their organization sells or produces products or services across borders. Who else might be an international business stakeholder
Global business managers conduct stakeholder analysis to understand how operations in different countries impact the overall corporate strategy.
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beyond Google and its management? First, Google is likely to have to pay taxes, right? It probably pays sales taxes in markets where it sells its products, as well as property and payroll taxes in countries where it has facilities. Each of these governmental stakeholders has an important economic interest in Google. Moreover, in many countries, the government is responsible for protecting the environment. Google’s large computer-server farms consume energy and generate waste, and its products come in disposable packaging, thus impacting the environment in places where they are manufactured and sold.
As stakeholders, most national governments, for instance, maintain embassies and consulates in foreign countries. National governments also participate in international treaties related to such issues as trade, the environment, or child labor. Supraorganizations such as the United Nations (UN) or the World Trade Organization (WTO) are practically separate governments themselves, with certain powers over all member countries.
National nongovernmental organizations (NGOs) include any nonprofit, voluntary citizens’ groups that are organized on a local, national, or international level. International NGOs (NGOs whose operations cross borders) date back to at least 1839. For example, Rotary International was founded in 1905. It has been estimated that, by 1914, there were 1,083 NGOs. Today, it’s estimated that there are 10 million NGOs worldwide. International NGOs were important in the antislavery move-ment and the movement for women’s suffrage, but the phrase “nongovernmental organization” didn’t enter the common lexicon until 1945, when the UN was established along with the provisions in Article 71 of Chapter 10 of the UN charter, which granted a consultative role to organizations that are neither governments nor member states.
During the twentieth century, globalization actually fostered the development of NGOs because many problems couldn’t be solved
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within a single nation. In addition, international treaties and organizations, such as the WTO, were perceived by human rights activists as being too centered on the interests of business. Some argued that in an attempt to counterbalance this trend, NGOs were formed to emphasize humanitarian issues, developmental aid, and sustainable development. A prominent example of this is the World Social Forum—a rival convention to the World Economic Forum held every January in Davos, Switzerland. Global business leaders are key voices in all of these forums.
Beyond the company and governments, other stakeholder groups might include industry associations, trade groups, suppliers, and labor. For instance, you’ve already learned that Google is a technology company, so it could be a member of various computer- related industry associations. Labor is also a stakeholder. This can include not only the people immediately employed by a business like Google but also contract workers, or workers who will lose or gain employment opportunities depending on where Google chooses to produce and sell its products and services as well as Google’s internal and external policies. Effective global managers need to be aware of the evolving expectations of stakeholders along with the local and global operating environment.
Did You Know? The Concept of Privacy Differs by Country
From our opening case, you’ve learned a little about how different countries deal with personal privacy. Global managers need to be aware of the legal, operational, and cultural differences among countries. At about the same time Google was experiencing difficulty protecting individuals’ privacy in China, its managers in Italy were being convicted of violating consumer-privacy laws. Google executives had been accused of breaking Italian
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law by allowing a video clip of four boys bullying another child to be posted online. The video had originally been posted by the boys themselves, and Google removed the video when Italy’s Interior Ministry requested its removal.
The three Google executives were absolved of the defamation charges but convicted of privacy violations.
Google said that the conviction of its top Italian managers “attacks the ‘principles of freedom’ of the internet and poses a serious threat to the web.”
Following the conviction, several privacy advocates stepped up to speak out in Google’s defense—a position quite contrary to their typical stances in Google privacy stories.
Google has also been challenged by Europe’s Right to be Forgotten laws. Google’s approach to privacy was not the only business practice to run afoul of European regulators. Since June 2017, the European Union’s (EU’s) antitrust chief levied Google with three separate fines totaling a record 8.2 billion euros (or $9.3 billion) on the basis that the powerful web search leader illegally steered users toward its comparison shopping site and with a warning that other parts of Google’s business were also problematic. The fine is the largest the EU has levied against a company for abusing its dominant position. While Google is appealing the fine and charge, this decision by the EU marked the latest confrontation over business practices between EU regulators and American tech giants. The European Union has become the world’s most aggressive watchdog of an industry with an increasingly powerful role in society and the global economy.
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Key Takeaways
Beyond yourself, as an international business student and future global manager, you can identify the people and organizations that might have an interest in international business if their interests are affected now or in the future by it. Such international business stakeholders include employees, managers, businesses, governments, and nongovernmental organizations.
Stakeholder analysis is a technique used to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of an activity, project, or business.
Exercises
(AACSB: Reflective Thinking, Analytical Skills)
1. What is a stakeholder? What is stakeholder analysis?
2. Why is it important for global managers to be aware of operational, legal, and cultural differences between countries?
‹ Previous Next ›
Footnotes
1. “Google Bosses Convicted in Italy,” BBC News, February 24, 2010, http://news.bbc.co.uk/2/hi/8533695.stm. ↑
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2. J. R. Raphael, “Italy’s Google Convictions Set a Dangerous Precedent,” PCWorld, February 24, 2010, http://www.pcworld.com/article/190191/italys_google_convictions_set_a_dangerous_precedent.html. ↑
3. Colleen Barry, “Three Google Employees Convicted in Italian Court of Privacy Violations,” Associated Press, February 24, 2010, http://www.cleveland.com/world/index.ssf/2010/02/three_google_employees_convict.html. ↑
4. Paul McNamara, “Conviction of Google Execs in Italy Sheer Madness,” PCWorld, February 24, 2010, http://www.pcworld.com/article/190125/conviction_of_google_execs_in_italy_sheer_madness.html. ↑
5. Jaikumar Vijayan, “Conviction of Google Execs Alarms Privacy Advocates,” PCWorld, February 24, 2010, http://www.pcworld.com/article/190175/conviction_of_google_execs_alarms_privacy_advocates.html. ↑
6. Adam Satariano, “Google Fined $1.7 Billion by E.U. for Unfair Advertising Rules,” March 20, 2019, https://www.nytimes.com/2019/03/20/business/google-fine- advertising.html. ↑
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Global Business Management v2.0 Sanjyot P. Dunung
1.3 Debate on Globalization
Learning Objectives
1. Identify what global managers need to understand about globalization.
2. Understand two current competing theories about globalization.
3. State arguments for and against globalization.
4. Recognize how the debate on globalization impacts global firms.
What Do Global Managers Need to Understand about Globalization?
Every day we hear people talk about how the world is shrinking. Advancements in transportation and communications are bringing people from all over the world in closer contact with each other, making them more aware of what is available and what they might sell to people abroad. They may argue about borders, religions, and politics. But take a look around and you’ll see many people are demanding goods and services from the same countries that they may have felt so uncomfortable coming into close contact with.
In today’s global economy, everyone is accustomed to buying goods
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from other countries—electronics from Taiwan, vegetables from Mexico, clothing from China, cars from Korea, and skirts from India. They’re sipping Cokes, paying for meals with Visa cards or Apple Pay, driving Toyotas and Mercedes, and wearing shoes made in Italy, Vietnam, or Brazil. Most modern shoppers take the “Made in [a foreign country]” stickers on their products for granted.
Long-distance commerce wasn’t always this common, although foreign trade—the movement of goods from one geographic region to another—has been a key factor in human affairs since prehistoric times. Thousands of years ago, merchants transported only the most precious items—silk, gold and other precious metals and jewels, spices, porcelains, and medicines—via ancient, extended land and sea trade routes, including the famed Silk Road through central Asia. Moving goods great distances was simply too hard and costly to waste the effort on ordinary products, although people often carted grain and other foods over shorter distances from farms to market towns.
While global trade has existed for centuries, what’s relatively new is the speed by which global trade is growing, impacting people within each country as well as the world overall. Global trade has been growing rapidly in recent decades because of technological expansion, liberalization of governmental policies on international trade and resource movements, development of institutions needed to support and facilitate international transactions, and increased global competition. Because of all these factors, companies increasingly use foreign countries as a source of both production and sales.
Accordingly, globalization has become inevitable. All countries permit some level of foreign trade, although some permit more than others. Most governments have conclusively decided that global trade and investment can benefit their countries and their people. Private
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companies have also realized that the best opportunities for growth and profits often come from outside their home countries.
Despite the pervasive influence of globalization, it is hard to pin down one definition that will suit everybody. For our purposes, globalization refers to an interdependent world economy—in which people in one part of the world interact with people in another part as buyers, sellers, or intermediaries.
Much of this interdependency came under greater scrutiny in 2020 as COVID-19 ravaged countries and the global economy. These disruptions were further compounded in 2022 with the devastating Russian invasion of Ukraine and the subsequent realignment of geopolitical issues further taking a toll on global businesses’ operations. The long-lasting impact of the COVID-19 pandemic and the realignment of geopolitical issues is unclear, but it’s not likely to end globalization. Rather, the second age of globalization that began in 1945 will now morph into a new version of globalization. World War I brought about the end of the first globalization from 1870 to 1914. Now, COVID-19 is triggering a new wave of creative destruction, and the crisis will unleash a third wave of improved globalization, which will eventually offer immense opportunities for innovation and dynamic improvements in productivity, technological and organizational innovation, and a rethinking of traditional supply- chain strategies.
In reality, globalization has created both opportunities and challenges. Recently, globalization has come under greater scrutiny from its detractors as nationalist and populist movements around the world have questioned the impact of globalization on local economies. Economists around the world are assessing the impact of global trade and governments and businesses are exploring new solutions to address some of the challenges of globalization, while preserving and promoting some of the opportunities. Global
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managers need to be aware of the broader social, economic, and political concerns that may impact the business of their firms.
Globalization isn’t in retreat, but it has morphed into a very different phenomenon, increasingly powered by trade in services and by intraregional trade. Underlying it all is the impact of automation on low-skill jobs—which will ultimately increase the need for innovation in operations, manufacturing, and supply chains. . . . The trade intensity of manufactured goods is going down. That means more goods that are produced are now sold in the country they’re produced in. They’re not traded or exported and imported. But at the same time, we see services trade continues to grow much faster than goods trade. So, increasingly, globalization is about trade in various forms of services, like IT services and telecommunications, transportation, business services, and these types of things. . . . So, even though we talk a lot about trade in goods, the service component of goods is incredibly important. And it’s growing more important. If you added up the services component of manufactured goods—if you considered all the intangible assets that global companies shift around the world, as well as these free digital services, like music and video streaming or internet search and email—it could well be that the value of traded services is already greater than the value of traded goods. For some specific countries, including the United States, our overall trade balance would look very different if you appropriately accounted for all the exports of services.
What Is the Debate on Globalization?
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What is the globalization debate? Well, it’s not so much a debate as it is a stark difference of opinion on how the internationalization of businesses is affecting countries’ cultural, consumer, worker, and national identities—and whether these changes are desirable. For instance, the ubiquity of such food purveyors as Coca-Cola and McDonald’s in practically every country reflects the fact that some consumer tastes are converging, though at the likely expense of local beverages and foods. Remember, globalization refers to the shift toward a more interdependent and integrated global economy. This shift is fueled largely by (1) declining trade and investment barriers and (2) new technologies, such as the internet. The globalization debate surrounds whether and how fast markets are actually merging together.
There are several main viewpoints that frame our current thinking of globalization. Let’s look more closely at two: the flat-world versus the multidomestic perspectives.
The flat-world perspective , which remains relevant, is a metaphor for viewing the world as a level playing field in terms of commerce, where all competitors have an equal opportunity. It’s largely credited to Thomas Friedman, who covers the world for the New York Times, and his access to influential local authorities, corporate executives, local Times bureaus and researchers, the internet, and a voice recorder that enabled him to compile a huge amount of information into a book called The World Is Flat. Many people consider globalization a modern phenomenon, but according to Friedman, this is its third stage. The first stage of global development, what Friedman calls “Globalization 1.0,” started with Columbus’s discovery of the New World and ran from 1492 to about 1800. Driven by nationalism and religion, this lengthy stage was characterized by how much industrial power countries could produce and apply.[2]
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“Globalization 2.0,” from about 1800 to 2000, was disrupted by the Great Depression and both World Wars and was largely shaped by the emerging power of huge, multinational corporations. Globalization 2.0 grew with the European mercantile stock companies as they expanded in search of new markets, cheap labor, and raw materials, and continued with subsequent advances in sea and rail transportation. This period saw the introduction of modern communications and cheaper shipping costs. “Globalization 3.0” began around 2000, with advances in global electronic interconnectivity that allowed individuals to communicate as never before.
In Globalization 1.0, nations dominated global expansion. Globalization 2.0 was driven by the ascension of multinational companies, which pushed global development. In Globalization 3.0, major software advances have allowed an unprecedented number of people worldwide to work together with unlimited potential.
Today, companies can outsource any service or business that can be broken down to its key components and converted to computerized operations. This includes everything from making restaurant reservations to reporting corporate earnings to reading x-rays. And it doesn’t stop at basic services. With the “globalization of innovation,” multinationals in India are filing increasing numbers of U.S. patent applications, ranging from aircraft-engine designs to transportation systems and microprocessor chips. Japanese-speaking Chinese nationals in Dalian, China now answer call-center questions from Japanese consumers. Due to Dalian’s location near Japan and Korea, as well as its numerous universities, hospitals, and golf courses, some 2,800 Japanese companies outsource operations there. While many companies are outsourcing to other countries, some are using “home sourcing”—allowing people to work at home. JetBlue uses home sourcing for reservation clerks. Today, about 12 percent of the U.S. workforce works fully remote, usually from home. In many ways,
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outsourcing and home sourcing are related; both allow people to work from anywhere.
Watch & Learn: Understanding the Debate on Globalization
Become knowledgeable on the debate regarding globalization, the development of an increasingly integrated global economy. Global business has been growing rapidly in recent decades for a number of political, economic, technical, and social factors. But despite the growth of global trade and investment, globalization is not without controversy. Gain important perspective on the current issues being debated by governments, businesses, and NGOs.
How the World Got Flat
Friedman identifies ten major events in recent times that helped
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reshape the modern world and make it flat:
1. 11/9/89: When the walls came down and the windows went up. The fall of the Berlin Wall ended old-style communism and planned economies. Capitalism ascended.
2. 8/9/95: When Netscape went public. Internet browsing and email helped propel the internet by making it commercially viable and user friendly.
3. Work-flow software: Let’s do lunch. Have your application talk to my application. With more powerful, easier-to-use software and improved connectivity, more people can share work. Thus, complex projects with more interdependent parts can be worked on collaboratively from anywhere.
4. Open sourcing: Self-organizing, collaborative communities. Providing basic software online for free gives everyone source code, thus accelerating collaboration and software development.
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Infosys is a multibillion-dollar global IT and consulting firm headquartered in India.
Source: By Indianhilbilly (Own work) [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons
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5. Outsourcing: Y2K. The internet lets firms use employees worldwide and send specific work to the most qualified, cheapest labor, wherever it is. Enter India, with educated and talented people who work at a fraction of U.S. or European wages. Indian technicians and software experts built an international reputation during the Y2K millennium event. The feared computer-system breakdown never happened, but the Indian IT industry began handling e-commerce and related businesses worldwide. Outsourcing has now expanded to include other countries in Asia, such as Singapore and the Philippines.
6. Offshoring: Running with gazelles, eating with lions. When it comes to jobs leaving and factories being built in cheaper places, people think of China, Malaysia, Thailand, Mexico, Ireland, Brazil, and Vietnam. But going offshore isn’t just moving part of a manufacturing or service process. It means creating a new business model to make more goods for non-U.S. sale, thus increasing U.S. exports.
7. Supply chaining: Eating sushi in Arkansas. Walmart demonstrates that improved acquisition and distribution can lower costs and make suppliers boost quality.
8. Insourcing: What the guys in funny brown shorts are really doing. This kind of service collaboration happens when firms devise new service combinations to improve service. Take United Parcel Service (UPS). The “brown” company delivers packages globally, but it also repairs Toshiba computers and organizes delivery routes for Papa John’s pizza. With insourcing, UPS uses its logistics expertise to help clients create new businesses.
9. Informing: Google. Google revolutionized information searching. Its users conduct some 1.2 trillion searches each year worldwide! This search methodology and the wide access to knowledge on the internet transforms information into a commodity people can use to spawn entirely new businesses.
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10. The steroids: Digital, mobile, personal, virtual, and artificial intelligence. Technological advances range from wireless communication to processing, resulting in extremely powerful computing capability and transmission. One new Intel chip processes over 100 billion instructions per second, compared to 60,000 MIPS in 1971. And technology continues to advance exponentially. Advances in artificial intelligence will likely transform global business and society at large, even further in the years to come.
These ten factors had powerful roles in making the world smaller, but each worked in isolation until, Friedman writes, the convergence of three more powerful forces: (1) new software and increased public familiarity with the internet, (2) the incorporation of that knowledge into business and personal communication, and (3) the market influx of billions of people from Asia and the former Soviet Union who want to become more prosperous—fast. Converging, these factors generated their own critical mass. The benefits of each event became greater as it merged with another event. Increased global collaboration by talented people without regard to geographic boundaries, language, or time zones created opportunity for billions of people.
Political allegiances are also shifting. While critics say outsourcing costs U.S. jobs, it can also work the other way. When the state of Indiana bid for a new contract to overhaul its employment claims processing system, a computer firm in India won. The company’s bid would have saved Indiana $8 million, but local political forces made the state cancel the contract. In such situations, the line between the exploited and the exploiter becomes blurred.
Corporate nationality is also blurring. Hewlett-Packard (HP) is based in California, but it has employees in 178 countries. HP manufactures parts wherever it’s cheapest to do so. Multinationals like HP do
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what’s best for them, not what’s best for their home countries. This leads to critical issues about job loss versus the benefits of globalization.
We Live in a Multidomestic World, Not a Flat One!
International business professor Pankaj Ghemawat takes strong issue with the view that the world is flat and instead espouses a world he characterizes as “semiglobalized” and “multidomestic.” If the world were flat, international business and global strategy would be easy. According to Ghemawat, it would be domestic strategy applied to a bigger market. In the semiglobalized world, however, global strategy begins with noticing national differences. Given the recent rise in global nationalism, this viewpoint is getting a refresh.
Ghemawat’s research suggests that to study “barriers to cross-border economic activity,” global managers need to use a “CAGE” analysis. We will look more closely at managing the CAGE framework in Chapter 10, Section 3 “Managing CAGE Analysis”. Let’s briefly introduce the four factors that constitute the CAGE framework.
1. Culture. Generally, cultural differences between two countries reduce their economic exchange. Culture refers to a people’s norms, common beliefs, and practices. Cultural distance refers to differences based on language, norms, national or ethnic identity, levels of trust, tolerance, respect for entrepreneurship and social networks, or other country-specific qualities. Some products have a strong national identification, such as the Molson beer company in Canada. Conversely, genetically modified foods (GMOs) are commonly accepted in North America but highly disdained in Western Europe. Such cultural disdain for GMOs would make it easier to sell GMO corn in the United States but impossible to sell in Germany.
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2. Administration. Bilateral trade flows show that administratively similar countries trade much more with each other. Administrative distance refers to historical governmental ties, such as those between India and the United Kingdom. This makes sense; they have the same sorts of laws, regulations, institutions, and policies. Membership in the same trading bloc is also a key similarity. Conversely, the greater the administrative differences between nations, the more difficult the trading relationship—whether at the national or corporate level. It can also refer simply to the level and nature of government involvement in one industry versus another. Farming, for instance, is subsidized in many countries, and this creates similar conditions.
3. Geography. This is perhaps the most obvious difference between countries. You can see that the market for a product in Los Angeles is separated from the market for that same product in Singapore by thousands of miles. Generally, as distance goes up, trade goes down, since distance usually increases the cost of transportation. Geographic differences also include time zones, access to ocean ports, shared borders, topography, and climate. You may recall from the opening case that even Google was affected by geographic distance when it felt the speed of the internet connection to Google.com was slowed down because the Chinese were accessing server farms in other countries, as none were set up in China (prior to the setup of Google.cn).
4. Economics. Economic distance refers to differences in demographic and socioeconomic conditions. The most obvious economic difference between countries is size (as compared by gross domestic product, or GDP). Another is per capita income. This distance is likely to have the greatest effect when (1) the nature of demand varies with income level, (2) economies of scale are limited, (3) cost differences are significant, (4) the distribution or business systems are different, or (5)
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organizations have to be highly responsive to their customers’ concerns. Disassembling a company’s economy reveals other differences, such as labor costs, capital costs, human capital (e.g., education or skills), land value, cheap natural resources, transportation networks, communication infrastructure, and access to capital.
Each of these CAGE dimensions shares the common notion of distance. CAGE differences are likely to matter most when the CAGE distance is great. That is, when CAGE differences are small, there will likely be a greater opportunity to see business being conducted across borders.
Amusing Anecdote: Challenges of Translating
Pankaj Ghemawat provides this anecdote in partial support of his multidomestic (or antiflat-world) view. “It takes an aroused man to make a chicken affectionate” is probably not the best marketing slogan ever devised by a global marketing team. But that’s the one Perdue Chicken initially used to market its fryers in Mexico. Mexicans were nonplussed, to say the least, and probably wondered what was going on in founder Frank Perdue’s henhouse. How did the slogan get approved by management? Simple: it’s a literal translation of Perdue’s more appetizing North American slogan “It takes a tough man to make a tender chicken.” As Perdue’s managers discovered, at least through this experience with the literal translation of the company’s motto into Spanish, understanding cultural differences is essential.
While the world may not be flat, it is probably safe to say that it is flattening. We will use the CAGE framework throughout this book to
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better understand this evolving dynamic.
Opportunities and Challenges of Globalization
We’ve covered two viewpoints on globalization. Let’s look more closely at the key arguments supporting both the challenges and the opportunities in the global debate on globalization.
Some people lose while others gain, both in absolute and relative terms. Despite the growth of global trade and investment, there’s growing consensus that globalization has not equally benefited the majority of people it has impacted. Advocates of global trade and investment argue that globalization, by giving consumers more choices and forcing companies to compete, has created economic growth and millions of jobs. This growth has provided investment for building roads, airports, factories, and basic infrastructure in less developed countries. Developing countries that opened their borders most to imports are the ones that have grown fastest. Until recently, it took at least two generations for living standards to double, but now, in places like China, Brazil, the Philippines, and Vietnam, living standards double every ten years.
Despite this progress, critics argue that increased globalization has contributed to income inequalities—both between and within countries. Critics also argue that when companies move production from a developed to a developing country to take advantage of cheaper labor supply, they barely improve the economic well-being of their new workers while causing immeasurable hardship to the workers they displaced. Although this displacement is similar to what occurs from technological changes, workers react differently. In developed countries like the United States and countries in Western Europe, frustration from workers displaced by globalization has led to increased support for protectionism. Critics also claim that the
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cost savings from using cheaper labor go mainly to shareholders in developed countries rather than to consumers or to stakeholders in developing countries. In the past two decades we’ve heard a lot about the abuse of sweatshops in developing countries. Whether it’s the leather industry in Bangladesh or a garment factory in Myanmar, labor activists argue that companies use cheap labor pools in different countries to keep their product costs very low. Additionally, they can avoid the costs of providing benefits or decent working conditions. However, the ethics of such practices are not so clear cut. For many workers these sweatshop jobs, while not ideal or decent by Western standards, may be the best they can find. In some countries, such as Bangladesh or Cambodia, a local worker may earn only a few dollars a day in a sweatshop, but this pay may well be above the local minimum wage and well above what the worker could earn elsewhere for a similar job.
As has been the case throughout history, there remain companies and governments who do not abide by the same global business rules and practices. Global organizations such as the WTO or national courts offer mechanisms for disputes to be addressed.
The near-term reality is that while globalization may be good for the world as a whole, not everyone wins in the process. Human nature is such that we often fear change, even if it can improve overall conditions for the majority of people. Over the long run, most agree that globalization has helped and will continue to help improve conditions for the broadest segment of the world. “In general, countries that are more upbeat about their national economy are more likely to say life today is better compared with the past. For example, in Vietnam, where 91 percent say economic conditions are good, a corresponding 88 percent say life is better for people like them compared with 50 years ago. And in contrast, in Venezuela, where only 20 percent say conditions are good, 10 percent say life is better for people like them.”
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As we will learn in this book, global managers are challenged to pursue opportunities for their firms while mitigating any negative impact on a country and its residents.
Countries diminish their sovereignty. For many people, particularly those in developing regions such as in Asia, Latin America, and Africa, globalization is often viewed with suspicion, not only because they fear that big foreign companies will benefit themselves at the expense of their local population, but also because they fear that these companies will be instruments of their home countries' political interests. Bear in mind that many developing countries have a short history of independence and their citizens remember when colonial powers controlled them. Thus, they often restrict foreign trade and investment to benefit their national interests.
However, developed countries also limit international trade and investment. Although the United States is considered one of the more open economies, its government influences both foreign trade and foreign investment for economic and political reasons. For example, the United States limits foreign ownership in its strategically important industries, such as transportation, communications, and military hardware. On the other side of the world, Japan has long used economic policy to influence trade by promoting exports and discouraging imports. The Japanese have also successfully used government policy to promote certain key industries with global potential, hence the early government support for the automobile and electronics industries in the 1960s and 1970s.
However, critics of globalization argue that countries can’t enforce policies that they think are in the better interests of their citizens. They argue that global governing bodies like the World Trade Organization (WTO), the International Monetary Fund (IMF), and regional trading groups, such as the European Union, dictate policy to countries rather than letting them come up with their own policies.
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Many labor and environmental groups are concerned that these organizations are spinning out of control, and that they are overly powerful global organizations that are accountable only to wealthy corporate interests intent on increasing their coffers at the expense of local governments and people. These opponents of supra-national organizations believe their national governments should have the sovereign right to enact and implement domestic legislation.
The reality is that these supra-national organizations have established means to smooth the path of globalization. Take the WTO, which has been successful in creating and enforcing rules for global trade. Let’s look at an example of beef. When the European Union tried to block the imports of hormone-treated beef, the WTO struck down the European regulations that denied beef access to the European markets. The WTO authorized the United States to retaliate by restricting entry of European goods, but only within strict guidelines on the volume and type of those goods. Advocates of the WTO and globalization argue that in the absence of a world body, a country might have retaliated much more harshly. In essence, the WTO helped moderate the debate and mitigate the response. Many people are concerned about the perceived loss of national sovereignty caused by these supra-national organizations.
However, globalists argue that economic interdependence helps keep a balance among governments. A country may be less prone to take economic or political actions against a country with which it is mutually interdependent. Further, they argue that governments will be encouraged to provide a base level of social standards for workers to maintain their standing in this global organization. For example, some activists see the United Nations, particularly some of its subgroups such as the International Labour Organization, as the missing link in the international system that can help control the excesses of globalization and spread the gains more evenly.
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National cultures change and become diluted. It’s clear from what we see around the world that more contact among countries brings about cultural change. Depending on one's viewpoint, this may be for better or worse. Over the recent decades, the culture of the United States, which is the strongest international trading and investing nation, has permeated many cultures around the world. As a result, for many years, countries feared an Americanization of their culture and people, sometimes referred to as a Coca-Colanization. For example, in January 1990, when the first McDonald’s opened in Russia, almost 30,000 Russians braved the winter cold to experience their first American Big Mac.
In contrast, one critic of cultural inroads is France, which at times has prohibited the business use of terms such as le weekend and le drugstore and continues to protect its domestic movie industry. Twenty-five years ago, in France, McDonald’s bashing was hailed as an act of heroism. Indeed, José Bové, the leader of the radical farmers who bombed a McDonald’s in Millau in 1999, became a national icon, and by 2001 he became an international one as he took up the banner of the antiglobalization movement. Despite the local cultural misgivings, the French government has permitted foreign companies to expand in-country—and conversely, French firms have expanded their global footprint.
Governments have fewer ways to monitor companies and hold them accountable. The debate on globalization often ends up focusing on the ability to control international companies. Critics claim that global firms avoid paying taxes and avoid adhering to strict environmental and labor standards by moving operations to countries with laxer regulations than their home countries. Certainly, the global cruise ship industry is an example. The major cruise ship companies are incorporated in tax havens such as Panama, which enable the firms to pay nominal or no taxes and avoid regulations governing employees.[10]
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Yet globalists argue that the answer is not to thwart international economic interdependence, but rather for countries to work more closely together to develop and agree on standards for corporate accountability and means of monitoring their compliance throughout the world.
The debate on globalization will continue as businesses and governments try to make sure that the benefits of global trade outweigh the costs for all countries, not just a select few. Through the process, global organizations like the WTO and UN will work to provide a framework to level the playing field for all countries, promote and protect the rights of workers and basic human values everywhere, and encourage companies to be responsible global citizens.
Key Takeaways
The globalization debate pits the opinions of Thomas Friedman against those of Pankaj Ghemawat. Their differing views help you better understand the context of international business. Through exposure to Friedman’s ideas, you gain a better perspective on the forces, or “flatteners,” that are making cross-border business more prominent.
Ghemawat portrays a world that is “semiglobalized” and “multidomestic,” where global strategy begins with noticing national differences.
Ghemawat’s CAGE framework covers four factors— culture, administration, geography, and economics.
Global managers need to be aware of the broader social, economic, and political concerns that may impact the business of their firms.
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Exercises
(AACSB: Reflective Thinking, Analytical Skills)
1. What are the basic tenets of the flat-world perspective?
2. What are the four components of the CAGE analytical framework?
3. What is one argument against globalization and the countering argument in favor?
4. Why do global managers need to understand the debate on globalization?
‹ Previous Next ›
Footnotes
1. Simon London and Susan Lund, Globalization’s Next Chapter, May 2019, https://mck.co/2CKiL4m. ↑
2. Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2005), 48–159. ↑
3. Emma Goldberg, “Do We Know How Many People Are Working From Home?” New York Times, March 30, 2023. ↑
4. Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2005), 48–159. ↑
5. Pankaj Ghemawat, “Distance Still Matters,” Harvard Business Review 79, no. 8 (2001): 137–47. ↑
6. Pankaj Ghemawat, “Distance Still Matters,” Harvard Business Review 79, no. 8 (2001): 137–47. ↑
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7. Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Boston: Harvard Business School Press, 2007), 42. ↑
8. Libby Hogan, “The True Cost of Myanmar’s Growing Garment Industry,” PRI, May 29, 2018, https://www.pri.org/stories/2018-05-29/true-cost- myanmars-growing-garment-industry. ↑
9. Jacob Poushter, “Worldwide, People Divided on Whether Life Today Is Better Than in the Past: Current economic conditions a key factor in assessing progress,” Pew Research, December 5, 2017, https://www.pewresearch.org/global/2017/12/05/worldwide-people- divided-on-whether-life-today-is-better-than-in-the-past/. ↑
10. Kelly Phillips, “Ship Isn’t The Only Thing That Stinks At Carnival: Low Tax Rate Stirs Ire,” Forbes, February 16, 2013, https://www.forbes.com/sites/kellyphillipserb/2013/02/16/ship-isnt-the- only-thing-that-stinks-at-carnival-low-tax-rate-stirs-ire/#78d10fd55575. ↑
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Global Business Management v2.0 Sanjyot P. Dunung
1.4 Navigating Ethics and International Business
Learning Objectives
1. Learn about the field of ethics.
2. Gain a general understanding of business ethics.
3. See why business ethics might be more challenging for global managers operating in international settings.
A Framework for Ethical Decision Making
Today’s global managers need to be aware of how ethics impacts international business and management. We hear about ethics in a variety of ways, but it helps to be clear what we mean by ethics and how it applies to global managers across cultures. Throughout this book, we’ll explore Ethics in Action as it applies to specific business functions and management practices. Let’s first come to a common understanding of what ethics are, specifically the category of business ethics.
Definitions of ethics and ethical behavior seem to have strong historical and cultural roots that vary by country and region. The
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field of ethics is a branch of philosophy that seeks virtue. Ethics deals with morality about what is considered “right” and “wrong” behavior for people in various situations. While business ethics emerged as a field in the 1970s, international business ethics didn’t arise until the late 1990s. Initially, it looked back on the international developments of the late 1970s and 1980s, such as the Bhopal disaster in India, which resulted in the deaths of more than 3,000 people due to accidental exposure to a chemical gas, or the infant milk-formula debate in Africa, which inadvertently promoted formula over mothers’ milk. Today, those who are interested in international business ethics and ethical behavior examine various kinds of business activities and ask, “Are managers conducting global business in ethically right or wrong ways?”
While ethical decision making is tricky stuff, particularly regarding international business issues, it helps if you start with a specific decision-making framework, such as the one summarized from the Markkula Center for Applied Ethics at Santa Clara University.
1. Is it an ethical issue? Being ethical doesn’t always mean following the law. And just because something is possible doesn’t mean it’s ethical—hence the global debates about artificial intelligence or biotechnology advances, such as cloning. Also, ethics and religion don’t always concur. This is perhaps the trickiest stage in ethical decision making; sometimes the subtleties of the issue are above and beyond our knowledge and experience. Listen to your instincts—if it feels uncomfortable making the decision on your own, get others involved and use their collective knowledge and experience to make a more considered decision.
2. Get the facts. What do you know and, just as important, what don’t you know? Who are the people affected by your decision? Have they been consulted? What are your options? Have you reviewed your options with someone you respect? As managers,
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it’s important to get a diverse set of viewpoints and not rely on people who automatically agree with you.
3. Evaluate alternative actions. There are different ethical approaches that may help you make the most ethical decision. For example, here are five approaches you can consider:
a. Utilitarian approach. Which action results in the most good and least harm?
b. Rights-based approach. Which action respects the rights of everyone involved?
c. Fairness or justice approach. Which action treats people fairly?
d. Common good approach. Which action contributes most to the quality of life of the people affected?
e. Virtue approach. Which action embodies the character strengths you value?
4. Test your decision. Could you comfortably explain your decision to a colleague, friend, or family member? To a person on the street? On television? If not, you may have to rethink your decision before you take action.
5. Just do it—but what did you learn? Once you’ve made the decision, implement it. Then set a date to review your decision and make adjustments if necessary. Often, decisions are made with the best information on hand at the time, but things change and your decision making needs to be flexible enough to change too. Even a complete about-face may be the most appropriate action later on.
Ethics in Action: Soccer Balls and Child Labor
You might know that more than 40 percent of the soccer balls in the world are made in the city of Sialkot, Pakistan. Historically, these balls were hand-stitched in peoples’
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homes, often using child labor. During the 1996 European Championships, the media brought attention to the 7,000 seven- to fourteen-year-old children working full time stitching balls. NGOs (nongovernmental organizations) and industry groups stepped up to take action. UNICEF, the World Federation of the Sporting Goods Industry, the International Labour Organization (ILO), and the Sialkot Chamber of Commerce signed the Atlanta Agreement to eliminate the use of child labor in Pakistan’s soccer ball industry. The Atlanta Agreement got ball production out of the home and into stitching centers, which could be monitored more easily. This also led to the centralization of production in approved “stitching centers.” On the one hand, the centers made it easier for the Independent Monitoring Association for Child Labor (IMAC)—an NGO created to watch over the Atlanta Agreement—to make sure no child labor was used. On the other hand, the centralization sometimes forced workers to commute farther to get to work. As a result, child labor has, to a large extent, disappeared from this sector. Moreover, global fair-trade companies, such as GEPA, have set up village-based stitching centers that solely employ women.
Additionally, local social customs, based on religion, prohibit women from working with men in Pakistan, and the women-only soccer ball stitching centers give them an opportunity to have a job and improve their families’ incomes. This example illustrates how global managers, businesses, governments, and NGOs can team together to create ethical business solutions. We’ll explore more examples in the chapters ahead.
What Ethics Is Not
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Two of the biggest challenges in identifying ethical standards relate to questions about what the standards should be based on and how we apply those standards in specific situations. Experts on ethics agree that the identification of ethical standards can be very difficult, but they have reached some agreement on what ethics is not. At the same time, these areas of agreement suggest why it may be challenging to obtain consensus across countries and regions as to “What is ethical?” Let’s look at this five-point excerpt from the Markkula Center for Applied Ethics at Santa Clara University about what ethics is not.
What Ethics Is Not
1. Ethics is not the same as feelings. Feelings provide important information for our ethical choices. Some people have highly developed habits that make them feel bad when they do something wrong, but many people feel good even though they are doing something wrong. And often our feelings will tell us it is uncomfortable to do the right thing if it is hard.
2. Ethics is not religion. Many people are not religious, but ethics applies to everyone. Most religions do advocate high ethical standards but sometimes do not address all the types of problems we face.
3. Ethics is not following the law. A good system of law does incorporate many ethical standards, but law can deviate from what is ethical. Law can become ethically corrupt, as some totalitarian regimes have made it. Law can be a function of power alone and designed to serve the interests of narrow groups. Law may have a difficult time designing or enforcing standards in some important areas, and may be slow to address new problems.
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4. Ethics is not following culturally accepted norms. Some cultures are quite ethical, but others become corrupt—or blind to certain ethical concerns (such as slavery in Europe, Africa, the Middle East, Asia, and North and South America throughout history), or the current eighty-six countries where women continue to face legal limitations or barriers in the workplace.
“When in Rome, do as the Romans do” is not a satisfactory ethical standard.
5. Ethics is not science. Social and natural science can provide important data to help us make better ethical choices. But science alone does not tell us what we ought to do. Science may provide an explanation for what humans are like. But ethics provides reasons for how humans ought to act. And just because something is scientifically or technologically possible, it may not be ethical to do it, as the debate around artificial intelligence applications illustrates.
Watch & Learn: Global Business Ethics
Navigating the world of global business ethics is tricky, but we can help. Business ethics are impacted by culture, including a group’s attitudes, values, and beliefs. Watch to explore ethical, moral, and socially responsible behaviors and find out how culture influences management and employee practices, as well as marketing, gift-giving, and customer communications. Ethical questions have become more complicated—and there’s often no clear-cut correct answers! Learn what professionals need to consider when evaluating global business ethics and the impact on business goals.
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Key Takeaways
The subject of ethics is important in almost any context—be it medicine, science, law, or business. You learned a framework for ethical decision making as well as some opinions on what ethics is not.
Many would argue that international business ethics can have a strong foundation in national culture. Some argue that ethics shouldn’t follow culturally accepted norms. However, business managers should have a good understanding of which norms their ethical standards are based on and why and how they believe they should apply in other national contexts.
Exercises
(AACSB: Reflective Thinking, Analytical Skills)
11:50
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1. To what does the term business ethics refer?
2. What are the five steps in the ethical decision-making framework?
3. What five areas have experts agreed are not ethics?
‹ Previous Next ›
Footnotes
1. Georges Enderle, ed., International Business Ethics: Challenges and Approaches (Notre Dame, IN: University of Notre Dame Press, 1999), 1. ↑
2. “A Framework for Thinking Ethically,” Markkula Center for Applied Ethics, Santa Clara University, June 18, 2023, https://www.scu.edu/ethics/ethics- resources/ethical-decision-making/. ↑
3. Ritu Boopathy, “The Story of Sialkot: The Soccer Ball Capital,” International Law and Policy Brief, George Washington University, April 18, 2022, https://studentbriefs.law.gwu.edu/ilpb/2022/04/18/the-story-of- sialkot-the-soccer-ball-capital/. ↑
4. “Atlanta Agreement,” Independent Monitoring Association for Child Labor, http://www.imacpak.org/atlanta.htm. ↑
5. “Child Labour Eliminated in Manufacturing Soccer Balls,” The Nation, April 19, 2010, https://nation.com.pk/18-Apr-2010/child-labour-eliminated-in- manufacturing-soccer-balls. ↑
6. GEPA website, https://www.gepa.de/en/welcome.html. ↑
7. “Nearly 2.4 Billion Women Globally Don’t Have Same Economic Rights as Men,” World Bank, March 1, 2022, https://www.worldbank.org/en/news/press-release/2022/03/01/nearly-2-4- billion-women-globally-don-t-have-same-economic-rights-as-men. ↑
8. “A Framework for Thinking Ethically,” Markkula Center for Applied Ethics,
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Santa Clara University, June 18, 2023, https://www.scu.edu/ethics/ethics- resources/ethical-decision-making/. ↑
10/31/26, 7:57 AM1.5 Understanding the Roles and Function of a Global Manager | Global Business Management
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Global Business Management v2.0 Sanjyot P. Dunung
1.5 Understanding the Roles and Function of a Global Manager
Learning Objectives
1. Identify the types of global managers.
2. Understand the difference between business, country, and functional managers.
3. Understand what we mean by going global versus being global.
What Does It Mean to Be a Global Manager?
To understand the role of a global manager, it helps to have a common definition of managers. Fundamentally, a manager is simply someone who is responsible for controlling or administering all or part of a company or similar organization, regardless of size.
It would then seem that a global manager is someone who is responsible for controlling or administering all or part of a company or similar organization in one or more countries. But as we will see in this book, for many of the midsize and larger companies, the practical application of this definition is more complex. While the
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theories and applications of global management are evolving as companies and academic researchers absorb new information, technologies, and global realities, we can identify a practical understanding of the functions and roles of global managers.
Traditionally, global managers were typically people with either a country or language expertise, but not necessarily deep knowledge of a company’s business, industry, or the specific functions within the company. While country knowledge is essential, it’s only one of several management capabilities that global firms need.
In reality, there is no such thing as a universal global manager in today’s business environment. Multinational companies instead require three kinds of specialists—business managers, country managers, and functional managers. Additionally, there are the senior corporate executives at corporate headquarters, the leaders who manage the complex interactions between the three—and can identify and develop the talented executives a successful global firm requires. Many of today’s larger firms have utilized these four types within a management structure that balances the local, regional, and global demands placed on companies operating across the world’s many borders. For our purposes, we will use the term global manager to inclusively refer to all of these roles. Let’s look more closely at each of these global management specialists to understand their role and function within a global firm.
Business managers are typically people who are responsible for supervising and overseeing the day-to-day activities and employees within a company. There are managers with tiered levels of responsibility, starting with junior to senior managers. The internal structure, role, and responsibilities of managers can differ between companies, although there are often similarities within industries.
Global business or product-division managers have one overriding responsibility: to further the company’s global-scale efficiency and
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competitiveness in one specific business area of the company. This task requires not only the perspective to recognize opportunities and risks across national and functional boundaries but also the skill to coordinate activities and link capabilities across those barriers. Business managers are distinctly different from country managers, who are focused on the business operations within a country.
The global business manager’s overall goal is to focus on the full benefit of integrated worldwide operations. The primary roles of a business manager’s job are to serve as the strategist for their organization, the architect of its worldwide asset and resource configuration, and the coordinator of transactions across national borders. Coordination probably takes up more of the global business manager’s time than any other aspect of the job. This role requires that a manager have great administrative and interpersonal skills to ensure that coordination and integration don’t deteriorate into heavy-handed control.
Ultimately, the global business manager’s responsibility for the distribution of crucial assets and resources is closely tied to shaping an integrated strategy. While they often rely on the input of heads of departments in the region, the business manager is still the architect who usually initiates and leads the debate on where major plants, technical centers, and sales offices should be located—and which facilities should be closed.
Country managers oversee a company’s operations within a country or geographic region setting (regional managers) across functional areas. “The building blocks for most worldwide companies are their national subsidiaries. If the global business manager’s primary objective is to achieve global-scale efficiency and competitiveness, the national subsidiary manager’s is to be sensitive and responsive to the local market.”
Country managers are responsible for understanding local customer
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needs, satisfying the host government’s requirements, and defending their company’s market positions against local and external competitors. Country managers are best positioned to help companies adapt to market changes in-country. This local knowledge also enables country managers to nurture local product innovations that can be shared with the corporate units. “To be effective, country managers play three vital roles: the sensor and interpreter of local opportunities and threats, the builder of local resources and capabilities, and the contributor to and active participant in global strategy.” Country managers who are attuned to local or cultural nuances in the workplace as well as within the marketplace tend to function best. Additionally, country managers are responsible for conveying local market knowledge to business and corporate managers, who may have less local insight and are often managing a business unit or the company across multiple countries. “Consumer trends in one country often spread to another; technologies developed in a leading-edge environment can have global significance; a competitor’s local market testing may signal a wider strategy; and national legislative initiatives in areas like deregulation and environmental protection tend to spill across borders.”
Functional managers have management authority over an organizational unit, for example, finance, accounting, or human resources. While global business managers and country managers have become more integrated into the overall global corporate structure, the role of functional specialists on a global level is still evolving. Traditionally, companies have not integrated the support- staff roles into critical global strategy development or enabled functional managers to contribute meaningfully to the corporate mainstream’s global activity. “But now, as information, knowledge, and expertise have become more specialized, an organization can gain huge benefits by linking its technical, manufacturing, marketing, human resources, and financial experts worldwide. Given that today’s transnationals face the strategic challenge of resolving the
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conflicts implicit in achieving global competitiveness, national responsiveness, and worldwide learning, business and country managers must take primary responsibility for the first two capabilities. But the third is the functional manager’s province.”
The functional manager in human resources roles must scan for specialized information worldwide, “cross-pollinate” leading-edge knowledge and best practices, and champion innovations that may offer transnational opportunities and applications to transform piecemeal information into strategic intelligence.
Corporate managers oversee the broad range of corporate activities across multiple business units, markets, and countries. Research shows that there is no single model for the global manager. “Neither the old-line international specialist nor the more recent global generalist can cope with the complexities of cross-border strategies. Indeed, the dynamism of today’s marketplace calls for managers with diverse skills. Responsibility for worldwide operations belongs to senior business, country, and functional executives who focus on the intense interchanges and subtle negotiations required. In contrast, those in middle management and frontline jobs need well-defined responsibilities, a clear understanding of their organization’s transnational mission, and a sense of accountability.”
Meanwhile, corporate managers integrate these many levels of responsibility, playing perhaps the most vital role in transnational management. The corporate manager not only leads in the broadest sense; they also identify and develop talented business, country, and functional managers—and balance the negotiations among the three. It’s the role of corporate managers to promote strong managerial, country, and functional specialists.
Mindset: Going Global versus Being
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Global
Traditionally, global managers from any culture would assume that they could apply the same management practices in a new country and be effective. Whether it was an American manager working in Thailand or a Japanese manager working in Australia, global firms have come to realize that effective global management requires that professionals adapt management practices to integrate local cultural values and attitudes into the corporate culture . A company’s culture is also referred to as the organization’s culture, which encompasses values and behaviors that contribute to the unique social and psychological environment of a business. As we will discuss in this book, our focus is more on understanding the cultures of countries, but it’s important to recognize that a company’s culture is equally relevant to global operations.
We will learn more about the cultural factors that impact communications, interactions, and business practices in Chapter 5 “Impact of Culture on Global Business Management”. Additionally, throughout the book we will explore how culture impacts management practices in specific countries.
Working as a global manager requires the development of a global mindset. It’s more than simply knowing the processes of international business and technically doing business in a different country, although this base of knowledge is essential. It’s about developing the capacity to integrate varying cultural and business perspectives into everyday aspects of global operations and decision- making. Effective global managers value an understanding of local cultures and seek to integrate this knowledge in daily as well as strategic management. Furthermore, in today’s VUCA (volatile, uncertain, complex, and ambiguous) world, companies need leadership skills and organizational capabilities different from those that helped them succeed in the past.
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“Success in today’s international climate—a far cry from only a few decades ago—demands highly specialized yet closely linked groups of global business managers, country or regional managers, and worldwide functional managers. This kind of organization characterizes a transnational rather than an old-line multinational, international, or global company. Transnationals integrate assets, resources, and diverse people in operating units around the world. Through a flexible management process, in which business, country, and functional managers form a triad of different perspectives that balance one another, transnational companies can build three strategic capabilities: global-scale efficiency and competitiveness; national-level responsiveness and flexibility; and cross-market capacity to leverage learning on a worldwide basis.”
Watch & Learn: Developing a Global Mindset
Over time, the expansion of trade and the exchange of ideas and cultures have led to an increasingly interconnected global economy. As countries, companies, and people reassess how to operate globally, it’s clear that the way we interact and communicate with stakeholders, including customers and colleagues from different cultures, is evolving. It’s tempting to think that business, thought processes, and communications are the same everywhere —but they’re not. It’s more than geography. In order to operate effectively across cultures, we need a global mindset. What do we mean by a global mindset? And how do we develop one? Explore the building blocks—cultural intelligence, cultural acumen, and cultural agility—that help frame a global mindset. Intuitively developing a global mindset and integrating an awareness of local cultures when managing stakeholders, processes, and projects is
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essential for profitable success and global expansion.
Key Takeaways
Multinational companies require three kinds of specialists—business managers, country managers, and functional managers.
Corporate managers oversee the broad range of corporate activities across multiple business units, markets, and countries. These leaders manage the complex interactions between the three—and can identify and develop the talented executives a successful global firm requires.
Working as a global manager requires the development of a global mindset. It’s more than simply knowing the processes of international business and technically doing business in a different country, although this base of knowledge is essential. It’s about developing the capacity to integrate varying
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cultural and business perspectives into everyday aspects of global operations and decision-making.
Exercises
(AACSB: Reflective Thinking, Analytical Skills)
1. Describe the differences between business, country, functional and corporate managers.
2. What are the core elements of developing a global mindset as a manager?
‹ Previous Next ›
Footnotes
1. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
2. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
3. Saif Abood, “7 Qualities All Successful Country Managers Have In Common,” LinkedIn, March 7, 2016, https://www.linkedin.com/pulse/7- qualities-all-successful-country-managers-have-abood-mba. ↑
4. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
5. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a-
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global-manager. ↑
6. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
7. Christopher A. Bartlett & Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
8. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
9. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
10. Christopher A. Bartlett and Sumantra Ghoshal, “What is a Global Manager,” Harvard Business Review, August 2003, https://hbr.org/2003/08/what-is-a- global-manager. ↑
10/31/26, 7:57 AM2.1 What Do Managers Need to Understand About International Trade Theory? | Global Business Management
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Global Business Management v2.0 Sanjyot P. Dunung
2.1 What Do Managers Need to Understand About International Trade Theory?
Learning Objectives
1. Understand international trade.
2. Compare and contrast different trade theories.
3. Determine which international trade theory is most relevant today and how it continues to evolve.
What Is International Trade?
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.
People or entities trade because they believe that they benefit from the exchange, and they may need or want the goods or services.
Continue reading Section 1.6: Tips in Your Managerial Toolkit: Developing a Career in International Management
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While at the surface this may sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade.
In this section, you’ll learn about the different trade theories that have evolved over the past century and which are most relevant today. Additionally, you’ll explore the factors that impact international trade and how businesses and governments use these factors to their respective benefits to promote their interests.
What Are the Different International Trade Theories?
Figure 2.1 The Silk Road
People have engaged in trade for thousands of years. Ancient history provides us with rich examples such as the Silk Road—the land (red) and water (blue) trade routes that covered more than 4,000 miles and connected the Mediterranean with Asia.
Source: By Whole_world_-_land_and_oceans_12000.jpg: NASA/Goddard Space Flight Center derivative work: Splette (talk) - Whole_world_- _land_and_oceans_12000.jpg, Public Domain,
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“In ancient times, around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries. . . . As with traders ever since, increasingly it came to look like tribute as Uruk merchants' dwellings were plonked amid the rural settlements of the trading partners in the hills. A cooperative trade network seems to have turned into something more like ancient colonialism. Tax and even slavery began to rear their ugly heads. Thus was set the pattern that would endure for the next 6,000 years.”
To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories. As we review these theories, it’s important to recognize that economics is an evolving science, and trade theories are periodically modified to reflect the impact of new trade data as well as global social, political, technological, and environmental factors.
https://commons.wikimedia.org/w/index.php?curid=10449197
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Figure 2.2 Classical Country-Based versus Modern Firm- Based Trade Theories
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Classical or Country-Based Trade Theories
Mercantilism Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In its simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus , or a situation where the value of exports is greater than the value of imports, and to avoid a trade deficit , or a situation where the value of imports is greater than the value of exports.
A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports. This
Source: © 2003–2024, Atma Global Knowledge Media, Inc. Reprinted with permission.
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strategy is called protectionism and is still used and debated today.
Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas to India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations.
Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic- industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Free- trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries at the expense of both consumers and other companies, within and outside of the industry.
Absolute Advantage In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations. Smith offered a new trade theory called absolute advantage , which focused on the ability of a
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country to produce a good more efficiently than another nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization.
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people.
Comparative Advantage The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries.
Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity
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differences, whereas absolute advantage looks at the absolute productivity.
Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of doing legal work, she would be giving up $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type quickly, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is comparative advantage. A person or a country will specialize in doing what they do relatively better. In reality, the world economy is more complex and consists of more than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory.
Heckscher-Ohlin Theory (Factor Proportions Theory) The theories of Smith and Ricardo didn’t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a country’s production factors—land, labor, and capital— which provide the funds for investment in plants and equipment.
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They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. Their theory, also called the factor proportions theory , stated that countries would produce and export goods that required resources or factors that were in great supply and therefore were cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand.
For example, China, India, Indonesia, and Vietnam are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments.
Leontief Paradox In the early 1950s, Russian-born American economist Wassily W. Leontief studied the U.S. economy closely and noted that the United States was abundant in capital and therefore should export more capital-intensive goods. However, his research using actual data showed the opposite—the United States was importing more capital- intensive goods. According to the factor proportions theory, the United States should have been importing labor-intensive goods, but instead it was actually exporting them. His analysis became known as the Leontief Paradox because it was the reverse of what was expected by the factor proportions theory. In subsequent years, economists have noted historically that in the 1940s and 1950s, labor in the United States was both available in steady supply and more productive than in many other countries; hence it made sense to export labor-intensive goods. Over time, labor in other countries has become more productive while remaining cheaper than the United States; and this dynamic, along with unprecedented advances in technology and domestic and international policies, has contributed to the economic populism in the United States.
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Over the decades, many economists have used theories and data to explain and minimize the impact of the paradox. However, what remains clear is that international trade is complex and is impacted by numerous and often-changing factors. Trade cannot be explained neatly by one single theory, and more importantly, our understanding of international trade theories continues to evolve.
Modern or Firm-Based Trade Theories
In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry trade , which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.
Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows.
Country Similarity Theory Swedish economist Staffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or a similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer
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preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers’ decision-making and purchasing processes.
Product Life Cycle Theory Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. U.S. manufacturing was the globally dominant producer in many industries after World War II.
It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of the manufacturing and production process is done in low- cost countries in Asia and Mexico.
The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, today, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing
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or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.
Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries, and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include:
research and development,
the ownership of intellectual property rights,
economies of scale,
unique business processes or methods as well as extensive experience in the industry, and
the control of resources or favorable access to raw materials.
Porter’s National Competitive Advantage Theory In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are: (1) local market
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resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.
1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor and investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding force continuous innovation and the development of new products and technologies. Many sources credit the demanding U.S. consumer with forcing U.S. technology companies to continuously innovate, thus creating a sustainable competitive advantage in technology products and services.
Figure 2.3 Four Determinants
Source: Adapted from Porter, 1990
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3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.
Which Trade Theory Is Dominant Today?
The theories covered in this chapter are simply that—theories. While they have helped economists, governments, and businesses better understand international trade and how to promote, regulate, and manage it, these theories are occasionally contradicted by real-world events. Countries don’t have absolute advantages in many areas of production or services and, in fact, the factors of production aren’t neatly distributed between countries. Some countries have a disproportionate benefit of some factors. For example, the United States has ample arable land that can be used for a wide range of agricultural products. It also has extensive access to capital. While its
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labor pool may not be the cheapest, it is among the best educated in the world. These advantages in the factors of production have helped the United States become the largest and richest economy in the world. Nevertheless, the United States also imports a vast amount of goods and services, as U.S. consumers use their wealth to purchase what they need and want—much of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs. Despite the noted advantages, the United States, like other wealthy nations, has experienced uneven economic opportunity and incomes across all of its population, giving rise to pockets of discontent. There are varying explanations and theories as to why some workers and companies have done well under the current economic system, and others less so. New interpretations of trade theory are often discussed and debated by economists and politicians alike.
As a result, it’s not clear that any one theory is dominant around the world. This section has sought to highlight the basics of international trade theory and its evolution in recent centuries to enable you to understand the realities that face global businesses. In practice, governments and companies use a combination of these theories to both interpret trends and develop strategy. Just as these theories have evolved over the past 500 years, they will continue to change and adapt as new factors impact international trade.
Key Takeaways
Trade is the concept of exchanging goods and services between two people or entities. International trade is the concept of this exchange between people or entities in two different countries. While a simplistic definition, the factors that impact trade are complex, and economists throughout the centuries have attempted to interpret trends and factors through the
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evolution of trade theories.
There are two main categories of international trade— classical, country-based and modern, firm-based.
Porter’s theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. He identified four key determinants: (1) local market resources and capabilities (factor conditions), (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.
Exercises
(AACSB: Reflective Thinking, Analytical Skills)
1. What is international trade?
2. Summarize the classical, country-based international trade theories. What are the differences between these theories, and how did the theories evolve?
3. What are the modern, firm-based international trade theories?
4. Describe how a business may use the trade theories to develop its business strategies. Use Porter’s four determinants in your explanation.
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Footnotes
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1. Matt Ridley, “Humans: Why They Triumphed,” Wall Street Journal, May 22, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html. ↑
2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. ↑
