take home eassy

http://en.wikipedia.org/wiki/National_sport

Case The Globalized Business of sports

tennis pros come from every inhabited continent. For 2017 the As- sociation of Tennis Professionals (ATP) sanctioned 68 tournaments in 33 countries. It also requires pros to compete in a certain number of events—and thus play in a number of countries—to maintain international rankings.

Because no tennis pro can possibly play in every tournament, organizers compete for top draws to fill stadium seats and land lucrative TV contracts. Prizes can be extremely generous (about US $2.7 million for each of the 2016 Australian Open singles champions).

Tournaments earn money through ticket sales, corporate spon- sorship agreements, television contracts, and leasing of advertising space. The larger the stadium and TV audiences, the more backers and advertisers will pay to get their attention. Moreover, international broadcasts attract sponsorship from companies in various industries and countries.

From National to International Sports Pastimes Some countries have legally designated a national sport as a means of preserving traditions; others effectively have one. Map 1.1 shows a sample of these. However, other sports have sometimes replaced national sports in popularity, such as cricket replacing field hockey as India’s most popular sport.

Baseball was popular only in its North American birthplace for most of its history, but the International Baseball Federation now has over 100 member countries. As TV revenues flattened in North America, Major League Baseball (MLB) broadened its fan base by broadcasting games to international audiences, which also showed youngsters all over the world how the game was played. The aver- age MLB clubhouse is now a bastion of multilingual camaraderie, with players and coaches talking baseball in Spanish, Japanese, Mandarin, and Korean as well as English.

The WIde World oF TelevISed SPorTS

Not surprisingly, other professional sports have expanded their global TV coverage (and marketing programs). Most viewers of Stanley Cup hockey watch from outside North America. Fans can watch NASCAR races (National Association for Stock Car Auto Racing) and NBA games in most countries.

TV isn’t the only means by which sports organizations are seek- ing foreign fan bases and players. The National Football League (NFL) of the United States underwrites football programs in Chinese schools and plays some regular games in Europe. The NBA is helping to build basketball youth leagues in India.

Sports may be the world’s most globalized business.1 Fans demand to see the best, and “best” has become a global standard of com- petition. (The opening photo shows a marathon in Berlin, Germany that had runners from over 130 nations and more than a million spectators.) Satellite TV brings live events from just about anywhere in the world to fans just about anywhere else. This gives the key sports-business participants—athletes, team owners, league repre- sentatives, and sports associations—broadened audience exposure, expanded fan bases, and augmented revenues.

National sports federations’ sponsorship of international com- petitions are common, most notably the longstanding World Cup in football (soccer) and the Olympics. More national organizations par- ticipate in these events than there are United Nations (UN) members, and probably more people follow them than follow most of the UN’s activities. How do these international competitions relate to busi- ness? Cities and countries compete to host events to attract tourists and publicize their business opportunities. In turn, companies pay for marketing rights as sponsors. Finally, individual athletes, such as Michael Phelps in swimming, compete not only for medals, but also for lucrative contracts to endorse products.

While the Olympics and the World Cup participations have long been global, the competitive location has been less so. This has re- cently changed with the 2010 World Cup in South Africa, the 2016 Olympics in Brazil, and the 2022 World Cup in Qatar.

The INTerNaTIoNal Job MarkeT

The search for talent has become worldwide. Professional basket- ball scouts search remote areas of Nigeria for tall high-potential youngsters. Baseball agents provide live-in training camps for Do- minican Republic teenagers in exchange for a percentage of their future professional signing bonuses. However, assembling talent is necessary but insufficient for making a sports business successful. Shrewd marketing and financial management are crucial too. For instance, Fútbol Barcelona, one of recent years’ best professional soccer teams, turned to young business graduates to help reduce its financial problems.

Most of today’s top-notch athletes are willing to follow the money anywhere. About two-thirds of the players in England’s professional soccer league (Premiership) are from other countries, which helps improve the caliber of play and increase the TV fan base outside England.

how the aTP Courts Worldwide Support You’ve probably noticed that individual sports professionals are globe hoppers. Take tennis. No country boasts enough fans to keep players at home for year-round competition, yet today’s top-flight

Chapter 1 Globalization and International Business 3

BANGLADESH kabaddi

(hadudu)

CANADA lacrosse (summer) hockey (winter)

SRI LANKA volleyball

SCOTLAND golf

PAKISTAN field hockey

NORWAY cross-country

skiing

NEW ZEALAND rugby

JAPAN sumo

GUYANA cricket

DOMINICAN REPUBLIC

baseball

COLOMBIA tejo

RUSSIA bandy

MaP 1.1 examples of National Sports Some 63 countries have either defined a national sport by law or de facto have a national sport. Some national sports are shared by more than one country, such as cricket by England and seven of its former colonies. Some others have been established to protect an historical heritage, such as tejo in Colombia and pato in Argentina. Note also that Canada has two designations, one for winter and one for summer. Source: The information on sports was taken from Wikipedia, http://en.wikipedia.org/wiki/National_sport (accessed March 18, 2016).

The Top-Notch Pro as Upscale brand Many top players are effectively global brands, such as U.S. tennis pro Serena Williams and Portuguese soccer forward Cristiano Ronal- do. Because of their sports success and charisma, companies within and outside the sports industry pay them handsomely for endorsing clothing, equipment, and other products.

Promotion as Teamwork A few teams, such as the New York Yankees in baseball, the New Zealand All Blacks in rugby, and Manchester United (Man U) in soc- cer also have enough brand-name cachet to be global brands for selling clothing and other items. Just about every team can get something for the rights to use its logo, while some have enough name recognition to support global chains of retail outlets. Simi- larly, companies both sponsor and seek endorsements from well- known teams, such as the placement of “Fly Emirates” on Real Madrid’s soccer jerseys.

Still others pay for naming rights to arenas and other venues. Of course, teams themselves can be attractive international invest- ments. For instance, U.S. investors bought the Liverpool Football Club of the United Kingdom.

The Upsides and downsides of Globalized Sports What does all this mean to a sports fan? Now that pro sports have become a global phenomenon, fans can enjoy a greater variety— and a higher level of competition—than any former generation. That’s the upside, but people don’t always take easily to another country’s sport. Despite many efforts, cricket, although popular in countries that were British colonies for centuries, is not popular elsewhere. Nor has American football gained much popularity out- side the United States. One possible reason is that rules for cricket and American football are so complicated. However, basketball and soccer have traveled to new markets more readily because they are easier to understand and require little specialized equipment.

Further, there is disagreement about the economic effect of suc- cessfully winning a bid to host big international competitions such as the World Cup and Olympics. On the one hand, they help spur tour- ism, foreign investment, infrastructure construction, and improve- ment of blighted areas that will speed future economic growth. On the other hand, in light of threats from global terrorism, the cost of security has skyrocketed, while hosts may have to spend on stadi- ums and facilities that have no use afterward. Many competitions

4 part 1 Background for International Business

have ended with substantially increased local and national debt. Crit- ics, therefore, often believe the funds would have been better spent on social services.

Nor is everyone happy with the unbridled globalization of sports—or at least with some of the effects. Brazilian soccer fans lament the loss of their best players, and French fans protested the purchase of the Paris Saint-Germain (PSG) football club by the Qatar Investment Authority. Some factions within England have contended that the large influx of foreign players has disadvantaged the devel- opment of native players.

Finally, the high stakes within professional sports has tempted the commitment of corruption. Although this corruption has hit sports

as obscure as handball, the most notable recent instances have in- volved bribes to officials of FIFA (the soccer governing body) and the fixing of cricket matches in India. ■

Questions

1-1. Professional athlete A is a star, and professional athlete B is

an average player. How has the globalization of professional

sports affected each of these both positively and negatively?

1-2. As you read the chapter, identify and show an example of

each international mode of operations that is illustrated in the

globalization of professional sports.

INTrodUCTIoN The case shows how global contact allows the world’s best sports talent to compete, and their fans to watch them, just about anywhere. It also shows why sports bodies and players have moved internationally as well as inconsistencies in the global popularity of different sports, some forms by which organizations participate, and criticism of sports’ globalization. We will expand on these points, applying them to the growth of IB in general. As you read through the chapter, keep referring back to Figure 1.1, which outlines the set of relationships between international environments and operations.

OPERATING ENVIRONMENT

INSTITUTIONAL AND PHYSICAL FACTORS

Geographic influences Cultural factors Political policies and legal practices Economic forces

• • • •

OBJECTIVES Sales expansion Resource acquisition Risk reduction

• • •

MEANS Modes Functions Overlying Alternatives

Merchandise exports and imports Service exports and imports Investments

•

• •

Marketing Manufacturing and supply-chain management Accounting and finance Human resources

• •

•

Choice of countries Organization and control mechanisms

• •Competitive product

strategy Company resources and experience Competitors in each market

•

OPERATIONS

STRATEGY

COMPETITIVE FACTORS

Figure 1.1 Factors in iB Operations The conduct of a company’s international operations depends on two factors: its objectives and the means by which it intends to achieve them. Likewise, its operations affect, and are affected by, two sets of factors: physical/social and competitive.

Chapter 1 Globalization and International Business 5

Why STUdy aboUT GlobalIzaTIoN, Ib, aNd TheIr relaTIoNShIP? Globalization is the widening and deepening of interdependent relationships among people from different nations. The term sometimes refers to the elimination of barriers to in- ternational movements of goods, services, capital, technology, and people that influence the integration of world economies.2 Throughout history, expanded human connections have extended people’s access to more varied resources, products, services, and markets. We’ve al- tered the way we want and expect to live, and we’ve become more deeply affected (positively and negatively) by conditions outside our immediate domains.

Industries have expanded to distant places to gain supplies and markets. As consumers we know from “Made in” labels that we commonly buy products from all over the world, but these labels do not tell us everything. For instance, a Belgian Neuhaus bonbon and an American Ford automobile contain so many different components, ingredients, and specialized business activities from diverse countries that pinpointing where they were made is challenging.3 Although Apple ships its iPhones from China and they appear to be Chinese products, less than 4 percent of their value is created in China.4

Globalization enables us to get more variety, better quality, or lower prices. Our meals contain spices that aren’t grown domestically and fresh produce that may be out of season in the local climate. Our cars cost less than they would if all the parts were made and the labor performed in one place.

hoW doeS IB FIT IN?

The relation to Globalization The global connections between supplies and markets result from the activities of IB, which are all commercial transactions (including sales, invest- ments, and transportation) that take place among countries. Private companies undertake such transactions for profit; governments may undertake them either for profit or for other reasons.

The STUdy oF Ib Why should you study IB? Simply, it makes up a large and growing portion of the world’s business. Global events and competition affect almost all industries and com- panies, large and small. Not only do companies sell output and secure supplies and resources abroad, they compete against products, services, and companies from for- eign countries. Thus, most managers need to take into account IB when setting their operating strategies and practices. As a manager in almost any company you’ll need to consider (1) where you can obtain the best inputs at the best possible price for your production and (2) where you can best sell the product or service you’ve put together from those inputs.

Understanding the environment/operations relationship The best way to do busi- ness abroad may not be the same as the best way within your domestic market. Why? First, when your company operates internationally, it will engage in modes of business, such as ex- porting and importing, which differ from those it uses domestically. Second, physical, insti- tutional, and competitive conditions differ among countries and affect the optimum ways to conduct business. Thus, international companies have more diverse and complex operating environments than purely domestic ones.

Making Nonbusiness decisions Even if you never have direct IB responsibilities, under- standing some of the complexities may be useful to you. Companies’ international operations and their governmental regulations affect overall national conditions—economic growth,

IB consists of all commercial transactions between two or more countries.

• The IB goal of private business is to make profits.

• Government IB may or may not be motivated by profit.

Studying IB is important because

• most companies are either international or compete with international companies,

• modes of operations may differ from those used domestically,

• it helps managers to decide where to find resources and to sell,

• the best way of conducting business may differ by country,

• an understanding helps you make better career decisions,

• an understanding helps you decide what governmental policies to support.

6 part 1 Background for International Business

employment, consumer prices, national security—as well as the success of individual indus- tries and firms. A better understanding of IB will help you make more informed decisions, such as where to work and what governmental policies to support.

The ForCeS drIvING GlobalIzaTIoN aNd Ib Measuring globalization is problematic, especially for historical comparisons. First, a country’s interdependence must be measured indirectly.5 Second, when national boundaries shift, such as in the breakup of Ukraine, domestic business transactions can become international ones and vice versa. Nevertheless, various reliable indicators as- sure us that economic interdependence has been increasing, although sporadically, at least since the mid-twentieth century. Currently, about a quarter of world production is sold outside its country of origin, compared to about 7 percent in 1950. Restrictions on imports have generally been decreasing, and output from foreign-owned investments as a percentage of world production has increased. In periods of rapid economic growth, such as most years since World War II, world trade grows more rapidly than world pro- duction. However, in recessionary periods, global trade and investment shrink even more than the global economy.

At the same time, however, globalization is less pervasive than you might suppose. In fact, many Americans are surprised to learn that only about 15 percent of the value of U.S. consumption comes from other countries. In much of the world (especially in poor rural areas), people lack the resources to connect much beyond their isolated do- mains. Such isolation is changing quickly, though, especially since the advent of mobile phones.6 (The below photo shows a solar-powered Internet café in Kenya, thus illustrat- ing how innovation is enabling people in remote areas to access the rest of the world.) Only a few countries—mainly very small ones—either sell over half their production abroad or depend on foreign output for more than half their consumption. This means that most of the world’s goods and services are still sold in the countries where they’re produced. Moreover, the principal source of capital in most countries is domestic rather than international.

Although hard to measure, globalization

• has been growing, • is less pervasive than

generally thought, • has economic and

noneconomic dimensions, • is stimulated by several

factors.

This solar-powered Internet café within a shipping container in a rural area of Kenya enables people in an impoverished village to have access to the rest of the world. Source: Tony Karumba/Stringer/Getty Images

▶

Chapter 1 Globalization and International Business 7

Granted, these measurements address only economic aspects of globalization. Various studies have made more comprehensive comparisons by including, say, people-to-people contacts through travel and communications, technological interchanges, government-to- government relationships, and acceptance and adaptation of attributes from foreign cultures such as words from other languages.7 The studies’ results have several commonalities:

• Size of countries—Smaller countries tend to be more globalized than larger ones, mainly because their smaller land masses and populations permit a lower variety of production.

• Per capita incomes—Countries with higher per capita incomes tend to be more global- ized than those with lower ones because their citizens can better afford foreign products, travel, and communications.

• Variance among globalization aspects—Although a country may rank as highly globalized on one dimension, it may be low on another, such as the United States being high on technological scales but low on economic ones.

FaCTorS IN INCreaSed GlobalIzaTIoN What factors have contributed to the growth of globalization in recent decades? Most ana- lysts cite the following interrelated factors:

1. Rise in and application of technology 2. Liberalization of cross-border trade and resource movements 3. Development of services that support IB 4. Growth of consumer pressures 5. Increase in global competition 6. Changes in political situations and government policies 7. Expansion of cross-national cooperation

rise in and application of Technology Many of the proverbial “modern marvels” and efficient means of production have come about fairly recently. These include new products, such as handheld mobile communications devices, as well as new applications of old prod- ucts, such as Indian guar beans in oil and natural gas mining.8 Thus, much of what we trade today either did not exist or was unimportant in trade a decade or two ago. Why have techni- cal developments increased so much? More than half the scientists who have ever lived are alive today. One reason, of course, is population growth. But another is rising productivity— taking less time to produce the same thing—which frees up more people to develop new products because fewer people are necessary to produce them. This rising productivity also means that on average people can buy more, including the new products, by working the same number of hours. The entry of new products into the market creates a need for other complementary products (such as cases and apps for smartphones), thus accelerating the need for scientists and engineers.

Construction of many new products cannot successfully take place in a single country. Much new technical innovation takes so many financial and intellectual resources that com- panies from different countries must cooperate to take on portions of development. Further, when new products are developed, the optimum scale size of production seldom corre- sponds with the market demand in a single country. Consequently, companies may need to sell both domestically and internationally in order to spread the fixed developmental and production costs over more units of production.

Advances in Communications and Transportation Strides in communications and trans- portation now allow us to discover, desire, and demand goods and services from abroad. Meanwhile, the costs of these strides have risen more slowly in most years than costs in gen- eral, thus increasing affordability. A three-minute phone call from New York to London that

8 part 1 Background for International Business

cost $10.80 in 1970 costs less than $0.20 today, while a call using Voice over Internet Protocol (VoIP) is virtually free.

Innovations in transportation mean that more countries can compete for sales to a given market. U.S. purchases of foreign-grown flowers used to be largely impractical and aimed only at high-income consumers; today, however, flower producers from as far away as Ecuador, Israel, the Netherlands, and New Zealand compete with each other for the U.S. market because growers can ship flowers quickly and economically.

Improved communications and transportation also enhance a manager’s ability to over- see foreign operations, such as more easily visiting foreign facilities and communicating with managers therein. Thanks to the Internet, companies can instantly exchange pictures of samples. Even small companies can reach global customers and suppliers. However, you may ponder the following question: Has the Internet been a bigger force in globalization than the laying of the first transoceanic cable across the Atlantic in 1858 that reduced com- munication time from 10 days to a matter of a few minutes?

liberalization of Cross-border Trade and resource Movements To protect its own industries, every country restricts the entry and exit of not only goods and services but also the resources—workers, capital, tools, and so on—needed to produce them. Such restric- tions, of course, set limits on IB activities and, because regulations can change at any time, contribute to uncertainty. Over time, however, most governments have reduced such restric- tions, primarily for three reasons:

1. Their citizens want a greater variety of goods and services at lower prices. 2. Competition spurs domestic producers to become more efficient. 3. They hope to induce other countries to lower their barriers in turn.

Services that Support Ib Companies and governments have developed services that facilitate global commerce. For example, because of bank credit agreements—clearing ar- rangements that convert one currency into another and insurance that covers such risks as nonpayment and damage en route—most producers can be paid relatively easily for their sales abroad. When Nike sells sportswear to a French soccer team, a bank in France collects payment in euros from the soccer team when the shipment arrives at French customs and pays Nike in U.S. dollars through a U.S. bank.

Growth in Consumer Pressures More consumers know more today about products and services available in other countries, can afford to buy them, and want the greater variety, better quality, and lower prices offered by access to them. However, this demand is spread unevenly because of uneven affluence, both among and within countries as well as from year to year.

Consumer pressure has also spurred companies to spend more on research and devel- opment (R&D) and to search worldwide for innovations and products they can sell to ever- more-demanding consumers. By the same token, consumers are more proficient today at scouring the globe for better deals, such as searching the Internet for lower-priced prescrip- tion drugs abroad.

Increase in Global Competition Increased competitive pressures can persuade com- panies to buy or sell abroad. For example, a firm might introduce products into markets where competitors are already gaining sales, or seek supplies where competitors are getting cheaper or more attractive products. Once a few companies respond to foreign opportunities, others inevitably follow suit. And they learn from each other’s foreign ex- periences. As the opening case suggests, the early success of foreign-born baseball players in U.S. leagues undoubtedly spurred U.S. basketball and football organizations to look for and develop talent abroad.9

So-called born-global companies start out with a global focus because of their founders’ international experience10 and because advances in communications give them a good idea

Chapter 1 Globalization and International Business 9

of the location for global markets and supplies. Take SoundCloud, a Swedish audio-sharing web service. Its cofounders—one born in England and one in Sweden—were previously knowledgeable enough about the German and U.S. markets to move into both within months of starting up.11 Regardless of industry, most firms and individuals have to become more global; in today’s competitive business environment, failure to do so can be disastrous.

Changes in Political Situations and Government Policies For nearly half a century after World War II, business between Communist countries and the rest of the world was minimal. Today, only a few countries are heavily isolated economically or do business almost entirely within a political bloc. In fact, political changes sometimes open new frontiers, such as diplomatic relations between the United States and Cuba. Nevertheless, governments still deny business with others for political reasons, such as many countries’ sanctions against do- ing business with North Korea.

Governments support programs, such as improving airport and seaport facilities, to foster efficiencies for delivering goods internationally. They also now provide an array of services to help domestic companies sell more abroad, such as collecting information about foreign markets, furnishing contacts with potential buyers, and offering insurance against nonpayment in the home-country currency.

expansion of Cross-National Cooperation Governments have come to realize that their own interests can be addressed through international cooperation by means of treaties, agreements, and consultation. The willingness to pursue such policies is due largely to these three needs:

1. To gain reciprocal advantages 2. To attack problems jointly that one country acting alone cannot solve 3. To deal with areas of concern that lie outside the territory of any nation

Gain Reciprocal Advantages Essentially, companies don’t want to be disadvantaged when operating internationally, so they lobby their governments to act on their behalf. Thus, governments join international organizations and sign treaties and agreements with other governments for a variety of commercial activities. For instance, some treaties and agreements allow countries’ commercial ships and planes to use each other’s seaports and airports; some cover commercial-aircraft safety standards and flyover rights; and some protect property, such as foreign-owned investments, patents, trademarks, and copyrights. Countries also enact treaties for reciprocal reductions of import restrictions.

Multinational Problem Solving Governments often act to coordinate activities along their mutual borders by building highways, railroads, and hydroelectric dams that serve the inter- ests of all parties. (However, there are still border inefficiencies. For instance, trains between Italy and Sweden must change locomotives three or four times because of different national systems.)12

They also cooperate to solve problems that they either can’t or won’t solve alone. First, the needed resources may be too great for one country to manage. Further, sometimes no single country is willing to pay all the cost for a project that will also benefit another coun- try. In any case, many problems are inherently global—think of countering global climate change or terrorism.

Second, one country’s policies may affect those of others. Higher real-interest rates in one country, for example, can attract funds very quickly from individuals and firms in countries with lower rates, thus creating a shortage of investment funds in the latter. This movement is particularly disruptive to small developing economies.13 Similarly, a country may weaken the value of its currency so that its products are cheaper in foreign markets. Thus buyers may switch to the newly cheaper country, hence contributing to unemployment in the country they forsook. To coordinate economic policies in these and other areas, the most economi- cally important countries meet regularly to share information and pool ideas. The most

10 part 1 Background for International Business

notable coordination, known as the G20 countries, consists of 19 of the world’s most eco- nomically important countries plus representation from the European Union of its members not included in the 19. These countries account for over 85 percent of the world’s production, 80 percent of world trade, and about two-thirds of the world’s population.

Areas Outside National Territories Three global areas belong to no single country: the noncoastal areas of the oceans, outer space, and Antarctica. Until their commercial viability was demonstrated, they excited little interest for either exploitation or multinational coop- eration. The oceans, however, contain food and mineral resources and constitute the surface over which much international commerce passes. Today, we need agreements to specify the amounts and methods of fishing, to address questions of oceanic mineral rights (such as on oil resources below the Arctic Ocean), and to deal with the piracy of ships.14

Likewise, there is disagreement on the commercial benefits to be reaped from outer space. Commercial satellites, for example, pass over countries that receive no direct benefit from them but argue that they should. If that sounds a little far-fetched, remember that countries do charge foreign airlines for flying over their territories.15

Antarctica, with minerals and abundant sea life along its coast, attracts thousands of tourists each year, has a highway leading to the South Pole and a Russian Orthodox church. Thus, it has been the subject of agreements to limit commercial exploitation. However, there is still disagreement about the continent’s development—how much there should be and who does it.

The CrITICISMS oF GlobalIzaTIoN Although we’ve discussed interrelated reasons for and the benefits from the rise in IB and globalization, the consequences of the rise are controversial. Antiglobalization forces regularly protest international conferences and governmental policies—sometimes violently. We focus here on three issues: threats to national sovereignty, environmental stress, and growing income inequality and personal stress.

ThreaTS To NaTIoNal SovereIGNTy You’ve probably heard the slogan “Think globally, act locally,” which means to accommodate local interests before global ones. Some observers worry that the proliferation of interna- tional agreements, particularly those that undermine local regulations on how goods are produced and sold, will diminish a nation’s sovereignty—its freedom to “act locally” and without externally imposed restrictions.

The Question of local objectives and Policies Countries seek to fulfill their citizens’ objectives by setting policies reflecting national priorities, such as those governing worker protection and environmental practices. However, critics argue that these priorities are un- dermined by opening borders to trade. For example, if a country has stringent regulations on labor conditions and requires clean production methods, it may not be able to compete with countries that have less rigorous rules. By opening its borders to trade, it may either have to forgo its labor and environmental priorities to be competitive or face the downside of fewer jobs and economic output.

The Question of Small economies’ overdependence Critics complain that economi- cally small countries depend too much on larger ones for supplies and sales. Thus, they are vulnerable to foreign mandates, including everything from defending certain UN positions to supporting a large economy’s foreign military or economic actions. Nobel economist George Akerlof has noted that this dependence is intensified by poor countries’ inadequate administrative capacity to deal with globalization.16 Similarly, critics complain that large international corporations are powerful enough to dictate their operating terms (say, by

Critics of globalization claim

• countries’ sovereignty is diminished,

• the resultant growth hurts the environment,

• some people lose both relatively and absolutely,

• greater insecurity increases personal stress.

Chapter 1 Globalization and International Business 11

threatening to relocate), exploit legal loopholes to avoid political oversight and taxes, and counter the small economies’ best interests by favoring their home countries’ political and economic interests.

The Question of Cultural homogeneity Finally, critics charge that globalization ho- mogenizes merchandise, production methods, social structures, and even language, thus undermining the cultural foundation of sovereignty. In essence, they argue that countries have difficulty maintaining the traditional ways of life that unify and differentiate them. Fundamentally, they claim helplessness in stopping the incursion of foreign influences by such means as satellite television, print media, and Internet sites.17

eNvIroNMeNTal STreSS Much critique of globalization revolves around the economic growth it brings. One argu- ment is that growth in both production and international travel consumes more nonrenew- able natural resources and increases environmental damage—despoliation through toxic runoff into rivers and oceans, air pollution from factory and vehicle emissions, and defor- estation that can affect weather and climate. In addition, critics contend that buying from more distant locations increases transportation, hence increasing the carbon footprint, which refers to the total set of greenhouse gases emitted.18 They point further to the more than 1000 container ships plying the seas and relying on heavy oil as a fuel; each pollutes as much as 50 million cars do.19

The argument for Global Growth and Global Cooperation However, other factions assert that globalization is positive for conserving natural resources and maintaining an en- vironmentally sound planet—the former by fostering superior and uniform environmental standards and the latter by promoting global competition that encourages companies to seek resource-saving and eco-friendly technologies. A case in point is the automobile industry that has progressively produced cars that use less gas and emit fewer pollutants.

The positive effects of pursuing global interests may, nevertheless, conflict with national interests. Consider the effect of global pressure on Brazil to help protect the world’s climate by curtailing logging activity in the Amazon region. Unemployed Brazilian workers have felt that job creation in the logging industry is more important than climate protection outside Brazil.

GroWING INCoMe INeQUalITy aNd PerSoNal STreSS In terms of economic well-being, we look not only at our absolute situations but also com- pare ourselves to others. We generally don’t find our economic status satisfactory unless we’re doing better and keeping up with others.20

Income Inequality By various measurements, income inequality, with some notable exceptions, has been growing both among and within many countries. Critics claim that globalization has affected this disparity by helping to develop a global superstar system, cre- ating access to a greater supply of low-cost labor, and developing competition that leads to winners and losers.

The superstar system is especially apparent in sports, where today’s global stars (as com- pared to past years) earn far more than the average professional player or professionals in less popular sports. The system carries over to other professions, such as in business, where charismatic leaders can command many times what others can.

Although globalization has brought unprecedented opportunities for firms to profit by gaining more sales and cheaper or better supplies, critics argue that profits have gone disproportionately to the top executives rather than to the rank and file. Nobel economist Robert Solow has supported this criticism by arguing that greater access to low-cost labor in poor countries has reduced the real wage growth of labor in rich countries.21 And even if

12 part 1 Background for International Business

overall worldwide gains from globalization are positive, there are bound to be some absolute or relative losers (who will probably oppose globalization). The speed of global technological and competitive expansion creates more winners and losers along with changing the rela- tive positions of individuals, companies, and countries. As an example, manufacturing and foreign sales growth in China and India have helped them to grow more rapidly than the United States, thus lessening the relative economic leadership of the United States over those countries.22 Likewise, some workers have lost economic and social standing as manu- facturing jobs have shifted to other countries. The challenge, therefore, is to maximize the gains from globalization while simultaneously minimizing the costs borne by the losers.

Personal Stress Some repercussions of globalization can’t be measured in strictly eco- nomic terms, such as people’s stress from real and potential loss of relative economic and social positions.23 Further, stress, if widespread, goes hand in hand with costly social un- rest.24 Although few of the world’s problems are brand new, we may worry about them more now because globalized communications bring exotic sagas of misery into living rooms everywhere.25

Yes Offshoring is the dependence on production in a foreign country,

usually by shifting from a domestic source. If offshoring suc- ceeds in reducing costs, it’s good. This is happening with many companies. Most branded clothing companies locate offshore to have work done by cheaper sewing machine operators. Many investment companies, such as Fidelity in India, are hiring back-office workers in lower-wage coun- tries to cut the cost of industry research. What good are cost savings? It’s basic. If you can cut your costs, you can cut your prices or improve your product. Thus, by offshoring work to India, Claimpower, a small U.S. medical-insurance billing company, cut costs, lowered the prices it charges doctors, quadrupled its business in two years, and hired more U.S. employees because of the growth.26

What’s the main complaint about offshoring? Too many domestic jobs end up abroad. As we discuss this, keep in mind that employment results from offshoring are diffi- cult to isolate from other employment changes. Sure, many workers in high-income countries have lost jobs, but this has probably been due mainly to improvements in produc- tion technology. Let’s try to pinpoint direct results of off- shoring.

Samsung is a good example. By offshoring mobile phone assembly from Korea to Brazil, China, India, and Vietnam, the company was able to lower costs and sell more units, there- by maintaining the same number of low-paying domestic jobs while increasing high-paying jobs at home in R&D, en- gineering, design, and marketing.27 If Samsung failed to en- act such cost savings, its competitors in low-wage countries could underprice it with competitive products and services. In summary, cost savings generate growth, and growth cre- ates more jobs.

Not just any jobs, either: This process lets companies create more high-value jobs at home—the ones performed by people like managers and researchers, who draw high salaries. When that happens, demand for qualified people goes up. In the United States, that process has already resulted in a higher percentage of white-collar and profes- sional employees in the workforce. These are high-income people, and more of them are employed as a result of send- ing low-income jobs to countries with lower labor costs.28

Further, offshoring is a natural extension of outsourcing, the process of companies’ contracting work to other com- panies so that they can concentrate on what they do best.29 This contributes to making a company more efficient. What is the difference, then, of outsourcing to a domestic versus a foreign location?

Admittedly, workers do get displaced from offshoring, but aggregate employment figures show that these work- ers find other jobs, just like workers who get displaced for other reasons. In a dynamic economy, people are constantly shifting jobs, partly due to technology. The prevailing em- ployment for U.S. women was once as telephone operators; direct dialing technology changed that. Attendants used to pump all the gas, but most is now self-service. Passenger aircraft used to carry five cockpit crew members; technology eliminated the need for the navigator, flight engineer, and radio operator. On the near-future horizon, pilotless passen- ger aircraft and package-carrying drone helicopters will re- duce the cockpit crew to one or even zero,30 while driverless cars will reduce demand for traffic policemen, auto insurers, emergency room personnel, and makers of such products as road signals and guard rails.31 In fact, a study of 702 U.S. occupations showed that about 47 percent of employment is at risk from computerization.32

Is Offshoring of Production a Good Strategy?

Point Point

Chapter 1 Globalization and International Business 13

What all this means is that the shifting of jobs is common- place, and shifting because of outsourcing is no different from doing so for any other reason. In any case, because there are bound to be upper limits on the amount of outsourcing work a country can do, the direst predictions about job loss are ex- aggerated: There simply aren’t enough unemployed people abroad who have the needed skills and who will work at a sufficiently low cost. Further, as production increases in out- sourced facilities abroad, wage rates go up there.

Offshoring isn’t for all companies or all types of opera- tions. Some firms are bringing many operations back from abroad, a situation known as reshoring or rightshoring, because of miscalculating offshoring advantages to begin with as well as poor quality, consumer pressure, concerns about competitive security, and advantages of locating production near technical development.33 That brings us back to what we said explicitly at the outset: Offshoring works when you cut operating costs effectively.

no Some things are good for some of the people some of

the time, and that’s almost the case with offshoring. Unfortunately, it is good for only a few people but not for most. I keep hearing about the cost savings, but when I buy goods or services I rarely find anything that’s cheaper than it used to be. Whether buying a Ralph Lauren shirt, getting medical services from a doctor who is saving money through Claimpower, or having Fidelity manage my as- sets, I have seen no lower prices for me. Instead, the lower production costs have resulted in higher compensation for already high-paid managers and for shareholders. Further, Claimpower’s growth had to be at the expense of other companies in the business, not because of growth in the number of people getting medical services. In fact, studies show that in aggregate, the percentage of national income going to labor has gone down while the percentage of na- tional income going to profits and upper-level employees has been going up.34

Here’s a key problem: When you replace jobs by offshor- ing, you’re exchanging good jobs for bad ones. Most of the workers who wind up with the short end of the offshoring stick struggled for decades to get reasonable work hours and a few basic benefits, such as health-care and retire- ment plans. More important, their incomes allowed them to send their kids to college, and the result was an upwardly mobile—and productive—generation.

Now many of these employees have worked long and loyally for their employers and have little to show for it in the offshoring era. Yes, I know governments give them unem- ployment benefits but these never equal what the employ- ees had before, and they run out.35 On top of everything else, they may have no other usable skills, and at their ages, who’s going to foot the bill for retraining them? The increase in what you call “high-value jobs” doesn’t do them any good. Further, when reshoring occurs (usually because managers didn’t think through the offshoring decision ad- equately in the first place), you can bet they rehire domestic

workers at less cost than before they offshored those jobs.

Offshoring may lead to short-term cost savings, but many studies indicate that it merely diverts companies’ at- tention from taking steps to find innovative means of more efficient production, such as productivity-enhancing tech- nologies.36 Concentrating on these innovative means may cut costs, increase production, maintain the jobs that are going abroad, and permit incomes of workers to rise.

While we’re on the subject of job “value,” what kinds of jobs are we creating in poor countries? Because coun- tries are competing with lower wages, it encourages them to keep wages from rising, a sort of race to the bottom. However, multinational enterprises (MNEs) no doubt pay workers in low-wage countries more than they could get otherwise, and I’ll grant that some of these jobs—the white-collar and technical jobs—are pretty good. But for most people, the hours are long, the working conditions are barbaric, and the pay is barely enough to survive. When you use such suppliers, your reputation can suffer. In Ban- gladesh, workers were killed when locked doors prevented their escape from a fire, and others were killed when their ramshackle workplace building collapsed. There is also little job security. If salaries creep up where companies are offshoring, the companies merely move to even cheaper places to get the job done.

Admittedly, in a dynamic economy, people have to change jobs more often than they would in a stagnant economy— but not to the extent caused by offshoring. There’s still some disagreement about the effects of offshoring on a country’s employment rate. Researchers are looking into the issue, but what they’re finding is that more of the so-called better jobs are also being outsourced, such as in finance and IT. So are we really creating higher-level jobs at home? Here’s the bot- tom line: In countries like the United States, workers simply aren’t equipped to handle the pace of change when it means that jobs can be exported faster than the average worker can retrain for different skills.

Counterpoint

Is Offshoring of Production a Good Strategy?

14 part 1 Background for International Business

Why CoMPaNIeS eNGaGe IN Ib Let’s now focus on some of the specific ways firms can create value through IB. Take another look at Figure 1.1, where you’ll see three major IB operating objectives:

• Sales expansion • Resource acquisition • Risk reduction

Normally, these three objectives guide all decisions about whether, where, and how to en- gage in IB. Let’s examine each in more detail.

SaleS exPaNSIoN A company’s sales depend on consumers’ demand. Obviously, there are more potential con- sumers in the world than in any single country. Now, higher sales ordinarily create value, but only if the costs of making the additional sales don’t increase disproportionately. Recall, for instance, the opening case. Televising sports competitions to multiple countries gener- ates advertising revenue in excess of the increased transmission costs. In fact, additional sales from abroad may enable a company to reduce its per-unit costs by covering its fixed costs—say, up-front research costs—over a larger number of consumers. Because of lower unit costs, it can boost sales even more.

So increased sales are a major motive for expanding into international markets, and many of the world’s largest companies derive more than half their sales outside their home countries. Bear in mind, though, that IB is not the purview only of large companies. In the United States, 97 percent of exporters are small firms. Further, many sell products to large companies, which install them in finished products slated for sale abroad.37

reSoUrCe aCQUISITIoN Producers and distributors seek out products, services, resources, and components from for- eign countries—sometimes because domestic supplies are inadequate (such as industrial di- amonds in the United States). They’re also looking for anything that will create a competitive advantage. This may mean acquiring any resource that cuts costs. For instance, Rawlings’s relies on labor in Costa Rica—a country that hardly plays baseball—to produce baseballs.

Sometimes firms gain competitive advantage by improving product quality or differentiat- ing their products from those of competitors; in both cases, they’re potentially increasing mar- ket share and profits. Most automobile manufacturers, for example, hire design companies in northern Italy to help with styling. Many companies establish foreign R&D facilities to tap additional scientific resources.38 Indian firms have recently followed foreign acquisition strategies to gain knowledge needed to compete globally.39 Further, by operating abroad, companies gain diversity among their employees that can bring them new perspectives.

rISk redUCTIoN Selling in countries with different timing of business cycles can decrease swings in sales and profits (e.g., increasing sales stability through operations in countries that enter and recover from recessions at even slightly different times). Moreover, by obtaining supplies of products or components both domestically and internationally, companies may be able to soften the impact of price swings or shortages in any one country.

Finally, companies often go international for defensive reasons. Perhaps they want to counter competitors’ advantages in foreign markets that might hurt them elsewhere. By operating in Japan, for instance, Procter & Gamble (P&G) delayed potential Japanese rivals’ foreign expansion by slowing their amassment of the resources needed to enter into other

Pursuing international sales usually increases the potential sales and potential profits.

Foreign locations may give companies

• lower costs, • new or better products, • additional operating

knowledge.

International operations may reduce operating risk by

• smoothing sales and profits, • preventing competitors from

gaining advantages.

Chapter 1 Globalization and International Business 15

international markets where P&G was active. Similarly, Tredegar Industries followed its main U.S. customer into the Chinese market so as to prevent its customer from finding an alternative supplier who might then threaten Tredegar’s U.S. position.

Ib oPeraTING ModeS When pursuing IB, an organization must decide on suitable modes of operations included in Figure 1.1. In the following sections, we define and introduce each of these modes.

MerChaNdISe exPorTS aNd IMPorTS Exporting and importing are the most popular IB modes, especially among smaller compa- nies. Merchandise exports and imports are tangible products—goods—that are respec- tively sent out of and brought into a country. Because we can actually see these goods, they are sometimes called visible exports and imports. For most countries, the export and import of goods are the major sources of international revenues and expenditures.

ServICe exPorTS aNd IMPorTS The terms export and import often apply only to merchandise. For non-merchandise interna- tional earnings, the terms are service exports and imports and are referred to as invisibles. The provider and receiver of payment makes a service export; the recipient and payer makes a service import. Services constitute the fastest growth sector in international trade and take many forms. In this section we discuss the following:

• Tourism and transportation • Service performance • Asset use

Tourism and Transportation Let’s say that some U.S. fans take Korean Air to attend the 2018 Winter Olympics. Their tickets on Korean Air and travel expenses in Korea are service exports for Korea and service imports for the United States. Obviously, then, tourism and transportation are important sources of revenue for airlines, shipping companies, travel agencies, and hotels. The economies of some countries depend heavily on revenue from these sectors, such as Greece and Norway from foreign cargo carried on their shipping lines and for the Bahamas from foreign tourists.

Service Performance Some services, including banking, insurance, rental, engineering, and management services, net companies earnings in the form of fees: payments for the performance of those services. On an international level, for example, companies receive fees for engineering services rendered in turnkey operations, which are construction projects performed under contract and transferred to owners when they’re operational. For instance, the Spanish turnkey operator, Sacyr Vallehermosa, constructed the Panama Canal expansion that opened in 2016. Companies also receive fees from management contracts—arrange- ments in which they provide personnel to perform management functions for another, such as Disney’s management of theme parks in France and Japan.

asset Use Companies receive royalties from licensing agreements, whereby they al- low others to use some assets—such as trademarks, patents, copyrights, or expertise. For example, the Real Madrid football team receives a royalty from Adidas’ use of its logo on merchandise. Companies also receive royalties from franchising, a contract in which a company assists another on a continuous basis and allows use of its trademark. For instance, McDonald’s assists individually owned McDonald’s’ trademarked restaurants by providing supplies, management services, technology, and joint advertising programs.

Merchandise exports and imports are the most popular IB modes.

Service exports and imports are international nonproduct sales and purchases.

• They include travel, transportation, banking, insurance, and the use of assets such as trademarks, patents, and copyrights.

• They are very important for some countries.

• They include many specialized IB operating modes.

16 part 1 Background for International Business

INveSTMeNTS Dividends and interest from foreign investments are also service exports and imports be- cause they represent the use of assets (capital). The investments themselves, however, are treated separately in national statistics. Note that foreign investment means ownership of foreign property in exchange for a financial return, such as interest and dividends, and it may take two forms: direct and portfolio.

direct Investment In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company. When, for ex- ample, U.S. investors bought the Liverpool Football Club, it became a U.S. FDI in the United Kingdom. Control need not be a 100 percent or even a 50 percent interest; if a foreign investor holds a minority stake and the remaining ownership is widely dispersed, no other owner may effectively counter the investor’s decisions. When two or more companies share ownership of an FDI, the operation is a joint venture. (There are also non-equity joint ventures.)

Portfolio Investment A portfolio investment is a noncontrolling financial interest in an- other entity. It consists of shares in or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor. They’re important for most international companies, which routinely move funds from country to country for short-term financial gain.

TyPeS oF INTerNaTIoNal orGaNIzaTIoNS Basically, an “international company” is any company operating in more than one country, but a variety of terms designate different ways of operating. The term collaborative arrange- ments denotes companies’ working together—in joint ventures, licensing agreements, manage- ment contracts, minority ownership, and long-term contractual arrangements. The term strategic alliance is sometimes used to mean the same, but it usually refers either to an agreement that is of critical importance to a partner or one that does not involve joint ownership.

Multinational enterprise A multinational enterprise (MNE) usually signifies any company with foreign direct investments. This is the definition we use in this text. However, some writers use the term only for a company that has direct investments in some minimum number of countries. The term multinational corporation or multinational company (MNC) is often used as a synonym for MNE, while the United Nations uses the term trans- national company (TNC).

Does Size Matter? Some definitions require a certain size—usually giant. However, a small company can have foreign direct investments and adopt any of the operating modes we’ve discussed. Note though that, if successful, small companies become medium or large ones.40 Vistaprint (now Cimpress) is a good example. Founded in 1995, its sales grew to $6.1 million in 2000 and to over $1 billion by 2012 with operations mainly in North America and Europe.

Why do CoMPaNIeS’ exTerNal eNvIroNMeNTS aFFeCT hoW They May beST oPeraTe abroad? Let’s now turn to the conditions in a company’s external environment that may affect its in- ternational operations. Although there are many anecdotes illustrating operational problems when companies have failed to consider foreign environmental differences, these differ- ences are not so daunting that they prevent success. First, some of the anecdotes are merely myths that have been repeated so often their validity is seldom challenged. Second, gaining start-up success domestically is also problematic almost anywhere in the world; thus, when companies look objectively at their domestic opportunities and risks, foreign entries may

Key components of portfolio investment are

• noncontrolling interest of a foreign operation,

• extension of loans.

A multinational enterprise or MNE (sometimes called MNC or TNC) is a company with foreign direct investments.

Although foreign external environmental differences are problematic

• some anecdotes of failures are merely myths,

• they must be weighed against domestic opportunities and risks,

• understanding institutional factors and how they affect all business functions helps assure success abroad.

Chapter 1 Globalization and International Business 17

seem less formidable. Third, a good understanding of what one will encounter helps reduce operating risks, and smart companies develop the means to implement international strate- gies by examining the following conditions abroad that can affect their success:

• Physical factors (such as geography or demography) • Institutional factors (such as culture, politics, law, and economy) • Competitive factors (such as the number and strength of suppliers, customers, and rival firms)

In examining these categories, we delve into external conditions that affect patterns of com- panies’ behavior in different parts of the world and that influence companies to alter what they do domestically to fit foreign needs.

PhySICal FaCTorS Physical factors can affect how companies produce and market products, employ personnel, and even maintain accounts. Remember that any of these factors may require a company to alter its operation abroad (compared to domestically) for the sake of performance.

Geographic Influences Managers who are knowledgeable about geography are in a posi- tion to better determine the location, quantity, quality, and availability of the world’s natural resources and conditions. Their uneven global distribution helps explain why different prod- ucts and services are produced in different places.

Again, take sports. Norway fares better in the Winter Olympics than in the Summer Olympics because of its climate, and except for the well-publicized Jamaican bobsled team (whose members actually lived in Canada), you seldom hear of tropical countries compet- ing in the Winter Olympics. East Africans’ domination in distance races is due in part to their ability to train at higher altitudes than most other runners.

Geographic barriers—mountains, deserts, jungles, and land-locked areas—often affect communications and distribution channels. And the chance of natural disasters and adverse climatic conditions can make business riskier in some areas than in others while affecting supplies, prices, and operating conditions in far-off countries. Keep in mind also that cli- matic conditions may have short- or long-term cycles. For instance, recent melting of Arctic ice floes along with new ship technologies have allowed more ships to use a Northwest Passage to cut transport costs by saving as many as 15 days at sea.41

demographic Influences Finally, countries’ populations differ in many ways, such as density, education, age distribution, and life expectancy. These differences impact IB opera- tions, such as market demand and workforce availability.

INSTITUTIoNal FaCTorS Institutions refer to “systems of established and prevalent social rules that structure social in- teractions. Language, money, law, systems of weights and measures, table manners and firms (and other organizations) are thus all institutions.”42 We will now examine a sample of these.

Political Policies Not surprisingly, a nation’s political policies influence how and if IB takes place. For instance, before Cuba and the United States severed diplomatic relations in the 1960s, Havana had a minor league baseball franchise. Not only did that disappear, but also the facility by which Cuban baseball players could join U.S. professional teams. Many of them did so, although most had to defect from Cuba to play abroad. That changed again with the beginning of political normalizations in 2014.43

Obviously, political disputes—particularly military confrontations—can disrupt trade and investment. Even conflicts that directly affect only small areas can have far-reaching effects since these areas may produce important components needed for production elsewhere and because tourists’ fear prevents their travel to the entire region.

Physical factors affect

• where different goods and services can be best produced,

• operating risks.

Politics often determines where and how IB can take place.

18 part 1 Background for International Business

legal Policies Domestic and international laws play a big role in determining how a com- pany can operate abroad. Domestic law includes both home- and host-country regulations on such matters as taxation, employment, and foreign-exchange transactions. British law, for example, determines how the U.S.-investor-owned Liverpool Football Club is taxed and which nationalities of people it employs in the U.K. Meanwhile, U.S. law determines how and when the earnings from the operation are taxed in the United States.

International law—in the form of legal agreements between countries—determines how earnings are taxed by all jurisdictions. As we point out in our closing case, international agreements permit ships’ crews to move about virtually anywhere. When transactions be- tween countries involve disputes, such as whether a French football team must pay Nike for imported uniforms when it questions the quality, the contract usually specifies the country’s law that will make the determination.

Finally, the ways in which laws are enforced also affect a firm’s foreign operations. In the realm of trademarks, patented knowledge, and copyrights, most countries have joined in international treaties and enacted domestic laws dealing with violations. Many, however, do very little to enforce either the agreements or their own laws. This is why companies must determine how fastidiously different countries implement their laws.

behavioral Factors The related disciplines of anthropology, psychology, and sociology can help managers better understand different values, attitudes, and beliefs to help them make operational decisions abroad. Let’s return once again to the opening case. Although professional sports are spreading internationally, the popularity of specific sports differs among countries, while rules and the customary way of play for the same sport sometimes differ as well. Because of tradition, tennis’s grand slam tournaments are played on hard courts in Australia and the United States, on clay in France, and on grass in England. A base- ball game in the United States continues until there is a winner, while Japanese games end with a tie if neither team is ahead after 12 innings. Presumably the reason for the baseball difference is that the Japanese value harmony more than Americans do, whereas Americans value competitiveness more than the Japanese do.

economic Forces Economics helps explain why countries exchange goods and services, why capital and people travel among countries in the course of business, and why one country’s currency has a certain value compared to another’s. Recall the internationalization of sports. Non-U.S.-born players make up an increasing portion of major league baseball rosters, and players from the Dominican Republic form the largest share. Obviously, higher incomes in the United States and Canada enable major league teams to offer salaries that attract Dominican players. Further, putting a major league baseball team in the Dominican Republic isn’t practical because too few Dominicans can afford the ticket prices necessary to support a team.

Economics also helps explain why some countries can produce goods or services for less. And it provides the analytical tools to determine the impact of an international company’s operations on the economies of both host and home countries, as well as the impact of the host country’s economic environment on a foreign firm.

The CoMPeTITIve eNvIroNMeNT In addition to its physical and social environments, every globally active company operates within a competitive environment. Figure 1.1 highlights the key competitive factors in the external envi- ronment of IB: product strategy, resource base and experience, and competitor capability.

Competitive Product Strategy Products compete by means of cost or differentiation strat- egies, the latter usually by

• developing a favorable brand image, usually through advertising or from long-term con- sumer experience with the brand; or

• developing unique characteristics, such as through R&D efforts or different means of distribution.

Each country has its own laws regulating business. Agreements among countries set international law.

Countries’ behavioral norms influence how companies should operate there.

Economics explains country differences in costs, currency values, and market size.

Companies’ competitive situations may differ by

• their relative size in different countries,

• the competitors they face by country,

• the resources they can commit internationally.

Chapter 1 Globalization and International Business 19

Using either approach, a firm may mass-market a product or sell to a niche market (the latter approach is called a focus strategy). Different strategies can be used for different products or for different countries, but a firm’s choice of strategy plays a big part in determining how and where it will operate. Take Fiat Chrysler Automobiles (FCA) that competes with its best-sell- ing models by using a cost strategy aimed at mass-market sales. This strategy has influenced FCA to shift some fabrication of engine plants to China, where production costs are low, and to sell in India and Argentina, which are cost-sensitive markets. At the same time, FCA has centered its production of its Alfa Romeo and Maserati vehicles in Italy because these com- pete with a high-priced focus strategy that requires access to both the expertise and image of high technical competence. And it has targeted most sales of these high-priced vehicles in high-income countries.

Company resources and experience Other competitive factors are a company’s size and resources compared to those of its competitors. A market leader, for example—say, Coca- Cola—has resources for much more ambitious international operations than a smaller com- petitor like Royal Crown. Royal Crown sells in about 60 countries, Coca-Cola in more than 200.

In large markets (such as the United States), companies have to invest much more to secure national distribution than in small markets (such as Ireland). Further, they’ll prob- ably face more competitors in large markets than in small ones. Conversely, national market share and brand recognition have a bearing on operating in a given country. A company with a long-standing dominant national market position uses operating tactics that are quite dif- ferent from those employed by a newcomer. Such a company, for example, has much more clout with suppliers and distributors. Remember, too, that being a leader in one country doesn’t guarantee being a leader anywhere else. For example, in terms of global market share, Toyota and General Motors see-saw in the number one and two positions, but in many countries they hold neither of these top two positions.

Competitors Faced in each Market Finally, market success, whether domestic or for- eign, often depends on the strength of competition and whether it is international or local. Large commercial aircraft makers Boeing and Airbus, for example, compete almost only with each other in every market they serve. What they learn about each other in one country is useful in predicting the other’s strategies elsewhere. In contrast, Walmart faces different local competition with customized local strategies in almost every foreign market it enters.

about and demand the best products for the best prices regardless of their origins. This view, known as connectography, premises that internationally con- necting infrastructure will accelerate.44 Those who hold this view also argue that because MNEs have built so many international production and distribu- tion networks, they’ll pressure their governments to place fewer restrictions on international movements of goods and means to produce them.

Even if we accept this view, we must still meet at least one challenge to riding the wave of the future: Because the future is what we make of it, we must figure out how to spread the benefits of globaliza- tion equitably while minimizing the hardships placed on those parties—both people and companies— who suffer from increased international competition.

At this juncture, opinions differ on the future of IB and globalization. Basically, there are three major scenarios:

• Further globalization is inevitable. • IB will grow primarily along regional rather than

global lines. • Forces working against further globalization and

IB will slow down the growth of both.

Globalization is inevitable

The view that globalization is inevitable reflects the premise that advances in human connectivity are so pervasive that consumers everywhere will know

Looking to the Future Three Major Scenarios on Globalization’s Future

20 part 1 Background for International Business

The Wall Street Journal posed a question to Nobel Prize winners in economics: “What is the greatest economic challenge for the future?” Several responses addressed globalization and IB. Robert Fogel said it’s the problem of getting available technology and food to people who are needlessly dying. Both Vernon Smith and Harry Markowitz specified the need to bring down global trade bar- riers. Lawrence Klein called for “the reduction of poverty and disease in a peaceful political environ- ment.” John Nash felt we must address the problem of increasing the worldwide standard of living while the amount of the earth’s surface per person is shrinking.45 Clearly, each of these responses proj- ects both managerial challenges and opportunities.

More regional than Global Growth

The second view—that growth will be largely regional rather than global—is based on studies showing that almost all of the companies we think of as “global” conduct most of their business in home and neigh- boring countries.46 Most world trade is regional, and many treaties to remove trade barriers are regional. Transport costs favor regional over global business. And regional sales may be sufficient for companies to gain scale economies to cover their fixed costs adequately. Nevertheless, regionalization of business may be merely a transition stage. In other words, companies may first promote international business in nearby countries and then expand their activities once they’ve reached certain regional goals.

Globalization and iB Will slow

The third view argues that the pace of globalization will slow, or may already have begun collapsing.47 In light of the antiglobalization sentiments mentioned earlier, it’s easy to see that some people are adamant and earnest in voicing their reservations. The crux of the antiglobalization movement is the perceived schism between parties (including MNEs) who are thriving in a globalized environment and those who aren’t. For example, in 2015, about 14 percent of the developing countries’ population was living in ex- treme poverty. However, the figure was 47 percent in 1990. Most of the improvement came in China.48

Antiglobalists pressure governments to promote nationalism by raising trade barriers and rejecting international organizations and treaties. Historically, they have often succeeded (at least temporarily) in obstructing either technological or commercial

advances that threatened their well-being. Recently, antiglobalization sentiments have grown in many countries, such as law changes in some U.S. states that hinder activities of undocumented aliens, the deportation by France of ethnic Roma (gypsies), the evacuation in Italy of immigrants to protect them against local residents, and the backlash against ac- cepting refugees in a number of countries. In Brazil and South Africa, the governments have authorized domestic companies to copy pharmaceuticals under global patent protection. Bolivia and Venezuela have nationalized some foreign investments, and Canada prevented the Malaysian state energy firm, Petronas, from buying Progress Energy, a natural gas producer. The sparring between pro- and anti-globalists is one reason why the globalization process has progressed in fits and starts.

Other uncertainties may hamper globalization. First is the question of oil prices, which affect inter- national transportation because they can constitute more than 75 percent of operating costs on large ships.49 Not only have global oil prices fluctuated widely, but technology for fracking and shale oil conversion have altered production locations when prices are high. Many U.S. companies, such as furniture manufacturers, have responded by reshor- ing rather than facing transport cost uncertainty. Second, safety concerns—property confiscation, terrorism, piracy of ships, and outright lawless- ness—may inhibit companies from venturing abroad as much.

Finally, one view holds that for globalization to succeed, efficient organizations with clear-cut man- dates are necessary; however, there is concern that neither the organizations nor the people working in them can adequately handle the complexities of an interconnected world.50

Going Forward

Only time will tell, but one thing seems certain: If a company wants to capitalize on international oppor- tunities, it can’t wait too long to see what happens on political and economic fronts. Investments in re- search, equipment, plants, and personnel training can take years to pan out. Forecasting foreign opportuni- ties and risks is always challenging. Yet, by examining different ways in which the future may evolve, a com- pany’s management has a better chance of avoiding unpleasant surprises. That’s why each chapter of this book includes a feature that shows how certain chap- ter topics can become subjects for looking into the future of IB. ■

Case

The call of the sea spurs the cruise business.51 Sea voy- ages have had an aura of mystique for centuries, but only in recent decades have they been available to a mass market. Historically, recreational sea voyages were an essentially elitist endeavor. Certainly, members of the lower classes occasionally found themselves on the open sea, but usually as displaced job seekers or ships’ crew members. In recent years, however, the cruise industry has targeted the work- ing middle class as well as the idle rich.

What’s a Cruise, and What Happened to the Cruise Industry? A “cruise” is a sea voyage taken for pleasure (as opposed to, say, working aboard a ship or conveying oneself from point A to point B). Typically, passengers enjoy cabin ac- commodations for the duration of a fixed itinerary that brings them back to their original point of embarkation.

There was a time when ships (called liners) transported people across waters for business or pleasure, but the ad- vent of transoceanic air service after World War II offered a speedier and less expensive alternative, and airlines captured liners’ passengers. The competitive balance tipped decisively in the 1960s, when advances in jet technology made air travel a viable option for a growing mass market of budget-minded travelers. One by one, shipping companies retired the great luxury liners that had plied the seas for decades.

The Contemporary Cruise Industry Today, the cruise industry is dominated by two compa- nies: Carnival and Royal Caribbean, which command a combined 71 percent of the market. By far, the largest is Carnival, which offers cruises to every continent on the globe and operates 10 lines that it calls brands. Map 1.2 shows the headquarters of these brands.

Carnival was born when its founder saw an opportunity to expand mass-market sea travel by promoting the idea of the “Fun Ship” vacation—an excursion designed to be a little less formal and luxurious than the traditional ocean liner. The timing was right. Sea travel still projected a certain aura, and more people could afford an ocean-borne vacation. Further, a lot of vacationers preferred to spend their holidays in ways that were compatible with the Fun Ship concept, such as on group tours, theme-park visits, and sojourns to Las Vegas. Carnival bought a retired liner at a good price, refurbished it

Carnival Cruise Lines

in bright colors, rigged it with bright lights, and installed dis- cos and casinos. On its maiden voyage in 1972, the ship ran aground with 300 journalists on board; fortunately, neither the ship nor the business concept was severely damaged.

Over time, Carnival added not only ships but also whole cruise lines to its fleet. Today, each brand operates primar- ily in a designated region and is differentiated from other Carnival brands in terms of geographically pertinent themes (in Italy, for instance, Costa boasts a Mediterranean flavor) and in terms of cost (cruises on Cunard and Seabourne cost much more per night than on Carnival). In 2016 Carnival com- menced a brand, Fathom, which takes passengers to devel- oping countries for a week where they participate in a variety of volunteer services.

Doing Business in International Waters Almost the whole cruise-line industry is international in scope. Take the nationality of competitors. Companies can obtain flags of convenience from about 30 different countries. By registering as, say, a Liberian legal entity, a company can take advantage of lower taxes and less stringent employ- ment rules. Legally, Carnival is a Panamanian company, even though it’s listed on the New York Stock Exchange, has oper- ating headquarters in Miami and London, and caters mainly to passengers who set sail from the United States. Although cruise-line revenue is subject to neither Panamanian nor U.S. income taxes, Carnival does have to pay substantial “port fees.” In fact, ports compete for cruise stopovers because of fees and tourist expenditures.

Only a few cruise-line offerings—such as excursions along the Mississippi River—can be characterized as purely domestic. Even trips from the U.S. West Coast to Alaska are “international” because they stop in Canada. By far the most popular destination for cruise passengers is the Caribbean/Bahamas, largely because the area boasts balmy weather year round. During summer months, Carnival shifts some of its ships from Caribbean/Bahamas to Alaskan and Mediterranean routes.

Obviously, cruise ships go only where there are seaports, but Carnival cooperates with (and owns some) tour operators who provide almost 2,000 different onshore excursions (for ad- ditional fees). Carnival estimates that half its passengers to the Caribbean take shore excursions to such sightseeing attractions as the Mayan ruins in Belize. Nevertheless, critics contend that passengers see and spend too little in the countries they visit, going only to cruise-line-sanctioned locations and stores.

I must go down to the seas again, for the call of the running tide

Is a wild call and a clear call that may not be denied —John Masefield, Sea Fever

22 part 1 Background for International Business

UNITED KINGDOM Cunard P&O Cruises

NORTH AMERICA Carnival Fathom Holland America Princess Seabourne

ITALY

Costa

GERMANY

AIDA

AUSTRALIA P&O Cruises Australia

MaP 1.2 Where Carnival’s Cruise lines (brands) are headquartered Countries designated on the map denote headquarters locations of each company/brand (e.g., five lines operate out of North America and two out of the United Kingdom). Carnival has the most recognized brands in North America, the United Kingdom, Germany, Italy, and Australia—areas that account for 85 percent of the world’s cruise-line passengers. Source: Data from “Carnival: Our Brands” at http://phx.corporate-ir.net/phoenix.zhtml?c=200767&p=irol-productssome changes (accessed March 17, 2016).

What It Takes to Operate a Cruise Line

Ship Shopping Ships constitute the biggest investment for cruise lines. Carnival introduces two to three new ships per year. Governments in several countries subsidize shipbuilding because it employs many people and uses locally produced steel—a practice that gives the cruise-line industry less ex- pensive ships.

Where to Find Crew Members Shipping companies scour the world for crew members who can perform specialized tasks, are properly certified (by international agreement, a registered crew member can enter virtually any port in the world), and who can interact with passengers, especially in English. On a typical Carnival ship, crew members hail from over 100 countries, but about a third of the world’s ship crews are Filipino because of their English fluency and willingness to work for low wages.

Casinos and Other Amenities Each of its Carnival’s cruises offers one or two formal nights per week; theme-based dinners centering on na- tional cuisines; a variety of musical entertainment, games, and contests; spas and athletic facilities; and onboard shopping. Casinos are onboard fixtures because cruises,

by operating outside the jurisdiction of any national au- thority, are not subject to any national laws restricting gambling.

The Overseas Environment Because Carnival operates around the world, it has the advantage of treating the whole world as a source of both customers and supplies. In addition, because its chief as- sets are ocean-borne, Carnival can move them where they can best serve the company’s needs. However, it’s also vulnerable to a wide range of environmental disturbances. Let’s take a look at a few of these.

Safety Issues After terrorists seized a cruise ship in the Mediterranean in 1985, the major cruise lines instituted strict security checks for boarding passengers; thus, they had in place a security protocol before 9/11 and before the airline industry had one.

In the wake of 9/11, when cancellations started to ex- ceed bookings, Carnival increased the number of U.S. ports from which its ships embarked so that passengers with a heightened fear of flying could reach points of departure by land. Carnival also redeploys cruises to avoid areas of politi- cal upheaval or crime. During the mosquito-borne Zika virus outbreak, Carnival offered cancellations with credit for future cruises to pregnant women and their families.

http://phx.corporate-ir.net/phoenix.zhtml?c=200767&p=irol-productssome changes

Chapter 1 Globalization and International Business 23

still relatively untapped cruise destinations that Carnival has either not exploited or has only recently begun to serve, such as the addition of ports in Vietnam, Indonesia, and Papua New Guinea. Further, changes in U.S.–Cuban relations is expected to create a boon in U.S. cruise travel.

Since only 20 percent of the U.S. population has taken a cruise, there is growth potential. On the other hand, people who have taken a cruise continue to be repeat customers, but the percentage of first-time customers is declining. On the downside, then, industry observers worry that experi- enced cruisers will tire of visiting one port that’s pretty much like another and that noncruisers will still prefer to fly to re- sorts where they can spend more time in a single place than they can on cruises. There is also concern about the uncer- tainty of gasoline prices, taxes, and mortgage interest rates.

Questions

1-3. What specific steps has Carnival Cruise Lines taken to benefit

from global social changes?

1-4. What economic factors influence success of the international

cruise industry? Explain how each affects such success.

1-5. Although most cruise-line passengers are from the United

States, the average number of annual vacation days taken by

U.S. residents is lower than that of workers in most other high-

income countries (13 days, compared to 5 weeks in France

and Germany). How might cruise lines increase sales to peo-

ple outside the United States?

1-6. What threats exist to the future performance of the cruise-line

industry and specifically of Carnival Cruise Lines? If you were in

charge of Carnival, how would you (a) try to prevent these

threats from becoming reality and (b) deal with them if they were

realized?

Fortunately, shipboard emergencies are infrequent, but when they do occur they are problematic. For instance, the Costa Concordia hit a rock and sank off Italy, causing 32 people to die. A generator fire on the Carnival Triumph stranded 4000 passengers for four days. Sporadically, viruses causing diarrhea and vomiting strike cruise ships, causing Carnival to take an infected ship out of service to eradicate all traces of the virus by sanitizing virtually every object on board. Although these incidents are costly, the cruise industry has a fatality rate three times better than airlines.

Economic Issues Spending for a cruise is generally considered discretion- ary. During recessions, people are more apt to take shorter cruises and to embark from nearby ports rather than flying to faraway points of departure. Interestingly, however, in comparison with other segments of the tourist industry, cruise lines have fared well during economic downturns, partly because of offering discounts and partly because fixed cruise-line prices spare passengers the added risk of encountering unforeseen unfavorable exchange rates.

The Weather Whenever there is extreme weather, Carnival may have to cancel trips, switch embarkation points, or change destina- tions. Typically, passengers on canceled trips receive full refunds and those on shortened cruises partial refunds.

The Future Overall, the outlook for Carnival and the cruise-line industry is mixed. On the one hand, with prospects for growing in- comes in many countries, such as China, more people will have discretionary income to spend on tourism. There are

Scan for Endnotes or go to www.pearsonhighered.com/daniels

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

1-7 What global forces have contributed to the growth of the cruise-line industry? How have they contributed?

1-8 Discuss the ethics of cruise lines regarding the avoidance of income taxes while buying ships built with governmental subsidies.

Endnotes

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If you see men stroking their beards, stroke yours.

—Arab proverb

Objectives

After studying this chapter, you should be able to

2-1 explain why culture, especially national culture, is important in ib, but tricky to assess

2-2 Grasp the major causes of national cultural formation and change

2-3 Discuss major behavioral factors influencing countries’ business practices

2-4 Recognize the complexities of cross-cultural communications

2-5 Analyze guidelines for cultural adjustment

chApteR 2 the cultural environments Facing business

comparative environmental Frameworks pARt twO

So ur

ce : h

ik rc

n/ Fo

to lia

Nabawi Mosque at Medina, Saudi Arabia.

▶

http://www.pewforum.org/2012/12/18/global-religiouslandscape-exec/?utm_content=bufferf682f&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer

appease conflicting groups, such as requiring women to wear lon- ger robes (women must wear abayas and men customarily wear thobes) in exchange for advancing women’s education. However, the abayas, traditionally black, are increasingly in more modern designs and bright colors.

The Religious FacToR

If you are accustomed to fairly strict separation between religion and the state, you will probably find the pervasiveness of religious culture in Saudi Arabia daunting. Religious proscriptions prohibit pork products and alcohol. During the holy period of Ramadan, when people fast during the day, restaurants serve customers only in the evening. Restaurants such as McDonald’s dim their lights and close their doors during the five times a day that Mus- lim men are called to prayer. Many companies convert revenue- generating space to prayer areas; Saudi Arabian Airlines does this in the rear of its planes, the British retailer Harvey Nichols in its department store.

However, there are regional differences. In Riyadh, women cus- tomarily wear niqabs that cover their faces. But in Jeddah, which has more contact with foreigners and is less conservative, dress codes are more relaxed and fewer women wear them. Nevertheless, mer- chants routinely remove mannequins’ heads and hands and keep them properly clad to prevent public objections. IKEA even erased pictures of women from its Saudi catalogue.

Rules of behavior may also be hard to comprehend because religious and legal rules have sometimes been adapted to contem- porary situations. Islamic law, for instance, forbids charging inter- est and selling accident insurance (strict doctrine holds there are no accidents, only preordained acts of God). In the case of mortgages, the Saudi government offers interest-free mortgage loans instead. It allows accident insurance because Saudi businesses, like busi- nesses elsewhere, need the coverage.

Nor are expected behaviors necessarily the same for locals and foreigners. Non-Muslim foreign women are not required to wear head scarves, although they may be admonished by reli- gious patrols. Saudi Arabian Airlines does not hire Saudi wom- en as flight attendants (being in direct contact with men might tempt promiscuous behavior), but it hires women from other Arab nations. In addition, the government permits residents of compounds, inhabited largely by Americans and Europeans, to dress therein much the way they do back home. However, in an example of a reverse dress code, some compounds prohibit resi- dents and their visitors from wearing abayas and thobes in their public areas.

Saudi Arabia (see Map 2.1) can be perplexing to foreign managers as they try to exercise acceptable personal and business behav- ior.1 Its mixture of strict religious convictions, ancient social tra- ditions, and governmental economic policies results in laws and customs that often contrast with those in other countries, shift with little advance notice, and vary by industry and region. Thus, foreign companies and employees must determine what these differences are and how to adjust to them. A brief discussion of a sample of Saudi traditions, cultural norms, and foreign operat- ing adjustments should help you understand the importance of culture in IB.

a liTTle hisToRy and BackgRound

Although the land encompassing the Kingdom of Saudi Arabia has a long history, during most of that history invaders controlled a divided land and most inhabitants had a tribal rather than nation- al loyalty. Nevertheless, the inhabitants have shared a common language (Arabic) and religion (Islam). In fact, Saudi Arabia is the birthplace of Islam and the location of its two holiest cities, Mecca and Medina. (The opening photo shows the Nabawi Mosque at Medina, the second holiest mosque in Islam.) King Ibn Saud, a de- scendant of Mohamad, took power in 1901, merged independent areas, created a political and religious entity, and legitimized his monarchy and succession by being the defender of Islamic holy areas, beliefs, and values.

The growing importance of oil for Saudi Arabia, particularly since the 1970s, led to rapid urbanization and gave the government the means to offer social services such as free education. These changes have furthered its citizens’ sense of a national identity, while dimin- ishing their traditional (particularly nomadic) ways of living. Cities have modernized physically. However, below the physical surface, Saudis hold some attitudes and values that are neither like the norm elsewhere nor easily discerned.

Modernization has been controversial within Saudi Arabia. A liberal group, supported by an elite foreign-traveled segment, wants economic growth to provide more choices in products and lifestyles. A conservative group, supported by religious leaders, is fearful that modernization will upset traditional values and strict Koranic teachings. The government (the Royal Family) must satisfy conservative viewpoints, lest its leadership becomes vulnerable. For instance, Iran’s Islamic Revolution was spearheaded in part by dissenters who viewed the Shah’s modernization movements as too secular. Meanwhile, liberals have been largely pacified by tak- ing well-paid government jobs and slowly gaining the transforma- tion they wish. The government has sometimes made trade-offs to

Saudi Arabia’s Dynamic CultureCASe

Chapter 2 The Cultural Environments Facing Business 27

TRadiTional FacToRs

Some Saudi Arabian traditions are probably the outgrowth of a tribal and nomadic past. For instance, the oft-quoted saying “Me against my brother, my brothers and me against my cousins, then my cous- ins and me against strangers” illustrates a family-centered society where trust of others is highly correlated with the degree of familiar- ity with them.

Given the trust factor, most Saudi businesses have historically been family owned and operated, preferring to hire family mem- bers or people they know well even though others might be better qualified technically. However, as companies have needed to part- ner with foreign firms to gain expertise, the partnering process has usually been lengthy. Saudis take time to know the foreigners well and are reluctant to make full financial disclosures outside the fam- ily. They generally prefer to get to know you well, perhaps invite you into their homes, and develop a certain level of friendship before ever turning to business.

Arabian Sea

Mecca

Medina Ash Shaqra

Riyadh

Jeddah

Dubayy

Ajman Ash Shariqah

Muscat

Ra’s al Khaymah

Umm al Qaywayn Al Fujayrah

Abu Dhabi Gulf o f Oman

Per s ian Gul f

Red Sea

Mediterranean Sea

Map 2.1 saudi arabia and the arabian peninsula The kingdom of Saudi Arabia comprises most of the Arabian Peninsula in Southwest Asia. The capital is Riyadh. Mecca and Medina are Islam’s holiest cities. Jeddah is the most important port. All of the country’s adjacent neighbors are also Arabic—that is, the people speak Arabic as a first language. All the nations on the peninsula are predominantly Islamic.

Not understanding this norm, a British publisher dispatched two salesmen to Saudi Arabia and paid them on commission. The salesmen moved aggressively to make the same number of calls— and sales—per day as they made in Britain, where they were used to punctual schedules, undivided attention of potential clients, and conversations devoted only to business. To them, time was money. In Saudi Arabia, however, they found that appointments seldom be- gan at the appointed time, usually taking place at cafés over cups of coffee. They felt that Saudis spent too much time in idle chitchat while ignoring business to talk with friends. Eventually, both sales- men showed their irritation, and their Saudi counterparts regarded them as rude and impatient. The publisher had to recall them.

Saudis’ preference for dealing with people they know has led to a system known as wasta, which roughly translates into English as “connections.” Thus, who you know helps a great deal in almost everything, such as moving a résumé to the top of a pile, gaining

28 part 2 Comparative Environmental Frameworks

approval of a zoning request, getting a passport, and obtaining a visa to bring in a visitor from headquarters.

Gender Roles Perhaps the most baffling aspect of Saudi culture to outsiders is the role of gender. Based largely on a Koranic prescription whereby daughters receive half the inheritance that sons receive, females are placed in a separate and often seemingly subservient position. Their role has been to be virtuous, marry young, and have offspring, while males take responsibility as their protectors and the family bread- winners. The appearance of female virtue is also required. Because of family importance, a negative perception of one member reflects on all. These beliefs have led to prohibitions for women, such as for traveling abroad without a male relative’s permission and study- ing abroad without a male relative escort. Basically, non-kin males and females may interact personally only in “open areas,” or in “closed areas” when the females are accompanied by a male rela- tive. However, applying this restriction may seem a bit confusing to outsiders. For instance, restaurants are considered closed areas, and proprietors must maintain separate dining rooms and entrances for men without female companions. However, the food malls at most shopping centers are considered open areas where members of both sexes intermingle.

Nevertheless, several recent events foretell possibly fewer future differences in gender requirements: women can now vote and hold political offices, a Saudi prince has supported women’s right to drive as a means of limiting the number of foreign workers, schools have commenced physical education classes for females, a two-member women’s team participated in the Olympics (London) for the first time, and divorced women and widows can now manage their family affairs.

Men and women may mix in the workplace, but the situation is complex. Male and female employees within the public sector work in separate buildings. When they must meet together, they do so within special meeting rooms, where they must use separate en- trances. Men and women may work together within the private sec- tor, but there are other limitations.

Although females now outnumber males as university gradu- ates, only about 15 percent of the Saudi workforce is female. Why? Some women prefer traditional family roles. Some find driving re- strictions to be too much of a hassle. And some families prohibit female members from working because of family honor (“What will people think?”). Economic factors blend with cultural ones as well, such as companies’ reluctance to hire women so as to avoid incur- ring the cost of providing separate entrances and toilet facilities. Nevertheless, the genders do interact in multinational companies as long they adhere to dress codes. However, females are limited in foreign business travel because they need permission from their male relatives. Some multinationals ease this problem by paying the travel costs for a male relative to accompany a woman abroad.

At one time, visas for single women to enter Saudi Arabia were nearly unobtainable. However, Saudi Arabia promotes investments by MNEs, and they need visas to send female executives there. While these visas are not given automatically, they can be obtained—more easily for women over 40, but also possible for younger women, es- pecially with the use of wasta. The U.S. consulting company Monitor Group brought in American women in their 20s and L’Oreal has sent its female human resources manager there.

Restrictions on gender interactions also lead to other adjust- ments. For instance, four young Saudis, who had lived abroad, needed market research before opening an upscale restaurant in Jeddah. Such research is difficult because limitations on male–female inter- actions restrain family-focused interviews. In this case, however, con- sultants interviewed apparently affluent families by approaching them in restaurants. How did they know they were affluent? Aside from the caliber of restaurants, they noted clients’ comportment, whether they wore custom-made versus off-the-rack robes, the quality of wrist- watches showing beneath long sleeves, and how well the men kept their beards. These were indicators that researchers unfamiliar with the society would probably overlook.

At upscale foreign- based department stores like Saks Fifth Avenue, only the lower floors have mixed shopping. There, all sales- people are men (even those specializing in such products as cosmet- ics and lingerie), and there are no changing rooms or places to try cosmetics. Meanwhile, the upper floors are for women only, and fe- male shoppers can check their abayas and shop in jeans or whatever they choose. (Meanwhile, the men who drove the women there can relax in a space the stores have set aside for them.) One problem: Because male managers can visit these upper floors only when a store is closed, they are limited in their ability to observe operations.

culTuRal dynaMics

Almost all aspects of culture evolve, and we have shown that Saudi Arabia is no exception. Since the first public school for girls opened in 1960, there has been a gradual increase in years of study and cur- riculum for females. On the one hand, economic need has spurred changes in education and its use within the workforce. On the other hand, critics have had to be persuaded that changes for women are compatible with their roles. One of the first acceptances of working women (alongside men) was in the medical field because of the short- age of doctors, the high cost to separate male and female specialists, and the compatibility of healing with women’s role as nurturers.

In addition, Saudi opinion and policy has been to reduce the heavy dependence on and cost of foreign workers. Thus, the govern- ment pays for foreign university education of its citizens while in- creasingly recognizing that much female talent is not being exploited.

The Saudi business world has seen much change. Consider that women own about 20 percent of all Saudi businesses, or that a woman is CEO of one of the country’s largest concerns, the Olayan

Chapter 2 The Cultural Environments Facing Business 29

Financing Company. Five things will likely boost Saudi female work- force participation: (1) an increase in inward FDI, (2) more women studying abroad, (3) women’s psychological drive to prove them- selves, (4) social media access that connects genders and provides Saudis with more outside information, and (5) the uncertainty of in- come from oil as prices fluctuate. Bear in mind, however, that changes tend to be uneven, particularly among the country’s geographic areas and among people with different income and educational levels. ■

Questions

2-1. Assume you are an MNE manager who needs to send a

team to Saudi Arabia to investigate the feasibility of selling

your products there. What advice should you give them

to help assure that cultural problems do not impede their

success?

2-2. Assume your company is from North America or Europe and

considering the establishment of an office in Saudi Arabia.

What additional operating costs might it have to assume be-

cause of the Saudi culture?

culTuRe’s iMpoRTance in iB and TRickiness To assess Our opening case illustrates companies’ need to understand and be sensitive to the culture where they operate. The adjacent Figure 2.1 shows the relation of culture to IB.

naTional culTuRes as a poinT oF ReFeRence Values are learned, and all individuals have them. They are reflected in their attitudes, be- liefs, and actions. Their core values are so strong that they are not negotiable, whereas their peripheral values are less dominant and more pliable.2 The shared values, attitudes, and beliefs of a group of individuals constitutes a culture.

Culture is an elusive topic to study, partly because people belong to multiple cultures based on their nationality, ethnicity, religion, gender, work organization, profession, age, and income level. We emphasize national cultures, but also discuss how major cultural member- ships differ among countries.

The nation provides a workable definition of culture because similarity among people is both a cause and effect of national boundaries. Within a nation’s borders, people chiefly share such essential attributes as values and language. The feeling of “we” casts foreigners

concepT check

In Chapter 1 (page 18), we ex- plained that behavioral factors, values, attitudes, and beliefs can be studied as keys to developing suitable business practices abroad.

The nation is a useful definition of society because

• similarity among people is a cause and an effect of national boundaries,

• it is a reference people make to “we” versus “they”.

OPERATING ENVIRONMENT

INSTITUTIONAL AND PHYSICAL FACTORS

COMPETITIVE FACTORS

Cultural factors Political policies and legal factors Economic forces Geographic influences

• •

OPERATIONS

OBJECTIVES

STRATEGY

MEANS

• • •

•

Cultural awareness Identification and dynamics of cultures Behavioral practices a�ecting business Strategies for dealing with cultural di�erences

FiGuRe 2.1 Cultural Factors Affecting iB Operations

30 part 2 Comparative Environmental Frameworks

as “they.” National identity is perpetuated through rites, symbols, and respect for national heroes, while the preservation of national sites, documents, monuments, and museums pro- motes a common perception of “we.”

The nation as cultural Mediator Obviously, not everyone in a country shares all the same values, nor is each country unique in all respects. Nations include various subcultures, and a nation must be flexible enough to accommodate and mediate its diversity;3 those that fail sometimes dissolve. Yet a nation’s shared and mediated characteristics constitute its national identity and affect the practices of any company that does business there. At the same time, some people (probably a growing number) are bicultural or multicultural, meaning that they have internalized more than one national culture because of having dual or multiple citizenships, parents or spouses from another country, or lived abroad at an impressionable age.

Groups can hold more similar attitudes with like-groups abroad than with dissimilar groups in their own countries. For instance, urban people in Country A may have more in common with urban people in Country B than with rural people in their own country. As a consequence, when comparing nations culturally, one must be careful to examine relevant groups—differentiating between, say, the typical attitudes of rural and urban dwellers, or be- tween managers and production workers.

The people FacToR IB involves people from different national cultures, which affects every business function— managing a workforce, marketing and transporting output, purchasing supplies, dealing with regulators, securing funds.

cultural diversity As nationalities come together through projects and teams, their di- verse perspectives and experiences often enable businesses to gain a deeper knowledge of how to create and deliver products and services. However, successful cultivation of diversity is difficult because individuals may interact as they do within their own cultures. Fortunately, there is an emerging body of research on nationally diverse teams that helps make them more effective. For instance, problems occur when some nationalities are accustomed to compete with team members while others are accustomed to cooperate, when some await precise directions while others take self-initiative, and when some expect to divide tasks while others seek a cooperative solution to each. Similarly, language differences inhibit a common understanding of team roles, priorities, and sentiments.4 The more successful teams work to understand each other’s cultures before dealing with the tasks at hand.5 When there is an expectation of diversity, team members are more prone to realize the need to prepare to deal with differences, keep open minds, and develop a nonthreatening atmosphere, es- pecially for dealing with others who may feel insecure in the language or threatened when expressing minority and divergent viewpoints.6

cultural collision When contact among divergent cultures creates problems, the situation is known as cultural collision. Such collision may result in a company’s implementation of practices that are less effective than intended and to its employees’ distress because of dif- ficulty in adjusting to behaviors abroad.

Our opening case illustrates both problems: the publisher failed to meet its sales objec- tives, and its sales reps became distressed because they wrongly assumed their potential Saudi customers would be punctual and give them their undivided attention. Specifically, the British sales reps came from a deal-focus (DF) culture, where people are primarily task-oriented; whereas the Saudis came from a relationship-focus (RF) culture.7 The latter had less com- pulsion to wrap things up, regarded small talk at a café as a means to identify acceptable busi- ness partners, and put dealings with friends ahead of business dealings. DF people typically view RF people as time-wasters, whereas RF people view DF people as offensively blunt.

Despite using the nation as a cultural reference point

• not everyone therein shares the same values and attitudes,

• subcultures exist within nations,

• some people have internalized more than one culture,

• cultural similarities link groups from different countries.

Cultural diversity can be a competitive advantage, but managing it can be difficult.

Cultural collision may cause

• ineffective business practices,

• personal distress.

Chapter 2 The Cultural Environments Facing Business 31

Building culTuRal awaReness A firm doing business abroad must determine which foreign business practices differ from its own and then decide what adjustments, if any, it should make. Some cultural differences, such as acceptable attire, are fairly obvious; others aren’t. And people often react to given situations by expecting the same responses they would likely get in their own countries.

Most cultural variables—daily routines and rules, codes of social relations, language, emotive expression, concepts of luck—exist everywhere; however, the forms they take differ among cultures. Every national culture, for instance, features dancing, but types of and par- ticipation in dancing vary among and even within cultures.8

No foolproof method exists for building cultural awareness.9 Travelers remark on cultural differences, experts write about them, and international managers note how they affect op- erations. Even so, people disagree on what they are, whether they’re widespread or limited, and whether they are caused by core versus peripheral values.

Some people have an innate ability to say and do the right thing at the right time, while others offend unintentionally or seem ignorant. Experts note, however, that businesspeople can improve their awareness and sensitivity and, by educating themselves, enhance the likeli- hood of succeeding abroad. Although research on another culture can be instructive, one must assess information carefully to determine if it perpetuates unwarranted stereotypes, covers only limited segments of a country’s culture, or is obsolete. One should also observe the behavior of those people who have garnered the kind of respect and confidence they themselves will need.

Of course, cultural variations are too numerous to memorize completely. Just consider one—the many different ways to address people. Should you use a given name or a sur- name? Does a surname come before or after a given name? Do people take a parent’s name as a surname? If so, is it taken from a parent’s first or last name? If so, is it from one or both parents? Does a wife take her husband’s name? What titles are appropriate for different pro- fessions? Note also that many countries use pronouns and verb forms (familiar and polite) that reflect status and familiarity. Mistakes that may seem minor can be perceived as igno- rance or rudeness, thus jeopardizing a business deal. Fortunately, you can consult guide- books and speak with knowledgeable people at home and abroad. In addition, there are many recent studies on cross-cultural attitudes and practices that concern businesspeople.10 Nevertheless, many attitudes, practices, and cultures remain insufficiently studied.

shoRTcoMings in culTuRal assessMenTs Too often when we can’t explain some difference—say, why the Irish consume more cold cereal than the Spanish do—we attribute it to culture without probing why. (Perhaps the difference is simply that cereal companies have marketed more in Ireland.) Nor is it easy to isolate culture from economic and political conditions. Entrepreneurial practices, for ex- ample, could be influenced not only by risk-taking values but also by current economic con- ditions.11 China’s changing preference for male versus female offspring offers an example of cultural and economic interaction. When China had its one-child policy, millions of families aborted female fetuses and put girls up for adoption. Why? Because males could carry on a family name (cultural), help work fields in rural areas (economic), and care for parents in old age (cultural and economic). Recently, however, China has seen a shift toward preference for female offspring. Why? Urbanization requires fewer male workers on farms (economic), while rising property values (economic) have taken a toll on families’ tradition (cultural) of buying living quarters for sons before they can marry.12

We should also emphasize a few common shortcomings in interpreting cultural research:

1. Comparing countries by what people say can be risky. Responses may be colored by the very culture one tries to understand. Some groups may be happiest when they’re com- plaining; some respond with what they think questioners want to hear. In responding to degrees of agreement, say on a scale of one to five, some cultures are more apt to select the middle point, others the extremes.13

Almost everyone agrees that national cultures differ, but they disagree on what the dif- ferences are and the impor- tance of them.

Cultural research can improve a person’s awareness and sensitivity.

Sometimes differences are attributed only to culture, although other factors may be influential.

Shortcomings in cultural research include

• erroneous responses to questions,

• relying on averages when there are variations,

• overlooking changes.

32 part 2 Comparative Environmental Frameworks

which more than one may be official. In fact, the official language(s) may not even be the most prevalent. Further, many people are bilingual or multilingual. Nevertheless, language is at the heart of social identity. When people from different countries speak the same lan- guage, culture spreads more easily among them. Commerce also expands, because a com- mon language fosters a sense of shared identity, and, on a practical level, there is less need to translate everything. When a group, especially one with few people, has a language not spoken elsewhere, people therein either learn other languages or they become isolated.

Certain languages have long been a regional lingua franca, such as French in parts of Africa and Russian in Eastern Europe and Central Asia. These languages often become a sec- ond language when the regional one is not the official or primary language, such as Russian in Ukraine. This leads native speakers of regional or very widely spoken languages to be complacent about learning foreign languages because they can so often get by without doing so. Further, these languages are often seen as the languages of power, influence, and op- portunity. For instance, as English has emerged as the top tier of these lingua francas, there is less foreign language learning in English-speaking countries than in most others. This has made native English speakers more dependent on others (whom they often hardly know) to mediate in multicultural and multilingual business settings. There is a simple business logic to this: If you speak the languages of both parties, you need not depend on an intermediary who may confuse the communication. (Map 2.2 shows the distribution of the world’s major language groups.)

why english Travels so well Although the countries where English is spoken as a first language have only 6 percent of the global population, they account for 25 percent of the world’s output.20 This difference helps to explain why English is the world’s most important second language. Remember, too, that MNEs—which are largely headquartered in English- speaking countries—decide on the common language for communication among their

A common language is a unify- ing force, but many countries

• have multiple language groups,

• depend on a regional lingua franca.

English has become the “international language of business” because

• native English language countries account for so much of world production,

• it is the world’s most important second language.

2. Researchers focusing on national differences in terms of averages may overlook variations within countries. For instance, the average Scandinavian may be uncomfortable with bar- gaining, but assuming that a Swedish buyer for IKEA doesn’t expect to bargain on prices could be a grave mistake.14 And of course, personality differences make some people out- liers in their own cultures, with no certainty that they’ll eventually integrate and conform to their national norms.15 Nevertheless, there is a marked difference among countries in the extent that people conform close to the countries’ average. When most people are close to the average, it is known as cultural tightness. When people are not, it is known as cultural looseness.16

3. Because cultures evolve, research may be outdated. Our opening case, for instance, details some changing Saudi practices toward gender differences.

inFluences on culTuRal FoRMaTion and change Culture is transmitted in various ways—from parent to child, teacher to pupil, social leader to follower, peer to peer. Developmental psychologists believe that most people acquire their basic value systems, especially core values, as children, including such concepts as evil versus good, dirty versus clean, ugly versus beautiful, unnatural versus natural, abnormal versus normal, paradoxical versus logical, and irrational versus rational.17

souRces oF change Examining individual and collective evolution of values helps explain how cultures come to accept (or reject) certain business practices—a useful examination for companies attempting to introduce their business practices abroad. The important thing here is willingness to ac- cept a change, which may result from either choice or imposition.

change by choice Change by choice may occur because social and economic situations present people with new alternatives. When rural people choose to accept factory jobs, for example, they change some basic customs—notably, by working regular hours they give up work-time social interactions that farm work allowed.

change by imposition Change by imposition—sometimes called cultural imperialism— involves imposing certain elements from an alien culture, such as a forced change in laws by a dominant country that, over time, becomes part of the subject culture.

As a rule, contact among countries brings change, known as cultural diffusion. When the change results in mixing cultures, we have creolization. For example, the U.S. popularity of Mexican tortillas is a result of cultural diffusion. Subsequent U.S. innovations to adapt them to U.S. tastes, such as tortilla chips and burritos, are creolization. Some groups and govern- ments have tried without full success to protect national cultures. Their efforts have been hampered by their citizens’ foreign travel, access to information abroad, and desire to adopt foreign technology that advances them economically. Thus, most countries seek to preserve traditions that help maintain national cohesiveness while being open to changes that grow their economies. South Korea, for example, has recently become more multiethnic because of the influx of foreigners needed to work in its factories. To help maintain traditions, the government now sponsors programs and language centers to “Koreanize” the foreigners.18

language as BoTh a diFFuseR and sTaBilizeR oF culTuRe Language is probably the most noticeable aspect of culture because it limits contact among people who can’t communicate with each other. Although a nation may have a single official language, the reality is much more complex.19 Many nations contain multiple languages, of

Cultural value systems, espe- cially core values, are set early in life but may change through

• choice or imposition, • contact with other cultures.

Chapter 2 The Cultural Environments Facing Business 33

A common language is a unify- ing force, but many countries

• have multiple language groups,

• depend on a regional lingua franca.

English has become the “international language of business” because

• native English language countries account for so much of world production,

• it is the world’s most important second language.

LANGUAGES

Arabic

Danish

Dutch

English

French

German

Italian

Korean

Malayan

Portuguese

Regional

Russian

Spanish

Swahili

Turkish

Chinese

Map 2.2 distribution of the world’s Major languages Globally, people speak about 6000 different languages, but 50 to 90 percent are expected to be extinct by the end of the twenty-first century. Only a few languages remain important in the dissemination of culture. A significant portion of countries, for example, speak English, French, or Spanish. But take a look at Mandarin Chinese. It’s important in IB because China comprises a lot of people and has become the world’s second-largest economy. The classification “Regional” actually takes in two categories: (1) countries in which the dominant language is not dominant anywhere else (e.g., Japan) and (2) countries in which several different languages are spoken (e.g., India).

34 part 2 Comparative Environmental Frameworks

employees in different countries. Not surprisingly, they usually select English, because many of their managers either speak only English or have English as a second language. In addi- tion, some MNEs from non-English-speaking countries have adopted English—the “inter- national language of business”—as their operating language. Nevertheless, this policy can have some negative effects, such as overvaluing people with English language competence.21 More competent individuals who are less adept at English may not be hired. If hired, they may become marginal in decision-making, lose status, and eventually leave the company. However, at the same time, a common corporate language is often an illusion as individuals continue to use other languages informally.

Monolingual English speakers may eventually experience more difficulty in communicat- ing worldwide. Why? Because the percentage of them will decrease, while the languages of such countries as China and India will grow rapidly along with their economies.22 As is often the case, history may teach us about this matter: Latin and French were once the languages of scholarship and diplomacy, respectively. Aramaic was once dominant in the Middle East.23 But the use of these languages has long since been diminished or supplanted.

The evolvement of languages Languages add and delete words. Over time, if groups of people become sufficiently isolated from each other, a common language may evolve into more than one, such as occurred with the various Romance languages that developed from Latin. At the same time, languages coexist and influence each other. When, say, a U.S. prod- uct enters a foreign market, its vocabulary often enters the language as well—sometimes in a strange form. In a Spanish-speaking country, for instance, you might see a sign announcing Vendemos blue jeans de varios colores (“We sell various colors of blue jeans”). It might appear that the use of the word “jeans” in this context is an example only of English predominance. However, the English language adapted the word “Gênes,” the French word for the Italian city of Genoa and the fabric (now referred to as denim) that originated there. This cross- pollination of languages is an ongoing phenomenon that coincides with the diffusion of cultures.

Religion as a culTuRal sTaBilizeR Map 2.3 shows the approximate distribution of the world’s major religions. Religion has been a cultural stabilizer because centuries of religious influence continue to shape cultural values even in those societies where the practice of religion has been declining.24 The role of religion in shaping behavior is even stronger among people and countries with strong reli- gious convictions.

Religions—such as Buddhism, Christianity, Hinduism, Islam, and Judaism—influence specific beliefs that affect business. Each religion is too complex to make meaningful brief realistic generalizations about it, so be cautious in accepting cultural explanations that rely very heavily on simplifications. For one, there are divisions within religions, such as between Theravada and Vajrayana Buddhists, Evangelical and Catholic Christians, Sunni and Shite Muslims (in Islam), and Orthodox and Reform Jews. Nevertheless, religious pervasiveness causes companies to make operating adjustments. For instance, McDonald’s limits sales of beef and pork in India to keep from offending, respectively, its Hindu and Muslim popula- tions. El Al, the Israeli national airline, does not fly on Saturday, the Jewish Sabbath. In fact, religion has an impact on almost every business function. To be viewed legitimately, compa- nies must take religious beliefs into account.25

But not all nations with the same dominant religion impose the same business con- straints. For example, Friday is a day of worship in Islam, but Turkey (a secular Islamic coun- try) has Friday as a workday to adhere to the Christian work calendar and keep in step with European business activity. Where rival religions vie for political control, strife can cause business upheaval. Unfortunately, the problem is substantial. In recent years, religious vio- lence has erupted in such countries as India, Iraq, Sri Lanka, Sudan, and Syria.

The use of English in IB may overvalue people simply because of language competence.

Many strong values are the result of a dominant religion.

Chapter 2 The Cultural Environments Facing Business 35

MajoR BehavioRal pRacTices aFFecTing Business Cultural variables are sometimes defined differently and with various names given to slightly different and sometimes overlapping concepts. Because of these nuances, there are thou- sands of possible ways to relate culture to business—far too many to cover in one chapter. We’ll settle for hitting the highlights.

issues in social sTRaTiFicaTion Every culture ranks people. Such social stratification creates hierarchies and influences a per- son’s class, status, and financial rewards within that culture. In business, this practice may entail ranking members of managerial groups more highly than production group members. Social stratification is determined by (1) individuals’ achievements and talents (meritocracy) and (2) their group memberships. These two factors interact, but the importance of one

Roman Catholic (Western Rite)

Eastern Churches

Protestantism

RELIGIONS Christianity

Chinese Religions (Confucianism, Taoism, and Buddhism)

Shinto and Buddhism

Islam: Sunni Muslims

Islam: Shiah Muslims

Southern Buddhism, and Lamaism (Northern Buddhism)

Hinduism

Tribal and Traditional Religions

Judaism

Tribal and Christian

Tribal, Christian, and Islamic

Number of adherents (in millions)

Christian ...............2,200 Muslim ..................1,600 Hindu ....................1,000 Chinese Folk 394 Buddhist ...................

............ 500

Sikh ............................. 23 Judaic ...........................14

Map 2.3 distribution of the world’s Major Religions About 84 percent of the world’s population identifies with a religious group. Most countries are home to people of various religious beliefs, but a nation’s culture is typically influenced most heavily by a dominant religion. The practices of the dominant religion, for instance, often shape customary practices in legal and business affairs. Source: The numbers for adherents are taken from Pew Research Center, “The Global Religious Landscape,” (December 18, 2012) http://www.pewforum.org/2012/12/18/global-religious- landscape-exec/?utm_content=bufferf682f&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer (accessed February 6, 2016).

36 part 2 Comparative Environmental Frameworks

versus the other varies among cultures. Further, more formal cultures expect more status- oriented communications between hierarchical levels. Higher-status individuals, for exam- ple, may be offended if people from a lower status address them by a first name or without using a title.

individual Qualifications and Their limitations In most societies, meritocracy is impor- tant in business, such as in choosing a star athlete to promote sportswear or a highly edu- cated and motivated person to handle competitive responsibilities. However, we shall see that this is not always the case.

Because societies value group affiliations differently, business practices differ among countries. For example, Japanese companies generally place more weight on seniority than companies in other countries, and seniority favors older employees.26 In another example, a study comparing British and German banks’ staff-reduction practices, the former were more prone to save costs by discharging on a performance-to-salary basis (targeting, say, a middle-aged manager with a high salary and average performance), whereas the latter were more inclined to minimize personal hardship (targeting younger managers, regardless of performance, because they could find new jobs more easily).27

The above examples deal largely with age groups, but there are many other ways to clas- sify people’s group memberships. Those usually determined by birth are ascribed group memberships, including gender, family, age, caste, and ethnic, racial, or national origin. Acquired group memberships include those based on religion, political affiliation, educa- tional place and achievement, and profession.

Laws and policies often try to reinforce or remove group difference. For example, policies that exclude female access to education in much of sub-Saharan Africa reinforce fe- males’ lower earning potential. The Nobel economist Amartya Sen referred to this exclusion from the workforce as unfreedom and pointed out its negative effect on economic advance- ment.28 In contrast, European policies that require large companies to include a minimum percentage of women on their boards are aimed at overcoming male dominance therein.29

Even when individuals qualify for given positions and no legal barriers exist to hold them back, opposition to certain groups—by other workers, customers, shareholders, or govern- ment officials—may limit their equal access to employment.

The following sections focus on some of the group memberships that influence how a person is viewed from country to country. An additional factor that is often important is a person’s social connections,30 which corresponds to the old adage, “It’s who you know, not what you know.”

Ethnic and Racial Groups Malaysia, for example, defines political parties and employ- ment quotas explicitly by three ethnic groups—–Malays, Chinese, and Indians. The em- ployment quotas are primarily to upgrade the economic position of Malays because the Chinese and Indian minorities long dominated business ownership and the professions, respectively.31 The system requires companies to maintain expensive record-keeping systems of their hiring.32 Similarly, Brazilian common language usage has many terms to designate skin color, of which five are official classifications within its census. The coun- try has racial quotas in universities and some groups have pressured to enact quotas for employment as well.33 (But there has been no pressure for national football team racial quotas, where only competence counts.)

Gender-Based Groups Country-specific differences in equality and attitudes toward gen- der are sometimes quite pronounced. 34 In our opening case, we discussed Saudi Arabian cultural attitudes toward gender, resulting in almost seven employed men for every em- ployed woman. Compare that with Norway, where only 1.1 men are employed for every woman. In Lithuania, more than 50 percent of both males and females agreed with the fol- lowing statement: “When jobs are scarce, men have a better right to a job than women”; in Sweden and Iceland, the number was under 10 percent.35

Businesses reward meritocracy more highly in some societies.

Group affiliations can be

• ascribed or acquired, • a reflection of class and

status.

Country-by-country attitudes vary toward

• social connections, • race and ethnicity, • male and female roles, • rules and expectations

based on age, • family ties.

Chapter 2 The Cultural Environments Facing Business 37

A World Bank study of 173 countries found that 90 percent of them have laws hindering women’s ability to work. Although many of these laws are intended to protect women, the results are sometimes discriminatory. For example, France prohibits women from work- ing in jobs requiring them to lift more than 25 kilos (55 pounds), even though that’s about the weight of a 5-year-old that they regularly lift. It also cuts them off from working, for example, to deliver FedEx packages.36 In many places, however, gender barriers in employ- ment practices are coming down because of changes in attitudes and work requirements. A noticeable U.S. change is reflected in the number of people of one gender employed in occupations previously dominated by the other, such as more male nurses and more fe- male physicians. But some of this change may be economic rather than attitudinal as males have gravitated to where there are jobs; even now, few boys say they want to grow up to be nurses.37 The change in work requirements is reflected in the decrease in jobs requiring brawn and increase in jobs needing specialized education, such as X-ray technology and psychiatric casework.

Age-Based Groups All countries enforce age-related laws such as on employment, driving privileges, rights to obtain products and services (alcohol, cigarettes, certain pharmaceuticals, bank accounts), and civic duty (voting, serving in the military or on juries). Sometimes the logic of these laws seems paradoxical. For example, Americans can vote, marry, drive, and die for their country before they can legally buy alcohol at age 21. In contrast, Luxembourgers can legally buy distilled alcohol at age 16.38 U.S. firms bombard children with TV advertising, but Sweden prohibits ads targeted to children.

National differences toward employment age are substantial. Both Finland and the Netherlands enforce mandatory retirement ages, but with few exceptions (e.g., airline pilots) U.S. law specifically prohibits the practice. In Britain, age discrimination laws apply to all ages, whereas U.S. law (except for child labor) protects only people over age 40.39 When the proposition “When jobs are scarce, people should be forced to retire early” was put to people in different countries, almost three-quarters of Bulgarians agreed, but only 10 percent of Japanese.40 Why this latter difference? For one thing, Japanese hold strongly to the assumption that there’s a correlation between age and wisdom.

Family-Based Groups In some cultures, such as in much of Latin America, family is the most important group. A person’s position in society depends heavily on the family’s social status or “respectability” rather than on individual achievement. When family ties are strong, small family-run companies are quite successful; however, they often encounter growth difficulties because owners are reluctant to share responsibility with technically competent professional managers hired from outside the family. When its business culture is thus ham- pered, a country may lack sufficient numbers of indigenously owned large-scale companies that are usually necessary for long-term economic development.41

woRk MoTivaTion Highly motivated employees (toward work) are normally more productive than workers who aren’t. Further, higher worker productivity impacts companies’ efficiency and countries’ economic development. We now summarize major studies showing some differences in how and why nations differ in this motivation.

Materialism and Motivation When developing his Protestant work ethic theory, Max Weber observed that predominantly Protestant countries were the most economically devel- oped. He attributed this to an outgrowth of the Protestant Reformation in sixteenth-century Europe, which reflects the “ethic” that work is a pathway to salvation and that material suc- cess does not impede redemption. Although we no longer strictly accept this distinction for Protestants, we do tend to adhere to some of Weber’s underlying notions: namely, that

The desire for material wealth is

• a prime motivation to work, • positive for economic

development.

38 part 2 Comparative Environmental Frameworks

task—say, winning a fair footrace—may be high or low, and most of us usually exert more effort when the expectation of reward from success is much higher than for failure.

Success and Reward Across Borders Performed in different countries, the same tasks come with different probabilities of success and different rewards for success versus failure. In cultures where the probability of economic failure is almost certain and the perceived rewards of success versus failure are not much different, people tend—not surprisingly—to view work as unsatisfying, mainly because they foresee little benefit to themselves. This attitude may prevail in harsh climates, in very poor areas, or in subcultures subject to dis- crimination. Likewise, there is less motivation to work hard where public policy allocates output from productive workers to unproductive workers. When high outcome uncertainty is combined with a positive reward for success and little or no reward for failure, we find the greatest work enthusiasm.47

performance and achievement

The Masculinity–Femininity Index The masculinity–femininity index measures atti- tudes toward achievement. A high-masculinity score indicates a preference for “live to work,” whereas a high-femininity score indicates a preference for “work to live.” In essence, high-masculinity individuals show admiration for successful achievers, little sympathy for the unfortunate, preference to be better than others rather than on a par with them, and a money-and-things orientation. (They also strongly prefer role differences between the gen- ders.) A high-femininity score denotes the opposite. It indicates a people orientation rather than work orientation and a preference for quality of life and the environment over economic performance and growth.48

This index may help explain national differences in behaviors. Let’s say a firm in a high- masculinity country such as Austria sets up operations in a high-femininity country such as Sweden. Purchasing managers in Sweden, if they are high-femininity individuals, probably prefer smooth social relationships, amiable and ongoing dealings with suppliers, and em- ployee and social welfare. Whereas the Austrian firm prefers lower costs, faster delivery, and minimized compensation for workers.

hierarchies of needs According to the hierarchy-of-needs theory of motivation, people try to fulfill lower-level needs before moving on to higher-level ones.49 The most basic needs are physiological: food, water, and sex. We have to satisfy (or nearly satisfy) those before our security needs—safe physical and emotional environments—become motivators. These must be satisfied before triggering affiliation needs—peer acceptance. Then we’re motivated to satisfy our esteem needs—bolstering our self-image through recognition, at- tention, and appreciation. The highest-order need calls for self-actualization—self-fulfill- ment. Finally, the theory infers that once a need is satisfied, its motivation value diminishes.

This theory helps in distinguishing among employees’ reward preferences in different parts of the world. In very poor countries, for example, a large portion of workers are likely engaged in very menial and unskilled jobs;50 thus, a company may motivate them simply by providing enough compensation to satisfy needs for food and shelter. Elsewhere, a larger portion of workers are motivated by other needs.

Compensation (even at low levels of income) cannot fully explain differences in work motivation. A long-term study among a U.S. airline’s back-office employees (almost all fe- male) found that those in the United States and the Dominican Republic saw the job as a stepping-stone to higher-level positions. However, few in Barbados (because of using work largely to help fulfill affiliation needs) wanted a promotion because it would change rela- tionships with friends. U.S. workers dressed very casually because they perceived choice of attire in a back-office job to be insignificant in fulfilling their esteem needs. But Barbadians dressed up to be seen en route to what they considered a prestige job. In fact, the company offered the Barbadians free company-owned bus transport, but they preferred to use slower public transportation where others could see them. The Barbados staff had low absenteeism

People are more eager to work if

• rewards for success are high relative to failure,

• there is some uncertainty of success.

A high-masculinity culture prefers to “live to work,” and a high-femininity culture prefers to “work to live.”

The hierarchy of needs

• may differ among countries, • is useful in deciding how to

motivate differently among countries.

self-discipline, hard work, honesty, and a belief in a just world foster work motivation and, thus, economic growth.42

On one hand, evidence indicates a positive correlation between the intensity of religious beliefs per se (regardless of specific belief systems) and adherence to some attributes that lead to economic growth (say, confidence in the rule of law and belief in the virtue of thrift).43 Moreover, individuals’ desire for material wealth motivates them to work hard, which in turn leads to community-wide economic development.44 On the other hand, some religious val- ues, such as predetermination, may lessen work motivation because “what will be, will be.”45 Further, in societies such as Bhutan and Myanmar, a large portion of the population vanishes from the economic workforce temporarily or permanently while pursuing religious activities and being supported by others. (See the adjacent photo in Yangon, Myanmar.)

The Productivity/Leisure Trade-Off Some cultures value leisure time more than oth- ers do. They push to work shorter hours, take more holidays and vacations, and generally spend more time and money on leisure activities. In a study of OECD (fairly high-income) countries, France and the United States offered a contrast. The French had 30 days mandated vacation; Americans had none. The French also spent more time per day eating and sleeping than Americans.46 In the United States, there is still some disdain for people who work very little: people of privilege who appear to contribute too little to society and people who ap- pear to be satisfied to live on social benefits. Americans who give up work (primarily retirees) often complain of doing too little to occupy their time meaningfully.

expectation of success and Reward The perceived likelihood of success and its re- wards versus failure influence work motivation. Generally, people have little enthusiasm for effort when the likelihood of success seems overly easy or difficult. Few would care to run a race against either a snail or a racehorse; in either case, the outcome is too predict- able. Enthusiasm peaks when uncertainty of success is high, such as the challenge of racing another human of roughly equal ability. Likewise, the reward for a successfully completed

Buddhist monks in Myanmar (Burma) line up to await lunches that are donated to them. Source: simo2582/123RF

▶

Chapter 2 The Cultural Environments Facing Business 39

task—say, winning a fair footrace—may be high or low, and most of us usually exert more effort when the expectation of reward from success is much higher than for failure.

performance and achievement

People are more eager to work if

• rewards for success are high relative to failure,

• there is some uncertainty of success.

A high-masculinity culture prefers to “live to work,” and a high-femininity culture prefers to “work to live.”

The hierarchy of needs

• may differ among countries, • is useful in deciding how to

motivate differently among countries.

40 part 2 Comparative Environmental Frameworks

and turnover rates because Barbados has a history of women working long-term. In the Dominican Republic, however, most female employees stayed on only until they married.51

RelaTionship pReFeRences So far, we’ve discussed two categories of behavioral practices affecting business: social stratification systems and work motivation. Next, we examine some of the values underlying interpersonal differences in behavior.

power distance Power distance is a measurement of employee preferences of interac- tion between superiors and subordinates. Evidence suggests that people perform better when these interactions fit their preferences, thus companies should consider aligning rela- tionship styles effectively.

With high power distance, people prefer little consultation between bosses and subordi- nates. They also prefer management styles that are either autocratic (ruling with unlimited authority) or paternalistic (regulating subordinate conduct by supplying their needs). With low power distance, they prefer “consultative” styles.52 What might happen, therefore, if a Dutch manager, who typically prefers low power distance, were sent to work in Morocco, where workers typically prefer high power distance? The Dutch manager might consult with Moroccan subordinates, who lose confidence in the manager, believing “Why doesn’t the boss know what to do?” Thus, performance deteriorates rather than improves.

Interestingly, managers who prefer an autocratic relationship style are generally willing to delegate and accept decision-making by a majority of subordinates. What they don’t accept well is consultative interaction between the two tiers, which implies a more equal relationship between them. Clearly, worker-participation methods may need to be adjusted to fit different countries.

individualism versus collectivism High individualism describes a preference to fulfill lei- sure time, build friendships, and improve skills independently of the organization. People with high individualism also prefer to receive direct monetary compensation as opposed to fringe benefits, and they prefer to engage in personal decision-making and on-the-job challenges. High collectivism, in contrast, typifies an employee’s penchant for dependence on the orga- nization through training, satisfactory workplace conditions, and good benefits. For example, the United States is a highly individualist country, and employees socialize less with close work colleagues outside of work than employees do in more collectivist societies.53 In countries with high individualism, a self-actualization opportunity is a prime motivator because employees want challenges. In those with high collectivism, fulfilling security needs is a prime motivator.54

Degrees of individualism and collectivism also influence on-the-job interactions. Levi Strauss attempted to introduce team-based production into U.S. plants after its management observed its high productivity within Japan’s highly collectivist culture. However, U.S. employ- ees, especially the most skilled workers, detested the system; productivity went down, and Levi Strauss returned to a more individualistic system that better suited its U.S. workforce culture.

Risk-Taking BehavioR Cultures differ in people’s satisfaction with the status quo versus taking risks to change situ- ations. The following discussion examines four types of risk-taking behavior that reflect these attitudes: uncertainty avoidance, trust, future orientation, and fatalism.

uncertainty avoidance Uncertainty avoidance describes a trait of being uncomfortable with ambiguity. Where this trait is strong, most employees prefer to follow set rules even if they believe that breaking them may be in the company’s best interests. They also tend to stay with current employers for a long time, preferring the certainty of present positions over

There are national variations in the preference for auto- cratic versus consultative management.

“Safe” work environments mo- tivate collectivists. Challenges motivate individualists.

Risk-taking behavior differs among nationalities because of their

• ease of handling uncertainties,

• degree of trust among people,

• future orientation. • attitudes of self-

determination and fatalism.

Chapter 2 The Cultural Environments Facing Business 41

the uncertainty of their future elsewhere.55 In such situations, superiors may need to be more precise in their directions to subordinates, who typically don’t want to be responsible for ac- tions that counter what their superiors want.

Trust Surveys measuring trust indicate national differences in responses to such state- ments as “Most people can be trusted” and “You can’t be too careful in dealing with people.” Many more Norwegians than Brazilians, for example, regard most people as trustworthy.56 Where trust is high, business costs tend to be lower because managers spend less time fuss- ing over every possible contingency and noncompliance, thus giving them more time to pro- duce, sell, and innovate.57 At the same time, trust may differ between people’s in-group and others.58 For instance, we discussed that in some family-oriented societies, people have high trust of other family members, but low trust of people they know less well.

Future orientation A future orientation denotes a willingness to delay gratification in order to reap more in the future. People develop this characteristic as preschoolers and it relates positively to their success as adults. It also relates positively to trust (e.g. belief in whether they’ll receive the postponed rewards).59 Future orientation is more pronounced in, for example, Switzerland, than in Italy.60 In the former, it may be easier for companies to motivate workers through such delayed-compensation programs as retirement plans.

Fatalism If people are fatalistic, they’re less likely to accept the basic cause-and-effect relation- ship between work and reward. Thus, managers are less apt to sway them with cause-and-effect logic than by making personal appeals or offering them rewards for complying with requests.61

inFoRMaTion and Task pRocessing “Beauty,” we’re often told, “is in the eye of the beholder.” So, apparently, are perceptions and judgments, both of which are based on what people consider accurate information. The fol- lowing discussion examines some of the ways in which people perceive, obtain, and process information.

perception of cues As a rule, we’re selective in perceiving cues—features that inform us about the nature of something. We may identify things through any of our senses, and each sense can provide information in various ways, such as seeing color, depth, and shape through vision. People rely on cues that are partly physiological because evolution and ge- netics play a role in how different groups perceive.62 Genetic differences in eye pigmenta- tion, for instance, allow some people to differentiate colors more precisely than others.

Cultural differences, especially language, also reflect perceptual differences. The richness of a language’s descriptive vocabulary allows its speakers to note and express very subtle nuances that nonspeakers do not discern. For instance, the Arabic language has many more words for camels, their body parts, and the equipment associated with them than other lan- guages,63 and Arabic speakers who work around camels can express nuances about them that most other people overlook.

obtaining information: low-context versus high-context cultures Some countries (including the United States and most of northern Europe) are low-context cultures, ones where people generally regard as relevant only firsthand information that bears directly on the subject at hand. Businesspeople will spend little time on small talk and tend to get to the point. In high-context cultures, people tend to understand and regard indirect informa- tion as pertinent. Low versus high context cultural differences even cause misunderstanding in international litigation.64 Miscommunication can result as well. For example, in Japan, a high-context culture, subordinates typically understand superiors’ indirect instructions. But Japanese managers in the United Kingdom, a low-context culture, have been challenged in conveying instructions there because the subordinates expect more explicit explanations.65

Differences in perception of cues may result from genetics and language.

Managers are helped by know- ing whether cultures favor

• focused or broad information,

• a particular way of classifying information,

• sequential or simultaneous handling of situations,

• handling principles versus small issues first.

42 part 2 Comparative Environmental Frameworks

information processing All cultures process information inasmuch as they categorize, plan, and quantify. However, every culture has its own systems for ordering and classifying informa- tion. In U.S. directories, people’s names appear in alphabetical order by last (family) name; in Iceland, they’re organized by first (given) name. U.S. street numbers are generally odd on one side of the street and even on the other; in much of the Americas, the numbers indicate the distance from where the street begins; in much of Japan, the numbers refer to the construction date; and in Berlin, numbers often go up sequentially on one side of the street and then down the other.66 To perform efficiently and work amicably in a foreign environment, you need to understand such differences in processing systems. Further, different processing systems create challenges in sharing global data. Even global personnel directories are problematic because of different alphabets, alphabetizing methods, and number systems.

Monochronic versus polychronic cultures In monochronic cultures people normally pre- fer to work sequentially, such as finishing transactions with one customer before dealing with another. Conversely, polychronic people are more comfortable when working simultaneously on a variety of tasks (multitasking), such as dealing simultaneously with multiple customers who need service. Imagine the potential misconceptions when monochronic businesspeople think their polychronic counterparts are uninterested in doing business with them because they don’t bother to give them their undivided attention. Further, when teams combine people from both types of cultures, the monochronic members sometimes feel that the polychronic ones delay results by wasting time before finishing with any items in the program.67

idealism versus pragmatism Some cultures tend to focus first on the whole and then on the parts; others do the opposite. When asked to describe an underwater scene in which one large fish was swimming among some smaller fish, most Japanese first described the overall picture, whereas most Americans first described the large fish.68 Similarly, some cultures prefer to establish overall principles before they try to resolve small issues—an approach sometimes labeled idealism. Cultures in which people focus more on details than on ab- stract principles are said to be pragmatic.

These different approaches can affect business in a number of ways. In a pragmatic culture (as in the United States), labor negotiations tend to focus on specifically defined issues—say, hourly pay increases for a specific bargaining unit. In an idealist culture (as in Argentina), la- bor disputes tend to blur the focus on specific demands as workers are inclined to rely first on mass action, such as general strikes or political activities, to gain support for basic principles.

pRoBleMs in coMMunicaTing acRoss culTuRes We now look at problems in communicating across cultures—especially translating, differences in word meanings, and communication that occurs by means other than spoken and written language (a so-called “silent language”).

TRanslaTion oF spoken and wRiTTen language Translating one language into another is not as straightforward as it may seem. Some words simply don’t have direct translations. In English, for example, children may mean either “young people” or “offspring.” In Spanish, niños and hijos distinguish between the two, and there is no word that encompasses both meanings that exist in English. Thus, despite recent strides in machine translations, many errors still occur. Moreover, many translations—say, Galician into Welsh—go through an intermediate language, usually English.69

Language is constantly evolving. When Microsoft purchased a thesaurus code for its Spanish version of Word, the connotations of many synonyms had shifted by the time it

Cross-border communications do not always translate as intended.

Chapter 2 The Cultural Environments Facing Business 43

implemented the software; some, in fact, were transformed into outright insults that alien- ated potential customers.70 Of course, in any language, words mean different things in dif- ferent contexts. For example, the English word “old” can mean “former” or “long-standing.” Imagine the confusion of “We are the old leader in making returns on stock portfolios.”

Finally, grammar is complex and the seemingly slight misuse (or even placement) of a word can substantially change the meaning. The following, each originally composed to as- sist English-speaking guests, have appeared on signs in hotels around the world:

JAPAN: “You are invited to take advantage of the chambermaid.” NORWAY: “Ladies are requested not to have children in the bar.” SWITZERLAND: “Because of the impropriety of entertaining guests of the opposite sex in the bedroom, it is suggested that the lobby be used for this purpose.”

These examples offer a comical look at language barriers that usually result in only a chuckle or a little embarrassment. Poor translations, however, can cause commercial disputes; the Shanghai Maritime Court has dealt with thousands of such disputes between Chinese and foreign companies.71 So choose your words carefully. Although there’s no foolproof way of en- suring translations, experienced IB personnel rely on suggestions such as the following:

• Get references for the people who will be translators. • Make sure your translator knows the technical vocabulary of your business. • For written work, do back translations: Have one person go from, say, English to French

and a second from French back to English. If your final message says what you meant originally, it’s probably satisfactory.

• Make sure that the tone, not just the words, fit both your own intentions and the expec- tations of recipients.

• Use simple words whenever possible (such as ban instead of interdiction). • Avoid slang. U.S. slang, especially words or phrases originating from sports—off base, out

in left field, threw me a curve, ballpark figure—are probably meaningless to most business- people outside the United States.72

• When either you or your counterpart is dealing in a language other than your first lan- guage, clarify communications in several ways (repeat things in different words and ask questions) to ensure that all parties have the same interpretation.

• Budget from the start for the extra time needed for translation and clarification.

Be careful with humor because it sometimes lacks universal appeal. A Microsoft execu- tive quipped to Indian executives that he lacked qualifications to speak because he did not complete his MBA. The comment was badly received because most Indians place high im- portance on education and on persevering rather than dropping out.73

Finally, even when all parties to a communication come from countries that share an offi- cial language, don’t assume that understanding will go smoothly. Table 2.1, for instance, lists a few business terms that have different meanings in British and American English. What could go wrong? When Hershey’s launched its Elegancita candy bar in Latin America, it ad- vertised the cajeta in the product. Unfortunately, although cajeta means “goat’s-milk caramel” in Mexico, in much of South America it’s vulgar slang for a part of the female anatomy.74 In addition, marketers have learned that pronunciations and inflections need to be appropriate for the Spanish speaking country they target.75

silenT language We constantly exchange messages through a host of nonspoken and nonwritten cues that form a silent language.76 Recall from our opening case that in the process of conducting market research for a new restaurant, researchers depended on several such cues to deduce who was affluent.

44 part 2 Comparative Environmental Frameworks

colors For a product to succeed, its colors must coincide with consumers’ frame of refer- ence. Colors invoke distinct connotations in different countries, such as being lucky or un- lucky or being associated with a specific business (e.g., yellow cabs in the United States and black ones in the United Kingdom). In most Western countries, black is a color for mourning death; in parts of Africa, it’s white. United Airlines’ promotion of a new passenger service in Hong Kong backfired because of color. Why? It handed out white carnations to boarding cus- tomers, but Hong Kong residents give white carnations in sympathy for a death in the family.

distance For example, in the United States people tend to maintain larger distances during conversations or when conducting business than people in Mexico do. And except for handshakes, there is little or no touching in the United States, whereas touching one another in Mexico is quite common.77 Thus, U.S. and Mexican managers when conducting business with each other may find themselves constantly moving to maintain their accus- tomed distances and body contact. At the end of the discussion, both parties may well feel uneasy about each other without realizing why.

Time and punctuality Different perceptions of time and punctuality also may create confusion. U.S. businesspeople usually arrive before a business appointment time, a few minutes late for dinner at someone’s home, and a bit later still for large social gatherings. In another country, the concept of punctuality in any or all of these situations may be different. A Latin American host may be astonished and find U.S. guests perhaps discourteous if they arrive only a few minutes later than the stated time for dinner.

Is time a scarce commodity or an event? People who value time as a scarce commodity be- lieve that if it’s lost, it can’t be recouped.78 They tend to stick to schedules, even if taking longer would yield better results. In contrast, people who view time as an event prefer to take as long as necessary to complete a task to their satisfaction. In one case, a U.S. management team was so confident of winning a contract on the basis of better technology that it scheduled a tight, one-day meeting in Mexico City, thinking this was sufficient for its presentation and questions. Unfortunately, the Mexican team arrived one hour after the scheduled start. Then, when an ur- gent phone call caused a Mexican team member to leave the room, the whole Mexican group got upset when the U.S. team tried to proceed without him. The competing French team, in contrast, allocated two weeks for discussions and won the contract with less sophisticated technology.79

Body language Body language, or kinesics, is the way people walk, touch, and move their bodies. Very few have universal meanings. A Greek, Turk, or Bulgarian may indicate “yes” with a sideways movement of the head that could be construed as “no” in the United States and much of Europe. As Figure 2.2 shows, certain gestures may have several, even contradictory meanings.

prestige Another factor in silent language relates to a person’s status, particularly in an organizational setting. U.S. managers typically place great faith in physical things as cues to

Silent language includes color associations, sense of appropriate distance, concept of time, body language, and prestige cues.

TaBle 2.1 dangers of Misspeaking the language(s) of Business

Below is a short list of business words whose meanings are different in the United States and the United Kingdom—“two countries separated by a common language,” as the Irish playwright G.B. Shaw once quipped. There are approximately 4,000 words with the potential to cause problems for people who—in theory—speak the same language.

United States United Kingdom turnover redundancy sales turnover inventory stock stock shares president managing director chapter 11 receivership

Chapter 2 The Cultural Environments Facing Business 45

prestige and may underestimate the status of foreign counterparts who lack large, plush cor- ner offices on high floors. Foreigners may underestimate U.S. counterparts who perform their own services, such as opening doors, fetching coffee, and answering unscreened phone calls.

guidelines FoR culTuRal adjusTMenT After managers identify key cultural differences abroad, must they alter their customary practices to succeed there? Can people overcome culturally related adjustment problems when working abroad? There are no easy answers to these questions, but the following dis- cussion highlights four issues that affect degrees of successful adjustment:

1. The extent to which a culture is willing to accept the introduction of anything foreign 2. Whether key cultural differences are small or great 3. The ability of individuals to adjust to what they find in foreign cultures 4. The general management orientation of the company involved

The following sections address each of these issues in some depth.

hosT socieTy accepTance Although our opening case illustrates the advantages of adjusting to a host country’s culture, in- ternational companies sometimes succeed in introducing new products, technologies, and oper- ating procedures with relatively little alteration. They pull it off because what they’re introducing does not run counter to core values and because the host culture is willing to accept foreign prod- ucts or practices as an agreeable trade-off to its peripheral values. Bahrain needs non-Muslim workers, so it permits the sale of pork products (ordinarily prohibited by religious law) as long as transactions are limited to special places in which Muslims can neither work nor shop.

Sometimes the local society regards foreigners and domestic citizens differently. When staying overnight in Saudi Arabia, Western female flight attendants can wear types of cloth- ing publicly that local women cannot.80

degRee oF culTuRal diFFeRences Obviously, some countries are much like others, usually because they share many charac- teristics such as language, religion, geographic location, ethnicity, and level of economic development.

Host cultures do not always expect foreigners to adjust to them.

When doing business in a similar culture, companies

• usually have to make fewer adjustments,

• may overlook subtle differences.

United States It’s fine

Japan Money,

especially change

France Zero or

worthless

Greece An obscene symbol for a body orifice

Germany You lunatic

FiGuRe 2.2 Body Language is Not a universal Language The fine line between approval and put-down: Very few gestures have universal meanings. In the United States, you’d probably be safe in approving of another person’s statement by forming an O with your thumb and index finger (the so-called high sign). In Germany, Greece, and France, however, you’d be expressing a very different opinion.

Source: The meanings are based on descriptions in Roger E. Axtell, Gestures (New York: John Wiley, 1998). Reprinted by permission of John Wiley & Sons, Inc.

46 part 2 Comparative Environmental Frameworks

cultural distance A human values study comparing 43 societies on 405 cultural dimen- sions81 determined their cultural distance, which is the average number of countries they are apart on the dimensions. When a company moves into a culturally close foreign country, such as an Ecuadoran company into Colombia, it should encounter fewer cultural adjust- ments than when entering a culturally distant country, such as Thailand.

Even among culturally close countries, however, differences could still undermine busi- ness dealings. Managers may assume that countries are more alike than they really are, thus overlooking important subtleties or some differences that are not noted in overall cultural distance analysis. For instance, Arab countries are culturally close to each other overall, but women’s roles and behavior differ substantially from one Arab country to another.

hidden cultural attitudes Even if the home and host countries have seemingly similar cultures, people in the host country may reject the influx of foreign practices because they see them as additional steps that threaten their self-identities.82 And with thousands of minute cultural dimensions, it may not be easy to discern operating impediments by comparing coun- tries on the broad ones that are both obvious and studied. Disney had much more success in opening a theme park in Japan than in France, even though France is culturally closer to the United States. Why? First, many French were concerned about loss of the country’s individual- ity, especially vis-à-vis the United States because of encroachment of American English words into French, fast-food restaurants’ threat to customary long lunches with traditional cuisine, and U.S. companies’ acquisition of French firms considered focal to French distinctiveness. Next, subtle differences separated the Japanese from the French. The Japanese were more receptive to Disney because (1) both Japanese children and adults perceived Mickey Mouse as a wholesome, nonthreatening figure, (2) the Japanese had a tradition of buying souvenirs on family excursions, and (3) Disney’s reputation for super-cleanliness and smiling faces fit well with Japanese pref- erences for harmony and order. The French, in contrast, knew Mickey Mouse only as a comic conniver. They regarded Disney souvenirs as tacky and policies requiring personnel to dress uniformly and smile mindlessly as violations of personal dignity.83

aBiliTy To adjusT: culTuRe shock Some individuals’ passages abroad are self-initiated. In other cases, international companies send personnel abroad. In either situation, individuals may be subjected to potentially trau- matic foreign practices. In fact, cultural practices all over the world are considered by many outsiders as downright wrong, such as polygamy, child marriage, the punishment of people (sometimes severe) for activities not considered crimes at home, and the public display of executions and executed bodies. Both companies and individuals must decide if they’re ready to work in places that countenance such practices.

Even in countries whose practices aren’t necessarily traumatic to them, workers who go abroad often encounter culture shock—the frustration that results from having to absorb a vast array of new cultural cues and expectations. Even such seemingly simple tasks as using a different type of toilet or finding how to obtain specific merchandise or services can be tax- ing experiences at first. As such, some people may pass through certain adjustment stages. At first, much like tourists, they’re delighted with quaint differences. Later, however, they grow depressed and confused (the culture shock phase), so their effectiveness in the foreign environ- ment suffers. Fortunately for most people, culture shock begins to ebb after a month or two as they grow more comfortable. In fact, some people experience reverse culture shock when they return, having become partial to aspects of life abroad that are not options back home.

coMpany and ManageMenT oRienTaTions Whether and how a company and its managers adapt abroad depends not only on the host- country culture but also on their own attitudes. The following sections discuss three such attitudes or orientations: polycentrism, ethnocentrism, and geocentrism.

Some people get frustrated when entering a different cultural environment.

Chapter 2 The Cultural Environments Facing Business 47

polycentrism A polycentric organization believes it should act abroad like companies there. Given the uniquely publicized problems of not adapting to foreign cultures, companies’ de- velopment of polycentric perspectives is not surprising. However, polycentrism may be an overly cautious response to cultural variety, causing a firm to shy away from certain countries or avoid transferring home-country practices or resources that will actually work well abroad.

Look at it this way. To compete effectively, an international company must usually per- form some functions differently from its competitors abroad in order to have an advantage over them. They may, for instance, need to sell and market new products or produce old ones differently. Thus, the overly polycentric firm may rely too heavily on imitating proven host- country practices and, in the process, lose the innovative edge it has honed at home.

ethnocentrism Ethnocentrism reflects the conviction that one’s own practices are superior to those of other countries. In IB, the term is usually applied to a company (or individual) so strongly committed to the principle of “What works at home will work abroad” that its foreign practices ignore differences in cultures and markets. In turn, it underestimates the complexity of introducing new management methods, products, or marketing means, which likely leads to poor performance.

However, ethnocentrism isn’t entirely an inappropriate way of looking at things. Obviously, much of what works at home will in fact work abroad. Further, concentrating on national differences in terms of averages overlooks specific variations within countries. A company may be able to deal with outliers even though the average person in the country has a strong cultural bias against what the company does. For example, although the aver- age person in India has a strong cultural bias against eating meat, a company could sell meat products to the many Indians who do eat meat. Likewise, a company may identify partners, suppliers, and employees among a population’s minority whose attitudes don’t fit the cultural average (there are always individualists in even the most collectivist societies).

geocentrism Between the extremes of polycentrism and ethnocentrism, geocentrism inte- grates home- and host-country practices as well as introducing some entirely new ones.84 In our opening case, Saks Fifth Avenue adjusted to Saudi customs by setting aside women-only floors, introduced many home-country merchandising practices, and introduced the new practice of providing lounges for the drivers of female customers.

Geocentrism requires companies to balance informed knowledge of their own organiza- tional cultures with home- and host-country needs, capabilities, and constraints. Because it encourages innovation and improves the likelihood of success, geocentrism is the preferred approach for most companies to succeed in foreign cultures and markets.

sTRaTegies FoR insTiTuTing change As we’ve seen, companies may need to compete by operating differently in some ways from other companies abroad (i.e., they introduce some degree of change into foreign markets). Thus, they need to bear in mind that people don’t always accept change very readily. The methods they choose for managing such changes are important for ensuring success.

Fortunately, we can gain a lot of insight by examining the international experiences of both for-profit and not-for-profit organizations. Moreover, a great deal of material is avail- able on potential methods and so-called change agents (people or processes that intentionally cause or accelerate social, cultural, or behavioral change). The following sections discuss both experiences with and approaches to successful change, focusing on the following areas:

• Value systems • Resistance to too much change • Participation • Reward sharing • Opinion leadership

Polycentric management may be so overwhelmed by national differences that it won’t intro- duce workable changes.

Ethnocentric management overlooks national differences and

• ignores important factors, • believes home-country

objectives should prevail, • thinks acceptance by other

cultures is easy.

Geocentric management often uses business practices that are hybrids of home and foreign norms.

Because people do not neces- sarily accept change readily, the management of change is important.

48 part 2 Comparative Environmental Frameworks

• Biculturals as mediators • Timing • Learning abroad

value systems If something contradicts core values, it will likely not be accepted. But even contradictions to peripheral values face obstacles. In Eritrea, for example, seafood consump- tion is very low despite its periods of agricultural famine and long coastline rich in seafood. One reason is that Eritrea’s Cushitic speakers have religious taboos against eating much of the seafood that is available. Since seafood consumption goes against their core dietary value, the Eritrean government and the United Nations World Food Program have not been fully success- ful in persuading them to change their eating habits. But non-Cushitic speakers also eat little seafood. Part of the reason is economic. Poverty has prevented most of them from accessing ice and refrigeration to prevent seafood spoilage. Thus many adults have never developed a taste for seafood, worry about its safety, and believe it has a foul taste. Among schoolchildren, how- ever, whose value systems and habits are still flexible, officials have faced little opposition.85

Resistance to Too Much change The German magazine publisher G + J bought U.S.-based McCall’s and immediately overhauled the magazine’s format: changed editors, eliminated long stories and certain features, increased celebrity coverage, made layouts more robust, supplemented articles with sidebars, and refused discounts for big advertisers. Before long, morale declines led to greater employee turnover. More important, revenues fell because advertisers saw the change in format as too radical.86 According to most observers, G + J might have received more employee and advertiser acceptance had it phased in its plans for change a little more gradually.

participation One way to avoid problems is to discuss proposed changes with stakehold- ers (employees, suppliers, customers, and the like) in advance. The discussion might help

Yes The idea is pretty well accepted: IB influences globalization and glo-

balization influences culture. Now, I have nothing against IB or globalization—at least part of it. What I don’t like is modern cultural imperialism, which is what happens when the West, especially the United States, imposes its technical, political, military, and economic supremacy on developing countries.87

U.S. firms are in the business of exporting U.S. culture— mostly through tactics that are rarely in the best cultural interests of the nations it targets for economic domination. Because these firms nearly monopolize the international en- tertainment media, people all over the world are bombarded with U.S. movies and television, not to mention the barrage of accompanying ads from U.S. companies.

And what about the hordes of U.S. tourists who pay more for a night’s lodging in a developing country than the hotel maid makes in a year? The fact is they’re selling the U.S. lifestyle to a market that can’t afford it and that’s prob- ably better off without it. The combination of media, adver- tisements, and tourists means that people in developing countries are exposed to U.S. possessions, practices, and lifestyles to their hearts’ content. Never mind that they get an

erroneous impression. According to TV and the movies, the United States is mainly populated by the super-wealthy and by cops and psychotic malcontents whose daily lives are taken up with bullet-spattered body parts, round-the-clock sex, and inane family relationships. The lifestyle is, never- theless, seductive. That’s why people everywhere are eat- ing and consuming soft drinks at U.S. franchised fast-food restaurants and starting to behave and even talk like fictional Americans. Every speech from Manila to Managua is now peppered with U.S. slang. Along the way, people are letting their own cultural identities slip away.

I admit, if a country is rich enough, it can afford to resist most cultural exploitation. Canada says no to foreign invest- ment in culturally sensitive industries and makes sure there’s Canadian content in local entertainment media. France shuns outside languages and subsidizes a national motion picture industry. But even rich countries are affected. Some French TV programs and films are now being produced in English to cater to international audiences, and more of their univer- sity courses are being taught in English.88 In the developing world, where there’s precious little cash for fighting off cultural extinction, people are at the mercy of foreign culture brokers.

Does IB Lead To Cultural Imperialism?

Point Point

Chapter 2 The Cultural Environments Facing Business 49

no You imply that people in poor countries passively accept every-

thing they see in movie theaters and on TV. But they’ve turned their backs on a lot of products that international companies have promoted. Like most of us, they pick and choose.89 You also imply that cultures in developing coun- tries are the same. They aren’t. They interpret what they see and hear—and what they buy—quite differently.

Like cultural purists everywhere, you’ve overlooked how cultural diffusion works. Through contact, culture heads in both directions and evolves. Of course, American English is seeping into other languages, but Americans have recent- ly added a lot of foreign words as well. If you’re a macho (Spanish) guy in charge of the whole enchilada (Spanish), for example, you’re probably called the “head honcho” (Japanese).

Similarly, although U.S.-style fast food is almost every- where, it has not entirely displaced local foods anywhere. When it comes to food, the result of IB is greater diversity for everybody. What we’re witnessing is not “cultural impe- rialism” but cultural hybridization. In most countries, U.S. hamburgers, Japanese sushi, Italian pizza, Mexican tacos, and Middle Eastern pita bread coexist with the local cuisine.

Mexico’s Grupo Bimbo (owner of Sara Lee from the United States) sells tortillas in the United

States and U.S.-style bagels in Mexico.90

Also, just because people in developing countries have taken a liking to soft drinks and fast food doesn’t mean their tastes are permanent. Some evidence suggests that, al- though young people are most likely to adopt elements from a foreign culture, they tend to revert to traditional values and habits as they get older.91

As people seek to fulfill different wants, they must make trade-offs. But are people (and societies) worse off because they give up, say, lunch with the family to be able to afford certain consumer goods that will satisfy the whole family’s needs? Globalization simply gives people more options. And tourism is also a two-edged sword. Rather than having a primarily negative effect, quite often it has helped maintain certain features of a traditional culture, such as the revival of traditional Balinese dancing because tourists want to see it.

Rather than simply imposing a foreign culture, a successful business, whether local or foreign-owned, must accommo- date itself sufficiently to the culture in which it operates. This may mean revising plans to respond to local demands, which many foreign companies have done.

Counterpoint

management assess the strength of the resistance, stimulate stakeholders to recognize the need for change, and ease fears about the consequences. Stakeholders might be satisfied that manage- ment has at least listened to them, regardless of the decisions it ultimately makes.92

Companies sometimes make the mistake of thinking that stakeholder participation in decision-making is effective only with suitably educated people who can contribute and are willing to speak up. Anyone who has had to deal with foreign aid programs can tell you that participation can be extremely important even in countries where education levels are low and power distance and uncertainty avoidance high.

Reward sharing Sometimes a proposed change may have no foreseeable benefit for those whose support is needed. Production workers, for example, may have little incentive to try new work practices unless they see some imminent benefit for themselves. What can an employer do? It might develop means of sharing gains with stakeholders. For example, China National Petroleum has faced property damage from angry Iraqi farmers who have perceived problems without gains from living near drilling operations.93 In contrast, a U.S.–Peruvian gold-mining venture won the support of skeptical Andean villagers simply by donating sheep to them.94

opinion leadership By making use of channels of influence, or opinion leaders, a firm may be able to facilitate the acceptance of change. Opinion leaders may emerge in unexpected places. When Ford wanted to instill U.S. manufacturing methods in a Mexican plant, manage- ment relied on Mexican production workers—rather than either Mexican or U.S. supervisors— to observe operations at U.S. plants. The advantage was that the production workers had more credibility with the Mexican workforce who would have to implement the new methods.95

Biculturals as Mediators Companies may rely on bicultural or multicultural individuals, especially those within their own ranks, to present and explain changes to stakeholders.96

Does IB Lead To Cultural Imperialism?

50 part 2 Comparative Environmental Frameworks

The stakeholders are persuaded not only by the details of proposed changes, but also by their confidence in the presenters’ technical qualifications, understanding of host-country constraints, and flexible attitudes toward reaching solutions. Bicultural and multicultural in- dividuals may be especially adept at serving in this mediator role, especially if their cultures are from both the company’s home and host countries. Even if the cultures are from other countries, these individuals may understand nuances in the host country culture more easily than unicultural individuals. Further, their demonstrated empathy for divergent viewpoints may be more positively perceived by host country stakeholders simply because they seem less likely to be pushing an ethnocentric agenda.97

Timing Many well-conceived changes fail simply because they’re ill-timed. A proposed labor-saving production method, say, might make employees nervous about losing their jobs no matter how much management tries to reassure them. If, however, the proposal is made during a period of labor shortage, the firm will likely encounter less fear and resistance.

In certain cases, of course, crisis precipitates the acceptance of change. In Turkey, for example, where family members have traditionally dominated business organizations, poor performance stimulated a rapid change in this practice: rather than “running” the business, many families now serve in “advisory capacities” (often on the board of directors).

learning abroad Companies’ experience in foreign operations enables them to learn as well as impart valuable knowledge—knowledge that proves just as useful at home as in the host country. Such learning may concern any business function; however, access to R&D per- sonnel is a particularly potent advantage in operating abroad. Nevertheless, going abroad with the belief that one already knows everything provides little chance to learn. But there are many examples of good results from being open-minded. For example, the merger between Renault and Nissan brought complementary strengths together. Renault brought its better financial management (typical of French firms) to Nissan. Meanwhile, Nissan brought its superior abil- ity to have functional groups that work well together (typical of Japanese firms) to Renault.98

Finally, companies should examine the economies and businesses abroad that are per- forming well in order to determine practices they can emulate. For example, some large Indian companies have recently performed extremely well because of stressing social mis- sions and investing heavily in their employees.99 Can non-Indian companies learn from and emulate this experience successfully?

in every corner of the world wear similar clothing and listen to international recording stars alongside other people wearing local styles and listening to local recording artists. Competitors headquartered in far-flung global areas are increasingly copying each other’s operating practices, thus creating a competitive work environment that’s more global than national. As companies and people get used to operating internationally, they should continue to gain confidence in applying the benefits of cultural diversity and globally inspired operating procedures to explore new areas in both workplace productivity and consumer behavior.

scenario 1: new hybrid Cultures Will Develop and personal horizons Will

Broaden

International contact is growing at a rate perhaps unimaginable a few decades ago—a process that should lead to a certain mixing and greater similarity among national cultures. At first glance, that’s ex- actly what’s happening. The mixing seems evident when one sees, say, Japanese tourists listening to a Philippine band perform an American pop song at a British hotel in Indonesia. Likewise, combinations of languages such as “Spanglish” have emerged. The growing mix seems apparent when people

Looking to the Future Scenarios on The Evolvement of National Cultures

Chapter 2 The Cultural Environments Facing Business 51

We’ll also likely see people taking advantage of greater mobility and broadening their concepts of what it means to enjoy global or flexible citizen- ship.100 Historically, most people who immigrated to foreign countries were able to return to their birthlands perhaps once in their lives. They were thus usually compelled to accept the cultures of their adopted countries, sacrificing much of their native cultural identity in the process. Today, however, many obtain dual citizenship and main- tain contact with their native cultures through travel, direct-dial phone calls, and Internet com- munications. On the one hand, these immigrants tend to transfer culture in both directions, bringing greater diversity to both host and home countries. Further, as people travel more abroad, marriage among different nationalities increases; the number of Americans with foreign-born spouses doubled between 1960 and 2010.101 Evidence suggests that children in these circumstances are becoming bi- or multicultural, resulting in a class of interna- tional managers whose traditional ties to specific cultures are much looser than those of most people (witness CEO Carlos Ghosn of Japan’s Nissan and France’s Renault, a Brazilian of Lebanese extrac- tion educated in France).102 On the other hand, multiculturalism appears to be failing in many places because the number of immigrants is so large that they no longer have to assimilate into the culture of their new residency. This may lead to more cultural strife within nations.103

scenario 2: although the outward expressions of national Culture Will

Continue to Become More homogeneous, Distinct Values Will tend to remain stable

Beneath the surface of the visual aspects of culture (including the elements touched on in Scenario 1), people continue to hold fast to some of the basics that distinguish national cultures. In other words, although certain material and even behavioral fac- ets of cultures will become more universal, certain fundamental values and attitudes will continue to vary. Religious differences are as strong as ever; language differences still bolster ethnic identities. What’s important is that such differences are still powerful enough to fragment the world culturally

and stymie the global standardization of products and operating methods.

scenario 3: nationalism Will Continue to reinforce Cultural identity

If people didn’t perceive the cultural differences among themselves and others, they’d be less likely to regard themselves as distinct national entities. That’s why appeals to cultural identity are so effective in mobilizing people to defend national identity. Typically, such efforts promote the “national culture” by rein- forcing language and religion, subsidizing nationalistic programs and activities, and propagandizing against foreign influences on the national culture. Further, even though people will be more internationally mo- bile, peer pressure will force them to adhere to their national cultures.

scenario 4: existing national Borders Will shift to accommodate ethnic

Differences

Several countries are showing more evidence of subcultural power and influence. Why? Among ba- sic factors are immigration and the rise of religious fundamentalism. Equally important seems to be the growing desire among ethnic groups for indepen- dence from dominant groups where they reside. Both Yugoslavia and Czechoslovakia broke up for this rea- son, while people within ethnic groups in Britain and Spain (Scots, Catalons, and Basques) are currently pushing for independence. Meanwhile, some subcul- tures—such as the Inuits in the Arctic and the Kurds in the Middle East—transcend national boundaries and simply resist being “nationalized.” Because they have less in common with their “countrymen” than with ethnic brethren in other countries, it’s hard to assign them an identity on the basis of geography.

Regardless of the scenario that unfolds in any given arena, IB personnel must learn to examine specific cultural differences if they hope to operate effectively in a foreign environment. In the future, analysis based only on national characteristics won’t be sufficient; business will have to pay attention to all the other myriad factors that contribute to distinctions in values, attitudes, and behavior. ■

CASe —Mary Yoko Brannen and Terry Mughan

Tesco PLC: Leveraging Global Knowledge

David Potts stared out the plane’s window as it taxied for takeoff. 104 He had just completed his first visit to China as CEO of Tesco Asia. The visit had been exciting but had posed a number of big questions. The United Kingdom-based re- tailing giant had been in Asia for a little over a decade and sales and profits were already comfortably outstripping those in the UK and other Tesco areas. Yet it was clear that every Asian market was unique. Thailand, Malaysia, and South Korea had been great successes, yet Tesco had failed completely in Taiwan and operations in Japan were not go- ing well at all. The sheer size of China and India put them in a category of their own. How, then, was Tesco Asia going to develop across such a huge continent? And how could Asian operations strengthen the UK’s core operations? May- be Tesco could find an innovative answer to this challenge. It had done so supremely in other circumstances since its great transformation in the mid-1980s.

Company Background Tesco originated in the aftermath of World War I by purchas- ing and selling surplus military supplies. The company be- came a readily identifiable feature of the UK retail scene. Known as a “Pile it high, sell it cheap” retailer with outlets in almost every town and city, Tesco knew its place in the class-based pecking order of the UK market, in which chains such as Sainsburys and Marks & Spencer met the needs of consumers with more disposable income and more refined tastes.

During the recession of the mid-1980s, a new chairman ushered in a new management team that changed the cor- porate culture and its market position radically. Relying on a cohort of young, talented executives with an innate under- standing of the UK consumer market, Tesco became a store to meet all UK shoppers’ needs. It crushed the competition, including the Walmart-backed Asda.

Tesco’s approach to become market leader was to im- prove every aspect of its operations, including distribution, marketing, land acquisition, and product innovation. The key driver was a change in corporate culture to emphasize attention to people. The new management prized loyalty and commitment from staff and was determined to make Tesco the employer of choice in the retailing sector. Such an attitude manifested itself in simple and clear company lan- guage: “Treat people how we like to be treated” for custom- ers, “Listen, support and say thank you” among employees.

Tesco took the company language a step further by compiling a “Jargonbuster”—a corporate dictionary that

banished obscure terms and acronyms and laid down how simple words make for clear communication. This was increasingly important in Tesco’s UK home base because immigrants and people with multicultural backgrounds per- meated both the workforce and customer demographics. In the 1990s this dictate of clear and consistent communi- cation extended further as the company increased the size range of stores: the Super stores, the smaller Express stores in urban centers, and the large Extra stores carrying the wid- est range of merchandise. Tesco bolstered its own branded food product range by adding the “Value” line at the lower end and the “Finest” line at the top end. Tesco embarked on an aggressive marketing campaign dubbed “The Tesco Way,” a slogan called “Every Little Helps,” as well as a Club- card incentive scheme. It gained invaluable customer data and overtook its UK competition. During a six-year period, its sales and profits grew by over 300 percent, making it the largest Internet retailer and private sector employer in the country. Thus, it began looking to international markets for the next phase of expansion.

Internationalization In 1995 Tesco acquired the S-Market chain in Hungary. In 1998 it found a local partner in Thailand and established Tesco-Lotus. An innovative partnership in 1999 with Sam- sung in South Korea formed Homeplus, thereby creating the bedrock for a sustained Asian presence.

Tesco initially entered most of its foreign markets eth- nocentrically by replicating its home success and culture abroad. In the smaller and less distant cultures of central Eu- rope this had worked well—then came France. The setback across the Channel was no great surprise; UK competitors such as Marks & Spencer had also found the British–French cultural gap too wide, even though France was Britain’s nearest neighbor. In fact, Tesco made English its operating language, which was more challenging in France than in the other countries where it operated.

Another problem occurred in Taiwan where Tesco paraded its Britishness by displaying Union flags and Beef- eaters in front of the store. It had a disastrous £ 11 billion fail- ure there after it sought to sell all of its Taiwanese sites. But Tesco had to settle on swapping them for stores owned by Carrefour (a major French competitor) in the Czech Republic and Slovakia. The French and Taiwanese experiences taught Tesco a strong lesson about foreign market entry strategy. Determined to banish any signs of imperialism and restore the qualities of hard work, humility, and customer dedication

Chapter 2 The Cultural Environments Facing Business 53

in future ventures, the company moved toward a more locally responsive stance.

Tesco has desired to grow domestically and internation- ally in a bottom-up fashion. Almost all the young executives who came through the ranks in the 1990s were “lifers”— people who started on the bottom rung of the corporate ladder, stayed with the company, and worked their way up. Some had left school early to join Tesco by stacking shelves on the grocery floor and gradually moving into management. This gave managers a deep understanding of the store, its customers, and the challenges involved in meeting their daily needs. Tesco even institutionalized this learning progress through the practice of TWIST—Tesco Week In Stores— whereby all management must work in a store one week a year so as to always stay close to the customer and the stores’ basic operations. All other activities of the company, whether supplier management, executive meetings, or gov- ernment relations, are built around this key process. Extend- ing this practice abroad was a natural next step. Now, Tesco faced the challenges of operating in 14 countries across Asia, Europe, and North America. (Map 2.4 shows the countries with Tesco operations as of 2015.)

The main challenge for Tesco lay first in identifying the glob- al advantages of its foreign subsidiaries and second in learning from them in ways that would reinvigorate its UK competitive advantage. Although the company had accumulated a vast

working knowledge of IB as Tesco rapidly became the world’s third-largest food retailer, it faced questions. How could it go about managing flourishing growth in Asia while maintaining and even enhancing the competitive position of Tesco in the UK? Was there a way to transfer Tesco’s leading-edge data, purchasing, and distribution resources across its global opera- tions while also learning from the best practices evolving from operations in its foreign subsidiaries? And would it be possible to do all this and still maintain a globally integrated corporate culture? Was this a job for a consulting company? Could out- siders help solve this puzzle?

Thoughts went back to 2010, when, for the first time in over two decades, Tesco was losing its UK competitiveness while sales were down .5 percent for the year. Still, world- wide profits had risen by 12.9 percent, a growth led by the performance in Asia. Clearly there was a lot that Tesco might learn from its Asian subsidiaries. But how?

The Essence of the Tesco Project Tesco finally came up with a novel solution that was consistent with Tesco’s philosophy of building on its internal resources. Aware that declining growth is often a signal of complacency that can go unnoticed by people close to the situation, it de- cided to bring together a team of Asian managers who would

JAPAN

CHINA

SOUTH KOREA

INDIA TURKEY

Countries with operations

HUNGARY

SLOVAKIA

CZECH REPBULIC

POLAND

UNITED KINDOM

IRELAND

MALAYSIA

THAILAND

Map 2.4 Tesco locations and its cross-cultural project The orange-colored countries on the map show Tesco’s operations by country as of 2015. The arrows indicate the countries sending personnel to the United Kingdom to participate in the project. Note that Japan participated, but Tesco has since closed operations there.

54 part 2 Comparative Environmental Frameworks

visit and examine Tesco’s operations in the UK. As Tesco in- siders, they would be familiar with the company’s mission, values, processes, and procedures and thus would be able to feel at home in the store context; as outsiders in the UK, they could see things differently from the British managers, thereby bringing valuable home-country insights and sharing best practices that had evolved in their local markets. The project, “The Essence of Tesco,” had a two-pronged strategic purpose: (1) to determine what was and wasn’t working by conducting a health-check of Tesco UK’s current corporate state; and (2) to compare and contrast that state with what had evolved in Tesco’s Asian subsidiaries so as to learn from and leverage them globally.

Tesco chose nine managers from six of its Asian subsid- iaries: two each from Thailand, South Korea, and China—its largest Asian markets—and one each from Malaysia, Ja- pan, and India. It brought this Asian project team to the UK; trained its members in skills needed to observe and make sense of organizational behavior, values, and assumptions (a kind of corporate ethnography); and deployed them for a three-month period to observe and work in 52 stores across the UK and Ireland. The task of helping Tesco reinvigorate home operations was not easy; nor was it easy to find nine managers who could leave their jobs for an extended three- month period. In the end, the main criteria stipulated that team members had to have worked for Tesco for at least three years, have a working knowledge of English, and be store-level employees rather than country-level managers. The team was also assessed on various cultural adaptability skills needed to get by in a foreign environment, such as flexibility and openness, emotional resilience, and personal autonomy.

Three of the project team members were completely bilingual, having lived extensively in English-speaking envi- ronments; in fact, one had actually studied in England and thus had a deep cultural knowledge of the UK. These three proved helpful to the team, especially with such practical things as opening bank accounts, navigating the public transportation system, setting up mobile phone contacts, shopping, and the like. The others had varying degrees of cross-cultural exposure and competencies in the English language. All were from collectivist, high-context cultures, a fact that allowed teamwork to emerge quite naturally and ensured that the team would pay attention to unarticulated details—factors that proved invaluable for seeing things in the stores that others from low-context countries might not notice. Team members’ natural perceptual ability helped en- sure that they would be able to act as organizational bridges between their home subsidiaries and Tesco UK.

This journey of nine Asian Tesco managers across the United Kingdom took place at a time when many British cit- ies were shaken by riots and store looting. Still, the team compiled many pages of observations to use in creating their analysis. Their exposure to British culture was intense on many levels. Two of them were locked in a Liverpool

store during a riot and, though frightened, were impressed by the store managers’ calm manner to handle the situation. The day-to-day experiences, though less exciting, were also very informative and gave rise to many comparisons and contrasts in implementing such core company values as customer focus in the UK and the home countries.

The team exchanged brief anecdotes at the end of each working day and provided some insight into their findings. For instance, while watching a Tesco UK produce handler throw a bunch of bananas onto a display, Thai managers felt that UK standards were below those to which they were ac- customed. A Japanese project team member was shocked to learn that a UK fishmonger had only a couple of days’ training before taking on the new role of cutting and prepar- ing fresh fish, which was almost an art form in Japan and required several months of intensive training.

Was Tesco still a place where everybody could develop a career? It certainly didn’t seem so when the team ex- changed stories of how one shop floor worker had never been enrolled in the career advancement program, or how another had been working at the same job-grade level for quite a few years. What were the reasons for this? By en- gaging with store staff, the project team found out that, al- though there was a clearly developed “Opportunity to Get On” program, an employee had to be willing to move geo- graphically and/or take up a new job role in order to benefit from the program. The team uncovered many discrepan- cies between Tesco’s espoused corporate culture and its everyday practices in the UK. Noting these discrepancies and asking follow-up questions, the project team members brought new perspectives to the company culture and were able to offer solutions from their own home practices.

In noting that Tesco UK does not take every opportunity to make the customer’s experience as good as it can be, the Asian team offered suggestions about product promo- tions, family and community engagement, and customer service that would make UK stores more competitive. They provided great insights into how to take advantage of the market knowledge stemming from innovations that arose from the diverse partnerships forged in Asia. For example, by leveraging Samsung’s technological strengths at Tesco Homeplus Korea, Tesco-UK was able to come up with a smartphone app that could read bar codes off a panel shopping screen in the metro station and allow customers to easily shop online while waiting for their trains. Senior management absorbed these and many other Asian team’s observations through a project report and in ongoing face- to-face meetings.

In the first two years after the project, Tesco UK showed definite signs of reinvigoration at home. It em- ployed 8000 new store personnel and provided customer training to 250,000 staff members. Overall UK sales rose 1.8 percent. It refreshed more than 300 of the UK stores, improved the bakeries in 850 stores, and increased online grocery sales by 12.8 percent. The international strategy

Chapter 2 The Cultural Environments Facing Business 55

of the company seems to have moved beyond its ethno- centric past to become locally responsive and to learn from its operations abroad.

2014 was a turbulent year for Tesco. In the midst of the continuing economic recession, the company’s share price fell to an 11-year low when it was disclosed that profits had been overstated. This led to the resignation of both the CEO and the chairman. Furthermore, it depleted the company’s re- serves, caused a pretax loss for the previous year, and result- ed in the 2015 sale of its South Korean company to protect and strengthen its balance sheet. (This was Tesco’s third for- eign divestment in three years, following those in Japan and the United States. However, the Korean operation was the only one that had been a commercial and cultural success.) Commentators saw the South Korean sale as a sad end to a venture that had benefited both Tesco and South Korea. Tesco’s successful Korean localization strategies had distin- guished it from the approach of its earlier failed competitors, Carrefour and Walmart. By appointing a local businessman to lead, the company adopted a number of successful innova- tions, such as “Cultural Centres” in stores where customers could receive lessons in cooking or in English and a training academy for teaching retail skills to employees.

Tesco retains its investments in four Asian countries (China, India, Malaysia, and Thailand) as well as those in Central Europe and Turkey. An economic recession, man- agement failings, and rapid international expansion all have a part to play in this story.

Questions

2-3. The United States and France are more culturally similar to the

UK than are Thailand and Malaysia, yet Tesco failed in the for-

mer two and has been highly successful in the latter two. How

might you explain the difference?

2-4. What is the role of global teams in sharing best practices

across a firm’s global operations? What advice would you give

to make the teams more effective?

2-5. Look at the Tesco PLC website (www.tescoplc.com). What

exactly are its businesses and what do you think this tells us

about its international strategy today?

2-6. How would Tesco’s business model translate into policies of

recruitment, training and development, and career manage-

ment across the Group?

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

2-7 What cultural skill sets are needed for individuals from multiple cultures to share best practices across the global group?

2-8 What are some things an MNE can do to facilitate knowledge sharing and global integration across its global businesses?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

http://www.tescoplc.com

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Every road has two directions.

—Russian proverb

Objectives

After studying this chapter, you should be able to

3-1 explain how politics and laws influence business

3-2 Appraise the principles and practices of the political environment

3-3 Discuss the contemporary state of political freedom

3-4 interpret political risk

3-5 Appraise the principles and practices of the legal environment

3-6 Describe key legal issues facing international companies

3-7 Relate the ideas of politics, law, and the busi- ness environment

chApteR 3 the political and Legal environments Facing business

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MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

http://www.aon.com/2016politicalriskmap

Case China: Big Opportunities, Complicated Risks1

From 1949 to the late 1970s, China was autarkic, championing a self-sufficient economy that relied entirely on its own resources. Leaders of the governing Chinese Communist Party (CCP) feared in- teraction with foreigners would corrupt China’s politics and pollute its culture; hence, they prohibited foreign investment and restricted foreign trade. Near the end of the 1970s, China’s increasing eco- nomic struggles pushed its leaders to rethink this outlook. In 1978, China instituted the Law on Joint Ventures Using Chinese and Foreign Investment and began opening its market to the world. Since then, China’s economic liberalization has fueled booming exports and at- tracted waves of foreign investment. Undeniably, the CCP maintains its monopoly on political power. As one Beijing scholar observed, “The Party (CCP) is like God. He is everywhere. You just can’t see him.”2 Free market principles, however, steadily shape the country’s business environment.

Transformation yielded astonishing results. Over the past three decades, China has prospered more from globalization than any oth- er country, outsmarting and outperforming many on the world stage. Many of its citizens have moved from mud huts to high rises. China’s per capita income increased fivefold between 1990 and 2000, from $200 to $1,000. Between 2000 and 2010, its per capita income rose by the same rate, from $1,000 to $5,000, thereby moving China into the ranks of middle-income countries. Chinese companies have spun from woeful state-owned enterprises into world-class multinationals. Steadily, China has accumulated the greatest financial reserves in the world. Consequently, many see its ascendency as a global event without parallel.

Since the 1980s, MNEs of virtually every sort, size, and national- ity have opened Chinese operations. Total FDI in China, literally non- existent in 1980, headed toward $2 trillion in 2016 on investments in more than 600,000 ventures. Why have so many made huge bets on China? Quite simply, they see stunning opportunities in terms of con- sumer demand, worker productivity, ingenuity and innovativeness, infrastructure buildouts, and market potential.3

The Call and CompliCaTion of China

Tens of thousands of foreign investors have entered China, opened operations, managed activities, and earned profits. Still, China’s po- litical system imposes hardships while its legal system complicates activities. MNEs report that China’s political and legal systems can make business operations a hazy, frustrating process. Accustomed to democratic governance in Western markets, in which they have extensive political freedom and legal safeguards, they run into dif- ferent circumstances in the Middle Kingdom. There, the government, under the control of the CCP, practices “State Capitalism,” manipulat-

ing market activities to achieve political goals. Consequently, MNEs doing business in China find themselves struggling to make sense of political and legal activities. Ambitious Western firms such as Exxon- Mobil, ABB, Google, Best Buy, Home Depot, Caterpillar, and Vodafone started operations or purchased big stakes in Chinese companies. Political problems and legal difficulties short-circuited their plans. Eventually, like many others, they sold their stakes and reset their strategies.4

China’s rapid economic emergence accentuates long-running idiosyncrasies. Its mix of ancient and contemporary outlooks cre- ates many gray zones. Some argue that, when it comes to do- ing business in China, the number one rule is to throw away the rulebook. Foreign investors abandon the notion that Western ideas automatically work in China. For instance, the freedom to form a corporation “for any valid business purpose,” commonplace in the United States, does not exist in China. Incorporating in China re- quires informing the government—in excruciating detail—who you are, what you want to do, how you plan to do it, how much you in- tend to invest, how many jobs you will create, and on and on. MNEs endure protracted negotiations to get permission to open local units. Each stop along the long march finds national, provincial, and local officials asking how the proposed investment encourages capital formation, promotes exports, creates jobs, and transfers technology. Hitting the right targets, never an easy process, gets the green-light from the government.

dragons and snakes

Many countries, as does China, rely on a centralized state to shape political and legal environments to set the path and pace of eco- nomic development. China, however, poses a particularly tough case. The complexity of its political and legal systems imposes time- consuming tasks. China can stack the odds against foreigners who are bold enough to forge ahead in the face of an intricate government bureaucracy and a fledgling legal system.5 “If the great invention of European civilization was a legal system,” quipped an observer, “then China’s was bureaucracy.”6

Exasperated investors often blame a byzantine system that regulates activity based on transparent standards as well as arbi- trary agendas. Connections, not competencies, often matter more in righting wrongs and getting deals done. Managers who reason that objective economics should determine the efficient means of doing business see this as illogical. Still, it is utterly logical to Chinese lead- ers who regard state control of business activity as the most reliable path toward harmonious prosperity—and, one mustn’t forget, stay- ing in charge of the show. Consequently, foreign investors navigate often-mysterious political channels.

Chapter 3 The Political and Legal Environments Facing Business 59

The long-running conflict between central and local Chinese authorities further confuses matters. The vastness of the country means that local officials, whether headquartered in the smallest village or the largest city, are often left alone by their comrades in Beijing, the capital of China. Certainly, there are national laws, but how they move from Beijing to the other 33 provinces is a different story.7 “The center,” notes one observer, often “has no control over the provinces. When it sends people to investigate illegal pirating of CDs, local governors block access to the factories.”8 As Chinese folklore warns, “The mightiest dragon cannot crush the local snake.” This proverb captures the spirit of the enduring power struggle within China. Essentially, even though the central authorities in Beijing may appear to be all-powerful, the politics of powerful local fiefdoms of- ten subvert their authority, to the dismay of foreign investors.

preCise laws or ambiguous guidelines?

China had no formal legal system in 1978 when it launched one of the greatest campaigns of legal reform in history. Ongoing develop- ments have stabilized what had been an unpredictable, periodically chaotic legal environment. Still, China poses legislative gaps, hazy interpretation, and lax enforcement. Legislation is chock-full of ambi- guities, says one Beijing-based lawyer, who thinks it will take a gen- eration to iron out the wrinkles.9 Some are less optimistic, comparing the state of the Chinese legal system with that of the United States in the 1920s—then an antiquated composite of statutes and codes that took several decades to modernize.

Others note that, in the case of the Chinese legal system, bigger problems reflect a difference in the concept of legality. Western legal systems rest on the rule of law and its doctrine of legitimate regu- lations transparently administered by public officials who are held accountable for their just enforcement. In contrast, China practices the philosophy of the rule of man, seeing the right of the “man” (once in the person of the Emperor, today in the form of the CCP) to act free of checks and balances as long as “he” honors his “mandate of heaven.” The latter, an ancient Chinese philosophical idea, holds that tiān (heaven) grants an emperor the right to rule unilaterally, as long as he rules virtuously. Hence, besides being the law, the CCP has the legitimacy, based on its mandate of heaven, to operate above the law. So, in practice, rarely does the Chinese criminal court, under the direction of the CCP, end with anything other than a guilty verdict. Explained an FBI Special Agent and legal attaché at the U.S. Embassy in Beijing, “there is really no rule of law here . . . they (CCP) make a decision ahead of time to make a point.”10

The legaliTy of illegaliTy

China’s legal practices, combined with the growing pains of its novel legal institutions and evolving political norms, challenge MNEs. A flashpoint is the protection of intellectual property—patents, trademarks, copyrights, and so on. MNEs complain that relentless,

widespread, and sophisticated theft of their intellectual property fuels China’s surge. Early on, aggressive estimates linked nearly a third of the Chinese economy to piracy.11 Its share has declined in tandem with China’s expansion. Still, the FBI estimates that American companies lose hundreds of billions annually to counterfeiting. China continues to be the number one source country for counterfeit and pirated goods seized. In the United States, Customs officials report that nearly 90 percent of counterfeits seized originated in China.12 U.S. authorities, noting the rarity of legal punishment, charge Chinese officials with tolerating, if not encouraging, pirates. The United States, to slight success, has appealed to transnational institutions to redress China’s “inadequate enforcement” of intellectual property regulations.13

What accounts for China’s status as the world’s premier coun- terfeiter? Analysts point to a mix of its quest to catch the West, col- lectivist orientation, rule-of-man legacy, and dubious enforcement of ambiguous laws—conditions that create a political and legal muddle. Noted an observer, “We have never seen a problem of this size and magnitude in world history. . . . There’s more counterfeiting going on in China now than we’ve ever seen anywhere.”14 Problems threaten to escalate. Government policies have “left a deep impression on com- panies that intellectual property is there for anyone to use it.” Local and provincial authorities look to pirates to power economic growth. Moreover, China excels in making high-quality knockoffs. As some say in Shanghai, “We can copy everything except your mother.”15

whaT’s nexT?

Inevitably, investors question how an opaque, single-party political system, combined with a shadowy legal environment, can protect their property and business rights. Some believe that external in- stitutions will improve transparency. China’s 2001 ascension to the WTO, for example, required it to accept rules on all sorts of business matters, including tariffs, subsidies, and intellectual property. China has steadily amended its legal codes to comply with WTO standards. However, the struggle is not a shortage of regulations. Rather, critics charge China’s sluggish enforcement, even in cases of outright viola- tion, is the primary problem.

Some point to the CCP’s growing support of Confucian ideals foreshadowing its future legal standards. Xi Jinping, CCP chief and China’s president, champions Confucian virtues, seeing the home- grown thoughts of the ancient sage, codified in his collected teach- ings, “The Analects,” as useful guides for China’s political and legal evolution (the opening photo of this chapter shows a depiction of Confucius found in the Shanghai Confucius Temple). Confucianism holds that people are fundamentally good and, rather than coerced via government regulations and penal law, are better governed through the virtuous abstraction of Li—namely, traditional values, ritual, decorum, rules of propriety, customs, and norms. Internaliz- ing the ideals of Li, goes this reasoning, culminates in a harmoni- ous social order where all behave properly. Certainly, formal laws need exist, but they apply to individuals who selfishly maximize their

60 part 2 Comparative Environmental Frameworks

poliTiCs, laws, and operaTing inTernaTionally Politics and laws are always and everywhere dynamic. At different times, different parties champion different ideologies that endorse different political systems. Consequently, investing and operating internationally exposes MNEs to risks that arise from change in a country’s po- litical system.17 Map 3.1 identifies the degree of political risk in countries worldwide. We profile political risk later in the chapter, but, at this point, this map highlights an enduring reality of IB: every market in the world has some, with most having high, degree of political risk that

No DataVery lowLowMediumHighVery high Degree of System Stability

UnstableStable

map 3.1 map of political risk, 2015 The distribution of political risk worldwide shows that it is a fundamental feature of the global business environment. As we see below, some countries have more, some countries have less, but all pose short- and long-term threats to an MNE’s operating decisions and strategic choices. Source: Based on Marsh Political Risk Map 2015; and AON Political Risk, http://www.aon.com/2016politicalriskmap

self-interests at the expense of the collective. Foreign investors, nat- urally, wondered how blending Confucian virtues, ideals of Li, and social harmony might regulate their rights.16

Despite intimidating political difficulties and confusing legal ques- tions, legions of foreign investors profitably answer the siren call of China. Whether driven by bright forecasts, confidence in continued progress, or desperation to ride this megatrend, many foreign compa- nies leave the sanctuary of predictable markets for the distinctive ways of the Middle Kingdom. Then, once they clear immigration, convince

skeptical bureaucrats, and cross the modern-day Rubicon, they face the daunting task of interpreting China’s political and legal systems. ■

Questions

3-1. Recommend a perspective an MNE could use to make sense

of the political situation in China.

3-2. How would you advise an MNE to manage the intricacies of

China’s legal environment?

Chapter 3 The Political and Legal Environments Facing Business 61

threatens the short-term profit and long-term sustainability of business activity.18 Therefore, managers evaluate politics and law, making sense of the scale and scope of their dynamism, and estimating the resulting risks to the profitability and sustainability of their operations.

Operating internationally exposes managers to diverse, conflicting pressures. Some coun- tries are similar; Australian companies find few surprises in New Zealand, for instance. In other cases, the differences are profound; an ill-prepared U.S. company will hit bumps in China. Consider, for instance, Russia. Home to 144 million people, Russia is the world’s largest coun- try in terms of territory. It possesses vast natural resources and its government looks to foreign MNEs to help modernize its energy-dependent economy. Still, political risks pose big prob- lems for foreign investors. An executive at Swedish retailer IKEA explained that the Russian political environment is “a bit of a roller coaster. . . . [Y]ou don’t know exactly what will hap- pen tomorrow.”19 For instance, Russian authorities arbitrarily confiscated Motorola’s assets, charged PwC Russia with tax evasion on dubious allegations, and closed the McDonald’s fran- chise in retaliation for the U.S. policy on the Ukraine.20 Doing business in Russia means you had better be “big enough to defend yourself against bureaucratic attacks [and] . . . ready to hold your nose when elections are rigged and political opposition is crushed.”21 Then again, that might be insufficient—in 2015, Prime Minister Vladimir Putin authorized Russian prosecutors to declare foreign organizations “undesirable” and unilaterally close them. Besides political risk, Russia ranks high in terms of corruption, crony capitalism, and arbitrary governance.22

Politics and laws vary among the many markets that compose the global business environ- ment.23 The interplay of political ideologies, conceptions of political freedom, legacies of legality, presumptions of fairness, and standards of accountability in each market makes for challenging business environments. Navigating markets requires studying how political and legal circum- stances overlap and differ. Managers evaluate, monitor, and forecast the dimensions and dynam- ics of foreign political environments. They gauge whether political freedom is a practical ideal or a wishful abstraction. They study how state officials exercise authority, legislate policies, regulate enterprise, and punish wrongdoers. They assess the interplay between the rule of law and man. They monitor how politicians are elected and whether, and how, they depart. Then, based on their analyses, they forecast points of political risk, construct business scenarios, and determine the best ways to acquire resources, make investments, adapt operating modes, and manage threats.

Cross-national variations, as seen in Map 3.1, increase the challenge of interpreting differ- ent philosophies, laws, and attitudes on political freedom, property rights, and legal respon- sibility. Consequently, effective managers begin with the realization that when it comes to politics and laws, different ideas result in different outcomes in different countries. Figure 3.1 identifies the political principles and legal outlooks that define a nation’s business environ- ment. This chapter profiles how they influence the predominant political ideology, shape the role of government, moderate the degree of political risk, and define the legal system.

Managers study political and legal environments in order to fit activities to local circumstances.

EXTERNAL INFLUENCES

PHYSICAL AND SOCIAL FACTORS

COMPETITIVE ENVIRONMENT

Political policies and legal practices Cultural factors Economic forces Geographic influences

•

• • •

OPERATIONS

OBJECTIVES

STRATEGY

MEANS

•

• • • •

Role of government in society Political ideologies Political risk Legal environment Operational and strategic legal issues

Figure 3.1 Political and Legal Factors influencing iB Operations The political and legal environments are broad-stroke concepts that defy straightforward classification. Nevertheless, here we see key points that help managers develop useful perspectives.

62 part 2 Comparative Environmental Frameworks

The poliTiCal environmenT Whether targeting Afghanistan, Zimbabwe, or any of the 200-plus markets in between, managers study a nation’s political system—namely, the structural dimensions and power dynamics of the government that (1) specify institutions, organizations, and interest groups and (2) define the norms and rules that govern political activities. The mission of a politi- cal system is clear-cut: integrate different groups into a functioning, self-governing society. Likewise, its test is sustaining society in the face of divisive viewpoints. Success supports peace and prosperity, as we see in Australia, Botswana, and Sweden. Failure leads to instabil- ity, insurrection, and fragility of the sort seen in Afghanistan, Haiti, Libya, and Yemen.24

Explaining the similarities and differences of political systems has intrigued a long line of thinkers, beginning with Plato and Confucius and moving on to Herodotus, Machiavelli, Smith, Rousseau, Marx, Gandhi, and Friedman.25 Each wrestled with enduring philosophical issues: How should society balance individual rights versus the needs of the community to sustain a rational, righteous, and harmonious system? What is the basis of the state’s author- ity over its citizens? Should society guarantee an individual the freedom to pursue economic self-interest? Does society fare better when individual rights are subordinated to collective goals? Should society champion equality or institute hierarchy? Are individual rights in- alienable or conferred by the collective? Engaging these and like-minded questions, vital to interpreting political environments, directs our attention to the ideas of individualism and collectivism.

individualism The doctrine of individualism emphasizes the primacy of individual freedom, self-expression, and personal independence (think of the stipulation in the U.S. Declaration of Independence that we all have “certain inalienable Rights, that among these are Life, Liberty and the pur- suit of Happiness”).26 Individualism champions the exercise of one’s ambitions while oppos- ing regulations that constrain them. The government protects the liberty of individuals to act as they wish, as long as their actions do not infringe upon the liberties of others.

The business implications of individualism are direct: every person has the right to make decisions free of onerous rules and regulations. Countries with an individualistic orientation, such as Australia, Canada, the Netherlands, and the United States, shape their marketplace with the idea of laissez-faire (French for “let go/let do”). It holds that the government should not interfere in business affairs. Rather, the market operates according to the neoliberal prin- ciples of free market fundamentalism whereby people (1) regulate themselves in promoting economic prosperity and (2) act fairly and justly to maximize personal performance without threatening the welfare of society.

In practice, gaps between philosophical ideals and opportunistic behaviors fan an ad- versarial relationship between governments and businesses in individualistic societies. Apprehension that some maximize self-interest at the expense of collective welfare leads governments to apply regulations to reduce market inefficiencies (such as deficient con- sumer knowledge or excessive producer power). Presently, ongoing market problems in countries suffering anemic growth and social tension have led governments to restrain indi- vidualism to protect collective welfare.27

ColleCTivism The doctrine of collectivism emphasizes the primacy of the collective (e.g., a group, party, community, class, society, or nation) over the interests of the individual. No matter the importance of those who compose it, the whole of the collective trumps the sum of its indi- vidual parts. Today, collectivism strongly influences politics in a range of countries, including Argentina, China, Vietnam, Japan, South Korea, Egypt, Brazil, Taiwan, and Mexico.

ConCepT CheCks

Chapter 2 showed that culture moderates the practices of international business. Many points of interpretation, both from an academic and manage- rial perspective, follow from the play of collectivism or individu- alism in a country.

The goal of the political system is integrating the diverse ele- ments of a society. Its test is uniting society in the face of divisive viewpoints.

Individualism champions the primacy of the rights and role of the individual over the group.

Collectivism advocates the primacy of the rights and role of the group over the individual.

Chapter 3 The Political and Legal Environments Facing Business 63

Collectivism in the business world holds that the ownership of assets, the allocation of resources, the structure of industries, the conduct of companies, and the actions of manag- ers share a common goal: make decisions and conduct activities that improve the welfare of the collective. A collectivist outlook encourages political systems to develop regulations that promote social equality, labor rights, income equality, and workplace democracy. Then, the “welfare of the nation takes precedence over the selfishness of the individuals.”28 In extreme cases, such as Venezuela, Iran, or Saudi Arabia, political leaders limit individual property rights and police mass media in order to enforce collective standards. Private ownership of satellite dishes, for instance, is illegal in Iran and Saudi Arabia given the state’s view that they let people access media that promotes anti-Islamic individualism.29

poliTiCal ideology A nation’s orientation toward individualism or collectivism anchors its political system and, hence, its predominant political ideology. In theory, an ideology is an integrated vision that defines a holistic conception of an abstract ideal and its normative thought processes.30 For example, the ideal of freedom, the foundation of democratic ideologies, carries with it ideas about related principles, doctrines, goals, practices, and symbols. Practically, a political ideol- ogy stipulates how society ought to govern itself and outlines the methods by which it will do so. An effective political ideology moves beyond describing a vision of a better, brighter future—it specifies the means to achieve that ideal.31

Figure 3.2 interprets prominent political ideologies in terms of a political spectrum. By specifying a basic conceptual structure, spectrum analysis guides the assessment of a complex issue—in this case, political ideology. Configuring ideologies along the central axis lets us model different ones relative to the others. The starting point is specifying reason- able endpoints. Once set, one then positions other ideologies. Determining the standard of “reasonable endpoints” is open for interpretation given the range of candidates. Possibilities include anarchism, conservatism, secularism, environmentalism, liberalism, feminism, na- tionalism, socialism, theocracy, and so on. Culture also moderates interpretation. From a Western perspective, for example, one commonly sets the endpoints as conservative versus

A political ideology encapsulates the doctrine of political behavior and change. It outlines the procedures for converting ideas into actions.

DEMOCRACY Democratic Government

Autocratic Government

TOTALITARIANISM

Rea ction

ary Authoritarian

Fascist

Liberal

Radical Dicta tors

hip

m m

un is

C on

se rv

at ive

Figure 3.2 The Political Spectrum In practice, purely democratic and totalitarian systems are exceptions. Looking around the world, one sees many variations. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize different degrees of state control. Fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state.

64 part 2 Comparative Environmental Frameworks

liberal interpretations of democracy (i.e., Republican versus Democrat). Other endpoints command greater relevance in other contexts. A political spectrum in an Islamic country, such as Iran or Saudi Arabia, is bounded by theocracy versus secularism to reflect the role of the clergy in the government. In the case of Taiwan, parties that champion Taiwanese in- dependence oppose those advocating reunification with China. In Belgium, the ends would reflect the ethnic and socioeconomic tensions between the Dutch-speaking Flanders region and the French-speaking Walloon region. In Canada, they would be inclusive nationalism versus Bloc Québécois’s call for the sovereignty of predominantly French-speaking Québec.

A common theme anchors how managers interpret a political ideology: namely, its vi- sion of political freedom. The notion of political freedom originated in the practice of politics in ancient Greece and has since been inseparable from interpreting the play of politics and laws. Political freedom is the degree to which fair and competitive elections occur, the ex- tent to which individual and group freedoms are guaranteed, the legitimacy ascribed to the rule of law, and the existence of freedom of expression. Rather than an inalienable right, the ideal degree of political freedom is open to debate. Some, like the United States, champion a lot, others, like Saudi Arabia, advocate a little. Consequently, the matters of where, how, and why a company invests and how it manages operations are alienable freedoms, subject to the prevailing political ideology.

Poetical freedom sets the political spectrum that we use in this text (see Figure 3.2). Democracy, and its call to promote and protect individuals’ political freedom, anchors one endpoint. Totalitarianism, and its call to control and constrain individuals’ political freedom, sets the other.32 The ideologies that fall between these endpoints interpret political free- dom differently. Liberal ideologies, for instance, advocate the right of individuals whereas authoritarian ideologies subordinate individual freedoms to the welfare of the collective. In the former, managers have many options. In the latter, they have far fewer. Hence, manag- ers study how a political system interprets freedom, and gauge its implications for how the state then regulates the market. Unquestionably, each ideology in Figure 3.2 is notable; we lack the space to profile each. Understanding the ideals and the means of the two endpoints, democracy and totalitarianism, supports interpreting the others.

demoCraCy Abraham Lincoln held that democracy is a government “of the people, by the people, for the people.” Modern-day democracies translate this ideology into the principles that all citizens are politically equal, entitled to freedom of thought, opinion, belief, speech, and association, and command sovereign power over public officials.33 A democratic government protects personal and political rights, civil liberties, fair and free elections, and independent courts of law.34 These principles and practices institutionalize political freedoms and civil liberties that, by endorsing equality, liberty, and justice, support individualism.

Different legacies shape the performance of democracy in a nation. Practically, the scale and scope of modern society impose logistical constraints, particularly when the size of the population precludes all voters from participating directly. Table 3.1 shows that countries respond with different types of democracies. Notwithstanding variance, all advocate the authority of the many over the few. The future may see a resurgence of direct democracy. Evolving technologies increasingly support a virtual assembly of citizens who express their votes directly through electronic signature gathering or online polling processes.

business implications In a democracy, MNEs have the freedom to invest and operate based on economic, not political, standards. Managers and consumers are free to do as they see fit in a business environment that promotes commerce and encourages trade. The signaling devices of market activities, not bureaucratic regulation, organize resource flows. In political terms, freedom sanctions rights and liberties. In economic terms, it legitimizes profits and prosperity. Brazil, India, Indonesia, Thailand, Colombia, and Malaysia provide cases in point. A generation ago, their belief in central planning run by a strong state had led

Political freedom measures the degree to which fair and competitive elections occur, the extent to which indi- vidual and group freedoms are guaranteed, the legitimacy ascribed to the rule of law, and the existence of freedom of the press.

Democracy calls for participation by citizens in a fair and just decision-making process.

Democracy and individual- ism are intrinsically related and mutually reinforcing; individualism legitimates principles of democracy and democracy supports standards of individualism.

Chapter 3 The Political and Legal Environments Facing Business 65

to stagnant, if not failing, economies. Now, these countries are converting the energy of their emerging democracy into dynamic business environments.35

ToTaliTarianism A totalitarian system subordinates the interests of the individual to that of the collective. An agent in whatever form, such as an individual, a committee, an assembly, a junta, or a party, monopolizes political power and uses it to regulate many, if not all, aspects of public and private life. The agent, whether idealistic or delusional, believes it has noble intentions, protecting people from the hazards of individual choice.36 Fair game includes regulating residents’ occupation, income level, interests, religion, and even family structure.37 A totalitar- ian government eliminates dissent through indoctrination, persecution, surveillance, pro- paganda, censorship, and violence. It tolerates few, if any, ideas, interests, or activities that oppose state ideology.38 In extreme situations, personal survival is linked to that of the ruling regime. These conditions merge the interests of individuals with those of the state. Table 3.2 profiles types of totalitarian systems.

A totalitarian system consoli- dates power in a single agent who then controls political, economic, and social activities.

Table 3.1 prominent Types of democracies

The elemental definition of democracy hails from the Greek dēmokratía: “rule by the people.” Translating the ideal of the “rule by the people” into a functioning political system can take a variety of forms.

Representative Originates in a constitution that protects individual freedoms and liberties. The law treats all citizens equally. Elected representatives, while ultimately autonomous, act in the people’s interest. Officials represent voters and, while mindful of voters’ preferences, have the authority to act as they see fit. Examples include the United States and Japan.

Multiparty System whereby three or more parties govern, either separately or as part of a coalition. A single party cannot legislate policy without negotiating with opposition parties. Examples include Canada, Germany, Italy, and Israel.

Parliamentary Citizens exercise political power by electing representatives to a legislative branch, the parliament. The legislature is the source of legitimacy for the various ministers that run the executive branch. Examples include India and Australia.

Social Applies democratic means to guide the transition from capitalism to socialism. The government promotes egalitarianism while also regulating capitalism’s tendency toward opportunism. Examples include Norway and Sweden.

Table 3.2 prominent Types of Totalitarianism

First noted in reference to Italian fascism, “totalitario” stood for “complete, absolute,” control by a dictatorial one-party state that regulates every realm of life. Here, we see approaches that a ruling agent can take to control society to different degrees.

Authoritarianism Tolerates no deviation from state ideology. Day-to-day life reflects submission to state authority; resistance incurs punishment. Officials control the political environment, but pay less attention to the economic and social structure of society. Examples include Kazakhstan, North Korea, Chad, and Turkmenistan.

Fascism Advocates a single-party state that controls, through force and indoctrination, people’s minds, souls, and daily existence. Calls for the merger of state and corporate power, applying corporatist perspectives, values, and systems. There have been few fascist political systems; most prevailed during World War II.

Secularism A single-party government controls elections, tolerates dissent as long as it does not challenge the state, and suppresses other ideologies. The state does not prescribe an all-encompassing ideology. It grants limited individual freedoms provided one does not contest state authority or disrupt social harmony. Examples include China, Vietnam, and Venezuela.

Theocracy Government is an expression of the favored deity. Leaders profess to represent its interests on earth. The State applies ancient dogma in place of modern principles. Strict social regulation and gender regimentation typically prevails. Examples include Iran, Afghanistan, and Saudi Arabia.

66 part 2 Comparative Environmental Frameworks

The dynamics of change in a totalitarian state highlight the means used to enforce its ide- ology. Rejecting preceding forms of society as corrupt, immoral, and beyond reform, a single leader advocates a new society that corrects wrongs, redresses injustice, and creates har- mony. In place of private property, the state allocates power and status to reward supporters (who often monetize privileges through corruption). It uses propaganda, indoctrination, and incarceration to coerce citizens. State-controlled media filters information, state-controlled education filters ideas, and state-controlled courts, police, and security suppress dissent. In extreme cases, the cumulative result is a “virtual mind prison” that fuses leader and the state.39 An individual conforms or is cast out.

Although remote to citizens in Western democracies, forms of totalitarianism pre- vail throughout the world. Some 2.6 billion people—roughly one-third of the world’s population—live under such rule, with another 1.7 billion people residing in less draconian but still authoritarian political systems.40 The citizens of such countries as Madagascar, Turkmenistan, Afghanistan, China, Iran, North Korea, and Saudi Arabia have fewer personal freedoms and civil liberties than their counterparts in Japan, Canada, or Denmark. The reemergence of powerful, single-party states worldwide reinforces totalitarianism: Russia suppresses individual freedoms through arbitrary governance; Venezuela restricts dissenting media; Iran corrupts its electoral process; and Saudi Arabia regulates personal choice. Leaders of these and similarly governed states display improv- ing skillfulness. Research spotlights the “growing sophistication of modern authoritar- ians. They are flexible; they distort and abuse the legal framework; they are adept at the techniques of modern propaganda.”41 In particular, some point to the astute political practices powering China’s rise.42

business implications Managers in totalitarian systems face radically different markets than those found in democracies. Private enterprise, if permitted, supports state control of the economy. For instance, the Chinese government, under the direction of the CCP, owns and manages large swathes of its economy. The state is the majority owner of many of the largest publicly listed Chinese companies, some of which are among the biggest firms in the world.43 Similarly, conglomerates in finance, media, mining, metals, transportation, communication, and so on answer to the CCP. Likewise, China’s provincial and municipal officials control tens of thousands of medium-sized and smaller ones.44 Add it all up and you have an authoritarian system that rejects many of the practices found in a democracy.

Managers operating in these sorts of markets adjust decision-making to the fact that government’s imperative is sustaining state power, and it sees the market as a powerful tool to do so. Political risks affect all companies, but typically hit foreign investors hard- est. The state favors local companies at the expense of foreign competitors, providing them with advantageous financing, special tax programs, relaxed work regulations, and other benefits.45 The state manipulates markets for political purposes, thereby distorting resource valuations and blurring risk–return relationships. For example, China requires foreign enterprises to accept, if not facilitate, setting up Communist Party cells in their local operations. Local governments can insist private companies contribute a share of their payrolls to finance Party activities.46 The cells then direct companies to behave law- fully, fulfill their social responsibilities, promote harmonious labor relations, and maintain social stability.

MNEs strike deals in authoritarian states that they avoid elsewhere. Consider General Electric’s 50/50 joint venture with Aviation Industry, a Chinese military-jet maker, to pro- duce avionics, the electronic brains of aircraft. The deal required GE to take the risky, but potentially lucrative step of folding pieces of its global operations into a partnership with a state-owned enterprise. Such deals had earlier proved troublesome, souring over concerns that Chinese partners, after gaining access to Western technology and expertise, became po- tent rivals.47 Even so, seeing China as its “second home market,” GE reasoned the cost of missing the fast-expanding Chinese aviation industry exceeded the potential political risks. Reasoned GE’s vice chairperson: “Staying out of China in hopes of keeping our intellectual property safe is obviously not an option.”48

ConCepT CheCks

Recall our discussion in Chapter 2 (page 35), of “Major Behavioral Factors Affecting Business.” These variables change as people change—or as state authority influences them. Shaping people’s be- havior to support the state’s interests leads an authoritarian government to manipulate norms, including work motiva- tion, risk taking, communication practices, and consumption preferences.

Totalitarianism and collectivism are intrinsically related and mutually reinforcing; collectivism legitimates principles of totalitarianism and totalitarianism supports standards of collectivism.

Authoritarian parties often rely on shadowy politics, skewed elections, and nefarious secu- rity agencies.

Chapter 3 The Political and Legal Environments Facing Business 67

The sTaTe of poliTiCal freedom Since 1972 Freedom House has annually assessed the state of political freedom around the world.49 It declares that “Freedom is possible only in democratic political systems in which the governments are accountable to their own people; the rule of law prevails; and freedoms of expression, association, and belief, as well as respect for the rights of minorities and women, are guaranteed.”50 Freedom House applies measures derived from the Universal Declaration of Human Rights, a landmark document that defines the 30 rights to which all human be- ings are inherently entitled, including freedom of speech, religion, from fear, and from want.51 Freedom House assesses the rights and freedoms enjoyed by individuals, rather than those proclaimed by governments. Performance places a country into one of three classes:

• A “free” country exhibits open political competition, respect for civil liberties, independent civic life, and independent media. There are inalienable freedoms of expression, assembly, associa- tion, education, and religion. Examples include Australia, Brazil, India, and the United States.

• A “partly free” country exhibits limited political rights and civil liberties, corruption, weak rule of law, ethnic and religious strife, unfair elections, and censorship. Often, democracy is a convenient slogan for the single party that dominates within a façade of regulated pluralism. Examples include Guatemala, Pakistan, and Tanzania.

• A “not free” country has few to no political rights and civil liberties. The government allows minimal to no exercise of personal choice, relies on the rule of man as the basis of law, constrains religious and social freedoms, and controls a large share, if not all, of business activity. Examples include China, Russia, Saudi Arabia, and Iran.

Map 3.2 shows the distribution of freedom worldwide. In 2015, 86 countries were free, 59 partly free, and 50 not free. Regarding population, approximately 2.9 billion people

Freedom House identifies three types of political systems:

• Free • Partly free • Not free

Type of State Number of countries

Percentage of countries

Percentage of world population

Free 86 44 40

Partly free 58 30 24

Not free 51 26 36

map 3.2 map of freedom Freedom House, classifying countries in terms of their degree of political freedom, identifies three types—Free, Partly Free, and Not Free. If you live in a country classified as “free,” you enjoy a broad range of political rights and civil liberties. If you are a citizen of a “partly free” nation, your share of rights and liberties ranges anywhere from average to just below average. If your homeland is “not free,” you have few rights and liberties. Source: Freedom House, “Map of Freedom 2015,” at https://freedomhouse.org/report/freedom-world/freedom-world-2015. Used by permission of Freedom House.

https://freedomhouse.org/report/freedom-world/freedom-world-2015

68 part 2 Comparative Environmental Frameworks

(40 percent of the global population) live in a free country, 1.8 billion live in a partly free country, and 2.6 billion live in a not free country.

The prevalenCe of poliTiCal freedom The second half of the twentieth century saw the steady diffusion of democracy worldwide. Between 1950 and 2014, the number of electoral democracies grew from 22 to 120 countries. Many had been totalitarian states of some form, but had begun developing democratic gov- ernance. This shift signified the so-called Third Wave of Democratization, a global move- ment that expanded individual freedoms and civil liberties.52 Societies began building just institutions, fair property rights, independent media, and impartial judiciaries. As a result, by 2000, nearly half the world’s population, more than at any time in history, lived in a democ- racy of some sort.

Beginning in the mid-1970s, a confluence of trends began fueling engines that powered the Third Wave of Democratization. Ultimately, they culminated in toppling the Berlin Wall, undoing the Communist Bloc, and closing the Cold War. First, the growing failure of to- talitarian regimes to deliver prosperity eroded their legitimacy. Aggrieved citizens, weary of declining standards of life, rebelled. Formerly communist countries, shifting to freer markets, endorsed entrepreneurialism. Shift from collectivism to individualism promoted civil liber- ties and encouraged political freedom.

Second, improving communications technologies eroded totalitarian regimes’ power to control information. Whereas once it took weeks, if ever, for word-of-mouth protests to spread, improving connections quickly circulated news.53 Images of resistance and rebel- lion had snowball effects, inspiring pro-democracy campaigns worldwide. People, increas- ingly aware of their rights and the global march to freedom, challenged the injustice of state control.54 Expanding access to uncensored news, in light of Thomas Jefferson’s belief that “Information is the currency of democracy,” fortified calls for civil liberties.

Finally, freedom yielded economic dividends, helping people move from poverty to prosperity.55 The median per capita gross domestic product, a measure of the standard of living, was nearly seven times greater in free versus not free countries. Growing prosperity supported property rights, the rule of law, education opportunities, gender equality, media vigilance, and social tolerance.56 An expanding middle class, freed from the tyranny of cease- lessly seeking sustenance, shelter, and security, had growing resources to support the ideals of individuality, justice, and liberty. Rising prosperity supported the political stability and faith in a brighter future that anchors democratic ideologies.57

As the twentieth century came to a close, the multi-decade march toward greater political freedoms and expansive civil liberties fueled a belief in the inevitability of democracy. Some saw this surge symbolizing the “end of history,” whereby the universalization of Western liberal democracy represented the endpoint of humanity’s ideological evolution and the final stage of human government.58 This megatrend had huge consequences for IB. Democratic governance stabilized business environments, both at home and abroad. Growing stability encouraged MNEs to expand their investment horizon to include markets, such as China, Russia, and Eastern Europe, that had previously been off-limits given extreme political risks. Steadily, industries developed, middle classes emerged, globalization accelerated, and free- dom flourished worldwide.

The sTruggles of poliTiCal freedom Democracy, the most successful political idea of the twentieth century, has worldwide allure. Its ideals champion human rights, promote prosperity, and support peace.59 Troubling data, however, question its momentum in the twenty-first century. In 2008, its slowing momen- tum suggested a “democracy recession.” By 2012, data signaled democracy’s retreat world- wide. By 2015, retreat has given way to reversals in many countries and, as Freedom House warned, the “return of the iron fist.”

The Third Wave of Democratization refers to the third surge of democratically governed states in the twenti- eth century. Ultimately, as this wave crested, the number of countries led by a democratic government doubled.

Various forces powered past the Third Wave of Democratization:

• Failure of totalitarian regimes to deliver prosperity

• Improving communication technology

• Economic dividends of political freedom

ConCepT CheCks

Chapter 1 identifies the “Expansion of Technology” as a driving force of globalization. Advances in telecommuni- cations liberated the flow of information, thereby challenging and changing social and political attitudes in many countries.

ConCepT CheCks

In profiling “The Forces Driving Globalization” in Chapter 1, we noted the power of chang- ing political situations. Until recently, we have witnessed the diffusion of democracy and the corresponding decline in totali- tarianism. Growing acceptance of the legitimacy of democracy accelerated the expansion of international business.

Chapter 3 The Political and Legal Environments Facing Business 69

Table 3.3 Types and Characteristics of political systems in the world

Classification Characteristics64 examples

Full Democracy

• Mature political culture promotes and protects political freedoms and civil liberties.

• Government discharges responsibility transparently. • An effective system of checks and balances regulates politics. • The judiciary is independent, its decisions are impartially enforced,

and the rule of law prevails. • Media are independent, vigilant, and diverse.

Australia, Austria, Costa Rica, Denmark, Norway, South Korea, United States, Uruguay.

Flawed Democracy

• The State respects basic civil liberties. • Free and fair elections regularly occur but experience fraud or

media restrictions. • Governance problems and low political participation make for

a weak political culture. • Leadership and policy change occur frequently.

Brazil, Estonia, Hungary, India, Indonesia, Jamaica, Mexico, Namibia, Senegal, Singapore, South Africa, Taiwan.

Hybrid Regime

• Electoral irregularities undermine freedom and justice. • Government limits opposition parties and candidates. • Judicial bias signals the state corrupting the rule of law. • Political culture, public administration, and political

participation struggles. • Corruption is extensive, civil society fades, and media are regulated.

Bangladesh, Cambodia, Ecuador, Honduras, Kyrgyzstan, Mozambique, Niger, Pakistan, Tanzania, Thailand, Venezuela.

Authoritarian Regime

• Political pluralism is absent or repressed by the state. • Democratic institutions may exist, but have little substance

and the state uses them to legitimate single-party rule. • Elections, if they do occur, are neither free nor fair. • The state systematically disregards civil liberties. • There is no independent judiciary and the rule of man prevails. • Media are typically state-owned or controlled by groups connected

to the regime. • Censorship suppresses criticism of the state and propaganda

promotes the state ideology.

Afghanistan, Chad, China, Guinea, Kazakhstan, Kuwait, Nigeria, Russia, Saudi Arabia, Swaziland, Zimbabwe.

Increasingly, managers qualify their interpretation of rising political risks with the pos- sibility that “history,” rather than ending, is just beginning. Granted, the gains in electoral de- mocracies seen during the Third Wave of Democratization have not been erased. Individuals and institutions, however, struggle to promote free elections, defend human rights, constrain state power, and safeguard integrity in public policy. In their place, sham elections, police crackdowns, kangaroo courts, and persecution of dissidents gain traction. All speak to the stance taken by President Lukashenka of Belarus, who declared on the heels of a rigged election victory, “There will be no more mindless democracy in this country.”60 Worldwide, influential totalitarian regimes impose “forceful measures designed to suppress democratic reformers, international assistance to those reformers, and ultimately the very idea of de- mocracy itself.”61 As a result, 2015 marked the ninth consecutive year that political freedom declined worldwide—the longest consecutive period of setbacks in modern times.62

gauging the scale of struggle: The Texture of democracy Democracy, narrowly defined, is easily achieved—if merely holding elections were sufficient, virtually every coun- try would qualify. The Economist Intelligence Unit (EIU) resolves this distortion, gauging the electoral process, but also assessing the degree that day-to-day life supports political free- dom. Specifically, the EIU evaluates the “texture of democracy” in a country in terms of its public institutions, political processes, public attitudes, pluralism, civil liberties, political par- ticipation, and political culture. The EIU translates these dimensions into 60 indicators that measure the texture of democracy in 167 countries. Combined, these countries are home to nearly the entire global population.63 The EIU classifies a country as a full democracy, f lawed democracy, hybrid regime, or authoritarian regime. Table 3.3 profiles the general characteristics of each. Map 3.3 identifies their distribution worldwide.

Several indicators show slowing adoption of democracy throughout the world.

The Economist Intelligence Unit identifies four types of political systems:

• Full democracy • Flawed democracy • Hybrid regime • Authoritarian regime

70 part 2 Comparative Environmental Frameworks

Type of regime Scores

Full democracies 8.01 to 10

Flawed democracies 6.01 to 8.0

Hybrid regimes 4.01 to 6.0

Authoritarian regimes 0 to 4.0

Number of countries

Percentage of countries

Percentage of world population

20 12.0 8.9

59 35.3 39.5

36 22.2 17.5

52 30.5 34.1

map 3.3 The demoCraCy index The scale and scope of democracy varies worldwide. Differences in electoral process and pluralism, civil liberties, functioning of government, political participation, and political culture make for different outcomes. Source: Adapted from “Democracy Index 2014.” 2015. The Economist Intelligence Unit. Accessed November 25. http://www.eiu.com/public/topical_report.aspx?campaignid=Democracy0115 .

The EIU’s analysis reports that many countries are “democracies” in name only. Of the 76 countries commonly regarded as democracies, 24 are full democracies while 52 are flawed democracies. One sees 19 full democracies in the West, with the remainder in Latin America, Eastern Europe, and Africa. Flawed democracies predominate in Latin America and Eastern Europe. The fragility of their institutional structures, political participation, and democratic cultures constrains freedom. Likewise, their governments’ response to corruption, terrorism, and drug trafficking worsens the situation.

Of the remaining 89 countries, 39 are hybrid regimes that mix democratic and authori- tarian practices. Many hybrid regimes manifest the markings of democracies. Procedural irregularities, by corrupting free and fair processes, undermine freedom. Hong Kong, for example, exemplifies a hybrid regime. It has telltale aspects of a democracy, such as an im- partial judiciary, civil liberties, independent media, and political parties. Still, authoritarian policies persist. Consider, for instance, its electoral process. Its Chief Executive (effectively its president) is chosen not by Hong Kong’s 7 million residents, but by a 1,200-person “Election Committee” composed of handpicked elites; Hong Kong, by the way, tops the crony-capital- ism world league table.65

Authoritarian regimes predominate in 52 countries. Like hybrid regimes, most of these states showcase democratic practices, such as popular elections. Fundamentally, they are largely Potemkin designs—citizens have the freedom, for instance, to vote only for candi- dates that have been preapproved by the ruling elite. Day-to-day life evidences aspects of totalitarianism, including personal restrictions, public corruption, state-owned media, omni- present state security, pervasive censorship, and a biased judiciary.

Qualifying democracy by demography The distribution of political systems in terms of demography improve our understanding of the play of ideologies worldwide. In broad terms, about half of the world’s population lives within some sort of democracy—that is, they meet the minimum expectation, regularly running elections of some sort. However, EIU standards

Worldwide, few people live in fully functional democracies; many more live in authoritarian states.

http://www.eiu.com/public/topical_report.aspx?campaignid=Democracy0115

Chapter 3 The Political and Legal Environments Facing Business 71

indicate that 12 percent of the world population lives in countries with a functioning full democracy, 36 percent live in flawed democracies, 14 percent live in hybrid regimes, and 38 percent live in authoritarian regimes.66 Effectively, about 900 million people, or one of eight people, live in a full democracy. Alternatively, some 2.6 billion people, or about a third of the world’s population, live in authoritarian states.67

The allure of auThoriTarianism Countries, skeptical of the virtues of a multiparty democracy, have translated authoritar- ian ideologies into single-party political systems. This trend spans the world, includ- ing Hungary, Burkina Faso, Russia, Lithuania, Thailand, Venezuela, Turkey, and Malaysia.68 Authoritarianism reduces political freedom and alters the texture of democracy. Analogous to the engines that powered the Third Wave of Democratization, several contemporary developments promote authoritarianism.

political economy of growth The modernization hypothesis holds that aspects of economic development—notably, industrialization, urbanization, education, health, and income—support democratic governance. Rising wealth, particularly among an expanding middle class, promotes property rights and individualism, which in turn endorses democ- racy. Today, data challenges this thesis.69 Consider China. Many have seen its economic per- formance since 1980 validating, if not legitimating, its authoritarian, one-party system as an alternative to a liberal, multiparty democracy. For many poverty-stricken, politically unstable countries, patience with the not-yet-realized dividends of the “democracy advantage” thesis has worn thin. Some point to India, noting that more than 65 years of nearly uninterrupted democratic governance rule has failed to improve health, education, or wealth for a majority of its residents. Consequently, China’s model of a “people’s democratic dictatorship” gains credibility.70

rhetoric versus reality Democracy setbacks in Italy, France, UK, Spain, and the United States give pause to some 70 strategically significant countries at the politi- cal crossroads. If democracy can’t work there, how could it work here, wonder some in Bangladesh, Ecuador, Mozambique, and Afghanistan.71 Charges of hypocrisy against Western countries (owing to incursions in Iraq, Libya, and Afghanistan, along with the implications of antiterrorist activities to political freedoms and civil liberties) jumble democratic ideals. Double standards in foreign policy (i.e., some autocratic countries can be allies, such as Saudi Arabia, whereas others are foes, like Venezuela) discredit democracy’s promoters.72 Confidence in institutions has declined throughout the West. Fewer than one in five West Europeans trust political parties, while only one in three regards governments and parliaments as trustworthy.73 In the United States, 8 percent of Americans, versus 40 percent in 1987, report “a great deal” or “quite a lot” of confidence in Congress; this is the only major U.S. institution, from a set of 15 that includes the military, big business, public schools, banks, newspapers, and the presidency, to score in the single digits.74

economic problems High unemployment, slow growth, and rising debt in many Western democracies erodes the effectiveness of democracy. The International Labour Organization reports wavering belief that political policies in democratic states lead to a fairer and brighter future.75 History shows that right-wing totalitarian movements generally draw popular support from middle-class folks seeking to preserve the status quo. Those who fall into poverty are politically hazardous. Often, the worse the economy, the more people describe themselves as “right-wing.”76 Alternatively, left-wing totalitarianism often develops from working-class movements seeking to overthrow wealthy oppressors—think of the tension between the proletariat and bourgeois in Marxism. Persistent unemployment, debt, and anxiety erode confidence that democracy works.77

Powering the resurgence of totalitarianism is

• strong states support strong performance,

• gaps in the principles and practices of democracy.

• Economic insecurity following slowing growth,

• escalating debate of the meaning of democracy.

72 part 2 Comparative Environmental Frameworks

who defines democracy? The legitimacy of Western notions of democracy travels poorly to countries that endorse different ideals. Hu Jintao, former CCP chief and China’s president, speaks of “democracy” with a different meaning from that used by Westerners. In his view, calls for multiparty democracy are taboo, opposition cannot officially organize, reform must obey the “correct political orientation,” and “orderly” change must respect and preserve the authority of the CCP.78 Hu’s successor, Xi Jing Ping, elaborates this view, advising the West that “your democracy is the democracy of Greece and ancient Rome, and that’s your tradi- tion. We have our own traditions.”79 Similarly, Prime Minister Vladimir Putin, proclaiming himself “a true democrat,” argues the West misinterprets the virtues of authoritarianism. He charges “some of the participants in the international dialogue believe that their ideas [of democracy] are the ultimate truth.”80 Instead Putin has promised a “dictatorship of the law,” an approach that appeals to many Russians that prefer strong leadership to a vibrant democ- racy. Others add that Western-style democracy, rather than promoting individual rights and civil liberties, is an ideological ruse that disguises inequalities. Brazil’s former President da Silva contends the advocates of Western-style democracy no longer speak for the world, hav- ing lost the moral authority to dictate solutions to developing countries.81

The engines of totalitarianism, considered in the context of democracy’s reversal, raise vital questions. Our Looking to the Future assesses these trends and asks how MNEs might respond.

Managers wonder what a political map of the world might look like in the next decade. Will democracy regain its allure? Will totalitarianism gain momentum? Will new ideologies arise? It’s tempting to dismiss these questions as academic distractions. The data indicate they are anything but. As faltering free- dom and resurgent authoritarianism accelerate democracy’s retreat, countries reset, markets change, and MNEs adjust strategies. Trends spotlight three ideologies competing for supremacy—namely, the Washington Consensus, the Beijing Consensus, and the Clash of Civilizations. What, pray tell, might these mean to managers?

the Washington Consensus

Named after the close of the Cold War for the free-mar- ket, pro-trade, and pro-globalization policies promoted by the United States, the Washington Consensus ad- vocates democracy, political freedom, rule of law, and human rights.82 As Washington became the philo- sophical center in an America-dominated unipolar world, its idealized Consensus—promoted by exec- utives, politicians, generals, journalists, and institu- tions—called upon countries to reform in ways that mimic the political economy of the United States. Powering this call was a set of interrelated principles:

right-minded reform led to economic growth, which created a middle class that supported property rights, which, in turn, promoted the rule of law. Making those choices and implementing the requisite policies, in turn, supported individualism and instituted democ- racy. Navigating this sequence, reasoned the United States, built nations that championed prosperity and peace. A world of nations practicing U.S.-style, pro- peace democracy arguably signified the endpoint of humanity’s sociocultural evolution.83

the Beijing Consensus

Some see the growing appeal of the Beijing Consensus signaling the next predominant ideology.84 A euphe- mism for China’s self-proclaimed “people’s democratic dictatorship,” the Beijing Consensus is a single-party system in which elected representatives, preapproved by the CCP, oversee a nominal democratic system whose citizens, though granted the right to vote, can- not participate in decision-making.85 Elections, al- though free, are not fair. The CCP aspires to rule by consent, preferring benevolent persuasion to the iron fist. Still, it swiftly suppresses those who challenge its authority. Spontaneity in a single-party system, no mat- ter how apolitical, symbolizes protest. As CCP officials consistently explain, “Stability trumps everything.”86

Looking to the Future Political Ideology and MNEs’ Actions

Chapter 3 The Political and Legal Environments Facing Business 73

Unlike the ideologically interventionist Washington Consensus, the Beijing Consensus is ideologically agnostic. It prizes economic development and in- ternational trade as the means to generate domestic growth, create wealth, and build a harmonious soci- ety. It uses fast-growing prosperity to subvert indi- vidual political choice, reasoning that people value wage growth, prosperity, and social stability more than political freedom. The Beijing Consensus does not pass judgment on other countries’ politics; in turn, it expects not to be judged. It advocates trade with no strings attached—which, in the case of the Washington Consensus, are democracy, freedom, human rights, and the rule of law.87

China’s policy of harmonious stability within a single-party state finds followers worldwide; said one analyst, “[T]he ‘China model’ of authoritarian capitalism is gaining currency. Governments from Syria to Vietnam have sung its praises.”88 Some argue that state control that weds liberal economics with single-party authoritarian politics, rather than the union of liberal economics and multiparty de- mocracy, now represents the superior political path to prosperity and harmony.

the Clash of Civilizations

Spreading democracy in the Arab world, which is regu- larly rated the world’s least politically free region, has been a long-running goal of the West. An aim of the Iraq War was to build the luminous “city upon a hill” that would inspire democracy throughout the region. Efforts there, as well as pro-democracy movements in Afghanistan, Egypt, Libya, Yemen, and elsewhere, have had limited success. Moreover, Western military inter- vention calls into question the legitimacy of democratic ideals. Faltering institutions and changes in political sentiments hinder the transition to democracy in several Islamic nations, including Iran, Kuwait, and Saudi Arabia.

Regional instability hinders promoting pluralism, to say nothing of a functioning democracy. The dis- content of the disadvantaged, particularly among youth suffering few opportunities, mobilized the pro- democracy protests of the Arab Spring. Although initially promising, study of the determinants and consequences of democratic transitions advise cau- tion. Historically, violent uprisings struggle to insti- tutionalize durable democratic change. Moreover, weak property rights thwart democratic ideals.89 Productive economies in the oil-rich Persian Gulf also stall the spread of democracy as it appears that democracy is not a prerequisite of prosper- ity.90 Moderate Arab leaders contend that the

transition from totalitarianism to democracy is, at best, “a slow process.” Hardliners, meanwhile, vilify individualism.91

The reluctance of some Islamic states to adopt democracy animates the “clash of civilizations” sce- nario. Irreconcilable religious differences between Islam and the West, goes this reasoning, fuel back- lash against Western ideals and their crystalliza- tion in the ideologically interventionist Washington Consensus.92 Some speculate that the epic clash between oppositional civilizations will usher in a new political ideology.

What’s next? Managers ask

Managers study the direction that political ideologies might track. Will liberal democracy à la the Washington Consensus regain the commanding heights? Ongoing developments worldwide, led by a growing middle class linked into expanding social networks, support that forecast.93 Will the one-party trademark of the Beijing Consensus set political standards? China’s growing involvement in receptive countries worldwide endorses that projection. To that end, when recently asked, “How satisfied are you with the country’s direction?” 83 percent of Chinese reported satisfac- tion; in contrast, 31 percent in the United States, 19 percent in France, 15 percent in Britain, and 7 per- cent in Japan did so.94 Or, if countries bypass the American Way or the Chinese Path, might a clash of civilizations give rise to new ideas of freedom?95

Whatever the scenario, history reminds us that it matters. The first and second waves of democratiza- tion (1828–1926 and 1943–1962, respectively) were followed by periods of freedom backlash, democ- racy retreat, and backslides into authoritarianism. Hence, the question arises: Are we once again facing a cycle of transition and consolidation?96 Suffice to say, it’s risky to underestimate political change. If the Washington Consensus proves resilient, managers must adjust operations to the growing pains of coun- tries that champion freedom, advocate human rights, and adopt the rule of law. Prosperity will come with difficulty, but there will be prosperity for many. If the Beijing Consensus predominates, managers must rethink business in a world where governments regu- late growth in order to legitimate state control and secure social stability. Prosperity may come more easily, but its price will include individual freedoms. If ideologies transform as civilizations clash, the re- sulting religious orders will reset systems. Prosperity may prove a wild card as oppositional ideologies battle for the commanding heights. ■

74 part 2 Comparative Environmental Frameworks

poliTiCal risk Map 3.1 profiles the scale and scope of political risk that MNEs face operating in countries throughout the world. No matter whether it operates in Canada, Cambodia, Cameroon, or Chad, for instance, an MNE faces the risk that the political events in the host country will ad- versely affect its operational objectives, strategic goals, and profitability. Technically, political risk is the risk that political decisions, events, or conditions change a country’s business en- vironment in ways that force investors to accept lower rates of return, cost them some or all of the value of their investment, or threaten the sustainability of their operation.

Various trends increase political risk worldwide (See Figure 3.3). First, many emerging markets are rife with flashpoints. Arbitrary laws, fragile institutions, volatile societies, and corrupt regimes fuel uncertainty. Often, foreign investors must compete with state-run ri- vals whose political orientations complicate economic situations. Aggravating matters is the fact that political risks differ from market to market. In Venezuela, managers face economic nationalism; in Brazil, a manager must understand Congress’s multiparty alliances; in China, the task is interpreting the power and play of the CCP; in Saudi Arabia, a manager must decipher the internal dealings of the ruling family. Hence, operating in many emerging mar- kets differs significantly from the comparatively predictable politics in Western democracies. Analytics that work in one country often travel poorly to others.

Second, declining political freedom increases political risks. The Third Wave of Democratization began stabilizing the play of politics across markets. As countries developed democracies, often in the context of the Washington Consensus, managers could reasonably assume that the principles of Western-style political economy, not authoritarian outlooks, would shape national affairs. Flagging political freedom, by boosting the uncertainty of local politics, increases political risks.

Classifying poliTiCal risk The evaluation of political risk often applies a macro-micro criterion.97 Macro risks affect all companies, both domestic and foreign alike, in a given country. Micro risks are agent- specific actions that affect individual, usually foreign-owned, companies. Figure 3.4, besides identifying leading causes of political risk, applies this approach. It qualifies the macro-micro division with the characteristics of the type of risk.

Political risk refers to the threat that decisions or events in a country will negatively affect the profitability and sustain- ability of an investment.

The primary types of political risk, from least to most disrup- tive, are

• systemic, • procedural, • distributive, • catastrophic.

20 09

20 08

20 07

20 06

20 05

20 10

20 11

20 12

20 13

20 14

N um

be r

of C

ou nt

ri es

Year under Review

6059

59 56

34 34 37

42 40

Improved Declined

Figure 3.3 Freedom in the World: gains and Declines by Country The momentum of political freedom has changed over the past decades, as early gains have given way to increasing decline.

Source: “Freedom in the World 2015: The Return of the Iron Fist,” www.freedomhouse.org. Used by permission of Freedom House.98

http://www.freedomhouse.org

Chapter 3 The Political and Legal Environments Facing Business 75

systemic political risk A country’s political processes aim not to punish companies arbitrarily. Few would hazard the investment otherwise. Rather, investors commonly face political risk that follows from shifting public policy. Newly elected officials, for instance, adopt policies that differ from their predecessors—say, increasing individual tax rates to im- prove collective welfare. Similarly, a government may target a sector that it sees dominated by foreign interests, such as Venezuela’s program to nationalize energy companies.99 In both situations, politically motivated polices alter the macro environment, thereby creating sys- temic political risks that affect all firms.

Systemic political risks do not necessarily reduce potential profits. Policy shifts also cre- ate opportunities. Newly elected governments in Vietnam, Malawi, Estonia, and Guinea, for instance, deregulated previously state-controlled economies. Investors who accepted the risk of a policy reversal prospered as freer markets emerged. Our opening case traces similar pat- terns in China, showing how political trends encouraged pro-market reforms that, by chang- ing the risk–return relationship, created opportunities for enterprising MNEs.

procedural political risk People, products, and resources ceaselessly travel through the global market. Each move creates a procedural transaction between individuals, subsidiar- ies, companies, institutions, or countries. Political policies sometimes impose frictions that slow or stop these transactions. Corrupt officials, for instance, might pressure a firm to pay additional monies to clear goods through customs or obtain a permit to open a factory.100 Political interference escalates expenses, thereby lowering returns. Procedural political risk is a micro risk—that is, it affects some but not all companies. Monitoring industry develop- ments, minding the relative contribution of their firms to the local economy, and promoting solid citizenship help MNEs manage it.

distributive political risk Countries see successful foreign investors as agents of innova- tion and sources of prosperity. Often, as MNEs generate greater profits in the local economy,

Systemic political risks, by influencing the macro business environment, affect the operation of all firms.

Procedural political risk institutes impediments that constrain the flexibility of local operations.

Distributive political risks gradually eliminate the local property rights of foreign companies.

Scale Class Type Outcome

Micro Financial Anomalies or arrange overseas loans.

Systemic Competing Perspectives The host government’s policies on, for instance, human rights, labor conditions, or environmental sustainability, create public relations problems for a foreign company at home.

Unilateral Breach of Contract The host government repudiates a contract negotiated with a foreign company or approves a local firm’s doing the same.

Procedural Tax Discrimination

Restrictions on Profit Repatriation

Regulatory policies that make it di€cult for the company to get credit

A foreign company is saddled with a higher tax burden than a local competitor.

foreign company can remit from its local operations to the home o€ce. The host government arbitrarily limits the amount of profit that a

Distributive Destructive Government Actions Unilateral trade barriers, often via local-content requirements, interfere with the distribution of products to local consumers.

Harmful Action Against People Local employees of a foreign company are threatened by kidnapping, extortion, or terrorist actions.

Catastrophic Expropriation/Nationalization The host government or a political faction seizes a company’s local assets. Compensation, if any, is usually trivial. Resurgent totalitarianism and resource nationalism increase this risk.

Macro Civil Strife, Insurrection, War Military action damages or destroys a company’s local operations.

Figure 3.4 Classes and Characteristics of Political risk Political risks have telltale characteristics in terms of types, techniques, and outcomes.

76 part 2 Comparative Environmental Frameworks

the host government questions its share of the rewards. Many conclude they should re- ceive a larger cut and impose policies to reset the distribution. Sometimes, changes happen quickly; for example, rising silver prices led the Bolivian government to quickly “dismantle the privatization model” governing its mining industry and expropriate assets owned by foreign-owned mining companies.101 More often, governments apply creeping expropriation, whereby the gradual reduction of the MNE’s local property rights (via legislation, regulation, and taxation) captures a bigger share of its profits.102

Vigilance helps MNEs reduce exposure. Many take preemptive steps, configuring activi- ties to diversify operations. Chrysler deterred creeping expropriation in Peru by restricting its local factory to make about half the parts needed to assemble a car; importing the rest meant the local facility was useless if the government expropriated it. Likewise, Japan’s escalating tension with China (notably, consumer boycotts of Japanese products, anti-Japanese riots, and foreboding military confrontations) pushes Japanese MNEs to hedge their political risk. Some apply a “China-plus” approach whereby they backstop their supply chains, once anchored in China, with a shadow hub in another Asian market such as Thailand, Vietnam, or the Philippines. Although inefficient, alternative locations safeguard the Japanese firms’ Asian operations in the event that hostilities escalate.103

Sometimes the importance of the market leaves MNEs few options. The United States, for instance, is not generally considered a hotbed of distributive political risk. If you’re in the cigarette business, however, the United States is a hazardous market.104 Its government battles cigarette makers (both domestic, like Philip Morris, and foreign, like British American Tobacco) on matters of taxation, regulation, business practice, and liability. Preserving mar- ket access requires adeptly managing escalating political risks.

Catastrophic political risk Political developments that adversely affect the operations of every firm in a country arise from macro flashpoints—for instance, ethnic discord, ille- gitimate regime change, civil disorder, or insurrection. No matter the cause, these sorts of threats fundamentally disrupt society. Antistate activities in Egypt, for example, paralyzed its economy. Foreign commerce and domestic business halted, markets seized, and supplies of all sorts vanished. Auspiciously, Egypt pulled back from the brink. In other situations, such as in failed states like Chad, Libya, or Zimbabwe, spiraling disruptions trigger conflicts that devastate the business environment for all firms.105

Catastrophic political risk devastates the business environment for all companies.

Yes Companies take politics seri- ously, aware that host governments

regulate the business environment and, hence, their per- formance. Consequently, MNEs face threats that demand political risk management strategies. All have a choice: apply either a proactive or a passive approach. Those who advocate active political risk management reason that the best defense is a good offense. In my opinion, they’re right. Taking charge, predicting problems, and controlling risks, besides the basis of good management, is the path to re- duce risk.

What to Do Executives use battle-tested tactics. First, they apply state-of-the-art statistical modeling to quan- tify political risks. Second, they stress-test their models, consulting experts on the political drama in a country. This two-pronged approach integrates hard-nosed analysis with insightful interpretation. It begins with the thesis that

neither positive nor negative political events are indepen- dent or chance events. Civil strife, creeping expropriation, regime change, ethnic tension, terrorism, and the like do not happen randomly. They unfold in observable patterns that bright folks applying sharp analytics can measure to estimate the odds of future outcomes. Applying rigorous models that detect, measure, and frame scenarios moves an MNE ahead of the curve, proactively managing its politi- cal risk exposure.

What to Watch Measuring the right set of discrete events is the key to modeling political risk—one identifies valid indicators that one can reliably track. Research iso- lates useful candidates such as the number of military offi- cers holding political office, pace of urbanization, frequency of government crises, pervasiveness of corruption, extent of crony capitalism, scope of counterfeiting, ethno-lingual frac- tionalization, and so on. Evolving methods fortify analyses.

Proactive Political Risk Management: The Superior Approach

Point Point

Chapter 3 The Political and Legal Environments Facing Business 77

For example, sentiment analysis, opinion mining, and com- putational linguistics track emotionally charged words and phrases used in online communications. Comparing the relative frequency of positive and negative words used in millions of exchanges, feeds, and posts on the Internet produces a national as well as a global heat map of how people “feel.” Sentiment analysis, for example, indicated that people’s resentment of autocratic rule crossed critical thresholds in Egypt and Libya weeks before violence ex- ploded.106 Moreover, sentiment analysis confirms that the challenge is not identifying individual measures, but rather identifying the right mix. Once done, skillful statistical mod- eling can objectively estimate risk exposure.

What to aDD Yes, the proactive approach faces lim- its. Spreadsheet estimation, no matter how rigorous, car- ries analysis only so far. Reaching this bound need not

halt risk management. One complements quantitative mea- sures with in-depth, country-specific qualitative indicators. Surveying country experts taps interpretation of a country’s political drama in ways that numbers struggle to represent. Specialists make sense of subtle intricacies, enhancing quantitative analyses with their expertise on subjective conditions. Then, what appear to be idiosyncratic circum- stances become, in their eyes, systematic political patterns.

Integrating expert assessments into a political risk strategy is straightforward. Begin by running standardized interviews with experts to assess a country’s political en- vironment. If stuck, a useful starting point is the Internet; searching “political risk management” generates resources. Collectively, they support projecting realistic scenarios and logically assigning probabilities to reasonable outcomes— the hallmarks of proactive political risk management.

no Unquestionably, a proactive approach exhibits the hallmark of

good management—enterprising, confident, and control- ling. However, it fails to explain why many MNEs do the exact opposite, choosing to manage political risk passively by treating it as an unpredictable hazard. These compa- nies reason that no model, regardless of how brilliantly it has been conceptualized, how systematically it has been specified, and how precisely it has been administered, can consistently predict political risk. Granted, shrewd models extrapolate meaningful insights from economic, political, and social reports about who may take office, what poli- cies may pass, and how these sorts of political events may affect markets. Unquestionably, these insights make the political system and its risks understandable. They do not, however, make it predictable.

What to heDge Insights do not qualify as predictions precisely because of the impracticality of reliably measuring messy, ill-structured situations. The political world is com- plex, its inalienable feature is ambiguity, and its tendency to change is absurdly high. Complicating matters are the innu- merable variables and their interaction that shape a political system—think of the 60 indicators that the EIU evaluates to assess the texture of democracy in a nation. This situa- tion becomes more difficult as MNEs venture into emerging markets, each with its own political peculiarities. Going from the United States to Mexico may be a stretch, but that pales in comparison to expanding from the United States to, say, Saudi Arabia, Kazakhstan, or Zimbabwe. No matter how powerful the spreadsheet or insightful the expert, the

dimensions and dynamics of a political environ- ment defy precise specification. Yes, developing

broad frameworks that anticipate unpredictable hazards is good business sense. However, prudently managing po- litical risk starts by rejecting the delusion that one can. The objective is protection, not prediction—or, put differently, the best offense is a good defense.

hoW to heDge This, of course, raises the question: How does one hedge exposure? Typically, an MNE purchases po- litical risk insurance. Policies provide single-country coverage or broad, multi-country, regional, or global coverage for a number of risks, including expropriation, political violence, currency inconvertibility, nonpayment, and contract frustra- tion. A range of public agencies, international organizations, and private companies offer coverage options.

• Multilateral development banks (MDBs) are international financial institutions funded and owned by member governments that promote growth in member countries by providing financial incentives to potential investors. Reducing the capital at risk encourages firms to ex- pand into otherwise unacceptably risky environments. Examples are the African Development Bank, the Asian Development Bank, and the World Bank Group.

• The Overseas Private Investment Corporation (OPIC) encourages U.S. investment projects overseas by pro- tecting ventures against various forms of risk, including civil strife, expropriation, and currency inconvertibility. Increasingly, OPIC promotes investments in emerging markets that support U.S. foreign policy priorities.

Counterpoint

Proactive Political Risk Management: The Superior Approach

78 part 2 Comparative Environmental Frameworks

• Private insurance companies underwrite political risk protection. Many cover “routine” distributive and pro- cedural risks that involve property and income, such as contract repudiation and currency inconvertibility. Private insurers are reluctant to cover catastrophic risks that result from civil strife, insurrection, or war.

What to Realize Ultimately, we have no quarrel with the notion that prediction and control are touchstones of professional management. Still, politics are anything but predictable and controllable. Few, if any, predicted the

political turmoil of the Arab Spring and the swift collapse of the Mubarak regime in Egypt. Likewise, Britain’s vote to depart the European Union surprised many. Moreover, few forecast democracy’s retreat a decade ago, especially when leading analysts were celebrating the “end of history.” Not to put too sharp a point on it, but if one cannot predict these mega-events, then exactly what can one predict? Therefore, it just makes more sense—and, we might add, more cents—to resist the delusion of proactive manage- ment and opt for the practicality of passively managing political risk.

The legal environmenT Just as political ideologies differ among countries, so also do legal systems. Thus, a key aspect of the IB environment is how a country develops, interprets, and enforces its laws. Businesspeople champion consistency in laws from country to country. Uniform, trans- parent laws make it easier to plan where to invest and, once there, how to compete on competencies, not connections. In theory, legitimate rules that apply without prejudice to individual or company conduct, regardless of political, cultural, or economic status, anchor a just and fair legal environment. Done judiciously, individuals and companies can make lawful decisions that support peace and prosperity. Done arbitrarily, all suffer because, Honoré de Balzac warned, “To distrust the judiciary marks the beginning of the end of society.”

The legal system specifies the rules that regulate behavior, the processes that enforce laws, and the procedures that resolve grievances. Legal systems differ across countries due to variations in tradition, precedent, usage, custom, or religious precepts. Moreover, with the exception of the members of the European Union, countries rarely recognize the legiti- macy of legal practices or court judgments from other nations; “Products move very easily across borders. Legal judgments, not so much.”107

All things being equal, every legal system institutes rules that support business for- mation, regulate transactions, and stabilize relationships. Doing so ensures that a society can pursue economic development and, when disagreements arise, resolve them without resorting to lawlessness. Modern legal systems share three components: (1) constitu- tional law, which translates the country’s constitution into an open and just legal sys- tem, setting the framework for government and defining the authority and procedure of political bodies to establish laws; (2) criminal law, which safeguards society by specify- ing what conduct is criminal, and prescribing punishment to those who breach those standards; and (3) civil and commercial laws, which ensure fairness and efficiency in business transactions by stipulating private rights and specific remedies in order to regulate conduct between individuals and/or organizations. No single legal component in and of itself guarantees a functioning legal system. Success depends on the collective effectiveness of all components to set and sustain philosophical integrity, procedural justice, and personal security.

Aspects of each type of law influence MNEs’ actions in a host country.108 Our open- ing case profiled how China’s legal traditions and practices attract, retain, as well as deter investment. Whereas Western investors are accustomed to transparent bankruptcy laws that protect creditors, Chinese law presently protects debtors. Likewise, one in six business practitioners in Russia has been prosecuted for alleged economic crime over the past decade; most cases have no plaintiff, acquittals are rare, and company assets are often expropriated by the state.109 Russian law, contends critics, “is the property of those who enforce it, and written exclusively for them.”110

The legal system is the mechanism for conceiving, stipulating, interpreting, and enforcing the laws in a formal jurisdiction.

Modern legal systems evidence three components:

• Constitutional Law • Criminal Law • Civil and Commercial Law

Chapter 3 The Political and Legal Environments Facing Business 79

Types of legal sysTems A country’s legal system officially regulates the conduct of business transactions, the rights and obligations of those doing business, and the legal redress open to those who believe they have been wronged. Understanding its nuances pushes executives to assess a variety of issues: Are laws based on abstractions or practicality? Do judges or juries pass judgment? Is justice based on objective principle or seen as the province of divinity? Do personal con- nections trump case facts? Peculiar as these questions sound, IB puts managers into different situations wherein different interpretations of these issues result in different standards that regulate the legality of their actions.

The globalization of business drives the standardization of laws across countries. Still, enduring philosophical outlooks and practical orientations result in different types of legal systems around the world. Map 3.4 identifies the primary types that prevail today, namely common law, civil law, theocratic law, customary law, and mixed systems.111

Common law A common law system relies on tradition, judge-made precedent, and usage. It respects established case law in resolving disputes. Judicial officials refer to statu- tory codes and legislation, but only after considering the rules of the court, custom, judicial reasoning, prior court decisions, and principles of equity. The doctrine of stare decisis is a dis- tinguishing feature—it obliges judges to respect the precedent established by prior court rul- ings.112 Common law has Anglo-American legacies; it prevails in, among others, Australia, Canada, England, Hong Kong, India, New Zealand, and the United States.

Civil law A civil law system relies on the systematic codification of accessible, detailed laws. It assigns political officials, rather than government-employed judges, the responsibil- ity to translate legal principles into a compendium of regulatory statutes. Rather than create

Managers face five types of legal systems in the world today:

• Common law • Civil law • Theocratic law • Customary law • Mixed

Common law is developed by judges through the decisions of courts.

Civil law is based on strict application of statutory laws.

Civil Law Common Law Muslim Law Customary Law Mixed System

map 3.4 The wide world of legal systems Managers operating internationally face legal environments anchored in a variety of philosophies and principles. Here we see the world organized by predominant types. Source: University of Ottawa, “World Legal Systems,” retrieved February 15, 2016, from http://www.juriglobe.ca/eng/index.php. Used by permission.

http://www.juriglobe.ca/eng/index.php

80 part 2 Comparative Environmental Frameworks

law, as they do in the common law system, judges apply the relevant statutes to resolve disputes. In contrast to stare decisis, judicial officers in a civil law system are not bound by precedent. Statutory codes, however, constrain their authority. Similarly, notaries public play minor roles in common law countries, but are important gatekeepers as well as regulators of contracts and certificates in civil law systems. Civil law is the most widespread type of legal system in the world; we find it in approximately 150 countries, including France, Germany, Japan, and Mexico.

Theocratic law A theocratic law system relies on religious doctrine, precepts, and beliefs. Ultimate legal authority is vested in religious leaders, who regulate business transactions and social relations based on their interpretation of a sacred text. For instance, Iran’s President Hassan Rouhani defers to the final say of Iran’s Supreme Leader, cleric Ayatollah Ali Khamenei. Theocratic laws see no separation of church and state; government, law, and re- ligion are one. The most prevalent theocratic system, Muslim or Islamic law, Shari’a, is based on the Qur’an (Koran), the Sunnah (decisions and sayings of the Prophet Muhammad), the writings of Islamic scholars, and the consensus of legal communities in Muslim countries.113 Muslim law prevails in the Middle East and northern Africa. However, modernists (e.g., Turkey, Indonesia), traditionalists (e.g., Kuwait, Malaysia), and fundamentalists (e.g., Iran, Saudi Arabia) advocate different interpretations of Shari’a.

Customary law A customary law system reflects the wisdom of daily experience or, more formally, enduring spiritual legacies and time-honored philosophical outlooks. It an- chors legal systems in many indigenous communities, defining the rights and responsibilities of members. Legitimacy follows not from the stamp of a powerful person or institution, but from individuals recognizing the benefits of complying with community standards. Offenses are treated as torts (i.e., private wrongs or injuries rather than crimes against the state or society). Customary law prevails in many developing countries, particularly in Africa.114 Few nations operate under a wholly customary legal system. Rather, this type often plays a role in countries that have a mixed legal system.

mixed system A mixed legal system results when a nation uses two or more of the preceding types. Map 3.4 shows that one finds most mixed legal systems in Africa and Asia. The Philippines, South Africa, and Guyana, for instance, follow a blend of civil and common law. Nigeria, Malaysia, and Kenya mix common, theocratic, and customary law. Bangladesh, Singapore, and Pakistan blend common and theocratic law. Indonesia, Djibouti, and Oman, conversely, blend theocratic law with civil codes.115

The foundaTion of legaliTy The Third Wave of Democratization supplanted the philosophy of collectivism with individu- alism. This change endorsed individuals’ inalienable legal rights and instituted due process to protect them. In many countries, the law grew more transparent, the courts more impartial, and officials more accountable. Presently, democracy’s retreat, by signaling the rise of single- party governments advocating state-sponsored collectivism, pushes managers to pinpoint likely changes in legal systems. Given that authoritarian governments use the legal system to regulate business activity in order to support and sustain the state, there is little separation of law and the state. Bluntly put, justice is not blind, but arbitrary, oppressive, and state-serving.

Recall earlier observations on legal affairs in China. Doing business there, said an ob- server, means dealing with “a society that had . . . plenty of rules, but they were seldom en- forced. China appeared to be run by masterful showmen: appearances mattered more than substance, the rules were there to be distorted.”116 Moreover, the CCP’s official status above the law further complicates determining what is right and what is wrong. China is not the exception. The ambiguities that permeate Russia’s legal code means businesses “cannot even keep track of the law, let alone decide whether to follow it.”117 Besides confusion, ambiguity renders the law less about protecting citizens and more a tool of arbitrary state power.

Theocratic law is based on the inspirations and instructions of religious teachings.

Customary law is based on norms of behavior that gain legitimacy through ongoing practice.

ConCepT CheCks

As we saw in Chapter 1, national business environments vary. Granted, there are points of convergence, but conducting international business means recognizing the existence of fundamental differences across countries. Here, we stress legal systems differ on a variety of principles and practices.

Chapter 3 The Political and Legal Environments Facing Business 81

The basis of rule Once relegated to the periphery of the global economy, emerging mar- kets steadily command center stage. Their expanding economies increasingly frame interpre- tation of legal trends. Managers assess the prevailing philosophical basis of law in order to understand how local officials will regulate their activities. Specifically, the rise of emerging economies, along with their dissimilar conceptions of legality, requires managers ask, “What is the basis of rule in a given country?” This question inevitably directs attention to the rule of man versus the rule of law.

The rule of man holds that ultimate authority resides in a person whose word and whim, no matter how unfair or unjust, is law. For much of history, rulers and law were one and the same—the law was the will of the ruler, whether that ruler was called king, lord, empress, shogun, czar, raj, chief, caliph, etc.118 Today, these titles have given way to others, such as chairman, comandante, generalissimo, dictator, or supreme leader. In whatever form and with whatever title, the rule of man defines a legal system in which the sovereign leader’s actions are not restricted by a constitution, regulated by criminal codes, or open to opposi- tion. For example, Saddam Hussein, former president of Iraq, imperiously declared the “law is anything I write on a scrap of paper.”119 In China, top-ranked party members accused of wrongdoing answer to the CCP first, not to the law of the land, precisely because “the Party sits outside, and above the law.”120 In effect, the sovereign leader creates the law, officials are the followers of the law, and the citizens its subjects. The law is an apparatus of the state, used to suppress threats to, and reward support for, its authority. Constitutional issues are discretionary, criminal law is arbitrary, and opportunism taints commercial and civil matters. Hence, the rule of man is an instrumental device of authoritarianism.

The rule of law holds that no one, whether a public official or private citizen, is above the law. The U.S. Declaration of Independence’s decree, for instance, that “all men are cre- ated equal” holds that everyone, from kings to peasants, is subject to the same laws.121 More symbolically, in front of courthouses worldwide stands a statue of a woman, carrying a sword and measuring balances, sometimes wearing a blindfold, sometimes with eyes closed. Her sword stands for the power of the court; her scales for the competing claims of the petition- ers; and her blindfold signifies that justice is meted out objectively, without fear or favor, regardless of identity, power, or weakness. Justice is blind so that justice is impartial.

The rule of law holds that governmental authority is legitimately exercised in accordance with written, publicly disclosed laws. Citizens regard constitutional principles as legitimate, criminal codes as fair, and commercial/civil matters as just. Laws are clear, publicized, and protective of fundamental rights; they are developed, administered, and enforced transpar- ently; all citizens have access to a competent, independent, and ethical judiciary; and all of- ficials are accountable to the law of the land.122 Democracy, fortified by the rule of law, works precisely because it has the legal tools to constrain state power in safeguarding lives, liberty, and property.123

mapping The basis of law Originating in the Magna Carta of 1215, the concept of the rule of law anchored the legal evolution of many developed economies, most notably Great Britain, the United States, France, and Germany. Besides instituting a just political environment, the rule of law guar- antees the enforceability of commercial contracts and business transactions while safe- guarding property rights. Investors and companies rely on it to validate the laws, codes, and statutes that support investment and enterprise.

For example, in the West, property rights—namely, the authority to determine how one controls, benefits from, and transfers one’s property—are so taken for granted that they rarely cross our minds. We cannot say the same for many countries in Asia, Africa, the Middle East, and South America. There, the historic centrality of the rule of man makes the principles and practices of the rule of law remote abstractions. At best, the rule of law has a negligible legacy in the legal traditions of many long-developing, now-emerging countries. As a result, ambiguous property rights in countries like Russia, China, Venezuela, Malaysia,

ConCepT CheCks

As developed in Chapter 2, a country’s cultural orientation toward standards of account- ability, equity, and fairness influ- ences the principles that anchor its legal environment.

The rule of man holds that the ruler, in whatever form, com- mands authority that is above the law.

The rule of man anchors the legal system in totalitarian states.

The rule of law holds that no individual is above laws that are clearly specified, com- monly understood, and fairly enforced.

82 part 2 Comparative Environmental Frameworks

Percentile Range

No Data for country

0–10th

10–25th

25–50th

50–75th

75–90th

90–100th

map 3.5 The worldwide practice of the rule of law The coding of this map reflects the degree that a government exercised its authority according to written laws and established enforcement procedures. The United States’ classification at the 90th percentile indicates the pervasiveness of the rule of law in that nation. Conversely, Venezuela’s classification below the 10th percentile indicates the pervasiveness of the rule of man in that nation.126

Source: Kaufmann D., A. Kraay, and M. Mastruzzi (2010). The Worldwide Governance Indicators: Methodology and Analytical Issues. The Worldwide Governanace Indicators are available at: www.govindicators.org. © 2015 The World Bank Group. All Rights Reserved.

Ukraine, Saudi Arabia, and Vietnam are an enduring concern.124 In countries where the rule of man is the basis of law, acceptable marketplace behavior is unpredictable. Managers stay alert to trumped-up charges, solicitation of bribes, and favoritism of local rivals.

Map 3.5 indicates that the rule of law prevails in wealthier, westernized countries (i.e., the United States, Canada, Japan, New Zealand, Australia, and most of Europe).125 In con- trast, the countries that fall in the long crescent that starts in northern Russia, cuts southward through China, circles down to South East Asia, moves on toward the Middle East, and ex- tends through Africa over to South America show the far greater pervasiveness of the rule of man. Conclusion? The rule of man anchors the legal systems of many of today’s emerging countries. Managers, eyeing these fast-growing markets, realize that where there is no for- mal law officially in place, society typically defaults to the rule of man.

whiCh rule when? Some hypothesize that developing countries, especially fast-growing emerging economies like China, Nigeria, Peru, Thailand, and Malaysia, will follow the precedent of developed countries and gradually accept the legitimacy of the rule of law. History shows that as the de- veloped, wealthier countries moved from agrarian to industrial economies, individuals called

The rule of man anchors the legal systems of many of today’s emerging countries.

http://www.govindicators.org

Chapter 3 The Political and Legal Environments Facing Business 83

for laws to protect property rights. Sustaining economic development, as well as protecting growing wealth, required a legal system that no longer looked to the “man” for guidance and resolution, but to just, fair, and transparent laws. Therefore, extrapolating from western his- tory, the shift from agrarianism to industrialism in developing countries should progressively support the institution of the rule of law.

Recent circumstances, however, complicate the projected progression. Democracy’s on- going decline has slowed progress precisely because the rule of law is antithetical to totali- tarianism—one cannot be the “man” if one must answer to the law. More practically, China’s economic performance tests the thesis that a positive relationship exists between the rule of law, economic growth, and prosperity.128 China’s status as the world’s largest recipient of foreign investment over the past few decades, notwithstanding troublesome crony capital- ism and persistent corruption, questions the necessity of the rule of law. Similar situations in Russia, Venezuela, Saudi Arabia, Belarus, and Turkmenistan, among others, highlight foreign investors’ capacity to prosper in markets run by the “man.”

Along these lines, some point to the powerful influence of national legacies. The fore- cast of the rule of law as the inevitable end-state for all nations presumes that the legal philosophies of the West apply to all. Instead, some counter that the “West does not know best,” arguing that the efficiency and stability of a progressive, autocratic ruler are often more important than the liberty and freedom of a messy democracy. Explained a prominent Western U.S. commentator, “One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages.”129 Indeed, throughout its storied 5000-year history, Chinese civilization has never practiced democratic governance based on the rule of law. Instead, as dynasties came and went, each followed its mandate of heaven in instituting authoritarian governance and applying the rule of man. Consequently, managers watch and learn as changing economic environments influence the basis of law. That is, growing demand from increasingly wealthy

ConCepT CheCks

Chapter 1 suggests that demo- cratic political systems grant MNEs the freedom to engage in their preferred modes of inter- national business. Democracy’s retreat creates uncertainty about operating in particular countries given that all use their legal system to encourage, regulate, or prohibit business activity.

The growing confidence of emerging economies increasingly calls into question the long-running presumption that “the West knows best.”

Percentile Range

No Data for country

0–10th

10–25th

25–50th

50–75th

75–90th

90–100th

Lady Justice, here seen in the Römer Square in Frankfurt, Germany, is an allegorical personification of the moral force of the rule of law.127

Source: klickable/Fotolia.

▶

84 part 2 Comparative Environmental Frameworks

citizens for stronger property rights, by forcing the accountability of public officials, may gradually legitimate the institution of the rule of law.130

impliCaTions To managers Rising authoritarianism in many developing countries complicates legal circumstances. Again, look at Maps 3.2 and 3.3. Every country that Freedom House rates as “Partly Free” or “Not Free,” or, for that matter, the EIU classifies as a “hybrid regime” or “authoritarian re- gime,” lies within the “rule of man crescent.” Uncertainty about the basis of law and the goals of government throughout much of the world creates risky environments. Operating in mar- kets regulated by the rule of law sees consistent application of legitimate laws. Operating in markets regulated by the rule of man sees arbitrary, self-serving regulation.

In Germany, for example, action taken by foreign firms against local companies that counterfeit their products consistently proves decisive. Violators are restrained and punished. In Belarus or Kazakhstan, however, the same sorts of legal actions often prove pointless. There, as in other rule-of-man systems, writs, injunctions, and lawsuits are trapped in a slow-grinding legal machine that answers to the leader, not to impartial legal standards.131 Violators in the good graces of the “man,” whether Alexander Lukashenko of Belarus or Nursultan Nazarbayev of Kazakhstan, flourish.132

Certainly, as had long been the case, MNEs could avoid risky markets. Until 2000 or so, the basis of law was perhaps interesting, but largely extraneous. Western markets pro- vided many opportunities for productive, profitable activity. Developing markets were the periphery of the global economy, providing raw materials or low-cost labor. The occasional dispute between the adventurous Western company and the locals was typically resolved in the favor of the former. Today, slow growth in the West moves the fast-growing emerging economies to the center of the global market. Abundant supply of inexpensive, productive resources along with accelerating local demand is a siren call few MNEs can resist. As GE’s CEO explained, “We’ve globalized around markets . . . Today we go to Brazil, we go to China, we go to India because that’s where the customers are.”133 Looking forward, 400 midsize emerging-market cities (many unfamiliar in the West, such as Sanaa, Ibadan, Ouagadougou, Chittagong, Kinshasa, and Bamako), will generate nearly 40 percent of global growth over the next 15 years.134 Consequently MNEs long accustomed to the rule of law in markets like Germany and Japan, increasingly operate in markets anchored in the rule of man, like China and Russia.

legal issues faCing inTernaTional Companies The globalization of markets progressively standardizes legal systems. Countries intent on attracting foreign investors develop positive reputations, transparent regulation, and consis- tent politics. Similarly, officials design business regulations that are easily accessible and ob- jectively administered. Straightforward, well-designed rules discourage corruption, improve accountability, and boost economic growth. Joining transnational organizations accelerate these trends. For instance, the European Union requires that all member countries satisfy standards of the rule of law; the World Bank requires borrowers to agree to legal reforms; the WTO imposes a raft of legal standards that supersede national statutes.

Despite convergence, different countries regulate business activity differently. Besides the operating problems posed by differing political ideologies, countries’ application of diverse legal principles complicates matters. Moreover, new forms of business activity along with changing patterns of trade and investment put MNEs in uncertain legal situations. Aspects of day-to-day decision-making in the MNE adjust to obey local laws on starting, running, and closing a business. Likewise, how MNEs hire workers, obtain credit, pay taxes, and en- force contracts must comply with applicable, often differing, laws.135

Uncertainty about the basis of law in a particular country complicates decision-making in the MNE.

ConCepT CheCks

A theme of the text is the expanding linkages among individuals, companies, coun- tries, and institutions. Here, we emphasize the importance of relationships between ideas and ideals, namely the interplay among its type of political sys- tem, its organizing legal philos- ophy, and its prevailing doctrine of law. Making these connec- tions helps managers assess the systemic nature of the country’s business environment.

Chapter 3 The Political and Legal Environments Facing Business 85

operaTional ConCerns A fundamental thesis holds that productive business activity requires fair, just, and trans- parent rules that (1) set and sustain property rights, (2) minimize the costs and complica- tions of resolving disputes, (3) specify rules that reduce the riskiness of business transac- tions, and (4) organize rules to protect contractual partners against abuse. Annually, the World Bank assesses how well countries meet these standards, evaluating the influence of local laws on the day-to-day operations of private companies. Specifically, the World Bank looks at the costs, requirements, and procedures a business faces, at last count, in 185 countries in terms of starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, taxes, trading across bor- ders, enforcing contracts, getting an electricity connection, and closing a business. Table 3.4 provides a snapshot of cross- country variation in starting, running, and closing a business. Let’s take a closer look at each.

One quick note: We focus on the first-order effects of day-to-day operations for a small to medium-size enterprise. Keep in mind that the same sorts of activities challenge large MNEs. For instance, when entering India, multi-brand foreign chains, such as Walmart, Carrefour, IKEA, and Tesco, face a battery of regulations. They must operate as joint ventures, have no higher than a 51 percent ownership share, direct at least half of their capital invest- ments into processing infrastructure, and open outlets only in cities that have at least 1 mil- lion residents.136

getting started Starting a business involves activities such as registering its name, adopting the appropriate tax structure, obtaining licenses and permits, arranging credit, and securing insurance. Some countries expedite this process, others complicate it. A Brazilian entrepreneur recalled his experience starting his company in his home country; obtaining

Operational concerns that managers face worldwide include

• starting a business, • entering and enforcing

contracts, • hiring and firing workers, • closing a business.

Table 3.4 The rules of the game

The World Bank tracks micro-level characteristics of the regulatory frameworks in 185 economies. Comparative information on the rules of the game encourages officials to streamline their legal systems, thereby improving the efficiency of national business environments. Here we highlight data for a subsample of countries in terms of opening, running, and closing a business.

economy GNI Per

Capita (Us$) starting a Business enforcing Contracts Closing a Business

Number of Procedures

Time (Days)

Cost (% of income per

capita)

Quality of judicial process Time

Cost* (% of Claim)

Recovery rate (C on

the $) Time

(Years) Cost (%

of estate) Australia 64,680 3 2.5 0.7 15.5 395 21.8 82.18 1 8 Brazil 11,760 11 102 3.7 12.5 731 20.7 22.4 4 12 Canada 51,690 2 1.5 0.4 10.5 570 22.3 87.3 0.8 7 Chad 1,010 9 60 150.4 6.5 743 45.7 0 4 60 China 7,380 11 30 0.6 14.5 406 15.1 36.2 1.7 22 France 43,080 5 4 0.8 12 395 17.4 77.5 1.9 9 Germany 47,640 9 10.5 1.8 12 429 14.4 83.7 1.2 8 Guatemala 3,440 6 18.5 25 6 1402 26.5 27.5 3 14.5 India 1,610 14 29 17 7.5 1420 39.6 25.7 4.3 9 Japan 42,000 8 10.5 7.5 7.5 360 23.4 92.9 0.6 3.5 Korea, Rep. 27,090 3 For 14.5 13.5 230 10.3 83.6 1.5 3.5 Russia Fed. 13,210 5 12 1.2 12.5 310 15 41.3 2 9 Singapore 55,150 3 2.5 0.6 15.5 150 25.8 89.7 0.8 3 United States 55,200 6 4 1.3 15 370 22.9 81.5 1.5 7 United Kingdom 42,690 4 4.5 0.1 15 437 43.9 80.6 1 6

Source: Compiled from “Doing Business 2012” The World Bank.

86 part 2 Comparative Environmental Frameworks

authorizations, licenses, and permits from seven different ministries took about 150 days. Subsequently, he launched a U.S.-based business and noted that “within a week I had formed an LLC (limited liability corporation), incorporated in Delaware, and set up bank accounts.”137 Similarly, start-up is a straightforward process in Canada, requiring two reg- istration procedures that cover tax, labor, and administrative declarations. Conversely, India imposes 14 procedural requirements, including regulations for bank deposits, court registra- tion, health benefits, and so on. The upshot: it takes about a day and a half to start a business in Canada but about two weeks in India.

making and enforcing Contracts Once up and running, companies enter contracts with buyers and sellers.138 The sanctity of a contract is vital to business transactions. The United Nations Convention on Contracts for the International Sale of Goods sets guidelines for ne- gotiating and enforcing contracts. Still, standards vary across legal systems. Countries using a common law system, for instance, encourage precise, detailed contracts, whereas those with a civil law system sanction less exact agreements. Similar tendencies show up in contract- enforcement policies. Australia, Norway, and the United Kingdom impose the fewest num- ber of enforcement procedures. Burundi, Angola, Bolivia, Cameroon, El Salvador, Mexico, and Panama require many. Singapore needs 150 days to enforce a contract, the United States about 370 days, and Timor-Leste some 1,800 days.

hiring and firing No matter where a firm operates, it must hire and, when necessary, fire workers. Worldwide, workplace regulation and employment law speak to how workers are hired, what they are paid, how many hours they can work, and how they are fired. Singapore, New Zealand, and the United States have flexible labor-regulation statutes. China provides the greatest flexibility in hiring, firing, and setting employment conditions (work hours, mini- mum wages, and benefits). In contrast, Angola, Belarus, and Paraguay strictly regulate how companies terminate employees as well as require generous severance payments.

Slow-moving bureaucracies often complicate workplace regulation. Mexico, for in- stance, last overhauled its labor law in the 1970s; today, sacking a worker after a year of employment costs three times as much as in Chile, and eight times more than in Brazil. Mexico’s higher severance costs also constrain firms’ flexibility.139 Regarding bureaucracy, India’s national government imposes nearly 60 labor laws while its various states add another 150 or so. India’s Industrial Disputes Act, for example, requires any company employing 100 or more workers to obtain state permission before firing anyone, even if it has hit hard times.140

getting out or going under Closing a business involves more than padlocking the doors and walking away. In Western markets, the bankruptcy process is anchored in the English bankruptcy law of 1732, the first modern law to address this issue, and its progres- sive revision, beginning in 1800, by the United States. Ireland, Japan, Canada, and Hong Kong, for instance, make shutting down fast (between four to eight months) and cheap (be- tween 1 and 10 percent of the estate).141 The situation differs in developing countries. India’s lack of a comprehensive bankruptcy code complicates dealing with creditors, officials, and courts, which in turn discourages bankruptcy. Consequently, only 4 of every 10,000 firms go bankrupt in India, compared with 350 per 10,000 firms in the United States.142 Bankruptcy in Indonesia, Vietnam, and Ecuador is slow (between five to eight years) and expensive (between 10 and 30 percent of the estate). Several countries, including Burundi, Cambodia, Guinea-Bissau, and Dominica, stipulate no standards to govern dissolution.

sTraTegiC ConCerns Operational concerns focus managers’ attention on the day-to-day demands of opening, running, and closing a business. Strategic concerns direct their attention to long-term issues that shape the competitiveness, profitability, and sustainability of the firm. A country’s legal

The type of legal system in the country directly influences the standards of acceptable contracts.

Strategic concerns that manag- ers face worldwide include

• product origin and local content,

• marketplace behavior, • legal jurisdiction, • product safety and liability, • intellectual property

protection.

Chapter 3 The Political and Legal Environments Facing Business 87

environment influences each aspect. Let’s see how it shapes an MNE’s strategic decisions on making a product, marketing it, and safeguarding its proprietary features.

product regulation National laws affect the flow of products across borders. Host governments set laws that regulate access based on the product’s country of origin— the country where it was grown, produced, or manufactured. Some countries apply this policy to product labels, under the title COOL (country-of-origin labeling), to inform consumers and support local producers. National security concerns also shape country- of-origin regulations. Suspicion about the espionage capabilities of their communication products dog Huawei and ZTE. Both Chinese MNEs are marked by opaque governance and tight linkages with the Communist Party of China. National security concerns have led Australia, Canada, and U.S. authorities to exclude their network equipment products from public contracts.143

Politicians also enact regulations to protect jobs, appease voters, placate special interests, and preserve tax revenue. Host governments prefer that MNEs make the greatest possible portion of their product(s) locally. Besides boosting local enterprise, technology transfers and knowledge spillovers support domestic innovation. To spur reluctant companies, governments enforce local content regulations, thereby requiring that a certain percentage of intermediate goods used in the production processes come from domestic suppliers. Brazil, for instance, levies a 30 percent tax increase on imported cars with less than 65 percent local content.144

product safety and liability regulation Countries impose product-safety and li- ability laws that require an MNE to adapt a product or else forsake market access. As a rule, wealthier countries impose stringent standards, whereas poorer countries, re- flecting developing legal codes and rule-of-man legacies, inconsistently apply broader regulations. Presently, the European Union’s product-liability directive shapes global standards.145 It outlines the legal responsibility of manufacturers and stipulates the process of product-liability compensation claims. Then again, some MNEs proactively preempt the risk. The Danish toy maker Lego, for instance, noted consumers’ fear of the possible toxicity of plastic toys made in China and did not open a factory there. Instead, Lego opted for factories in comparatively more expensive, but less worrisome Mexico and Eastern Europe.146

legal Jurisdiction Determining which country’s legal system will adjudicate a dispute is the matter of legal jurisdiction. Typically, in a cross-national dispute, each company claims jurisdiction in the belief that it will likely receive favorable treatment from its home court. This situation is especially pressing when an MNE from a rule-of-law system, say Canada, has legal difficulties in a rule-of-man environment, say Venezuela. Complicated ownership patterns coupled with interdependent operations spanning multiple countries often make it difficult to determine legal jurisdiction. Hence, MNEs commonly specify a choice-of-law clause in contracts that stipulates whose laws, when necessary, govern dispute resolution. Similarly, companies initiating contracts commonly add an arbitration provision, agree- ing in advance to resolve potential disputes outside of court through agencies such as the International Court of Arbitration.

intellectual property In Adam Smith’s time, countries drew strength from their agricul- tural prowess. Later, smokestack industries defined a nation’s prosperity and power. Now, countries look to their brainpower to create might, prestige, and wealth. We call this output intellectual property (IP)—the creative ideas, innovative expertise, or intangible insights that create a competitive advantage for an individual, company, or country. The rising power of ideas in the global economy has made protecting intellectual property a growing concern.

Mainstream thought holds that the right to claim ownership of intellectual property stimulates innovation.147 Transnational institutions—notably, the World Intellectual Property Organization (WIPO), along with governments and industry associations—push for stron- ger protection. The primary safeguard is an intellectual property right (IPR) that grants the

Product safety regulations set by the European Union shape standards worldwide.

The addition of a choice-of-law clause to contracts between different parties in different countries is an effective legal safeguard.

Intellectual property is the general term for creative ideas, expertise, or intangible insights that grant its owner a competitive advantage.

Intellectual property rights refer to the right to control and derive the benefits from writing (copyright), inventions (pat- ents), processes (trade secrets), and identifiers (trademarks).

88 part 2 Comparative Environmental Frameworks

registered owners of inventions, literary and artistic works, and symbols, names, images, or designs the right to determine the legal authority to decide who may use the property and under what circumstances. Essentially, an IPR constitutes a legally enforceable, but limited monopoly granted by a country to the innovator.148

Matters of jurisdiction complicate IP protection. A U.S. patent, for example, estab- lishes an IPR only in the United States and its territories and possessions; it does not extend to foreign markets. There’s no shortcut to worldwide protection—a company can- not register a “global” patent, trademark, or copyright. Although an IPR sounds secure, enforcing it often proves difficult. For example, in the United States, companies can go after the makers and sellers, not users, of counterfeit goods.149 Worldwide, governments claim to abide by these agreements and enforce IPRs. However, piracy threatens popular, pricey, and vital products.

MNEs invest great effort to safeguard their intellectual property. The pervasiveness of piracy worldwide testifies to the challenge. Our closing case, “It’s a Knockoff World,” profiles this situa- tion. Weak enforcement in some countries, particularly those marked by a rule of man bias and authoritarian politics, imposes obstacles. Other problems arise because not all countries support the various agreements that protect IPRs—primarily, the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works. Both emerged in the 1880s and are periodically updated. The WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) broadens IP protection while, more recently, the EU is moving toward a “unitary patent” recognized automatically in all member countries.

poliTiCs, law, and The business environmenT Table 3.5 identifies the top-ranked and bottom-ranked countries whose political and legal policies enact, respectively, the most or least supportive business environments. In terms of the former, Singapore has developed a comprehensive legal code that fosters the most favor- able business environment in the world. Conversely, the Central African Republic’s political risks create the world’s least favorable business environment. The rankings highlight a key relationship: most of the top-ranked countries have a democratic political system and a com- mon or civil law legal system anchored in the rule of law. In contrast, most bottom-ranked countries exhibit authoritarian politics and a mixed legal system anchored in the rule of man.

ConCepT CheCks

Chapters 1 and 2 note that income and wealth influence the actions that countries, both rich and poor, take to develop their business environments. Correspondingly, these fac- tors also influence countries’ approach to regulating MNEs local operations.

Richer countries typically regulate business activities less. Poorer countries typically regulate more.

ConCepT CheCks

Chapter 1 notes that some interest groups fear globaliza- tion fatally weakens national sovereignty—that is, growing external control reduces a nation’s right to act in its own interests. Here, we observe that this attitude often intensifies political risk. Foreign investors face higher risks when a host government becomes increas- ingly sensitive to threats to its sovereignty.

Table 3.5 easy here, hard There: doing business in various Countries

The World Bank ranks 185 countries on their respective ease of doing business—the higher the score, the more favorable the business environment. Technically, the ease of business index averages the country’s percentile rankings on ten dimensions: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, and enforcing contracts. Here we see the best and worst performers.

Source: Doing Business 2016. The World Bank. Retrieved May 15, 2016.

Country Ranking Country Ranking Singapore 1 Niger 176 Hong Kong SAR, China 2 Côte d’Ivoire 177 New Zealand 3 Guinea 178 United States 4 Guinea-Bissau 179 Denmark 5 Venezuela 180 Norway 6 Congo, Dem. Rep. 181 United Kingdom 7 Eritrea 182 South Korea 8 Congo, Republic 183 Georgia 9 Chad 184 Australia 10 Central African Republic 185

Chapter 3 The Political and Legal Environments Facing Business 89

Case It’s a Knockoff World Companies are dogged by piracy—the illegal imitation, copying, or counterfeiting of their registered products. It’s a tense issue given that it cuts to issues of innovation, history, culture, politics, and prosperity. Making matters worse is that pirates, besides being everywhere, come in every form: individuals making unauthorized copies at work, imitators laboring in dingy sweatshops, and hardened criminals run- ning global networks.

The problem, basically, is straightforward: intellectual property (IP) in the form of books, music, product designs, brand names, process innovations, software, film, and the like is tough to conceive but ridiculously easy to copy.151 Moreover, notwithstanding moral shortcomings, pirates do not lack initiative or imagination. In our knockoff world, if it’s being made, it’s being faked. Fair game includes virtually everything—from the humble aspirin to the flashy Ferrari.152 And, for the kicker, knockoffs sell for a fraction of the price of the real thing to eager buyers worldwide.

Big Money, Big Risks IP theft is big business. Globalization and the Internet fuel the perfect storm, the former moving much of the world’s manufacturing to countries with poor IP protection, the latter providing cheap, easily accessible marketing platforms and distribution channels. The costs of counterfeit IP, from lost sales, eroded consumer confidence, diminished brand rep- utation, dangerous products, enforcement expenses, and legal costs, is staggering. The International Anti-Counter- feiting Coalition (IACC) estimates that international trade in illegitimate goods runs more than US$1.75 trillion a year—

approximately 7 percent of world merchandise trade. To top it off, piracy has grown more than 10,000 percent in the past three decades—it was a paltry $5.5 billion in 1982.153

Piracy grows because counterfeiting is astoundingly profitable; gross margins of 500 to 5,000 percent are com- mon.154 Counterfeit medicines are more profitable than heroin, copywatches may run a couple of bucks to make but sell for $20 in Beijing’s Silk Market and $250 on Internet sites, and sales of high-end counterfeit software rival the return from cocaine trafficking.155

The lucrative rewards of piracy entice even notorious drug cartels to diversify. Mexico’s La Familia and Los Zetas, for example, generate hundreds of millions of dollars selling counterfeit DVDs. Their expanding operations have made Mexico the piracy capital of Latin America. The cartels ex- port so many bootleg movies to Central America, for exam- ple, that some studios have stopped shipping their products there. Also, whether buying it in Cancun, Cozumel, Monter- rey, or Tijuana, the bootleg DVD more than likely bears a stamp indicating it was distributed by La Familia (a butter- fly) or Zetas (a stallion).156 Similarly, the cartels pirate soft- ware. La Familia sells counterfeit Microsoft software through kiosks, markets, and stores in the Michoacán region. Add- ing insult to injury, it stamps counterfeit Office discs with its “FMM” logo.157

Microsoft’s predicament in China highlights common problems. Copies of its Office and Windows programs are peddled in market stalls for a few dollars, a fraction of their retail price. Rampant software piracy means Microsoft’s revenue in China is a small fraction of its U.S. sales—even though personal-computer sales are higher in China. Early

Table 3.5, along with Table 3.4, highlights an inverse relationship between nation’s gen- eral income levels and its scope of regulation—generally, richer countries regulate less and poorer countries regulate more. In high-income countries (e.g., the United States, France, Japan), starting a business requires an average of 6.28 procedures, spans 18 days, and costs 7 percent of per capita income. Doing the same in middle-income countries (e.g., Mexico, Poland, Malaysia, China, India, South Africa), requires an average of 7.8 procedures, spans 36 days, and costs 28 percent of per capita income. Lastly, in low-income countries (e.g., Bangladesh, Ethiopia, Nepal), one is facing 7.5 procedures, a 90-day span, and 37 percent of per capita income. Furthermore, legal systems in wealthier nations tend to regulate opera- tional activities more consistently than do those in poorer countries—as one would expect, given the prevalence of the rule of law in the former and the rule of man in the latter.150

Countries that observe the rule of law, as opposed to the rule of man, more aggressively protect intellectual property rights. Hence, the predominant share of counterfeit products is made in countries in which the rule of man prevails.

90 part 2 Comparative Environmental Frameworks

on, explained its former CEO, Microsoft’s total revenue in China, with its population of 1.34 billion, was less than what it collects in the Netherlands, a country of fewer than 17 mil- lion.158 This situation is not Microsoft’s particular problem; thousands of companies in dozens of countries struggle with the same challenge.

Nothing Is Off-Limits Many think piracy is the problem of snobbish, expensive brands. Certainly, counterfeits target high-end brands—the top 10 brands counterfeited include Microsoft, Nike, Adidas, Burberry, Louis Vuitton, and Sony. Luxury fakes, however, account for about 5 percent of the problem. The remaining 95 percent include copies of everyday products. Nothing is off-limits; “If it’s making money over here in the U.S., it’s go- ing to be reverse-engineered or made overseas.”159

The pharmaceutical supply chain is a pirate’s paradise and counterfeiting threatens global health and safety; coun- terfeit medicines annually kill tens of thousands and it’s any- one’s guess how much fake medicine is floating around the world today. The Food and Drug Administration estimates that counterfeits account for 10 percent of all drugs sold in the United States. Studies of anti-infective treatments in Africa and Southeast Asia peg up to 70 percent as fake.160 The United Nations estimates that half of the anti-malarial drugs sold in Africa are counterfeits. Imitations of Pfizer’s best-selling drugs show up in legitimate supply chains in more than 50 countries.161

Waging a Multifront War Companies, industry associations, and governments use a battery of weapons to wage war on pirates. An enduring ap- proach relies on dispatching squads of lawyers on search- and-destroy missions. Big companies lawyer-up to lobby officials, monitor the web, prod Internet providers to take down copycat sites, and file injunctions against illegal sell- ers. UGG Australia began enforcing its IP upon realizing the prevalence of counterfeit boots. It has shut down thousands of websites selling fake UGGs and blocked many thou- sands more online listings. Liz Claiborne, owner of the Juicy Couture and Kate Spade brands, fights legions of websites selling counterfeits; it removed 27,000 auction listings of counterfeits in just a few months.

Some companies prefer high-tech assault. One approach embeds radio frequency identification (RFID) chips in the product packaging to allow precise tracking; IBM, 3M, and Abbot Laboratories are pacesetters. Others provide software programs that track products from factories to consumers. In Ghana, mPedigree lets consumers use their mobile phones to confirm the product is genuine; buyers call in a special code embossed inside the package to the vendor, who then verifies its authenticity.162 Moving forward, some anticipate weaving microscopic markers into a product’s packaging.

Governments, fearful of losing tax revenues and pressed by legitimate businesses, devise aggressive protection pro- grams. The European Union ranks IP theft as a high prior- ity.163 The United States has elevated software piracy from a misdemeanor to a felony and boosted enforcement efforts by threatening to sanction notorious pirates with records of “onerous and egregious” IPR violations (including countries such as China, Russia, Argentina, India, Thailand, Turkey, and Ukraine). Likewise, its Federal Drug Administration has opened offices in China, India, South Africa, and Mexico, among others, in effect taking the fight to the frontier. On other fronts, rhetoric escalates. The U.S. Trade Representa- tive, for instance, declared, “We must defend ideas, inven- tions, and creativity from rip-off artists and thieves.”164

MNEs, officials, and trade associations lobby transnation- al institutions to apply stronger tools. Industry associations, like the IACC, spearhead efforts to toughen laws. Govern- ments worldwide provide global services in public policy, business development, and consumer education. The World Intellectual Property Organization (WIPO) fortifies IP treaties and spurs members to bolster antipiracy programs. Likewise, the WTO applies the Trade-Related Aspects of Intellectual Property Rights (TRIPS) program to regulate enforcement, which requires member nations to protect and enforce IPRs according to global, not local, standards.

A barrage of legal assaults, novel technologies, smart- er investigations, diplomatic efforts, industry initiatives, consumer education, stronger IP policies, aggressive law enforcement, and concerted political, commercial, and in- stitutional action, one would think, should prove more than sufficient. Then, to make things a bit more interesting, add in the firepower of the global reach of vigilant MNEs, high- profile legal proceedings, increased government coopera- tion, criminalization of piracy, and tougher trade agreements. Such a shock-and-awe campaign should devastate the pi- rates, right? Surprise, surprise: Piracy continues to grow at an increasing rate. For instance, in 2009, Pfizer found counterfeit versions of 20 of its medicines in 81 countries. In 2012, Pfizer found 60 fakes in 106 countries. In 2015, Pfizer found 78 fakes in 109 countries.165

“The Bandits Are Everywhere” The global cat-and-mouse game between MNEs and pi- rates, far from winding down, escalates. Booming piracy in big, fast-growing emerging markets like China and India spells big, fast-growing trouble. As more people enter the global market, many of them are eager to consume Western brands despite income constraints. Experts warn that the resulting quest for low prices turbocharges piracy.

In addition, crafty pirates quickly overcome IP defenses. They crack licensing codes, duplicate holograms, falsify e- mail headers, and utilize crypto-currencies. Staying one step ahead of the IP police is a widespread competency. “Like drug trafficking, the counterfeiting problem is so massive

Chapter 3 The Political and Legal Environments Facing Business 91

[that] you don’t know how to get a handle on it. The bandits are everywhere.”166 Worrisomely, successful pirates evolve into sophisticated entrepreneurs. “When you are dealing with high-end counterfeits, you are talking about organiza- tions that have a full supply chain, a full distribution chain, a full set of manufacturing tools all in place and it is all based on profits.”167 Lamented one analyst, “Counterfeiting is like a balloon filled with water. You push it on one side, but when you remove your hand, it bounces back even stronger.”168

Piracy gets a huge boost from the increasing availabil- ity of counterfeit goods through Internet channels, such as P2P file-sharing sites, mail order sites, or auction sites. Out- gunned and outfoxed, some companies surrender. Foley & Corinna, a high-end handbag maker, explained that as it saw more Internet fakes, it stopped looking altogether. “It’s just too frustrating. You can try to do something, but it’s so big and so fast.”169 Then again, there are those who treat IPR as the price of doing business. Despite everyday piracy of his products in the Chinese market, an executive reasoned that the profitability of his legal sales more than offset the losses due to counterfeits.170

Is Piracy Inevitable? The pervasiveness of piracy, in the face of aggressive lawyering, sophisticated tracking and tagging technolo- gies, database software, and security controls, poses profound questions for protecting IPRs. Some worry that different legal legacies and political ideologies among countries complicate basic issues. TRIPS, by standard- izing codes and norms, should have settled such trou- blesome issues. Legal and operational boundaries have limited its impact.

Others fear that the antipiracy war may already be lost. Evidently, a not-too-small number of consumers and busi- nesses around the world have few ethical qualms about using counterfeits. Take software, for instance. Global soft- ware piracy is rampant. In 2013, the worldwide PC software piracy rate hit 43 percent. Put differently, of all the pack- aged software installed on PCs worldwide, 43 percent was obtained illegally, at a cost of US$62.7 billion in lost rev- enue (up from losses of $29 billion in 2003). For many na- tions, such as Armenia, China, Indonesia, Nigeria, Thailand, Ukraine, Venezuela, and Vietnam, software piracy rates top 70 percent. Even the best-behaved nations, like France, Japan, and the United States, report software piracy rates north of 18 percent.171 Consequently, Microsoft’s biggest rival is not another software company—it is counterfeiters.

Ultimately, the quest to live prosperous lives on tight budgets pushes people to seek counterfeits. Similarly, some in collectivist cultures reason that IP holders should honor society by abandoning their profit-maximizing busi- ness models. Sharing knowledge to benefit all, not protect- ing it for personal gain, is the moral imperative. But, counter others, without protection, ultimately there will be no IP to share or, for that matter, steal.

Questions

3-3. Would you expect piracy to thrive in a democracy or authori-

tarian state? Why?

3-4. Can you envision a scenario where developers and consumers of

IP develop a relationship that eliminates the profitability of piracy?

3-5. Put yourself in the place of a poor individual in a poor country

struggling to improve the quality of your life. What thoughts

might shape how you interpret the legality of IPRs?

MyManagmentLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

3-6 Can MNEs stop piracy without government help? Why would they prefer greater government assistance? Why would they oppose it?

3-7 Do you think consumers in wealthier countries versus those in poorer coun- tries justify piracy with similar rationalizations? Why?

endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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A man is rich who owes nothing.

—French proverb

Objectives

After studying this chapter, you should be able to

4-1 explain the value of economic analysis

4-2 Differentiate the types of economic environments

4-3 explain the idea of economic freedom

4-4 Differentiate the types of economic systems

4-5 interpret indicators of economic development, performance, and potential

4-6 Profile elements of economic analysis

chaPter 4 the economic environments Facing businesses

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

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Case emerging economies: Comeback or Collapse?1

An epochal shift in the center of gravity of the global economy is un- derway. By 2050, four of the six largest economies in the world— China, India, Japan, and Russia—will be in greater Asia. Their growth will create a second tier of robust economies among their Asian neighbors, such as Singapore, the Philippines, South Korea, Indonesia, Taiwan, Kyrgyzstan, Vietnam, and Thailand. Countries in other, once sluggish parts of the world, like Africa and South America, will develop along with their Asian counterparts. Although the pace varies, all are moving from the periphery to the center of the global economy.2

Extrapolating from 2017 to 2050 is, undeniably, more specula- tion than specification. Still, many emerging economies are applying potent pro-growth policies. Hard data confirm their success so far. In 1980, their combined output accounted for 36 percent of global GDP. They crossed a milestone in 2009, accounting for more than half of total world GDP.3 Similarly, emerging economies’ share of world ex- ports exceeds more than 50 percent, versus 20 percent in 1970. The IMF reports that the 10 fastest-growing markets in the years ahead are in emerging economies. Others suggest that 400 midsize emerg- ing-market cities, many unfamiliar in the West, such as Abidjan, Chit- tagong, Khartoum, Kinshasa, Luanda, and Ouagadougou, will produce about 40 percent of global growth over the next 15 years.4 Institution- ally, the G-7, long a U.S.-Europe stronghold, has expanded into the G-20, thereby giving members like China, India, Brazil, Mexico, and South Korea greater say in global governance. These new stakehold- ers advocate different views of trade promotion and investment regu- lation. Moreover, emerging economies build institutions, such as the Asian Infrastructure Investment Bank, to champion their agenda. Col- lectively, the accelerating rise of emerging economies signaled that the wealthier countries of the twentieth century would not dominate the global economy in the twenty-first century.5

The past generation of progress and prosperity in emerging mar- kets suggests the revolution has only begun. The ambition to improve infrastructure, increase productivity, create jobs, and alleviate pov- erty has put into motion what will likely be the biggest stimulus in history. The last transformation of similar magnitude—the Industrial Revolution—involved far fewer people in far fewer nations, but still powered a century-and-a-half expansion that altered lives every- where. Today’s revolution spans the globe, includes far more people in far more countries, and represents the biggest opportunity in the history of capitalism.6 The transfer of the leadership baton from wealthy countries to emerging markets, for better and for worse, revolutionizes our interpretation of economic environments.

Precedents and Predictions

Tracking the past millennium puts the current drama into perspective. Before the steam engine and the power loom drove the transfer of

economic might from Asia to the West, today’s emerging economies dominated world output. From 1000 to the mid-1880s, they produced, on average, 70 to 80 percent of world output (see Figure 4.1). Over this span, China and India were the world’s two biggest economies; China alone generated one-third of global gross domestic product in 1820. In 1850, China produced the highest percent of all the goods consumed in the world. Britain, riding the Industrial Revolution, soon claimed this title before ceding the top spot to the United States around the beginning of the twentieth century. By 1950, emerging economies’ share of global output had fallen to 40 percent, China’s to 5 percent. Many floundered as internal political failure, aggravated by colonialism and dubious trade agreements, spurred isolationism and xenophobia. Consequently, the Industrial Revolution benefited the West while bypassing today’s emerging markets.

Presently, the ambition of emerging economies is straight- forward: Restore their historic stature as the engine of the global economy. This goal will culminate in their comeback, where, once again, they account for more than 70 percent of global output.7 Sym- bolizing this change, in 2009 China reclaimed the top spot it last held in 1850—producing about 20 percent of all the goods consumed in the world; the United States, leader for the previous 110 years, fell to second.8 Likewise, the IMF reported that China has become the cen- tral trading power in the world—it is the biggest or second-biggest trading partner for 78 countries.9

20502025200519501913182015001000

Developed Economies Emerging Economies

Figure 4.1 emerging Markets Make a Comeback Throughout much of the past millennium, today’s emerging economies, notably China and India, accounted for about 70 percent of global economic output. By the twentieth century, today’s developed economies, such as the United States, Germany, and Japan, generated nearly three-quarters of global economic output. Trends suggest that by 2050, if not sooner, emerging economies will again account for more than 70 percent of global economic output, thereby culminating in their comeback.

Source: Based on Development Centre Studies, The World Economy: A Millennial Perspective, OECD Publishing, 2006. Looking to 2060: A Global Vision of Long-Term Growth, OECD Economic Policy Papers, November 2012.

Chapter 4 The Economic Environments Facing Businesses 95

Problems in Paradise

Notwithstanding the spectacular performance and potential of emerging economies, by mid-2016 a steady stream of foreboding developments sounded alarms. A startling collapse in many com- modity prices, from coffee to oil to cement to iron, has dampened prospects for many. Brazil, besides experiencing a severe recession, faced tough political times as corruption and cronyism triggered an impeachment crisis. Russia resorted to fanning nationalism to neu- tralize its declining prospects given the collapse in energy prices. South Africa appeared overwhelmed by the worldwide decline in commodity prices, waning demand from China, its biggest trading partner, and the worst drought in 50 years; it teeters on the edge of an economic cliff as credit agencies threaten to cut its sovereign debt to junk status. Saudi Arabia, struggling with the dramatic drop in oil prices and record budget deficit in 2015, cut social services for the first time in decades and faced an “economic time bomb.” Bleak financial situations pushed emerging economies toward debt to fi- nance budget shortfalls and balance-of-payment problems. In 2007, China had $7.4 trillion in debt; by 2015 it had risen to over $30 tril- lion. Increasingly, China’s growing debt mountain casts a worrisome shadow over its prospects, especially as its growth in 2015 was the slowest in 25 years, continued a multiyear slowdown, showed little sign of abating, and fanned social unrest.10

Skeptics suggested that the overhyped comeback had morphed into an inevitable collapse. Limiting economic freedom, others add- ed, had finally caught up with emerging economies. Now, with mar- kets crumbling, state authorities, once omnipotent, looked impotent. Anemic economic performance, for instance, eroded confidence in

Thailand’s ruling junta, Venezuela’s dominant party system, and Zim- babwe’s long-running dictatorship.11 The customary policy solutions, namely market reforms, deregulation, and privatization, directly op- posed the state capitalist systems that prevailed in many emerging economies. Those cures, by reducing state authority, threatened the sustainability of the single-party government that is the institutional core of many emerging economies.

making sense to make cents

Megatrends such as the comeback are millennial events. And, un- questionably, trends can go dramatically awry. Consequently, the global economic environment was caught in challenging times—one way or another, policymakers, executives, workers, and investors wrestled with the unfolding revolution powered by the comeback, or, as the case may be, the fallout of the collapse. Making invest- ments, positioning assets, and running operations for either outcome pushed managers to make sense of the possibly good, possibly bad, brave new global business environment. ■

Questions

4-1. Transformations such as the comeback of the emerging

economies happen quite rarely. Their infrequency amplifies

their impact on our lives. Identify from the case how your life

has changed, or will likely change, given the comeback.12

4-2. Now, flip analysis and consider the implications of the

possible collapse of emerging economies to your life. How

might it change?

international economic analysis In the IB realm, cultural, political, and legal systems influence a company’s decision on where, when, and how to do business. This chapter completes our profile of the environ- mental domains of IB, evaluating how economic systems shape a market. Throughout it, we spotlight the relevance of economics to citizens, executives, companies, officials, and institu- tions. And, with that in mind, apply the idea that a broad understanding of its dimensions and dynamics helps all make better consumption, investment, operating, and policy deci- sions. This chapter presents the general perspectives and specific tools that assess economic environments. It also profiles the ideas and frameworks that integrate interpretation.13

Developing an understanding of the global business environment is a fascinating chal- lenge. Think about the scale and scope of the task. The World Bank identifies 214 discrete economic environments in the world today—188 countries and 26 economies with popula- tions of more than 30,000. The former include countries that most are quite familiar with, such as Australia, China, France, Indonesia, and Singapore. The set of 26 includes some that many have likely heard of, but also others that many have not, such as the Isle of Man, Macao, San Marino, and Vanuatu.14 Mapping these markets, from the biggest (China) to the smallest (Tuvalu), is an essential aspect of IB. In this chapter, we profile how managers do so, highlighting principles and tools that make sense of the remarkable diversity of markets.

Studying an economic environ- ment helps managers make better investment choices and operating decisions.

Resource constraints require managers to identify which countries in the world warrant investment as well as those they must avoid.

96 part 2 Comparative Environmental Frameworks

Few, if any, MNEs can fund and run operations in all 214 economic environments. Resource constraints require managers prioritize options, targeting markets that of- fer the greatest return with the least risk. Improving the odds of success depends on assessing the development, performance, and potential of an economy. Economics identifies a range of rigorous tools that help systematize evaluation. Familiar metrics, such as gross domestic product, interest rates, inflation, and unemployment, estimate important features. Integrating analysis taps scientific principles, like production func- tions, marginal analysis, and the general equilibrium model, as well as behavioral as- sumptions, like rationality and incentives. Both perspectives clarify consumer choice, firm conduct, industry structure, and market activity.15 The combined mix of objective and subjective analytics support insightful interpretations. Still, challenges emerge on several fronts.

complexity Economic environments are dynamic systems. The intricacy of the simplest economic system defies straightforward specification. Stipulating models that definitively represent a country’s economic performance and potential as well as work reliably in all types of economic environments is difficult. Hence, managers wrestle with identifying valid measures for developed, developing, and emerging economies, then modeling their relation- ships, mapping them onto a particular market, and monitoring their reliability. Confounding matters is the fact that managers are inundated with more raw knowledge, accessible infor- mation, and clever insights than ever before. Rather than improving analysis, expanding data streams often make a hard task harder.16

dynamism Market changes can make today’s valid measures dubious tomorrow. Evolving circumstances, compounded by disruptive situations and puzzling trends, generate anomalies and exceptions that convert comebacks into collapses. For instance, analytics anchored in the politically free markets commonly found in the West poorly translate to the state- sponsored capitalism at play in the East. Likewise, product devel- opment strategies in affluent developed countries struggle to fit the profound poverty often found in developing economies. In the former, customers prefer robust product functionality, whereas inexpensive simplicity matters more in the latter. Managers’ eco- nomic instincts, tried and tested for the past decades in developed economies, adapt to the changing, often contradictory circumstances in emerging markets. The character- istics of an economic environment determine which, where, and when each approach makes sense.

interdependence Just as no one is an island, no country is isolated. The consequence of cross-national connections means actions here influence outcomes there. For instance, growing political control of economic processes improves efficiencies in developing econo- mies, but lessens them in their developed counterparts; recycling foreign-exchange reserves means capital is too cheap here, but too expensive there; greater competition for scarce re- sources raises the prices of commodities, but lowers the costs of manufactured goods; and poverty falls in developing economies, but rises in their developed counterparts.17 Cross- national interdependencies moderate the forces of supply, demand, and their pricing signals. Adjusting analysis for actions and reactions across an expanding scope of markets compli- cates interpretation.

navigating challenges Figure 4.2 shows how managers navigate these challenges. It holds that economic condi- tions shape a country’s development, performance, and potential. It highlights the ele- ments that guide assessment and emphasizes that change in one causes change in others. Clarifying interactions among these features, no matter if the context is a developed, de- veloping, or emerging economy, assists with mapping development paths and estimating

Managers study a country’s economic environment to assess its development, explain its performance, and estimate its potential.

concePt check

A principle of globalization is the broadening network of relationships among people, companies, countries, and institutions. Philosophically, the same principle applies to the emergence and evolution of economies.

Various principles help manag- ers better assess economic environments, including

• system complexity, • market dynamism, • market interdependence.

Chapter 4 The Economic Environments Facing Businesses 97

potentials. Hence, Figure 4.2 endorses a systems perspective that qualifies interpretation in terms of:

1. The type of economic environment in terms of its state of development. 2. The economic freedom managers have to make investments and run operations. 3. The orientation of the economic system that shapes its path of development, perfor-

mance, and potential. 4. The drivers of economic change, particularly the moderators of productivity, innovation,

and competitiveness.18

Collectively, engaging these issues pinpoints where investments should go and, more importantly, where they should not.

Who’s Who in the global business environment Managers track economies, evaluating events and trends to spot opportunities and preempt risks. The scale and scope of economics spanning 214 markets quickly muddle assessment. Getting one’s bearing often begins by determining general characteristics—essentially, as- sessing who’s who and then aggregating the data in order to compare consumers, compa- nies, and countries. In IB, the development level of a country is the single most important indicator of who’s who. It influences nearly every aspect of business, including the nature of consumer demand, organization of productive activity, attitudes toward foreign inves- tors, regulatory transparency, sophistication of market systems, and the freedom one has to make effective and efficient business decisions. Hence, estimating the attractiveness of a country as a place to do business and, once there, making smart investment and opera- tional decisions depends on how well managers understand its economic environment. We follow the lead of the United Nations (UN) to identify who’s who. Based on a wide range of dimensions, it classifies a nation as a developed economy, developing economy, or an economy in transition.19

develoPed economies A developed economy has a robust economic environment marked by wide-ranging ac- tivities, efficient capital movement, stable institutions, extensive infrastructure, international trade and investments, advanced technologies, and higher economic freedom. Developed

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Chapter 1 notes changing environmental conditions that promote and constrain globalization, Chapter 2 notes changing cultural identities, and Chapter 3 notes chang- ing political philosophies and legal outlooks. The same perspective applies here as well—namely, the changing economic environments of IB create opportunities and impose constraints.

Broad classes of countries include

• developed countries, • emerging economies, • developing countries.

Developed economies generally have high income levels, extensive industrial- ization, advanced techno- logical infrastructure, and high standard of living.

• Type of Economic Environment • Degree of Economic Freedom • Drivers of Economic Performance • Orientation of Economic System

ENVIRONMENTAL DOMAINS MNE ACTIVITIES

VISION

STRATEGY

ORGANIZATION

OPERATIONS

• Cultural Conditions

• Political Policies

• Legal Practices

• Economic Elements

Figure 4.2 economic Factors Affecting international Business Operations Although economic environments vary from country to country, they share telltale principles and practices. Managers focus on these, as well as their interactions, to organize analysis.

98 part 2 Comparative Environmental Frameworks

countries cluster in a few regions of the world; the UN classifies Australia, Canada, Japan, New Zealand, Norway, Switzerland, United States, members of the European Union, and the like as developed economies. Generally, each relies on a broad mix of manufacturing and services to generate high income and deep wealth. Today, approximately 16 percent of the world’s population (about 1.2 billion people) lives in developed economies. Collectively, they generate more than 60 percent of the current gross world product of $78 trillion; as recently as 2002, their share was nearly 80 percent.20 In 2016, the five largest developed economies were the United States, Japan, Germany, the United Kingdom, and France.

Developed economies typically champion political freedom, practice multiparty demo- cratic governance, enforce the rule of law, and support free markets. In turn, these anchor a stable, productive economic environment. Residents enjoy a high standard of living, long lives, diverse educational opportunities, adequate nutrition, broad health care, comprehen- sive public hygiene, and a variety of goods and services. Skilled, educated workers, often referred to as “knowledge workers” or the “creative class,” typically earn high salaries work- ing in urban centers.21 Correspondingly, residents in high-income developed economies, such as Austria, Norway, South Korea, Switzerland, and the United States, averaged nearly $45,000 in annual income in 2015.

Still, many people struggle with poor quality jobs in developed countries. One of four jobs in the United States, for instance, qualify as low-paying positions with an approximate annual income of $23,000.22 Likewise, an individual must work 55 hours per week at the minimum wage to move a four-person family above the relative poverty line in the United States.23 In comparison, one must work 85, 66, 64, 52, and 40 hours per week in a minimum wage job in the Czech Republic, Israel, South Korea, Canada, and France, respectively, to lift a four-person family out of poverty.24 Consequently, many developing countries experience rising income inequality, whereby the rich grow richer while the poor grow poorer.25

Developed economies steadily shift to diversified, service-oriented activities that rely on information and technology to support product and process innovation. Manufacturers in developed economies have outsourced many activities to low-cost factories in the emerg- ing economies. Robotics, 3-D printing, and the like spur new manufacturing methods that may reshore some outsourced activities (i.e., returning outsourced personnel and services to developed economies). Still, the dominant trend in developed economies for the past generation has been migrating manufacturing to lower cost, higher productivity factories in developing economies.

Movement from manufacturing to service as the basis of economic activity prompts referring to developed countries as high-income economies, advanced markets, advanced industrial economies, or postindustrial economies. In the future, we may see the term “estab- lished market economies,” given their high per capita income, high standard of living, and sophisticated institutional framework but slower growth relative to developing economies.

develoPing economies Generally, a developing economy has an uneven economic environment that is marked by narrow market activities, inefficient capital movement, resistance to foreign ownership, trade restrictions, imperfect competition, unstable institutions, limited infrastructure, sketchy technologies, and lower economic freedom.26 Corruption, cronyism, and crime compli- cate efforts to regulate society consistently or adopt prudent economic policies. Workers, often lacking formal education or practical training, earn low annual incomes. Certainly, a few developing economies are rapidly industrializing; these are commonly called emerg- ing economies. Many are not, and remain extensively agrarian. Typically, a small share, say 2 to 4 percent, of workers in developed economies work on a farm. In some developing economies, such as Angola, Ethiopia, Indonesia, and Pakistan, 30 to 90 percent do. The UN classifies approximately 150 countries as developing; they span Africa, Asia, Eastern Europe, Latin America, the Middle East, and South America. Today, roughly 85 percent of the world’s population resides in developed economies. Collectively, they generate about 40 percent of

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“The Forces Driving Global- ization” profiled in Chapter 1 (page 6), explained how eco- nomic environments respond to technology, trade, competi- tion, consumer attitudes, and cross-border relationships. The scope of the connections among these conditions differs given the level of development in the particular economic systems.

Developed economies are also referred to as

• high-income economies, • advanced markets, • advanced industrial

economies, • postindustrial economies.

Developing economies gener- ally have low income levels, slight industrialization, incom- plete infrastructure, and lower standards of living.

Chapter 4 The Economic Environments Facing Businesses 99

gross world product.27 In 2016, the five largest developing economies were China, India, Russia, Brazil, and Indonesia.

Developing economies, as a rule, have a low gross national income per capita. At the lower range, one sees average annual incomes in the mid to high hundreds (US$) in countries such as Afghanistan, Chad, Liberia, Malawi, and Togo. In others, like Cameroon, Nicaragua, Nigeria, Uzbekistan, and Yemen, average annual incomes run in the low thou- sands (US$).28 Finally, some, such as Azerbaijan, China, Indonesia, Mexico, and Turkey, see per capita income in the high thousands. Developing economies often have pockets of great wealth; in 2015, for instance, China reported more billionaires than the United States, with 596 versus 537.29 Still, many of the approximately 6 billion residents of developing econo- mies endure abject poverty, low living standards, scarce opportunities, and limited access to few goods and services.

Life differs on innumerable aspects between developed and developing economies. Some argue that developing countries have strong communities and social ties, extraordi- nary self-sufficiency, and admirable work ethics. Alternatively, one regularly finds higher infant mortality, shorter life expectancy, lower literacy levels, poorer public hygiene, in- sufficient health care, and inadequate nutrition in developing countries relative to their developed counterparts. Harsh conditions largely follow from the poverty that prevails throughout developing economies. Certainly, poverty shapes economic environments of all countries, from the wealthiest developed to the poorest developing country. However, poverty profoundly influences life and markets in developing economies. Approximately 2.1 billion people in the developing world live on less than US$3.10 a day.30 Poverty forces many to struggle for food, shelter, clothing, clean water, and health services, to say nothing of safety, education, and opportunity. Deprivation contributes to malnutrition, mental illness, epidemics, famine, conflict, and humanitarian crises. Governments struggle to provide social services, health care, education, and civil stability. Markets are prone to corruption, cronyism, and political risk. The grinding struggle for survival deters enterprise, stymies entrepreneurs, and slows productivity, thereby recharging a brutal cycle of persistent poverty. Ultimately, however, economic progress and IB expansion ultimately depend on developing the means to alleviate poverty.

Markets experiencing widespread, oftentimes extreme, poverty require MNEs reas- sess many taken-for-granted aspects of an economy. For instance, advertisers in developed

Significant gaps exist in economic and social character- istics between developed and developing economies.

Poverty is the state of having little or no money, few or no material possessions, and limited access to education, health, and community.

Morocco, Marrakech, View over roofs with satellite dishes towards Atlas mountains

Once unusual, satellite dishes are now ubiquitous throughout developing countries. Here, we see a view over roofs in Marrakech, Morocco, many tagged with satellite dishes, each expanding cross-national linkages that promote economic development. Source: Westend61 Premium/ Shutterstock

▶

100 part 2 Comparative Environmental Frameworks

economies assume high rates of literacy; in South Korea, France, and New Zealand, for in- stance, virtually everyone can read. However, in Chad, Ethiopia, and Mali, fewer than half can. Hence, managers must fine-tune analytics anchored in the wealthy developed economies for the radically different market circumstances routinely found in developing economies.

economies in transition Great range marks the economic performance among developing economies precisely be- cause different economies experience different levels of development at different rates. At the low end, countries marred by fragile political institutions, heavy indebtedness, poorly performing markets, and ongoing conflict (e.g., Afghanistan, Democratic Republic of Congo, or Timor Leste) average per capita incomes in the low hundreds (US$). Besides poverty, these sorts of economies contend with governments overcome by sovereign responsibilities. In contrast, at the high end of developing economies, we find faster-growing, quickly indus- trializing countries such as China, Mexico, Indonesia, and the Philippines. Increasingly, these countries are referred to as economies in transition, emerging markets, frontier markets, or newly industrializing countries; generally, description defaults to emerging economies.

There are approximately 30 or so emerging economies in the world (see Map 4.1).31 These nations are experiencing accelerating growth in productivity, manufacturing, export- ing, and per capita income, resulting in material improvements achieved in years, rather than decades. Their financial systems, political institutions, and market infrastructure steadily modernize. Market liberalization promotes foreign investments and growing exports, de- regulation and privatization improve business efficiency, and expanding economic freedoms encourage entrepreneurialism. Prosperity and progress support a growing middle class whose economic aspirations fuel a revolution of rising expectations, thereby spurring society and the state to improve living standards.

When one speaks of the emerging economies, many point to Brazil, Russia, India, and China (referred to as the BRICs); officially, emerging economies are developing countries, but the pace of their performance leads to distinguishing them. Table 4.1 identifies other group- ings. Although much larger in scale and scope than other emerging economies, many see the

The worldwide growth of business activity and economic progress ultimately depends on alleviating poverty.

The term emerging economies is often used in place of economies in transition. One also sees terms such as frontier markets and newly industrial- izing countries.

Brazil

Venezuela

Morocco China

Russia

IndiaEgypt SaudiArabia

South Africa

Nigeria

Israel Turkey

Czech Republic

Taiwan Hong Kong Philippines Singapore

Hungary Greece

Bulgaria

Poland

Romania

South Korea

Colombia

Mexico

Chile

Peru Indonesia

Malaysia �ailand

Pak ista

Qatar

United Arab

Emirates

Bangladesh

Argentina

maP 4.1 emerging economies of the World Various designations organize economic environments. Here we highlight markets commonly referred to as emerging economies, namely those given their accelerating economic development.

Chapter 4 The Economic Environments Facing Businesses 101

table 4.1 the alphabet of emerging economies

A range of acronyms classify various sets of emerging economies. As different countries develop, observers have coined a variety of shorthand codes.

acronym specification BRIC B for Brazil, R for Russia, I for India, C for China BASIC Add AS for South Africa, Removes R for Russia

BIC Remove R for Russia BRICA Add A for Arab countries—Saudi Arabia, Qatar, Kuwait, Bahrain, Oman,

and the United Arab Emirates BRICET Add E for Eastern Europe, T for Turkey BRICIT Add I for Indonesia, T for Turkey BRICK Add K for South Korea BRICS Add S for South Africa BRIIC Add I for Indonesia BRIMC Add M for Mexico CARBS Canada, Australia, Russia, Brazil, South Africa CIVETS Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa MIST Mexico, Indonesia, South Korea, Turkey N-11 (The Next 11) Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines,

South Korea, Turkey, Vietnam PPICS Peru, Philippines, Indonesia, Colombia, Sri Lanka

BRICs as the vanguard of the comeback or collapse, presuming that where the BRICs go, both good and bad, others will follow. Currently one sees improving productivity and prosperity in an expanding range of countries, often referred to as frontier markets, such as Oman, Kenya, Nigeria, Romania, Rwanda, and Vietnam. Their performance echoes policies and programs commonly seen in the BRICs rather than in poor, slower growing developed economies.

Estimates see more than 70 percent of the world’s growth over the next few years in emerging markets and, to a lesser degree, secondary developing economies.32 Some 400 midsize emerging-market cities will generate about 40 percent of global growth over the next 15 years. Many of these, such as Chittagong, Bamako, Kampala, Kano, Kinshasa, and Sanaa, are strategic centers in, respectively, Bangladesh, Mali, Uganda, Nigeria, Democratic Republic of Congo, and Yemen.33 Low-cost resources, productive labor, expanding consump- tion, pro-business policies, and enterprising conglomerates power their emergence. Indeed, companies in emerging economies are cleverly reinventing systems of production and distri- bution and experimenting with new business models. From mobile money in Kenya to frugal innovation in India, pioneering companies like Safari.com and Goonj improve the perfor- mance and potential of developing countries. Figure 4.3 highlights the consequence of these trends, showing the shifting center of economic gravity in our world. Since the mid-1980s, the pace of change—from the nations of the West toward those in the East—is moving faster than ever before in human history.34

the issue of different degrees of develoPment Gross world output increased nearly sixfold between 1970 and 2015, growing from $12 tril- lion to $78 trillion. In absolute terms, globalization expanded the economy for all. In rela- tive terms, though, many countries prospered, some more than others, and a few not at all. Different reasons explain different levels of economic development in different countries. Analysis directs attention to the economic, political/legal, and cultural moderators of devel- opment (see Table 4.2). Various models, for instance structural change theory, linear stages of growth, international dependence theory, and neoclassical theory, propose integrative

Emerging economies exhibit improving productivity, rising income, and growing prosper- ity, particularly relative to slower growing developing economies.

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Although developing countries are attractive in terms of economic potential, manag- ers heed the discussions of Chapters 2 and 3 concerning the different cultural, political, and legal environments found in developing countries. Still, Chapter 1 notes the drivers of globalization steadily narrow the gap between developed and developing countries.

102 part 2 Comparative Environmental Frameworks

1980 1990

2000

2010

2050

1820

1500

1000

1950 1960 1970

1 CE

1940

1940 1913

1913

1980 1990

2000

2010

2050

1820

1500

1000

1950 1960 1970

1 CE

Figure 4.3 Mapping the earth’s economic Center of gravity: 1 Ce to 2025 The world’s center of economic gravity has shifted over the past centuries. One sees here the jump from Asia to Europe in the 1800s due to the Industrial Revolution, and then onward to the United States in the nineteenth century. Since the mid- 1980s, however, the direction and pace of the shift have changed. Now, for a host of reasons, the center of economic gravity is increasingly returning to Asia. Presently, it’s shifting approximately 140 kilometers/85 miles eastward per year.

Source: Dobbs, R, Jaana Remes, James Manyika, Charles Roxburgh, Sven Smit, and Fabian Schaer. Urban world: Cities and the rise of the consuming class. McKinsey Global Institute, 2012.35

interpretations of progress and prosperity.36 Findings indicate market situations and eco- nomic circumstances often overlap among countries, but, just as well, they differ among others. And, as we just saw, differences are often extreme. For example, annual income per person in, for instance, Singapore versus the Central African Republic, finds a gap of $80,000 to $600 per person. Observed one analyst, “That’s absolutely astounding, to be on the same planet and to have that extreme variation in material well-being.”37 As such, the mysteries of capitalism and their implication to the different levels of economic development endure.

Recent trends refine interpretations of economic development. One, the Base of the Pyramid spotlights the some four billion people who earn a few dollars per day and live primarily in developing economies. Though long seen as inaccessible and unprofitable, the Base represents a tremendous volume of consumption, and is the next frontier of the global economy.38 Likewise, accelerating income growth in developing economies moves many of today’s poor up the income ladder.39 Middle-class consumer spending in the developed economies of North America and Europe, for example, is approximately $15 trillion; it will grow to $17 trillion by 2030.40 Meanwhile, middle-class consumer spending in Asia– Pacific, home to many emerging and developing economies, is presently $4.9 trillion. It will

The Base of the Pyramid is the largest, but poorest, socioeco- nomic group in the world.

Chapter 4 The Economic Environments Facing Businesses 103

table 4.2 moderators of economic development

Research reports that various economic, political/legal, and cultural conditions moderate growth, progress, and prosperity.

economic Factors

• Advocacy of Economic Freedom • Agrarian, Industrial, or Service Based Activity • Business Efficiency • Degree of Literacy • Educational Opportunity • Entrepreneurial and Executive Expertise • Equality of Income Distribution • Land, Labor, Capital, and Technology Factors • Poverty and Productivity • Scale and Scope of Market Systems • Sophistication of Infrastructure • Sound Macroeconomic Policies

Political/Legal Factors

• Advocacy of Political Freedom • Basis of Law • Extent of Criminality, Corruption, and Cronyism • Extent of Government Bureaucracy • Membership in Regional/Global Trade Groups • Openness to Foreign Trade and Investment • Political Risk and Sovereign Fragility • Prevalence of Privatization and Deregulation • Sanctity of Property Rights • Stability of Public Policy • State of Social Services, Health Care, and Hygiene • Tariff Policies, Subsidies, and Investment Regulations

Cultural Factors

• Expectation of Fairness, Equality, and Justice • Interplay of Individualism and Collectivism • Legitimacy of Free Enterprise • Measures of Achievement • Meritocratic, Aristocratic, or Militaristic Elites • Religious vs. Secular Schooling • Size and Stability of the Middle Class • Technological Aptitude and Orientation • Tolerance for Counterfeiting and Piracy • Transparency Standard

expand nearly 600 percent to roughly $33 trillion by the year 2030. Some see it powering an economic surge unlike any we have ever seen.41

economic freedom The scale and scope of the differences among developed, developing, and emerging econo- mies challenge analysis. A key idea, namely that of economic freedom, bolsters interpreta- tion. Think back for a moment to Chapter 3’s use of political freedom to anchor evaluation of the political environment. Political freedom is the central concept in political thought and the pivotal dynamic of a political environment. Any dialogue on politics, no matter the ter- minology, dimensions, or dynamics, ultimately addresses the issue of what one is free to do and, arguably more importantly, what one is prohibited from doing. We apply the same logic here, focusing on the degree of economic freedom an individual has to use initiative, effort, and competencies to pursue one’s ambitions.

104 part 2 Comparative Environmental Frameworks

Economic freedom reflects the liberty managers have to decide endless aspects of ev- eryday business operations. For example, what investments they make, how they allocate resources, what property rights they claim, how they compete, whom they hire and fire, and what forms of operations they engage in. In many countries, primarily developed economies, aspects of economic freedom are so taken for granted that they rarely cross managers’ minds. In many others, primarily developing economies, they are so restricted that they serve as topics of ongoing fascination and, often, flashpoints.

Formally, economic freedom is the “absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself.”42 The greater the degree of economic freedom in an economic environment, the greater the freedom an individual has to decide how to work, produce, consume, save, invest, and innovate. Furthermore, the greater the degree of economic freedom, the greater an individ- ual’s confidence in the legitimacy of property rights, liberty to use factors of production, flexibil- ity to organize goods and services, and protection from undue political interference. Economic freedom creates opportunities and boosts productivity, functioning as the critical link between ambition and actions.43 Economically free countries support activities that create income and generate wealth. Successful entrepreneurs map paths that others follow to build better lives.

Economic freedom does not signify the absence of government. Ultimately, freedom requires protection. Think of, for example, the police force that protects property rights, market regulators that ensure fair competition, monetary authorities that monitor a sound currency, or an impartial judiciary that enforces business contracts. Each, as an agent of the state, safeguards economic freedom. Hence, protecting economic freedom requires government regulation, but, ideally, only to the degree needed to transparently protect and legitimately sustain it. Excessive regulation, by substituting political judgment in place of individual choice, constrains entrepreneurialism and reduces market efficiency.

The Economic Freedom Index estimates economic freedom in a particular nation. In principle, this index measures the degree that a nation accepts Adam Smith’s thesis that “ba- sic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society.”44 In practice, it sets 4 key categories and disaggregates those into 10 dimensions that then organize 50 measures (see Table 4.3).45 The ultimate score ranges from zero (no freedom) to 100 (full freedom); hence, the higher the index for a particular nation, the higher its degree of economic freedom.

Economic freedom holds that one has the right to work, produce, consume, save, and invest in the way that one prefers.

Economic freedom measures the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to pro- tect and maintain liberty.

table 4.3 dimensions of the economic freedom index

Category Component Measure Rule Of Law Property Rights Ability of individuals to accumulate private property, secured by clear laws that are fully enforced

by the state. Freedom from Corruption Degree that corruption introduces insecurity and uncertainty into economic relationships.

Limited Government Fiscal Freedom Tax burden imposed by government on its citizens. Government Spending Government expenditures as a percentage of GDP.

Regulatory efficiency Labor Freedom Aspects of the legal and policy framework that regulates the country’s labor market. Business Freedom The ability to start, operate, and close a business that represents the overall burden of

regulation as well as the efficiency of government in the regulatory process. Monetary Freedom The degree of price stability and the extent of price controls.

Open Markets Trade Freedom The absence of tariff and nontariff barriers that affect imports and exports of goods and services. Investment Freedom Ability of individuals and firms to move resources, without restriction, into and out of activities

both internally and across the country’s borders. Financial Freedom Efficiency of banking as well as the independence of the financial sector from government

control and interference.

Adapted from information reported in “Methodology,” 2015 Index of Economic Freedom, The Heritage Foundation, in partnership with the Wall Street Journal, retrieved February 6, 2016, from www.heritage.org/index/book/methodology.

Chapter 4 The Economic Environments Facing Businesses 105

the value of economic freedom Economic Freedom delivers ongoing dividends, supporting higher growth in the short- (5 years), medium- (10 years), and long-term (20 years). Today, the average income in econom- ically free countries is more than double the worldwide average and four times higher than that found in mostly unfree and repressed economies (see Figure 4.4). Freedom lets managers bet- ter balance risk and return over economic cycles, particularly given confidence in efficient capi- tal markets and prudent monetary policy. Economic freedom fortifies macroeconomic stability;

Category in the Index of Economic Freedom

Greater Economic Freedom, Higher Standard of Living

$53,106 $50,841

$39,097

$27,452

$8,658 $10,655

$5,841

$15,607

$11,228 $8,371

10,000

20,000

30,000

40,000

50,000

$60,000

Middle East and…

Asia-Pacific

Five Most Free Nations Five Least Free Nations

Europe Americas Sub-Saharan Africa

GDP Per Capita Income, by Region

GDP Per Capita

$52,799

$39,840

$18,509

$6,157 $7,995

10,000

20,000

30,000

40,000

50,000

$60,000

Free Mostly Free Moderately Free Mostly Unfree Repressed

Figure 4.4 economic Freedom and the Standard of Living Economic freedom has significant relationships with a variety of market, social, and political measures. Here we see the relationship between economic freedom and a broad indicator of the standard of living, GDP per capita.

Source: Adapted from Terry Miller and Anthony Kim, “Why Economic Freedom Matters | 2015 Index of Economic Freedom Book.” 2016. Accessed April 15. http://www.heritage.org/index/book/chapter-2. Used by permission.

Note: GDP is adjusted for PPP.

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Chapter 1 suggests that income inequality and poverty should diminish as IB improves the efficiency of resource alloca- tion. Chapter 3 highlighted the importance of people’s freedom to do so. Here we add to the mix ideas of economic freedom and its thesis that productive use of liberated capital creates progress and prosperity.

http://www.heritage.org/index/book/chapter-2

106 part 2 Comparative Environmental Frameworks

Economic Freedom Scale

80–100 Free

70–79.9 Mostly Free

60–69.9 Moderately Free

50–59.9 Mostly Free

0–49.9 Repressed

Not Ranked

maP 4.2 the Presence and Prevalence of economic freedom The Economic Freedom Index classifies a country as either free, mostly free, moderately free, mostly unfree, or repressed given the degree to which its government regulates individual economic choices. The greater the regulation, as indicated by a lower score, the less choice an individual commands.49

Source: Terry Miller and Kim Holmes, 2016 Index of Economic Freedom, (Washington, DC: The Heritage Foundation and Dow Jones & Co., Inc., 2016).

inflation and unemployment rates, for example, are significantly lower in freer countries. Higher economic freedom supports business efficiency, a key moderator of productivity and catalyst of new business development. The World Competitiveness Yearbook, for instance, con- cludes that the freedom of private firms to choose how to operate innovatively, profitably, and responsibly is the key feature shared by the world’s most competitive nations.46

Standards of living and human development thrive in economically free markets. Improving prosperity expands access to education, promotes literacy, boosts health care, and supports sustainability. Poverty rates are lower in economically free countries; they run about a quarter of that found in less free nations. Growing prosperity in economically free nations, by improving the quality of life, supports social stability and diminishes the frequency and severity of humanitarian crises.47

Economic freedom promotes the globalization of markets. Fortifying property rights, lim- iting the scale and scope of government, streamlining regulations, and liberalizing markets opens a nation to investment and trade. Countries intent on improving economic freedom generally endorse WTO initiatives to boost trade as well as enter into regional free trade agreements (e.g., NAFTA, EU, or the TPP) or transnational capital market mechanisms (e.g., the AIIB, IMF, or World Bank). Trade promotion institutionalizes elements of economic free- dom into market structures and encourages entrepreneurs as well as established companies to pursue international opportunities.

the Prevalence of economic freedom Map 4.2 displays the Economic Freedom Index for 178 developed, developing, and emerging economies.48 Collectively, these represent nearly all global market activity. Recent perfor- mance data indicate that economic freedom:

• Improved in 97 countries, most commonly among developing and emerging economies, such as Benin, Botswana, Burundi, Israel, Morocco, Senegal, and Tonga.

The track record of free markets around the world indi- cates that economic freedom is positively related to financial prosperity, economic stability, and standards of living.

Economic freedom, by expanding international trade across open borders, promotes globalization.

Chapter 4 The Economic Environments Facing Businesses 107

• Achieved the highest ever scores in 32 countries, including Burma, Germany, India, Israel, Lithuania, the Philippines, Poland, and Vietnam.

• Declined in 74 countries, most commonly among developed markets such as Austria, Australia, Canada, Hong Kong, New Zealand, Singapore, Switzerland, and the United States.

• Fell to the lowest level ever in 11 countries, notably Venezuela, Argentina, Bolivia, Algeria, Greece, and El Salvador.

National and regional developments amplify these trends.

• The freest economies are Hong Kong, Singapore, New Zealand, Australia, and Switzerland; the least free are Eritrea, Zimbabwe, Venezuela, Cuba, and North Korea.

• Regionally, on average, economic freedom has advanced the most for countries in sub- Saharan Africa and Asia–Pacific, changed little for those in the Middle East/North Africa, South and Central America/Caribbean region, and declined for those in Europe and North America.

• Prominent emerging economies, notably Brazil, India, China, and Russia, showed little improvement; these, like many other emerging economies, rate as mostly unfree.

• The United States is currently rated a “mostly free” economy. In 2007, prior to the great financial crisis, it ranked as a “free” economy. Decreasing labor, business, and fiscal free- doms dropped the United States to 75.4 percent in 2015, matching its lowest score in Index history.

Recently, economic freedom has benefited from expanding international trade, improv- ing capital market stability, and decreasing corruption. In global terms, the average economic freedom score across the 178 sampled countries set a record in 2016, reaching 60.7 percent.50 The world average has now regained the ground lost in the aftermath of the great financial crisis and subsequent recession. Over time, economic freedom performance changes for nations, regions, and the world—and as we see in Table 4.4, variation in the degree of eco- nomic freedom modifies, from a little to a lot, the marketplace. Certainly, the pace of change varies from country to country, as governments relax or impose controls that promote or restrict individual choice. Consequently, executives monitor economic environments, study- ing policies and practices to determine government intentions and the implications for eco- nomic freedom.51

economic freedom and tyPe of economic

environment Table 4.5 reports the average freedom score by type of economic environment. It also reports the average score per the 10 components of economic freedom. The different characteristics of different levels of economic development are apparent in terms of the corresponding degree of freedom across market types. Consistently, developed countries devise policies that promote and protect individual choice—hence, their average economic freedom score runs higher. Notably, property rights and freedom from corruption differ by type of economic environment. As discussed in Chapter 3, gaps largely follow from the prevalence of the rule of law in developed economies versus the rule of man in developing economies. Similarly, developing countries regulate investment and financial freedoms more strictly. Collectively, the development status of an economic environment influences managers’ freedom to make investments, build operations, and run businesses.

the Paradox of Promise versus Prevalence The fall of the Berlin Wall in 1989 symbolized the triumph of capitalism over communism. More pointedly, it signified the supremacy of economic freedom over state regulation

Worldwide, economic freedom dropped in the aftermath of global financial crisis. It has steadily regained ground.

Paradoxically, despite the docu- mented benefits of economic freedom, just 5 countries, out of 178, have policies that maximize it.

108 part 2 Comparative Environmental Frameworks

table 4.4 economic freedom: classification and characteristics52

economic Freedom score Class General Characteristics

Representative Nations53

80–100 Free

• Companies, both domestic and foreign, face none to few restrictions making or selling products.

• Government advocates openness to international trade and investment. • Negligible to nominal government interference in the economy. • Slight corruption or risk of expropriation. • Government guarantees property rights. • Regulation is minimal and centers on improving transparency, fairness,

and firm conduct.

Australia, Hong Kong, New Zealand, Singapore, Switzerland

70–79.9 Mostly Free

• Corruption is possible, but rare, and the risk of expropriation is low. • Foreign companies are subject to few restrictions. • Judicial system is subject to delays and may arbitrarily enforce contracts. • Limited state interference in the movement of labor, capital, and goods. • Sizable government ownership of companies in key sectors.

Canada, Chile, Colombia, Estonia, Ireland, Israel, Lithuania, South Korea, St. Lucia, Sweden, Taiwan, United States

60–69.9 Moderately Free

• Inflexible, often rigid, labor regulations. • Inward and outward capital movements face some restrictions. • Moderate government interference in economic affairs. • Regulations are somewhat burdensome and costly. • The government exercises ownership and control of significant

economic sectors. • The judiciary may be unduly influenced by other governmental agents.

Azerbaijan, Belgium, Botswana, Ghana, Italy, Jamaica, Kazakhstan, Kuwait, Mexico, Morocco, Oman, Peru, Philippines, Rwanda, Saudi Arabia

50–59.9 Mostly Unfree

• Considerable state action interferes with individual choice. • Foreign companies are subject to significant constraints. • Government owns or controls some to all of many companies. • Limited repatriation of profits; some transactions require state approval. • Private allocation of capital faces significant barriers. • Some laws are opaque or arbitrarily applied. • The court system is inefficient and subject to delays. • The State hinders the free flow of foreign commerce.

Bangladesh, Brazil, Cambodia, Cameroon, China, Ethiopia, Fiji, Greece, India, Lebanon, Nepal, Nicaragua, Pakistan, Russia, Sri Lanka, Swaziland, Tunisia, Vietnam

0–49.9 Repressed

• Burdensome regulations administered by an oppressive bureaucracy. • Corruption is pervasive and endemic. • Foreign companies, if permitted, are heavily restricted and face barriers to

entry and mobility. • Private property ownership is at best, weakly protected, at worst, outlawed. • Supervision and regulation are designed to restrict, if not eliminate, private

enterprise. • The State owns some to all property and directly produces goods and services. • Coercion and constraint pervade an unfair market.

Angola, Argentina, Belarus, Burma, Bolivia, Chad, Ecuador, Iran, North Korea, Turkmenistan, Venezuela, Zimbabwe

to promote development, improve performance, and boost potential. Since then, more and more folks worldwide saw greater personal choice improving their livelihood; and, as we see in Figure 4.4, economically free nations consistently outperform all others.54 Correspondingly, countries progressively abandoned the policies of state control and adopted the hallmarks of economic freedom: stronger property rights, improving gov- ernmental transparency, and fairer competition. Worldwide, governments deferred to the laws of supply and demand—the invisible hand of the marketplace rather than the visible hand of politicians—to anchor the principles and regulate the practices of their economic environments.

Source: Adapted from “Methodology | 2015 Index of Economic Freedom Book.” Accessed December 8, 2015. http://www.heritage.org/index/book/methodology.

http://www.heritage.org/index/book/methodology

Chapter 4 The Economic Environments Facing Businesses 109

table 4.5 average freedom scores by type of economic environment (in %)55

The higher the percent per category, the greater the freedom an individual commands in that domain.

Dimension Developed Countries

emerging economies

Developing Countries

Overall economic Freedom 75 65 58

Rule Of Law Property Rights 88 49 33 Freedom from Corruption

80 47 36

Limited Government Fiscal Freedom 64 79 80 Government Spending

40 67 65

Regulatory efficiency Labor Freedom 69 62 58 Business Freedom 85 71 60 Monetary Freedom 82 77 74

Open Markets Trade Freedom 87 80 73 Investment Freedom 83 59 51 Financial Freedom 74 58 42

Note: Scores range from zero (no freedom) to 100 (full freedom).

Notwithstanding progress, today we see a paradoxical gap between the promise and the prevalence of economic freedom. Specifically, given the documented benefits of economic freedom, why do so few countries maximize it? Take a quick look at Map 4.2. As you see, presently Hong Kong, Singapore, New Zealand, Australia, and Switzerland are the only “free” economies in the world; they are home to about 50 million people. Some 33 countries are rated mostly free, including Canada, the United States, Germany, Sweden, South Korea, and Malaysia; they are home to another 950 million or so. In contrast, 54 countries are moderately free, 62 are mostly unfree, and 24 are repressed; they are home to approximately 6.3 billion people. Put differently, 38 of 178 countries— about 22 percent—grant their residents considerable to extensive economic freedom. The rest do not.56

Managers study this irony, gauging its implications to property rights, government regulation, and market systems. Increasingly, as countries in the West struggle with economic shortfalls, managers wonder if free markets will prevail. Or, will governments claim the commanding heights of the economy, controlling markets in order to supervise development, regulate performance, and, ultimately, determine potential? Performance data complicates interpretation, raising the question of whether optimizing economic freedom is still necessary to anchor a productive economic system.57 The record of various countries, such as China, Russia, South Africa, Mexico, and Rwanda, indicate that economic freedom is not necessarily a requirement. Since 2008, real cumulative growth in prominent developed economies, historically advocates of economic freedom, has amounted to about 6 percent. In comparison, China, technically a mostly unfree economy, has seen its GDP increase more than 70 percent. Similarly, for the past decade, Rwanda, one of the developing world’s shining stars and a moderately free economy, has cranked out average growth of 7.5 percent and doubled its income per capita.58 China and Rwanda’s success is due not to maximizing economic freedom, but rather central direction by an authoritarian government. Furthermore, they are not isolated cases. Analysts note that many fast-growing emerging and developing economies deemphasize economic freedom. Instead, they advocate an alternative relationship between individu- als, markets, and governments. This outlook, as we profile in our Looking to the Future insert, spotlights the idea of state capitalism.

Managers watch key events to gauge the contest between economic freedom and state control. These include how the government

• regulates the economy, • protects property rights, • sets fiscal and monetary

policies, • promotes transparent

policies.

The surge in state capitalism helps explain why many emerging and developing economies deemphasize economic freedom.

110 part 2 Comparative Environmental Frameworks

An epic philosophical contest is underway. In one corner, we have the ideals of economic freedom, anchored in notions popularized by Adam Smith and implemented via free markets. In the other, we have models of state power, loosely tied to notions popularized by Karl Marx and Vladimir Lenin, and implemented via state capitalism. A generation ago, the state-controlled economy was seen as a way sta- tion on the path to a capitalist system. Now, impres- sive performance in many countries with emerging and developing economies suggests that free market economics is no longer the only viable route to mod- ernization. Worldwide, managers watch and wait as the contest between free markets and state power determines the sort of economy that works best in the modern world.

State capitalism is an economic system whereby political officials shape how assets are valued and when and where they are used.59 The state nurtures national champions, manages trade relations and exchange rates to promote exports and discourage imports, mediates the financial system to provide low-cost capital to domestic industries, and runs nationalist legal systems. State capitalism, unlike market capitalism or communism, does not stipu- late an ideological component. The government manages markets for long-term political survival and power projection, not to enforce an abstract ideal or promote a personality cult. Instead of politi- cized revolutionaries promising a brave, new future, state capitalism relies on pragmatic technocrats who, applying sophisticated management ideas, develop a prosperous, productive economy.

The government manipulates market outcomes for political purposes. It aims to stabilize market cycles, equalize income distribution, and preempt self-interests that threaten social harmony. Allowed to run free, market economies can encourage the psychology that greed is good. Only a strong state, goes the reasoning, stops it from devolving into psychosis.60 Hence, the state uses the market to promote stability and growth, thereby creating the prosperity that maximizes state power and legiti- mates its ongoing rule. The payoff is plain: sub- verting political freedom with economic prosperity fortifies the authority of the state. Unburdened of an ideological agenda, the state prefers anonymity. As long as a growing economy supports stability, it stays in the shadows, influencing activities and

shaping outcomes. In the event that plans go awry, the veiled hand quickly turns visible. The state steps in, revises policies, resets funding, and redirects activities.

Who owns Whom

State capitalism calls for the government to own, either directly or indirectly, its national champions, using them to influence market activity as well as consolidate its authority. For instance, the CCP of China is the majority owner of many of the largest publicly listed Chinese companies, including major banks, energy producers, telecom carriers, and media firms. Collectively, huge conglomerates in finance, media, mining, metals, transportation, communica- tion, and so on answer to the CCP.61 Furthermore, party officials in China’s provinces and cities own and run thousands of medium-sized and smaller ones. State officials, while discreet, are not shy. At all lev- els, “the tentacles of state-owned enterprises extend into every nook where profits can be made.”62 Similar situations in Brazil, Rwanda, Russia, Saudi Arabia, and South Africa, for instance, highlight the state’s expanding economic clout.

telltale Marks

State capitalist economies, whether in the Middle East, Asia, Eastern Europe, or South America, have telltale marks. Public investment, public wealth, and public enterprise prevail. Officials fan economic na- tionalism. State capitalism promotes the growth of particular industrial sectors and companies in order to speed development. The state promotes domestic markets as sanctuaries for national champions, aspir- ing to nurture them into global leaders.63 The state games the system, capturing competitive advantages through whatever means necessary. Officials install trade and FDI barriers in order to spur local develop- ment. Often, the state attracts innovative foreign com- panies, using state-owned banks to provide cheap loans, favorable regulations, and stable industry set- tings. Regulators may then require that foreign inves- tors create joint ventures with local companies when entering strategic industries. Moreover, if push comes to shove, foreign companies receive scant protection

Looking to the Future State Capitalism: Detour or Destination?

Chapter 4 The Economic Environments Facing Businesses 111

and even weaker legal defense. State capitalism has lit- tle need for an independent judiciary; the legal system legitimates state policies as needed. Similarly, the state uses the tax code as a tool for economic, not social, engineering.

Gaining Momentum

Presently, some 70 or so strategically important coun- tries worldwide are at a crossroads in determining their political and economic futures.64 Whether they adopt free markets or state capitalism remains to be seen. Many see China as the bellwether; it has used state capitalism to develop and direct the world’s fastest-growing economy that, in turn, has powered the swiftest, most extensive rise out of poverty any nation has ever seen. Its success—not just surviving, but also prospering during the great financial cri- sis—convinced “Chinese leadership that state control of much of the country’s economic development is

the steadiest path toward prosperity—and, therefore, domestic tranquility.”65 Some dismiss state capital- ism as inevitably unacceptable. Keep in mind that in 2002, asked whether the country’s economic situa- tion is good or bad, some 52 percent of Chinese ver- sus 46 percent of Americans respondents affirmed it as good. In 2015, asked the same, 90 percent of Chinese while 40 percent of Americans saw good times.66

Given the economic circumstances in the world today, one should not be surprised if others, par- ticularly authoritarian one-party political systems, find state capitalism attractive. Throughout Asia, the Middle East, Africa, and Latin America, authoritarian governments emulate China’s model.67 Their state- backed companies grow and expand, steadily gen- erating progress and prosperity. The surging suc- cess of state capitalism, besides clarifying surging single-state authoritarianism, helps explain why many countries, collectively home to several billion people, restrict economic freedom. ■

tyPes of economic systems Wherever they go, managers question how the host government might regulate the market, authorize property rights, implement fiscal and monetary policies, and interpret the stan- dards of economic freedom. Evaluating the particular type of economic system in a country enhances analysis. This perspective spotlights drivers of supply and demand, their implica- tion to resource allocation, and the consequence to managers’ economic freedom. Presently, we see variations of three types of economic systems, namely, the market, mixed, and com- mand economies (see Figure 4.5).

the market economy An economic system whereby individuals, rather than the government, make most decisions is a market economy. It is anchored in the doctrine of capitalism and its thesis that private ownership confers inalienable property rights that legitimize the profits earned by one’s ini- tiative, investment, and risk. Optimal resource allocation follows from consumers exercising their freedom of choice and producers responding accordingly. Market economies are com- monly found in developed economies, such as Australia, Canada, Hong Kong, Singapore, Switzerland, and the United States. Each grants its citizens wide-ranging freedom to decide where to work, what to do and for how long, how to spend or save money, and whether to consume now or later.68

The market economy champions the “invisible hand” of economically free, self- interested consumers as the driver of productive efficiency. Consumers, through their interactions with producers, shape aggregate growth, thereby optimally determining the relationships among price, quantity, supply, and demand. A market economy pushes pro- ducers, spurred by the profit motive, to make products that consumers, spurred by their quest to maximize utility, buy. Consequently, by virtue of what they buy—and, for that matter, do not—consumers direct the efficient allocation of resources and the optimal valuation of assets.

An economic system organizes the production, distribution, and consumption of goods and services.

Capitalism and its advocacy of the private ownership of factors of production anchors a market economy.

concePt check

Chapter 3 notes that the indi- vidual voter is the cornerstone of a democracy. Here we add that the individual, as a consumer, is the key factor in a free market. Whereas democ- racy recognizes the suprem- acy of voter sovereignty, the market economy recognizes the supremacy of consumer sovereignty.

112 part 2 Comparative Environmental Frameworks

Government owns most or all resources.

Command Mixed Market

Government and private ownership of economic

resources mixed in varying proportion.

Mostly private (individual or business) ownership of

resources.

Advocates decentralized, entrepreneurial innovation.

Applies the invisible hand, laissez faire, property

rights, and individualism.

Philosophical Anchor: Capitalism.

Advocates optimizing economic eciency, promoting egalitarianism,

and preempting self-interest.

Philosophical Anchor: Socialism.

Advocates centralized, large- scale, capital-intensive

production.

Applies the visible hand of the state, central planning, and

collectivism.

Philosophical Anchor: Communism.

Low High

Types and Features of Economic Systems

Degree of Economic Freedom

Figure 4.5 Types of economic Systems The three predominant types of economic systems endorse different philosophies, advocate different principles, and apply different approaches.

An enduring bias toward minimal government intervention anchors market econo- mies. The less visible the “hand” is due to government intervention, the more efficient is the market. Fundamentally, a market economy endorses the ideal of laissez-faire, which can be literally translated as “Let do,” and more broadly advises “Let it be” or “Leave it alone.” Laissez-faire opposes governmental interference in economic affairs beyond the minimum necessary to maintain property rights, safety, and peace. The consequence, as Adam Smith reasoned, is a market whereby “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man or order of men.”69 Still, the need for public goods (e.g., traffic lights, clean air, national defense) and regulatory protections (e.g., minimum wage, product safeguards, and environmental standards) requires govern- mental involvement. Therefore, a market economy looks to the state to enforce contracts, protect property rights, ensure fair and free competition, regulate certain activities, and pro- vide general safety and security.

the command economy In theory, communism champions state ownership of resources and control of economic activity. Nominally a political ideology, communism calls for an egalitarian, classless, and ultimately stateless society based on the government’s command of the economy (the in- strumentality of attaining the Marxian mandate, “From each according to his ability, to each according to his need”).70 Implementing this system requires the state adopt a command economy in which it owns and controls the factors of production (namely, land, labor,

A market economy endorses the doctrine of capitalism, its principles of the invisible hand and laissez-faire, and the goal of maximizing economic freedom.

The need for government to provide public goods and protect society makes visible the otherwise invisible hand in a market economy.

In a command economy, the visible hand of the state super- sedes the invisible hand of the market.

Chapter 4 The Economic Environments Facing Businesses 113

capital, and entrepreneurship). Public officials, not private agents, decide what products to make, in what quantity, at what price, and in what way. For example, in a market economy, if the government needs automobiles, it collects taxes and buys cars at market prices from privately held carmakers. In a command economy, the visible hand of the government, with little regard for price, orders state-owned carmakers to produce them.71

Making the invisible hand explicitly visible means that government officials, not pri- vate consumers, determine the prices of goods and services and, hence, the allocation of resources. Consequently, product quality is often erratic and, absent profit-maximizing incentives, typically deteriorates. Products are usually in short supply and there are few sub- stitutes. State-owned enterprises, typically large-scale, inefficient, and unprofitable, have few resources to upgrade or incentives to innovate.

Command economies can outperform free markets for short periods. Controlling ev- eryone and everything lets the state mobilize idle resources, usually labor, to generate high- growth spurts. High productivity continues as long as the state competently manages the supply of slack, low-cost resources. Improving performance often moves state officials to proclaim that the command economy is superior to a free market. History, however, shows otherwise. Central planning commonly proves counterproductive, given that officials, no matter how astute, cannot consistently predict consumers’ preferences, craft incentives for entrepreneurs, or efficiently allocate resources. Far more typically, command economies struggle in the face of diminishing productivity, along with growing inefficiency, inequality, cronyism, corruption, and, ultimately, failure to meet rising expectations. Command econo- mies have included the Soviet Union (which, at its peak, was the world’s second-largest economy), China during its Great Leap Forward era beginning in 1958, India prior to its economic reforms in 1991, and Afghanistan during the rule by Soviet occupation and the Taliban. Today, we see few pure examples, most notably North Korea and, to a diminishing degree, Cuba.

A command economy and state capitalism, while overlapping on some elements, dif- fer on others. Surveying the economic environments of various countries, such as China, Iran, Rwanda, Russia, Saudi Arabia, and Vietnam, finds the visible hand of a single-party authoritarian state directing resource allocation, controlling some to many companies, and regulating individual autonomy. Correspondingly, many developing economies fall in the “mostly unfree” and “repressed” categories of the Economic Freedom Index. Hence, state capitalism exhibits hallmarks of state control that are suggestive of a command economy. Fundamentally, they ultimately differ. As noted in the Looking to the Future profile, instead of organizing a command economy anchored in some version of communism, governments practice state capitalism. In that model, the state manipulates the economic environment, not in line with a grand ideological agenda, but with the goal of improving individual pros- perity in order to legitimate and sustain its authority.

mixed economy Most economies, broadly labeled mixed economies, fall between the market and command types. A mixed economy is a system in which economic decisions are principally market driven and ownership is largely private, but the government intervenes, from a little to a lot, in valuing assets, allocating resources, regulating activities, and organizing markets. Put simply, the state reasons that it is the government’s responsibility to make strategic decisions about strategic industries.

The mixed economy blends elements of the command and market systems. On one hand, the state intermingles ownership of some resources, centralizes certain plan- ning functions, and regulates market systems. On the other hand, the state authorizes a range of economic freedoms to individuals and companies. Fundamentally, the inter- action of supply and demand, signaled to producers through the choices that consum- ers make, rather than public dictate, organizes production.72 For example, in a mixed economy the government may partially own a carmaker. Rather than instructing it on the

concePt check

Totalitarianism subordinates people’s day-to-day lives— including their market behavior and economic outlook—to the state. Government command of the economy supports this policy, enabling it to determine asset valuation, direct resource allocation, and regulate productivity.

Despite points of overlap, state capitalism is not a form of a command economy; the former promotes state wealth whereas the latter promotes state ideology.

A mixed economic system combines elements of the mar- ket and command economic systems; both government and private enterprise influence production, consumption, investment, and savings.

A market economy is anchored in capitalism, a command economy is anchored in com- munism, and a mixed economy is anchored in socialism.

114 part 2 Comparative Environmental Frameworks

type, quantity, and style of cars to make, the government authorizes the firm to decide. Generally, a mixed economic system falls short of the productivity of a market economy, but outperforms a command economy. Presently, countries classified as mixed economies include South Africa, Japan, South Korea, Sweden, Austria, France, Brazil, Germany, and India. They typically fall in the “mostly” and “moderately” free categories of the Economic Freedom Index.

Democracy promotes a market economy. Communism promotes a command economy. Similarly, socialism promotes a mixed economy. The notion of “mix” follows from the state letting the market allocate resources, as does capitalism, but directly channeling their use given political goals, as does communism. Philosophically, socialism holds that a fair and just economy, besides optimizing productivity, promotes common cause by supporting low un- employment, prevents the consolidation of wealth and privilege, helps the impoverished by fairly redistributing income, stabilizes society by mediating market failures, and protects the public by limiting abuses of market power. Advocates of socialism, and by extension a mixed economy, reason that governments more conscientiously promote an egalitarian ethos that deters the opportunistic individualism found in a market economy as well as prevents the oppressive collectivism found in a command economy.73

Like many features of IB, the extent of state intervention in a mixed economy varies from country to country. Political leadership, societal agendas, and market circumstances distinctively shape how a government interprets economic freedom and state intervention.74 In Sweden, like fellow Nordic countries, the state applies the idea of lagom (“just the right amount”) to promote work-life balance, income equality, and collaborative social relations. Implementation calls on the state to set a broad range of employment, social, welfare, envi- ronmental, and market standards. Alternatively, France champions the notion of dirigisme (“to direct”), whereby the state shapes market conduct, often taking control of key sectors, but refrains from regulating social standards. The extent of the French government’s eco- nomic direction falls short of that seen in Sweden.75

assessing economic develoPment, Performance, and Potential Managers tap a broad portfolio of macro and micro measures to assess a country’s develop- ment, performance, and potential. Some measures may be informal or idiosyncratic, such as the number of wireless subscriptions, Internet searches for telltale terms, scale of family- owned conglomerates, or prevalence of military officers controlling companies.76 Typically, convention dominates practice and managers use monetary metrics to estimate productivity, income, and wealth. Improving their understanding leads them to augment analyses with measures of sustainability and stability.

monetary measures Comprehensive, single-item monetary measures are incisive indicators of whether an economy (1) is expanding or contracting, (2) needs a boost or should be constrained, and (3) is threatened by inflation or recession. Taking the temperature of a patient is a simple procedure, for instance, but it quickly highlights the performance of vital activities that are essential to life. The same holds true for single-item monetary measures. Standards, notably gross national income, gross domestic product, or gross national product, efficiently sum- marize the economic activity of households, businesses, and governments in terms of their consumption, investment, spending, and trading. Furthermore, tracking real change in an aggregate measure, like GDP, models overall production, maps the direction of the market, and indicates the health of the country’s economy. Some see, for instance, the GDP statistic as “truly among the great inventions of the 20th century, a beacon that helps policymakers steer the economy toward key economic objectives.”77

Among monetary aggregates, GNI provides the broad- est measure of economic performance.

Chapter 4 The Economic Environments Facing Businesses 115

Gross National Income (GNI) is the broadest measure of a country’s economic perfor- mance. It has four components: personal consumption, business investments, government spending, and net exports of goods and services. It measures the value of all production in the domestic economy together with the income that the country receives from other coun- tries (in the forms of profits, interest, and dividends), less the same sorts of payments that it has made to other countries. For example, the value of a Samsung TV built in South Korea as well as the value of a Samsung TV made in Japan using Samsung’s resources is counted in South Korea’s GNI. Similarly, the value of a Sony TV built in South Korea using Sony’s re- sources counts in the GNI of Japan. Too, if Samsung’s Japanese subsidiary repatriates profits to headquarters in Seoul, it increases South Korea’s GNI.

For most countries, incomes received by the country versus payments made to the rest of the world typically offset each other; hence, there is little difference between GNI and other macro estimators, like GDP. For instance, GNI for the United States in 2014 was only about a percent higher than its GDP. For some countries, MNEs play an outsized role and, consequently, flows are uneven.78 Large-scale repatriation of profits from a country’s MNEs’ foreign subsidiaries, for instance, can drop GDP well below GNI, thereby understating a na- tion’s economic performance. In 2014, for instance, Japan’s GDP was $4.61 trillion while its GNI hit $5.34 trillion.79

Gross Domestic Product (GDP) is the total market value of all output produced within a nation’s borders, no matter whether it is generated by a domestic or foreign-owned en- terprise, over a fixed period of time.80 It estimates the output from a sample of businesses in every part of a nation’s economy, from agriculture to social media. Each sector’s weight reflects its relative importance in the national economy. As such, GDP measures the total value of finished goods and services that have been produced for consumers, business, and government in that nation. Measuring the flow of economic activity in terms of producing goods and services, not simply its stock of productive assets, indicates if an economy is ex- panding or contracting. Presently, GDP is the most commonly used estimator of economic performance, serving as a universal benchmark of productivity and prosperity. Table 4.6 lists the largest economies by GDP.

Technically, GDP plus the income generated from exports, imports, and the interna- tional activities of a nation’s companies equal its GNI. For instance, a smartphone made by Samsung and Sony in South Korea contributes to South Korea’s GDP. A computer made in Japan by Samsung, a South Korean MNE, does not. Instead, it contributes to Japan’s GNI. Therefore, GDP better estimates performance in those markets, such as South Korea, Ireland, or China, where foreign MNEs’ local output is a significant share of total activity.81

Gross National Product (GNP) begins by estimating the market value of goods and services produced in a given year by the labor, assets, and capital supplied by the resident

GDP is the total market value of goods and services pro- duced by workers and capital within a nation’s borders; it provides the truest measure of national economic activity.

GNP is the total value of all final goods and services produced within a nation in a particular year.

table 4.6 the 10 largest economies by gdP, 2014a

Rank Country Type of economy GDP ($, billions) % of World Total 1 United States Developed 17,419 22.4 2 China Emerging 10,345 13.3 3 Japan Developed 4,601 5.9 4 Germany Developed 3,868 5.0 5 United Kingdom Developed 2,988 3.8 6 France Developed 2,829 3.6 7 Brazil Emerging 2,346 3.0 8 Italy Developed 2,141 2.8 9 India Emerging 2,048 2.6 10 Russian Federation Emerging 1,860 2.4 ** World $77,845

Source: World Bank Development Indicators 2014.82

116 part 2 Comparative Environmental Frameworks

of a country. It then adds the income that its citizens earned working abroad, but removes the income earned by foreigners working domestically (the latter counts toward their home nation’s GNP). Effectively, GNP estimates economic performance in terms of the location of ownership, including production done locally as well as when the country’s capital or labor produces value outside of its borders.83 As such, GNP counts the production by citizens and companies of a nation–even if this production occurs in another country. In contrast, GDP centers on the geographical location of production, namely that done by any and all workers within a country’s borders.84 GDP, by tracking only national production, supports short-term monitoring and analysis as well as facilitates cross national comparisons. Countries began emphasizing GDP in the 1960s, and by 1990, it had eclipsed GNP as the superior estimator of productivity and performance.85

imProving economic analytics GNI, GDP, and GNP estimate an economy’s absolute performance. Despite strengths, they can distort country comparisons. For example, economic powers like the United States, Japan, and Germany consistently claim the top rankings in the league tables for GNI, GDP, and GNP. Some may mistakenly conclude that they are also more productive and faster growing than lower-ranked countries. Often, the opposite is true. Therefore, we improve the usefulness of macro estimators by adjusting for the (1) rate of economic growth, (2) size of the population, and (3) purchasing power of the local currency.

rate of economic growth Monetary aggregates take a static snapshot of an economy at a point in time. Hence, they do not capture its rate of change. Interpreting present and forecasting future performance prompts considering an economy’s growth rate. In the short term, an expanding economy, indicated by positive growth in, say, GDP, means that busi- ness, jobs, and personal income are growing. Longer term, GDP’s growth rate estimates a country’s economic potential: If it is growing faster (or slower) than the growth rate of its population, then the country’s standards of living are rising (or falling).86

The growth rate of aggregate measures helps managers identify promising business op- portunities. Looking at the 214 countries that compose the global business environment, one finds, as expected, a wide range of growth rate. For instance, GDP in many developing economies is rising at two to five times the rate of per capita growth in the world’s richest countries. China has been one of the fastest-growing economies over the past three de- cades; it has expanded by 9.8 percent on average since 1995. Commensurately, its GDP has gone from about $600 billion then (with a population of 1.2 billion) to $10.35 trillion in 2014 (with a population of 1.34 billion).87 Its expanding market has created many jobs, boosted workers’ income, increased aggregate demand, attracted foreign investors, and raised living standards.

Population size Managers routinely adjust indicators by the number of people who live in a country.88 This conversion is sensible given how unevenly the world’s population of 7,514,656 is distributed (e.g., from a high of 1.383 billion in China to a low of 56 in the Pitcairn Islands).89 Adjusting GNI by population, therefore, lets managers qualify a coun- try’s performance for its demographics. For instance, China is the world’s second-largest economy when ranked by aggregate GNI. Adjusting its performance for its population of 1.34 billion people, however, moves it to the lower-middle income tier. Similarly, in 2014, Norway’s GNI hit $336 billion, versus the $17,419 billion reported by the United States. However, given its population of 5.1 million residents, Norway ranked first by GNI per capita at $103,630.90 By comparison, the United States, with its 320 million citizens, reported GNI per capita of $55,200, ranking seventh.91

Purchasing Power Parity The prices of goods and services vary from country to coun- try due to, among other things, differing factor endowments, productivity rates, and

Managers improve the economic indicators by adjusting for the

• growth rate of the economy, • number of people in a

country, • local cost of living.

Purchasing power parity pro- vides a method of measuring the relative purchasing power of different countries’ curren- cies for the same basket of goods and services.

Adjusting for PPP controls for differences in the relative cost of living between countries.

Chapter 4 The Economic Environments Facing Businesses 117

regulations. Some prices vary little, say from one developed economy to another developed economy. Some vary a lot, say from a developed country to a developing country. One can buy a liter of gasoline, for instance, in Kuwait for $.23 or in Malaysia for $.39; the same liter of gas costs $.59, $1.49, and $1.73 in the United States, the United Kingdom, and Norway, respectively.92 As such, simple comparisons cannot tell how many goods and services one can buy with a unit of income in one country (e.g., India) versus how much one can buy with an equivalent unit of income in another country (e.g., the United States). Likewise, measures like GNP per capita presume that a dollar of income in Mumbai has the same purchasing power as a dollar of income in Miami, even though the cost of living differs dramatically between India and the United States. Overlooked, price differences distort the usefulness of macro estimators.

Analysts overcome this problem by adjusting for the relative purchasing power par- ity (PPP) between countries. Technically, one applies the rate at which the currency of one country converts into that of another country in order to buy an equivalent basket of goods and services. The “basket” commonly includes items such as a liter of cooking oil, cell-phone plan, a liter of gasoline, or even a McDonald’s Big Mac. Setting equivalent baskets and then calculating their local price given the relative costs of living and currency effects between countries, say India and the United States, makes the purchasing power of a dollar in Mumbai equivalent to that in Miami.93 Commonly, the PPP conversion rate is set in terms of the number of units of a country’s currency needed to buy a basket of goods and services with an equivalent basket in the United States.

Table 4.7 shows the effect of adjusting national economic performance by PPP. Notably, the rankings by GDP reported in Table 4.6 change considerably. For instance, China displaces the United States as the largest economy in the world—its GDP of $10,069 billion, adjusted for PPP, converts to $17,918 billion. Similarly, PPP adjustments boost India and Russia, drop Japan, Germany, the United Kingdom, and France, and replace Italy with Indonesia. Relatedly, PPP reduces some of the otherwise extreme vari- ability in many country-to-country per capita comparisons. Norway’s GDP per capita falls from $97,363 to $65,970 when adjusted for the reduced purchasing power that a unit of its currency commands in its relatively expensive market. The opposite occurs in the case of countries with less expensive standards of living, such as India; its GDP per capita of $1,530 rises to $5,640 when adjusted for PPP.94 These sorts of adjustments help explain the appeal of the Base of the Pyramid, highlighting the real economic potential of billions of poorer people spanning the globe. Map 4.3 profiles countries in terms of GNI per capita adjusted for PPP.

table 4.7 the 10 largest economies, gdP adjusted for Purchasing Power Parity, 2014

Rank Country Population (millions)

GDP by PPP (Us$ trillions)

% of Total World economy

1 China 1,341 $18,017 16.5 2 United States 322 $17,419 16.0 3 India 1,267 $7,384 6.8 4 Japan 127 $4,630 4.3 5 Russian Federation 142 $3,745 3.4 6 Germany 83 $3,704 3.4 7 Brazil 203 $3,263 3.0 8 Indonesia 252 $2,676 2.5 9 France 64 $2,571 2.4

10 United Kingdom 63 $2,560 2.4 World 7,386 $108,596

Source: World Bank Development Indicators 2015.95

118 part 2 Comparative Environmental Frameworks

$591 $140,600$70,300 GDP per captia, PPP (current international $)

maP 4.3 gdP per capita, 2015, adjusted for Purchasing Parity Source: Based on World Bank Indicators, Data; Map access link: http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD/countries?display=map

the Wildcard: the shadoW economy Estimating and adjusting GNI, GDP, and GNP, as well as a host of similar indicators, re- quires good statistics. Throughout the world, governments ably collect data. Their efforts are complicated by the shadow economy (sometimes called the black, gray, or parallel market, or the informal economy). Found anywhere and everywhere, the shadow economy includes the extra-legal activities (e.g., driving an unlicensed taxi, street trading, or unregistered day care center) as well as well as illegal doings (e.g., prostitution, drug-slinging, illicit gambling, cigarette and alcohol smuggling, product piracy) that fall beyond official statistics. Besides conducting business in hard-to-track cash, shadow players typically go to great lengths to hide illicit transactions or dodge taxes. The off-the-books activities of the shadow economy evade and, therefore, confound official performance estimates.96

Developed economies, such as Canada, Germany, and the United States, tend to have a smaller shadow economy than developing economies, such as Greece, India, and Mexico. In the former, the shadow economy commonly runs up to 15 percent of GDP. In devel- oping economies, particularly in Latin America and sub-Saharan Africa, it typically runs much higher—recent reports estimate that in Georgia, Bolivia, Azerbaijan, Peru, Tanzania, Zimbabwe, Thailand, Uruguay, and Guatemala, the shadow economy ran from 55 to 73 percent of GDP.97 Worldwide, the shadow economy accounts for 23 percent of global GDP— more than $16 trillion, which is almost as large as the U.S. economy.98

Growing pressure to keep a nation’s debt and deficits, relative to the size of its reported GDP, within the EU’s prescribed targets spurs some European countries to increase the size of their economy. As such, the scale and scope of shadow economies lead governments to rethink how they tally GDP. Ireland, Italy, and the United Kingdom, among others are mov- ing to include shadow activities when measuring production in their economy. The United Kingdom, for example, estimated that including the value of illicit drug trade (about $7.5 billion) and prostitution activity (about $9 billion) would boost its GDP by 0.7 percent.99 Including all extra-legal and illegal activities that presently go uncounted would lift British GDP by 3 to 4 percent.100

All countries experience the effects of the shadow economy; they are particu- larly influential in developing economies.

http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD/countries?display=map

Chapter 4 The Economic Environments Facing Businesses 119

sustainability and stability GNI, GDP, and GNP, even after adjusting for growth rates, population size, and purchasing power, partially profile a country’s economic performance and potential. Besides the compli- cation posed by the shadow economy, misestimating the costs and consequences of growth distorts analysis. At the least, the term “gross,” rather than “net,” signifies that the value lost through the wear and tear of the resources used in production is not deducted from the value of total output. Moreover, as we’ll see below, monetary aggregates miss other costs, so- called externalities like air, water, or noise pollution, which are the by-products of economic activity. Representing the performance of an economy beyond the information provided by monetary aggregates directs our attention to estimating its sustainability and stability.

sustainability Green economics holds that an economy is a component of, and dependent on, the natural world. Measuring the monetary quantity of market activity through GNI, GNP, and GDP, without accounting for the associated social and ecological costs that result from the ac- tivity that generated the growth, misestimates performance and misrepresents potential. Sustainability endorses a broader accounting of the gains and costs of growth that fall be- yond monetary metrics but help gauge an economic environment. For instance, many coun- tries have seen startling growth result in worrisome imbalances among economic, social, and environmental objectives. Sustainability advocates complementing monetary metrics by assessing economic performance in terms of “meeting the needs of the present without com- promising the ability of future generations to meet their own needs.”101 Presently Sweden, Switzerland, Norway, the United Kingdom, and New Zealand top the world rankings for sustainability; at the other extreme, Nigeria, Venezuela, Egypt, Thailand, and China face the greatest challenge.102 Several proposals outline paths to ‘greenify’ GNI, GNP, or GDP. Current candidates include the following:

• Net National Product (NNP) measures the depletion of natural resources and degra- dation of the environment that result from making and consuming products. Just as a company depreciates its tangible and intangible assets when making a product, so too should countries. NNP does so by depreciating the country’s assets commensurate with their wear and tear in generating growth.103

• Genuine Progress Indicators (GPI) begin by applying the same accounting framework used to calculate GDP. It then adjusts for the corresponding costs of reduced environ- mental quality, health and hygiene, livelihood security, equity, free time, and educational attainment. For example, unlike GDP, GPI values voluntary and unpaid household work as paid labor and subtracts the costs of crime, pollution, and family stress. Effectively, GDP versus GPI is analogous to gross profits versus net profits—accounting for all costs converts gross to net. Accordingly, GPI will equal zero if the costs of pollution, crime, and family troubles, holding all other factors constant, equal the monetary gains from the production of goods and services.

• Human Development Index (HDI) Matters of human development do not show up immediately in income or growth measures. Ultimately, the reasoning goes, they will, given that improving the human condition through better nutrition, education, health care, and hygiene improves economic performance. So, estimating a country’s degree of human development, in terms of the physical, intellectual, and social standards that shape its overall quality of life, helps managers measure market potential.104 The UN translates this view into the HDI and its components: Longevity, measured by life ex- pectancy at birth; Knowledge, measured by the adult literacy rate and the combined pri- mary, secondary, and tertiary gross enrollment ratio; and Standard of Living, measured by GNI per capita (PPP). Nations scoring high on the HDI include Norway, Australia, Switzerland, Denmark, and the Netherlands. Laggards include Benin, Uganda, Rwanda, Haiti, and Togo.105

concePt check

Chapter 1 notes that some groups oppose globalization, Chapter 2 discussed cultural objections, and Chapter 3 identified political reasons that inspire opposition. Here, we add that critics charge that overly emphasizing monetary measures misrepresents the economic benefits of global- ization.

Green measures gauge economic performance in terms of the effect of current choices on long-term sustain- ability.

Estimators of economic progress toward improving happiness include

• Net National Product, • Genuine Progress Indicators, • Human Development Index.

Sustainability and stability perspectives hold that the objective of economic activity is to create an environment for people to enjoy long, healthy, and happy lives.

120 part 2 Comparative Environmental Frameworks

stability Universal affluence, despite its appeal, is presently impossible: the earth lacks sufficient resources to support and sustain high consumption for 7.4 billion people, to say nothing of earth’s projected population of 9.7 billion by 2050. Indeed, warns the WorldWatch Institute, if all countries were to consume resources and produce pollution at the current per-capita level in the United States, an affluent country, we would require five planet Earths to meet demand and sustain the system. Rather than assessing an economy’s potential for increas- ing affluence, perspectives like happynomics or welfare economics encourage incorporating elements of psychology, health, security, and sociology. More fundamentally, they advocate redefining the traditional performance standards of wealth, income, or profit to reflect prin- ciples of well-being, quality of life, and life satisfaction.106 As the UN declares, “Happiness is increasingly considered a proper measure of social progress and a goal of public policy.”107

Happynomics encourages moving “from the concept of financial prosperity to the idea of emotional prosperity.”108 The constitution of Bhutan, for instance, advocates making its citizens happier, not richer, every year; goals include the happiness of society, people’s sat- isfaction with their lives, and national well-being independent of monetary achievement. Rethinking the goal of economic activity in terms of happiness, the argument goes, promotes the sustainability and stability that better represents performance and potential. For in- stance, happynomics reports that nearly 70 percent of personal satisfaction is determined by the quantity and quality of interpersonal relationships, not by economic output, income flow, or wealth creation.109 The United States, when rated on monetary metrics, leads Australia, the Netherlands, and Sweden. Re-sorting performance in terms of life expectancy, leisure time, income equality, freedom to make life choices, generosity, and trust, however, moves Australia, the Netherlands, and Sweden ahead of the United States.110

Estimating stability, happiness, and the like, is difficult. For instance, happiness, like beauty, is often in the eye of the beholder. Potential indicators such as enjoyment, altruism, engage- ment, or, conversely, depression, sadness, and stress, are notoriously difficult to pin down. In addition, how does one meaningfully assign a monetary value to reasonable goals, like safe streets and clean air, which can be measured? Some contend that mapping happiness unnec- essarily confuses economic analysis. However, an unhappy citizenry may be a leading indicator of a secular shift in consumption or social instability that increases economic risk.111 Too, mea- suring subjective well-being positions policymakers to improve the design of public spaces and the delivery of public services, thereby fortifying economic performance and potential.

The intricacies of happiness capture increasing attention; insight promises to clarify mea- surement. The UN, for instance, is progressively operationalizing its resolution, Happiness and Well-Being: Defining a New Economic Paradigm.112 In the meantime, managers tap the following estimators:

• Your Better Life Index (YBLI): Developed by the Organization for Economic Cooperation and Development (OECD), the YBLI advocates evaluating economic per- formance in terms of matters that people worldwide believe are important (e.g., housing, jobs, social relationships, health, security, work–family balance, education) but that fall beyond the narrow scope of monetary measures. Doing so directly measures people’s well-being and perceptions of living conditions. Explained the OECD, YBLI pushes the “boundaries of knowledge and understanding in a pioneering and innovative manner…. It has extraordinary potential to help us deliver better policies for better lives.”113

• Gross National Wellness Index (GNWI): Others contend that material and spiritual development occur side by side; one reinforces the other or both suffer. GNWI measures a country’s capacity to promote individual well-being in terms of mental, health, work, income, social relations, economic, retirement, political, and environmental standards. The GNWI is purposely secular, unlike its complementary counterpart, the Bhutan gross national happiness index. The latter, reflective of Bhutan’s Buddhist orientation, empha- sizes equitable and sustainable socioeconomic development, elevating spirituality, pre- serving cultural values, conserving the natural environment, and championing fair, just governance.

Fully understanding growth, progress, and prosperity calls for assessing the consequenc- es of economic choice on sustainability and stability.

Estimators of economic progress toward improving happiness include

• Your Better Life Index, • Gross National Happiness, • Happy Planet Index.

Chapter 4 The Economic Environments Facing Businesses 121

• Happy Planet Index (HPI): A utilitarian view holds that people aspire to live long, healthy, ecologically sensitive lives. How well a country helps its citizens to do so, while not infringing on the opportunity of future generations and people in other countries to do the same, fully represents its economic performance and potential. The HPI holds that the fundamental logic of monetary metrics are misaligned, overly emphasizing growth at all costs while downplaying its costly, destabilizing, and often destructive externalities. In the realm of the HPI, progress is defined not in terms of economic development, but through success in achieving a sustainable well-being for all.114 Presently, the HPI ranks 151 countries.115 Costa Rica leads the world table; it is followed by Vietnam, Colombia, Belize, and El Salvador. At the other end, Botswana, Chad, Qatar, Central African Republic, and Mali face the greatest challenge.

concePt check

As we saw in Chapter 1, critics of globalization often point to the inefficient use of resources to promote economic activity. Hence, many advocate consid- ering sustainability in evaluat- ing the benefits and costs of globalization.

Yes Growth is not only good, it is an absolute necessity. Growth is life, ac-

tualizing the productive potential of individuals, communities, institutions, and countries. Growth creates benefits for every- one, anywhere and everywhere. It morally stabilizes society. It liberates those trapped in poverty. It reduces violent conflict. It raises living standards. It funds safety nets and government backstops. It creates material improvements that comfort life. It creates jobs, income, wealth, and prosperity for individuals and society. Let’s take a closer look at each.

Civil Stability Growth rallies social attitudes and fortifies political institutions, key anchors of civil stability. People experiencing rising incomes are commensurately tolerant of and benevolent toward each other. In a word, wealth engen- ders humanity. Growth creates the resources that promote transparency of authority, openness of opportunity, toler- ance of diversity, pathways of social mobility, fair and just laws, and virtues of democracy.

Poverty Reduction Notwithstanding the kindness of strangers, growth is the only means to alleviate poverty for the billions struggling to sustain life. Growth has reduced the number of people living in abject poverty. Some 1.94 bil- lion people, or 43 percent of the world population, lived be- low the extreme poverty line of $1.25 a day in 1981. Today, as freer markets fuel growth, it has dropped to 15 percent of the world—about 1.3 billion people.116 Without growth, hu- manity loses the war against poverty and countless millions will suffer physically and psychologically.

Business Dividend Growth stimulates higher employment, capital investment, and productivity. Rising asset valuations, stabilizing wealth effects, and confidence in surviving tough times supports the prosperity of individuals and companies. Amidst the panic of the recent global crisis, for instance, people endorsed the virtue of growth. Some 76 percent of Americans agreed that U.S. strength is “mostly based on

the success of American business” and 90 percent stated that they respect people who “get rich by working hard.”117

Fiscal Dividend Government finances are ultimately at the mercy of growth. A thriving economy boosts tax revenues, thereby providing local, state, regional, and national govern- ments the monies to finance spending projects that sup- port, enrich, and sustain society. Although appealing, his- tory shows cheap government does not translate into good government.

Peace Dividend Growth creates more opportunities for more people in more places. People who see the potential for prosperity behave peacefully. Poor people who move into the middle class, for example, think and behave differently. Free from the tyranny of ceaselessly seeking sustenance, shelter, and security, they become more open-minded, more concerned about their children’s future, more influenced by abstract values than traditional norms, more inclined to settle conflicts peacefully, more supportive of free markets and democracy, and more inclined to have faith in the future.

Environmental Benefits Growth encourages innovation. People specialize in what they do best and, courtesy of pro- growth policies, outsource the rest. Collectively, insightful paths promote the efficient allocation of resources. The fall- ing ratio of energy consumption per unit of GDP, in the face of the growing abundance of goods and services, testifies to the benefits of growth. By making resources valuable, growth spurs us to consume them wisely.

Quest to Excel Growth incents people to bring to bear their ingenuity, their imagination, and their industriousness to find a better way, every day, to make a productive dif- ference. Pushing back the frontier of human experience— whether it involves the trivial (e.g., forms of social media) or the substantive (e.g., alternative energy)—is powered by the quest to grow. Eliminating the pursuit of progress, by diminishing the quest to excel, saps society’s vibrancy.

Growth: Positive and Productive?

Point Point

122 part 2 Comparative Environmental Frameworks

Life Growth supports longer lives. In 1900, life expectancy at birth was 47 years in the United States. In 2015, after a century marked by an epic burst in growth, it was 78 years. Moreover, people now need to work just half the time they once had to, relying on new tools to boost productivity, finding comfort in rising quality-of-life standards, taking solace in improving health care, and seeing inspiration and a brighter future.

Progress or Decline Unquestionably, as the Counterpoint argues, growth imposes costs on individuals, humanity, and the planet. We agree that these costs are striking. Still, our position is unequivocal: No matter the costs of growth, they pale in comparison to the unacceptable, if not indefensible, price of not growing. Bluntly put, when growth stops, decay starts.

no We accept the premise that growth supports life, fostering

morality, transparency, tolerance, mobility, justice, and lib- erty. However, ignoring or, worse, denying the costs of these benefits, costs that seem to grow faster than growth itself, imperils civil society and, ultimately, the stability of humanity and sustainability of the planet. Once you untan- gle the strands of half-truths, falsehoods, and self-interests that lace deceptive pro-growth arguments, the promise of endless milk and honey for all devolves into a bitter delu- sion. The problems of growth span the immediate and the future; where one stops and the other starts is tough to pin- point. Still, as we contend, each hits society hard.

Growth Privileges Few The quintessential promise of growth is “a rising tide lifts all boats.” In theory, as an econ- omy grows, it generates higher wages, income, and wealth for all. In reality, the benefits of growth are unevenly distrib- uted, creating extreme inequalities of income, wealth, and power. We agree that over the long run, increasing growth has lifted the tide for millions around the world. However, a share of the global population has seen their patchwork-rafts capsize, many struggle to keep their leaky boats afloat, and a tiny fraction upgraded to even more ostentatious yachts.

Growth Is Misleading Despite the hype and hoopla, growth does not deliver the benefits it promises. It rewards the financially strong, but punishes the economically weak. It liberates people from old routines, but enslaves them to new habits. It creates free time to spend with family and community, but then demands mobility and migration that cut connections. It promises newer, cooler products to en- able self-fulfillment, and then insidiously traps consumers in a never-ending cycle of hope and deception. Put simply, growth oversells and underdelivers, condemning people to “spiritual despair scarcely concealed by the frantic pace of life.”118 People, trapped on hedonic treadmills, endlessly searching for newer, shinier, better, bigger, faster, or fan- cier, confuse consumption of the latest and greatest as the path toward of actualization (i.e., ‘I shop, therefore I am’). Instead, the destination is alienation.

Growth Threatens Life Polluted air, poisoned water, and toxic land—let alone global warming,

biodiversity collapse, and resource depletion—are the in- evitable by-products of growth. Indisputably, we need some production and consumption. Overproduction and overcon- sumption, however, destabilize the basis of life. Ironically, when we measure the value created by an economy—say, in GNP—no costs are tallied. Rather, they are labeled “ex- ternalities,” mysteriously understood to affect society, but conveniently excluded while we praise the wondrous “ben- efits” of growth in the church of conspicuous consumption. Effectively, since “nobody” is responsible for the costs of externalities, “nobody” pays for them, and the growth engine chugs merrily along. Ultimately, “everybody” pays with a despoiled environment, warped values, and financial servitude.

Growth Destroys Individuality Growth’s mandate to max- imize efficiency requires massification—mass production, mass consumption, mass distribution, mass markets, mass media, and so on. Maximizing massification delivers tre- mendous economic benefits, but at extreme social cost. One analyst notes that “a part of the price that people in the West pay for this unending procession of shiny assem- bly-line products is the concomitant loss of those now rarer things that once imparted zest and gratification—the loss of individuality, uniqueness and flavor; the loss of crafts- manship, local variety and richness; the loss of intimacy and atmosphere, of eccentricity and character.”119

Current Growth Is Unsustainable Humanity plunders the earth at an unprecedented rate. Presently, human con- sumption is 30 percent greater than nature’s capacity to regenerate. By 2050, at current trends, humanity will require three to five planets of natural resources just to keep the game going. “For more than 20 years we have exceeded the Earth’s ability to support a consumptive lifestyle that is unsustainable and we cannot afford to continue down this path,” warns the Worldwatch Institute.120 Barring black- swan innovations in mining, agriculture, manufacturing, and recycling, no matter how hard we wish otherwise, Mother

Counterpoint

Growth: Positive and Productive?

Chapter 4 The Economic Environments Facing Businesses 123

Earth is going to stop current growth patterns sooner rather than later.

Change the Game Our position is straightforward. Epic poverty for billions, slow-motion death spiral of ecosys- tems, false hope of actualization through consumption, binge-buying alienation, and the deterioration of nominal democracies into shadow plutocracies puts the world at the

proverbial fork in the road. We can remain blissfully ignorant of the price of growth, lost in the endless rush of apparent gains, but continually surprised by inevitable and underesti- mated externalities. Or, alternatively, we can face the issue full on, applying the standards of sustainability and radically resetting the equation so that growth “meets the needs of the present without compromising the ability of future gen- erations to meet their own needs.”121

elements of economic analysis Narrow (e.g., GNI, GDP, and GNP) and broad (e.g., HDI, HPI, and NPP) estimators profile ab- solute and relative economic conditions in developed, developing, and emerging economies. Partial equilibrium analysis, for instance, encourages assessing a restricted range of discrete indicators in order to refine analyses and elaborate interpretation. For instance, central bank- ers’ monetary policies directly influence interest and inflation rates; hence, managers keen to the performance of capital markets concentrate on those indicators. Table 4.8 profiles key indicators including the balance of payments, income distribution, inflation, poverty, public debt, and unemployment. Besides specifying measurement, it highlights market implications.

integrating economic analysis The complexity of modern market systems, both absolute and relative, prevents fully repre- senting the properties of economic environment by evaluating a snapshot of disaggregated components. Studying the connections among micro elements of a macro system refines analysis of economic performance and potential. Let’s take a look at various meta-models.

Economics is rich with metrics to measure performance and potential.

table 4.8 key components of economic analysis

Dimension specification Implication Balance of Payments (BOP) Summary of an economy’s trade and financial

transactions, as conducted by individuals, businesses, and government agencies, with the rest of the world.

Indicates if a country has sufficient savings to pay for its imports as well as if it produces enough income to finance growth.

Deflation General decline in prices, often caused by a reduction in the supply of money or credit or declining aggregate demand.

Slows economic growth; anticipating lower prices, consumers defer purchases, thereby risking a deflationary spiral. Increases the real value of debt.

Foreign Direct Investment Controlling ownership in a business enterprise in one country by an entity based in another country.

Promotes development, job expansion, industrialization, and exports. Transfers skills and technologies.

Income Distribution The distribution of income among a nation’s population; estimated by the Gini coefficient.122

Equality opens opportunities whereas inequality promotes debt, stress, and risks.

Inflation The sustained rise in consumer prices measured against a standard level of purchasing power.

Influences interest rates, living costs, consumer confidence, and, ultimately, political stability.

Misery Index The sum of a country’s inflation and unemployment rates. The higher the sum, the greater the economic misery.

Higher misery discourages spending and investment in the face of growing austerity.

Poverty Multidimensional condition whereby a person or community lacks the essentials for a minimum standard of well-being and life.

Persistent poverty destabilizes performance and constrains potential. Creates stress points that challenge civil society.

Public Debt The total of a state’s financial obligations; measures what the government borrows from its citizens, foreign organizations, foreign governments, and international institutions.

Decreasing debt opens growth opportunities. Growing debt signals increasing austerity, rising taxes, and, if uncontrolled, debt crises that impose political, economic, and social costs.

Unemployment The share of out-of-work citizens actively seeking employment for pay relative to the total civilian labor force.

People gainfully employed testify to the competency of policymakers to sustain a productive economy. Persistent unemployment spotlights government ineptitude.

124 part 2 Comparative Environmental Frameworks

the global competitiveness index (gci) The World Economic Forum holds that providing increasing prosperity hinges on how well a country develops institutions, regu- lates activity, and uses resources to improve productivity. A country’s proficiency managing these domains determines its international competitiveness.123 The GCI summarizes the performance and relationship among 110 variables that compose 12 so-called “pillars of competitiveness” within a nation. These pillars tap dimensions like financial market develop- ment, macroeconomic environment, technological readiness, market efficiency, and innova- tion. The impact of each pillar on competitiveness varies across countries, given the stage of economic development, as indicated by GDP per capita. Whereas productivity in developed economies like Sweden or Taiwan is largely innovation driven, for instance, it’s determined by factor endowments of labor and natural resources in developing economies like Ghana, Nigeria, or Cambodia. Ultimately, the GCI links a broad set of economic indicators, ef- fectively integrating macroeconomic and microbusiness aspects of competitiveness into a single, summary index.

Today’s top 10 competitive economies are a diverse bunch. Switzerland, annually ranked first since 2010, continues to set the standard. It is followed by Singapore and the United States. Rounding out the top 10 are Germany, the Netherlands, Japan, Hong Kong, Finland, Sweden, and the United Kingdom. Of the big emerging economies, China and India steadily move up the rankings. Smaller markets, notably Qatar, Malaysia, and the United Arab Emirates, are rising quickly.124

the global innovation index (gii) Countries increasingly look to brainpower for innova- tions that boost productivity, fortify competitiveness, and increase prosperity. The growing power of ideas and insights in the global market makes a country’s capacity for innovation a key determinant of its economic performance and potential. Rather than focus on the scale of research and development, the GII estimates a nation’s capacity to imagine ideas, leverage them into pioneering products, and, in the process, generate knowledge, competitiveness, and wealth. The GII anchors analysis in terms of inputs and outputs. Inputs, which promote and enable innovation, include institutions and policies, human capacity, infrastructure, technological sophistication, business markets, and capital. Outputs include knowledge, competitiveness, and wealth. Collectively, these indicators measure a country’s competency in promoting technologies, expanding human capacities, streamlining organizational capa- bilities, and improving institutional responsiveness. The GCI indicates that those who do well consistently transform neat ideas into real innovations.125

Presently, developed countries claim the top spots in the GII standings: Switzerland is the global leader, followed by Sweden, Singapore, Finland, the United Kingdom, the Netherlands, Denmark, Hong Kong, Ireland, and the United States. Accelerating innovation in Asia sees India, Turkey, and China rising in rank. Collectively, the data show more Asian countries shifting from practices that had optimized industrial efficiency to policies that im- prove the environment for innovation.126

the World competitiveness index (Wci) The World Competitiveness Project assesses a nation’s ability to set and sustain a business environment that enables enterprises to compete, prosper, and create wealth. Four factors determine a nation’s competitiveness: economic performance, government efficiency, business efficiency, and infrastructure. Each category has sub-measures that tap dimensions such as international trade, employment, prices, business legislation, productivity, and management practices. Ultimately, the WCI evaluates more than 300 criteria to summarize a nation’s performance.

In 2015, the United States, on the strength of its business efficiency, financial sector, in- novation, and infrastructure, topped the WCI scoreboard. Hong Kong and Singapore moved up, overtaking Switzerland, which dropped to fourth place. Canada, Luxembourg, Norway, Denmark, Sweden, and Germany, in sequence, completed the top 10.127 Cross-national commonalities highlight the decisive importance of business productivity. Country move- ment, both up and down the rankings, follows performance moving into higher value-added activities, improving business efficiency, and promoting international connectivity.

Managers often consider meta-models to improve their understanding of the abso- lute and relative potential of an economic environment. Popular indices include

• Global Competitiveness Index,

• Global Innovation Index, • Where-To-Be-Born Index, • World Competitiveness

Index.

concePt check

Making sense of the different domains in a big world, as we saw in Chapters 1, 2, and 3, encourages the integration of various indicators into a comprehensive, coherent in- dex. Indices of the sort we see here help managers develop a holistic profile of particular markets in terms of productivi- ty, competitiveness, innovation, and the quality of life.

An economy’s productivity, namely its efficiency in convert- ing inputs into useful outputs, is a key determinant of its competitiveness.

Chapter 4 The Economic Environments Facing Businesses 125

the Where-to-be-born index (Wtbbi) Finally, looking a bit further into the future, the WTBBI holds that how well a country provides opportunities for a healthy, safe, and prosper- ous life helps explain both its current and future economic environment.128 The WTBBI eval- uates 11 indicators, such as geography, demography, quality of life, per capita income, and life expectancy. Presently, the “lucky baby” league table, comprising 80 countries, is topped by Switzerland, followed by Australia, Norway, Sweden, and Denmark. Smaller nations dominate the top performers, accounting for the top 15 countries in the lottery of life. Large, wealthy countries—notably the United States, Japan, France, and Great Britain—populate the next tier. Emerging and developing economies run from the middle down to the bottom of the ranking.

economic freedom, innovation, and comPetitiveness We close by highlighting the connection of the conceptual anchor of this chapter, economic freedom, to meta-measures of the vitality of developed, developing, and emerging econo- mies. Specifically, Table 4.9 reports the economic freedom score for various countries as well as their ranking on the preceding measures of competitiveness and innovation. Countries with higher degrees of economic freedom consistently show higher degrees of competitive- ness and innovation. Singapore and Switzerland stand out; each has high economic freedom and ranks highly in terms of competitiveness, innovation, and, incidentally, as a great place to be born. The data indicate that countries that emphasize economic freedom, aiming to improve the efficiency of business activity and flexibility of individual choice, are more likely to develop environments that install systems that support productivity. In turn, they reap the rewards of world-class innovation and competitiveness.

In general, smaller economies score higher in the lottery of life.

Economic freedom has a strong relationship with a country’s relative competitive- ness and innovation perfor- mance.

table 4.9 integrating economic freedom, innovation, and competitiveness

Nation

economic Freedom

score Type of

economy129

Rank, Global Competitiveness

Index

Rank, World Competitiveness

Index

Rank, Global Innovation

Index

Rank, Where-To-Be-Born

Index Singapore 89.4 Developed 2 3 8 6 Australia 81.4 Developed 22 18 19 2 Switzerland 80.5 Developed 1 4 1 1 Canada 79.1 Developed 15 5 11 9 China 78.5 Emerging 28 23 35 49 United States 76.2 Developed 3 1 5 16 Germany 73.8 Developed 5 10 15 16 Japan 73.3 Developed 6 27 22 25 Sweden 72.7 Developed 10 9 2 4 Colombia 71.7 Emerging 66 51 60 42 South Korea 71.5 Developed 26 25 13 19 Malaysia 70.8 Emerging 20 14 32 36 Poland 68.6 Emerging 43 33 49 33 Mexico 66.4 Emerging 61 39 63 39 South Africa 62.6 Emerging 56 53 58 53 Philippines 62.2 Developing 52 41 90 63 Saudi Arabia 62.1 Developing 24 * 42 38 Indonesia 58.1 Emerging 34 42 85 71 Brazil 56.6 Emerging 57 56 64 37 Kenya 55.6 Developing 90 * 99 79 Nigeria 55.6 Developing 127 * 120 80 India 54.6 Emerging 71 44 7 66 Russia 52.1 Emerging 53 45 62 72

Scanning emerging economies finds enterprising compa- nies, entrepreneurial citizens, and free market advocates building a brighter future. Scanning the developed econo- mies of the West, such as Australia, Canada, Germany, and the United States, finds many chasing the same dream. But, facing different circumstances, developed economies face different futures. The sheer stature of Western markets— they account for roughly more than 60 percent of global GDP and are the makers of many world-class processes and products—pushes people to ask a very basic question. Namely, as production frontiers shift, market systems trans- form, and economic environments evolve, what then will the developed economies of the West do?

Persistent Problems and Troublesome Anomalies Since 2008, real cumulative growth in the developed econo- mies of the West has amounted to an anemic 5–6 percent; comparatively, China’s GDP had risen about 70 percent while others, like India, Mali, Rwanda, and Turkmenistan, were not far behind.130 The West wrestles with growing un- employment, faltering productivity, slowing wage growth, and worsening income inequality.131 On the policy front, Zero Interest Rate Policies (ZIRP) implemented by anxious central bankers meant that interest rates were not just low within the context of modern times—they were at the lowest levels in 5,000 years.132 Movement in some markets, no- tably Japan, Sweden, and Switzerland, to Negative Inter- est Rate Policy (NIRP) created the unprecedented situation whereby investors paid governments to hold their money; in 2016, more than half of the world’s developed-market sov- ereign debt traded at negative yields.133

Notwithstanding extraordinary monetary expansion in nearly every Western market, falling aggregate demand meant that, for the first time since the Great Depression, deflation, not inflation, posed the greatest risk. Countries, with few options for fighting deflation, resorted to competi- tive currency devaluations while central bankers speculated about “helicopter money.”134 Public debt and unfunded non-debt liabilities grew ominously high, weighing down public-sector balance sheets. Fading public-sector invest- ment, given growing debt burdens and falling aggregate demand, aggravated market shortfalls. Western nations’ struggle with problems and anomalies, besides destabiliz- ing their markets, threatened to undermine economic envi- ronments worldwide. In mid-2016, the IMF concluded that the prolonged slow growth had increased the risk that the developed economies of the West would fall into deflation- ary spirals while developing economies experienced secu-

lar stagnation. Correspondingly, for the seventh time since 2012, the IMF lowered its forecast of global growth and world trade.135

Increasingly, mindful of the comeback of emerging economies, managers ask what might become of the West. Would policy changes in Japan and the United States, for example, finally take hold and revitalize aggregate demand? Could monetary policy generate true organic growth? Would the many unemployed in Portugal, Italy, Greece, and Spain, among others, rejoin the workforce? How might consumers, from Australia to the United States, regain their mojo and resume spending? Might long-term stagnation, some added, be the price the West must pay for using extreme monetary and fiscal policies to pull con- sumer demand forward? And, ultimately, how might devel- oped economies compete against their enterprising rivals in emerging economies?

Looking here, there, and everywhere for answers, ana- lysts projected wide-ranging scenarios. But, as growth stayed stuck in a rut and policymakers applied increasingly drastic tactics, attention turned to a provocative possibil- ity. Might the economic environments of the West, given the emergent 4th Industrial Revolution, be in the early stage of a fundamental shift in how people work, consumers spend, companies compete, officials regulate, and markets per- form?136

The Promise and Peril of the 4th Industrial Revolution Table 4.10 profiles the pivotal stages in how we have pro- duced, consumed, and related to one another over the past 250 years or so. Thus far, every 60 years or so a wave of technology comes along that transforms economies and blazes new market frontiers. Today, the accelerating con- vergence of the physical and digital world ushers in the 4th Industrial Revolution. This era, even if it faintly echoes prec- edent, will introduce radically different tools and techniques that require fundamentally rethinking the idea of work, pro- ductivity, and prosperity.

The “Internet of things” will digitize the physical world, continuously tracking data feeds among sensors loaded in billions of objects. Besides tracking everything, we will syn- thesize ingenious materials and redesign production and consumption systems to maximize resource efficiencies. 3-D printing, as “one of the pillars of the future of manu- facturing,” signals that big factories may be unnecessary to achieve efficient production. The falling cost of making

economic environments of the West: Problems, Puzzles, and the 4th Industrial Revolution

Case

Chapter 4 The Economic Environments Facing Businesses 127

much smaller batches of a much wider variety of prod- ucts moves MNEs to scenarios where they will be able to make items tailored precisely to a customer’s request. Ro- botic platforms will support small-scale factories, located anywhere and everywhere in the world, that efficiently en- able mass customization. Already, robot makers contend that machines are more cost-effective than humans in an expanding range of applications, suggesting that “We’re on the cusp of completely changing manufacturing and distri- bution. I think it’s not as a singular event, but it will ultimate- ly have as big an impact as the Internet.”137 Finally, cheap smartphones, equivalent to supercomputers a generation ago and increasingly in everyone’s pocket, will turbocharge the technosphere.

Timing Revolutions Preceding Industrial Revolutions radically reset economic logics, marketplace activities, and workplace standards. Earlier, for instance, machine power replaced farm labor—in 1900, 41 percent of the U.S. labor force was employed in agriculture; today, it’s less than 2 percent. Then, automation replaced factory labor—in 1965, 28 percent of the U.S. labor force was employed in manufacturing; today, it’s less than 9 percent. Now, besides farming and manufacturing jobs, business processes, historically the realm of white-collar jobs, are becoming “mechanized” via robots powered by ar- tificial intelligence. Workers in a far wider set of professions (accounting, education, and medicine) and industries (trans- portation, manufacturing, energy) face growing job insecu- rity. Some anticipate artificial intelligence systems, in the form of frightfully powerful thinking machines applying in- creasingly sophisticated learning based algorithms, joining, and perhaps replacing, upper management.138 Collectively, forecasts are dire: estimates see nearly half of the jobs in the developed economies of the West at high risk from the changes underway in digitization and automation.139 Unlike before, where these shifts unfolded over three or four gen-

erations, the West faces the unprecedented challenge of ex- periencing this shift in a single generation. Already, evidence indicates big change: a generation ago, every million-dollar increase in GNP in the West generated roughly 10 jobs; now, it generates 1 or 2.

What Next? By definition, a revolution radically disrupts, if not resets, existence. In the economic realm, the 4th Industrial Revolu- tion heralds such a change; robots, 3-D printing, artificial intelligence, infinite connectivity, to say nothing of nano- technology, implantable devices, wearable tech, and sen- tient machines, will reset the dimensions and dynamics of economic environments. Expectedly, workers, consumers, companies, citizens, regulators, and governments through- out the developed markets of the West, already wrestling with puzzling problems and troublesome anomalies, won- dered what it all meant to their understanding of economic environments.

Questions

4-3. How do the current economic problems reflect the changes

and challenges of the 4th Industrial Revolution?

4-4. What are the implications of the 4th Industrial Revolution to

current notions of economic freedom?

4-5. In the economic environment of the technosphere, should

governments estimate performance with monetary aggre-

gates, like GDP, or sustainability and stability, like human de-

velopment or happiness?

4-6. Working in the technosphere signals the increasing likelihood

of working alongside ever-smarter machines. Some advise

workers to complement, not compete with, AI-powered ma-

chines. How would you do so?140

4-7. Who will likely benefit more from the 4th Industrial Revolution:

developed, developing, or emerging economies?

table 4.10 stages of the industrial revolution

stage start Catalyst Key Outcomes I 1784 Water and steam energy powered mechanical production

equipment. Transition from an agrarian to industrial economy.

II 1870 Electrical energy and division of labor supported widespread, large-scale industrialization. Mass production, mass consump- tion, mass media, and mass distribution ensued.

Moved many workers from agrarian to industrial lifestyles. Re- sulting jobs and careers fueled the rise of the middle class and, by extension, property rights, the rule of law, and democracy.

III 1970 Electronics and information technology opened a digital world. Exploration opened business frontiers and career paths.

Connectivity reset automation, production, communication, and collaboration standards. Emergence of knowledge workers and the creative class.

IV 2020 Ubiquitous connectivity, artificial-intelligence based software, big data platforms, and robotic technologies expand the scale and scope of the technosphere.

Emerging cyber-physical systems transform production and consumption processes. Revolutionary efficiencies drive a new cycle of global economic activity.

128 part 2 Comparative Environmental Frameworks

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the following Assisted-graded writing questions:

4-8 Identify the three most important factors that you believe drive the comeback of emerging economies. Explain why you think they would have the greatest impact on the development, performance, and potential of the economic envi- ronment in a developed country such as Germany, Japan, or the United States.

4-9 Identify three implications of the emergence of BRICs for careers and companies in a developed country.

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

Objectives

After studying this chapter, you should be able to

5-1 Describe the trade-offs among different stake- holders in MNe activities

5-2 evaluate the major economic effects of MNes on home and host countries

5-3 explain the broad foundations of ethical behavior

5-4 identify the cultural foundations of ethical behavior

5-5 illustrate how ethical behavior is affected by dif- ferent legal attitudes

5-6 show how corruption and bribery affect and are affected by cultural, legal, and political forces

5-7 summarize what the roles are of governments and companies in resolving environmental issues

5-8 Demonstrate how global labor issues need to be addressed by MNes to their stakeholders

5-9 Restate how codes of conduct can help MNes re- spond to concerns by stakeholders over respon- sible corporate behavior

chapteR 5 Globalization and society

MyManagementLab® Improve Your Grade! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

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When the last tree has been cut down, the last river has been polluted and the last fish has been caught—only then do you realize that money can’t buy everything.

—Native American proverb

Solar electricity plants like this one will help the transition to sustainable energy.

▶

Case ecomagination and the Global Greening of Ge

As noted on Map 5.1, a recent TV ad invites viewers to “accompany” a small green frog as it does a little globe hopping from one exotic location to another.1 The frog, however, doesn’t seem intent on hitting the usual tourist spots, instead preferring stopovers at such places as a solar farm in South Korea, a water-purification plant in Kuwait, and a wind farm in Germany. To begin the second leg of his tour, he hops on a GE90 aircraft engine flying over China and takes viewers to a “clean” coal-powered facility somewhere in Florida. Then he boards a GE Evolution locomotive in the Canadian Rockies as a voiceover explains the point of all this seemingly ordinary sightseeing: “At GE, we’re combining imagination with advanced technology around the world to make it a better place to live for everyone.” The journey’s end finds our frog in the midst of a lush, green tropical rain forest.

“Green Is Green”

The ad is part of a major promotional campaign by General Electric Company (GE) for its Ecomagination Initiative. Announced in 2005 by CEO Jeffrey Immelt, Ecomagination is an ambitious strategy de- signed to demonstrate that an ecologically conscious conglomerate can cultivate the bottom line while doing its duty toward the global environment—hence, the campaign motto “Green Is Green.”

The world’s eighth-largest corporation (in terms of market capi- talization), U.S.-based GE sells products in more than 175 countries through its industry business and GE capital. Industry is further divid- ed into oil and gas, energy management, health care, transportation, and appliances and lighting. It sells, among other things, appliances, aircraft engines, consumer electronics, energy-related products such as solar panels and wind generators, and locomotive engines. It also operates research centers in the United States, Brazil, India, China, Germany, and Israel. In early 2016, GE announced that it was selling its appliance business to Chinese company, Haier.

When the company announced its plan to launch an internal green revolution, GE surprised both investors and industrial customers who had long seen the firm as an ally in the struggle against environmen- tal activists and lobbyists. But as more and more evidence piles up to support the claim that carbon dioxide emitted from human-made sources is heating up average global temperatures, GE has decided to take a more conciliatory stance, allying itself with a growing num- ber of companies that regard investor and environmental interests as intrinsically interlocked, rather than diametrically opposed.

CommItments and Goals

GE’s new initiative represents five basic commitments on its part: (1) to reduce greenhouse emissions and improve the energy efficiency of operations; (2) to double investment in the research and development of “clean” technologies; (3) to increase revenues from those same

technologies; (4) to reduce its global water use by 20 percent; and (5) to keep the public informed. It now evaluates business unit man- agers not only on profitability and return on capital but also on suc- cess in reducing carbon dioxide emissions, the chief greenhouse gas (GHG) attributed to global warming. Energy-intensive divisions, such as those catering to the power and industrial sectors, are responsible for the largest cuts.

The company’s overall target was a 1 percent reduction from 2004 levels by 2012. At first glance, the goal doesn’t seem to have been overly ambitious, but that number represents a significant improvement if you account for the fact that, given GE’s projected growth, levels would oth- erwise soar to 40 percent above 2004 levels. Immelt also committed the company to reducing the intensity of GHG emissions—its level of emissions in relation to the company’s economic activity—30 percent by 2008 and to improving energy efficiency 30 percent by 2012. To ensure that these goals were met, Immelt assembled a cross-business, cross-functional team to oversee planning and monitor progress. By 2014, the company had reduced GHG emissions by 31 percent from its 2004 baseline, more than the 25 percent it had forecast. It also had improved energy intensity by 32 percent from 2004 levels.

a lIttle Consensus seekInG

In addition to instituting the internal changes necessary to curb GHG emissions, Immelt considered GE’s global political environment. He enlisted the Belgian and Japanese governments in the global ecologi- cal discussion and allied GE with other green-minded corporations to lobby American lawmakers on such matters as mandatory GHG reduc- tions. Working with the Environmental and Natural Resources Defense Council and the Pew Center on Global Climate Change, GE also joined other companies to form the U.S. Climate Action Partnership to help shape the international political debate over global warming.

GE and its allies want to be known for developing forward- looking strategies and making long-term investments in an in- creasingly fragmented regulatory environment. With half of its markets located outside the United States, GE is already under the jurisdiction of foreign governments that are more active than the United States in addressing environmental issues.

teChnoloGICal taCtICs and eCo-FrIendly ProduCts

Under Immelt’s direction, GE has also been gearing up to double R&D investment in clean technologies, including renewable- energy, water-purification processes, and fuel-efficient products from which it expects significant revenue growth. GE had already spent $10 billion on R&D investment between 2010 and 2014.

Chapter 5 Globalization and Society 131

In 2006, GE announced that it would reduce water usage by 25 percent from its 2006 baseline, and it achieved a 42 percent re- duction by 2014.

When the Ecomagination initiative was first launched, GE mar- keted only 17 products that met its own Ecomagination criteria; by 2009, there were 90 such products, and by 2011, there were 140 products and solutions generating $105 billion in revenues. By 2014, revenues over the 2010–2014 period had increased to $200 billion. GE wind was generating $30 billion in revenues, and there were over 30,000 wind turbines in operation. In 2016, GE purchased the energy business of French-based Alstom, giving GE access to Alstom’s giant offshore wind turbine technology.

In addition to making other products, such as appliances and light bulbs, energy efficient, GE intends to establish itself as an “en- ergy-services” consultant and to bid on contracts for maintaining water-purification plants and wind farms, a venture that could be five times as lucrative as simply manufacturing the products needed for such projects. The use of its website to communicate informa- tion about its green products and the efforts to improve its own GHG emissions reduction is an example of commitment #5, listed above:

to keep the public informed. In addition, it communicates information through social media such as Twitter and Facebook.

“solvInG envIronmental Problems Is Good busIness”

GE insists that the markets for such products and services are both growing and profitable, and Immelt is convinced that tak- ing advantage of them not only helps the environment but also strengthens the company’s strategic position with major profit op- portunities.

GE also regards its Ecomagination strategy as a necessary re- sponse to customer demand. Before embarking on this initiative, GE spent 18 months working with industrial customers, inviting managers to two-day “dreaming sessions” to imagine life in 2015 and to discuss the kinds of products they’d need in such an environment. The re- sult? Management came out of the talks with the indelible impression that both GE’s customers and the social and political environments in which it conducted business would be demanding more environmen- tally “clean” products.

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MAP 5.1 Global Travels of GE’s “Green Frog,” Its Symbol of Commitment to the Environment

132 part 2 Comparative Environmental Frameworks

Many of GE’s Asian and European competitors had already begun investing in cleaner technologies, and GE knew it couldn’t risk fall- ing behind. GE is also focusing on emerging markets such as China and India, where rapid economic growth has spurred the need for expanded infrastructures, such as water and sewage systems, and for means of curbing appallingly high levels of pollution.

mIxed reaCtIons

Not surprisingly, GE has been praised for its efforts to go green. It reached the ninth spot on Fortune magazine’s list of the “Most Ad- mired Companies” for 2015, and it earned a place on the Dow Jones Sustainability Index, which identifies the 300 firms that perform best according to combined environmental, social, and financial criteria.

At the same time, however, the company has generated a certain amount of skepticism. What happens, for example, if the markets it’s betting on don’t materialize fast enough (or at all)?

Another potential risk revolves around the participation of devel- oping nations in the clean-technology push. In particular, will they be willing to pay prices that developed countries pay for the technol- ogy that reaches the market? GE also faces the challenge of imple- menting the internal changes entailed by its fledgling green strategy.

Traditionally, the firm’s culture has been accustomed to strategies of incremental change in time-tested products and services. In fact, its highly touted Six Sigma program, championed by ex-CEO Jack Welch, inherently discourages radical deviation and unnecessary risk taking. Management may have its work cut out when it comes to persuading marketing, sales, and production teams that untested, early stage Ecomagination products are worth the risk.

Then, of course, there are clients and shareholders. Many of GE’s customers work out of the utility sector, which has assumed a leader- ship role in disregarding warnings of climatic change and opposing ecofriendly regulation. Some investors seemed particularly concerned about the company’s newfound activism and the potential of newly instituted greening initiatives to alienate industrial customers. ■

Questions

5-1. What are the major challenges GE faces in adopting a green

strategy while keeping all of its stakeholders happy?

5-2. From the standpoint of environmental impact, do you think

it’s more important for GE to reduce its carbon footprint or

to develop products that fit their Ecomagination strategy of

being energy efficient?

InTroduCTIon In this chapter, we’ll examine how globalization affects society and managers’ judgments as they interact with different laws and cultures and try to be socially responsible. Doing busi- ness abroad is not easy. The greater the “distance” from one’s home country, the more com- plicated it is to do business. Distance can be described in many different ways, but one way to identify it is the acronym CAGE: cultural (also known as psychic distance), administrative (such as political and institutional policies), geographic, and economic.2 Given the criticisms of globalization and the challenge of companies and individuals doing business in areas of the world that are quite distant, as defined above, how can companies and individuals be successful, or at least not create serious mistakes?

STAkEholdEr TrAdE-oFFS To prosper—indeed, to survive—a company must satisfy different groups of stakeholders, including shareholders, employees, customers, suppliers, and society at large. Obviously, this juggling act can be quite tricky. The shareholder (or stockholder)-versus-stakeholder dilemma pits the demands of one stakeholder against all the others. There is a debate on the idea of shared value, which implies that companies can increase profits while at the same time ad- dressing critical social problems. It is tricky to do both successfully, but many MNEs feel it is worth the effort.3 The basic idea of focusing on stakeholders more broadly is that companies can consider various socially important groups when making decisions.4 In the short term, for example, group aims often conflict. Shareholders want additional sales and increased produc- tivity (which result in higher profits and returns). Employees want safer workplaces and higher compensation. Customers want higher-quality products at lower prices. Society would like to see more jobs, increased corporate taxes, more corporate support for social services, and more trustworthy behavior on the part of corporate executives.

Companies must satisfy the demands of

• shareholders, • employees, • customers, • suppliers • society.

Chapter 5 Globalization and Society 133

In the long term, all of these aims must be adequately met. If they aren’t, there’s a good chance that none of them will be, especially if each stakeholder group is powerful enough to bring operations to a standstill. In addition, pressure groups—which may reflect the interests of any stakeholder group—lobby governments to regulate MNE activities both at home and abroad.

As we noted in our opening case, for example, GE’s Ecomagination initiative has gen- erated pressure from various constituencies, including clients and shareholders concerned about profitability, various governments concerned with drafting regulations, employees wondering about changes in the company’s strategies and goals, and environmental lob- byists, NGOs, and fellow businesses trying to preserve the environment. Each group has a powerful influence on how GE does business and on how successful it is in the market- place. However, GE has to satisfy a variety of stakeholders with different concerns. For that reason, it has many different initiatives working with different stakeholders, not just those interested in climate change.

ThE EConoMIC IMPACT oF ThE MnE As we examine globalization and society, let’s begin with a discussion of the impact of MNEs on the countries where they operate. As discussed in Chapter 1, there are many ways a com- pany can do business abroad, and its success or failure can be strongly affected by the operat- ing environment, including physical, social, and competitive factors as illustrated in Figure 1.1. In addition, the MNE’s activities can also affect the operating environment, such as through corruption and bribery, environmental impact (i.e., air and water pollution), and labor policies.

Although not all companies engage in foreign production, the dynamics involved in this decision raise lots of interesting issues. According to the eclectic paradigm of international production, there are three conditions that help explain the foreign production decision: ownership-advantages of MNEs that give them an advantage over companies in the host countries, location-specific advantages of the host country that make them attractive loca- tions for FDI, and internalization advantages for the MNEs to utilize their specific ownership advantages rather than sell or license them to outsiders to exploit.5 Figure 5.1 identifies some of the ownership-specific advantages of the MNE, focusing on what the MNE has to offer.

Measuring the impact of the MNE on home and host societies depends on its stakehold- ers, the ability to understand cause-and-effect relationships, and individual versus aggregate effects.

Cause-and-effect relationships refer to the true impact of an MNE on a host country. Opponents of FDI persist in trying to link MNE activities to such problems in host coun- tries as inequitable income distribution, political corruption, environmental debasement, and social deprivation.6 In contrast, proponents of MNE activities tend to assume a positive

It is hard to determine whether or not the actions of MNEs affect societal conditions.

• Access to clean technologies • Pollution- abatement skills • Companywide Standards

• Export expansion • Lower-cost imports

• R&D • Industrial upgrading • New capital equipment

• Training • Employment • Managerial skills

• Links to local companies • Increased Productivity • Improved e€ciency • Capital formation

Human Resources Technology Trade EnvironmentInvestment

MNEs

Figure 5.1 What MNes Have to Offer

134 part 2 Comparative Environmental Frameworks

link between their activities and such effects in recipient countries as higher tax revenues, increased levels of employment and exports, and greater innovation. There may or may not be a link, but each side needs to provide evidence to back up their position.

In terms of individual versus aggregate effects, some countries evaluate MNEs and their activities on individual or case-by-case bases. Other countries prefer to apply the same poli- cies and control mechanisms to all MNEs, even though this approach risks missing some good opportunities while steering clear of dubious ones. Moreover, it’s hard to choose between these two approaches because the governments that have applied one or the other have been far from perfect in predicting the future impact of FDI activities in their jurisdictions.

BAlAnCE-oF-PAyMEnTS EFFECTS This refers to trade and capital flows that result from FDI. Under different conditions, these effects may be positive or negative, either for the host country or the home country.

Host countries want capital inflows because they provide the foreign exchange needed to import goods and services and to pay off foreign debt. Remember, however, that FDI results in both capital inflows and capital outflows. Many countries, therefore, are concerned about the net balance-of-payments effect and about the possibility that, when the books are ulti- mately balanced, the effect of FDI on their net balance of payments may be negative.

Effect of Individual FdI To appreciate better why countries must evaluate the effect of each investment on their balance of payments, we can examine two extreme hypothetical scenarios reflecting the effects of FDI on a nation’s balance of payments:

• Scenario 1: Assume that a Mexican MNE makes an FDI when purchasing a Haitian- owned company as a portfolio investment. If the MNE makes no changes in management, capitalization, or operations, profitability remains the same for the Haitian company. Dividends, however, now go to the Mexican owners rather than remaining in Haiti. This results in a drain on Haiti’s foreign exchange and a corresponding inflow to Mexico.

• Scenario 2: A Mexican MNE purchases idle resources (land, labor, materials, equipment) in Haiti and converts them to the production of formerly imported goods. Rising con- sumer demand leads the MNE to reinvest its profits in Haiti, where import substitution increases the host country’s foreign-exchange reserves.

Most FDI falls somewhere between these two extreme examples. That’s why they’re hard to evaluate, particularly when policymakers try to apply regulations to all in-bound investments.

There is, however, a basic equation for analyzing the effect of FDI on a host country’s bal- ance of payments:

B = (m - m1) + (x - x1) + (c - c1)

where

B = balance-of-payments effect m = import displacement m1 = import stimulus x = export stimulus x1 = export reduction c = capital inflow for other than import and export payment c1 = capital outflow for other than import and export payment

Calculating net Import Effect Even though the equation itself is pretty straightforward, determining the value for each variable can be a challenge. Let’s examine the effect of the de- cision to locate a Toyota automobile plant in Brazil—an instance of FDI by a Japanese MNE.

The philosophy, goals, and ac- tions of each MNE are unique.

The effect of an individual MNE may be positive or negative.

ConCePt CheCk

On page 123 of Chapter 4, we mention how the balance-of- payments is a key feature of a country’s economy.

The formula to determine the balance-of-payments effect is simple but the data used must be estimated and are subject to assumptions.

Chapter 5 Globalization and Society 135

First, to calculate the net import effect (m - m1), we need to know how much Brazil would import if the Toyota plant were not built.

We must, of course, consider the amount that Toyota makes and sells in Brazil, but that would be only a rough indication of how much Brazil would import. Why? Because the selling price and product characteristics of the Brazilian-made cars may differ from those of the cars that Brazil would otherwise import from Japan. Moreover, sales of the Brazilian-made Toyota cars may come at the expense either of cars from other plants in Brazil or of imported foreign cars other than Toyotas. Note, too, that by definition, the value of m1 should include the equipment, com- ponents, and materials brought by Toyota into Brazil. Remember, for example, that Toyota buys a lot of parts from suppliers that may be made locally or imported from other countries.

Finally, the value of m1 should also include estimates of the increase in Brazilian imports due to increases in national income caused by the capital inflow from Japan. Assume, for instance, that, because of the Toyota investment, Brazilian national income rises R$50 million (50 million reais). At this point, we have to consult the marginal propensity to import, which is the fraction of a change in imports due to a change in income and assumes that the recipi- ents of that income will spend some portion of it on imports. If we calculate this portion as 10 percent, imports should rise by R$5 million (that is, 10 percent of R$50 million).

The net export effect is the export stimulus minus the export reduction (x - x1), but bear in mind that this figure is particularly controversial, because different evaluators, starting out with different assumptions, regularly arrive at widely varying conclusions. Let’s go back to our Toyota example. In this case, we can make the assumption that the Brazilian plant merely substitutes for imports from and production in Japan. If in fact we proceed on this assumption, we get no net export effect for Brazil. For Japan, we arrive at a negative net export effect be- cause of Toyota’s export reduction (it’s now selling cars made in Brazil to Brazilian consumers instead of exporting Japanese-made cars to Brazil). Toyota, however, might well defend itself on the grounds that its moves abroad are (largely) defensive. How so? Under this assumption, Toyota can argue that it is capturing sales that would otherwise go to non-Japanese carmak- ers in Brazil. In that case, Toyota’s export reduction from Japan amounts only to the export replacement (loss) resulting from the decision to build a production plant in Brazil.

In some cases, MNEs have argued that their overseas investments stimulate home-country exports of complementary products (say, in Toyota’s case, auto parts) that they can sell in host countries through foreign-owned facilities.

Calculating net Capital Flow Net capital f low (c - c1) is the easiest figure to calculate because of controls maintained by most central banks. There are, however, a few sticking points. Basing your evaluation on a given year is problematic because there’s a time lag be- tween a company’s outward flow of investment funds and the inward flow of remitted earn- ings. Because companies eventually plan to take out more capital than they originally put in, what appears at a given time to be a favorable (or unfavorable) capital flow may prove, over a longer period, to be the opposite. The time it takes Toyota to recoup its capital outflow to Brazil depends on such factors as the need to reinvest funds in the host country, the ability to borrow locally, estimates of future exchange rates, and rules on the repatriation of capital.

As a rule, MNE investments are initially favorable to the host country and unfavorable to the home country in the short run. After some time, however, the situation usually reverses.7 Why? Because nearly all foreign investors eventually plan to have their subsidiaries remit div- idends back to the parent company in excess of the amount they sent abroad. If the net value of the FDI continues to grow through retained earnings, dividend payments for a given year may ultimately exceed the total amount of capital transfers composing the initial investment.

GrowTh And EMPloyMEnT EFFECTS In contrast to balance-of-payments effects, MNE effects on growth and employment don’t necessarily amount to zero-sum games (where gains must equal losses) between home and host countries. Classical economists assumed that production factors were always at full

On the import side, the balance-of-payments is positive if the FDI results in a substitution for imports and negative if it results in an increase in imports.

The balance-of-payments effects in terms of capital flows for FDI are usually

• positive for the host country initially and negative for the home country,

• negative for host country and positive for the home country later.

136 part 2 Comparative Environmental Frameworks

employment; consequently, any movement of any of these factors from home to abroad would result in an increase in foreign output abroad and a decrease in domestic output. Even if this assumption were realistic, it’s still possible that gains in the host country will be greater or less than the losses in the home country.

The argument that both home and host countries may gain from FDI rests on two as- sumptions: 1) resources aren’t necessarily being fully employed and 2) capital and technology can’t be easily transferred from one industry to another. Let’s say, for example, that a soft- drink maker is producing at maximum capacity for the domestic market but is limited (say, by high transportation costs) in generating export sales. In addition, moving into other product lines or using its financial resources to increase domestic productivity aren’t viable options.

Setting up a foreign production facility is appealing because it would allow the company to develop foreign sales without reducing resource employment in its home market. In fact, it may wind up hiring additional domestic managers to oversee international operations; perhaps it will also end up earning dividends and royalties from the foreign use of its capital, brand, and technology.

In recent years, many U.S. and European garment manufacturers have moved produc- tion operations to low-wage countries to realize cost advantages. In the process, they’ve shut down—or at least declined to expand—home-country operations. Thus overseas FDI in the garment-making industry has resulted in a loss of jobs in home countries while creating jobs abroad. The situation may be unfortunate, but the fact that it did come about may mean it was inevitable. In the absence of serious protection, argue some experts, home-country op- erations would have closed down because of competition from abroad, and jobs would have been lost anyway. Conversely, of course, host countries gain through the transfer of capital and technology. If that capital is used to acquire host-country operations that are going out of business, then the foreign investor may very well save host-country jobs and, through the import of technology and managerial ability, even create new jobs.

Critics, however, contend that MNEs often make investments that domestic companies could otherwise make, thereby locking out local entrepreneurs. Likewise, they say, foreign investors often bid up prices when competing with local companies for labor and other resources. Critics also claim that FDI destroys local entrepreneurship in ways that affect national development. Because entrepreneurs are inspired by the reasonable expectation of success, the collapse in several countries of small cottage industries, especially in the face of MNE efforts to consolidate local operations, may have played a role in undermining the competitive confidence of local businesspeople.

ThE FoundATIonS oF EThICAl BEhAvIor Companies and those who work for them must act responsibly wherever they go. However, a look at ethical behavior tends to focus on individuals—those who finally make the decision of how to behave. But top management can determine the values a company espouses and to which employees must adhere. Such values are generally included in a Code of Conduct (discussed at the end of the chapter) and in the behavior of other individuals in the organi- zation, especially peers and superiors. In order to ensure adherence to those values, manage- ment will try to hire individuals who are willing to work in the type of ethical environment it is trying to create. However, people still must make the decision about how they are going to act in any given situation.

The sections below will examine the cultural and legal dimensions of ethical behavior in a global context. First, though, let’s briefly examine the broad foundations of ethical behavior. There are three levels of moral development:8

• Level 1, the preconventional level, where children learn what is right and wrong but don’t necessarily understand why their behavior is right or wrong.

• Level 2, the conventional level, where we learn role conformity, first from our peers (includ- ing parents), then from societal laws. One could argue that company codes of conduct are also part of the conventional level of behavior in the narrow context of a company rather

Growth and employment effects are not a zero-sum game because MNEs may use resources that were unem- ployed or underemployed.

Many actions elicit universal agreement on what is right or wrong, but other situations are less clear.

There are three levels of moral development:

• Preconventional • Conventional • Postconventional,

autonomous, or principled

Chapter 5 Globalization and Society 137

than a society. However, behavior espoused by companies likely reflects the values of the company’s home country.

• Level 3, the postconventional, autonomous, or principled level, where individuals internalize moral behavior, not because they are afraid of sanctions, but because they truly believe such behavior is right.

It is possible that behaviors under Level 2 and Level 3 are the same as long as individuals ac- cept the laws where they live, or the codes of conduct of the companies they work for.9

When individuals confronted with ethical decisions enter the realm of moral reasoning, they examine their moral values, especially as related to Levels 2 and 3 above, and decide what to do. One method of doing so, the teleological approach, holds to the idea that decisions are based on the consequences of the action. Utilitarianism, a consequences-based theory of moral reasoning, means that “an action is right if it produces, or if it tends to produce, the great- est amount of good for the greatest number of people affected by the action. Otherwise, the ac- tion is wrong.”10 A second method, the deontological approach, asserts that we make moral judgments or engage in moral reasoning independent of consequences. It implies that actions are right or wrong per se.11 In other words, ethics teaches that “people have a responsibility to do what is right and to avoid doing what is wrong.”12 When individuals engage in moral rea- soning, they use one or the other of these methods, or possibly some mixture of the two.

When an individual moves abroad, moral reasoning becomes very complicated. Consequences may vary due to legal differences, and what is right or wrong may depend to an extent on local values. People need to figure out how make moral decisions—and so do the companies they work for. Two questions arise here: Why should companies and individu- als care about ethical behavior? And what are the cultural and legal foundations of ethical behavior when it comes to adapting to a foreign environment?

why do CoMPAnIES CArE ABouT EThICAl BEhAvIor? Why should companies worry about ethical behavior at all? From a business standpoint, ethical behavior can be instrumental in achieving one or both of two possible objectives:

1. To develop competitive advantage 2. To avoid being perceived as irresponsible

First, some argue that responsible behavior contributes to strategic and financial suc- cess because it fosters trust, which in turn encourages commitment.13 For instance, GE’s Ecomagination program reflects top managers’ belief that by actively responding to social concerns about global warming, GE can gain a strategic advantage over competitors, perhaps developing an edge in emerging markets that are facing severe environmental problems.

Second, companies are aware that more and more NGOs and other groups and individu- als are becoming active in monitoring—and publicizing—international corporate practices. Governments also want to ensure that individual and corporate behavior is consistent with the best interests of the broader community and that laws are being duly followed. Even worse than perception is reality. Unethical behavior can result in serious sanctions against companies and legal action against individuals.

ThE CulTurAl FoundATIonS oF EThICAl BEhAvIor

rElATIvISM vErSuS norMATIvISM Despite the cultural differences found among countries, as discussed in Chapter 2, it is tempting to assume that there is almost universal agreement on what’s right and what’s wrong when it comes to ethical and socially responsible behavior in business. In the real

Teleological Approach: Decisions are based on the consequences of the action.

Utilitarianism: An action is right if it produces the greatest amount of good.

Deontological Approach: Moral judgments are made and moral reasoning occurs independent of consequences.

NGOs are active in prodding companies to comply with certain standards of ethical behavior.

Values differ from country to country and between employ- ees and companies.

138 part 2 Comparative Environmental Frameworks

world, however, managers face situations in which the whys and hows of applying cultural values are less than crystal clear. Everything that complicates dilemmas in the domestic busi- ness environment tends to complicate them even further in the international arena. So, does ethical behavior vary by country, or are there uniform values that everyone should share?

relativism One point of view is to accept that there are significant differences from coun- try to country that might affect our behavior. “When in Rome, do as the Romans do” is an oft-quoted expression that dates to the fourth century AD which implies that in different environments, one must adapt to local customs out of respect for them.14

Applying this expression in an international environment may depend on whether we assume that decisions are based on the consequences of our actions or on a strongly held view of right and wrong. Relativism holds that ethical truths depend on the values of a particular society and may vary from one society or country to another.15 The implication is that it would not be appropriate to inject or enforce one’s ethical values on another, or that a foreigner must adopt local values or morals whether or not they are consistent with the foreigner’s own home values and beliefs.

normativism In contrast, normativism holds that there are indeed universal standards of behavior that, although influenced by different cultural values, should be accepted by people everywhere. Even a pluralistic society such as the United States has a large core of commonly held values and norms.16 However, people may adopt other values and norms as their own. The key is to distinguish between what is common to all and what is unique to the individual.

walking the Fine line Between relative and normative Companies and their em- ployees struggle with the problem of how to implement their own ethical principles in foreign business environments: Do those principles reflect universally valid “truths” (the normative approach)? Or must they adapt to local conditions on the assumption that every place has its own “truths” and needs to be treated differently (the relative approach)?

Many individuals and organizations have laid out minimum levels of business practices that they say a company (domestic or foreign) must follow regardless of the legal require- ments or ethical norms prevalent where it operates.17 One could consider this as behavior based on principles of honesty and fairness, or “ordinary decency.”18

ThE lEGAl FoundATIonS oF EThICAl BEhAvIor Dealing with ethical dilemmas is often a balancing act between means (the actions we take, which may be right or wrong) and ends (the consequences of our actions, which may also be right or wrong). Legal foundations for ethical behavior can provide guidance here, but legal justification is more rooted in the teleological approach to moral reasoning and moral behav- ior (consequences) than in the deontological approach (right vs. wrong behavior). However, there are good reasons to consider the law as a foundation of ethical behavior, just as there are limitations to using the law. Another concern is whose laws take precedence? Should the MNE only worry about local laws, or do they have to worry about the laws of the country where their headquarters are located? If there is a conflict between home country and host country laws, which laws take precedence?

lEGAl JuSTIFICATIon: Pro And Con According to the legal argument, an individual or company can do anything that isn’t illegal. However, there are five good reasons why this is inadequate:

1. Some things that are unethical are not illegal. Some forms of interpersonal behavior, for example, can clearly be wrong even if they’re not against the law.

ConCePt CheCk

Recall from Chapter 2, pages 29-30, our discussion of “ Cultural Awareness” and the various ways in which social and cultural distinctions can char- acterize a country’s population. We also observed that compa- nies doing business overseas need to be sensitive to internal diversity: They should remem- ber that people in most nations are often members of multiple cultures and in some cases have more in common with certain foreign groups than with domestic groups.

Relativism: Ethical truths depend on the groups holding them.

ConCePt CheCk

In discussing “guidelines for cultural adjustment” on page 45 in Chapter 2, we dem- onstrate that successful accom- modation to a host country’s culture depends not only on that culture’s willingness to ac- cept anything foreign but also on the extent to which foreign firms and their employees are able to adjust to the culture in which they find themselves.

Normativism: There are univer- sal standards of behavior that all cultures should follow.

Managers need to exhibit ordinary decency—principles of honesty and fairness.

Social responsibility requires human judgment, which is subjective and ambiguous.

ConCePt CheCk

Note that on page 78 in Chapter 3 we define a country’s legal system as the fundamen- tal institution that creates a comprehensive legal network to regulate social interaction; its purpose is to stabilize political and social environments as well as to ensure a fair, safe, and ef- ficient business environment.

Chapter 5 Globalization and Society 139

2. The law is slow to develop in emerging areas, and it takes time to pass and test laws in the courts. Moreover, because laws essentially respond to issues that have already sur- faced, they can’t always anticipate dilemmas that will arise in the future.

3. The law is often based on imprecisely defined moral concepts that can’t be separated from the legal concepts they underpin.

4. The law often needs to undergo scrutiny by the courts. This is especially true of case law, in which the courts create law by establishing precedent.

5. The law simply isn’t very efficient. “Efficiency” in this case implies achieving ethical be- havior at a very low cost, and it would be impossible to solve every ethical behavioral problem with an applicable law.19

In contrast, there are also several good reasons for using the law to justify ethical behavior:

1. The law embodies many of a country’s moral principles, making it an adequate guide for proper conduct.

2. The law provides a clearly defined set of rules, and following it at least establishes a good precedent for acceptable behavior.

3. The law contains enforceable rules that apply to everyone. 4. Because the law represents a consensus derived from widely shared experience and

deliberation, it reflects careful and wide-ranging discussions.20

CorruPTIon And BrIBEry Bribery is one facet of corruption. The determinants of corruption include cultural, legal, and political forces.21 As defined by NGO Transparency International, corruption is “the abuse of entrusted power for private gain. When government officials are involved, bribes can be paid to obtain government contracts, or they can be as minor as trying to get government officials to do what they should be doing anyway. It can be grand, petty, and political depending on

Legal justification for ethical behavior may not be sufficient because not everything that is unethical is illegal.

The law is a good basis for ethical behavior because it embodies local cultural values.

Bribery of public officials takes place to obtain government contracts or to get officials to do what they should be doing anyway.

Rejecting the temptation to receive bribes comes from principled behavior reinforced by corporate standards of conduct that prohibit bribes. Source: Maryna Pleshkun/Shutterstock

▶

140 part 2 Comparative Environmental Frameworks

the amounts of money and the sector where it operates.”22 Bribes are payments or promises to pay cash or anything of value.

Figure 5.2 provides information on the Corruption Perceptions Index for 2015 by identify- ing the perceived levels of public-sector corruption for a small sample of countries. Although no country is free of corruption, it is depressing to note that the most corrupt countries tend to be in high-conflict regions, especially in Africa. Clearly poverty is an issue, although corruption and bribery occur at all income levels. Higher levels of corruption and bribery can also lead to or re- sult from destabilized political environments, which can create problems for foreign investors as well as local companies. Transparency International not only publishes a Corruption Perceptions Index but also a Bribe Payers Index, which identifies which of the top 28 countries in the world are likely to have companies that pay bribes to do business abroad. In a recent survey, they reported that companies from Russia, China, Mexico, Indonesia, and the United Arab Emirates were most likely to pay bribes, either to foreign government officials or to other private sector companies.23

PETroBrAS: CorruPTIon In BrAzIl wITh A GloBAl TwIST Corruption is a widespread phenomenon. Sometimes it occurs within a country involv- ing local politicians and companies or between companies and individuals outside of the political system. But corruption can also involve foreign actors. A good example involves Petrobras, the Brazilian national oil company, which has resulted in the disclosure of at least $2 billion in bribes, kickbacks, and money laundering, involving payments to company executives, the ruling Brazilian Worker’s Party, and more than 50 sitting politicians and nu- merous companies trying to secure lucrative contracts with Petrobras. The speaker of Brazil’s lower house of Congress and a powerful senator close to Brazil’s president are also being implicated. On the international side, British Engineering group Rolls-Royce was also ac- cused of paying bribes to secure contracts.24 Other foreign engineering companies are also being investigated for overinflating services and funneling bribes to Petrobras officials and political parties. The Petrobras corruption scandal is one of nine such scandals targeted by Transparency International for a campaign called “Unmask the Corrupt.”

ThE ConSEquEnCES oF CorruPTIon Corruption affects company performance and local economies. Higher levels of corruption, for instance, correlate strongly with lower national growth rates and lower levels of per capita income.25 Corruption can also erode the authority of governments that condone it, as is

Bribes are payments or promises to pay cash or anything of value.

0 10

High tendency toward bribery

Low tendency toward bribery

Germany 81

United Kingdom 81

20 30 40 50 60 70 80 90 100

Taiwan 62

South Korea 56

Italy 44

Russia 29

Nigeria 26

Brazil 38

India 38 Greece 46

Libya 16

North Korea 8

United Arab Emirates 70

France 71

Austria 69

Canada 83 Sweden 89

China 37

Singapore 85Spain 58

United States 76

Hong Kong 75

Venezuela 17 Japan 75

Figure 5-2 Where Bribes Are (and Are Not) Business as usual Transparency International asked country experts, nonresidents, and residents about the overall extent of corruption (frequency and/or size of bribes) in the public and private sectors. The scale runs from 0 to 100, where 0 means that a country is perceived as highly corrupt and 100 means it is perceived as very clean. The figures include a sample of countries. Source: Based on Transparency International, “TI Corruption Perceptions Index” (2015), transparency.org/cpi2015 (accessed February 15, 2016).

Chapter 5 Globalization and Society 141

being seen in Brazil because of the Petrobras scandal. Over the years, bribery-based scandals have led to the downfall of numerous heads of state, with many government officials and business executives being imprisoned, fined, or forced to resign. President Dilma of Brazil was impeached in 2016 over the bribery scandals. Moreover, disclosures of corruption not only damage the reputations of companies and whole countries, they also compromise the legitimacy of MNEs in the eyes of local and global communities when they become involved in the scandals.26 Finally, corruption is expensive, inflating a company’s costs and bloating its prices. Nevertheless, it persists as one of the most challenging concerns in international busi- ness and politics in the world today.

whAT’S BEInG donE ABouT CorruPTIon? Many efforts are underway to slow the pace of bribery as an international business practice at international and national levels. International efforts to combat bribery include those established by the OECD (Organization for Economic Cooperation and Development), the ICC (International Chamber of Commerce), and the United Nations through UNCAC (United Nations Convention against Corruption). The problem is that none of the conven- tions have the force of law behind them. They can identify key issues in corruption and shine the spotlight on offenders, but legal action under the control of national governments must be taken for the fight against corruption to be effective.

The OECD comprises 34 mostly high-income countries from around the world. Its Anti-Bribery Convention, signed in 1997 by the 34 member countries plus six nonmem- ber countries (Argentina, Brazil, Bulgaria, Colombia, Russia, and South Africa), establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides recommendations to the 40 signatory countries, which adopted the 2009 Anti-Bribery Recommendation. As shown in the case of Brazil, it’s clear that the Convention isn’t working as anticipated. Prior to the signing of the convention, only one country had made foreign bribery a crime, and most others treated foreign bribe payments as legitimate tax-deductible expenses. Of course, the member countries have to implement the recommendations into national law in order for them to have any weight. In addition, the countries have to do a better job of enforcement.27 For example, a 2015 study by Transparency International found active enforcement in only 4 of the signatory countries, moderate enforcement in 6, and limited, little, or no enforcement in 29 countries.28

The European union The European Commission confirmed its support for strong an- ticorruption measures within the EU in a 2007 communication to the European Council, Parliament, and Economic and Social Committee. This included the adoption of the UN’s official definition of corruption and support for many of the policies contained within inter- national agreements. The communication also sanctions the work of the Commission’s office of antifraud (OLAF), which conducts the affairs of the EU relevant to corporate and indi- vidual corruption, as well as an internal auditing service that monitors the activities of all of the Commission’s departments. The EU does not have specific anticorruption legislation, but it encourages member nations to adopt high standards and follow them. In its most recent Anti-Corruption Report, the EU noted that corruption costs the EU 120 billion euro per year, and that efforts to combat corruption are very uneven across the EU29—thus the importance of national legislation.

national Initiative: The united States There are several ways the United States has gotten involved in foreign corruption. For example, the Foreign Corrupt Practices Act (FCPA) outlaws bribery payments by U.S. firms to foreign officials, political parties, party officials, and political candidates. The coverage of the FCPA was extended in 1998 to include bribery by foreign firms operating in any U.S. territory. The FCPA applies not only to com- panies registered in the United States but also to any foreign company quoted on any U.S. stock exchange.

The Foreign Corrupt Prac- tices Act is U.S. legislation that makes bribery illegal. It applies to domestic or foreign operations and to company employees as well as their agents overseas.

142 part 2 Comparative Environmental Frameworks

Although it is legal to make payments to officials to expedite otherwise legitimate transactions (officially called facilitating payments but sometimes referred to as speed money or grease money), payments can’t be made to officials who aren’t directly responsible for the transactions in question. In 1988, an amendment to the FCPA actually excluded facilitating payments from the definition of bribery. Now, for example, payment to a customs official to clear legitimate merchandise is legal, whereas paying a government minister to influence a customs official is not.

The Justice Department can also fight against global corruption even when it doesn’t affect government officials. For example, an estimated $150 million bribery scandal involv- ing FIFA, the Swiss-based governing body of football (or soccer in the United States), was brought to light by the U.S. Justice Department because of income tax evasion in the United States by some of the parties, and because of the use of the U.S. financial system to facilitate the flow of funds. Even U.S.-based Nike was brought into the picture because of possible bribes paid to the Brazilian soccer federation. However, the allegations against Nike would not be prosecuted under the FCPA since it didn’t involve a foreign government. The scandal became truly global, and the powerful head of FIFA was forced to resign.30

Another major legislative effort in the United States is the Sarbanes–Oxley Act (SOX), which was passed in 2002 as a response to an epidemic of well-known corporate scandals. SOX toughened standards with regard to corporate governance, financial disclosure, and oversight of accounting and auditing practices. With its passage, the Justice Department be- gan to use the FCPA more aggressively to combat bribery.

EThICS And ThE EnvIronMEnT In this section, we refer to the environment more narrowly in the context of pollution, both air and water, and global warming. Although global warming is the dominant concern from a global perspective, pollution is important as well. Companies can create water pollution through disposal of industrial waste into water systems as well as the inefficient use of wa- ter, which results more in water shortage than in water pollution. There is a link between air pollution and global warming, but the dominant greenhouse gas (GHG) that causes global warming is carbon dioxide, whereas air pollution is more affected by ozone (also a GHG), sul- phur dioxide, nitrogen oxide, and particulates. In modern times, China and India are famous for poor air quality. Even though the advanced industrial countries have seen a reduction in air pollution due to industrial decline and clean air policies, there are still major issues. The European Union estimates that more than 400,000 Europeans die prematurely each year due to air pollution and that health-related issues from air pollution cost 3–7 percent of GDP.31 Even as the world struggles with global warming, they still have to fight against air pollution.

As we saw in our opening case, GE has come to see eco-responsibility as a matter of pro- tecting not only the future of the environment but also its own future. Like GE, companies contribute to environmental damage in a variety of ways. Some, for example, contaminate the air, soil, or water during manufacturing, or make products such as automobiles or elec- tricity that release fossil-fuel contaminants into the atmosphere.

In extracting natural resources, other companies also have a direct and unmistakable ef- fect on the environment. But even in these cases the issue isn’t necessarily clear-cut. Granted, although some resources (such as minerals, gas, and oil) may not be renewable, others (such as timber) are, and some observers even suggest that resources can never really become scarce. Why? Because as they become less available, prices go up and technology or substi- tutes compensate.

whAT IS “SuSTAInABIlITy”? Sustainability means meeting the needs of the present without compromising the abil- ity of future generations to meet their own needs. In this section, we use sustainability from the perspective of environmental sustainability. Proponents of the concept argue that

Sarbanes–Oxley legislation in the United States is helpful in combating corruption through more effective corporate governance, financial disclo- sure, and public accounting oversight.

Companies that extract natural resources, generate air or water waste, or manufacture products such as autos that generate pollution need to be concerned with their environ- mental impact.

Sustainability involves meet- ing the needs of the present without compromising the ability of future generations to meet their own needs while taking into account what is best for the people and the environment.

Chapter 5 Globalization and Society 143

sustainability considers what’s best for both people and the environment. It is important that companies that affect the environment establish policies for responsible behavior toward the earth—a responsibility that has both cultural and legal ramifications.

But is it possible that sustainability is not only a good business practice, but also good business? GE has demonstrated that it makes good business sense to adopt a strong policy of sustainability, but it also has vast resources at its disposal. However, even born-global companies can adopt a sustainable strategy and generate export revenues at the same time.

GloBAl wArMInG And ThE PArIS AGrEEMEnT

on ClIMATE ChAnGE At the core of the United Nations Climate talks held in Paris in December 2015 is the con- cept that global climate change results from an increase in carbon dioxide and other gases that act like the roof of a greenhouse, trapping heat that would normally radiate into space, and thereby warming the planet. If carbon dioxide emissions aren’t reduced and controlled, rising temperatures could have catastrophic consequences, including melting the polar ice cap, flooding coastal regions, shifting storm patterns, reducing farm output, causing drought, and even killing off plant and animal species.32 The UN Framework Convention on Climate Change (UNFCCC) dates back to 1992 at the Rio Earth Summit. The Kyoto Protocol, which was signed in 1997, committed signatory countries to reducing the emissions to 5.2 percent below 1990 levels between 2008 and 2012. However, the Protocol did not include rapidly growing emerging economies like India and China who were two of the biggest polluters, the United States withdrew its support in 2001, and Canada withdrew from the Protocol in 2011.

However, the Paris Agreement changed everything. One hundred eighty-seven countries agreed to keep the increase in the global average temperature to 2°C above pre-industrial levels and try to achieve 1.5°. The countries also agreed to try to shoot for a target of zero net GHG emissions by the second half of the century.33 That would involve moving away from fossil fuels for electricity and transportation, the two primary creators of GHG emissions, and moving more toward sustainable energy, such as solar and wind. To achieve this ambi- tious and improbable goal, all countries, including the emerging markets, intended to set national goals called “intended nationally determined contributions or INDCs.” In addition, the developed countries agreed to provide $100 billion per year by 2020 to developing coun- tries to help them adapt to climate change. The Paris Agreement discussed how to not only stabilize atmospheric concentration of GHG emissions, but also to avoid dangerous anthro- pogenic (human) interference with the climate. A big target of the latter concern is reducing deforestation and forest degradation in countries like Indonesia and Brazil. The problem is that shrinking forests contribute to GHG emissions, and their disappearance also eliminates a major natural way to sop up and store carbon dioxide.34

The success of the Paris Agreement to slow global warming has to come from two sources—the public sector and the private sector. The problem with the public sector is that countries still rely heavily on fossil fuels. India, for example, is the world’s third-largest producer of coal, behind China with 46.1 percent and the United States with 11.6 percent. However, India generates 71 percent of its electricity from coal. Even though it invests heav- ily in alternative energy, especially solar, it will take a while to replace coal. Given the drop in oil prices since mid-2015, the shift to solar and wind energy will require a significant amount of government subsidies. The second source is the private sector. Most large MNEs, as demonstrated by GE in the opening case, are responding to global concerns about the environment by setting their own goals and reporting progress to their stakeholders. Most annual reports are replete with information about the efforts of the companies to reduce their carbon footprint and respond to other environmental concerns. However, a major chal- lenge will be enticing companies to invest heavily in the development of alternative sources of energy without government subsidies to fund growth and money from outside investors. If investors don’t see a viable return from investing in alternative energy, they decide not to invest in the energy sector.

Sustainability is no longer just good business practice. New businesses are emerging that are combining the idea of environmental responsibility and profitability.

Global warming results from the release of greenhouse gases that trap heat in the at- mosphere rather than allowing it to escape.

The Paris Climate Agreement involving 187 countries tar- geted policies to reduce GHG emissions in order to keep the global average temperature to 2°C above pre-industrial levels.

144 part 2 Comparative Environmental Frameworks

Finally, bear in mind that many MNEs, based in the United States or elsewhere, also have the task of adapting to different standards in different countries. A European-based MNE with operations in, say, the United States, Germany, and China, and a U.S.-based MNE with plants in the same countries are faced with a smorgasbord of regulatory environments. On the one hand, the legal approach to responsible corporate behavior says an MNE can settle for operating in accord with local laws. The ethical approach, on the other hand, urges com- panies to go beyond the law to do whatever is necessary and economically feasible to reduce GHG emissions, given that they still have multiple stakeholders to satisfy.

EThICAl dIlEMMAS oF lABor CondITIonS A major challenge facing MNEs today is the labor conditions of foreign workers, whether in their own offshore operations or their outsourced supply chains. They’re especially critical in retail, clothing, footwear, electronics, and agriculture—industries in which MNEs typically outsource huge portions of production to independent companies abroad.

Major labor issues that MNEs get involved in through FDI or purchasing from independent manufacturers in developing countries are fair wages, child labor, working conditions, working hours, and freedom of association.

Yes However, it is hard to know where the corruption begins

and who knows what. On September 18, 2015, the U.S. Environmental Protection Agency announced that it was going to order German auto company, Volkswagen AG, one of the world’s leading auto manufacturers and the largest in Europe, to recall over 500,000 vehicles in the United States because they were equipped with software that allowed them to evade emissions standards for reducing smog dur- ing testing. The software would recognize when a car was being tested and turn up emissions controls. Then when the car wasn’t being tested, the software turned down the emis- sions controls, which resulted in better driving performance and fuel economy. It was estimated that in normal driving conditions, cars would emit up to 40 times the amount of pollutants allowed by U.S. government regulations. VW an- nounced that the software designed to trick or “defeat” the emissions tests had been installed in millions of vehicles.35 Eventually, this spread to certain models in Audi and Porsche, two other VW brands. How could this have hap- pened? There were several very interesting dimensions to the case—different regulatory environments in Europe and the United States; VW’s desire to increase its market share in the United States, especially in diesel cars; and the efforts of the regulators and VW itself to find out who knew what was going on.

One of the real ironies is that in its 2014 Sustainability Re- port, VW claimed that it was selling environmentally friendly products and meeting the guidelines for emissions of carbon dioxide, nitrogen oxide, and other pollutants. It also said it was in compliance with the Global Reporting Initiative (G4),

the UN Global Compact, and the German Sustainability Code. PricewaterhouseCoopers, one of the leading global public accounting firms, certified that the Sustainability Re- port was accurate. Not only did VW claim that it was operat- ing according to high standards, but it also had a program to make sure its employees understood what the company stood for.

Different legal and regulatory systems also contributed to differences between U.S. and German stakeholders. Given that VW is a German Company and therefore under the reg- ulatory environment of the European Union, it claimed that even though it was violating U.S. regulatory guidelines, it was not violating European regulatory guidelines. Is it pos- sible that the software was not illegal in Europe, even though it was in the United States? There are not only different stan- dards in the United States and EU, but there are also differ- ent testing procedures. In the United States, California has a stringent antipollution regulatory environment, and VW real- ized it had to find a way to be successful there if it wanted to increase the sale of its diesel engines. Also, U.S. regulators conduct their own tests to see if auto manufacturers’ claims are accurate, whereas European regulators leave the test- ing and verification to the manufacturers themselves.36 In order to keep from losing its U.S. customers, VW offered payments to customers who had bought cars with the diesel engines that had the “defeat” software installed. Of course, the legal environment in the United States that allows for class-action suits probably had something to do with that. Class-action lawsuits are relatively unknown in Europe, and payments were not offered to European customers, espe- cially since VW didn’t feel it was violating any law in Europe.

Should MNEs Accept Full Responsibility for the Unethical Behavior of Their Employees?

Point Point

Chapter 5 Globalization and Society 145

no VW obviously must take responsibility for installing the

“defeat” software into some of the diesel models it is sell- ing worldwide, but who is responsible for this happening? Wolfgang Hatz, the head of engines and transmissions for VW, is one of the key people in this scandal. He was also one of the first employees suspended by VW when the crisis broke in September 2015. One of his first concerns at VW was to figure out how to develop a diesel engine that would meet the stringent antipollution requirements set by the State of California. He was hired from the same position at Audi, one of VW’s brands as well as Porsche. Hatz loved his cars, and he realized that to meet emission requirements VW would have to introduce more diesels into the United States. But how could they develop a car that would still be allur- ing and peppy, something that American drivers wanted? Diesels have better fuel economy and lower GHG emissions, but they also have higher smog-forming pollutants. One strategy being considered at VW was to build an alliance with Mercedes-Benz and BMW to develop new technolo- gies, but Mr. Hatz and others at VW decided they wanted to develop a less expensive alternative. However, it was clear that this would not meet the emissions requirements. Rather than scale back their strategy to increase the sales of diesels in the U.S. market, someone decided to cheat.

But who was behind the scheme to introduce the “defeat” software? Was it Hatz? Was it Martin Winterkorn, the CEO who hired Mr. Hatz and who retired from VW just before the scandal hit? Or was it Matthias Muller, the current CEO of VW who has denied any knowledge of the software? An in- ternal whistle-blower at VW was responsible for uncovering exaggerated carbon-dioxide and fuel economy claims, but

Counterpoint

Should MNEs Accept Full Responsibility for the Unethical Behavior of Their Employees?

Figure 5.3 highlights the multiple pressures external stakeholders place on companies to encourage them to adopt responsible worker-related practices in their overseas operations. A more specific listing of worker issues was developed by the Ethical Trading Initiative (ETI), a British-based organization that focuses on MNEs’ employment practices and whose stan- dards are consistent with those adopted by the UN-based International Labor Organization. Its members include representatives from GAP Inc., Inditex, H&M, Marks & Spencer, The Body Shop International, and other companies, as well as from trade union organizations, NGOs, and governments. The objective of ETI is to get companies to adopt ethical employ- ment policies and then monitor compliance with their overseas suppliers. ETI’s trading ini- tiative base code identifies the following issues:

1. Employment is freely chosen. 2. Freedom of association and the right to collective bargaining are respected. 3. Working conditions are safe and hygienic. 4. Child labor shall not be used. 5. Living wages are paid. 6. Working hours are not excessive.

the U.S. EPA uncovered the “defeat” software strategy for pollutants in the United States. VW

decided to offer amnesty to anyone at VW who could shed any light on this subject. So far, a number of employees have stepped forward with some information, but we still don’t know who is holding the smoking gun. Offering amnesty for information is relatively rare in these cases, but a similar thing happened in 2008 when the Siemens bribery scandal broke. In this case, it was determined that Siemens diverted funds filed under bogus consulting contracts into a network of “black accounts” for bribing officials in countries like Italy, Greece, Argentina, and Saudi Arabia. One thing that came out of the investigation is that Siemens had created a culture of corruption. Although the VW example doesn’t involve bribery, it obviously involved corrupt behavior in the sense that some- body felt comfortable breaking regulatory guidelines in the United States and probably Europe in order to enhance sales. As noted by Hans-Dieter Potsch, VW’s chairman, “There was a tolerance for breaking the rules. It proves not to have been a onetime error, but rather a chain of errors that were allowed to happen.”37

Given what we know about VW’s supposed commitment to a high level of corporate behavior, why didn’t someone step forward and say “no!”

Question

1. If you were an engineer working on the project to devel- op the software that would allow VW to avoid providing regulators and consumers accurate data about GHG and pollution emissions, would you have said “no”? Explain why or why not.

146 part 2 Comparative Environmental Frameworks

7. No discrimination is practiced. 8. Regular employment is provided. 9. No harsh or inhumane treatment is allowed.38

Although all issues identified by ETI are important, we focus on the one that, for a variety of good reasons, receives significant attention: child labor.

ThE ProBlEM oF ChIld lABor Let’s start by considering a couple of very brief cases:

• There are two arguments for the use of children in the Indian carpet industry: (1) they’re better suited than adults to perform certain tasks, and (2) if they weren’t employed, they’d be even worse off. In fact, children in India are often put to work because parents don’t earn enough to support families; if parents can’t pay off debts, their children are often indentured to creditors.

• In the 1990s, the impoverished Asian nation of Bangladesh was pressured to stop em- ploying thousands of child workers or face U.S. trade sanctions. In this case, the plight of the children did in fact go from bad to worse. Between 5,000 and 7,000 young girls, for example, went from factory work to prostitution.39

According to the International Labor Organization (ILO), a UN institution, 168 million children between the ages of 5 and 17 are not legally working worldwide.40 The challenge is that much of this data is not current or is difficult to get. However, the ILO has very specific guidelines describing what it considers child labor to be and what the worst forms of child labor are. In particular, the worst forms involve slavery and prostitution—illicit activities that are a danger to the health, safety, and morals of a child. ILO guidelines state that children who are at least 12–14 years old may be employed in “light” work that’s not harmful to their health, is less than 14 hours a week, and doesn’t interfere with school. All children under the age of 18 should be protected against the most abusive labor conditions.41

For MNEs, the basic challenge is negotiating a global labyrinth of business environments with different cultural, legal, and political rules than those they’re used to at home. In addi- tion, they typically rely on local suppliers who are subject to specifically local pressures.

Individual investors

Media

Trade unions

Governments

Consumers

Corporate investors (e.g., pension funds)

Pressures for ethical behavior with respect to workers

NGOs

Figure 5.3 Sources of Worker-related Pressures in the global Supply Chain

Chapter 5 Globalization and Society 147

whAT MnES CAn And CAn’T do In spite of these difficulties, MNEs are not powerless when it comes to labor-related matters in overseas facilities. When the Swedish retailer IKEA ran into trouble in India for buying carpets from local companies that relied heavily on extensive child labor, it identified and tackled two different problems rather than try to force suppliers to stop exploiting the chil- dren. First, it helped working mothers increase family earning power so they could escape the clutches of the loan sharks to whom they were putting up their children as collateral. Second, it set up “bridge schools” to enable working children to enter mainstream education channels within a year.42

Frequently, MNEs operating in countries with very different labor policies succumb to the pressure to simply leave the market. Usually, this turns out to be a shortsighted decision. Research shows, for instance, that companies like IKEA have substantially improved the conditions of workers in overseas facilities. Granted, MNEs are in no position to revolution- ize the employment practices of the countries in which they operate, but they can improve conditions at subcontract facilities and even influence the guidelines set by other foreign investors.43

CorPorATE CodES oF EThICS: how Should A CoMPAny BEhAvE?

MoTIvATIonS For CorPorATE rESPonSIBIlITy Companies generally experience four strong motivations for acting responsibly:

1. Unethical and irresponsible behavior can result in legal headaches, especially in such ar- eas as financial mismanagement, bribery, and product safety.

2. Such behavior could also result in consumer action such as a boycott. 3. Unethical behavior can affect employee morale. Conversely, responsible behavior can

have a positive influence on a workforce, both at corporate headquarters and in overseas facilities.

4. You never know when bad publicity is going to cost you sales. Perhaps this concern is one reason why many global apparel and clothing companies responded so quickly to criti- cism about unfair employment practices in developing countries.

dEvEloPInG A CodE oF ConduCT A code of conduct is a major component of most companies’ strategies for ethical and so- cially responsible behavior. In the context of international operations, it can take the form of two perspectives: external and internal. Codes of conduct are useful insofar as they give companies some general guidance on how to operate. The practical challenge for the com- pany is familiarizing itself with the codes of many different organizations and using them to fashion its own internal code of conduct.

What makes a good internal code of conduct? Here are four criteria:

1. It sets global policies with which everyone working anywhere for the company must comply. A good example is the code promulgated by the Finnish cell-phone company Nokia, which discusses how its code was set, who approved it, how it is communicated to its employees, and what its foundation values are.

2. It communicates company policies not only to all employees but to all suppliers and subcontrac- tors as well.

3. It ensures that the policies laid out in the code are carried out. This usually occurs through training programs where employees sign off on their compliance and sometimes through internal audits.

Some companies avoid operat- ing in countries where child labor is employed, whereas others try to establish respon- sible policies in those same countries.

Companies need to act responsibly because unethical and irresponsible behavior

• could result in legal sanctions,

• could result in consumer boycotts,

• could lower employee morale,

• could cost sales because of bad publicity.

A major component in a com- pany’s strategy for ethical and socially responsible behavior is a code of conduct.

Codes of conduct involve four dimensions:

• Setting a global policy that must be complied with wherever the company operates

• Communicating the code to employees, suppliers, and subcontractors

• Ensuring that policies are carried out

• Reporting results to external stakeholders

148 part 2 Comparative Environmental Frameworks

4. It reports the results to external stakeholders. This usually occurs in a company’s annual report to shareholders, but GE uses social media to communicate with external stake- holders, a common practice of most MNEs. In addition, a major contributor to enhanced transparency is the Global Reporting Initiative (or GRI) which has issued G4 sustain- ability reporting guidelines that identify several different areas related to the environ- ment, society, and the economy. GRI is an independent international organization that links the interests of governments, companies, and various stakeholders to encourage responsible behavior by companies. The reports are broad and comprehensive and pull together many of the issues discussed in the chapter.44

This chapter has continued the discussion from Chapter 1 on the effects of globalization, but with more focus on the ethical issues and how companies can be more responsible as they operate abroad. Chapter 1 identified three scenarios on the future of globalization:

• Further globalization is inevitable. • International business will grow primarily along

regional rather than global lines. • Forces working against further globalization and

international business will slow down the growth of both.

Regardless of what happens, the more companies expand abroad, the greater the likelihood they will have hard decisions to make on how they should operate in a socially responsible manner. As discussed by Bartlett and Beamish45, MNEs can operate in one four major ways. They can be exploitative, which is the model of the past. However, some MNEs still operate exploitatively in poorer countries that do not have the strength to stand up for what they think is best. Second, they can operate on a transactional basis where they engage in doing deals and respecting the law. The challenge is that they may have to choose

between local law and the law of the country where their corporate headquarters is domiciled. Third, they can be responsive in the sense of try- ing to make a difference in the countries where they operate. This is clearly the direction that most large MNEs find themselves. Many of them have signed on to the UN Global compact and try to make a difference in human rights, labor standards, the environment, and anticorruption. Finally, they can be transformative in terms of tak- ing the lead in generating broad change. This is far more difficult and requires a joint partnership with NGOs and local governments, often respond- ing to the wishes of their stakeholders.

It is clear that social media will have a greater im- pact on socially responsible behavior in the future. Historically, we have always thought that one of the keys to transparency is an independent press willing to investigate and report on wrongdoings. But now social media such as Facebook, Twitter, YouTube, and so on have added an important new dimension to transparency. Neither companies nor govern- ments can hide in the shadows, so it is critical for socially responsible companies to be transparent, and a solid social media strategy is an important dimension of their transparency. ■

Looking to the Future Dealing with Ethical Dilemmas in the Global Economy

Case

By now it should be obvious that, regardless of where it chooses to do business, an MNE is going to face quite a variety of threats and disruptions to its plans and operations, ranging from bureaucratic corruption and political instability to terrorism and war. In 2007, Anglo American PLC, at that time one of the world’s largest gold miners, found itself fac- ing a threat that defies most traditional categories of things that complicate business overseas—an HIV/AIDS epidemic in South Africa.46

In 2002, Anglo American made a landmark decision to provide free antiretroviral therapy (ART) to HIV-infected employees there. Surprisingly, however, this commitment met with mixed reactions from various stakeholders and achieved only controversial results. Now the U.K.-based company is asking itself, “Where do we go from here?”

AIDS in South Africa How bad must a disease be to be accorded the status of an “epidemic”? When Anglo American was first confronted with the issues of HIV/AIDS, sub-Saharan Africa was home to just over 10 percent of the world’s population and 60 per- cent of all people infected with HIV, the virus that causes AIDS. South Africa had the highest number of people living with HIV/AIDS and one of the world’s highest rates of HIV infection and mortality from AIDS-related diseases.

Thus, over the past decade the spread of HIV/AIDS has had a profound impact on the people of South Af- rica and their economy. Life expectancy is 56.1 years compared to, say, 76.8 years in Poland, a country with a similar population size and per capita GDP. AIDS has also devastated the country’s economy. Between 1992 and 2002, South Africa lost $7 billion annually—around 2 per- cent of GDP—as a result of AIDS-related worker deaths. Experts were predicting that, if AIDS continued to spread throughout sub-Saharan Africa at the same pace, it would continue to reduce per capita growth by 1 to 2 percent per year and, in the worst-affected countries, cut annual GDP growth by as much as 0.6 percent by 2010. The conse- quences include both diminishing populations and shrink- ing economies, with GDPs deflating anywhere from 20 to 40 percent of the sizes they would have reached in the absence of AIDS.

Anglo American Operations in South Africa Anglo American PLC is a diversified mining conglomerate operating worldwide in 45 countries and employing 133,900 employees to produce diamonds, precious metals (plati- num), base metals (copper, nickel, zinc, and phosphates), and bulk metals (for ferrous metals and coal). Founded in 1917 as the Anglo American Corporation of South Africa, it

anglo american PLC in south africa: What Do You Do When Costs Reach epidemic Proportions?

HIV awareness in Capetown, South Africa, is an important part of the effort to control HIV/AIDS. Source: Monkey Business Images/Shutterstock

▶

150 part 2 Comparative Environmental Frameworks

was South Africa’s first home-based public limited company, but now it is a multinational firm headquartered in London.

In spite of its global spread, the company dominates South Africa’s domestic economy through direct employ- ment, contractors, and its supply chain.

Anglo American and ART With such a huge investment in South Africa, Anglo Ameri- can has been hit hard by the HIV/AIDS epidemic. Having recognized the threat as far back as the early 1990s, Anglo was one of the first corporations to develop a comprehen- sive, proactive strategy to combat the ravages of the disease on its workforce and the repercussions for its operations.

Originally, the program consisted of prevention initia- tives aimed at education and awareness, the distribution of condoms, financial and skill-related training to alleviate pov- erty, and a survey system to monitor the prevalence of the infection. Eventually, these policies were expanded to in- clude voluntary counseling, testing, and care-and-wellness programs, and the services of all programs were extended to cover not only the families of employees but also the pop- ulations of surrounding communities. Anglo also became a member of the Global Business Council on HIV/AIDS, an organization of multinational companies that focuses on al- leviating the effects of AIDS throughout the world and on protecting the rights of infected workers.

By adopting these strategies so early, Anglo American became a de facto leader in the private-sector fight against HIV/AIDS in Africa. Many other MNEs—including Coca- Cola, Ford, Colgate-Palmolive, and Chevron Texaco—soon followed Anglo’s example and initiated prevention, educa- tion, and wellness programs of their own. Even then, how- ever, the majority of companies operating in South Africa still hesitated, which is why Anglo’s 2002 announcement that it would provide ART to its South African workforce (at company expense) was met with a good deal of excited ap- proval from such interested parties as the WHO, the Global Business Council on HIV/AIDS, and a host of other NGOs.

The Costs of Operating in an Epidemic The incentive for Anglo American’s ART program largely came from the failure of its AIDS-prevention efforts to make much headway in stemming the spread of the disease. By 2001, the prevalence of HIV-positive workers had risen to an average of 21 percent across all operations—a figure that was climbing steadily at a rate of 2 percent annually. It was estimated that HIV/AIDS was adding as much as $5 to the cost of producing one ounce of gold, thereby tacking on $11 million a year to the company’s production costs. Then there was the $7 million it was spending annu- ally to combat such AIDS-related illnesses as tuberculosis (which was five times as prevalent as it had been just a decade earlier).

Finally, in addition to losses in productivity, the company had to bear the costs entailed by high levels of absenteeism, the constant retraining of replacement workers, and burgeon- ing payouts in health, hospitalization, and death benefits. Studies conducted at the time indicated not only that the costs of AIDS could reach as much as 7.2 percent of the company’s total wage bill but also that the costs of leaving employees un- treated would be even higher than the cost of providing ART.

Nine years after it rolled out its ART program, Anglo now finds itself struggling to please various stakeholders and determine whether all of its efforts are making a difference in the underlying problem or merely masking its effects. By the end of 2009, for instance, although 27 percent of the HIV-infected workforce were receiving ART, the company still struggled with high rates of non-adherence and dropout from treatment regimens.

Anglo also faces the problem of spiraling costs for the program itself. Even though the prices of most of the nec- essary drugs have been decreasing, the cost of distribut- ing them remains high, and the treatment regimen costs the company an estimated $4,000 per year per employee—quite expensive, especially compared to the wages and benefits that Anglo typically offers mineworkers. (Average monthly wages in the South African mining industry are about 5,100 rand, or US$830.) Meanwhile, as Anglo officials continue to remind investors that treating workers ultimately serves the bottom line, recent estimates project a total cost to the com- pany of $1 billion or more over 10 years.

On the upside, cost per patient should decrease as the number of workers participating in the program increases. Unfortunately, one of the biggest challenges facing Anglo is encouraging participation among a migrant and largely uneducated workforce laboring under harsh conditions in an unstable environment. In South Africa, HIV/AIDS still car- ries a severe stigma, and many South Africans refuse to be tested or to admit they’ve been infected for fear of discrimi- nation by managers, fellow employees, and even society at large. Moreover, many of those who agreed to participate have been confused by rumors and misinformation, leading them to assume that they could stop using condoms once they were on the drugs—a situation, of course, that only ex- acerbated the prevalence of unsafe behavior.

In addition, harsh working conditions often make it hard for workers to take medications on time or to deal with cer- tain side effects. Finally, migrant workers—about four-fifths of the total workforce—who come from isolated villages hundreds of miles away are 2.5 times more likely to contract the disease, which they take with them back to their villages.

Constituencies and Critics Anglo American also faces the problem of pressure from various stakeholders. The National Union of Mineworkers has been hesitant to voice its support, citing the company’s limi- tations on health-insurance benefits and lack of cooperation

Chapter 5 Globalization and Society 151

with national agencies. The union has also accused the com- pany of helping to foster working conditions that exacerbate the problem. Even Brian Gilbertson, former CEO of BHP Bil- liton, another large mining concern operating in South Africa, charged Anglo with merely trying to contain the problem in- stead of attacking its underlying causes, saying, “You don’t approach the problem by just throwing drugs at it.”

Anglo has countered many of these criticisms, insisting that it’s beyond the resources and capacity of a single com- pany to combat the overall problem, and it has called for more involvement on the part of the South African govern- ment. Instead of cooperation, however, the company initially encountered outright opposition from political leaders.

In addition, dealing with pharmaceutical companies has proved a tricky proposition. On the one hand, Anglo has a deal with GlaxoSmithKline allowing it to purchase ART drugs at a tenth of the market price in the industrialized world (the same that GSK charges not-for-profit organizations). At the same time, however, other pharmaceutical companies have been hesitant and unreliable at best, promising price cuts and then reneging over fears of violating intellectual prop- erty rights. As a matter of fact, several of these companies, complaining that cheap generic drugs made available in Af- rica will eventually be resold by profiteers on higher-priced Western markets, have put their energies into suing the South African government for what they claim to be gener- ally poor enforcement of their patent rights.

Given the many challenges Anglo has faced, not to mention the opposition from unexpected quarters, some observers have gone so far as to suggest that the company would be better off simply pulling back on its HIV/AIDS treatment program rather than pouring more resources

into the effort to make it work. In the long run, however, Anglo must consider the continued pressure it will get from ethically minded shareholders as well as its own sense of moral responsibility.

There are also indications that the future may not be as bleak as it initially appeared. Due to an aggressive global campaign to deal with HIV/AIDs, new HIV infections dropped by 41 percent between 2000 and 2014. AIDS related deaths also fell by 48 percent. For its part, Anglo American extended its treatment program to the dependents of its employees in 2008, and by 2014, 86 percent of its employees and depen- dents received free ART therapy, testing, and treatment.

Anglo American’s strategy for HIV/AIDS intervention has in some ways become a model closely followed by other companies with operations in regions heavily affected by the disease. Perhaps the criticism for such interventions is wan- ing as companies continue to adopt responsible and effec- tive initiatives for HIV/AIDS treatment.

Questions

5-3. Because such a large percentage of its workforce consists of

migrant workers who are more likely to acquire and spread

HIV/AIDS, should Anglo adopt the policy of not hiring migrant

workers? Should the South African government close the

doors to migrant workers?

5-4. What role do pharmaceutical companies play in responding to

the HIV/AIDS epidemic in South Africa? Given that HIV/AIDS

drugs can be exported from India at a lower cost than from

the pharmaceutical companies themselves, should Anglo just

import the drugs to be used for their employees?

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

5-5 Who are the various stakeholders that Anglo American needs to consider as it adopts an effective HIV/AIDS strategy?

5-6 What are the pros and cons of Anglo’s adoption of an aggressive strategy in combating HIV/AIDS among its South African workforce? What recommenda- tions would you give the company concerning its HIV/AIDS policy?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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A market is not held for the sake of one person.

—African (Fulani) proverb

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

Objectives

After studying this chapter, you should be able to

6-1 Understand why policymakers rely on international trade and factor mobility theories to help achieve economic objectives

6-2 illustrate the historical and current rationale for interventionist and free trade theories

6-3 Describe theories that explain national trade patterns

6-4 explain why a country’s export capabilities are dynamic

6-5 summarize the reasons for and major effects of international factor movements

6-6 Assess the relationship between foreign trade and international factor mobility

PArt threetheories and institutions: trade and investment

chAPter 6 international trade and Factor Mobility theory

Tea harvesting in Taiwan.▶

https://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP#2015_data

Case The evolution of Taiwan’s International Trade —Used with permission of the author, Lichung Jen.1

Taiwan, officially the Republic of China, is a small southeast Asian island country (slightly larger than the U.S. state of Maryland), with a 2015 population of about 23.4 million. Given a lack of natural re- sources, Taiwan’s main natural advantage is its location on the impor- tant seaway connecting the east-Asian mainland with the rest of the world. (Map 6.1 shows Taiwan’s location and major export markets.)

Taiwan has been called one of the “Asian Tigers” because of its rapid economic growth. Despite being ranked only 55th among coun- tries in terms of population, it is 28th in per capita GDP, rising from 38th in 1950. International trade has been an important engine of its economic growth, and it is the world’s 21st-largest exporter. Dur- ing the last half century, Taiwan’s economic and export dependence have shifted from agricultural to industrial products.

Evidence of Taiwan’s habitation go back about 10,000 years, but we will overview its trade policies only since the beginning of the Japanese occupation in 1895.

The Japanese OccupaTiOn (1895–1945)

Japan took over Taiwan (a Chinese province since 1885) in 1895 after defeating China at war. At that time, Taiwan depended almost en- tirely on agricultural exports—mainly tea, sugarcane, and rice. (The opening photo shows tea harvesting in Taiwan’s highlands.) In fact, its only significant manufactured export was fake Panama hats. This dependence changed little under Japanese occupation; however, the Japanese did much to make Taiwan’s business environment more competitive. With funds and Japanese technical experts, it modern- ized the infrastructure and social structure through the building of roads, railroads, dams for electricity, hospitals, schools, and irrigation systems. It also brought law and order, often brutally, through strict police control. At the same time, Japan absorbed almost all Taiwanese exports at higher-than-world-market prices in order to feed its agri- cultural needs because a considerable portion of the Japanese popu- lation was moving from agriculture into the manufacturing sector.

The periOd Of impOrT subsTiTuTiOn (1945–1958)

At the end of World War II in 1945, Taiwan once again became a part of China, but trade was short-lived. The communists took power in the mainland the same year, the nationalist government moved to Taiwan, and business between the mainland and Taiwan came to a virtual halt. Taiwan expelled nearly all Japanese (over 400,000), and lost its protected Japanese export market. It faced a food short- age, high inflation, unemployment, and insufficient foreign earnings to buy the imports it needed. The government focused on increasing production and exports while decreasing imports. To do this, the gov- ernment strictly controlled imports and gave production subsidies to

many sectors so that domestic consumers would buy domestically produced goods rather than imported ones (known as an import sub- stitution policy) and so that its traditional primary products would be competitive in external markets.

These policies allowed domestic industries to develop and in- creased Taiwan’s foreign earnings and reserves. For example, in 1950 Taiwan forbad the import of radios, but not radio parts, thus encouraging local assembly of radios to sell domestically. In addi- tion, the policies helped the survival of some light, simple-technical and labor-intensive industries, such as textiles, plywood, and home appliances. During this period, Taiwan’s economy boomed with the real GDP increasing steadily at 7.1 percent a year.

However, the negative effects of the import substitution policy included (1) overproduction of some goods because of insufficient domestic demand coupled with a lack of scale economies to com- pete internationally; (2) industry inefficiency because noncompetitive manufacturers were not eliminated through market competition; and (3) the emergence of several monopolies that damaged consumer and societal welfare.

The periOd Of expOrT expansiOn (1958–1969)

Given the negative effects of import substitution, especially the reliance of production for the domestic market, the government changed its trade policy to promote export expansion. It promoted a series of policies to encourage exports. First, Taiwan depreciated its currency (the NT dollar) by 50 percent to make its products cheaper when bought in foreign currencies. Second, the government set up a system whereby companies could be rebated for the taxes (du- ties) they paid on imported raw materials when they used them in exported finished goods. Third, companies could avoid duties alto- gether if imports were processed in bonded factories or warehouses and then exported. Fourth, the government set up export processing zones (the first in the world) in three cities. There were no import duties in these zones as long as companies exported all the finished goods produced therein.

In the meantime, companies in industrially advanced countries, such as Japan and the United States, invested in Taiwan to take advantage of its abundant low-cost labor. This furthered Taiwan’s economic growth. The result was that in 1966, the export value of Taiwan’s industrial goods exceeded those of agricultural goods for the first time, despite continued agricultural growth resulting from agricultural productivity gains that took place in the so-called “green revolution.” In turn, this growth freed agricultural workers to move into the manufacturing sector. The economic structure of the economy had also changed from dependence on domestic to

Chapter 6 International Trade and Factor Mobility Theory 155

export demand. Meanwhile, Taiwan became a bigger part of the global economy, and its exports became the principal thrust of its economic growth.

The secOnd periOd Of impOrT subsTiTuTiOn (1969–1980)

Whereas the first period of import substitution sought to reduce de- pendence on finished foreign consumer goods, the aim during this second import substitution period was to reduce foreign dependence on the equipment and components needed to produce finished goods.

During this period, the government sought to improve competi- tiveness by investing in what was referred to as the “The Big Ten Constructions.” These focused on six transportation projects (a new freeway, extended railroad, railroad electrification, two harbor devel- opments, and an international airport) and four projects in heavy in- dustries (steel, shipbuilding, petrochemicals, and nuclear power). In addition to decreasing foreign dependence, “The Big Ten Construc- tions” speeded up economic growth and created 146,000 new jobs. However, not all of the heavy industries were equally successful; petrochemicals were more successful than shipbuilding and steel.

The 1970s also saw the growth of small- and medium-sized com- panies, most of which were family owned, dependent on private loan clubs, labor intensive, export oriented, and involved in processing inputs from other companies. The portion of these companies’ sales in export markets grew from 56 percent in 1972 to 75 percent in 1983. This period also saw the growth of foreign investment in export industries. The number of foreign companies exporting from Taiwan increased from 52 in 1966 to 300 in 1980. FDI in exporting businesses increased from US$10 million to US$380 million in the same time frame.

The periOd Of ecOnOmic refOrm and cOnTinuOus expOrT expansiOn (1981–1989)

Although exports continued to expand during this period, the basic government policy was “Liberalization and Globalization.” The aim was to increase competition and to open the economy more to imports. The first step was to reduce import duties. This was done gradually to lower the impact on domestic industries. The average nominal import duty fell from 31.71 percent in 1980 to 9.65 percent in 1989. The second step was to liberalize fi-

map 6.1 Taiwan and its major export markets “Estimates for 2012 indicate that 61.4 percent of Taiwan’s exports went to only five countries/territories.”

156 part 3 Theories and Institutions: Trade and Investment

nance and banking, such as by the deregulation and establish- ment of private banking institutions, the use of market forces to determine interest rates, and the relaxation of foreign currency controls.

The ecOnOmic pOlicies in The 1990s

A major change for Taiwan during the 1990s was its renewal and growth of trade and investment with China. While part of this change was caused by political leadership change, economic fac- tors influenced the growth. By this time, Taiwan was no longer en- gaged primarily in the labor-intensive processing of components from abroad. Instead, its economic growth, rise in technology, and accompanying higher-wage rates required it to offshore and out- source assembly (e.g., laptop computers) to a lower wage-rate country in order to be competitive. Chinese coastal cities across the strait from Taiwan were ideal for this, and China needed the jobs it would create. At the same time, many Taiwanese firms made investments in the Chinese assembly operations and moved ma- chinery and equipment into China as part of their investment. The result was that China became Taiwan’s largest export market and recipient of its direct investment. Concomitantly, Chinese exports to and direct investment in Taiwan have consistently been lower than Taiwan’s exports and investments in China. However, official sta- tistics obscure both the value and direction of trade. For instance, when Taiwan ships components to China, those components may be reshipped in finished products that go, say, to the United States. But U.S. and Taiwanese trade figures show the reshipment merely as Chinese exports.

massive fdi and facTOr mObiliTy (2000–presenT)

Since the millennium, Taiwan has continued to reduce its trade re- strictions, such as by joining the World Trade Organization (WTO) in 2002. (We will discuss the WTO’s functions in Chapter 8.) Between 2000 and 2013, its exports increased 100 percent and its imports 90 percent. Because unemployment rates have been very low, Taiwan has had to utilize foreign contract workers to help keep its produc- tion increasing—more than 400 thousand of them in 2013. These are almost all from other Asian countries—over 60 percent from Vietnam and Indonesia—and are employed at the bottom rung of the socio- economic ladder. Meanwhile, Taiwan’s outward FDI more than dou- bled between 2000 and 2015. By 2016, its stock of direct investment abroad was almost four times greater than the FDI within Taiwan.

At the same time, the Taiwanese government has indicated that it needs to make two changes: it needs to change its production base from an efficiency seeking model to one of innovation and change its primary export market dependence from China to Japan and the United States. ■

Questions

6-1. Using the framework in Table 6.1, explain which of the theo-

ries relate to Taiwan’s trade policy during each of the eras

described in the case.

6-2. Map 6.1 shows that 61.4 percent of Taiwan’s exports go to

only five countries/territories. Which trade theories may help

to explain this concentration and why?

inTrOducTiOn: Why dO pOlicymakers rely On inTernaTiOnal Trade and facTOr mObiliTy TheOries? Figure 6.1 shows countries’ international links through trade and factor mobility (movement of capital, technology, and people). The preceding case illustrates Taiwan’s use of these links to help achieve its economic objectives. Not only are trade and factor mobility important in growing portions of the global economy, the theories to explain them help all governments wrestle with the decisions of what, how much, and with whom to trade. These questions are intertwined with considerations of what they can produce competitively by boosting the quality and quantity of capital, technical competence, and worker skills.

This chapter will first examine theories that endorse great governmental intervention in trade movements (mercantilism and neomercantilism) versus a laissez-faire approach of no governmental intervention (free-trade theories of absolute advantage and comparative advan- tage). It will then look at theories to explain trade patterns (how much countries depend on trade, in what products, and with whom), including theories of country size, factor proportions, and country similarity. It will subsequently consider theories dealing with the dynamics of

Trade theory helps managers and government policymakers focus on these questions:

• What products should we import and export?

• How much should we trade?

• With whom should we trade?

Some trade theories prescribe that governments should influence trade patterns; others propose a laissez-faire treatment of trade.

Chapter 6 International Trade and Factor Mobility Theory 157

Table 6.1 What major Trade Theories do and don’t discuss: a checklist

A check mark indicates that a theory of trade concerns itself with the question asked at the head of the column; if there’s a dash, it doesn’t. In the last four columns, you can see how each theory responds to the specific question; again, a dash indicates that the theory does not address the question.

Description of Natural Trade Prescription of Trade Relationships

Theories How Much Is Traded?

What Products

are Traded?

With Whom Does Trade Take Place?

should Government

Control Trade?

How Much should Be Traded?

What Products

should Be Traded?

With Whom should

Trade Take Place?

Interventionist & free trade Mercantilism — — — yes ✓ ✓ ✓ Neomercantilism — — — yes ✓ — — Absolute advantage — ✓ — no — ✓ — Comparative advantage — ✓ — no — ✓ — National trade patterns Country size ✓ ✓ — — — — — Factor proportions — ✓ ✓ — — — — Country similarity — ✓ ✓ — — — — export dynamics Product life cycle (PLC) __ ✓ ✓ __ __ __ __ Diamond of national

competitive advantage — ✓ — — — — —

OBJECTIVES

STRATEGY

Country A Country B

MEANS OF OPERATIONS Importing and exporting goods and services (trade) Transferring production factors, such as labor and capital, internationally

•

Figure 6.1 international Operations and economic Connections To meet its international objectives, a company must gear its strategy to trading and transferring its means of operation across borders––say, from (Home) Country A to (Host) Country B. Once either of these processes has taken place, the two countries are connected economically.

countries’ trade competitiveness for particular products, which include the product life cycle theory and the diamond of national competitive advantage theory. Because the stability and dynamics of countries’ competitive positions depend largely on the quantity and quality of their production factors (land, labor, capital, technology), we’ll conclude this chapter with an overview of factor mobility, mainly emphasizing the mobility of human resources. Whether taking a laissez-faire or interventionist approach, countries rely on trade and factor mobility theories to guide policy development. In turn, companies respond by basing their location decisions on these policy developments.

Table 6.1 summarizes the major trade theories and their emphases. These different theories expand our understanding of how government trade policies might affect business

158 part 3 Theories and Institutions: Trade and Investment

competitiveness. For instance, they provide insights on favorable locales and products for ex- ports, thereby helping companies determine where to locate their production facilities when governments do or do not impose trade restrictions.

inTervenTiOnisT and free Trade TheOries At one extreme of trade policies, governments intervene a great deal in trade. Let’s begin with mercantilism because it is the oldest trade theory, out of which neomercantilism has more recently emerged.

mercanTilism Mercantilism holds that a country’s wealth is measured by its holdings of “treasure,” which usually means its gold. This theory, which formed the foundation of economic thought from about 1500 to 1800,2 holds that countries should export more than they import (run a trade surplus) and, if successful, receive gold from countries that run deficits. Nation-states emerged during this period, and gold empowered governments to raise armies and invest in national institutions that helped to solidify people’s primary allegiance to the new nations.

Governmental policies To run a trade surplus, governments restricted imports and sub- sidized noncompetitive production. Countries with colonies imported commodities from them that they would otherwise have to purchase from elsewhere. They monopolized co- lonial trade in order to force the colonies to export less highly valued raw materials to them and import more highly valued manufactured products from them. This way, the colonies ran deficits that they paid off with gold.

As mercantilist policies weakened after about 1800, governments seldom directly limited their colonies’ development of industrial capabilities. However, their home-based companies had technological leadership, ownership of raw material production abroad, and usually some degree of protection from foreign competition—a combination that continued to make colonies dependent on raw material production and tie their trade to their industrialized mother countries. We still see vestiges of these relationships, which we discuss in the next chapter.

The concept of balance of Trade Some mercantilist terminology has endured. For ex- ample, a favorable balance of trade (also called a trade surplus) still indicates that a coun- try is exporting more than it imports. An unfavorable balance of trade (also known as a trade deficit) indicates the opposite. These terms are misnomers because the word favorable implies “benefit,” and the word unfavorable suggests “impairment.” In fact, running a trade surplus is not necessarily beneficial, nor is running a trade deficit necessarily detrimental. A country with a favorable balance of trade is supplying people in foreign countries with more than it receives from them.3 In the mercantilist period, the deficit was paid by a gold trans- fer. Today, the surplus country, say China, grants credit to the deficit country, say the United States, by holding its currency (U.S. dollars) or investments denominated in U.S. dollars. If that credit cannot eventually buy sufficient goods and services, the so-called favorable trade balance actually may turn out to be disadvantageous for the country with the surplus.

neOmercanTilism Neomercantilism is the running of a favorable balance of trade to achieve some social or political objective. For example, a country may reduce unemployment by encouraging its companies to produce in excess of the home demand and send the surplus abroad. Or it may attempt to maintain political influence in an area by sending more merchandise there than it receives, such as a government granting merchandise aid or loans to a foreign government.

According to mercantilism, countries should export more than they import.

Running a favorable balance of trade is not necessarily beneficial.

A country that practices neo- mercantilism attempts to run an export surplus to achieve a social or political objective.

Chapter 6 International Trade and Factor Mobility Theory 159

free Trade TheOries Why do countries need to trade at all? Why can’t Taiwan (or any other country) be content with the goods and services it produces? To begin with, no nation has all the natural re- sources, geographic conditions, and technology necessary to produce everything we con- sume today. In addition, two free trade theories further help answer this question: absolute advantage and comparative advantage.

Both theories hold that nations should let the market determine producers’ survival based on what consumers choose to buy.4 Both theories also imply specialization. Just as individuals and families produce an excess of specialized goods and services and exchange them for oth- ers’ excess specialized goods and services, nations export their specialized surpluses and pay for imports with their export earnings.

TheOry Of absOluTe advanTaGe In 1776, Adam Smith declared that a country’s well-being is its citizens’ access to goods and services rather than the mercantilists’ concept of its ownership of gold. His theory of abso- lute advantage holds that different countries produce different things more efficiently than others and that consumers should not have to buy domestically produced goods when they can buy them more cheaply from abroad. Smith reasoned that unrestricted trade would lead a country to specialize in those products that gave it a competitive advantage. Its resources would shift to the efficient industries because it could not compete in the inefficient ones. Through specialization, it could increase its efficiency for three reasons:

1. Labor could become more skilled by repeating the same tasks. 2. Labor would not lose time in switching production from one kind of product to another. 3. Larger amounts of production would provide incentives for developing more effective

working methods.

In what products should a country specialize? Although Smith believed the marketplace would make the determination, he thought that a country’s advantage would be either natural or acquired.

natural advantage A country’s natural advantage in production comes from climatic conditions, access to certain natural resources, or availability of certain labor forces. As we saw in our opening case, Taiwan’s major export used to be tea, a product it still exports and has advantages in producing because its high elevations give its oolong tea a unique taste. Taiwan imports wheat. If it were to increase its wheat production, for which its climate and terrain are less suited, it would have to use land now devoted to tea as well as workers in some of its high-tech industries, thus reducing those earnings.

Conversely, the United States produces a small quantity of tea. To become self-sufficient in tea production would require diverting resources away from products such as wheat, for which its climate and terrain are naturally suited. Trading tea for wheat achieves more efficiency than if these two countries were to try to become self-sufficient in the production of both. The more the two countries’ natural advantages differ, the more likely they will favor trade with one another.

Variations among countries in natural advantages also help explain where certain manu- factured or processed items might best be produced, particularly if a company can reduce transportation costs by processing an agricultural commodity or natural resource prior to exporting. Processing tea leaves reduces bulk and is likely to reduce transport costs on tea exports; producing bottles of a prepared tea drink would add weight, lessening the industry’s internationally competitive edge.

acquired advantage Most of today’s world trade is in manufactured goods that compete through an acquired advantage, usually in either product or process technology. A product

cOncepT check

In Chapter 1 (Page 8), we observe that nations have been reducing barriers to the move- ment of trade and production factors because competition spurs efficiency and consumers want a greater variety of goods and services at lower prices.

According to Adam Smith, a country’s wealth is based on available goods and services for its residents rather than on gold.

Specialization increases efficiency because

• labor skills improve, • less time is lost by not

switching production, • it incentivizes better working

methods.

Natural advantage considers climate, natural resources, and labor force availability.

Acquired advantage occurs through either product or process technology.

160 part 3 Theories and Institutions: Trade and Investment

technology enables a country to produce a unique product or one that is easily distinguished from those of competitors. For example, Denmark exports silver tableware, not because there are rich Danish silver mines but because Danish companies have developed distinctive prod- ucts. A process technology enables a country to efficiently produce a homogeneous product (one not easily distinguished from that of competitors). Iceland now exports tomatoes grown near the Arctic Circle, while Brazil exports quality wine produced near the equator—both of which were impossible until the countries developed fairly recent process technology.5 Countries that develop product or process technologies have acquired advantages, but only until producers in another country emulate or surpass them successfully. Such dynamics are commonplace as new products replace old ones, as new uses develop for old products, and as different ways of production come into play.

how does specialization increase Output? We can demonstrate absolute trade advan- tage by examining two countries and two commodities. Because we are not yet considering the concepts of money and exchange rates, we define the cost of production in terms of the resources needed to produce either commodity. This example is realistic because real income depends on the output of goods compared to the resources used to produce them.

Say that Taiwan and the United States are the only two countries and each has the same amount of resources (land, labor, and capital) to produce either tea or wheat. Using Figure 6.2, let’s say that 100 units of resources are available in each country. In Taiwan, as- sume that it takes 4 units to produce a ton of tea and 10 units per ton of wheat. The purple Taiwanese production possibility line shows that Taiwan can produce 25 tons of tea and no wheat, 10 tons of wheat and no tea, or some combination of the two.

In the United States, it takes 20 units per ton of tea and 5 units per ton of wheat. The green U.S. production possibility line indicates that the country can produce 5 tons of tea and no wheat, 20 tons of wheat and no tea, or some combination of the two. Taiwan is more efficient in tea production (that is, requires fewer resources to produce tea), while the United States is more efficient in wheat production.

How can production be increased through specialization and trade? Let’s say the two countries have no foreign trade. We could start from any place on each production possibil- ity line; for convenience, let’s assume that if each country devotes half of its 100 resources to production of each product, Taiwan can produce 12.5 tons of tea (divide 50 by 4) and 5 tons of wheat (divide 50 by 10), shown as point A in Figure 6.2, while the United States

Free trade will bring

• specialization, • higher global output.

Q ua

nt ity

o f T

ea (t

on s)

0 5 10

B D

15 Quantity of Wheat (tons)

20 25

121/2

21/2

ASSUMPTIONS for Taiwan 1. 100 units of resources available 2. 10 units to produce a ton of wheat 3. 4 units to produce a ton of tea 4. Uses half of total resources per product when there is no foreign trade

PRODUCTION

Without Trade:

Tea (tons)

Taiwan (point A) United States (point B) Total

With Trade: Taiwan (point C ) United States (point D) Total

121/2 21/2 15

25 0

ASSUMPTIONS for United States 1. 100 units of resources available 2. 5 units to produce a ton of wheat 3. 20 units to produce a ton of tea 4. Uses half of total resources per product when there is no foreign trade

U.S. production possibilities Taiwan production possibilities

Wheat (tons)

5 10 15

0 20 20

Figure 6.2 Production Possibilities under Conditions of Absolute Advantage In short, specialization increases potential output.

Chapter 6 International Trade and Factor Mobility Theory 161

can produce 2.5 tons of tea (divide 50 by 20) and 10 tons of wheat (divide 50 by 5), shown as point B in Figure 6.2.

Because each country has only 100 units of resources, neither can increase wheat produc- tion without decreasing tea production, or vice versa. Without trade, the combined produc- tion is 15 tons of tea (12.5 + 2.5) and 15 tons of wheat (5 + 10). If each country specialized in the commodity for which it had an absolute advantage, Taiwan could then produce 25 tons of tea and the United States 20 tons of wheat (points C and D in the figure).

You can see that specialization increases the production of both products. By trading, global efficiency is optimized, and the two countries can have more tea and more wheat than they would without trade.

TheOry Of cOmparaTive advanTaGe We have just described absolute advantage, which is often confused with comparative ad- vantage. In 1817, David Ricardo examined the question, “What happens when one country can produce all products at an absolute advantage?” His resulting theory of comparative advantage says that global efficiency gains may still result from trade if a country specializes in what it can produce most efficiently—regardless of other countries’ absolute advantage.

comparative advantage by analogy Although this theory may seem initially incongru- ous, an analogy should clarify its logic. Imagine that the best physician in town also happens to be the best medical administrator. It would not make economic sense for the physician to handle all the office’s administrative duties because the physician can earn more money by concentrating on medical duties, even though that means having to hire a less-skilled office administrator. In the same manner, a country gains if it concentrates its resources on the commodities it can produce most efficiently. It then trades some of those for commodities produced abroad. The following discussion clarifies this theory.

production possibility Assume the United States is more efficient in producing tea and wheat than Taiwan is, thus having an absolute advantage in the production of both.6 Take a look at Figure 6.3. As in our earlier example, it assumes that there are only two countries, each with a total of 100 units of resources available, and half of each used in each product.

Gains from trade will occur even in a country that has absolute advantage in all prod- ucts, because the country must give up less efficient output to produce more efficient output.

5 6

D E

252015 171/2121/2

Quantity of Wheat (tons)

ASSUMPTIONS for Taiwan 1. 100 units of resources available 2. 10 units to produce a ton of wheat 3. 10 units to produce a ton of tea 4. Uses half of total resources per product when there is no foreign trade

PRODUCTION

Without Trade:

Tea (tons)

Taiwan (point A) United States (point B) Total

With Trade (increasing co�ee production): Taiwan (point C) United States (point D) Total

With Trade (increasing wheat production): Taiwan (point C) United States (point E) Total

5 10 15

10 6

10 5

ASSUMPTIONS for United States 1. 100 units of resources available 2. 4 units to produce a ton of wheat 3. 5 units to produce a ton of tea 4. Uses half of total resources per product when there is no foreign trade

U.S. production possibilities Taiwan production possibilities

Q ua

nt ity

o f T

ea (t

on s)

183/4 105

Wheat (tons)

5 121/2 171/2

0 171/2 171/2

0 183/4 183/4

Figure 6.3 Production Possibilities under Conditions of Comparative Advantage There are advantages to trade even if one country enjoys an absolute advantage in the production of all products.

162 part 3 Theories and Institutions: Trade and Investment

It takes Taiwan 10 units of resources to produce either a ton of tea or a ton of wheat, whereas it takes the United States only 5 units to produce a ton of tea and 4 for a ton of wheat. Taiwan can produce 5 tons of tea and 5 tons of wheat (point A on the purple line), and the United States can produce 10 tons of tea and 12.5 tons of wheat (point B on the green line). Without trade, neither country can increase its tea production without sacrificing some wheat pro- duction, or vice versa.

Although the United States has an absolute advantage in producing both commodities, its comparative advantage is only in wheat. This is because its wheat production is 2.5 times that of Taiwan, whereas its tea production is only twice as much. Although Taiwan has an absolute disadvantage in the production of both products, it has a comparative advantage (or less of a comparative disadvantage) in tea. Why? Because its production is half as efficient in tea and only 40 percent as efficient in wheat.

Without trade, the combined production is 15 tons of tea (5 in Taiwan plus 10 in the United States) and 17.5 tons of wheat (5 plus 12.5). Through trading, the combined pro- duction of the commodities within the two countries can be increased. For example, if the combined wheat production is unchanged from when there was no trade, the United States could produce all 17.5 tons by using 70 units of resources (17.5 tons times 4 units per ton). The remaining 30 resource units could be used for producing 6 tons of tea (30 units divided by 5 units per ton), shown by point D in Figure 6.3. Taiwan would use all its resources to pro- duce 10 tons of tea (point C). The combined wheat production has stayed at 17.5 tons, but the tea production has increased from 15 to 16 tons.

If the combined tea production is unchanged from the time before trade, Taiwan could use all its resources to produce tea, yielding 10 tons (point C in Figure 6.3). The United States could produce the remaining 5 tons of tea by using 25 units, with its remaining 75 units be- ing used to produce 18.75 tons of wheat (75 divided by 4). This production possibility is point E. Without sacrificing any of the tea available before trade, wheat production has increased from 17.5 to 18.75 tons.

If the United States were to produce somewhere between points D and E, both tea and wheat production would increase over what is possible without trade. Whether the produc- tion target is a rise in tea or wheat or a combination of the two, both countries can gain by having Taiwan trade some of its tea production to the United States for some U.S. wheat output.

don’t confuse comparative and absolute advantage Most economists accept the comparative advantage theory, which influences them to promote policies for freer trade. Nevertheless, many so-called knowledgeable people confuse comparative advantage with absolute advantage and do not understand how a country can simultaneously have a com- parative advantage and absolute disadvantage in the production of a given product.

TheOries Of specializaTiOn: sOme assumpTiOns

and limiTaTiOns Both specialization theories claim an increased production through trade. However, these theories make assumptions, some of which are not always completely valid.

full employment Our earlier physician/administrator analogy assumed that the physi- cian could stay busy full time practicing medicine. If not, the physician might perform the administrative work without sacrificing earnings from medical duties. The free trade theories assume fully employed resources. When countries have many unemployed or unused re- sources, they may seek to restrict imports to employ or use idle resources.

economic efficiency Our analogy also assumes that the physician is interested primarily in maximizing income. Yet there are a number of reasons for choosing not to work full time at medical tasks, such as finding administrative work relaxing and self-fulfilling, fearing that

Full employment is not necessarily a valid assumption of absolute and comparative advantage.

Countries’ goals may not be limited to economic efficiency.

Chapter 6 International Trade and Factor Mobility Theory 163

a hired administrator would be unreliable, or wishing to maintain administrative skills in the somewhat unlikely event that administrators will command higher wages than physicians in the future. Often, countries also pursue objectives other than output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology and by price fluctuations or because they do not trust foreign countries to always supply them with essential goods.

division of Gains Although specialization brings potential economic benefits to all trad- ing countries, the earlier discussion did not indicate how countries will divide increased out- put. In the case of our wheat and tea example, if both the United States and Taiwan receive some share, they will both be better off in an absolute sense. However, people and nations are concerned with relative as well as absolute economic gains. If they perceive that a trading partner is gaining too large a share of benefits, they may prefer to forgo absolute gains for themselves so as to prevent others from gaining a relative economic advantage.7

Transport costs If it costs more to transport the goods than is saved through specializa- tion, the advantages of trade are negated. In other words, in our two-country scenario, some workers would need to forgo producing tea or wheat in order to work in transporting the tea and wheat abroad. However, as long as the diversion reduces output by less than what the two countries gain from specialization, there are still gains from trade.

insufficient demand If trade increases production by more than normally acceptable tea and wheat consumption, is there still an advantage? Yes. The consumers in the two countries can gain access to sufficient output by working fewer hours, thus giving them more leisure time.

statics and dynamics The theories of absolute and comparative advantage address countries statically—by looking at them at one point in time. However, countries’ abilities change. Recall in our opening case how Taiwan’s production and exports have evolved. In our two-product example, the resources needed to produce tea or wheat in either Taiwan or the United States could change, such as because of advancements in mechanized tea harvesting and acceptance of genetically modified crops.8 Thus, we should not assume that future absolute or comparative advantages will remain as they are today. We return to this theme later in the chapter as we examine theories to explain the dynamics of competitive production locations.

services The theories of absolute and comparative advantage deal with products rather than services. However, with a growing portion of world trade made up of services, the theories apply because resources must also go into service production. For instance, the United States sells an excess of such services as education to foreign countries (many foreign students attend U.S. universities). At the same time, it buys an excess of foreign shipping ser- vices. To become more self-sufficient in international shipping, the United States might have to divert resources from its more efficient use of them in higher education or in the produc- tion of other competitive products.

production networks Although portions of products increasingly may come from differ- ent countries, this development fits well with the concept of advantages through specializa- tion. In other words having portions of products produced in those countries where there is an absolute or comparative advantage saves costs.

mobility These theories assume that resources can move domestically from the produc- tion of one good to another—and at no cost. But this assumption is not completely valid. For example, wheat farmers might not easily become tea harvesters because of different skill needs and having to move to new locations. Even if they do, they may be less productive than before.9

cOncepT check

Recall from Chapter 1 (Page 12) that individuals evaluate their well-being on both an absolute and a comparative basis. In Chapter 2 (Page 39) we noted national differences in preference for “live to work” versus “work to live.”

Countries’ absolute and comparative advantages can change.

Free trade advantages apply to services as well as physical products.

cOncepT check

Chapter 1 (Page 5) explained that many products are partially made in different countries. Nevertheless, the concepts of absolute and comparative advantage hold in these instances.

Neither domestic labor mobility nor international labor immobil- ity is as great as implied by the free trade theories.

164 part 3 Theories and Institutions: Trade and Investment

The theories also assume that resources are immobile internationally. Increasingly, they are mobile, thus affecting countries’ production capabilities. For instance, nearly half a mil- lion contract workers are in Taiwan, mainly because of better job opportunities there.10 Further, foreign companies have moved both managers and capital to support their invest- ments there, which has contributed to changing Taiwanese capabilities. Such movement is clearly an alternative to trade, a topic discussed later in the chapter. However, it is safe to say that resources are more mobile domestically than they are internationally.

TheOries TO explain naTiOnal Trade paTTerns The free trade theories demonstrate how output growth occurs through specialization and free trade; however, they do not deal with trade patterns such as how much a country trades, what products it trades, or who will be its trading partners. In this section, we discuss the theories that help explain these patterns.

hOW much dOes a cOunTry Trade? Free-trade theories of specialization neither propose nor imply that only one country should or will produce a given product or service. Non-tradable goods—products and services (haircuts, retail grocery distribution, etc.) that are seldom practical to export because of high transportation costs—are produced in every country. However, among tradable goods, we’ll now discuss theories to explain why some countries depend on imports and exports more than others.

Theory of country size The theory of country size holds that countries with larger land masses usually depend less on trade than smaller ones. They are apt to have more varied climates and an assortment of natural resources that make them more self-sufficient. Most large countries (such as Brazil, China, India, the United States, and Russia) import less of their consumption and export less of their production output than do small nations (such as Uruguay, Belgium, and Sri Lanka).

Furthermore, distance to foreign markets affects large and small countries differently. Normally, the farther the distance, the higher the transport costs, the longer the inventory carrying time, and the greater the uncertainty and unreliability of timely product delivery. The following example illustrates why distance is more pronounced for a large country than for a small one.

Assume that the normal maximum distance for transporting a product is 100 miles because costs rise too much at greater distances. Although almost any location in Belgium is within 100 miles of a foreign country, the same isn’t true for its two largest neighbors, France and Germany. This shorter distance to foreign markets for Belgium additionally helps to explain its higher dependence on trade as a percentage of its production and consumption.

size of the economy While land area helps explain the relative dependence on trade, countries’ economic size helps explain absolute differences in the amount of trade. The world’s largest five economies in 2014 were also the top five exporting countries. Simply put, the largest economies produce so much that they have more to sell, both domestically and internationally. At the same time, most of developing countries’ trade is with developed countries. There has, however, been a recent upsurge of trade among developing countries, mainly because the economic growth in China and India has increased their demand for raw materials found mainly in developing countries.11

Related to levels of economic development is landlocked countries’ disadvantage in trade. With few exceptions, these countries lag maritime countries in both trade and GDP per capita. They must depend on other countries to build infrastructure to gain their access to the

Bigger countries (in terms of land mass) differ in several ways from smaller countries. They

• tend to export a smaller portion of output and import a smaller part of consumption,

• have higher average transport costs for foreign trade.

Larger economies are the biggest traders because they produce and consume more.

Chapter 6 International Trade and Factor Mobility Theory 165

sea, and there is little incentive for them to do this. At the same time, landlocked countries generally have higher transport costs for exporting. Further, potential trading partners view suppliers from landlocked countries as less reliable because conditions in transit countries can impede trade. Those exceptional landlocked countries’ success hinges on forgoing transit problems by depending on service exports (e.g., Switzerland with financial services) or on goods exported by air (e.g., Botswana with diamonds).12

The United States offers a good example of the difference between relative and absolute dependence on trade because it is the third-largest country in area and the largest eco- nomically. Although its dependence on either imports or exports is comparatively low as a percentage of either production or consumption, it is the world’s largest trader (imports + exports). In fact, the output of each U.S. state is so high that states have plenty of opportunity to buy and sell with each other. Map 6.2 illustrates the large U.S. economic size by showing how each of its states compares economically with countries.

OK Kazakhstan

NE Angola

SD Turkmenistan

ND Costa Rica

MT Tanzania

KY Portugal

ME Uruguay

PA Switzerland

MI Belgium

VA Poland

WV Uzbekistan

OH Saudi Arabia

IN South Africa

NC TaiwanTNHong Kong SC

Vietnam AL

BangladeshMS Ecuador

AR Hungary

LA Pakistan

MO Denmark

IA New Zealand

MN United Arab

Emirates WI

Israel

GA Nigeria

TX Canada

FL Indonesia

CO Malaysia

NM Ukraine

UT Iraq

AZ Singapore

NV Kuwait

ID Azerbaijan

WY Lithuania

OR Ireland

WA Norway

CA France KS

Venezuela

IL Netherlands

NY Korea

HI Sri Lanka

AK Lebanon

MD †ailand DE

Myanmar

DC Morocco

NJ Argentina

RI Luxembourg

MA Sweden

NH Dominican Republic

VT Libya

CT Colombia

map 6.2 u.s. states’ economies compared to national economies The U.S. size, both geographically and economically, results in its being one of the world’s largest trader while also depending relatively less than most countries on imports and exports.

GDP figures for the U.S. states are based on https://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP#2015_data and U.S. Department of Commerce, Bureau of Economic Activity, retrieved December 14, 2015. Country GDP figures came from http://knoema.com/nwnfkne/world-gdp-ranking-2015-data-and-charts and IMF World Economic Outlook (WEO), October 2015.

http://knoema.com/nwnfkne/world-gdp-ranking-2015-data-and-charts

166 part 3 Theories and Institutions: Trade and Investment

WhaT Types Of prOducTs dOes a cOunTry Trade? We won’t delve again into those factors we’ve already discussed (climate and natural resources) that give a country a natural advantage; instead, we will examine the factor endowment theory of trade and the importance of production and product technology.

factor proportions Theory Eli Heckscher and Bertil Ohlin developed the factor propor- tions theory, maintaining that differences in countries’ proportional endowments of labor, land, and capital explain differences in these endowments’ costs. For instance, if labor were abundant in comparison to land and capital, labor costs would be low relative to land and capital costs; if scarce, the costs would be high. These relative factor costs would lead coun- tries to excel in the production and export of products that used their abundant—and there- fore cheaper—production factors.13

General Observation Factor proportions theory appears logical, and a general obser- vation gives many examples that conform to the theory. For instance, densely populated Hong Kong uses little land for agriculture and produces manufactured products not requir- ing large amounts of land. Canada is the opposite. Hong Kong does best in manufacturing operations that use a minimum of land per worker (e.g., printing, clothing, watches) by lo- cating these in multistory buildings. Canada produces agricultural and manufactured prod- ucts that require lots of land per worker, such as wheat and automobiles. On the one hand, Germany, a country with a vast amount of capital relative to its population excels at chemical production, which requires capital intensity. On the other hand, Bangladesh, a country with abundant labor relative to capital, excels at apparel production, which is labor intensive.

A Closer Observation However, because the factor proportions theory assumes produc- tion factors to be homogeneous, tests to substantiate the theory have been mixed.14 Neither land nor labor is homogeneous. Land varies, for example, in its arability and productiv- ity. Labor varies by skill level because of training and education differences that require capital expenditures. These expenditures do not show up in traditional capital measure- ments, which include only plant and equipment values. When the factor proportions theory accounts for capital invested to train people, the factor endowment theory explains many trade patterns.15 For example, because high-income countries employ a higher proportion of highly educated employees (e.g., scientists and engineers) than do developing econo- mies, they depend on an abundance of highly trained human resources in the production that they export. Low-income countries, though, show a high dependence on less-skilled labor in their exports.16

Process Technology Factor proportions analysis becomes more complicated when the same product can be created by different methods, such as with labor versus capital inten- sity. The following photos show rice harvesting in Indonesia, where many manual laborers are employed, versus Italy, where mechanized methods require few workers. In the final analysis, the optimum location of production depends on comparing the cost in each locale based on the type of production that minimizes costs there.

Not all products lend themselves to such trade-offs in production methods. Some re- quire huge amounts of fixed capital and long production runs to spread the fixed capital costs over more output units. These usually are located in countries with large markets.17 However, companies may locate long production runs in small countries if they are able to export from them.18 In industries where long production runs reduce unit costs substan- tially, companies tend to locate production in only a few countries, using these locations to export. Where long production runs are less important, we find a greater prevalence of mul- tiple production units scattered around the world in different countries so as to minimize transportation costs.

In addition, high R&D expenditures create high up-front fixed costs. Therefore, a techno- logically intensive company from a nation with a small market may need to sell more abroad

According to the factor proportions theory, countries have their best trade advan- tage when depending on their relatively abundant production factors.

Production factors, such as land and labor, are not homo- geneous.

Companies may substitute capital for labor, depending on the cost of each.

Countries with bigger markets depend more on producing products requiring larger pro- duction runs.

Chapter 6 International Trade and Factor Mobility Theory 167

than a company in a large domestic market. It may, in turn, pull resources from other domes- tic industries and companies, which leads to more national specialization than one finds in a larger country.19

Product Technology Manufacturing is the largest sector in world trade, with commercial services the fastest-growing sector. Manufacturing competitiveness depends largely on tech- nology to develop new products and processes, which, in turn, depends on a large number of highly educated people and a large amount of capital to invest in R&D. Because developed countries have an abundance of these features, they originate most new products and ac- count for most manufacturing output and trade. Developing countries depend much more on the production of primary products; thus, they depend more on natural advantage.

WiTh WhOm dO cOunTries Trade? Below, we discuss the roles that country similarity and distance play in determining trading partners.

country-similarity Theory The country-similarity theory says that companies create new products in response to market conditions in their home market. They then turn to mar- kets they see as most similar to what they are accustomed, especially those markets where consumers have comparable levels of per capita income.20

Specialization and Acquired Advantage In order to export, a company must provide consumers abroad with an advantage over what they could buy from their domestic produc- ers. Trade occurs because companies in a given country spend more on R&D in some sectors than in others, thus leading to countries’ specialization and acquired advantage. Germany, for instance, is traditionally strong in machinery and equipment, Switzerland in pharmaceu- tical products, and Denmark in food products.21 Even developing countries gain advantages through specialization in very narrow product segments. Bangladesh has succeeded in ex- porting shirts, trousers, and hats, but not bed linens or footballs, which Pakistan has success- fully exported.22

Product Differentiation Trade also occurs because companies differentiate products, thus creating two-way trade in seemingly similar products. The United States is both a major exporter and a major importer of tourist services, vehicles, and passenger aircraft because different firms from different countries have developed product variations with different appeals. For instance, both Boeing from the United States and Airbus from Europe produce large passenger jets that will fly from point A to point B, but airlines buy both companies’

Developed countries trade primarily with each other because they

• produce and consume more,

• emphasize technical breakthroughs in different industrial sectors.

Product differentiation causes countries to conduct two-way trade in seemingly similar products.

The rice harvesting is capital intensive in Italy (left), where labor rates are high. It is labor intensive in Indonesia (right), where labor rates are low. Source: mosista/Shutterstock

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Most new products originate in developed countries.

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168 part 3 Theories and Institutions: Trade and Investment

aircraft because their models differ in such features as capacity, flying range, fuel consump- tion, and perceived reliability.23 As a result, Boeing and Airbus sell within their own and each other’s home markets as well as within countries that produce no aircraft.

The Effects of Cultural Similarity Importers and exporters perceive greater ease in doing business in countries that are culturally similar to their home country, such as those that speak a common language. Likewise, historic colonial relationships explain much of the trade between specific developed and developing economies. For instance, France’s colonial history in Africa has given Air France an edge in serving the continent’s international air passenger markets.24 Importers and exporters find it easier to continue business ties than to develop new distribution arrangements in countries where they are less experienced.

The Effects of Political Relationships and Economic Agreements Political relationships and economic agreements among countries may discourage or encourage trade between them. Witness the political animosity between Israel and most other Middle Eastern coun- tries that has diminished their mutual trade for about six decades. An example of trade en- couragement is the agreement among many European countries to remove all trade barriers with each other, thereby causing a greater share of the countries’ total trade to be conducted with each other.

The Effects of Distance Although no single factor fully explains specific pairs of trading partners, the geographic distance between two countries is important in as much as trans- port costs increase with distance. However, distance is more important for homogeneous products than for differentiated products inasmuch as the former compete more on the basis of price.25 In addition, analysis of cost differences must take into account the available transportation modes. Wine exports from Australia can reach the United Kingdom (UK) by container ship for about the same transport cost as wine exports to the UK from southern France because the latter have substantial overland and expensive transport.26

The dynamics Of expOrT capabiliTies We’ve alluded to the fact that trading patterns change due to such factors as political and economic relations among countries and the development of new product and process capabilities. We now discuss two theories—the product life cycle theory and the diamond of national advantage—that help explain how countries develop, maintain, and lose their competitive advantages.

prOducT life cycle (plc) TheOry The international product life cycle (PLC) theory of trade states that the production loca- tion of certain manufactured products shifts as they go through their life cycle. The cycle consists of four stages: introduction, growth, maturity, and decline.27

Product Introduction Most new products and process technologies originate in devel- oped countries in response to companies’ observation of nearby needs for them.28 Once a company creates a new product, theoretically it can manufacture it anywhere in the world. In practice, however, during this product introductory stage, it generally produces domestically to obtain rapid market feedback and save on transport costs to its predominantly domestic market. Production is apt to be more labor-intensive than in later PLC stages because more labor-saving machinery may be introduced only when sales begin to expand rapidly and the product becomes highly standardized. At this point the highly skilled and educated labor in high-income countries is usually cost efficient despite its high compensation because of its adeptness on nonstandardized production. Even if its cost is somewhat higher than

Trading partners are affected by

• cultural similarity, • political relations between

countries, • distance.

cOncepT check

In Chapter 2 (Page 46), we showed that a company should expect fewer adjustments when moving to a country whose culture is close to that of its home base.

According to the PLC theory of trade, the production loca- tion for many products moves from one country to another depending on the stage in the product’s life cycle.

The introduction stage is marked by

• innovation in response to observed need,

• exporting by the innovative country,

• evolving product characteristics.

Chapter 6 International Trade and Factor Mobility Theory 169

production in a developing country, many consumers are willing to pay a high price for new products rather than wait for future price reductions.

Growth Sales growth attracts competitors to the market, particularly in other developed countries where firms have technology to replicate the innovating company’s product. Let’s say the innovator is in the United States, and a competitor is in Japan. The Japanese produc- tion is sold mainly in Japan because:

1. The growing Japanese demand does not allow for much attention to other markets. 2. Japanese producers stay occupied in developing product variations for Japanese

consumers. 3. Japanese costs may still be high because of production start-up problems.

Global sales growth creates an incentive for companies to develop labor-saving process technology, but this incentive is partly offset because competitors are differentiating their products, especially to fit the needs of different countries’ consumers. Thus the capital inten- sity, though growing, is less than will come later. The original producing country will increase its exports, especially to developing countries, but will lose certain key export markets where local production commences.

Maturity In the maturity stage, worldwide demand begins to level off, although growing perhaps in some countries and declining in others. Typically, there is a shakeout of producers, more standardized production, and increased importance of price as a competitive weapon. Increased capital-intensive production reduces per-unit cost, thus creating even more de- mand in developing economies. Because markets and technologies are widespread, the in- novating country no longer commands a production advantage, thus its exports decrease as foreign production replaces it. Shifting production to developing countries is advantageous because firms can employ less skilled and less expensive labor efficiently for standardized (capital-intensive) production.

Decline As a product moves into the decline stage, those factors occurring during the matu- rity stage continue to evolve. The markets in developed countries decline more rapidly than those in developing economies as demand among affluent customers becomes saturated and because those customers want ever newer products. By this time, market and cost fac- tors dictate that almost all production is in developing economies. They export to the declin- ing or small-niche markets in the developed world. In other words, the country in which the innovation first emerged—and was exported from—then becomes the importer.

verification and limitations of plc Theory Empirical evidence verifies the PLC theory for many products, such as ballpoint pens and hand calculators. They were first produced in a single developed country and sold at a high price; then, production shifted to multiple de- veloped country locations to serve those local markets. Today, most production is in develop- ing countries, and prices have declined.

However, types of products abound for which production locations usually do not shift. Such exceptions include the following:

• Products with high transport costs (non-tradable goods) that may have to be produced close to the market, thus never becoming significant exports.

• Products that, because of very rapid innovation, have extremely short life cycles, making it impossible to reduce costs by moving production from one country to another. Some fashion items fit this category.

• Luxury products for which cost is of little concern to the consumer. In fact, production in a developing country may cause consumers to perceive the product as less luxurious.

• Products for which a company can use a differentiation strategy, perhaps through adver- tising, to maintain consumer demand without competing on the basis of price.

Growth is characterized by

• increases in exports by the innovating country,

• more competition, • increased capital intensity, • some foreign production.

Maturity is characterized by

• a decline in exports from the innovating country,

• more product standardization,

• more capital intensity, • increased competitiveness

of price, • production start-ups in

emerging economies.

Decline is characterized by

• a concentration of production in developing countries,

• an innovating country becoming a net importer.

Not all products conform to the dynamics of the PLC.

170 part 3 Theories and Institutions: Trade and Investment

• Products that require specialized technical personnel to locate near production so as to continually move the products into their next generation of models. This seems to explain the long-term U.S. dominance of medical equipment production and German domi- nance in rotary printing presses.

Regardless of product, the current trend is for international companies to introduce new products at home and abroad almost simultaneously. In other words, instead of merely ob- serving needs within their domestic markets, companies develop products and services for observable worldwide market segments. In so doing, they choose an initial production loca- tion (which may or may not be in the innovating company’s home market) that will mini- mize costs for serving markets in multiple countries.

The diamOnd Of naTiOnal cOmpeTiTive advanTaGe Why have countries developed and sustained different competitive advantages? The dia- mond of national competitive advantage is a theory showing four features as important for competitive superiority: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure, and rivalry29 (see Figure 6.4).

We have discussed these conditions in the context of other trade theories, but how they combine affects the development and continued existence of competitive advantages. The framework of the theory, therefore, is a useful tool for understanding how and where glob- ally competitive companies develop and sustain themselves.

facets of the diamond Usually, all four conditions need to be favorable for an industry within a country to attain and maintain global supremacy.

Demand Conditions Both PLC theory and country-similarity theory show that new prod- ucts (or industries) usually arise from companies’ observation of need or demand, which has traditionally been in their home countries, where they start production. This was the case for the Italian ceramic tile industry after World War II: In a postwar housing boom, consumers wanted cool floors (which tile would provide) because of the hot Italian climate.

Factor Conditions Recall natural advantage within the absolute advantage and factor pro- portions theories. Wood was expensive, and most production factors (skilled labor, capital, technology, and equipment) for producing tile were available within Italy on favorable terms.

According to the diamond of national competitive ad- vantage theory, companies’ development and maintenance of internationally competitive products depends on favor- able

• demand conditions, • factor conditions, • related and supporting

industries, • firm strategy, structure, and

rivalry.

Factor conditions: Are su�cient quantities and combinations of the quality of labor, capital, and raw materials available at acceptable prices?

The Diamond of National Competitive Advantage

Demand conditions: Are consumers likely to buy what we can produce with the factor conditions above and at the price we can deliver to them?

Development

Sustainability

Related and supporting industries: Can we outsource production of su�cient components and services to allow us to concentrate our e�orts on what we can do best?

Firm strategy, structure, and rivalry: Will competitive conditions and our reactions to them enable us to evolve our operations to sustain and improve our market position?

Figure 6.4 The Diamond of National Competitive Advantage The interaction of these conditions must usually be favorable if an industry in a country is to develop and sustain itself. The theory was developed with domestic conditions in mind, but globalization results in favorable conditions that may come from anywhere.

Source: Based on Michael E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review, 68:2 (March–April 1990).

Chapter 6 International Trade and Factor Mobility Theory 171

Related and Supporting Industries Tile production needed enamels and glazes. Had these not been available nearby, as they were in the case of Italy, costs would have increased too much. Recall, for instance, the importance of transport costs in our discussions of the theory of country size, assumptions of specialization, and factors limiting the PLC theory.

Firm Strategy, Structure, and Rivalry The combination of three features—demand, factor conditions, and related and supporting industries—influenced companies’ ability to success- fully initiate ceramic tile production in postwar Italy. The ability of the companies to sustain a competitive advantage required favorable circumstances for the fourth feature: firm strategy, structure, and rivalry.

Barriers to market entry were low in the tile industry (some companies started up with as few as three employees), and hundreds of companies initiated production. Rivalry became intense as companies tried to serve increasingly sophisticated Italian consumers. These cir- cumstances forced breakthroughs in both product and process technologies, which gave the Italian producers advantages over foreign firms and enabled them to gain the largest global share of tile exports.

limitations of the diamond of national advantage Theory The existence of the four favorable national conditions does not guarantee that a flourishing industry will develop. Entrepreneurs may face favorable conditions for many different lines of business. In fact, comparative advantage theory holds that resource limitations may cause a country’s firms to avoid competing in some industries despite having an absolute advantage. For instance, Swiss conditions would seem to have favored success if companies in Switzerland had be- come players in the personal computer industry. However, doing so might have lessened protection of Swiss global positions in such product lines as watches and scientific instru- ments as companies downsized innovation in those industries by moving their highly skilled people into developing a new industry.

A second limitation concerns the growth of globalization. The industries on which this theory is premised grew when companies’ access to competitive capabilities was much more domestically focused. We can see how globalization affects each of the four conditions:

1. Observations of foreign or foreign-plus-domestic demand conditions have spurred much of the recent Asian export growth. In fact, such Japanese companies as Uniden and Fujitech target their sales almost entirely to foreign markets.30

2. Companies and countries do not depend entirely on domestic factor conditions. For example, capital and managers are now internationally mobile, and companies may de- pend on foreign locations for portions of their production.

3. If related and supporting industries are not available locally, materials and components are now more easily brought in from abroad because of transportation advancements and relaxed import restrictions. In fact, many MNEs now assemble products with parts supplied from a variety of countries.

4. Companies react not only to domestic rivals but also to foreign-based rivals at home and abroad. Thus the prior domestic absence of any of the four conditions from the diamond may not inhibit companies and industries from gaining these conditions and becoming globally competitive.

using the diamond for Transformation By expanding the diamond of national advan- tage theory to include changes brought about by globalization, we can see its validity for countries’ economic policies. In our opening case, Taiwan diversified its economy from agri- cultural products to modern high-tech products by satisfying the market entry conditions of the diamond. This transformation could not have occurred had Taiwanese authorities looked only at what was available within their own borders. In Taiwan itself, there was (and still is) insufficient demand for the high-tech products it now produces, such as microchips and medical devices; good transportation, however, makes efficient export possible. Similarly, the country initially lacked some of the factor conditions necessary for producing high-tech

Domestic existence of all conditions

• does not guarantee an industry will develop,

• is not necessary with globalization.

172 part 3 Theories and Institutions: Trade and Investment

products, especially trained personnel. Eventually, though, it altered its educational system so that human resource development fit production needs. It also allowed companies to bring in foreign managers and technicians to fill personnel gaps. Finally, it developed lo- cal factors and competition, such as by attracting high-tech companies to ensure a vibrant competitive environment. Thus, understanding and having the necessary conditions to be globally competitive is important, but these conditions are neither static nor purely domestic.

The TheOry and maJOr effecTs Of facTOr mObiliTy As both the quantity and quality of countries’ factor conditions change, their relative capa- bilities change as well. The change may be due to internal circumstances. For instance, if savings rates increase, countries have more capital relative to their factors of land and labor. If they spend relatively more on education, they improve the quality of the labor factor. The change may also be due to international mobility as people, capital, and technology move across borders.

A strategic trade policy, or industrial policy, is one in which a government identifies target industries to

develop to be internationally competitive. Yes If you’re a country that wants to compete in today’s

globalized business environment (and you have to), you must develop and maintain some industries that will be internationally competitive. Those industries must grow and earn sufficient revenues to keep your domestic economy growing at least as well as other countries are performing.

A government’s role is rarely neutral. The government may claim that its economic policies don’t affect the performance of specific domestic industries on the world stage, but a lot of those policies are bound to have precisely that effect. Who will argue that U.S. efforts to “improve agricultural productiv- ity” and “enhance defense capabilities” have nothing to do with the fact that the United States does a healthy business in the export of farm and aerospace products?

Moreover, just about every government policy designed to help one industry will have a negative effect on another. European airlines complain (with some justification) that European government support for high-speed rail traffic de- prives them of the revenue they need to compete with U.S. overseas carriers, which don’t have much to worry about from railroad passenger traffic at home. In other words, na- tional policymakers everywhere face trade-offs. So if every government policy will help one party while hurting another, why shouldn’t a country’s practices call for taking special care of the industries that will likely give it its best competi- tive advantage?

Executing such a plan can be pretty simple. First, target a growth industry and figure out what factors make it poten- tially competitive. Next, identify your country’s likely com- petitive advantages (and make sure you know why you have

them). Finally, develop a little synergy between the strong points you’ve uncovered during both processes: Target the resources needed to support the industries that fit best with your country’s advantages.

A strategic trade policy is particularly effective if you’re a developing country. Why? Because you’ve probably already decided that (1) you need to integrate yourself into the global economy and (2) you need to figure out the best way to excel in the international game. If other countries support high- potential start-ups and you don’t, your new industries will be disadvantaged.31 But you need to remember that simply opening up your borders to foreign competition doesn’t nec- essarily mean that domestic producers will have an easier time competing either abroad or at home.

When you do this, foreign competitors may have consid- erable advantages over homegrown companies you’re try- ing to foster. They’ve had a head start that’s allowed them to develop not only certain efficiencies but cozy relations with everybody in the international distribution channel. More- over, no matter how promising your targeted industries may be, or how carefully you’ve tried to match up your industries with your competitive advantages, as a developing country your businesses probably lack the technology and market- ing skills they’ll need to compete. So, why not help them?32

This brings us back to why strategic trade policy is your optimal choice. Your government must protect your local industries—say, by helping them get the skills and technology they’ll need. You could also focus your efforts on attracting foreign investment by companies that have the marketing and technical skills you need; that’s one good way to bring in the kind of production you need. It also wouldn’t hurt to extend incentives within the industries you’re counting on.

Want some evidence that strategic trade policy is effec- tive in helping developing nations go global? Look at South

Should Nations Use Strategic Trade Policies?

Point Point

Chapter 6 International Trade and Factor Mobility Theory 173

Korea, which not only managed to attract companies with experience in consumer-electronics production but even- tually emerged as a global competitor by building on im- ported technologies and targeting technical education to become both a competitive and technical leader.33 By the same token, we have ample evidence that laissez-faire often doesn’t work in developing countries. In sub-Saharan Africa, for example, government institutions are so deeply rooted that it’s almost impossible for anyone—either individuals or

multinationals—to make a move without getting entangled in the bureaucratic undergrowth.34

Moreover, because no single political institution in devel- oping countries has much in the way of resources, all are bet- ter off focusing their collective efforts on specific industries that have some potential for international competitiveness; otherwise, what you have is a bunch of under-resourced agencies and ministries aiming at markets scattered all over the economic landscape.35

no Of course, countries should try to become most competitive

in the industries that promise the best returns and have the most potential for going global. Obviously, they’re the ones most likely to add value to the national economy. However, strategic trade policy is not the best way to achieve this goal.

I’ll make a concession: Under limited circumstances a targeting program will work, particularly for small countries such as Taiwan. Because Taiwan’s GDP amounts to just a little more than the value of Walmart’s annual sales, parties involved can manageably work together to reach mutually beneficial agreements with minimal frustration. But in a large economy? Impossible.

However, it’s debatable just how much Taiwan’s econom- ic success is due to strategic trade policy and how much goes back to conditions that existed before the govern- ment began involving itself in foreign trade. During the era of Japanese occupation, Taiwan’s infrastructure, literacy, and school attendance improved markedly so that its environ- ment for becoming internationally competitive was well es- tablished. Further, when it instituted its import substitution policies, these policies were not really targeting industries to be internationally competitive.

An alternative is for a country to focus on conditions af- fecting its attractiveness as a competitive location in gen- eral instead of targeting specific industries. In other words, a government can alter conditions affecting, say, factor pro- portions, efficiency, and innovation by upgrading production factors—cultivating human skills, moving to new levels of infrastructure, encouraging consumers to demand higher- quality products, and promoting an overall competitive environment—for any industry interested in doing business within its borders.

Let’s turn to your comments about sub-Saharan Africa. I’ll even make another concession: Inefficiency from politi- cal bureaucracy is indeed a way of life in much of the area, and there’s no reason to expect that it will go away any time soon.36 But what if we looked at things from another per- spective? Rather than trying to focus on a specific industry in, say, the global high-tech universe, wouldn’t all these bu- reaucratic agencies and ministries find it more constructive

to review (and enforce) their own laws; take steps to stabilize their populations; rectify their most

glaring economic, social, and gender inequities; and sup- port entrepreneurial activity in the informal sectors of their economies? Wouldn’t they find it more positive to foster an environment of trust—one in which, say, the government helps cut transaction costs so local firms will be willing to work with other companies, domestic and foreign, to acquire a little of the knowledge and a few of the resources they need to compete?37 Again, instead of picking and haggling over special industries, wouldn’t they be better advised to improve the investment environment in which, after all, ev- erybody will ultimately have to operate anyway?

At this point, I might as well take the offensive in this de- bate. Strategic trade policies typically result in no more than small payoffs—primarily because most governments find difficulty in identifying and targeting the right industries.38 What if a country targets an industry in which global demand never quite lives up to expectations? That’s what happened to the United Kingdom and France when they got together to underwrite supersonic passenger planes. Or what if the domestic companies in a targeted industry simply fall short of being competitive? That’s what happened when Thailand decided to support the steel business.39

What if too many nations target the same global industries, thereby committing themselves to excessive competition and inadequate returns?40 What if two countries compete to sup- port the same industry, as happened when both Brazil and Canada decided to produce regional jets in the same hemi- sphere?41 Finally, what if a country successfully targets an in- dustry only to find unexpected conditions? Should it stay the course by reacting to various pressures, such as the pressure to support employment in a distressed industry?42

Finally, even if a government can identify a future growth industry in which a domestic firm is likely to succeed—a very big if—it doesn’t follow that a company deserves public as- sistance. History recommends that nations permit their en- trepreneurs to do what they do best: take risks that don’t jeopardize whole sectors of the economy. The upshot will probably be the same as always: Some will fail, but the suc- cessful ones will survive and thrive competitively.

Counterpoint

Should Nations Use Strategic Trade Policies? Counterpoint

174 part 3 Theories and Institutions: Trade and Investment

Currently, one of the biggest changes underway concerns relative population numbers. Presently, 46 percent of the world’s population lives in countries, mainly developed ones, where the fertility rates are below the population replacement rate.43 These countries are also encountering a higher portion of people at a postretirement age along with a higher portion who are entering the workforce at a later age because of engaging in extended edu- cation. This leaves a smaller percentage of residents in their workforces. Further, the aging of the population is expected to require more workers in order to care for illnesses, such as de- mentia.44 Even with increases in productivity, these countries will need more immigrants to help provide for their nonemployed populations. Concomitantly, nine countries are expected to account for half of the world’s population increase, with India, Pakistan, and Nigeria lead- ing the pack.45

These changes, of course, are important in understanding and predicting changes in export production and import market locations. At the same time, the mobility of capital, technology, and people affect trade and relative competitive positions. Here we address the factor mobility theory, which focuses on why production factors move, the effects of that movement on transforming factor endowments, and the impact of international factor mo- bility (especially people) on world trade.

Why prOducTiOn facTOrs mOve capital Capital, especially short-term capital, is the most internationally mobile produc- tion factor. Companies and private individuals primarily transfer capital because of differ- ences in expected return (accounting for risk) that is caused by their outlooks of economic and political conditions. They find information on interest-rate differences readily available, and they can transfer capital by wire instantaneously at a low cost. Short-term capital is more mobile than long-term capital, such as direct investment, because there are more active markets to buy foreign holdings and sell them if investors want to transfer capital back home or to another country.

At the same time, companies invest abroad for the long term to tap markets, improve quality, and lower operating costs. However, businesses do not make all the international capital movements. Governments give foreign aid and loans. Not-for-profit organizations donate money abroad to relieve worrisome conditions, and individuals remit funds to help their families and friends in foreign countries. Regardless of the donor or motive, the result affects factor endowments.

people People are less mobile than capital. Some, of course, travel to other countries as tourists, students, and retirees; however, this does not affect factor endowments because these travelers do not work in the destination countries. Unlike funds that can be cheaply transferred by wire, people usually must incur high transportation costs to work abroad. Also, if they move legally, they must get immigration papers, which most countries provide sparingly. Finally, they may have to learn another language and adjust to a different culture away from their customary support groups. Despite such barriers, people do endure hard- ships and risks to move to other countries.

Migration was the major engine of globalization during the late nineteenth and early twentieth centuries, and at present it is important again. About 3.3 percent of the world’s population (about 244 million people) has migrated to another country. Because this move- ment is spread unevenly, the percentage is much greater in some countries than in others (e.g., 27 percent of the population in Australia and less than 1 percent in Mexico).46

Of the people who go abroad to work, some move permanently, some temporarily. On the one hand, some people immigrate to another country, become citizens, and plan to reside there for the rest of their lives. On the other hand, some enter a country on tempo- rary work permits, usually for short periods. For instance, most workers in the United Arab Emirates are there on temporary work permits.47 In addition, MNEs may assign employees to work abroad for periods ranging from a few days to several years (usually to a place where

Capital and labor move internationally to

• gain more income, • flee adverse political

situations.

Chapter 6 International Trade and Factor Mobility Theory 175

they also transfer capital). In many cases, workers leave their families behind in the hopes of returning home after saving enough money while working in the foreign country. Some move legally, others illegally (undocumented)—that is to say they lack government permis- sion to enter or work.

Motives People move to another country largely for economic reasons, such as Indonesian laborers working in Malaysia to earn more than at home. People also move for political reasons—for example, because of persecution or war dangers, in which case they are known as refugees and usually become part of the labor pool where they live. It is not surprising that most refugees emanate from war-torn countries—recently many from Syria, Afghanistan, South Sudan, The Democratic Republic of the Congo—and mainly go to nearby countries. Recently, the largest recipients have been Turkey, Pakistan, and Iran.48 In addition, there are about 10 million people who have no citizenship, most of whom are seeking some country to give them rights as citizens.49

Sometimes it is difficult to distinguish between economic and political motives for inter- national mobility because poor economic conditions often parallel poor political conditions. In recent years, hundreds of thousands of Syrians fled the civil war in their country; however, the fact that many have returned after not finding work may indicate that their motive was economic.

effecTs Of facTOr mOvemenTs Neither international capital nor population mobility is a new occurrence. For example, had it not been for historical mass immigration, Australia, Canada, and the United States would have greatly reduced populations today. Further, many immigrants brought human capital with them, thus adding to the base of skills that enabled those countries to be newly competitive in an array of products they might otherwise have imported. Finally, these same countries received foreign capital to develop infrastructure and natural resources, which fur- ther altered their competitive structures and international trade.

What happens When people move? Recent evidence is largely anecdotal. Nevertheless, we have indicated that immigration is substantial for many countries and insignificant for others.50

The United States is currently an example of a country whose recent immigration is largely concentrated at the high and low ends of human skills. Over a third of all people with doctoral degrees in the United States are foreign-born. At the other extreme, much recent U.S. immi- gration has been made up of low-skilled workers. At both extremes, the United States has had shortages of native-born workers, which has been partially alleviated through immigration.

A controversial issue is the effect of outward migration on countries. On the one hand, countries lose potentially productive resources when educated people leave—a situation known as a brain drain. On the other hand, many of these people are now sending remit- tances back. For example, remittances account for 29 percent of Nepal’s GDP.51

There is also evidence that the outward movement and remittances of people leads to an increase in start-up companies and capital in their home countries. Further, the emigrants learn abroad, transfer ideas back home, use remitted capital to start businesses in their native lands, and export to companies with which they have developed connections abroad.52

Finally, countries receiving productive human resources also incur costs by providing social services and acculturating people to a new language and society. Thus, on the one hand there is an employment need for the immigrants; on the other hand, there have been backlashes concerning the costs and the possible infiltration of terrorists. The unskilled workers who take jobs native-born workers don’t want—dishwashing, maintaining grounds, picking agricultural produce—often have children who eventually enter the workforce. If these children are also unskilled, the country is perpetuating a long-term class of “have-nots.” If the children attain skills, then there is a need to bring in even more unskilled workers from abroad.

Factor movements alter factor endowments.

176 part 3 Theories and Institutions: Trade and Investment

The relaTiOnship beTWeen Trade and facTOr mObiliTy Factor movement is an alternative to trade that may or may not be a more efficient use of resources.53 Let’s see how international factor mobility can affect trade.

subsTiTuTiOn When the factor proportions vary widely among countries, pressures exist for the most abundant factors to move to countries with greater scarcity, where they can command a better return. If permitted, many in the labor pool where workers are unemployed or poorly paid, go to countries that have full employment and higher wages. They receive higher wages not only because of the greater scarcity, but also because more capital-rich countries have invested in machinery and infrastructure that make the imported laborers more pro- ductive than in their home countries.

Of course, as we discussed in the section on factor endowment theory, the ratio of land (an immobile factor) to people also influences the movement of labor. Russia has a low pop- ulation density and the most unfarmed arable land of any country. Next door is China with the highest population and little available unfarmed land. About 400,000 Chinese are now working on Russian farms, and much of the output is shipped to China.54

Similarly, capital tends to move away from countries in which it is abundant to those in which it is scarce (e.g., Mexico getting capital from the United States, which gets labor from Mexico).55 If finished goods and production factors were both free to move internationally, the comparative costs of transferring goods versus factors would determine production lo- cation. Let’s look at a hypothetical example of supplying the United States with tomatoes. Because U.S. labor to cultivate and pick tomatoes is costly, U.S. capital might move to Mexico to set up tomato production, which is then exported to the United States. Or Mexican labor might move to the United States to work in tomato production. The comparative cost of moving either workers or tomatoes will determine whether trade or factor mobility is used to minimize costs.

In some cases, the inability to gain sufficient access to foreign production factors may stimulate efficient methods of substitution, such as the development of alternatives for tra- ditional production methods.56 For example, at one time U.S. tomato growers in California depended almost entirely on Mexican temporary workers under what was known as the bracero program. Since the termination of this program, the California tomato harvests have quadrupled, while mechanization has replaced 72 percent of the number of workers.

However, not all harvesting jobs can reasonably be mechanized at present. Because cantaloupes ripen at different times, pickers go through a cantaloupe field about 10 times. A robot would have to be able to distinguish colors so as to leave green cantaloupes behind.57 However, advancement of robots using cameras that distinguish ripeness foretell the dimin- ished need for future agricultural laborers.58 At the same time, many other jobs that defy mechanization—such as bussing tables at restaurants and changing beds in hotels—are largely filled by unskilled immigrants in developed countries.

cOmplemenTariTy In our tomato example for the United States and Mexico, we showed that factor movements may substitute for or stimulate trade. Companies’ investments abroad often stimulate ex- ports from their home countries. In fact, MNEs account for 80 percent of global exports, such as among their parents and subsidiaries or to independent companies.59

Many of the exports would not occur without foreign investments, partly because a company may export equipment as part of its foreign investment. Or, domestic operating units may export materials and components to their foreign facilities for use in a finished

There are pressures for the most abundant factors to move to areas of scarcity.

Factor mobility through foreign investment often stimulates trade because of

• the need for components, • the parent company’s ability

to sell complementary products,

• the need for equipment for subsidiaries.

Chapter 6 International Trade and Factor Mobility Theory 177

product, such as Coca-Cola’s exports of concentrate to its bottling facilities abroad. Finally, a company’s foreign facility may produce part of the product line while serving as sales agent for exports of its parent’s other products.

Finally, immigration enhances trade by creating ethnic enclaves of networks that link im- migrants with their native countries. The enclaves serve as niche markets for imports from their native countries (e.g., early U.S. soy sauce imports sold mainly to Asian-Americans). The ethnic networks also embody product and country-specific knowledge that aids in exporting to immigrants’ birth-countries. This is more important when a network is from a low-trust culture, especially one that also values family ties strongly. Most people from such a culture have more trust for people they know better, which leads them first to prefer busi- ness within the family, next with close friends, etc. Conducting business with people from another country is well down the list of trusted people. But the ethnic network offers an alternative, allowing people from low-trust cultures to deal abroad with others whose lan- guage and responses are similar to their home-country experiences. Without this network, they need more time to overcome the perceived risk brought about by lack of knowledge and low trust of potential business partners. Thus potential importers and exporters are more willing to trade when they are part of the ethnic network.60

cOncepT check

In Chapter 2 (Page 41), we emphasized societal differenc- es in trust along with strength in family ties, especially as it affects trust. We also discussed that higher trust reduces the cost of business transactions.

rapidly than developed countries. Concomitantly, as companies shift production to developing econo- mies, they displace jobs at home. These displaced workers need to find new jobs. But it is uncertain how quickly new jobs will replace old ones and how much developed countries will tolerate employment displacement and job shifts. If they become intol- erant, they may enact protectionist measures that would stifle trade.

Another key issue is the future of factor en- dowments. If present trends continue, relationships among land, labor, and capital will continue to evolve. For example, the population growth rate is expected to be much higher in developing econo- mies than in developed ones, which could result in continued shifts of labor-intensive production to developing economies and pressures on the devel- oped countries to accept more immigrants.

Urbanization will likely grow faster in develop- ing than in developed countries, which are already heavily urbanized. Considerable evidence indicates that productivity rises with urbanization because firms can more likely find people with the exact skills they need, because there are economies in moving supplies and finished products, and because knowl- edge flows more easily from one company and industry to another. Thus we might expect higher growth in some developing countries due to their pace of urbanization. Such growth should also help them account for a larger share of world trade.

When countries have few restrictions on foreign trade and factor mobility, companies have greater latitude in reducing operating costs. For example, fewer trade re- strictions give them opportunities to gain economies of scale by servicing markets in more than one coun- try from a single base of production. Fewer factor movement restrictions allow them to combine factors for more efficient production. However, government trade and immigration restrictions vary among coun- tries, over time, and under different circumstances.

Nevertheless, it’s probably safe to say that trade restrictions have been diminishing, primarily be- cause of the economic gains that countries fore- see through freer trade. Further, restrictions on the movement of capital and technology have become freer, but whether restrictions on the movement of people are freer is questionable.

There are uncertainties as to whether the trend toward the freer movement of trade and production factors will continue. Groups worldwide question whether the economic benefits of more open econo- mies outweigh some of the costs, both economic and noneconomic. Although the next chapter dis- cusses government influence on trade in detail, it is useful at this point to understand the overall evolu- tion of protectionist sentiment.

One key issue is the trade between developed and developing economies. As trade barriers are being lowered, some developing economies with very low wage rates are growing economically more

Looking to the Future Scenarios That May Change Trade Patterns

178 part 3 Theories and Institutions: Trade and Investment

At the same time, on the one hand the finite sup- ply of natural resources may lead to price increases for these resources, even though oversupplies have often depressed prices. The limited supply may work to the advantage of developing economies be- cause their supplies have been less fully exploited. On the other hand, technology to find and extract natural resources, such as fracking to secure natu- ral gas from shale, may shift supply locations and lessen price rises.

We will probably see the continued trend toward a more finely tuned specialization of production among countries to take advantage of specific con- ditions. Although part of this will be due to wage and skill differences, other factors are important as well. For instance, country differences in property right protection may influence businesses to locate more of their technologically intensive activities within countries that offer more protection. Or they may disperse portions of production to different coun- tries in order to hinder potential competitors from gaining the full picture needed to pirate their prod- ucts and processes.

Four interrelated factors are worth monitoring because they could cause product trade to become relatively less significant in the future:

1. As economies grow, efficiencies of multiple pro- duction locations also grow because they can all gain sufficient economies of scale. This may allow country-by-country production to replace trade in many cases. For example, most auto- mobile producers have moved into China and Thailand—or plan to do so—as a result of those countries’ growing market size.

2. Flexible, small-scale production methods, especially those using robotics and digital

technologies, may enable even small countries to produce many goods efficiently for their own consumption, thus eliminating the need to im- port them. For example, before the development of efficient mini-mills that can produce steel on a small scale, steel production took larger capital outlays that needed enormous markets. Similarly, consumers’ demand for evermore dif- ferentiated products largely negates the cost advantages of long production runs, thus mak- ing smaller scale manufacturing close to mar- kets more advantageous.61

3. Output from and research on 3-D printers are in- creasing expeditiously. We already see produc- tion of such final products as medical implants, jewelry, lampshades, car parts, and mobile phones. Now there is research using 3-D print- ers for making molds, tools, and dyes. There have been notable breakthroughs, such as the printing of a footbridge, prefabricated sections of buildings, and the replica of an automo- bile.62 As this technology develops, products can be fabricated efficiently where they are used rather than traded from one country to another. However, there will still be a need to trade production-grade materials as inputs to the printers.

4. Services are growing more rapidly than products as a global portion of production and consump- tion. Part of this change involves technology, such as substituting digitalized products like music and reading material for traditionally man- ufactured products. Thus, one buys the right to copy (a service sale) from anywhere in the world with no need to ship products. Consequently, product trade may become a less important part of countries’ total trade. ■

Case

Stein intended her line to illustrate what a word can invoke. Given the many uses of “rose” throughout the ages, the word brings a nearly unique image and emotion to each of us.63 It has been a name for daughters, an adornment for a garden or vase, a representation of a deceased versus living mother on Mother’s Day, a mark of love on Valentine’s Day, an ingredient for perfume and medicine, a confetti of strewn petals, and even the symbol of opposing armies during Eng- land’s War of the Roses.

Some Global Changes Although growers have sold roses for centuries, their perish- ability (they should usually be sold within three to five days of being cut) prevented extensive export before there was timely, dependable, and economical air service. Today, roses compose about half the $14 billion cut-flower export indus- try. Developing countries, many without significant domestic cut-flower markets, have accounted for most recent export growth. The world’s largest exporter is Colombia, with Ec- uador and Kenya running neck and neck for the second and third positions. Given that consumers purchase roses as dis- cretions rather than as necessities, most exports are to high- income countries. Given the need to reach markets quickly and inexpensively, most exports are regional—Kenya sends most of its flowers to Europe, Taiwan to Japan, Colombia and Ecuador to the United States. However, chilling technology may soon allow cut flowers to be sent in containers on ships.

In addition to feasible air service, other logistical im- provements have speeded the connection between grow- ers and consumers. Take, for example, flower imports into the United States. About 85 percent of the annual market enters by air through Miami, which has more than 50 whole- salers and importers. These flowers, mainly from Latin America, are packaged where they are cut and air freighted the same day. The packaging often includes address labels and tracking information so as to avoid the costly and time- consuming process of re-packaging for transshipment. On arrival in Miami, the roses are placed at once in refriger- ated warehouses, where U.S. government customs and agriculture inspectors clear shipments by spot-checking packages to ascertain their invoice accuracy and absence of insects.

Of course, long before the growth in export markets, many countries produced flowers for nearby sale, and some are still domestically focused. China and India have larger land areas under flower cultivation than any other countries, but their quality is insufficient to compete much internationally. Japan, the world’s second-largest cut-flower

ecuador: a Rosy export Future?

market, has purchasing power, but it fills most demand with domestic production. However, in many other countries, im- ports have largely displaced domestic output. For instance, the United States now imports more than twice the value of its domestic flower production.

Ecuadoran Advantages Developing countries have a labor cost advantage in the rose market because production is very labor-intensive at almost every stage—planting, fertilizing, fumigating, pruning, removing thorns, assembling by size and rose variety, and packaging. Although Ecuador has this overall advantage, it has a labor cost disadvantage with Colombia, its main com- petition, because its monthly minimum wage is almost $100 more. Further, its transport cost for roses to the United States averages 20–30 percent more than Colombia’s. However, Ecuador has almost unique advantages in rose cultivation.

Because the equator runs through the country, the sun is almost directly overhead throughout the year, which speeds growth and allows for year-round temperature consisten- cy. It grows roses at high altitudes (averaging about 2000 meters, or 6561 feet) that provide the very cool nights that are ideal. Seventy percent are grown north of the capital of Quito, and 30 percent to the south. These areas obtain

Rose is a rose is a rose is a rose —Gertrude Stein, “Sacred Emily” from Geography and Play (1922)

Roses Harvest, plantation in Tumbaco, Cayambe, Ecuador

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180 part 3 Theories and Institutions: Trade and Investment

water from the mineral-rich melting snow of the Andes. The result is that Ecuadoran roses have very large buds, stems up to a meter in length, vivid colors, and extended vase life. The growers sell them at about a one-third price premium above Colombian exported roses. In addition, because Ec- uadoran growing areas have less rainfall variation than those in Colombia, they enjoy a lower climatic risk. Nevertheless, damage from weather conditions, particularly wind and rain, is an uncertainty for growers everywhere. In addition, the growing area south of Quito, because of its higher altitude, can produce more premium roses (bigger buds and longer stems), but it is subject to a greater risk of frost than the area to the north.

Market Structure Ecuador’s cut-flower exports, of which 73 percent are ros- es, have become very important to its economy, employing over 100,000 people directly and many more in supporting industries. Its rose farms are typically owned by individual families, who engage in a mixture of cooperation and com- petition. They cooperate through a producers’ association, Expoflores, to negotiate better airline carriage rates and find means to improve production methods; they compete vigor- ously with each other for customers abroad; and it is com- mon for them to sell below cost if they are short of cash and have excess supplies that might otherwise perish.

For Ecuador’s largest market, the United States, growers sell to both importers and wholesalers. The importers sell to large customers, such as wholesalers, mass-market retail- ers (including grocery chains), and hotels. Wholesalers, in turn, sell to mass-market retailers or florists, who then sell to final consumers. The farms have been trying to sell more di- rectly to wholesalers in order to capture some of the margin in sales between importers and wholesalers; however, too much effort to do so could jeopardize their existing sales to the importers on whom they depend. Given final distribution fragmentation, it is impractical for farmers to sell directly to retailers abroad.

Sales to importers and wholesalers are generally highly personalized, handled via verbal agreement rather than written contract, and dependent on trust. In most instanc- es, there is a buyers’ market for cut flowers, so exporters seek to develop confidence and trust among buyers to help secure repeat sales. For instance, if a farm cannot sup- ply what it has promised, perhaps due to adverse weather conditions, it will typically try to buy supplies from other producers in order to fulfill its commitment and build buyer confidence. Negotiations take place largely via e-mail, but exporters make occasional visits to importers and whole- salers to help cement personal relationships. Contacts, both in person and via e-mail, also help the growers plan the quantity of future production by date and rose vari- ety. Growers generally extend credit to the importers and wholesalers; however, if importers do not pay as agreed,

then exporters require payment by letter of credit in future sales. Sales are f.o.b. Quito, which means that growers keep title only until the roses are loaded on the aircraft; thus, they do not have legal responsibility if the roses ar- rive damaged or no longer fresh. (They are responsible for damage caused by disease and for sending a different va- riety of rose than was ordered.) However, the personal rela- tionship in transactions means that importers, wholesalers, and growers work out responsibility in such circumstances. Although wholesalers and importers try to maintain high quality on roses sold to final consumers, there is an under- ground market for older and damaged roses that is difficult to control.

Fluctuations in Demand Planning rose production is difficult because of demand changes during business cycles, during periods of the year, and by variety of rose. This planning is further complicated by unforeseen supply situations.

The demand for roses, especially the high-end market for Ecuador’s large, long-stemmed varieties, has been par- ticularly sensitive to income changes in importing countries. For instance, a global economic recession caused the value of Ecuador’s cut-rose exports to fall 42 percent between 2007 and 2009, but export sales recovered nearly to the 2007 level by 2012. With the 2014 fall in oil prices, Ecuador’s exports to oil-dependent-Russia (Ecuador’s second-largest market) fell 30 percent in value. The decreases occurred as consumers bought fewer flowers of any kind, replaced some rose purchases by buying less expensive flowers, and switched in part to less premium roses. The demand change was most noticeable through florists’ sales, which depend more on the most expensive roses; mass-market sales of mixed flower bouquets held up fairly well.

Demand during the calendar year changes substantially in both volume and rose type. The biggest spike in sales by far is for red roses on Valentine’s Day. Accounting for 25 to 30 percent of Ecuadoran rose exports, they are primarily office gifts and must usually be presented on February 14. (When Valentine’s Day falls on the weekend rather than on a week day, sales drop substantially.) Since the growth period for a rose stem is between 90 and 100 days, the farms must keep clipping stems so that they start growing and then mature on the right date for shipment. However, this 10-day margin between 90 and 100 days is due to uncontrollable weather conditions. With more sunlight, the roses mature faster; with colder weather, they mature slower. Farms can warm grow- ing areas artificially (at a cost). Slowing down maturity when temperatures rise is even more costly inasmuch as agrono- mists must paint rose encasements with mud or cover entire greenhouses with black fabric. The second-biggest spike is for Mother’s Day, but the demand is spread among different colors of roses. During the whole month of June, demand increases again because it is a big month for weddings and

Chapter 6 International Trade and Factor Mobility Theory 181

the demand is primarily for cream-colored roses. During the rest of the year, the export demand is fairly steady in both volume and color of rose, and growers try to get standing orders to assure steady sales. However, growers must make decisions on how much effort to put into production for the high-demand periods versus the remainder of the year. Fur- ther, they must make these decisions without knowing what other growers are doing, which could mean over- or under- supply at any given time.

Roses vary by such characteristics as color, fragrance, size, stem length, and the way they open. In fact, there are about 6,500 varieties of roses, and a farm cannot grow them all. The variety per farm depends largely on the farm’s size. Hoja Verde, one of the largest Ecuadoran producers, grows over 400 rose varieties, whereas a more typical Ec- uadoran rose farm, such as Grupo Vegaflor, grows about 60. Regardless of farm size, its managers must estimate what the market will demand in order to choose which va- rieties to grow, how much area to allocate to each, and when to bring different quantities to maturity. Of course, growers depend largely on a few fairly standard but distinct roses for which there is demand throughout the year and in ongoing years. Despite its dependence on standard roses from year to year, the industry also depends on innovation. Growers are pressured, like producers in a fashion industry, to sell new varieties each year. Rose breeders, almost all in developed countries, such as Rosen Tantau in Germany and E. G. Hills in the United States, develop new rose vari- eties that they promote to distributors. Rose growers must then predict the success of new varieties in order to choose which to grow. In turn, growers pay a fixed licensing fee to the breeders for the rights to grow the new varieties and use their names.

Another factor affecting the rose market is the emer- gence of demand for fair-trade products, including cut flowers, from developing countries. For instance, TransFair, a not-for-profit organization, certifies whether flowers are grown by using techniques promoting the environment and providing sufficient benefits to workers and communities. Once certified, the flowers sell for about a 10 percent pre- mium, which is used for the workers and community. While reliable figures are unavailable on the size of this market, some estimates put it as high as 10 percent of the rose ex- port market. As of 2011, less than 10 percent of Ecuadoran rose farms had been certified.

Present and Future Market Our discussion implies that Ecuadoran rose growers could benefit by having consumers treat flowers as a less expend- able purchase, choose roses over other flowers, develop a preference for Ecuadoran roses, increase rose buying during nonpeak periods, and better align their rose partiality with the varieties that growers have chosen to produce. However, the growers presently have little influence on final consum-

ers and must therefore depend on distributors to promote those final sales. In fact, many florists advertise through various media, and a quick perusal of the Internet indicates that some specifically promote Ecuadoran roses. Thus, for growers to increase exports they must convince importers and wholesalers to promote final demand, such as through retailers, for the differentiated Ecuadoran premium-priced roses. This is difficult because the number of players (grow- ers, importers, wholesalers, and retailers) is so large and fragmented that no single player at any point in the distribu- tion chain has much influence on final consumers.

Many Ecuadoran growers are putting more emphasis on some countries than on others. Although Ecuador exports roses to more than 90 countries, its sales are highly con- centrated in the United States and Russia, which account for a bit over 60 percent of its export market. These two countries are also the largest final consumer markets for im- ported cut roses. Ecuador and Colombia dominate the rose export sales to these countries. Colombian roses dominate the U.S. import market, and Ecuadoran roses dominate the Russian import market. Observers believe this discrepancy in market share between the two leading markets is due to Russian consumers’ preference for long-stemmed roses, whereas the U.S. mass-market preference is for shorter and less expensive roses sold in supermarkets.

Ecuador and Colombia together dominate the export sale of cut roses to some other markets as well, such as Canada and Spain, but these markets are small compared to the United States and Russia. Thus, there is a question of the existence of some fairly untapped markets. Some Ecua- doran growers are considering the Middle East as a possibil- ity for sales expansion because new air service links Ecua- dor with Iran via Venezuela. Other growers believe that most future growth must come from traditional export locations, either through increasing total rose sales in those locations or by picking up market share from Colombian and other countries’ producers. At any rate, whether Ecuador’s future cut-rose export sales will be rosy or not seems to have noth- ing to do with its production ability. Rather, it will depend partly on foreign demand (i.e., the penchant of consumers in other countries for buying its roses). It will depend also on foreign competition (i.e., East African countries, such as Kenya, Zimbabwe, and Uganda are presently in the process of increasing their output).

Questions

6-3. Look back in Chapter 1 to the factors in increased globaliza-

tion and explain which have influenced the growth of world

trade in cut roses and why.

6-4. Think back to the external institutional conditions (cultural,

legal-political, and economic) discussed in Chapters 2 through

4 and discuss how these have affected and might affect future

demands for Ecuadoran cut roses.

182 part 3 Theories and Institutions: Trade and Investment

6-5. There are a number of ways Ecuadoran growers might in-

crease demand for their cut roses. Among these are (a) to try

to get more consumers to move up-market by buying pre-

mium roses, (b) to promote more rose demand for a different

special day (e.g., roses account for a small percentage of

U.S. flower sales for Christmas/Hanukkah, Thanksgiving,

and Easter/Passover), and (c) to promote sales in relatively

untapped markets, such as the Middle East. Compare these

and any other alternatives you can think of.

6-6. Some countries have found success by promoting the na-

tionality of their products, such as the Juan Valdez campaign

for Colombian coffee. Discuss the viability of a national cam-

paign to promote Ecuadoran roses abroad.

Scan for Endnotes or go to www.pearsonhighered.com/daniels

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the following Assisted-graded writing questions:

6-7 Discuss each of the trade theories that help explain Ecuador’s competitive position in exporting roses.

6-8 Which trade theories do not help explain Ecuador’s competitive position in exporting roses? Why is this so?

Endnotes

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Objectives

After studying this chapter, you should be able to

7-1 Recognize the conflicting outcomes of trade protectionism

7-2 Assess governments’ economic rationales and outcome uncertainties with international trade intervention

7-3 Assess governments’ noneconomic rationales and outcome uncertainties with international trade intervention

7-4 Describe the major instruments of trade control

7-5 classify how companies deal with governmental trade influences

chApteR 7 Governmental influence on trade

Charity begins at home.

—English proverb

Fish farm on Vietnam’s La Ngà River. ▶

Case The U.s.–Vietnamese Catfish Dispute

Catfish, long a part of the U.S. Deep South diet, are the ninth most consumed seafood or fish product in the United States.1 The U.S. industry is centered (accounting for 86 percent of its 2015 pro- duction) in poor areas of two states—Alabama and Mississippi. At its height, it employed about 10,000 people. However, U.S. per capita consumption of fish and seafood has been decreasing (by 11 percent between 2003 and 2013). Further, as catfish imports (mainly from Vietnam) have taken a larger share of the U.S. market (20 percent in 2005 versus 75 percent in 2013), U.S production has fallen. Meanwhile, Vietnam’s industry is also centered in one of its poorer areas, the Mekong Delta. (The opening photo shows a fish farm in southern Vietnam.) The Vietnamese industry em- ploys about 1 million people and accounts for about 2 percent of Vietnam’s economy. The changing competitive situation has spurred the U.S. catfish industry to seek means to limit the impor- tation of Vietnamese catfish. (Map 7.1 shows the production areas in the two countries.)

The Rise of AquAculTuRe

During most of history, marine life grew faster than humans could consume it. However, during the last half century, overfishing has led to many species not being fully replenished, a situation caused by population growth and technology that enables locating and land- ing fish like never before. One factor countering the overfishing has been the rise in aquaculture, or “fish farming,” of which the U.S. and Vietnam industries have been a part. In other words, rather than be- ing caught in the wild in nets or hooked on fish line, most catfish are grown in ponds and harvested when they grow to a certain size. In turn, catfish have ceased to be traditional scavengers; instead, they are fed corn and soybean feed, a change publicized by U.S. catfish growers as they promote sales to consumers who do not want to eat scavenger fish.

The VieTnAmese AdVAnTAge

The U.S. catfish industry has developed largely by converting lands that will no longer grow much cotton, but are high in clay content and hold pumped-in water very well. Meanwhile Vietnam has some competitive advantages that enable it to export to the United States. Its winterless climate permits the fish to grow faster. One of its spe- cies, the tra, can surface to breathe air; thus enabling the fish to grow in greater density. Vietnam’s lack of restrictions (unlike the United States) on the discharge of fishpond waters into rivers also allows for a greater production density. Finally, its lower labor rates are an important factor for filleting and freezing the fish.

The u.s. indusTRy fighTs BAck

Changing Names Alarmed by market losses, U.S. catfish grow- ers’ first defense was to convince Congress to disallow Vietnamese imports to be called “catfish.” Because Vietnamese fish were of a different variety (from about 3,000 catfish varieties found all over the world) than those farmed in the United States, the Vietnamese varieties had to be imported as tra, basa, or pangasius. The U.S. producers reasoned that consumers were not likely to buy some strange-sounding and unknown fish in lieu of catfish. However, the name change did not prevent Vietnamese inroads. One of the prob- lems was that few U.S. locales have truth-in-menu laws. Thus, the names for tra, basa, and pangasius were changed on menus and grocery labels to be “catfish,” a more expensive grouper, or just plain “fish.” Clearly, the U.S. catfish producers needed a different means to stifle the imports.

In the meantime, the U.S. industry’s profits diminished because of increased costs for corn and soybean feed. In order to raise prices and increase demand, an association representing catfish growers, the Catfish Institute, is now promoting a premium catfish with a dif- ferent name—delacata. Basically, the name “catfish” has had a neg- ative connotation for many people, and the Institute noted how name changing had recently helped sales of other previously unpopular fish (e.g., the slimehead became the “orange roughy” and the Patagonian toothfish became “Chilean sea bass”). At this writing, it is too early to tell if the change-of-name strategy will work.

Unfair Competition: Dumping Because the U.S. industry was los- ing jobs and sales, it petitioned for increased taxes on the imported Vietnamese fish, claiming that they were being sold below the cost of production (dumping). Given that Vietnam is a command economy, it was difficult to establish what the true production costs were; how- ever, these were estimated on the basis of Bangladesh production costs, and antidumping taxes (tariffs) of 64 percent were placed on the importation of the fish. Later, the industry succeeded in having estimates based on higher Indonesian costs.

Health Arguments Despite the higher prices, the Vietnamese fish have taken an increasing share of the U.S. market. However, in 2007, the U.S. catfish industry seemed to have found salvation when about 39,000 U.S. dogs and cats were sickened or killed after consuming imported Chinese pet food. This led to a negative attitude toward imported food products in general, especially seafood originating anywhere in Asia. The U.S. catfish farmers responded quickly. First, they publicly implied that imported fish may be contaminated, such as through publicity saying, “U.S. farm-raised catfish: Safety you can trust.” The Catfish Institute convinced several states to require

Chapter 7 Governmental Influence on Trade 185

country-of-origin labeling on food and menus by advocating that consumers have the right to know whether the fish and seafood they buy could be contaminated. The Institute has followed up with videos showing unsanitary areas where Vietnamese catfish are cultivated. However, studies on changes in consumer purchases indicate that these measures have had no effect on demand.

Second, catfish farmers lobbied to increase inspections of fish from Vietnam. Their congressional representatives pointed out that U.S. seafood inspection is of only 2 percent of the imports, whereas the European Union inspection is of about 20 percent. They were successful at burying a provision deep in the 2008 farm bill, which called for the Department of Agriculture—rather than the Food and Drug Administration (FDA)—to be in charge of catfish safety. Basi- cally, the provision required 100 percent inspection at the production source, which is particularly difficult in Vietnam because its highly dispersed fisheries would require an army of inspectors. Further, since Vietnamese imports were no longer called catfish, enforcement had to await amendments in the bill to refer to “catfish-like” prod- ucts. The catfish inspections were never enforced because of budget and other concerns, and the provision was formally revoked in 2012. However, passage of the 2014 farm bill required quarterly inspection of both U.S. and foreign catfish. This inspection was set to begin in

March 2016 and be phased in over an 18-month period. Still, by the start date, there was no agreed upon criteria for what the inspection would be. Vietnamese producers speculated that the criteria would be arbitrary to exclude them from the U.S. market.

The opposiTion

As with most regulatory changes, there has been opposition to the protection of the U.S. catfish industry, mainly along four lines:

1. Although the farm bill’s inspection requirement was ostensibly to protect the health of American consumers, it singled out only catfish-like species without any evidence that these posed more danger than other types of imported fish.

2. The cost of an effective catfish inspection program will be high (e.g., Vietnam exports about 500 tons of catfish to the United States per month). Given budget deficit worries, there is consid- erable opposition.

3. Vietnam is a fast-growing economy with a large population. U.S. exports to Vietnam have been rising steeply. For instance, U.S. farm exports to Vietnam went from $215 million in 2006 to $2.3 billion in 2015. Additional U.S. catfish import restrictions could

mAp 7.1 Areas of major u.s. and Vietnam catfish production The catfish production for both the United States and Vietnam are near deltas of major rivers, the Mississippi and the Mekong respectively. Both areas have a great deal of poverty.

186 part 3 Theories and Institutions: Trade and Investment

jeopardize U.S export sales to Vietnam. Vietnam has threatened to take retaliatory action by buying less U.S. beef, for example.

4. Finally, economic conflicts between the United States and Vietnam could deteriorate political relations between the two. Further, Vietnam might bring charges against the United States in the World Trade Organization (WTO). (Chapter 8 discusses the WTO’s dispute mechanisms.) If Vietnam were to win, the win would likely not only negate the protective catfish mea- sures, but also weaken U.S. efforts to persuade other countries to reduce their trade barriers.

An adage says that if you give a man a fish, he will have food for a day. If you teach him to fish, he will have food for a lifetime.

However, the U.S.–Vietnamese catfish controversy illustrates that knowing how to fish is insufficient in international competition. One also needs to know how to influence and maneuver through a maze of government regulations that affect competition. ■

Questions

7-1. List the advantages and disadvantages for the U.S. protection

of its catfish industry.

7-2. As you read through the chapter, list the protective measures

(instruments) the United States has not used to protect its

catfish industry. Briefly explain why each would or would not

be successful.

conflicTing ouTcomes of TRAde pRoTecTionism At some point, you may be an employee or shareholder in a company whose performance or survival depends on governmental trade practices. These may affect foreign producers’ ability to compete in your home market and your company’s ability to operate abroad. Collectively, governmental actions to influence international trade are known as protectionism.

Restrictions, such as those illustrated in the opening case, are common inasmuch as all countries regulate the flow of goods and services across their borders. Figure 7.1 illustrates the institutions that pressure governments to regulate trade and the subsequent effect on business competitiveness. This chapter reviews the economic and noneconomic rationales for trade protectionism, the major forms of trade controls, and trade control’s effects on com- panies’ operating decisions.

Despite free-trade benefits, governments intervene in trade to attain economic, social, or political objectives. Officials enact trade policies that they reason will have the best chance to benefit their nation and its citizens—and, in some cases, their personal political longevity. Their decisions are complicated because outcomes are uncertain and affect groups of their citizens differently.

All countries seek to influence trade and respond to their economic, social, and political objectives.

ConCept CheCk

Chapter 6 (pages 160–162) demonstrates how specializa- tion and free trade can increase output, but here we point out that protectionist policies, although sometimes war- ranted, can lead to conflicting outcomes.

COUNTRY A

Cultural values, attitudes, and beliefs Political policies and legal practices Economic forces

TRADE ENHANCEMENTS

TRADE RESTRICTIONS

COMPANIES’ COMPETITIVE

ENVIRONMENT

•

• •

COUNTRY B

Cultural values, attitudes, and beliefs Political policies and legal practices Economic forces

•

• •

Figure 7.1 institutional Factors Affecting the Flow of goods and Service In response to a variety of institutional factors (i.e., cultural, political/legal, and economic), governments enact measures designed to either enhance or restrict international trade flows. These measures invariably affect the competitive environment in which companies operate internationally. To an extent, of course, the converse is also true: Companies influence government trade policies that affect their institutions.

Chapter 7 Governmental Influence on Trade 187

The Role of sTAkeholdeRs Proposals on trade regulations often spark fierce debate among people who believe they will be affected—the so-called stakeholders. Of course, those most directly affected are most apt to speak out, such as workers, owners, suppliers, and local politicians whose livelihoods depend on the actions taken. Displaced workers may see themselves as unemployed for the long term or forced to take new jobs in new industries, perhaps even in new towns at lower wages. People threatened in this way tend to voice their views often and loudly.

In contrast, consumer stakeholders typically buy the best product they can find for the lowest price, often without knowing or caring about its origin. They frequently don’t real- ize how much retail prices rise in aggregate because of import restrictions. Nor do they take much notice, since the retail price rises are typically spread out among many people over time and entail a small increase for individual purchases. For example, even if U.S. consum- ers realized that import restrictions cause them to pay more for catfish at restaurants and supermarkets, they would not likely band together to lobby for removal of the restrictions. In effect, their potential gains would be too low in comparison with their efforts.

economic RATionAles foR goVeRnmenTAl TRAde inTeRVenTion And ouTcome unceRTAinTies Governments intervene in international trade for either economic or noneconomic reasons, as shown in Table 7.1. Let’s begin by analyzing some leading economic rationales.

fighTing unemploymenT Probably no pressure group is more effective than the unemployed; no other group has more time and incentive to protest publicly and contact government representatives. Import- displaced workers are often the least able to find alternative work, especially if large numbers are concentrated in small company towns where there are virtually few alternative employ- ment opportunities.2 When they do, they generally earn less than before.3 Moreover, they often need to spend their unemployment benefits to survive in the short term, and they put off retraining because they hope to be recalled to their old jobs. Further, many workers, es- pecially older ones, lack the needed educational background to gain required skills. Or they train for jobs that do not materialize.

What’s Wrong with full employment as an economic objective? Nothing! However, gaining jobs by limiting imports may not fully work as expected. Even if jobs are gained, the costs may be high and must be borne by someone.

The Prospect of Retaliation When restricting imports to create jobs, the countries losing those jobs may retaliate with their own restrictions. Our opening case addressed the concern that Vietnam would respond to more U.S. catfish import restrictions by buying fewer U.S. agricultural products. Thus, unemployment would merely shift from one sector to another.

Those stakeholders most affected by trade regulations push hardest for trade rules favorable to them.

The unemployed can form an effective pressure group for import restrictions.

Import restrictions to create domestic employment

• may lead to retaliation by other countries,

• affect large and small economies differently,

• reduce import handling jobs,

• may decrease jobs in another industry,

• may decrease export jobs because of lower incomes abroad.

TABle 7.1 Why governments intervene in Trade

economic Rationales Noneconomic Rationales Fighting unemployment Maintaining essential industries Protecting infant industries Promoting acceptable practices abroad Promoting industrialization Maintaining or extending spheres of influence Improving comparative position Preserving national culture

188 part 3 Theories and Institutions: Trade and Investment

However, large trading countries are more important in the retaliation process. For instance, China would have more power to retaliate than, say, Mauritius, to U.S. limits on clothing imports. And the United States is less apt to retaliate against Mauritian than Chinese trade restrictions because of the lesser effect on the U.S. economy.

Other Limits on Employment In addition to retaliation, gaining jobs by limiting imports has the following limitations:

1. Fewer imports mean fewer import-handling jobs, such as those in the container-shipping industry, the clearance of goods through customs, and the distribution of the imports.

2. Given the global complexity of production, import restrictions on one industry cause higher input costs for other industries, thus making them less competitive.4 For example, U.S. import restrictions on steel raise input costs in the U.S. automobile and farm equip- ment industries.

3. Imports stimulate exports, though less directly, by increasing foreign income, which for- eign consumers then spend partially on new imports. Thus, restricting earnings abroad has some negative effect on domestic earnings and employment.

Analyzing Trade-Offs Analysis of net changes in employment cannot capture the price of distress suffered by people who lose their jobs through import competition. Nor is it easy for working people to understand that their economic gains through lower prices from freer trade may exceed their higher taxes to support unemployment or welfare benefits for those who lose jobs.

In summary, many groups call for protectionism to increase or protect employment. However, evidence suggests that employment is better dealt with through fiscal and mon- etary policies.

pRoTecTing “infAnT indusTRies” The infant-industry argument holds that a government should shield an emerging indus- try from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own.

underlying Assumptions The infant-industry argument presumes that early operating costs within a newly producing country may be too high to compete in world markets and that sufficient cost reductions will occur over time. Therefore, protection for fledgling companies enables them to gain economies of scale and higher productivity through worker experience.

Risks in designating industries However, production costs may never fall enough to cre- ate internationally competitive products. Inherently, there are problems.

Determining Probability of Success First, governments must identify those industries that have a high probability of success, and this is hard. For example, governmental protection worked for the Brazilian automobile industry, but not for the Malaysian one. Second, the secu- rity of government import protection may deter managers from adopting the cost and quality measures needed to compete. Third, if a protected industry fails to become globally competi- tive, its affected stakeholders may successfully prevent the imports that benefit consumers.

Who Should Bear the Cost? Even if policymakers choose the right industries, some eco- nomic segment must absorb the high early cost before domestic production becomes inter- nationally viable. This burden may fall on consumers who pay higher prices for the protected products or on taxpayers who pay for subsidies. When taxes go for subsidies, governments may be less able to spend to improve overall competitiveness, such as on education and infrastructure. Finally, why rely on governmental assistance? Many entrepreneurs have en- dured early losses to achieve future competitiveness.

The infant-industry argument says that production becomes more competitive over time because of

• increased economies of scale,

• greater worker efficiency.

ConCept CheCk

In Chapter 6 (pages 172–173 in the Point-Counterpoint section), we discuss govern- mental problems to determine what industries to support in a strategic trade policy and the difficulty of removing the support if the industries do not become globally competitive.

Possible costs of import restric- tions include higher prices and higher taxes. Such costs should be compared with those of unemployment.

Chapter 7 Governmental Influence on Trade 189

deVeloping An indusTRiAl BAse Since the industrial revolution, countries increasing their industrial bases grew their employ- ment and economies more rapidly. This observation led to protectionist arguments to spur local industrialization. These arguments have been based on the following assumptions:

1. Surplus workers can increase manufacturing output more easily than agricultural output. 2. Import restrictions lead to foreign investment inflows, which provide jobs in

manufacturing. 3. Prices and sales of agricultural products and raw materials fluctuate widely, which is a

detriment to economies that depend heavily on them, especially if the dependence is on just one or a few commodities.

4. Markets for industrial products grow faster than markets for both agricultural and raw material commodities.

In the sections that follow, we review each of these assumptions.

surplus Workers Disguised unemployment is high in rural areas of many developing countries, where many people effectively contribute little, if anything, to the agricultural output. Consequently, they can move into the industrial sector without significantly reduc- ing agricultural output. This industrialization argument presumes that, although a country may develop an inefficient and non-globally competitive industrial sector, it will achieve eco- nomic growth by enabling the unemployed and underemployed to work in industry.5

Shifting people out of agriculture, however, can create problems:

1. The underemployed in rural areas may lose the safety net of their extended families, while many migrating to urban areas cannot find enough suitable jobs, housing, and social services. For example, although millions of Chinese have moved to cities to find jobs, many have not prospered through the move.6

2. Improved agricultural practices may be a better means of achieving economic success than a drastic shift to industry. Many developed countries continue to profit from ex- ports of agricultural products and maintain high per capita income with a mix of indus- try and efficient agricultural production.

3. Most past manufacturing was performed by relatively unskilled workers and at a time when this output’s proportion of global output and growth exceeded those in other sec- tors (e.g., agriculture, raw materials, and services). Thus, there were ample opportunities in factories for the unskilled labor force who were “fresh off the farm.” However, this situation has changed and is known as premature industrialization. Manufacturing em- ployment has been falling as a portion of total global employment because technology is replacing the need for as many workers, especially unskilled ones. Although there are growing employment opportunities in the service sector, people lacking much education are forced into low-paying service jobs.7

investment inflows Import restrictions, applied to spur industrialization, also may in- crease FDI, which provides capital, technology, and jobs. Barred from exporting to an attrac- tive foreign market, foreign companies may transfer manufacturing to that country to avoid the loss of a lucrative or potential market.

diversification Export prices of many commodities, such as oil and coffee, fluctuate markedly because of weather and technology affecting supply or business cycles affecting demand, thus wreaking havoc on economies that depend on their export. Because many developing countries rely on only one or a few commodities, they are caught in a feast- or-famine cycle, as it were: able to afford foreign luxuries one year but unable to find the funds for essential equipment’s replacement parts the next. However, a greater dependence on manufacturing does not guarantee diversification of export earnings. The population of many developing economies is small; a move to manufacturing may shift dependence from

Countries seek protection to promote industrialization be- cause that type of production

• can use surplus agricultural workers more easily,

• brings in investment funds, • diversifies the economy, • brings faster growth than

primary products do.

When a country shifts from agriculture to industry

• output may increase if the agricultural workers produced little before,

• demands on social and political services in cities may increase,

• development possibilities in the agricultural sector may be overlooked,

• industrial jobs may not be forthcoming.

If import restrictions keep out foreign-made goods, foreign companies may invest to pro- duce in the restricted area.

Although demand and prices for commodities fluctuate markedly, a shift to produc- tion of manufactures creates competitive risk.

190 part 3 Theories and Institutions: Trade and Investment

one or two agricultural commodities to one or two manufactured products, which face com- petitive risks and potential obsolescence.

growth in manufactured goods The quantity of imports that a given quantity of a country’s exports can buy—say, how many bananas Country A must sell to Country B to purchase one refrigerator from Country B—is the terms of trade. Historically, except for short periods, the prices of commodities have not risen as fast as those of finished products.8 Over time, therefore, it takes more low-priced primary products to buy the same amount of high-priced manufactured goods.

Why? First, the quantity of primary products demanded does not rise as rapidly as manufactured products and services, due partly to consumers’ spending a lower percentage of income on food as their incomes rise and partly to raw-material-saving technologies. Second, because commodities are hard to differentiate, they usually must compete on price, whereas the prices of manufactured products can stay high because competition is based more on differentiation.

import substitution and export-led development Traditionally, developing coun- tries fostered industrialization by promoting import substitution—restricting imports to boost local production of products they would otherwise import. In contrast, some coun- tries, such as Taiwan and South Korea, have achieved rapid economic growth by promoting the development of industries with export potential, an approach known as export-led development. In reality, it’s not easy to distinguish between import substitution and export-led development. Industrialization may result initially in import substitution, yet export development of the same products may be feasible later.

economic RelATionships WiTh oTheR counTRies Nations monitor their absolute economic situations and compare their performance to other countries. Among their many practices to improve their relative positions, four stand out: making balance-of-trade adjustments, gaining comparable access to foreign markets, using restrictions as a bargaining tool, and controlling prices.

Balance-of-Trade Adjustments A trade deficit influences reductions in a nation’s ex- change reserves—the funds that help purchase priority foreign goods and maintain the trustworthiness of its currency. So balance-of-trade deficits may cause a government to act to reduce imports or encourage exports. Two options that can affect its competitive position broadly are:

1. Depreciating or devaluing its currency, which makes basically all of its products cheaper in relation to foreign products

2. Relying on fiscal and monetary policy to bring about lower price increases in general than those in other countries

Both of these options take time. Furthermore, they aren’t selective; for instance, they make both foreign essentials and foreign luxury products more expensive. Thus, a country may use protection instead to affect only certain products. Doing so is really a stopgap measure to gain time to address the fundamental competitive situation—the perceived quality, quantity, characteristics, and prices of products—that is causing its residents to buy more abroad than they are selling.

comparable Access or “fairness” The comparable access argument holds that indus- tries are entitled to the same access to foreign markets as foreign industries have to theirs. Economic theory supports this idea when substantial production cost decreases result from economies of scale. Companies that lack equal access to a competitor’s market will be rela- tively disadvantaged in gaining enough sales to be cost-competitive.9

Terms of trade may deteriorate because

• demand for primary products grows more slowly than manufactured ones,

• production cost savings for primary products will be passed on to consumers.

Industrialization emphasizes either

• products to sell domestically or

• products to export.

If domestic producers have less access to foreign markets than foreign producers’ have to their market,

• they may be disadvantaged, • restricting foreign entry

may disadvantage domestic consumers,

• negotiating equal market access for each product is impractical.

Chapter 7 Governmental Influence on Trade 191

Comparable access is also presented from a fairness perspective. For instance, the U.S. government permits foreign financial service firms to operate in the United States, but only if their home governments allow U.S. financial service firms equivalent market access. There are, however, at least two practical reasons for rejecting the idea of fairness:

1. Tit-for-tat market access can lead to restrictions that may deny one’s own consumers lower prices.

2. Governmental negotiation and monitoring of separate agreements for each of the thou- sands of different products and services that might be traded would simply be impractical.

import Restrictions as a Bargaining Tool The threat or imposition of import restrictions may persuade other countries to lower their import barriers or not raise them. The danger is that each country then escalates its restrictions instead, creating, in effect, a trade war that negatively impacts all their economies. Using restrictions successfully as a bargaining tool requires very careful product targeting by considering the following criteria:

• Believability: Either the country has access to alternative sources for the product or its consumers are willing to do without it. The EU successfully retaliated against U.S. import restrictions on clothing by threatening to impose trade restrictions on U.S.-grown soy- beans when Brazil had a surplus.

• Importance: Exports of the restricted product must be significant to influential parties in the producer country. This consideration was emphasized when the United States placed restrictions on imported steel. The EU threatened to restrict apple and orange imports, which would hurt producers in Washington and Florida. Given the importance of these two states in a close presidential election, apple and orange stakeholders quickly con- vinced the United States to remove the steel import restrictions.

export Restrictions Countries that hold a near-monopoly of certain resources sometimes limit their international sale in an effort to raise prices abroad. However, this policy often en- courages smuggling (such as occurs with emeralds and diamonds), the development of tech- nology (such as synthetic rubber in place of natural rubber), or different means to produce the same product (such as caviar from farm-grown rather than wild sturgeons).10 Export controls are especially ineffective for digital products because they are so easily copied abroad.

A country may also limit exports of a product that is in short supply worldwide to favor domestic consumers. Typically, a greater supply drops domestic prices beneath foreign ones. Russia and Argentina have pursued this strategy by limiting exports of food products; India has limited cotton exports to increase supplies for its textile industry, and the United States has curtailed crude-oil exports.11 However, favoring domestic consumers disfavors domestic producers, so they have less incentive to maintain production when prices are low.

Affecting exporters’ prices Import restrictions may aim either to raise or lower export- ers’ prices.

Prevention of Foreign Monopolies There is fear that foreign producers will price their ex- ports so artificially low that they will drive producers out of business in the importing country. If they succeed, there are two potential adverse consequences for the importing economy:

1. The foreign country may be shifting its unemployment abroad by subsidizing the sales. 2. If there are high entry barriers, surviving foreign producers may be able to charge exorbitant

prices. However, for most products competition is so widespread that no country or company can reach such a dominant position. For example, low import prices have eliminated most U.S. production of consumer electronics; still, the United States has some of the world’s low- est consumer electronics prices because so many companies make them in so many countries.

Prevention of Dumping Exporting below cost or below home-country price is dumping. Most countries restrict imports of dumped products, but enforcement usually occurs only if

Successful countries’ threats to levy trade restrictions to coerce other countries to change their policies

• must be believable, • involve products important

to the other countries.

Export restrictions may

• raise world prices, • require more controls to

prevent smuggling, • be ineffective for digital

products, • lead to product substitution

or new ways to produce the product,

• keep domestic prices down by increasing domestic supply,

• give producers less incentive to increase output.

ConCept CheCk

Discussion of neomercantilism in Chapter 6 (page 159) explained that countries may attempt to shift their economic and social problems abroad.

192 part 3 Theories and Institutions: Trade and Investment

the imported product disrupts domestic production; otherwise host-country consumers get the benefit of lower prices and don’t complain. While exporting countries may encourage dumping to improve employment, companies may dump products to introduce them and build a market abroad. Essentially, a low entry price encourages consumers to sample the foreign brand—after which they can charge a high enough price to make a profit.

Companies can afford to dump products if they are subsidized or if they can charge high prices in their home market. Ironically, exporting-country consumers or taxpayers seldom real- ize that they are paying for foreign consumers’ lower prices. An industry that believes it’s com- peting against dumped products may appeal to its government to restrict the imports. However, determining a foreign company’s cost or even its domestic price to middlemen is difficult because of limited access to its accounting records, fluctuations in exchange rates, and the pas- sage of products through layers of distribution before reaching the end consumer. Nevertheless, industries do manage to succeed, (e.g., U.S. steelmakers’ curtailment of Korean steel pipes).12 However, critics claim that governments allegedly limit imports arbitrarily through antidumping restrictions and are slow to dispose of the restrictions if pricing situations change. Companies caught by antidumping restrictions often lose the export market they labored to build.

Invoking the Optimum-Tariff An optimum-tariff theory is one by which a foreign producer lowers its export prices when an importing country places a tax on its products. If this occurs, benefits shift to the importing country because the producer lowers its profits on the export sales.

Let’s examine a hypothetical situation. Assume an exporter has costs of $500 per unit and is selling abroad for $700 per unit. With the imposition of a 10 percent tax on the imported price, the exporter may choose to lower its price to $636.36 per unit, which, with a 10 percent tax of $63.64, would keep the price at $700 in the foreign market. The exporter may feel that a foreign market price higher than $700 would result in lost sales and that a profit of $136.36 per unit instead of the previous $200 is better than no profit at all. Consequently, an amount of $63.64 per unit has shifted to the importing country.

As long as the foreign producer lowers its price by any amount, some shift in revenue goes to the importing country and the tariff is deemed an optimum one. There are many ex- amples of products whose prices did not rise as much as the amount of the imposed tariff. For instance, purveyors of luxury producers have narrowed profit margins in Brazil to help offset import levies and sales taxes.13 However, predicting when, where, and which exporters will voluntarily reduce their profit margins is imprecise. Further, a criticism of the optimum tariff is that developing country exporters reduce payment to their workers rather than absorbing the full impact through a lower profit margin, thus sometimes causing severe hardships.14

goVeRnmenTs’ noneconomic RATionAles And ouTcome foR TRAde inTeRVenTion Although noneconomic arguments are used to influence trade, many of these also have eco- nomic undertones and consequences. However, let’s look at the major noneconomic rationales:

• Maintaining essential industries (especially defense) • Promoting acceptable practices abroad • Maintaining or extending spheres of influence • Preserving national culture

mAinTAining essenTiAl indusTRies Under the essential-industry argument nations apply trade restrictions to protect crucial domestic industries so that they are not dependent on foreign supplies during hostile politi- cal periods. For example, the United States subsidizes domestic silicon production so that its computer-chip makers need not depend on foreign suppliers. (In some cases, countries also

Dumping

• may be used to introduce a new product,

• may cause higher prices or subsidies in the exporting country,

• is hard to prove.

An optimum tariff’s success

• shifts revenue to an importing country,

• is difficult to predict, • may cause lower worker

income in developing countries.

In protecting essential industries, countries must

• determine which ones are essential,

• consider costs and alternatives,

• consider political and economic consequences.

Chapter 7 Governmental Influence on Trade 193

prevent foreign companies from acquiring domestic companies needed for national security; the United States does this through the Committee on Foreign Investment in the United States [CFIUS].) Because of nationalism, defense needs have much appeal in rallying support for import barriers. However, in times of real (or perceived) crisis or military emergency, almost any product could be deemed essential.

The essential-industry argument should not be (but frequently is) accepted without a careful evaluation of costs, real needs, and alternatives. Once given, protection is hard to remove, even when the rationale for protection no longer exists. For instance, the United States subsidized mohair producers for more than 20 years after mohair was no longer es- sential for military uniforms.15

In addition, governments buy and stockpile supplies of essential raw materials that might be in future short supply. For example, the United States stockpiles rare-earth elements because China controls most output and because the military needs them for weapons, jet engines, high-powered magnets, and other gear.16

pRomoTing AccepTABle pRAcTices ABRoAd Governments limit exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies. They also limit exports and imports to compel a foreign country to change some objectionable policy or capability. The rationale is to weaken the foreign country’s economy by decreasing its foreign sales and by limiting its access to needed products, thus coercing it to amend its practices on some issue such as human rights, envi- ronmental protection, military activities, and production of harmful products. Trade limita- tions are often combined with other economic pressures and incentives such as restricting access to bank accounts and cutting off or increasing foreign aid.

The effectiveness of trade sanctions depends on the sanctioned country’s inability to retaliate effectively, secure alternative markets and supplies, and develop a production capa- bility of its own. Our Point-Counterpoint section discusses the pros and cons of sanctions.

Trade limitations may be used to compel a foreign country to amend an objectionable practice.

Yes Let’s face it: We’re now living in a global society where actions

in one country can spill over and affect people all over the world. For instance, the development of a nuclear arsenal in one nation can escalate the damage that terrorists can do elsewhere. The failure of a country to protect endangered species can have long-term effects on the whole world’s environment. We simply can’t sit back and let things hap- pen elsewhere that will come back to haunt us.

At the same time, some pretty dastardly things occur in some countries that most of the world community would like to see stopped: human trafficking for forced prostitu- tion, child slaves to harvest crops, political prisoners given near-starvation diets, to name a few. Even if we can’t stop such occurrences, we have a moral responsibility not to par- ticipate even if it costs us. I may get some economic benefits by buying from criminals, and I may not stop their activity by withholding my business; however, I refuse to deal with them because, in effect, that makes me a criminal’s associate.

Although not all trade sanctions have been successful, many have at least been influential in achieving their ob- jectives. These included UN sanctions against Rhodesia

(now Zimbabwe), U.K. and U.S. sanctions against the Amin government of Uganda, and Indian sanctions against Ne- pal.17 Sanctions against Myanmar helped bring the country to such economic disaster that its military leaders decided democracy was a better route to take.18 Sanctions against Iran helped terminate Iran’s nuclear program, and pressure on Brazil led to greatly reduced cutting of Amazon forests.19

Further, even if sanctions do not completely change behav- ior, they may force countries not to escalate their unaccept- able practices.20

Finally, when a nation breaks international agreements or acts in unpopular ways, what courses of action can oth- er nations take? Between 1827 and World War I, nations mounted 21 blockades, but these are now considered too dangerous. Military force has also been used, for example, during the overthrow of the Saddam regime in Iraq, but such measures have little global support. Thus, nations may take such punitive actions as withholding diplomatic recognition, boycotting athletic and cultural events, seizing the other country’s foreign property, and eliminating foreign aid and loans. These may be ineffective in and of themselves without the addition of trade sanctions.

Should Governments Impose Trade Sanctions?

Point Point

194 part 3 Theories and Institutions: Trade and Investment

no Every time I turn around, I see governments imposing a new

sanction. Some of these cause law-abiding companies to lose revenue that took years to develop. For one, there is a chance of retaliation. Trade sanctions on Russia after its an- nexation of Crimea were costly to Norwegian fish exporters because Russia turned to Chile.21 Thus, the trade sanctions aimed at hurting the Russian government ended up hurting non-Russian companies even though they’d never engaged in any objectionable behavior.

Besides, I really question whether these sanctions even work. When the United States was maintaining its 20-year trade embargo on Vietnam, Vietnamese consumers could still buy U.S. products such as Coca-Cola, Kodak film, and Apple computers through other countries that did not enforce the sanctions.22 The more than 50-year trade embargo with Cuba weakened over time and became ineffective as coun- tries ceased their trade suppression. Oil embargoes against South Africa, because of its racial policies, merely spurred South African companies to become leaders in converting coal to oil.23

Even if trade sanctions succeed at weakening the tar- geted countries’ economies, who really suffers? You can bet that the political leaders will still get whatever they need, so innocent people bear the costs of sanctions. This occurred in Iran, where there were widespread re- ports of deaths because of sanction-induced shortages

of medicine.24 Moreover, the people adversely affected usually blame their suffering not on

their internal regime but on the countries carrying on the sanctions. Despots are very good at manipulating public opinion.25

In addition, critics of sanctioning point to import restric- tions that are not fully effective because they aim too much at curtailing supply rather than demand (e.g., U.S. actions aiming to curtail the production of opiates abroad rather than efforts to restrain U.S. demand). In another example, many countries restrict ivory imports so that countries (mainly African) will limit ivory supplies by protecting ele- phants.26 However, although restrictions may have slowed elephant slaughter, poaching still continues (in the five years between 2010 and 2015, Tanzania and Mozambique lost 60 and 48 percent of their elephants respectively) be- cause of high demand for ivory.27 The below photo shows part of 1.5 tons of imported ivory products seized and de- stroyed by the Belgian government.

Finally, governments sometimes seem to impose trade sanctions based on one issue rather than on a country’s overall record. For instance, some critics have suggested using trade policies to press Brazil to restrict the cutting of Amazon forests, even though its overall environmental record—particularly its limitation of adverse exhaust emis- sions by converting automobile engines to use methanol instead of gasoline—is quite good.

Counterpoint

Should Governments Impose Trade Sanctions? Counterpoint

Photo shows seized ivories and ivory products prior to their destruction in Belgium. Source: Gong Bing/Xinhua/Alamy Stock Photo

▶

Chapter 7 Governmental Influence on Trade 195

mAinTAining oR exTending spheRes of influence Governments use trade to support their spheres of influence—giving aid and credits to, and encouraging imports from, countries that join a political alliance or vote a preferred way within international bodies. For example, the EU and 78 states from Africa, the Caribbean, and the Pacific participate in the Cotonou Agreement that formalizes an array of economic and political ties and economic issues.

pReseRVing nATionAl culTuRe To help sustain a collective identity that sets their citizens apart from other nationali- ties, governments prohibit exports of art and historical items deemed to be part of their national heritage. In addition, they limit imports that may either conflict with or replace their dominant values. The relevance of culture has been confirmed through several UNESCO conventions aimed at preserving cultural diversity, and the concern has been largely focused, but not entirely, on media (print, visual, and audio).28 For instance, many countries, such as Canada and Australia, require levels of national content in media.29 In addition to media, Japan, South Korea, and China maintained for many years an almost total ban on rice imports, largely because rice farming has been a historically cohesive force in each nation.30

mAjoR insTRumenTs of TRAde conTRol In seeking to influence exports or imports, governments’ choice of trade-control instrument is crucial because each may incite different responses from domestic and foreign groups. One way to understand these instruments is by distinguishing between those that directly influence export or import prices and those that directly limit the amount of a good that can be traded. Let’s review these instruments.

TARiffs: diRecT pRice influences Tariff barriers directly affect prices, and nontariff barriers may directly affect either price or quantity. A tariff (also called a duty) is a tax levied on a good shipped internationally. That is, governments charge a tariff on a good when it crosses an official boundary— whether it be that of a nation or a group of nations that have agreed to impose a common tariff on goods crossing the boundary of their bloc. A tariff assessed on a per-unit basis is a specific duty, on a percentage of the item’s value an ad valorem duty, and on both a compound duty.

Tariffs collected by the exporting country are called export tariffs; if they’re collected by a country through which the goods pass, they’re transit tariffs; if they’re collected by import- ing countries, they’re import tariffs. Because import tariffs are by far the most common, we discuss them in some detail.

import Tariffs Unless they’re optimum tariffs (discussed earlier in the chapter), import tar- iffs raise the price of imported goods by taxing them, thereby giving domestically produced goods a relative price advantage. Although consumers are often unaware of the cost increase from tariffs on imports, they learn very quickly when encountering duty-free shops in inter- national airports and at cruise ship stopovers. (See the following photo.)

Tariffs as Sources of Revenue Tariffs also generate governmental revenue, but revenue is of little importance to developed countries because collection costs usually exceed the yield.31 In many developing countries, though, they are a major source of revenue because they are often more easily collected than income taxes. Although revenue tariffs are most commonly

ConCept CheCk

We observe in Chapter 2 (pages 29–30) that a primary function of culture is that it supports a nation’s sense of its uniqueness and integrity.

Tariffs may be levied

• on goods entering, leaving, or passing through a country;

• for protection or revenue; • on a per-unit basis, a value

basis, or both.

196 part 3 Theories and Institutions: Trade and Investment

collected on imports, some countries charge export tariffs on raw materials. Transit tariffs were once a major source of countries’ revenue, but governmental agreements have nearly abol- ished them.

The Effective Tariff Controversy Raw materials (say, coffee beans) from developing countries frequently enter developed countries free of duty; however, if they are pro- cessed (say, instant coffee), developed countries then assign an import tariff. Because an ad valorem tariff is based on the total value of the product (say, 10 percent on a $5 jar of instant coffee), the raw materials and the processing combined (say, $2.50 for the coffee beans and $2.50 for the processing) pays $.50. Developing countries have argued that the effective tariff on the manufactured portion turns out to be higher than the pub- lished tariff rate because the manufactured portion is effectively charged 20 percent. This anomaly further challenges developing countries to find export markets for products that use their raw materials.

nonTARiff BARRieRs: diRecT pRice influences Now that we’ve shown how tariffs raise prices, let’s discuss other ways that governments alter product prices to affect their trade.

subsidies Subsidies offer direct assistance to companies to boost their competitiveness. Although this definition is straightforward, disagreement on what constitutes a subsidy causes trade frictions. In essence, not everyone agrees that companies are being subsi- dized just because they lose money, nor that all types of government loans or grants are subsidies. One long-running controversy involves commercial aircraft. Airbus Industrie and the EU claim that the U.S. national and state governments subsidize Boeing through R&D contracts for military aircraft that also have commercial applications and through the granting of incentives to influence their location decisions. Further, because the U.S. Ex-Im Bank offers loan guarantees to foreign buyers, Delta Air Lines has argued that this gives non-U.S. airlines an advantage not available to U.S. airlines.32 Meanwhile, Boeing and the U.S. government claim that the EU subsidizes Airbus Industrie through low-interest gov- ernment loans.33

Developing countries argue that their processed portion of commodities have higher tariffs than the published rates.

Governmental subsidies may help companies be competitive,

• but there is little agreement on what a subsidy is,

• but agricultural subsidies are difficult to dismantle,

• especially to overcome market imperfections because they are least controversial.

Tourists shopping for duty-free items in St. John’s, Antigua and Barbuda. Source: M.Sobreira/Alamy Stock Photo

▶

Chapter 7 Governmental Influence on Trade 197

An area that may well raise future questions about subsidies is governmental support to shore up floundering companies and industries, especially during global recessions. For instance, governments have bailed out banks, granted generous consumer loans to sup- port their auto companies, eliminated taxes on their companies’ export earnings, and in- vested in an ownership share of key companies. In turn, these actions alter international competitiveness.34

Agricultural Subsidies The one area in which everyone agrees that subsidies exist is agriculture, especially in developed countries. The official reason is that food supplies are too critical to be left to chance. Although subsidies lead to surplus production, they are argued to be preferable to the risk of food shortages. Further, to counter overproduction, the United States pays additional subsidies to farmers so that they do not produce as much.35 However, this official reason does not explain agricultural subsidies for nonfood products, such as U.S. cotton subsidies that Brazil claims to disadvantage its competitiveness.36

The strength of agricultural interests is also important. Within Japan, the United States, and the EU, rural areas have a disproportionately high representation in government decision- making. For instance, Japanese rural interests have been able to force a 778 percent tariff on rice.37 In the United States, there is one senator per 300,000 people in Vermont (a state with a 68 percent rural population) and one senator per 19 million in California (which is 93 percent urban). Agriculture accounts for 38 percent of the EU budget even though it composes only 7 percent of GDP.38 The result is that internal politics effectively prevent the dismantling of such instruments as price supports for farmers, government agencies to improve agricultural pro- ductivity, and low-interest loans to farmers.

What is the effect? Although some developing countries, such as India, are also major agricultural subsidizers, many are deprived from fully serving the developed markets with competitive agricultural products. Further, much surplus production from developed countries is exported at very low prices, thus distorting trade and further disadvantaging developing countries’ production.39

Overcoming Market Imperfections Most countries offer potential exporters many business development services, such as market information, trade expositions, and foreign contacts. This type of subsidization is less contentious than tariffs because the actions seek to overcome, rather than create, market imperfections. Further, collecting and dis- seminating information widely is less costly than if each potential exporter were to work individually.

Aid and loans When governments require foreign aid and loan recipients to spend the funds in the donor country, a situation known as tied aid or tied loans, some other- wise noncompetitive output can compete abroad. For instance, tied aid helps win large contracts for infrastructure, such as telecommunications, railways, and electric power projects.

However, tied aid and loans sometimes require the recipient to use output and sup- pliers that may not be the best. They may also slow the advancement of local suppliers in developing countries. These concerns led OECD members to untie financial aid to devel- oping countries.40 However, China is using tied aid for nearly all its foreign infrastructure projects.41

customs Valuation Import tariff assessments depend on the product, price, and origin— which tempts exporters and importers to declare these wrongly to pay a lower duty and tempts governments to declare wrongly as a protectionist measure.

What Is the Import Worth? Most countries have agreed to use import invoice informa- tion unless customs doubt its authenticity. Agents must then appraise on the basis of the value of identical or similar goods arriving at about the same time.42 Customs must appraise similarly when goods enter for lease rather than purchase because there is no invoice. Critics,

Because it is difficult for customs officials to determine the honesty of import invoices,

• valuation procedures have been developed,

• they may restate the value, • they may question the origin

of and product-classification of imports.

198 part 3 Theories and Institutions: Trade and Investment

especially companies and governmental authorities from exporting countries, complain that agents in importing countries too often use discretionary power to levy higher duties, such as on Philippine cigarettes imported into Thailand.43

What Is the Product? Misclassifying a product (by accident or intentionally) is an easy way to change its corresponding tariff. Administering more than 13,000 categories of prod- ucts (with new products coming onto the market all the time) means a customs agent must use discretion to determine, say, if silicon chips should be considered “integrated circuits for computers” or “a form of chemical silicon.” In our opening case, we saw the controversy over whether the Vietnamese fish are catfish or whether they are basa, tra, or pangasius. The dif- ferences among products in tariff schedules are also minute. For example, the U.S. tariffs on athletic footwear are different from those on sports footwear, and these are subcategorized by whether the sole overlaps the upper part of the shoe or not. Each type of accessory and reinforcement of the shoes’ uppers is a different category.

Although classification differences may seem trivial, the disparity in duties may cost or save companies millions of dollars. Some contentious examples include whether the French company Agatec’s laser leveling device would be used primarily indoors or outdoors,44 whether Marvel’s X-Men Wolverines were toys or dolls, and whether sport utility vehicles— such as the Suzuki Samurai and the Land Rover—were cars or trucks.

Where Does the Product Originate? Because of different trade agreements, customs must determine products’ origins. For example, red meat products may involve animals born in one country, raised in a second, and slaughtered in a third. U.S. Customs requires traders to pro- vide details on these stages of production, thus adding documentation costs above those for meat products of a 100 percent U.S. origin.45 Officials have also uncovered many instances of product transshipment and document falsification to avoid or lessen restrictions. For instance, U.S. Customs fined Staples, OfficeMax, and Target for mislabeling the country of origin of pencils in order to avoid paying antidumping duties assessed on Chinese imports.46

other direct-price influences Countries use other practices to affect import prices, including special fees (such as for consular and customs clearance and documentation), requirements that customs deposits be placed in advance of shipment, and minimum price levels at which goods can be sold after they have cleared customs.

nonTARiff BARRieRs: quAnTiTy conTRols Governments’ regulations and practices affect the quantity of imports and exports directly. Let’s take a look at the various forms these typically take.

quotas A quota limits the quantity of a product that can be imported or exported in a given time frame, typically per year. Import quotas normally raise prices because they (1) limit supplies and (2) provide little incentive to use price competition to increase sales. A notable difference between tariffs and quotas is their effect on revenues. Tariffs generate revenue for the government. Quotas generate revenue only for those companies that obtain and sell a portion of the intentionally limited supply of the product at prices higher than what com- petitive prices would be. (Sometimes governments allocate quotas among countries based on political or market conditions.)

To circumvent quotas, companies sometimes convert the product into one for which there is no quota. For instance, the United States maintains sugar import quotas that result in its sugar prices averaging more than the world market price. As a result, some U.S. candy producers have moved plants to Mexico and Canada where they can buy lower-cost sugar and import the candy duty-free to the United States.47

A country may establish export quotas to provide domestic consumers a sufficient supply of goods at a low price, to prevent depletion of natural resources, or to attempt to raise prices abroad by restricting foreign supply.

A quota may

• be on imports or exports, • set the total amount to be

traded, • allocate amounts by country, • be negotiated as a voluntary

export restraint (VER), • prohibit all trade when it is

an embargo.

Chapter 7 Governmental Influence on Trade 199

Voluntary Export Restraints A voluntary export restraint (VER) is a quota variation whereby, essentially, Country A asks Country B to voluntarily reduce its companies’ ex- ports to Country A. For instance, the United States and Mexico agreed on a VER dealing with Mexican tomato exports.48 The term voluntarily is misleading; typically, either Country B agrees to reduce its exports or else Country A may impose tougher trade restrictions. Procedurally, VERs have unique advantages. They are much easier to switch off than an im- port quota, and the appearance of a “voluntary” choice by a particular country to constrain its shipments can do less damage to political relations than an import quota.

Embargoes A specific type of quota that prohibits all trade is an embargo. As with quotas, a country or group of countries may place embargoes on either imports or exports, on partic- ular products regardless of origin or destination, on specific products with certain countries, or on all products with given countries. Governments impose embargoes in an effort to use economic means to achieve political goals, thus they are a type of trade sanction which we discuss in our Point-Counterpoint section.

“Buy local” legislation Buy local legislation sets rules whereby governments give prefer- ence to domestic production in their purchases. Given the enormity of government sectors in most economies, this preference can be substantial. Sometimes governments, such as the U.S. government, specify a domestic content restriction—that is, a certain percentage of the product must be of domestic origin.49 Sometimes governments favor domestic producers through price mechanisms, such as permitting an agency to buy a foreign-made product only if the price is a predetermined margin below that of a domestic competitor. Sometimes governments favor domestic purchases indirectly, such as the U.S. prohibition of foreign Medicare payments for elderly Americans except in emergency situations—a regulation that limits U.S. foreign purchases in the fast-growing area of medical tourism.

standards and labels Countries can devise classification, labeling, and testing standards to allow the sale of domestic products while obstructing foreign-made ones. Consider prod- uct labels. The requirement that companies indicate products’ origins informs consumers who may prefer buying domestic products. In our opening case, we saw that the U.S. catfish industry sought country-of-origin labeling on fish. Countries also may dictate that com- panies place content information on their packaging, which differs from what is required elsewhere. These technicalities may seem trivial, but they add to a firm’s costs, particularly if the labels must be translated for different export markets. In addition, raw materials, compo- nents, design, and labor increasingly come from many countries, so most products today are of such mixed origin that they are difficult to sort out.

The professed purpose of standards is to protect safety or health, but some companies argue they are just a means to protect domestic producers. For example, some U.S. and Canadian producers have contended that EU regulations and labeling requirements on genetically engineered corn and canola oil are merely means to keep out the products until their own technology catches up.50 In another case, following U.S. publicity about con- taminated Chinese foods, China retaliated by upping its rejection of foodstuffs from the United States, citing contamination with drugs and salmonella.51

In reality, there’s no way of knowing to what extent products are kept out of countries for legitimate safety and health reasons versus arbitrarily protecting domestic production. Rejecting shipments for health and safety reasons, particularly those from developing coun- tries, may cause a negative image for the exporting countries’ other products, causing them to lose sales and lower their export prices.52

specific permission Requirements Countries may require that importers or exporters secure governmental permission (an import or export license) before transacting trade. A company may have to submit samples to government authorities to obtain such a license. The procedure can restrict imports or exports directly by denying permission or indirectly because of the cost, time, and uncertainty involved.

Through “buy local” rules

• government purchases give preference to domestically made goods,

• governments sometimes legislate a percentage of domestic content.

Other types of trade barriers include

• arbitrary standards; • importing, exporting, and

currency licensing; • administrative delays; • reciprocal requirements; • service restrictions.

200 part 3 Theories and Institutions: Trade and Investment

A foreign exchange control requires an importer to apply to a government agency to secure the foreign currency to pay for the product. As with an import license, failure to grant the exchange, not to mention the time and expense of completing forms and awaiting replies, obstructs foreign trade.

Administrative delays Closely akin to specific permission requirements are adminis- trative customs delays that may be caused by intention or inefficiency. In either case, they create uncertainty and raise the cost of carrying inventory. Intentional delays may occur not only to protect domestic producers, but also for political reasons. Japanese companies reported such delays in China after Japan and China clashed over ownership of islands in the East China Sea.53

Reciprocal Requirements Importing countries sometimes require that whole or partial payment be made to exporters in merchandise rather than fully in currency, a transaction known as barter trade. The World Trade Organization estimates that 15 percent of world trade involves some type of barter.54

Countertrade In countertrade or offsets, a government in the importing country requires the exporter to provide it with additional economic benefits such as jobs or technology as part of the transaction. Critics in exporting countries contend that large defense contractors, by participating in these arrangements, shift purchases from smaller domestic contractors to those in foreign countries, thus weakening these domestic suppliers and the exporting coun- try’s future defense capabilities.55

Problems for Exporters Reciprocal requirements necessitate that exporters assess the value and find markets for goods outside their expertise, engage in complicated operating ar- rangements, and undertake activities outside their proficiency. Raytheon, which makes such products as missiles and radar systems, had to undertake shrimp farming to gain a Saudi Arabian contract.56 All things being equal, companies avoid these transactions. However, some have developed competencies in these types of arrangements in order to gain com- petitive advantages. Others rely on specialized companies that handle barter transactions.

Restrictions on services Service is the fastest-growing sector in international trade. In deciding whether to restrict service trade, countries typically consider four factors: essential- ity, not-for-profit preference, standards, and immigration.

Essentiality Governments sometimes prohibit private companies, foreign or domestic, from operating in some sectors because they feel the services are essential and provide social stability. In other cases, they set price controls or subsidize government-owned service or- ganizations that create disincentives for foreign private participation. Some essential services in which foreign firms might be excluded are media, communications, banking, utilities, and domestic transport.

Not-for-Profit Services Mail, education, and hospital health services are often not-for- profit sectors in which few foreign firms compete. When a government privatizes these in- dustries, it customarily prefers local ownership and control.

Standards Some services require face-to-face interaction between professionals and clients, and governments limit entry into many of them to ensure practice by qualified personnel. The licensing requirements include such professionals as accountants, actuaries, architects, electricians, engineers, gemologists, hairstylists, lawyers, medical personnel, real estate brokers, and teachers.

At present, there is little reciprocal recognition in licensing because countries’ occupa- tional standards and requirements differ substantially. Thus an accounting or legal firm from one country faces obstacles in another, even to serve its domestic clients’ needs. The firm

Four main reasons why trade in services is restricted are

• essentiality, • preference for not-for-profit

operations, • different professional

standards, • immigration.

Chapter 7 Governmental Influence on Trade 201

must hire professionals within each foreign country or else have its domestic professionals earn certification abroad. The latter option is problematic because of having to take examina- tions and learn new materials, sometimes in a foreign language. There also may be lengthy prerequisites for taking an examination, such as internships, time in residency, and course- work at a local university.

Immigration Satisfying the standards of a particular country is no guarantee that a foreigner can then work there. In addition, governmental regulations often require an organization— domestic or foreign—to search extensively for qualified personnel locally before it can even apply for work permits for personnel it would like to bring in from abroad.

hoW compAnies deAl WiTh goVeRnmenTAl TRAde influences When companies are threatened by import competition, they have several options, four of which stand out:

1. Move operations to another country. 2. Concentrate on market niches that attract less international competition. 3. Adopt internal innovations, such as greater efficiency or superior products. 4. Try to get governmental protection.

Each option entails costs and risks; therefore, different companies make different choices. For example, competition from Japanese imports spurred the U.S. automobile industry to move some production abroad (such as subcontracting with foreign suppliers for parts), develop niche markets through the sale of minivan and sport utility vehicles (SUVs) that initially had less international competition, and adopt innovations such as lean production techniques to improve efficiency and product quality. They also successfully sought VERs from Japan, and General Motors and Chrysler eventually received substantial government funding to survive.

TAcTics foR deAling WiTh impoRT compeTiTion Granted, these methods are not realistic for every industry or company. Companies may lack the resources to shift their own production or find suppliers abroad. They may not be able to identify more innovative or profitable product niches. Even if they do, foreign competitors may quickly emulate them. In such situations, companies often ask their governments to restrict imports or open export markets.

conVincing decision-mAkeRs Governments cannot try to help every company that faces tough international competition. Likewise, helping one industry may hurt another. Thus, as a manager, you may propose or oppose a particular protectionist measure. Inevitably, the burden falls on you and your company to convince officials that your situation warrants particular policies. You must identify the key decision-makers and convince them by using the economic and noneco- nomic arguments presented in this chapter. You must also put forward the types of restric- tive mechanisms most likely to help your situation and convey to public officials that voters and stakeholders support your position.57

inVolVing The indusTRy And sTAkeholdeRs A company improves the odds of success if it can ally most, if not all, domestic companies in its industry. Otherwise, officials may feel that its problems are due to its specific inefficiencies

ConCept CheCk

In discussing “Factor Mobility” in Chapter 6 (pages 174–175), we explain the increasing reli- ance on people as an inter- nationally mobile production factor and that countries hand out immigration papers only sparingly.

When facing import competi- tion, companies can

• move abroad or find foreign supplies,

• seek other market niches, • make domestic output

competitive, • try to get protection.

202 part 3 Theories and Institutions: Trade and Investment

rather than the general trade challenges. Similarly, involving stakeholders, such as taxpayers and local merchants, can help. Finally, it can lobby decision-makers and endorse the political candidates who are sympathetic to its situation.

pRepARing foR chAnges in The compeTiTiVe enViRonmenT Companies take different approaches to deal with changes in the international competitive environment. Frequently, their attitudes toward protectionism are a function of the invest- ments they have made to implement their international strategy. Those that depend on freer trade and/or have integrated their production and supply chains among countries tend to oppose protectionism. In contrast, those with single or multi-domestic production facili- ties, such as a plant in Japan to serve the Japanese market and a plant in Taiwan to serve the Taiwanese market, tend to support protectionism.

Companies also differ in their confidence to compete against imports. Thus when com- panies recommend protection for their industries, typically one or more companies in that industry oppose it. The opposition usually comes from companies with commanding com- petitive advantages in terms of scale economies, supplier relationships, or differentiated products. Thus, they reason that not only can they successfully battle international rivals, they also stand to gain even more as their weaker domestic competitors fail to do so.58

When trade restrictions change, there are winners and losers among countries, companies, and workers. So it’s probably safe to say that we’ll see mixtures of pushes for freer trade and greater protection.

In addition, consumers’ gains from freer trade may be at the expense of some companies and workers—people who see themselves as big losers. They are not apt to lose without a struggle; they’ll garner as much support for protection as they can, and they may win. The support may well come from alliances that cross national borders, such as clothing companies in various developing nations uniting to push importing countries to enact quota agreements to protect their export markets against

Chinese and Indian competition. Thus, if you are a manager in an industry that may be affected by changes in governmental protection, you must watch closely to predict how the evolving politics may affect your own situation.

Finally, the international regulatory situation is be- coming more, rather than less, complex—a situation that challenges companies to find the best locations in which to produce. These complexities include new products that challenge the task of tariff classifica- tion, Internet services that create new channels of foreign competition, and heightened concerns about terrorism and product safety that compound consid- erations of what can be traded and with whom. ■

Looking to the Future Dynamics and Complexity of Future World Trade

Case

During the 50-year period through 2015, the U.S. life ex- pectancy at birth for males and females increased by 9.1 and 6.8 years respectively. Although there were multiple reasons for this increase, the development and availabil- ity of pharmaceuticals was a significant one. Despite the gains, there has been growing concern about U.S. life ex- pectancy relative to other countries (i.e., ranking only 28th out of 44 countries studied by the OECD). In turn, this gap has led to greater scrutiny of medical services and costs, including pharmaceuticals. On the one hand, the U.S. per capita spending on both health care and pharmaceuticals is the world’s highest. On the other hand, U.S. pharma- ceutical expenses have been rising faster than incomes, and the portion paid by workers has been rising faster than the portion paid by health plans. Further, a Kaiser Family Foundation/New York Times survey found that about a quarter of Americans between 18 and 64 had trouble paying medi- cal bills during 2015. Finally, anecdotes illustrate that some people are not filling their prescriptions because they have insufficient funds.

U.S. Import Regulations There are different ways to categorize pharmaceuticals, such as those approved for U.S. sale versus those that are not and those that have current patented brand names versus those that are generic because they are off-patent. Although there have been numerous proposals to deal dif- ferently with U.S. pharmaceutical imports, we deal with only one type and from one source—prescribed brand- name drugs that are approved for U.S. sales and sold in Canada. In essence, the issues for each category of drugs is different and controversial. For instance, in the United States, the Food and Drug Administration (FDA) is charged with assuring the safety and efficacy of drugs. It does not accept foreign clinical findings for a new drug’s approval. However, critics claim not only that the nonacceptance, say from Germany or Switzerland, is misguided, but that the policy also delays U.S. patients’ treatment with the lat- est advancements.

Since 1987, with the passage of the Prescription Drug Marketing Act, only pharmaceutical manufacturers may im- port their products into the United States. At the same time, these manufacturers sell the same medicines abroad, often at a lower price than in the United States. The lower foreign price has occurred partially because of market conditions and partly because foreign governments, such as in Canada, have negotiated maximum retail prices. In contrast, the U.S. law prohibits the federal or a state government from negoti- ating drug prices. In many cases, the drugs sold in Canada

should U.s. Imports of Prescription Drugs from Canada Be Widened?59

are actually produced and exported from the United States or from a U.S. company’s foreign facility that distributes to multiple countries. For example, the same Pfizer factory in Ireland exports its Lipitor pills to both Canada and the United States. Because non-manufacturers, such as pharmacy chains, are prohibited from importing prescription drugs, they cannot buy the cheaper product in Canada and export it to the United States. Thus, pharmaceutical companies can basically set their U.S. prices. In effect, then, U.S. consumers are subsidizing the purchase of medicines by consumers in other countries.

Although U.S. pharmaceutical companies have an overall record of maintaining justifiable prices, some 2015 incidents demonstrated the risk of excessive price increases of essential drugs when there is little or no domestic competition. Valeant Pharmaceuticals purchased the cardiac drug Nitropress, and immediately tripled the price. Turing Pharmaceuticals acquired and then raised the price overnight of a generic pill (Daraprim) from $13.50 to $750. Turing could do this because Daraprim had no good substitute, was essential for serving a small clien- tele, and had little short-term likelihood of U.S. competition in- asmuch as the cost and time necessary to gain U.S. approval for sales were high. Daraprim was sold widely abroad—, such as in India for five cents a pill and in the United Kingdom for $1.50—, but it was illegal to import it. Subsequent inquiries have turned up other examples of “price gouging” for other medicines, (e.g., Nitroprusside’s price jumping from $44 to $830 a vial).

This discussion does not imply that the United States imports no pharmaceuticals from abroad. In fact, the United States imports more than any other country, $73.2 billion in 2014, which was $24 billion more than Germany, the next- largest importer. Further, busloads of elderly people have long gone regularly to Canada to import drugs into the United States for personal use. This importation is illegal, but it is al- most always overlooked. The only permissible individual U.S. drug importation—and generally for no more than a three- month supply—is when a patient has a serious condition for which no effective treatment or commercialization is available within the United States.

Price Comparisons Most assessments conclude that Canadian prescription drugs may cost 40–60 percent less at the retail level than in the United States. However, comparing overall prices is a problem because prices and sales volumes per drug vary substantially. This hinders predictions of what con- sumers might save by having access to drugs sold in Canada. First, U.S. per capita drug expenditures are highly

204 part 3 Theories and Institutions: Trade and Investment

skewed because about a third of the market value is to treat chronic illnesses that serve only about 1–2 percent of patients. Second, almost 80 percent of U.S. volume sales are for generic products, which account for only 28 per- cent of the market value. Third, U.S. pharmacy drug prices vary substantially. Fourth, drugmakers have list prices, but these are seldom what individual consumers pay because prices vary among insurance companies and between people with and without insurance. In the final analysis, if U.S. consumers were allowed to import their drug sup- plies, they would have to decide on appropriate domestic prices for each medication and then individually compare them with dispensers in Canada.

U.S. consumers with medical insurance, however, are usually more interested in their co-pays than in the prices insurance companies pay for medications. If their co-pays are less than buying in Canada, there is no personal incen- tive to buy there. However, this comparison overlooks the cost to the system. By buying at higher U.S. prices than in Canada, U.S. pharmacies and health insurance companies incur higher costs that get passed on to their customers in the form of insurance costs.

Safety and Counterfeits The FDA assesses drug safety and efficacy, such as by evaluating new drugs’ ability to combat health problems without unacceptable side effects. It also evaluates gener- ics through an “abbreviated new drug application (ANDA)” when competitors want to produce and market a patent- expired drug. This approval is based largely on assessment that the manufacturer can and will produce a medicine with exactly the same attributes as the original. We are largely omitting generic drugs in our analysis because their U.S. prices have been going down to the point that they are gen- erally lower than in Canada, thus they are not a significant issue in the import question.

The Prescription Drug Marketing Act attempted to strengthen an already closed distribution system by put- ting more responsibility on supply chain participants through requiring their maintenance of records for each sale as drugs moved from manufacturer to final consumer. Pursuant to this, the FDA has claimed that there are insuf- ficient resources to halt the shipment of illicit drugs (e.g., medicines arrive by mail and within mislabled shipments from abroad). Further, they cannot adequately check out- lets abroad that produce and distribute pharmaceuticals. For instance, in an operation at three U.S. airports, vir- tually all Internet-ordered shipments (supposedly from Canadian pharmacies) were checked. The FDA found that 85 percent came from 27 other countries. In turn, a large portion of these were unsafe or inadequate to treat the intended illness. This type of problem is global. See the adjacent photo.

Recoupment of Development Costs Pharmaceutical firms may incur hundreds of millions of dol- lars in development costs before a new drug is approved for the market. In addition, many of their research projects reach dead-ends because their approaches do not work or because a competitor usurps the market by entering first. There is no argument that these development costs need to be recouped. But how?

Under the present system, high U.S. prices bear the bur- den of recovering developmental costs. Why not charge the same prices everywhere so that the burden is spread? In ef- fect, the competitive system abroad does not permit this, par- ticularly as governments negotiate prices and put upward lim- its on them. U.S. pharmaceutical companies claim that they will have to greatly reduce their research budgets if they lose the ability to charge high U.S. prices in the inception phase of their new drugs. Importing from Canada (or elsewhere) will counter this ability.

Many suggestions and proposals have been made for low- ering prescriptions’ costs, such as by extending the life of pat- ents and allowing imports to come in from anywhere. Any of these are nearly unique in that they respond to domestic pres- sures to reduce costs rather than to pressures by producers abroad who wish to gain a greater share of the U.S. market.

Questions

7-3. Should the United States legalize the importation of lower cost

pharmaceuticals? If so, should this apply to individual con-

sumers, pharmacies, or other entities?

7-4. If the United States were to permit importation of lower cost

pharmaceuticals from abroad, should this importation apply to

▶ The head of German customs and the chairman of the German Association of Pharmaceuticals scrutinize intercepted counterfeit drugs. Source: dpa picture alliance/Alamy Stock Photo

Chapter 7 Governmental Influence on Trade 205

all foreign countries or a limited number? If a limited number,

which should they be and why?

7-5. If the United States were to permit importation of lower cost

pharmaceuticals from Canada, what safeguards should

be enacted to help assure the safety and efficacy of the

imports?

7-6. If the United States were to permit importation of lower

cost pharmaceuticals from abroad, should this apply to all

pharmaceuticals or just to some? If just to some, what criteria

should be used?

7-7. If pharmacies were allowed to import less costly drugs from

abroad, should regulations be put into effect to pass on some/

all cost savings to consumers? If so, what should they be?

7-8. Consumers seldom propose the reduction of import restrictions

to lower their costs. Why has this occurred for pharmaceuticals

and not for other products?

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the follow- ing Assisted-graded writing questions:

7-9 Discuss the advantages and disadvantages of protectionist policies to domestic industry.

7-10 List and explain some potential outcomes that might occur as a result of the recent lifting of the U.S. embargo with Cuba.

Scan for Endnotes or go to www.pearsonhighered.com/daniels

Endnotes

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Objectives

After studying this chapter, you should be able to

8-1 Define the three major types of international economic integration

8-2 explain what the World trade Organization is and how it is working to reduce trade barriers on a global basis

8-3 summarize the major benefits of regional economic integration

8-4 compare and contrast different regional trading groups

8-5 Describe the forces that affect the prices of commodities and their impact on commodity agreements

Marrying is easy, but housekeeping is hard.

—German proverb

VW’s Skoda Octavia is assembled in the Czech Republic and competes with the Prius.

▶

chapter 8 cross-National cooperation and agreements

http://data.worldbank.org/

Case Toyota’s european Drive Anna Kessler put the key into the ignition of her brand-new Toyo- ta Yaris, started the engine, and began to navigate her way home from work through the crowded streets of Berlin, Germany.1 Having owned the car for just over a week, she was already satisfied with her decision. She liked the car’s distinctive European look, the gener- ous warranty it had come with, and its low fuel consumption.

Her decision the previous week marked the first time Anna had ever owned a vehicle manufactured by an Asian company; in fact, it was the first time she had considered one. When she had made her last car purchase, the thought of buying a car from Toyota—then known for its lackluster designs, limited options, and seven-month- long waiting lists—had not even entered her mind. However, as she was researching different vehicles, she found that Toyota had ranked the highest in several categories in a recent quality survey and that the Yaris had achieved an outstanding four-star Euro NCAP safety rating, which led her to investigate the car more thoroughly.

With her purchase, Anna became another one of the millions of Toyota vehicle owners located around the globe. Toyota, the largest auto manufacturing company in the world, sells vehicles in 170 coun- tries and regions, has 54 manufacturing companies in 28 countries and regions outside of Japan, and has R&D facilities worldwide. In Europe Toyota has manufacturing facilities in six countries, including France where the Yaris is manufactured. It also has R&D facilities in Belgium, the U.K., Germany, and France.

So why has it taken Toyota so long to crack into the competitive European market, and why are European companies only now begin- ning to feel the pressure from Asian manufacturers? Many analysts have pointed to an agreement between the Japanese government and the European Community (predecessor to the European Union) in which the two negotiated a quota each year for the number of Japanese cars imported into Europe. The quota amounts agreed upon each year depended on such factors as the level of consumer demand and sales growth in the region and were fixed at 11 percent of the European market.

The arrangement was set up to allow European carmakers to become more competitive as the EC made the transition to a com- mon market; previously, several independent European nations had their own import and registration restrictions on Japanese cars. Italy, for example, limited the number of imported Japanese vehicles to 3,000, while France kept them at a 3 percent share of its market. Britain, Spain, and Portugal imposed similar restrictions. This policy goes back to the end of World War II when the Japanese govern- ment asked the European automakers to curtail exports to Japan to help the nation rebuild its industry. The Europeans reciprocated by limiting the access of Japanese autos to their market. At the time, that wasn’t a problem. However, when the Japanese auto companies

became export conscious, they wanted access to the European mar- kets. The quota system helped protect the domestic industry.

Under the new system, these countries had to abandon their indi- vidual policies, but French carmakers fought to include an 80 percent local-content rule and an allowance to export 500,000 cars a year to Japan, five times the then-current level. In the end, the EC disregard- ed these additional requests, and in the first year of the agreement, 1.089 million Japanese cars were allowed to be imported.

The quota, however, also fixed separate caps for each partici- pating country and then divided this amount among the Japanese automakers according to their historical market shares. The caps es- sentially prevented the Japanese from being able to transfer their excess imports from countries where their quotas weren’t being met to ones where they were unable to meet demand due to having al- ready reached the maximum limits. It was primarily for this reason that they never actually met their quota for the EC; during the seven years the quota system was in effect, Toyota was held to a 2 to 3 percent market share in most EU countries.

Although the system seemed to be having the desired effect, even some French auto officials admitted that the eventual opening of the market was inevitable. One noted, “Can we put off change for years? Officially, yes. But honestly, I don’t think so.” That state- ment proved prophetic when the EU lifted the import quota in 1999 and made it easier for the Japanese auto manufacturers to expand distribution and sign up dealers. Although this move did not neces- sarily cause the Japanese to flood the European market with their products, it did open the way for them to invest more heavily in de- sign and manufacturing facilities in the EU, to broaden the range of products they marketed there, and to customize their offerings to better appeal to European tastes.

Toyota responded to the drop in barriers by introducing a new strategy of designing vehicles targeted specifically at European cus- tomers. This involved setting up a European Design and Development center in southern France and allowing design teams across the globe to compete for projects. The Yaris, Toyota’s best-selling vehicle in the EU, was designed by a Greek and was the first to be developed within the region. It subsequently was named Car of the Year in both Europe and Japan. As another key element of its European strategy, Toyota set up additional production centers in the region.

The collapse of the auto industry in Europe has been hard on all manufacturers, which is one reason for Toyota’s investment in Russia. In addition, Japanese competitors continue to open up fa- cilities in the Eastern bloc countries recently admitted to the EU. As noted above, Toyota has already set up state-of-the-art production plants in the Czech Republic and Poland. Because of the elimination of internal tariffs in the EU, Toyota can manufacture automobiles and

Chapter 8 Cross-National Cooperation and Agreements 209

parts anywhere within Europe and ship them to all markets duty-free. Riding on its success in Europe in the mid-2000s and its growth internationally, Toyota had ambitious goals for the future. However, the global financial crisis and the ongoing difficulties posed by inter- national recalls of more than 9.5 million vehicles have put a crimp in those plans. In addition, the 2011 earthquake and tsunami in Japan severely disrupted Toyota’s supply chain. However, Toyota began to recover sales and revenues in 2012, but the strong yen hampered the company’s ability to export and depressed earnings from its for- eign operations. By 2015, Toyota had only 4.2 percent of the Euro- pean market, well behind market leader VW with 24.9 percent.

Toyota is continuing its push to increase its share of the Euro- pean market by restructuring its Brussels-based European division, including transferring more decision-making power from Japan, and

focusing on the values of European consumers. This includes placing renewed focus on hybrid technology in Europe, in which the company still retains a comparative advantage over its global rivals. In 2012, Toyota introduced a hybrid engine for the Yaris, giving Anna Kessler and other potential Yaris customers access to hybrid technology. ■

Questions

8-1. Why did the Europeans try to protect their auto industry from

Japanese imports, and do you think this was fair to European

consumers?

8-2. What has Toyota done to be more successful in Europe, and

why do you think it hasn’t been more successful? What else

can it do?

Forms oF Economic intEgration In the mid- to late 1940s, many nations decided that if they were going to emerge from the wreckage of World War II and promote economic growth and stability within their borders, they would have to assist—and get assistance from—nearby countries. How do nations and regions combine forces to give and gain the assistance they need to prosper together?

Economic integration is a term used to describe the political and monetary agreements among nations and world regions in which preference is given to member countries. There are three major ways to approach such agreements:

• Global integration—Countries from all over the world decide to cooperate through the World Trade Organization (WTO)

• Bilateral integration—Two countries decide to cooperate more closely together, usually in the form of tariff reductions

• Regional integration—A group of countries located in the same geographic proximity decide to cooperate, as with the European Union

Trade groups, whether global, bilateral, or regional, are an important influence on MNE strategies. They can define the size of the regional market and the rules under which a com- pany must operate. In fact, an increase in market size is their single most important reason for existing.2 A company in the initial stages of foreign expansion must be aware of how the groups encompass countries with good manufacturing locations or market opportuni- ties. Recall from our opening case that Toyota has been able to find success in Europe by taking advantage of changes in EU policy that allow it to adjust its design and production strategies to meet the unique needs of European consumers. Similarly, in the ending case we’ll see how NAFTA affected Walmart’s expansion into Mexico and Central America. Thus, as a company expands internationally, it must change its operating strategies to continually benefit from these alliances.

MNEs are interested in regional trade groups because they tend to be regional as well. Although MNEs operate worldwide, they usually generate a large percentage of their rev- enues in their home regions.3 Additional research has shown that a 1 percent increase in physical distance results in a 1 percent decrease in trade and that a common border between two countries is likely to increase trade flows by 80 percent. This provides further evidence that firms are likely to generate a reasonably high percent of revenues from their home re- gions.4 However, companies that sell in their own region are also interested in trade agree- ments with other regions.

ConCept CheCk

Recall from Chapter 6 (page 177) our discussion of the ways in which the mobil- ity of capital, technology, and people affects a country’s trade and the relative competitive positions of domestic firms and industries. Imbalances in the mobility of factors of produc- tion are often addressed in strategies for cross-national integration.

Approaches to economic integration—political and economic agreements among countries in which preference is given to member countries— may be

• bilateral, • regional, • global.

210 part 3 Theories and Institutions: Trade and Investment

thE World tradE organization—global intEgration

gatt: PrEdEcEssor to thE Wto In 1947, 23 countries formed the General Agreement on Tariffs and Trade (GATT) under the auspices of the United Nations to abolish quotas and reduce tariffs. By the time the WTO replaced GATT in 1995, 125 nations had become members. Many believe that GATT’s contri- bution to trade liberalization enabled the expansion of world trade in the second half of the twentieth century.

trade Without discrimination The fundamental principle of GATT was that each mem- ber nation must open its markets equally to every other member nation. This principle of “trade without discrimination” was embodied in GATT’s most-favored-nation (MFN) clause—once a country and its trading partners had agreed to reduce a tariff, that tariff cut was automatically extended to every other member country, irrespective of whether the country was a signatory to the agreement.

Over time, GATT grappled with the issue of nontariff barriers in terms of industrial stan- dards, government procurement, subsidies and countervailing duties (duties in response to another country’s protectionist measures), licensing, and customs valuation. In each area, GATT members agreed to apply the same product standards for imports as for domestically produced goods, treat bids by foreign companies on a nondiscriminatory basis for most large contracts, prohibit export subsidies except on agricultural products, simplify licensing proce- dures that permit the importation of foreign-made goods, and use a uniform procedure to value imports when assessing duties on them.

Then GATT slowly ran into problems. Its success led some governments to devise craftier methods of trade protection. World trade grew more complex, and trade in services—not covered by GATT rules—grew more important. Procedurally, GATT’s institutional structure and its dispute-settlement system seemed increasingly overextended. Moreover, it could not enforce compliance with agreements. These market trends and organizational challenges made trade agreements harder to work out. Restoring an effective means for trade liberaliza- tion led officials to create the World Trade Organization (WTO) in 1995.

What doEs thE Wto do? The WTO adopted the principles and trade agreements reached under the auspices of GATT but expanded its mission to include trade in services, investment, intellectual prop- erty, sanitary measures, plant health, agriculture, and textiles, as well as technical barriers to trade. Its 162 members collectively account for most of the world trade. The entire member- ship makes significant decisions by consensus. However, there are provisions for a majority vote in the event of a nondecision by member countries. Agreements then must be ratified by the governments of the member nations, which can be politically challenging in the member countries.

most Favored nation The WTO continued the MFN clause of GATT, which implies that member countries should trade without discrimination, basically giving foreign products “national treatment.” Although the WTO restricts this privilege to official members, some exceptions are allowed, especially for developing countries or countries that are part of a regional or bilateral trading group.

dispute settlement One function of the WTO that is garnering growing attention is the organization’s dispute settlement mechanism, in which countries may bring charges of un- fair trade practices to a WTO panel, and accused countries may appeal. There are time limits on all stages of deliberations, and the WTO’s rulings are binding. If an offending country fails

ConCept CheCk

In Chapter 7 (page 195), we define a tariff as the most common type of trade control and describe it as a “tax” that governments levy on goods shipped internationally. Here we emphasize the fact that tariff bar- riers affect the prices of goods that cross national borders.

ConCept CheCk

In Chapter 7 (page 233), we ex- plain that, in principle, no coun- try allows an unregulated flow of goods and services across its borders; rather, governments routinely influence the flow of imports and exports. We also observe that governments directly or indirectly subsidize domestic industries to help them compete with foreign producers, whether at home or abroad. (In Chapter 1, we list the motivations for govern- ments to engage in cross- national agreements—indeed, to cooperate at all.)

ConCept CheCk

In discussing “Nontariff Barriers” as instruments of trade control in Chapter 7 (page 196), we include sub- sidies, which we describe as direct government payments made to domestic companies, either to compensate them for losses incurred from selling abroad or to make it more prof- itable for them to sell overseas.

The World Trade Organization is the major body for

• reciprocal trade negotiations,

• enforcement of trade agreements.

Chapter 8 Cross-National Cooperation and Agreements 211

to comply with the panel’s judgment, its trading partners have the right to compensation. If this penalty is ineffective, then the offending country’s trading partners have the right to impose countervailing sanctions. However, the effectiveness of this system is under serious debate, given the ambiguity and time-consuming nature of certain cases.

rEgional Economic intEgration

bilatEral agrEEmEnts Even though bilateral trade agreements are simpler than trying to forge a deal with the WTO, no trade agreement is easy. An example of a bilateral agreement is the U.S.–Colombia Trade Promotion Agreement, which is a free trade agreement and not a customs union. It also in- cludes provisions for gaining better access for U.S. investors and service providers as well as commitments to protect labor rights and the environment in Colombia, two key provisions to gain political support in the United States to sign the agreement.

Regional trade agreements are reciprocal pacts between two or more partners that lie somewhat between bilateral treaties and the WTO. Some of the best known RTAs are the European Union, the North American Free Trade Agreement (NAFTA), and the ASEAN (Association of Southeast Asian Nations) Free Trade Area (AFTA).

gEograPhy mattErs It’s logical that most trade groups contain countries in the same area of the world. Neighboring nations tend to ally for several reasons:

• The distances that goods need to travel are short. • Consumers’ tastes are likely to be similar, and distribution channels can easily be

established.

Neighboring countries may have common histories and interests, and they may be more willing to coordinate their policies than non-neighbors.5 Even though geographic proximity is a major factor leading to RTAs, this is not the case for all agreements. India has a number of trade agreements with most of the countries in its region, but also with Finland, Japan and Korea; Germany exports and imports about 58 percent of its merchandise to other EU members; Switzerland, which is not a member of the EU but which has a trade agreement with it, shares more than half its exports and imports with EU countries; and NAFTA includes Canada and Mexico, both of which share a common border with the United States. The Canada–Israel RTA, on the other hand, is certainly not based on geographic proximity, nor is the U.S.–Korea FTA.

Geography matters for a number of reasons in the case of RTAs. Neighboring countries often share a common history, language, culture, and currency. Unless the countries are at war with each other, they have usually developed trading ties already. Close proximity re- duces transportation costs, thereby making traded products cheaper in general. In fact, as physical distance between two countries increases by 1 percent, international trade drops by 1.1 percent. On the other hand, trade is likely to rise by 80 percent between countries with a common border, 200 percent with a common language (such as English between Canada and the United States), and 340 percent with a common currency (such as the euro for coun- tries in the EU that have adopted it). Another strong incentive for geographically close coun- tries to establish an RTA is that trade among bloc members is likely to rise by 330 percent once an agreement is established.6

As noted earlier, the major reason to establish a regional trade group is to increase mar- ket size. There are two basic types of RTAs from the standpoint of tariff policies; however, many agreements (especially agreements involving the United States) go beyond the liberal- ization of tariffs to include such issues as intellectual property, foreign direct investment, and

ConCept CheCk

In Chapter 7 (page 186), we show how the imposition of import restrictions can be used as a means of persuading other countries to lower import barri- ers. Here we point out that the same practice can also be used to punish nations whose policies fail to comply with provisions of the WTO or other agreements.

Bilateral agreements can be between two individual countries or may involve one country dealing with a group of other countries.

Regional trade agreements— integration confined to a region and involving more than two countries.

ConCept CheCk

In discussing geographic dis- tance in Chapter 6 (page 168), we observe that because greater distances ordinarily mean higher transportation costs, geographic proximity usually encourages trade co- operation. In the same chapter, we explain country similarity theory by showing that once a company has developed a new product in response to conditions in its home market, it will probably try to export it to those markets that it regards as most similar to its own.

Geographic proximity is an important reason for economic integration.

Major types of economic integration:

• Free trade area—no internal tariffs.

• Customs union—no internal tariffs plus common external tariffs.

• Common market—customs union plus factor mobility.

212 part 3 Theories and Institutions: Trade and Investment

services. From the standpoint of tariff reduction, the two main types of agreements are free trade agreements and customs unions.

• Free Trade Agreement (FTA) The goal of an FTA is to abolish all tariffs between member countries. It usually begins modestly by eliminating them on goods that already have low tariffs, and there is usually an implementation period during which all tariffs are elimi- nated on all products included in the agreement. Moreover, each member country main- tains its own external tariffs against non-FTA countries. About 90 percent of the RTAs identified by the WTO are free trade agreements.

• Customs Union In addition to eliminating internal tariffs, member countries levy a com- mon external tariff on goods being imported from nonmembers in order to establish a customs union. For example, when the EU was organized in 1957, it began to remove internal tariffs among member states, but in 1967 it eliminated the remaining internal tariffs and established a common external tariff, meaning that goods shipped into one member country from abroad are free from tariffs in the rest of the member countries. Now the EU negotiates as one region in the WTO and other regional and bilateral agree- ments rather than as separate countries.

Common Market Beyond the reduction of tariffs and nontariff barriers, countries can enhance their cooperation in a variety of other ways. The EU also allows free mobility of production factors such as labor and capital. This means that labor, for example, is generally free to work in any country in the common market without restriction. Adding free mobility of production factors to a customs union results in a common market. In addition, the EU has harmonized its monetary policies through the creation of a common currency, complete with a central bank. This level of cooperation creates a degree of political integration among member countries, which means they lose a bit of their sovereignty.

thE EFFEcts oF intEgration Regional economic integration can affect member countries in social, cultural, political, and economic ways. Initially, however, our focus is on its economic rationale. As we noted in Chapter 6, the imposition of tariff and nontariff barriers disrupts the free flow of goods, af- fecting resource allocation.

static and dynamic Effects Regional economic integration reduces or eliminates those barriers for member countries, producing both static and dynamic effects. Static effects are the shifting of resources from inefficient to efficient companies as trade bar- riers fall. Dynamic effects are the overall growth in the market and the impact on a company caused by expanding production and by its ability to achieve greater economies of scale. Figure 8.1 shows how RTAs result in static and dynamic effects on trade and investment flows.

Static effects may develop when either of two conditions occurs:

1. Trade Creation: Production shifts to more efficient producers for reasons of comparative ad- vantage, allowing consumers access to more goods at lower prices than would have been possible without integration. Companies protected in their domestic markets face real problems when the barriers are eliminated and they attempt to compete with more ef- ficient producers. The strategic implication is that companies that were unable to export to another country—even though they might be more efficient than producers there—are now able to export when the barriers come down, creating more demand for their prod- ucts and less for the protected ones. Investment also might shift to countries that are more efficient or that have a comparative advantage in one or more factors of production.

2. Trade Diversion: Trade shifts to countries in the group at the expense of trade with other countries, even though the nonmember companies might be more efficient in the ab- sence of trade barriers.

Regional integration has social, cultural, political, and economic effects.

Static effects of integration— the shifting of resources from inefficient to efficient compa- nies as trade barriers fall.

Dynamic effects of integration— the overall growth in the market and the impact on a company caused by expanding produc- tion and by the company’s ability to achieve greater economies of scale.

ConCept CheCk

In Chapter 7 (page 161), we de- fine comparative advantage as the theory that global efficiency gains may result from trade if a country specializes in those products it can produce more efficiently than other products (regardless of whether other countries can produce the same products even more efficiently).

Trade creation—production shifts to more efficient produc- ers for reasons of comparative advantage.

Trade diversion—trade shifts to countries in the group at the expense of trade with coun- tries not in the group.

Chapter 8 Cross-National Cooperation and Agreements 213

Economies of Scale Dynamic effects of integration occur when trade barriers come down and markets grow. Because of that growth, companies can increase their produc- tion, which will result in lower costs per unit—a phenomenon we call economies of scale. Companies can produce more cheaply, which is good because they must become more efficient to survive. This could result in more trade between the member countries (trade creation) or an increase in investment in the region by local or foreign companies as the market grows.

Increased Competition Another important effect of an RTA is greater efficiency due to increased competition. Many MNEs in Europe have attempted to grow through mergers and acquisitions to achieve the size necessary to compete in the larger market. Companies in Mexico were forced to become more competitive with the passage of NAFTA due to compe- tition from Canadian and U.S. companies. This could result in investment shifting from less efficient to more efficient companies, or it could result in existing companies becoming more efficient.

major rEgional trading grouPs MNEs are interested in regional trading groups for their markets, sources of raw materials, and production locations. The larger and richer the new market, the more likely it is to attract the attention of the major investor countries and companies. In addition, it is important to understand how the reduction of tariffs and other barriers improves access to countries in the region. Table 8.1 compares the GDP, population, and per capita GNI of three regional trade groups to give you an idea of how different they are in size. Pick just one country in each group, such as Ireland in the EU, Mexico in NAFTA, and Vietnam in ASEAN, and notice how small their national market would be compared with how big their market opportuni- ties are in their regional trade group.

Economies of scale—the average cost per unit falls as the number of units produced rises; occurs in regional inte- gration because of the growth in the market size.

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Investment shifts from less ecient to more ecient firms, possibly leading to foreign direct investment (FDI)

FDI increases from firms outside the free trade agreement to avoid barriers

Home-country firms increase FDI to achieve economies of scale

Figure 8.1 impact of Free Trade Agreements When economic integration reduces or eliminates trade barriers, the effects on the nations involved may be either static or dynamic. Static effects apply primarily to trade barriers themselves—for member countries they go down, and for nonmembers they go up. Dynamic effects, on the other hand, apply to economic changes affecting the newly structured market—not only does the market expand, but so do local companies, which take advantage of the larger market.

214 part 3 Theories and Institutions: Trade and Investment

thE EuroPEan union The largest and most comprehensive regional economic group is the European Union (EU). It began by gradually abolishing internal tariffs but eventually established an ex- ternal tariff while integrating in other ways such as facilitating the free movement of workers, establishing a common agricultural policy, and agreeing on a value-added tax system. The formation of the European Parliament and the establishment of a common currency, the euro, make the EU the most ambitious of all the regional trade groups.7 Table 8.2 summarizes its key milestones, while Map 8.1 identifies its members and other key European groups.

The European Union:

• Changed from the European Economic Community to the European Community to the European Union

• The largest and most successful regional trade group

• Free trade of goods, services, capital, and people

• Common external tariff • Common currency

tablE 8.1 comparative statistics by trade group

Source: Based on information from http://data.worldbank.org/ (accessed on March 5, 2016); http://www.asean.org/ (accessed on March 5, 2016). The data for the EU includes the United Kingdom, which voted to leave the EU in 2016l

Population in Millions (2014)

GDP Trillions of $ (2014)

Per Capita GNI in $ (2014)

European Union (EU) 508.3 18.5 35,718 North American Free Trade Agreement (NAFTA) 479.84 20.5 42,723 ASEAN Free Trade Area (AFTA) 622 14.3 4,136

tablE 8.2 European union milestones

From its inception in 1957, the EU has been moving toward complete economic integration. The initial six members were Belgium, Germany, France, Italy, Luxembourg, and the Netherlands.

Source: Europa, “The History of the European Union,” at http://europa.eu/about-eu/index_en.htm (accessed March 5, 2016)

1959 The first steps are taken in the progressive abolition of customs duties and quotas within the EEC (European Economic Community). The European Coal and Steel Community established in 1951 gave way to a broader vision of economic integration.

1960 The Stockholm Convention establishes the European Free Trade Association (EFTA) as a free trade alternative to the EU. Now, only four countries remain: Iceland, Norway, Liechtenstein, and Switzerland.

1961 The first regulation on free movement of workers within the EEC comes into force. 1962 The Common Agricultural Policy is adopted. 1966 Agreement is reached on a value-added tax (VAT) system; a treaty merging the Executives of

the European Communities comes into force; and the EEC changes its name to European Community (EC).

1967 All remaining internal tariffs are eliminated, and a common external tariff is imposed. 1973 Denmark, Ireland, and the United Kingdom become members 7, 8, and 9 of the EC. 1981 Greece becomes the 10th member of the EC. 1986 Spain and Portugal become the 11th and the 12th members of the EC. 1990 East and West Germany unite. 1992 Agreement to change the EC to the European Union is adopted in 1992 and implemented in

1993. 1995 Austria, Finland, and Sweden become the 13th, 14th, and 15th members of the EU. 1996 An EU summit names the 11 countries that will join the European single currency with all EU

countries joining except Britain, Sweden, Denmark (by their choice), and Greece (not ready). 1999 The euro, the single European currency, comes into effect (January 1, 1999). Coins and notes

enter circulation on January 1, 2002. 2001 Greece becomes the 12th country to adopt the euro. 2004–2016 Admission of 10 new member countries. Bulgaria and Romania join in 2007, and Croatia joins

in 2013, raising the membership to 28. Candidate countries as of 2016 are Croatia, Former Yugoslav Republic of Macedonia, and Turkey. The UK voted to exit the EU in 2016, but it will take two years to finalize the exit strategy.

http://www.asean.org/

http://europa.eu/about-eu/index_en.htm

Chapter 8 Cross-National Cooperation and Agreements 215

Predecessors Because of the economic and human destruction left by World War II, European political leaders realized that greater cooperation among their countries would help speed up recovery. Many organizations were formed, including the European Economic Community (EEC), which eventually emerged as the organization that would bring together the countries of Europe into the most powerful trading bloc in the world. Several other coun- tries, including the United Kingdom, formed the European Free Trade Association (EFTA) with the limited goal of eliminating internal tariffs. But most of those countries eventually became part of the EU. Those that have decided not to leave EFTA (Iceland, Liechtenstein, Norway, and Switzerland) still have a free trade agreement with each other. All but Switzerland are part of the European Economic Area, which provides them access to the “four freedoms” of the EU: the free movement of goods, services, persons, and capital. However, it does not in- clude other areas of cooperation, such as a customs union and monetary union.8

organizational structure The EU encompasses many governing bodies, among which are the European Commission, European Council, European Parliament, European Court of Justice, and European Central Bank.9

To be successful in Europe, MNEs need to understand the EU’s governance process, just as they need to understand the governance process of each individual European country in which they invest or do business. These institutions set parameters within which companies must operate, so management needs to understand the institutions and how they make

European Free Trade Association—FTA involving Iceland, Liechtenstein, Norway, and Switzerland, with close ties to the EU.

ConCept CheCk

In Chapter 6 (page 164), we discuss the theory of country size, which holds that large countries usually depend less on trade than small countries. The same principle tends to be true of economic blocs, and here we point out that regional integration is one way to achieve the size necessary to reduce members’ dependence on trade.

European Economic Area (EEA) All members of the EU Iceland Norway Liechtenstein

Members of the European Union: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom

EU Candidate Countries: Albania, Montenegro, Serbia, …e Former Yugoslav Republic of Macedonia, Turkey

Members of the European Free Trade Association (EFTA): Iceland, Norway, Liechtenstein, Switzerland

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maP 8.1 European trade and Economic integration Although the 28-member EU is easily the dominant trading bloc in Europe, it’s not the only one. Founded in 1960, the four-member European Free Trade Association (EFTA) also maintains joint free trade agreements with several other countries. The European Economic Area (EEA) includes three members of the EFTA and all members of the EU.

216 part 3 Theories and Institutions: Trade and Investment

decisions that could affect corporate strategy. This is because even though all of the countries are a part of the same trade agreement, there are still individual differences that need to be understood and planned for.

Key Governing Bodies The European Commission provides the EU’s political leader- ship and direction. It is composed of commissioners nominated by each member govern- ment and approved by the European Parliament for five-year terms of office. The president of the commission is nominated by the member governments and approved by the European Parliament. The commissioners run the different programs of the EU on a day-to-day basis rather than serve as representatives of their respective governments. The commission drafts laws that it submits to the European Parliament and the Council of the European Union.

The European Council is composed of representatives of each member country whose interests it represents. Along with the European Parliament, the council is responsible for pass- ing laws and making and enacting major policies, including those in the areas of security and foreign policy. The respective ministers of each country meet periodically to discuss the issues facing those ministries (e.g., ministers of agriculture meet to discuss issues facing agriculture). The presidents and/or prime ministers meet up to four times a year to set broad policy.

The European Parliament is composed of 751 members from all member nations; they are elected every five years, and membership is based on country population. Its three major responsibilities are legislative power, control over the budget, and supervision of ex- ecutive decisions. Members are grouped by political affiliation (such as Christian Democrats, greens, etc.) rather than by nationality. The commission presents community legislation to the Parliament, which must approve the legislation before it is submitted to the council for adoption.10

The Court of Justice ensures consistent interpretation and application of EU treaties. Member states, EC institutions, and individuals and companies may bring cases to the Court, which serves as an appeals court for individuals, firms, and organizations fined by the com- mission for infringing treaty law.11

antitrust investigations The EU has been very aggressive in enforcing antitrust laws in a variety of areas, including high-tech companies like Microsoft and Google on charges that they were harming competitors because of their dominant market positions, Apple and Amazon on suspicion that they were receiving unfair tax advantages from Ireland and Luxembourg respectively, and Facebook on allegations that it was violating privacy policies. Although most cases are still in process, the non-tax cases are always complicated because of the ever-changing landscape of technology, consumer behavior, and market demand.12 It is interesting to note that the EU is far more aggressive than the Fair Trade Commission in the United States, but it is also understandable that the EU would be more aggressive against foreign companies.

monetary union: the Euro In 1992, the members of the EU signed the Treaty of Maas- tricht in part to establish a monetary union. The decision to move to a common currency, the euro, in Europe has eliminated currency as a trade barrier for its adopters. As of 2016, 19 of the 28 EU members had adopted the euro. Others are preparing to do so as well, while only Denmark and the United Kingdom have opted out of the common currency. Other European countries also use the euro, even though they are not EU members. We’ll discuss the euro in more detail in Chapter 10 as well as the debt crisis that began with Ireland and then spread to Greece, Spain, Portugal, Italy, and Cyprus. The inability of these countries to meet their exter- nal debt obligations has threatened the banking system and forced other European countries to come to the rescue. As possibly the EU’s single biggest challenge, this threatens the future of the euro.

the schengen area In order to facilitate the free flow of people from country to country within the EU, the Schengen Agreement was signed in 1990 with gradual implementation allowing citizens to cross internal borders without having to go through border checks. Not

The European Commission provides political leadership, drafts laws, and runs the vari- ous daily programs of the EU.

The Council of the European Union, or European Summit, is composed of the heads of state of each member country.

The three major responsibili- ties of the European Parlia- ment are legislative power, control over the budget, and supervision of executive decisions.

The European Court of Justice ensures consistent interpreta- tion and application of EU treaties.

The Treaty of Maastricht sought to foster political union and monetary union.

The euro

• is a common currency in Europe,

• is administered by the European Central Bank,

• was established on January 1, 1999,

• fesulted in new banknotes in 2002.

Chapter 8 Cross-National Cooperation and Agreements 217

all members of the EU, including the UK and Ireland, have opted to be in the Schengen Area, whereas some non-EU states, such as the EFTA countries, are part of it.

migration: a threat to schengen Two things have hindered the free flow of people across national borders in Europe in recent years: terrorism and migration. Terrorist attacks in France and the fear that migrants would cross the border from France to Belgium forced Belgium to partly suspend passport-free travel to Belgium from France; large numbers of migrants from Syria and other countries who were living in camps close to the Belgium bor- der were trying to move into Belgium.13 The fear is that although Europe has always been open to refugees, especially political refugees, the crisis in Syria resulted in a massive flow of people to Europe in greater numbers than any time since World War II. It happened so fast that the EU was not prepared. Refugees streamed from Syria to Turkey to Greece and then elsewhere in Europe. The EU worked with Turkey to convince them to keep the Syrian refu- gees there and even promised financial support and help in completing their entrance into the EU if they would harbor more of the refugees. However, the refugees continued to flow into Greece where an economy with over 20 percent unemployment and a financial crisis was hard pressed to accept and keep all of the Syrian refugees.14 As world leaders tried to figure out a way to solve the political crisis in Syria, Europe was trying to solve the refugee crisis. Solutions ranging from making borders more difficult to cross to actually sealing bor- ders are among the options being considered. Clearly solving the migration crisis is impor- tant; otherwise, the idea of open borders in Europe will be a major casualty, not only causing irreparable damage to the idea of open borders but also slowing and harming cross-border commerce. And simply closing the borders could result in a serious humanitarian crisis.15

Expansion One of the EU’s major challenges is expansion. Official candidates for future membership currently include Turkey, Montenegro, Serbia, and the former Yugoslav Republic of Macedonia. Turkey is an interesting candidate since it straddles Europe and Asia, is 99.8 percent Muslim (mostly Sunni), and has a large population of 75.9 million people, second only to Germany with 80.89 million people. It has a strong manufacturing base and strong trade ties with Europe. As noted above, it may also be a key to help the EU come to grips with the hu- manitarian crisis with the Syrian refugees. Given its close proximity to the Syrian border, Turkey is in a unique position to help assimilate Syrian refugees with temporary work visas and then facilitate their return to Syria if and when political conditions stabilize there.

bilateral agreements In addition to reducing trade barriers for member countries, the EU has signed numerous bilateral free trade agreements with other countries outside the region. Since the EU negotiates with other countries as one entity, its trade talks are considered bilat- eral, even though all member states benefit from the results of the talks. The benefit to the other party to the agreement is that they get access to 28 countries when they sign the agreement.

the transatlantic trade and investment Partnership (t-tiP) One of the more intriguing potential agreements involves the United States and the EU. Even though tariffs between the two superpowers are already low (the United States and the EU have the world’s largest trading relationship and account for nearly half of the world’s economic output), the new agreement would eliminate the remaining tariffs, boost trade between the regions, and aid in harmonizing product standards between them. U.S. labor unions would be more willing to support such an agreement because of the region’s similar labor and environmental standards and because an agreement could result in billions of dollars in yearly growth and thousands of jobs.16

As the United States and the EU began negotiations in 2013, however, a number of chal- lenges began to arise. The French, backed by the European Parliament, want to continue providing subsidies and quotas to support its film and music industries and thus exclude the cultural industries from any future trade talks. On the other side, U.S. farmers are very upset about European agricultural safety standards and view them as protectionist. Obviously, any agreement will be difficult to reach, in spite of the hope for expanding economic growth in the regions.17

Migration and terrorism are threatening the open borders that are at the heart of the Schengen Agreement.

The EU expanded from 15 to 25 countries in 2004 with coun- tries from mostly Central and Eastern Europe. Romania and Bulgaria were admitted in 2007 and Croatia in 2013, bringing the number to 28.

ConCept CheCk

In Chapter 6 (page 174), we point out that in countries where labor is abundant compared to capital, many workers (not surprisingly) tend to be either unemployed or poorly paid. If permitted, they will migrate to countries that enjoy full employment and higher wages—a form of factor mobility that governments in the latter group of countries often restrict.

218 part 3 Theories and Institutions: Trade and Investment

how to do business with the Eu: implications for corporate strategy The EU is a tremendous market in terms of both population and income—one that companies cannot ignore. It is also a good example of how geographic proximity and the removal of trade barri- ers can influence trade. More than half the merchandise exports and imports of EU countries are considered to be intrazonal trade. That is far better than other regional or even bilateral trade agreements. Again, geographic proximity, a common currency for most of the member countries, and the length of time the EU has been in existence are key reasons why the intra- zonal trade is so high.

Doing business in the EU can influence corporate strategy, especially for outside MNEs, in three ways:

1. Determining where to produce. One strategy is to produce in a central location in Europe to minimize transportation costs and the time it takes to move products from one coun- try to another. However, the highest costs are in central Europe. As we saw in our open- ing case, for instance, manufacturing wages in the German auto industry were much higher than the lower wages among Eastern European members. That’s why Toyota opted to set up operations in lower-wage countries such as the Czech Republic and Poland.

2. Determining whether to grow through new investments, through expanding existing invest- ments, or through joint ventures and mergers. When Toyota initially set up its manufac- turing platform in Europe, it entered into a joint venture with PSA Peugeot-Citroën to build a new factory in the Czech Republic in order to take advantage of the European carmaker’s supplier network. The market is still considered fragmented and inefficient compared with the United States, so most experts feel that mergers, takeovers, and spi- noffs must continue in Europe, and U.S. companies are buying European companies to gain a market presence and to get rid of competition.

3. Balancing “common” denominators with national differences. There are wider national differences in the EU due to language and history. But there are also widely different growth rates, although that varies from year to year. Also, slow economic growth since 2008 means that nobody is growing very fast. In recent years, for example, economic growth in Southern Europe, especially Greece, Cyprus, Italy, and Spain, has been in negative territory, Germany and France have been positive but relatively flat, and Ireland has been relatively robust.

A good example of adapting business strategies to Europe is Toyota. In terms of products, Toyota is busy designing a European car, but for which Europe? Tastes and preferences—not to mention climate—vary greatly between northern and southern Europe. Toyota, however, is attempting to use production location and design to facilitate a pan-European strategy.

Companies will always struggle with the degree to which they develop a European strat- egy versus different national strategies inside Europe. In spite of the challenges, there are many opportunities for companies to expand their markets and sources of supply as the EU grows and encompasses more of Europe.

thE north amErican FrEE tradE agrEEmEnt (naFta) Various forms of mutual economic cooperation have historically existed between the United States and Canada, such as the Canada–U.S. Free Trade Agreement of 1989, which elimi- nated all tariffs on bilateral trade. In February 1991, Mexico approached the United States to establish a free trade agreement. Canada was included in the formal negotiations and the resulting North American Free Trade Agreement (NAFTA) became effective on January 1, 1994.

Why naFta? NAFTA has a logical rationale in terms of both geographic location and trading importance. Although Canadian–Mexican trade was not significant when the agree- ment was signed, the United States had key trade relationships with each of them. In fact,

Implications of the EU for corporate strategy:

• Companies need to determine where to produce products.

• Companies need to determine what their entry strategy will be.

• Companies need to balance the commonness of the EU with national differences.

The North American Free Trade Agreement

• includes Canada, the United States, and Mexico;

• went into effect on January 1, 1994;

• involves free trade in goods, services, and investment;

• is a large trading bloc but includes countries of different sizes and wealth.

Chapter 8 Cross-National Cooperation and Agreements 219

the one between the United States and Canada is the largest in the world, not including the 28-member EU. As Table 8.1 indicates, NAFTA is a powerful trading bloc with a combined population and GDP slightly less than the 28-member EU. What is significant, especially when compared with the EU, is the tremendous size of the U.S. economy compared to those of its neighbors, whereas there is no such dominant country in the EU. In addition, Canada generates a slightly higher GDP than does Mexico ($1.785 trillion vs. $1.295 trillion). However, Mexico has a larger population (125.4 million vs. 35.54) that is growing faster than that of Canada. But with roughly equal total GDP and the wide disparity in population, Canada has a higher per capita income than does Mexico.

NAFTA is a free trade agreement in goods and services rather than a customs union or a common market, and there is no common currency. However, its cooperation extends far be- yond reductions in tariff and nontariff barriers to include provisions for services, investment, and intellectual property.

Mexico made significant strides in tariff reduction after joining GATT in 1986, when its tariffs averaged 100 percent. Since January 1, 2008, all tariffs and quotas were eliminated on U.S. exports to Canada and Mexico.

Static and Dynamic Effects NAFTA provides the static and dynamic effects of economic integration. For example, Canadian and U.S. consumers benefit from lower-cost agricultural products from Mexico, a static effect of economic liberalization. U.S. producers also benefit from the large and growing Mexican market, which has a huge appetite for U.S. products—a dynamic effect.

Trade Diversion NAFTA is also a good example of trade diversion. Prior to the agreement, many U.S. and Canadian companies had established manufacturing facilities in Asia to take advantage of low-cost labor. IBM, for example, was making computer parts in Singapore. After NAFTA, Mexico became a good option for those companies, and in five years IBM boosted exports from Mexico to the United States from $350 million to $2 billion.

Non-NAFTA companies are also investing in Mexico to take advantage of NAFTA.

rules of origin and regional content An important component of NAFTA is the con- cept of rules of origin and regional content. Because it is a free trade agreement and not a customs union, each country sets its own tariffs to the rest of the world. That’s why a product entering the United States from Canada must have a commercial or customs invoice that identifies the product’s ultimate origin. Otherwise, an exporter from a third country could always ship the product to the NAFTA country with the lowest tariff and then re-export it to the other two countries duty-free. A major criticism of RTAs like NAFTA is that the rules of origin are complex and detract from the spirit of multilateral tariff reductions in the WTO.

Rules of Origin “Rules of origin” ensure that only goods that have been the subject of substantial economic activity within the free trade area are eligible for the more liberal tar- iff conditions created by NAFTA. This is a major contrast with the EU, which is a customs union rather than just an FTA. When a product enters France, for example, it can be shipped anywhere in the EU without worrying about rules of origin because tariffs are the same for all member countries. If NAFTA were a customs union instead of a free trade agreement, a product entering Mexico from, say, Japan and shipped to the United States would enter the United States duty-free because both countries would have the same duty on imports.

Regional Value Content Requirement One aspect of rules of origin in NAFTA refers to the Regional Value Content requirement. According to regional content rules, at least 50 percent of the net cost of components, raw materials, and labor of most products must come from the NAFTA region to qualify for the FTA. As long as a company meets the standard— and the regional content rules may vary depending on the nature of the product—a company may manufacture or assemble products in the NAFTA region and ship the goods to other members duty-free.

NAFTA rationale:

• U.S.–Canadian trade is the largest bilateral trade in the world.

• The United States is Mexico’s and Canada’s largest trading partner.

NAFTA calls for the elimina- tion of tariff and nontariff barriers, the harmonization of trade rules, the liberaliza- tion of restrictions on services and foreign investment, the enforcement of intellectual property rights, and a dispute settlement process.

NAFTA is a good example of trade diversion; some U.S. trade with and investment in Asia has been diverted to Mexico.

Rules of origin—goods and services must originate in North America to get access to lower tariffs.

Regional content:

• The percentage of value that must be from North America for the product to be considered North American in terms of country of origin.

• 50 percent for most products, 62.5 percent for autos.

220 part 3 Theories and Institutions: Trade and Investment

the impact of naFta There are pros and cons to any trade agreement, and NAFTA is no exception. It is obvious that trade and investment have increased significantly since the agreement was signed in 1994. U.S. goods and services trade with NAFTA totaled $1.6 tril- lion in 2009 (according to the latest data available). U.S. goods trade with the two partners totaled $918 billion in 2010, with the United States recording a trade deficit in goods.18 Canada is the largest export market for U.S. goods, and Mexico is number two. And Canada and Mexico are the second- and third-largest suppliers of goods to the United States.

Because of its size, the United States is very important to Canada and Mexico for both ex- ports and imports. Canada exports 76.7 percent of its merchandise to the United States and receives 54.3 percent of its imports from the United States. Mexico exports 80.2 percent of its merchandise and imports 49 percent of its merchandise from the United States. Mexico’s trade with Canada is less than 5 percent for both exports and imports. Canada is the number one export market for U.S. merchandise and is the third-largest supplier of merchandise im- ports to the United States just above Mexico.19

Immigration A major challenge to NAFTA is immigration. As trade in agriculture increased with the advent of NAFTA, more than a million farm jobs disappeared in Mexico due to U.S. competition. Many of these farmers ended up as undocumented workers in the United States, sending home more money in wire transfers (see the opening case in Chapter 9) than Mexico receives in FDI. Rapid economic growth in the United States compared with Mexico in the 1990s also resulted in a rise in migration from Mexico to the United States. However, that has now changed due to smaller families and a stronger economy in Mexico. During the period 2009–2014, more Mexicans returned to Mexico from the United States than migrated to the United States from Mexico. A major factor in their decision to return was reunification with their families.20 In spite of that, immigration still remains a hot issue on both sides of the border.

how to do business with naFta: implications for corporate strategy Although NAFTA has not expanded beyond the original three countries due to political obstacles, each member has entered into bilateral agreements with other countries. However, when U.S. companies invest in Mexico, for example, they have an opportunity to penetrate markets in countries where Mexico has FTAs, as we will see in the case on Walmart at the end of the chapter. That allows them to add additional scale as the market broadens, even though Mexico’s other trading partners are not members of NAFTA.

rationalization of Production One of the predictions made when NAFTA was signed was that companies would look at it as one big regional market, allowing them to rational- ize production, products, financing, and the like. That has largely happened in a number of industries, especially in automotive products and electronics. Each NAFTA member ships more automotive products, based on specialized production, to the other two countries than any other manufactured goods. Rationalization of automotive production has taken place for years in the United States and Canada, but Mexico is a recent entrant, attracting auto manu- facturing from all over the world, not just the United States. NAFTA’s rules of origin have forced European and Asian automakers to bring in parts suppliers and set up assembly oper- ations in Mexico. U.S. auto companies are shifting more of their production from the United States to Mexico, and the same is true for non-NAFTA companies, such as VW and Toyota. The Mexican Automobile Association trade group estimates that 70 percent of Mexican auto production will be exported to the United States.21

An interesting development in recent years is the decision by Chinese firms to invest more in Mexico as a platform for manufacturing electronics to ship into Canada and the United States. Hisense, a Chinese electronics company, purchased a factory in Mexico from Japanese company Sharp Corp. to manufacture TVs, with a goal of increasing its shipment of TVs to North America from 1.5 million (currently) to over 4 million. Higher wages and oper- ating costs in China make Mexico an attractive alternative and allow Hisense to establish a regional manufacturing base in Mexico.

A major challenge to NAFTA is illegal immigration.

ConCept CheCk

As you’ll recall from Chapter 7, page 201, trade restrictions may diminish export capabili- ties and induce companies to locate some production in countries imposing the restric- tions; the absence of trade bar- riers gives them more flexibility not only in deciding where to locate production but also in determining how to service different markets.

Chapter 8 Cross-National Cooperation and Agreements 221

mexico as a consumer market An additional benefit is that Canadian and U.S. companies have realized that Mexico is a consumer market rather than just a production location. Initially, the excitement over the country for U.S. and Canadian firms was the low-wage environment. However, as Mexican income continues to rise—which it must do as more investment enters and more of its companies export production—demand is rising for foreign products.

rEgional Economic intEgration in thE amEricas If you look at Maps 8.2 and 8.3, you’ll see six major regional economic groups in the Americas, divided into Central American and South American. Central America (exclud- ing Mexico) has the Caribbean Community (CARICOM), the Central American Common Market (CACM), and the Central American Free Trade Agreement (CAFTA-DR)—which includes the members of CACM but also Honduras and the Dominican Republic, along with the United States. The two major groups in South America are the Andean Community (CAN) and the Southern Common Market (Mercosur). The Andean Community is a cus- toms union, whereas Mercosur is set up to be a common market.

The major reason for these different collaborative groups was market size. The post–World War II strategy of import substitution to resolve balance-of-payments problems in much of Latin America was doomed because of the region’s small national markets. Therefore, some form of economic cooperation was needed to enlarge the potential market size so that Latin American companies could achieve economies of scale and be more competitive worldwide.

caricom The Caribbean Community (CARICOM) is working hard to establish an EU-style form of collaboration, complete with full movement of goods and services, the right of establishment, a common external tariff, free movement of capital and labor, a com- mon trade policy, and so on. It is officially classified by the WTO as an Economic Integration Agreement. Many of these initiatives have come about through an initiative called the CARICOM Single Market and Economy (CSME).

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HONDURAS

Central American Common Market (CACM)

Caribbean Community and Common Market (CARICOM) (Full members)

Central American Free Trade Agreement– Dominican Republic (CAFTA–DR)

UNITED STATES

maP 8.2 Economic integration in central america and the caribbean Throughout Central America and the Caribbean, the focus on economic integration has shifted from the concept of the free trade agreement (whose goal is the abolition of trade barriers among members) to that of the common market (which calls for internal factor mobility as well as the abolition of internal trade barriers). The proposed structure of the Caribbean Community and Common Market (CARICOM) is modeled on that of the EU.

222 part 3 Theories and Institutions: Trade and Investment

In some ways, the changes in the Caribbean Community mirror what has happened in the EU, though on a smaller scale. The entire population is only 6.5 million people, 60 per- cent of whom live in only two countries: Jamaica and Trinidad and Tobago. That would put it on the level of EU member Bulgaria in terms of population.

The Challenge Export Reliance Countries in Latin America and the Caribbean rely heav- ily on countries outside the region for trade. For example, Jamaica, a member of CARICOM, exports 49.3 percent of its merchandise to the United States and 18 percent to the EU. Although Trinidad and Tobago is the third major exporter of merchandise to Jamaica, no other member is significant as either a destination or a source for its exports. The same could be said for most of Latin America. The United States and EU represent significant markets for most of its countries.

mercosur The major trade group in South America is Mercosur, which was established in 1991 by Brazil, Argentina, Paraguay, and Uruguay. Its major goal is to become a customs union with free trade within the bloc and a common external tariff. Mercosur is classified as a customs union by the WTO for trade in goods and as an economic integration agreement for trade in services. Mercosur is significant because of its size: a population of 251 million and a GDP of $2.457 trillion. It generates 75 percent of South America’s GDP, making it the third-largest trading bloc in the world in terms of GDP after the EU and NAFTA.

Pacific alliance However, Mercosur has problems. It included Venezuela as a full mem- ber, and temporarily suspended Paraguay. Brazil and Argentina have serious problems with protectionism. Frustration over these and other issues in both CAN and Mercosur

ConCept CheCk

In Chapter 6 (page 164), we observe that little of the trade of low-income countries is con- ducted with other low-income countries. By and large, emerg- ing economies rely heavily on trade with high-income countries, typically exporting primary and labor-intensive products in exchange for new and technologically advanced products.

Mercosur is a customs union among Argentina, Brazil, Para- guay, and Uruguay.

BRAZIL

VENEZUELA

0 2000 mi

0 2000 km

Mexico Colombia Peru Chile

Pacific Alliance

Argentina Brazil Paraguay Uruguay Venezuela

MERCOSUR

Bolivia Colombia Ecuador Peru

Andean Community (CAN)

URUGUAY

ECUADOR

PARAGUAY

BOLIVIA

COLOMBIA

ARGENTINA

MEXICO

CUBA

PERU

CHILE

maP 8.3 latin american Economic integration

Chapter 8 Cross-National Cooperation and Agreements 223

led to the creation in 2012 of the Pacific Alliance, comprising Mexico, Colombia, Peru, and Chile. These countries refer to themselves as more hospitable to trade and investment due to their adherence to democracy and the rule of law rather than the more populist and protectionist philosophies of other countries in CAN and Mercosur.22 Having borders with the Pacific also means that they are trying to be a bridge between Latin America and the Asia–Pacific region, which makes sense given their dynamic and market-oriented economies.23

andean community (can) Although the Andean Community (CAN) is not as sig- nificant economically as Mercosur, it is the second most important official regional group in South America. CAN has been around since 1969. However, its focus has shifted from one of isolationism and statism (placing economic control in the hands of the state—the central government) to being open to foreign trade and investment. Colombia and Peru, two of the founding members of CAN, have changed significantly in recent years and entered into bi- lateral trade agreements with the United States, solidifying their move to greater openness in comparison with other members of CAN. As noted above, they also have decided to join the Pacific Alliance.

rEgional Economic intEgration in asia There are several RTAs in Asia as recognized by the WTO and a few significant trade initia- tives in process. Of the officially approved RTAs, the most important is the Association of Southeast Asian Nations/ASEAN Free Trade Area. As is the case in Latin America, regional integration in Asia has not been as successful as in Europe or North America because most of the countries in the region have relied on U.S. and EU markets for as much as 20 to 30 percent of their exports—not as extensive as in Latin America but still significant. In ad- dition, China and Japan, which are not members of ASEAN/AFTA, are significant players in the region in terms of trade and investment.

association of southeast asian nations (asEan) Organized in 1967, ASEAN is a comprehensive association that includes preferential trade as one of its many goals. This preferential trade agreement comprises Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam (see Map 8.4). With a combined GDP of $2.249 trillion and an estimated population of 634.8 million people,24 it is a significant organization.

ASEAN Free Trade Area On January 1, 1993, ASEAN officially formed the ASEAN Free Trade Area (AFTA) with the goal of cutting tariffs on all intrazonal trade to a maximum of 5 percent by January 1, 2008. The weaker ASEAN countries would be allowed to phase in their tariff reductions over a longer period. By 2005, most products traded among the AFTA countries were subject to duties from 0 to 5 percent, so AFTA has been successful in its ob- jectives. Free trade is crucial to the member countries because their ratio of exports to GDP is almost 70 percent. The best achievement of AFTA is that is has reduced tariffs, attracted FDI, and turned the region into a huge network of production, leading to what some call “factory Asia.”25

Although China is not a part of ASEAN, it is essential to ASEAN’s future. China’s working-age population is 795.4 million people, compared with 298 million for the ASEAN countries. Although the average monthly wage for manufacturing workers is much higher in Singapore and Malaysia than in China, it is much lower in the other ASEAN countries. As wages continue to rise in China, there are opportunities for ASEAN countries to at- tract more FDI, but those countries need to work hard to improve their infrastructure, especially supply chain and manufacturing infrastructure.26 These opportunities combined with China’s competitive position are forcing ASEAN to work harder to strengthen the ties among member countries. In addition to the FTA, ASEAN finalized the establishment of

The Andean Community is one of the original regional economic groups but has not been successful in achieving its original goals.

The ASEAN Free Trade Area is a successful trade agreement among countries in Southeast Asia.

224 part 3 Theories and Institutions: Trade and Investment

the ASEAN Economic Community (AEC) in 2015, which the member countries hope will go beyond trade liberalization and help establish the region as a single market and pro- duction base.

asia Pacific Economic cooperation (aPEc) Formed in November 1989 to promote multilateral economic cooperation in trade and investment in the Pacific Rim,27 Asia Pacific Economic Cooperation (APEC) is composed of 21 countries that border both Asia and the Americas. All but three members of AFTA are members of APEC, plus Canada, the United States, Mexico, Peru, and Chile in the Americas; Australia and New Zealand; and China, Japan, Korea, Russia, and Chinese Taipei. It is a large and powerful organization that is focused on a wide range of activities related to trade and investment, security, energy, sus- tainability, anticorruption, and transparency, among other things. However, it is not an RTA as defined by the WTO and does not show up on that list of RTAs. The sheer size of APEC is what sets it apart: 55 percent of global GDP and 43 percent of world trade.

trans-Pacific Partnership (tPP) The TPP was initiated by the United States to spur economic growth and create jobs, and it involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The formation of the initiative was announced in 2011, the agreement was concluded in October 2015 and signed by the trade ministers in February 2016. However, the TPP will not actually come into effect until it is ap- proved by the government of each member, which is a difficult political task, especially during a contentious election year in the United States. It is interesting to note that that the signatories to the agreement include the members of NAFTA, many but not all of ASEAN, and the Pacific Alliance. Other countries may eventually join if the TPP continues forward. A main goal of the TPP is to enhance trade and investment, although it also is concerned with labor and environ- mental standards. Its comprehensiveness will make it more difficult to approve and enforce.

APEC comprises 21 countries that border the Pacific Rim; progress toward free trade is hampered by size and geographic distance between member countries and by the lack of a treaty.

maP 8.4 the association of southeast asian nations Although the total population of ASEAN countries is larger than that of either the EU or NAFTA, per capita GDP is considerably lower. Economic growth rates among ASEAN members, however, are among the highest in the world.

MYANMAR

THAILAND

LAOS

VIETNAM CAMBODIA

M A L A Y S I A

SINGAPORE

I N D O N E S I A

PHILIPPINES

BRUNEI DARUSSALAM

P a c i f i c O c e a n

0 1000 mi

0 1000 km

ASEAN Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, �ailand, Vietnam

Chapter 8 Cross-National Cooperation and Agreements 225

rEgional Economic intEgration in aFrica Africa is truly the new frontier. The UN keeps revising its estimates of population growth in Africa, but the latest estimates are that South Africa’s population will double to 2.5 billion in 2050, up from 1.2 billion people in 2015, with Nigeria having a population of 400 mil- lion. In 2015, only China and India had more than 400 million people. Not only is Africa’s population large, but it is growing faster than most regions of the world as life expectancy has gone up from 37 years in 1955 to 60 years in 2015. Families are still large as fertility rates are among the highest in the world and infant mortality has dropped.28 Africa has the fast- est-expanding labor force in the world with more than 500 million people of working age (15–64), and is expected to surpass China and India in working-age population by 2040.29

From the standpoint of regional integration, however, Africa is complicated because of the large number of countries on the continent and the fact that there are 3 regional mon- etary unions and 17 trade blocs. On Map 8.5, we have selected only four of the trade blocs

There are several African trade groups, but they rely more on their former colonial powers and other developed markets for trade than they do on each other.

SOUTHERN AFRICAN DEVELOPMENT COMMUNITY (SADC): Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe

COMMON MARKET FOR EASTERN AND SOUTHERN AFRICA (COMESA): Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe

ECONOMIC COMMUNITY OF WEST AFRICAN STATES (ECOWAS): Benin, Burkina Faso, Cape Verde, Côte d'Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo

MALI

GUINEA- BISSAU SIERRA LEONE

LIBERIA

CAPE VERDE

GAMBIA

GUINEA

SENEGAL

COTE D’IVOIRE

GHANA

BURKINA FASO

TOGO

BENIN

NIGER

NIGERIA

EGYPT

SOUTH SUDAN

SUDAN

LIBYA

ERITREA

ETHIOPIA

DEM. REP. CONGO (ZAIRE)

RWANDA BURUNDI

ANGOLA ZAMBIA

NAMIBIA BOTSWANA

SOUTH AFRICA

SWAZILAND LESOTHO

MADAGASCAR

SEYCHELLES

MALAWI

MAURITIUS

COMOROS

M O

ZA M

BI Q

ZIMBABWE

DJIBOUTI

0 2000 mi

0 2000 km

EAST AFRICAN COMMUNITY: Burundi, Kenya, Rwanda, Tanzania, and Uganda

TANZANIA

KENYA UGANDA

maP 8.5 regional integration in africa Although most African nations are members of more than one regional trade group, the total amount of trade among members remains relatively small. African nations tend to rely heavily on trading relationships with countries elsewhere in the world—notably with former colonial and other industrialized nations.

226 part 3 Theories and Institutions: Trade and Investment

to illustrate the situation in Africa. The problem is that African countries have been strug- gling to establish a political identity, and the different trade groups have political as well as economic underpinnings. The key to continued growth in Africa is the reduction of risk as conflicts drop and peace improves. Nearly all of the 54 countries in Africa belong to more than one trade agreement.

To illustrate the challenges of economic integration in Africa, ECOWAS is a customs union, but there are lots of exceptions and there has not been a lot of progress on free movement of people, goods and transportation. The lack of intrazonal trade is generally because most countries rely on export of commodities to developed countries, especially former colonial powers, and they have little else to trade with each other. As a result, they resort to protecting local industry rather than increasing intrazonal trade. The markets, with the notable exception of South Africa, are relatively small and undeveloped, making trade liberalization a relatively minor contributor to economic growth in the region. The East African Community is successful because it only includes five neighboring countries so it is easier to resolve trade differences. A relatively new agreement was signed in 2015 creating the Tripartite Free Trade Area which covers 26 African countries, but that is pretty ambitious, and most members are already part of other trade agreements that don’t work very well.30

Yes A regional free trade agree- ment among a small group of

countries is easy to establish and monitor, unlike the broader agreements of the WTO. It provides a larger market area which will increase economies of scale and open up investment opportunities. An example is NAFTA which only involves three countries, with the United States having a common border with both. Since NAFTA is not a customs union, each country is free to set up bilateral trade agreements with other countries. The other extreme, however, is the European Union. From a trade perspective, the EU includes both a free trade agreement and a customs union.

The EU, unlike NAFTA and most other regional groups, has gone far beyond trade by establishing a common cur- rency, a European Central Bank, a European parliament, and a fairly extensive bureaucracy that is trying its best to bring the region ever closer together. In essence, countries are willing to give up sovereignty in order to receive the eco- nomic benefits of being part of a larger community. The ad- vantage of this more extensive approach is that large and small nations in Europe can work together to solve common problems, including migration, security, and economic tur- moil. Because of its longevity, the EU has seen its intrazonal trade rise to nearly 50 percent, which is much higher than other regional groups.

Another good example of the positive benefits of regional economic groups is the Dominican Republic-Central American Free Trade Agreement which links the United States together with six other countries—Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. The FTA holds enormous benefits for its signatories: opening the door for increased trade between the United States and the region; stimulating economic growth in the region by encouraging FDI and offering shorter international supply chains; and en- couraging economic and political reform in an area historically plagued by Marxism, dictatorships, and civil wars.

The United States has free trade agreements in force with 20 countries, including the members of CAFTA-DR and NAFTA. One of the biggest benefits for the United States is reciprocal tariff treatment from the other nations. Due to temporary trade-preference programs and other regional agreements, 80 percent of the products from at least five Central American nations already enter the United States duty-free. Prior to signing the agreement, U.S. manufactured exports were subject to tariffs that averaged 30 to 100 per- cent higher than those faced by Central American exports when entering the United States.31 CAFTA-DR allows the Central American nations to maintain these favorable gains, but it also leaves the playing field open for the United States to benefit similarly by reducing restrictions on 80 percent of U.S. consumer and industrial exports to the region.

Is Regional Economic Integration a Good Idea?

Point Point

Chapter 8 Cross-National Cooperation and Agreements 227

no The proponents of regional integration are governments, and

they invest so much political capital in negotiating and sign- ing agreements that they get trapped and can never get out. Also, a dominant economic power, such as the United States can impose its will on smaller trade partners such as those in CAFTA-DR. As free trade agreements progress to a customs union to more extensive integration, national sovereignty becomes gradually more compromised. It is not uncommon to overstate the benefits and understate the shortcomings. The British found that out in 2016 as the UK was faced with “Brexit”—a national referendum on whether or not to exit the EU.32 Those in favor of staying in were the Labour Party, the Liberal Democrats, and business and trade unions, which is ironic in comparison with the United States, where labor unions tend to be against any trade agreement. The main fear the Brits had was the unknown. There didn’t seem to be a good alternative to membership in the EU, so why leave? They were worried that if the UK left the EU, they would have to renegotiate all of their trade and investment relationships with EU countries and who knows what they would have ended up with. In addition, there were fears that London might lose its status as the financial center in Europe, even though the UK continued to use the British pound as their currency rather than join the Eurozone and adopt the euro. There was also a fear that if they left the EU, Scottish nationalists, who were not euro skeptics, might resurrect their desire to break away from the UK and join the EU on their own.

There were lots of reasons to support Brexit. The UK was not one of the original six members of the EU, and it never did want to join the common Eurozone. The free flow of la- bor and open borders are critical to the EU. This seems like a good idea for aging countries that need younger workers, but the increase of migrants from war-torn Syria caused se- rious political tensions in the UK. Should they continue to have open borders and the risk of escalating social costs? It is hard to reject the EU mandate of the free flow of labor and still be a member of the EU.

A major problem of the EU is the broad di- versity of political, cultural, and language forces.

Of course, all countries have to deal with these differences in normal trading relationships, but the problem with the EU and other regional trade groups is that these factors become more complicated with expansion, and it is harder to find a common ground to solve problems.

A major argument for Brexit is the loss of sovereignty. Although there is bureaucracy and a loss of sovereignty in the simplest of free trade agreements, the growth of the bureaucracy in the EU is pretty extreme. If the goal of the EU is to keep bringing countries closer together, it is obvi- ous that there will be an increasing loss of sovereignty. But Brexit forces in the UK are particularly concerned about the centralization of power in Brussels which has affect- ed many aspects of life. Thus any member of a regional group has to decide if the benefits of free trade outweigh the potential loss of sovereignty. The forces that are leading to Brexit are extreme since they could lead to a powerful country leaving a powerful regional economic alliance, but they are the same forces at the heart of the negotiations of any potential regional economic alliance. As a result of these arguments for and against Brexit, 51.9 percent of the British people voted on June 23, 2016 to leave the EU, even though the people in Scotland, Northern Ireland, and Lon- don voted to remain. Stock markets plunged around the world, the pound dropped, and the yen went up in value as uncertainty plagued markets. In order for the UK to leave the EU, it has to officially notify the other member countries, which then initiates a complex process that could take up to two years, or possibly longer, to work out the details for the UK’s exit. There are even rumblings that Scotland might try to leave the UK and become a sovereign member of the EU, and Northern Ireland might also leave the UK and become part of Ireland, resulting in Brexit leaving Eng- land and Wales as the remaining two countries in the EU. Clearly, there is a tremendous amount of uncertainty over the next few years, just as predicted in the run-up to the June referendum.

Is Regional Economic Integration a Good Idea? Counterpoint

Counterpoint

thE unitEd nations and othEr ngos the united nations The first form of cooperation worth exploring is the United Nations, which was established in 1945 in response to the devastation of World War II to promote international peace and security and to help solve global problems in such diverse areas as economic development, antiterrorism, and humanitarian actions. If the UN performs its re- sponsibilities, it should improve the environment in which MNEs operate around the world, reducing risk and providing greater opportunities.

The UN was established in 1945 following World War II to promote international peace and security. It deals with economic development, antiterrorism, and humanitarian movements.

228 part 3 Theories and Institutions: Trade and Investment

Organization and Membership The UN family of organizations is too large to list, but it includes the WTO, the International Monetary Fund, and the World Bank (the latter two discussed in subsequent chapters). These organizations are all part of the Economic and Social Council, one of six principal organs of the UN System, which also includes the General Assembly, the Security Council, and the International Court of Justice.

The UN has 193 member states represented in the General Assembly, including 15 that compose the Security Council. There are 5 permanent members of the Security Council— China, France, the Russian Federation, the United Kingdom, and the United States—and 10 other members elected by the General Assembly to serve 2-year terms.33

UNCTAD The UN Conference on Trade and Development, or UNCTAD, was established in 1964 to integrate developing countries into the global economy. UNCTAD’s main ac- tivities include globalization and development strategies, trade in goods and services, com- modities, investment and enterprise development, and trade logistics and human resource development. In particular, UNCTAD has been active in contributing to the debate on issues related to developing countries and the global economy.34

nongovernmental organizations (ngos) Nongovernmental, nonprofit voluntary or- ganizations are all lumped under the category of NGOs: private institutions that are inde- pendent of any government. The UN is an intergovernmental organization and thus not an NGO. Some NGOs operate only within the confines of a specific country, whereas others are international in scope. An example of the latter is the International Red Cross, which is concerned with humanitarian issues around the world, not just in one country. One of the functions of UNCTAD is to work with NGOs in helping shape policies and activities related to concerns of developing countries. NGOs perform an important role in bringing poten- tial abuses to light and tend to be very narrowly focused, usually on a specific issue (e.g., Transparency International discussed in Chapter 5).

UNCTAD was established to help developing countries par- ticipate in international trade.

NGOs—private nonprofit insti- tutions that are independent of the government.

The historic “yes” vote for Brexit will change the face of the EU forever. Source: Marian Weyo/Shutterstock

▶

Chapter 8 Cross-National Cooperation and Agreements 229

commodity agrEEmEnts Commodities refer to raw materials or primary products that enter into trade, such as metals or agricultural products. Primary commodity exports—such as crude petroleum, natural gas, copper, iron ore, tobacco, coffee, cocoa, tea, and sugar—are still important to develop- ing countries. Out of 135 developing countries tracked by the UN Conference on Trade and Development, 94 generated at least 60 percent of the exports from commodities, up from 88 countries in 2009–2010. It is clear from the UN Report that dependence on commodity exports by developing countries has risen in recent years, even as commodity prices have fallen due to the weak global economy.35

commoditiEs and thE World Economy Both long-term trends and short-term fluctuations in commodity prices have important consequences for the world economy. On the demand side, commodity markets play an im- portant role in industrial countries, transmitting business cycle disturbances to the rest of the economy and affecting the growth rate of prices. On the supply side, as noted above, primary products account for a significant portion of the GDP and exports of many commodity- producing countries.

consumErs and ProducErs For many years, countries tried to band together as producer alliances or joint producer/ consumer alliances to try to stabilize commodity prices. However, these efforts—with the exception of OPEC, which we discuss below—have not been very successful. UNCTAD established a Special Unit on Commodities to attempt to deal with the issues facing devel- oping countries because of high dependence on commodities, especially agricultural com- modities, for export revenues. Given such reliance, UNCTAD is concerned that it will be impossible to resolve poverty issues, especially in Africa, without dealing with fluctuating commodity prices.

The most important international commodity organizations and bodies, such as the International Cocoa Organization and the International Copper Study Group, take part in UN-led discussions to help commodity-dependent countries establish effective policies and strategies. However, each one, such as the International Coffee Organization (ICO), has its own organizational structure independent of the UN. The ICO is composed of 42 coffee- exporting nations—all of them developing countries—and 8 importing nations, most of which are developed countries, although the entire EU is considered one country. ICO mem- bers are responsible for over 98 percent of the world’s coffee exports and 83 percent of the world’s coffee consumption.36

Whereas many of the original commodity agreements were designed to influence price through a variety of market-interfering mechanisms, most of the existing ones have been es- tablished to discuss issues, disseminate information, improve product safety, and so on. Very little can be done outside of market forces to influence price. The ICO, for example, helps fund projects for coffee growing nations to combat pests and diseases and to expand coffee consumption through promotion efforts. Coffee consumption varies a lot from country to country, so the promotion efforts supported by ICO are designed to increase per capita con- sumption in low-consuming countries.

For many years, commodity prices fluctuated but did not increase dramatically. In the decade of the 2000s, however, global economic growth pulled them up. China, in particular, was growing so fast that it was pulling most commodity prices up, leading to trade agreements between China and many commodity-producing countries, as well as substantial foreign investment. The global economic crisis, however, caused a significant

The attempts of countries to stabilize commodity prices through producer alliances and commodity agreements have been largely unsuccessful.

ConCept CheCk

Commodities often represent natural advantages, which we define in Chapter 6 (page 159) as advantages in production resulting from climatic condi- tions, access to certain natural resources, or availability of certain labor forces.

ConCept CheCk

Remember from Chapter 6 (pages 164 –166) the fact that lower-income countries depend much more on the production of primary products than do wealthier nations; con- sequently, they depend more heavily on natural advantage as opposed to the kinds of ac- quired advantage that involve more advanced technologies and processes.

Many commodity agreements now exist for the purpose of

• discussing issues, • disseminating information, • improving product safety.

230 part 3 Theories and Institutions: Trade and Investment

contraction in commodity prices of nearly 17 percent in 2009, which had a very negative impact on the economies of the commodity-producing countries. The prices increased by 23 percent from January 2010 to January 2011 as the global economy began to recover.37 However, as the Chinese economy and the rest of the global economy began to contract in 2013, commodity prices dropped again through 2015. But as economic growth recovers, so too will commodity prices.

thE organization oF thE PEtrolEum ExPorting

countriEs (oPEc) Although OPEC supplies oil and natural gas, it’s important to understand that the world is dependent on the following main sources of energy: oil (31.1 percent), coal (28.9 percent), natural gas (21.4 percent), and everything else (18.6 percent). In terms of crude oil, OPEC is an important player.

The Organization of the Petroleum Exporting Countries (OPEC) is an example of a producer cartel that relies on quotas to influence prices. It is a group of 13 oil-producing countries that have significant control over supply and band together to control output and price. Its members include Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Several of the largest oil-exporting countries, including Russia, Norway, Canada, the United States, and Mexico, are not members of OPEC. Saudi Arabia is the largest producer of oil, closely followed by Russia and the United States. Saudi Arabia is also the largest net exporter of oil, followed by Russia and the United Arab Emirates.

Price controls and Politics OPEC controls prices by establishing production quotas on member countries. Saudi Arabia has historically performed the role of the dominant supplier in influencing supply and price. Periodically OPEC oil ministers gather together to deter- mine the quota for each country based on estimates of supply and demand. Politics is also an important dimension of the deliberations. OPEC member countries with large populations need large oil revenues to fund government programs. As a result, they are tempted to ex- ceed their export quotas to generate more revenues.

output and Exports OPEC member countries produce about 33.6 percent of the world’s crude oil and 19 percent of its natural gas. However, its oil exports represent about 60.4 per- cent of the oil traded internationally.38 In addition, OPEC has 81 percent of the world’s crude oil reserves, with the Middle East containing 66.4 percent of OPEC’s total reserves. Therefore, OPEC can have a strong influence on the oil market, especially if it decides to reduce or in- crease its level of production.

Sometimes OPEC policies work; sometimes they don’t. In addition, events beyond its control can influence prices. The rapidly escalating price of crude oil prior to the global eco- nomic crisis was a mixture of rising demand worldwide (especially in China), political insta- bility in the Middle East, and a shortage of refining capacity, caused in part by environmental rules in some countries that preclude the building of new refineries.

the downside of high Prices Keeping oil prices high has some downside for OPEC. Competition from non-OPEC countries rises because the revenues accruing to the competitors are higher. Because some OPEC countries are putting up roadblocks to production, major producers like BP, ExxonMobil, and Shell are investing heavily in ar- eas like the Caspian Basin, the Gulf of Mexico, and Angola and are trying to enter areas like the Russian Federation. Production in these areas is expected to grow significantly.

OPEC is a producers’ alliance in oil that has been success- ful in using quotas to keep oil prices high.

The downside of high oil prices for OPEC:

• Producers investing in countries outside of OPEC

• Complication of balancing social, political, and economic objectives

Chapter 8 Cross-National Cooperation and Agreements 231

High prices also attract competition to conventional oil, including nonconventional oil (such as oil shale, oil sands, and biofuels) and nuclear energy, although the damage to the nuclear reactors in Japan as a result of the earthquake and tsunami in 2011 had a chilling effect on nuclear energy.

Political and social forces also affect oil prices. The civil war in Libya impacted oil markets in 2011, causing oil prices to spike due to the fear that the unrest could spread to other big Middle East oil producers. The same was true when Russia invaded the Ukraine and an- nexed Crimea, resulting in sanctions against Russia. Companies that had hoped to cash in on Russian oil were forced to pull back until political relations between Russia and the West could be normalized, if ever.

The EU has its own challenges due to enlargement; the debt crises of several member countries, espe- cially Greece; inward migration from Syria and other countries and Brexit.

Regional integration in Africa will continue at a slow pace due to the vast size of the continent and that fact that so many countries have common borders with countries that are involved in different regional economic groups. However, Africa is flush with natural resources and will be a favorite trading partner of resource-hungry China as the Chinese and global economies recover. In addition, greater peace and stability in Africa and the rise in working- age population will make the continent an interest- ing place in which to invest and a potential source for consumer growth.

Asian integration, primarily in AFTA, APEC, and possibly the Trans-Pacific Partnership, will pick up steam as the economies of East and Southeast Asia continue to open up and as they collaborate to meet the challenge of China. Japan, which is not a member of AFTA, has signed a number of bilateral agreements with other countries in Asia, including an FTA with the members of ASEAN. It became a member of the Trans-Pacific Partnership in 2013 and is in the process of implementing new agree- ments with Australia, the Gulf Cooperation Council, India, and Korea. However, the key to the growth of most countries in Southeast Asia may be China and its rapidly growing influence in Asia and the rest of the world. ■

Will regional integration be the wave of the future, or will the World Trade Organization become the focus of global economic integration? The WTO’s objective is to reduce barriers to trade in goods, ser- vices, and investment. Regional groups attempt to do that and more. Although the EU has introduced a common currency and is increasing the degree of cooperation in areas such as security and foreign policy, the WTO will likely never engage in those issues. Regional integration deals with the specific problems facing member countries, whereas the WTO needs to be concerned about all countries in the world.

However, regional integration might actually help the WTO achieve its objectives in three major ways:

1. Regionalism can lead to liberalization of issues not covered by the WTO.

2. Regionalism is more flexible, given that it typically involves fewer countries with similar conditions and objectives.

3. Regional deals lock in liberalization, especially in developing countries.

As we have seen in this chapter, no trade agreement is easy or perfect. The WTO has serious challenges due to its size. Regional agreements like NAFTA, the EU, Mercosur, and others have many different chal- lenges as well. In cases of NAFTA and Mercosur, one dominant country in each (the United States and Brazil, respectively) implies that the balance of power among the member countries is not equal.

Looking to the Future Will the WTO Overcome Bilateral and Regional Integration Efforts?

Case Walmart Goes south

Comercial Mexicana S.A. (Comerci), one of Mexico’s larg- est retail chains, is faced with a serious dilemma.39 Since Walmart’s aggressive entry into the Mexican retail mar- ket, Comerci has found it increasingly difficult to remain competitive. Walmart’s strong operating presence and low prices since NAFTA’s lifting of tariffs have put pressure on Comerci, and now management must determine what the chain needs to do to compete against Walmart.

What has caused this intense competitive pressure on Comerci, and what is likely to be its future? Mexico’s re- tail sector has benefited greatly from the increasing trade liberalization the government has been pushing. After de- cades of protectionism, Mexico joined GATT in 1986 to help open its economy to new markets. In 1990, with Mexico’s economy on the upswing and additional free trade negotia- tions with the United States and Canada taking place, the founder of Walmart, Sam Walton, met with the president of Cifra, Mexico’s leading retail store. Their meeting resulted in a 50/50 joint venture in the opening in 1991 of Mexico’s first Sam’s Club, a subsidiary of Walmart, in Mexico City.

It took only a couple of months after the opening to prove the store’s success—it was breaking all the U.S. records for Sam’s Club. The JV evolved to incorporate all new stores, and by 1997, Walmart could purchase enough shares to have a con- trolling interest in Cifra. In 2000, the name changed to Walmart de México, S.A. de C.V., and the ticker symbol to WALMEX.

Prior to 1990, Walmart had never made moves to enter Mexico or any country other than the United States. Once

it started growing in Mexico, management created the Walmart International Division in 1993. By 2016, Walmart had expanded to 28 countries outside the United States through new-store construction and acquisitions. With growth stalling in the United States, Walmart is looking to international expansion. It currently has more than 11,500 retail units worldwide, of which more than 6,200 are outside the continental United States, and it employs more than 800,000 people outside the United States. Nevertheless, Walmart’s success internationally has varied by country. It has struggled to match consumer preferences and work successfully with suppliers in Japan, encountered trouble in the United Kingdom, and failed to turn profits in Ger- many and South Korea, forcing it to withdraw completely from the latter two markets. However, it has flourished in Canada and, most notably, in Mexico. Walmart’s opera- tions in Canada began in 1994 with the acquisition of 122 Woolco stores. It now has more than 400 Walmart stores and enjoys strong partnerships with Canadian suppliers. In Mexico, Walmart operates 2,360 units, including Sam’s Clubs, Bodegas (discount stores), Walmart Supercenters, Superamas (grocery stores), Suburbias (apparel stores), and VIPS restaurants, and it has become the largest retailer in the country, followed by Organizacion Soriana, Comercial Mexicana (Comerci), and Chendrauí.

Given its hit-and-miss success rate on the international scene, it is natural to wonder how much of Walmart’s tri- umph in Canada and Mexico has stemmed from its internal

Walmart has successfully expanded into Mexico, and its stores reflect the scale and quality of Walmart’s best in the world. The familiar Walmart logo and color scheme are typical of the Walmart stores. Source: Monkey Business Images/ Shutterstock

▶

Chapter 8 Cross-National Cooperation and Agreements 233

processes, international strategies, and geographic proxim- ity and how much can be attributed to the close econom- ic ties shared by the United States with the two countries through NAFTA.

Walmart’s Competitive Advantage Much of Walmart’s international success comes from the tested practices on which the U.S. division bases its suc- cess. Walmart is known for the slogan “Every Day Low Prices,” which is the core of their value proposition. It has expanded that internally to “Every Day Low Costs” to inspire employees to spend company money wisely and work hard to lower costs. Because of its sheer size and volume of pur- chases, Walmart can negotiate with suppliers to drop prices to agreeable levels.

The company also works closely with suppliers on inven- tory levels using an advanced information system that in- forms suppliers when purchases have been made and when Walmart will be ordering more merchandise. Suppliers can then plan production runs more accurately, thus reducing production costs, which results in cost savings for Walmart and passes on the savings to the consumer as lower prices.

Walmart also has a unique distribution system that reduces expenses. It builds super warehouses known as Distribution Centers (DCs) in central locations that receive the majority of merchandise sold in Walmart stores. It sorts and moves the merchandise via a complex system of bar codes, then its inventory information system directs transport to the various stores using its company-owned fleet or a partner. The central distribution center helps Walmart negotiate lower prices with its suppliers because of the large purchasing volumes. These strategies have resulted in great success for the company. And it even uses the second most powerful computer in the world—behind the Pentagon’s—to run its logistics.

Walmart in Mexico Prior to the passage of NAFTA, Walmart faced some challeng- es as it expanded into Mexico. One of the biggest was import charges on many of the goods sold in its stores, which pre- vented it from being able to offer its “Every Day Low Prices.”

Unsure of local demand, Walmart stocked its shelves with items like ice skates, fishing tackle, and riding lawn- mowers—all unpopular items in Mexico. Rather than inform- ing headquarters that they wouldn’t need those items, local managers heavily discounted the items, only to have the au- tomatic inventory system reorder them when the first batch sold. Walmart also encountered logistics problems due to poor roads and the scarcity of delivery trucks. Yet another problem was the culture clashes between the Arkansas ex- ecutives and the local Mexican managers.

Some of these problems were solved by trial and error, but the emergence of NAFTA in 1994 helped solve most of them. Among other things, NAFTA reduced tariffs on

American goods sold to Mexico from 10 to 3 percent. Prior to NAFTA, Walmart was not much of a threat to companies like Comerci, Gigante, and Soriana, Mexico’s top retailers. But once the agreement was signed, the barriers fell and Walmart was on a level playing field with its competitors— which was all it needed to become number one. However, the retail sector in Mexico is the second most competitive sector of the economy behind auto parts, so Walmart has had its work cut out for it to remain competitive against lo- cal Mexican retail chains and other foreign retailers, such as U.S.-based Costco and French-based Carrefour, which sold its outlets to Mexican competitor Chendrauí in 2005.

Since NAFTA has gone into force, Mexico has invested significantly in public and private infrastructure which has helped Walmart to improve the efficiencies in its distribu- tion network. The signing of NAFTA also opened the gates wider to foreign investment in the country. Walmart was paying huge import fees on goods shipped to Mexico from areas like Europe and Asia. Foreign companies knew that if they built manufacturing plants in Mexico, they could keep costs low with Mexican labor and ship to NAFTA’s free trade zone—Mexico, the United States, or Canada.

As companies began to build manufacturing plants in Mexico, Walmart could buy these products without paying the high import tariffs. An example of this tactic in the early years of NAFTA was Sony’s flat-screen television line, Wega. Sam’s Clubs in Mexico imported Wega TVs from Japan with a 23 percent import tariff plus huge shipping costs, resulting in a $1,600 retail price. In 1999, Sony built a manufacturing plant in Mexico, thus allowing Sam’s Club to purchase the Wegas without import tariffs; this tactic also yielded much lower shipping fees. Sam’s Clubs passed on the savings to customers. Recently, Chinese electronics manufacturer Hi- sense bought a factory in Rosarito, Mexico, from Japanese manufacturer Sharp Corp. and hopes to ship 4 million TVs under the Sharp brand name throughout North America, in- cluding to Walmart. Higher labor costs in China and closer proximity to the NAFTA markets make Mexico a far more at- tractive market for Hisense products, plus once it gains ac- cess to Walmart, it gains access to all of the markets where Walmart operates.40 NAFTA resulted in better suppliers due to an increase in competition, competitiveness, and effi- ciency among companies in order to gain the trust of their clients. Suppliers have invested in being more productive in order to be more competitive, while at the same time gaining greater access to better materials and technologies in the region. Better suppliers also increased the variety of prod- ucts available to consumers with wider price ranges, which allowed Walmart to offer customers better savings and thus increase their purchasing power. NAFTA also helped Mexico achieve greater economic growth and lower rates of infla- tion, again adding to the purchasing power of consumers.

Comerci and others have combated Walmart’s tactics by lowering their own prices, but on many items, they can’t get the prices as low. Walmart’s negotiating power with its

234 part 3 Theories and Institutions: Trade and Investment

suppliers is large enough that it can get the better deal. Also, most of Mexico’s retailers have priced goods differently. They were used to putting certain items on sale or at deep discount, a strategy known as “high and low,” rather than lowering all prices. Though they have been trying to adjust their pricing structure to match Walmart’s, they are still frus- trated with Walmart’s continued cost cutting.

Walmart’s Expansion into Central America Walmart also made two significant changes in its operations in Mexico. First, Walmart de Mexico purchased Walmart Centroamerica in 2009. One thing that facilitated that acqui- sition was the fact that Mexico, in addition to being a NAFTA member, signed free trade agreements with 49 countries around the world, including several in Central America. This meant that they could gain access to even more products and suppliers. Walmart worked with thousands of suppliers throughout Mexico and Central America, with more than 60 percent of their supplier base in Mexico composed of SMEs (small- and medium-sized entities). They were also able to better coordinate the network of 14 distribution centers in Mexico and Central America.

Second, Walmart established a multi-format operations approach in the region to address different consumer seg- ments. This occurred not only in Mexico but also in Central America through Bodegas and discount stores, hypermar- kets, clubs, and supermarkets. Two different store concepts it established are Bodega Aurrera and Superama, both supermarket stores aimed at different demographics. In addi- tion, Walmart opened apparel stores and restaurants. It also

learned things in Mexico to help target the Hispanic commu- nity in the United States by opening at Latin-themed ware- house store in Houston, Texas, called Más, a spinoff of Sam’s Club. In addition, Walmart imported products from Mexico for its stores in the United States for the Hispanic community.

How Much Did Bribes Help? Just as things were looking bright, allegations were brought against Walmart in 2012 that systematic bribery was an im- portant part of its expansion efforts. Allegedly, the CEO of Walmart de Mexico was using bribes to expedite their ability to obtain permits to build stores in a rush to expand. Were these alleged payments “business as usual,” or did they ille- gally give Walmart an advantage in its rush to expand there and gain greater dominance over its competition? This is an interesting question and one being investigated by the U.S. Department of Justice. However, as recently as 2015, little had been discovered in the way of major offenses, and it is likely that not much will come of the allegations.

Questions

8-3. How much of Walmart’s success is due to NAFTA, and how

much is due to Walmart’s inherent competitive strategy? In

other words, could any other U.S. retailer have the same suc-

cess in Mexico post-NAFTA, or is Walmart a special case?

8-4. What can a local retailer like Comerci do to compete against

Walmart?

8-5. How can NAFTA be beneficial to suppliers of Walmart?

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the following Assisted-graded writing questions:

8-6 Walmart tried to be successful in Germany and failed. However, it has been very successful in Mexico. How has the implementation of NAFTA affected Walmart’s success in Mexico?

8-7 What do you think of Walmart’s strategy in Mexico and Central America, and how have bilateral agreements and geographic proximity played a role in its success?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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Part Four

Another man’s trade costs money.

—Portuguese proverb

World Financial Environment

objEctivEs

After studying this chapter, you should be able to

9-1 Define what foreign exchange is and who the major players are in the foreign-exchange market

9-2 summarize the major characteristics of the foreign-exchange market

9-3 compare and contrast spot, forward, options, and futures markets

9-4 Explain some of the major aspects of the foreign-exchange markets

9-5 show how companies use foreign exchange to facilitate international trade

chaPtEr 9 Global Foreign-Exchange Markets

Western Union Store in Dubai. ▶

Case Going Down to the Wire in the Money-Transfer Market

How Migration Drives western Union’s BUsiness

From a business standpoint, it is interesting to think of corridors, such as the U.S.–Mexico corridor, or the India–United Arab Emirates (pri- marily Dubai) corridor. The larger and more stable the corridor, the more important it is to have the availability of Western Union services on both ends. Migration is based on supply and demand. People gen- erally migrate to other countries because of better economic opportu- nities, although the flow of immigrants from Syria to Europe is also a function of political unrest and security. The World Bank estimates that the top recipients of officially recorded remittances in this $600 billion annual market are India, China, the Philippines, Mexico, Nigeria, and Egypt. Each of these countries has large numbers of people working abroad who are sending money home to their families.

Most of the migrant workers in the United States come from North America (which includes Canada and Mexico), Latin America, and the Caribbean. Most of Western Union’s wire transfer business in the United States comes from Mexican immigrants who send part of their paychecks home to support their families. Mexico has histori- cally ranked as the largest host country in Latin America for remit- tances, followed by Brazil. Remittances often exceed foreign direct investment and overseas aid as sources of foreign exchange. Before the drop in oil prices, annual remittance income passed tourism to become the second-largest source of foreign-exchange income in Mexico, after oil revenues.

CoMpetitive ForCes

Financial institutions such as banks have pressured Western Union to use better exchange rates. Profit margins in the money-transfer business can reach 30 percent, and many banks have started to offer their own money-transfer services in an attempt to take ad- vantage of the continued expected growth of the foreign money- transfer industry.

This new onslaught of competition by banks has forced West- ern Union to cut its fees and offer new services, including a home- delivery service, where money is delivered directly to the recipient’s door. Western Union is also moving into countries such as China and India to boost its market share. The increased competition has driven down remittance fees around the world. Western Union has also developed other delivery mechanisms, including online and mobile delivery.

In addition, Western Union is affected by currency forces since it is a dollar-based company and earns revenues in other curren- cies. When the dollar strengthens, its revenues from foreign earn- ings fall. A slowdown in economic growth worldwide means that

Long known as “the fastest way to send money,” U.S.-based Western Union is the world leader of retail wire transfers—the electronic transfers of funds from one financial institution to an- other.1 However, it is facing stiff competition from a variety of sources and is also struggling with a complex economic and po- litical environment.

Western Union was started in 1851 when a group of business- men in Rochester, New York, formed the New York and Mississippi Valley Printing Telegraph Company. The name was changed to West- ern Union in 1861 when the first transcontinental telegraph line was completed. Western Union introduced its money-transfer service in 1871, and in 1989 it began offering it outside North America. Today, more than 500,000 Western Union agent locations are found in over 200 countries and territories around the world, in addition to more than 100,000 ATMs and kiosks. Because of their global reach, they execute transactions in more than 130 currencies. Western Union operates C2C, B2C, and B2B, although 80 percent of its revenues are C2C (consumer to consumer).

Consumers have many different options when sending money through Western Union: in person, at an agent location, over the phone, or online; via cash, debit cards, or credit cards. And they can use the service at a variety of locations: an actual Western Union office, a grocery store, a post office—just about anywhere people go to transact business. To send money to, say, India or Mexico us- ing a Western Union agent location, the customer fills out a “Send Money” form and gets a receipt, which includes a Money Transfer Control number to give to the person receiving the funds. To retrieve the funds, the receiver then fills out a “Receive Money” form and presents the Money Transfer Control number along with valid identi- fication at a Western Union agent location.

Converting CUrrenCy

Transfer funds are converted into the foreign currency using an ex- change rate set by Western Union. The fees for sending money are determined based on how much is sent, in what form (cash or debit/ credit card), and where it is going. For example, sending $500 to Mexico from a grocery store in Utah costs $8.00 (down from $12 only four years ago). In this case, payment must be made in cash, the $8.00 fee is subtracted, and the recipient on the other end receives 8,644 Mexican pesos, which is about 1.8 percent less than the go- ing spot exchange rate. Part of Western Union’s attractiveness is its speed and anonymity—it can move cash from one location of the world to another in just minutes. Money can be sent through an agent by cash (as in the case above), debit card, credit card, or a Western Union Gold Card, and senders are required to fill out a form and show a proper ID.

Chapter 9 Global Foreign-Exchange Markets 237

some countries are not attractive for immigration due to the lack of good jobs. Terrorism has also forced countries to implement stron- ger immigration policies and tighten up controls on the movement of money that could be used to finance terrorism.

exaMples FroM MexiCo anD DUBai

Immigrant workers may complain about the high transfer fees and exchange-rate spread associated with Western Union, but many continue to use this service instead of the lower-cost method of remitting money through banks. For example, Mexico has a history of unstable currencies and widespread inflation, resulting in a tradi- tional mistrust of banks. Other immigrants base their choice of how to remit money on word of mouth or convenience and location.

A major advantage of Western Union is its worldwide availabil- ity. For thousands of tiny villages, Western Union is the main link to the outside world. Coatetelco, a small village south of Mexico City, has no bank. Remittances—mostly from agricultural or construction workers in Georgia and the Carolinas—account for 90 percent of the villagers’ incomes. Patricio, 49, says that at the end of each month he gets a call from his two sons, who are working in Georgia. They give him a code number, and he drives or rides his horse four miles to the nearest Western Union office, located in a government tele- graph office, to pick up the $600 they spent $40 to wire to him. Less expensive remittance services are available at the nearby Banamex branch in Mazatepec, but so far Patricio and his neighbors are not willing to travel the eight miles to get there. Besides, he says, “we do not trust the banks, and they make everything more difficult.” For- tunately costs have dropped dramatically since Patricio first started receiving money from his sons in Georgia.

Dubai, one of the seven states in the United Arab Emirates (UAE), is an interesting point of comparison with Mexico. Although work- ers from India and Pakistan go to Dubai to work because of higher wages, they are actually recruited by companies in Dubai. Because

of Dubai’s relatively small local Emirati population (only 19 percent of the total population), there is no way the country could develop without foreign workers—skilled, semiskilled, and unskilled. India is the natural source of workers, with Mumbai only about 1,200 miles (1,900 km) away. Employees must have a permit to work in Dubai, typically for three years at a time. Workers can be sent home when- ever their employers decide they are no longer needed. But these workers are critical for the growth of the local economies. They have increased the speed of urbanization, fast-tracked infrastructure and economic development, helped the GCC countries diversify from oil by helping construct hotels and tourist attractions, and contributed to solid economic growth.

Western Union, with a deep understanding of the remittance markets, its ethnic marketing expertise, diversified presence and resulting closeness to customers, and its rapid growth in Dubai, has developed high and growing brand awareness there and has worked hard to develop products and messages that appeal to the customers. Dubai and the United States are different in terms of size and the demand for labor, while India and Mexico are differ- ent in terms of how and why they supply labor, but there is one constant: people need to move money, and that is where Western Union comes in. ■

Questions

9-1. The United Emirates, of which Dubai is a member, is one of

the Gulf Cooperation Council members. How does it com-

pare with the other GCC countries in terms of total popu-

lation and the nonimmigrant population as a percentage of

total population? How important do you think migration and

therefore capital remittances are for each of the countries in

the GCC?

9-2. What forces are likely to have the greatest influence on

Western Union’s business in the future?

wHat is Foreign exCHange anD wHo are tHe Major players in tHe Market? Foreign exchange is money denominated in the currency of another nation or group of nations.2 The market in which such transactions take place is the foreign-exchange mar- ket. Foreign exchange can be in the form of cash, funds available on credit and debit cards, traveler’s checks, bank deposits, or other short-term claims.3 As an example, our opening case illustrates how Mexican immigrant workers in the United States often use Western Union to convert dollars to pesos and then wire the pesos to offices in Mexico where rela- tives can retrieve the cash.

ConCept CHeCk

When we introduced the idea of a multinational enterprise (Mne) on p. 16 in Chapter 1, we emphasized that MNEs are firms that take a global approach to production and markets. Here we add that the need to deal with foreign exchange is one of the important factors in the environment in which MNEs must conduct business.

238 part 4 World Financial Environment

An exchange rate is the price of a currency—specifically, the number of units of one currency that buy one unit of another currency. The number can change daily. On March 25, 2016, €1 could purchase US$1.3181 (or $1 could purchase €0.7587).

The foreign-exchange market is made up of many different players. The Bank for International Settlements (BIS), a financial organization centered in Basel, Switzerland, owned and controlled by 60 member central banks, divides the market into three major cat- egories: reporting dealers, other financial institutions, and nonfinancial institutions.4

Reporting dealers, also known as money center banks, are large financial institutions that actively participate in local and global foreign-exchange and derivative markets. They are widely assumed to include the largest banks and financial institutions in terms of overall market share in foreign-exchange trading, such as Deutsche Bank, Citi, Barclays Capital, UBS, JP Morgan, HSBC, RBS, Credit Suisse, and Goldman Sachs. Because of the volume of transactions that the money center banks engage in, reporting dealers influence price- setting and are the market makers.

The other financial institutions are not classified as reporting dealers. They include smaller local and regional commercial banks, investment banks and securities houses, hedge funds, pension funds, money market funds, currency funds, mutual funds, special- ized foreign-exchange trading companies, and so forth. Western Union is a nonbanking financial institution that deals in foreign exchange. Nonfinancial customers comprise any counterparty other than those described above and include any nonfinancial end user, such as governments and companies. In the 2013 BIS Triennial Central Bank Survey of foreign- exchange and derivatives market activity, 39 percent of the daily turnover of forex was by reporting dealers, whereas 53 percent was by other financial institutions, and only 9 percent by nonfinancial customers.5

soMe aspeCts oF tHe Foreign-exCHange Market

How to traDe Foreign exCHange Foreign exchange is traded using electronic methods (eTrading), customer direct, interbank direct, or voice broker. Recently, more than 50 percent of foreign-exchange trading volume was being executed by electronic means. Although connection by voice with a broker is still important for some types of transactions, high touch trades by voice (where the broker provides research and advice) is giving way to low touch voice (which involves a voice transaction com- bined with eTrading).6 Different kinds of electronic methods are involved. One is an electronic broking system in which trades are matched up for foreign-exchange dealers using electronic systems such as EBS, Thomson Reuters, and Bloomberg. Another is an electronic trading system that is executed on a single-bank proprietary system or a multibank dealing system. Interbank direct refers to trades between dealer banks via telephone or direct electronic trading.

The electronic services provided for customers by EBS, Thomson Reuters, and Bloomberg also furnish a great deal of market data, news, quotes, and statistics about different markets around the world. It is not uncommon for a trading room to have more than one electronic service and for traders to have different preferences within the same office. Bloomberg and Reuters provide market quotes from a large number of banks, so their quotes are close to the market consensus.

The foreign-exchange market has two major segments: the over-the-counter market (OTC) and the exchange-traded market. The OTC market is composed of commercial banks as just described, investment banks, and other financial institutions. The exchange-traded market comprises securities exchanges, such as the CME Group, NASDAQ OMX, and Intercontinental Exchange (ICE), where certain types of foreign-exchange instruments, such as futures and options, are traded.

Foreign exchange—money denominated in the currency of another nation or group of nations; an exchange rate is the price of a currency.

The Bank for International Settlements divides the foreign-exchange market into reporting dealers (also known as dealer banks or money center banks), other financial institutions, and nonfinancial institutions.

Dealers can trade foreign exchange

• directly with customers, • through voice brokers, • through electronic

brokerage systems, • directly through interbanks.

Foreign-exchange market:

• Over-the-counter (OTC) commercial and investment banks

• Securities exchanges

Chapter 9 Global Foreign-Exchange Markets 239

gloBal otC Foreign-exCHange instrUMents The phrase “global OTC foreign-exchange instruments” refers to spot transactions, outright forwards, FX swaps, currency swaps, currency options, and other foreign-exchange products. These instruments are all traded in the markets mentioned above.

• Spot transactions involve the exchange of currency for delivery in two business days after the day the transaction was made. For example, a bank would quote an exchange rate for a transaction on Monday, but delivery would take place on Thursday.7 The rate at which the transaction is settled is the spot rate.

• Outright forward transactions involve the exchange of currency on a future date be- yond two business days. It is the single purchase or sale of a currency for future deliv- ery. The rate at which the transaction is settled is the forward rate and is a contract rate between the two parties. The forward transaction will be settled at the forward rate no matter what the actual spot rate is at the time of settlement.

• In an FX swap, one currency is traded for another on one date and then swapped back later. Most often, the first or short leg of an FX swap is a spot transaction and the second or long leg a forward transaction. Let’s say IBM receives a dividend in British pounds from its subsidiary in the United Kingdom but has no use for British pounds until it has to pay a UK supplier in 30 days. It would rather have dollars now than hold on to the pounds for a month. IBM could enter into an FX swap in which it sells the pounds for dollars to a dealer in the spot market at the spot rate and agrees to buy pounds for dollars from the dealer in 30 days at the forward rate.

• Currency swaps deal more with interest-bearing financial instruments (such as a bond) and involve the exchange of principal and interest payments.

• Options are the right, but not the obligation, to trade foreign currency in the future. • A futures contract is an agreement between two parties to buy or sell a particular cur-

rency at a particular price on a particular future date, as specified in a standardized con- tract to all participants in a currency futures exchange rather than in the over-the-counter market.

Outright forwards (13 percent) and FX swaps (42 percent) remain the dominant category of instruments, closely followed by spot transactions (38 percent). Options and other trans- actions are only 6.3 percent of the market.8

size, CoMposition, anD loCation oF tHe Foreign-

exCHange Market Before we examine the market instruments in more detail, let’s look at the size, composi- tion, and geographic location of the market. The BIS estimated in its 2013 survey of global foreign-exchange activity that daily foreign-exchange turnover was $5.3 trillion, an increase of 32.5 percent over the 2010 survey. However, the rise in activity was much smaller than the 71 percent increase from 2004 to 2007 due to the global economic crisis that began in 2008. Current daily turnover (mid-2016) is estimated to be closer to $7 trillion.

Using the U.s. Dollar on the Foreign-exchange Market The U.S. dollar is the most important currency on the foreign-exchange market; in the latest BIS Survey, it was one side (buy or sell) of 87 percent of all foreign currency transactions worldwide, as Table 9.1 shows. (Numbers in the table are percentages and add up to 200 percent because there are two sides to each transaction.) Although the dollar, euro, yen, and pound sterling are the most widely traded currencies, the Chinese yuan is steadily growing in importance. In 2014, nearly 25 percent of China’s trade took place in yuan, as compared with only 2 percent in 2009.9

The spot rate is the exchange rate quoted for transactions that require delivery within two days.

Outright forwards involve the exchange of currency beyond three days at a fixed exchange rate, known as the forward rate.

An FX swap is a simultaneous spot and forward transaction.

Currency swaps, options, and futures contracts are other forms of transactions in foreign exchange.

ConCept CHeCk

The most widely traded currencies in the world are those issued by countries that enjoy high levels of political freedom (Chapter 3, page 67) and economic freedom (Chapter 4, page 106).

240 part 4 World Financial Environment

There are five major reasons why the dollar is so widely traded:10

1. It’s an investment currency in many capital markets. 2. It’s a reserve currency held by many central banks. 3. It’s a transaction currency in many international commodity markets. 4. It’s an invoice currency in many contracts. 5. It’s an intervention currency employed by monetary authorities in market operations

to influence their own exchange rates.

The U.S. dollar is an important vehicle for foreign-exchange transactions between any two countries. Let’s say a Mexican company importing products from a Korean exporter

taBle 9.1 global Foreign exchange: Currency Distribution

The U.S. dollar is involved in 87 percent of all worldwide foreign-exchange transactions.

Source: Based on Bank for International Settlements, Central Bank Survey Report on Foreign Exchange Turnover in April 2013 (Basel, Switzerland: BIS, September 2013): 10.

Currency april 2001 april 2004 april 2007 april 2010 april 2013 U.S. dollar 89.9 88.0 85.6 84.9 87.0 Euro 37.9 37.4 37.0 39.1 33.4 Japanese yen 23.5 20.8 17.2 19.0 23.0 Pound sterling 13.0 16.5 14.9 12.9 11.8 Australian dollar 4.3 6.0 6.6 7.6 8.6 Swiss franc 6.0 6.0 6.8 6.4 5.2 All others 25.4 25.3 31.9 30.1 31.0

The City of London is one of the leading financial cen- ters of global finance and handles 40.9 percent of the foreign exchange trading in the world. Source: QQ7/Shutterstock

▶

Chapter 9 Global Foreign-Exchange Markets 241

converts Mexican pesos into dollars and sends them to the Korean exporter, who converts them into Korean won. Thus, the dollar has one leg on both sides of the transaction—in Mexico and in Korea. Why? One reason is that the Korean exporter might have no need for pesos but can use dollars for a variety of reasons. Or the Mexican importer might have trou- ble getting won at a good exchange rate if the Mexican banks are not carrying won balances. However, the banks undoubtedly carry dollar balances, so the importer might have easy ac- cess to the dollars. Thus, the dollar greatly simplifies life for a foreign bank because the bank doesn’t have to carry balances in many different currencies.

Frequently traded Currency pairs Another way to consider foreign currency trades is to look at the most frequently traded currency pairs. The top seven pairs in the 2013 BIS Survey involved the U.S. dollar, with the top two being euro/dollar (EUR/USD)—24.1 percent of the total—and dollar/yen (USD/JPY).11 Because of the importance of the U.S. dollar in foreign- exchange trade, the exchange rate between two currencies other than the dollar—for ex- ample, the exchange rate between the euro and the Brazilian real—is known as a cross rate.

the euro The euro is also in four of the top ten currency pairs. The top three currency pairs involving the euro are the dollar, the yen, and the British pound. However, the euro is also important for other currencies in the EU that are not part of the monetary union as well as non-EU countries in Europe, such as Turkey.

Given that the dollar is clearly the most widely traded currency in the world, you’d expect the biggest market for foreign-exchange trading to be in the United States. As Figure 9.1 il- lustrates, however, the biggest by far is in the United Kingdom. The four largest centers for foreign-exchange trading (the United Kingdom, the United States, Japan, and Singapore) account for 71.1 percent of the total average daily turnover. The U.K. market is so dominant that more dollars are traded in London than in New York.12

Foreign-exCHange traDes anD tiMe zones If the U.S. dollar is the most widely traded currency in the world, why is London so im- portant as a trading center? There are two major reasons. First, London, which is close to the major capital markets in Europe, is a strong international financial center where many domestic and foreign financial institutions operate. Thus, its geographic location relative to significant global economic activity is key.

The dollar, the most traded currency in the world, is part of four of the top seven currency pairs: the dollar/euro and the dollar/yen are the top two.

The biggest market for foreign exchange is London, followed by New York, Tokyo, and Singapore.

United Kingdom 40.9%

United States 18.9%Japan

5.6%

Singapore 5.7%

Switzerland 3.2%

Hong Kong (SAR) 4.1%

Australia 2.7%

Others 18.9%

Figure 9.1 Foreign-exchange Markets: geographical Distribution, September 2013 The United Kingdom handles 40.9 percent of all world foreign-exchange activity (compared to just 18.9 percent by the United States). Location is a big factor in the United Kingdom’s popularity: London is close to all the capital markets of Europe, and its time zone makes it convenient for making trades in both the U.S. and Asian markets.

Source: Based on Bank for International Settlements, Central Bank Survey Report on Foreign Exchange Turnover in April 2013: Preliminary Global Results (Basel, Switzerland: BIS, September 2013: 14): 1.

242 part 4 World Financial Environment

Second, London is positioned in a unique way because of its time zone. As Map 9.1 shows, noon in London is 7:00 a.m. in New York and evening in Asia. The London mar- ket opens toward the end of the trading day in Asia and is going strong as the New York foreign-exchange market opens up. Thus, the city straddles both of the other major world markets.

San Francisco

New York

London

Tokyo

Hong Kong

Tokyo

Singapore

Sydney

Map 9.1 international trade zones and the single world Market The world’s communication networks are now so good that we can talk of a single world market. It starts in a small way in New Zealand at around 9:00 a.m., just in time to catch the tail end of the previous night’s market in New York. Two or three hours later, Tokyo opens, followed an hour later by Hong Kong and Manila, then half an hour later by Singapore. By now, with the Far East market in full swing, the focus moves to the Near and Middle East. Mumbai opens two hours after Singapore, followed after an hour and a half by Abu Dhabi and Athens. At this stage, trading in the Far and Middle East is usually thin as dealers wait to see how Europe will trade. Paris and Frankfurt open an hour ahead of London, and by this time Tokyo is starting to close down, so the European market can judge the Japanese market. By lunchtime in London, New York is starting to open up, and as Europe closes down, positions can be passed westward. Midday in New York, trading tends to be quiet because there is nowhere to pass a position to. The San Francisco market, three hours behind New York, is effectively a satellite of the New York market, although very small positions can be passed on to New Zealand banks. Source: Based on Julian Walmsley, The Foreign Exchange Handbook (New York: John Wiley, 1983): 7–8. Reprinted by permission of John Wiley & Sons, Inc. Some information taken from David Crystal, ed., The Cambridge Factfinders, 3rd ed., (New York: Cambridge University Press, 1998): 440.

Frankfurt London New York Wellington, NZ Sydney Tokyo Singapore

Time in New York, EST 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Figure 9.2 Overlapping Time Zones and Foreign exchange Trades Although foreign exchange is traded 24 hours a day, most of the trading activity occurs when the major foreign-exchange markets, especially London and New York, are open.

Chapter 9 Global Foreign-Exchange Markets 243

Because of overlapping time zones, the times of greatest foreign-exchange activity are when Tokyo and London are both open, a period of about two hours. The next period of greatest foreign-exchange activity is when New York opens and London is still in full swing, from 8:00 a.m. until noon New York time. However, London has already been open and ac- tive for four hours before New York opens, so New York foreign-exchange traders usually start early so as not to miss the activity in London.

Major Foreign-exCHange Markets

tHe spot Market Rates are quoted by foreign-exchange dealers. The bid (buy) rate is the price at which the dealer is willing to buy foreign currency; the offer (sell) is the price at which the dealer is willing to sell foreign currency. The difference between the bid and offer rates is the dealer’s profit margin.

Direct and indirect Quotes Let’s look at an example of how a bid and offer might work. For example, the rate a U.S.-based dealer quoted for the British pound on April 1, 2016, was $1.4228/30. This means the dealer is willing to buy pounds at $1.4228 each and sell them for $1.4230 each (i.e., buying low and selling high). In this example, the dealer quotes the foreign currency as the number of U.S. dollars for one unit of that currency. This method of quoting exchange rates is called the direct quote, which is the number of units of the domestic currency (the U.S. dollar in this case) for one unit of the foreign currency. It is also known as American terms.

The other convention for quoting foreign exchange is known as the indirect quote, or European terms. It is the number of units of the foreign currency for one unit of the domes- tic currency. On April 1, 2016, the indirect quote for the U.K. pound was £0.7028, which is the number of British pounds per U.S. dollar.13

Base and Term Currencies When dealers quote currencies to their customers, they always quote the base currency (the denominator) first, followed by the terms currency (the nu- merator). A quote for USD/JPY (also shown as USDJPY = X) means the dollar is the base currency and the yen is the terms currency (the number of Japanese yen for one U.S. dollar). If you know the dollar/yen quote, you can divide that rate into 1 to get the yen/dollar quote. In other words, the exchange rate in American terms (the direct quote) is the reciprocal or inverse of the exchange rate in European terms (the indirect quote). For example, on April 1, 2016, the indirect quote for Japanese yen (USD/JPY) was ¥111.72 for one dollar. The recipro- cal would be 1/¥11.72 = $0.00895.14

In a dollar/yen quote, the dollar is the denominator, the yen the numerator. By tracking changes in the exchange rate, managers can determine whether the base cur- rency is strengthening or weakening. For example, on April 1, 2015, the dollar/yen rate was ¥119.75/$1.00, compared with ¥111.72/$1.00. As the numerator decreases, the base currency (the dollar) is weakening. Conversely, the terms currency (the yen) is strengthening.

There are many ways to get exchange rate quotes, including online and print media. Because most currencies constantly fluctuate in value, it is possible to get up-to-the-second quotes from providers like Reuters or Bloomberg. Quotes are also available from online and printed media such as The Wall Street Journal or Financial Times.

Interbank Transactions The spot rates provided by The Wall Street Journal are the selling rates for interbank transactions of $1 million and more. Retail transactions—those be- tween banks and companies or individuals—provide fewer foreign currency units per dollar than interbank transactions.

Key foreign-exchange terms:

• Bid—the rate at which traders buy foreign exchange.

• Offer—the rate at which traders sell foreign exchange.

• Spread—the difference between bid and offer rates.

• American terms, or direct quote—the number of dollars per unit of foreign currency.

• European terms, or indirect quote—the number of units of foreign currency per dollar.

244 part 4 World Financial Environment

tHe ForwarD Market As noted earlier, the spot market is for foreign-exchange transactions that occur within two business days. But in some transactions, a seller extends credit to the buyer for a period longer than that. For example, a Japanese exporter of consumer electronics might sell televi- sion sets to a U.S. importer with immediate delivery but payment due in 30 days. The U.S. importer is obligated to pay in yen in 30 days and may enter into a contract with a currency dealer to deliver the yen at a forward rate—the rate quoted today for future delivery.

In addition to the spot rates for each currency, foreign-exchange traders can provide for- ward rates for most currencies. The most widely traded are the euro, the Japanese yen, the Swiss franc, and the British pound due to their market liquidity. Although forward rates are available for different dates in the future, the more exotic the currency, the more difficult it is to get a forward quote out too far in the future, and the greater the difference is likely to be between the forward rate and the spot rate.

Forward Discounts and premiums Building on what we said earlier, we now can say that the difference between the spot and forward rates is either the forward discount or the forward premium. In order to explain how to compute and interpret the premium or dis- count, let’s use the direct rate between the U.S. dollar and the Swiss franc from the perspec- tive of a U.S. trader—in this case, the number of dollars per franc. If the forward rate for the Swiss franc is greater than the spot rate, the franc would get more dollars in the future, so it would be trading at a premium. If the forward rate is less than the spot rate, the franc would be selling at a discount since it would get you less dollars in the future. Assume the spot rate for the Swiss franc is $1.0784 and the six-month forward rate is $1.0808. The premium or discount would be computed as follows:

$ 1.0808 - 1.0784 1.0784

* 12 6

= .00445 * 100 or 0.45%

The premium is annualized by multiplying the difference between the spot and forward rates by 12 months divided by the number of months forward—6 months, in this example. Then you multiply the results by 100 to put them in percentage terms. Because the forward rate is greater than the spot rate, the Swiss franc is selling at a premium in the forward market by 0.45 percent above the spot rate. During this particular period of time, interest rates in the major economies were quite low because of the global economic slowdown and the desire to keep interest rates low in order to speed up economic growth. Thus the premium is also quite low. During periods of greater divergence in interest rates, the premium or discount could be much larger. In 2007, for example, the franc was selling at a 2.5 percent premium in the six-month forward market.

options An option is the right, but not the obligation, to buy or sell a foreign currency within a certain time period or on a specific date at a specific exchange rate. It can be purchased OTC from a commercial or investment bank or on an exchange. For example, a U.S. company purchases an OTC option from a commercial or investment bank to buy 1,000,000 Japanese yen at ¥85 per US$ ($0.011765 per yen)—or $11,765. The writer of the option will charge the company a fee for writing it. The more likely the option is to benefit the company, the higher the fee. The rate of ¥85 is called the strike price for the option; the fee or cost is called the premium. On the date when the option is set to expire, the company can look at the spot rate and compare it with the strike price to see what the better exchange rate is. If the spot rate were ¥90 per US$ ($0.01111 per yen)—or $11,000—it would not exercise the option because buying yen at the spot rate would cost less than buying them at the option rate. However, if the spot rate at that time were ¥80 per US$ ($0.0125 per yen)—or $12,500—the company would exercise the option because buying at the option rate would cost less than at the spot rate. The option gives the company flexibility because it can walk away from the option if the strike price is

The forward rate is the rate quoted for transactions that call for delivery after two business days.

A forward discount exists when the forward rate is weaker than the spot rate.

A premium exists when the forward rate is stronger than the spot rate.

An option is the right, but not the obligation, to trade a foreign currency at a specific exchange rate.

Chapter 9 Global Foreign-Exchange Markets 245

not a good price. In the case of a forward contract, the cost is usually cheaper than the cost for an option, but the company cannot walk away from the contract. So a forward contract is cheaper but less flexible.

The above example is for a simple, or vanilla, option. However, exotic or structured op- tions are used more widely to hedge exposure, especially by European companies. The idea behind them is to provide an option product that meets a company’s risk profile and toler- ance and results in a premium that is as close to zero as possible. The writer of the option can still make money on the structured option, but if the option is set up effectively, the company buying it won’t have to write out a big check for the premium.

FUtUres A foreign currency futures contract resembles a forward contract insofar as it specifies an exchange rate some time in advance of the actual exchange of currency. However, a future is traded on an exchange, not OTC. Instead of working with a bank or other financial institu- tion, companies work with exchange brokers when purchasing futures contracts. A forward contract is tailored to the amount and time frame the company needs, whereas a futures contract is for a specific amount and maturity date. It is less valuable to a company than a forward contract. However, it may be useful to speculators and small companies that cannot enter into the latter.

tHe Foreign-exCHange traDing proCess When a company sells goods or services to a foreign customer and receives foreign currency, it needs to convert it into the domestic currency. When importing, the company needs to convert domestic to foreign currency to pay the foreign supplier. This conversion usually takes place between the company and its bank.

Sometimes foreign-exchange services are provided by the large money center banks, such as Citi or HSBS, to corporate clients. For mid-market and smaller local companies, services are provided by the local banks who establish correspondent relationships with the larger money center banks. The left side of Figure 9.3 shows what happens when U.S. Company A needs to sell euros for dollars. This situation could arise when A receives payment in euros from a German importer. The right side of the figure shows what hap- pens when B needs to buy euros with dollars, which could happen when a company has to pay euros to a German supplier. In either case, the U.S. company would contact its bank for help in converting the currency. If it is a large MNE, such as a Fortune 500 firm in the United States or a Global Fortune 500 company, it will probably deal directly with a money center bank (as shown on the top arrow in Figure 9.3) and not worry about an- other financial institution. Smaller companies would probably work through Financial Institution A or B (a local or regional bank), which operates through a money center bank to make the trade. Assume that U.S. Company B is going to receive euros in the future. Because it cannot convert in the spot market until it receives the euros, it can consider a forward, swap, options, or futures contract to protect itself until the currency is finally de- livered. Financial Institution B can do a forward, swap, or options contract for Company B. However, Company B can also consider an options or futures contract on one of the ex- changes, such as the CME Group. The same is true for Company A, which will need euros in the future.

Banks anD exCHanges At one time, only the big money center banks could deal directly in foreign exchange. Regional banks had to rely on them to execute trades on behalf of their clients. The emer- gence of electronic trading has changed that. Now even the regional banks can hook up to

A futures contract specifies an exchange rate in advance of the actual exchange of currency, but it is not as flexible as a forward contract.

246 part 4 World Financial Environment

Bloomberg, Thomson Reuters, or EBS and deal directly in the interbank market or through brokers. Despite this, the greatest volume of foreign-exchange activity takes place with the big money center banks. Because of their reach and volume, they are the ones that set the prices in global trading of foreign exchange.

top Foreign-exchange Dealers There is more to servicing customers in the foreign- exchange market than size alone. Each year, Euromoney magazine surveys treasurers, trad- ers, and investors worldwide to identify their favorite banks and the leading dealers in the interbank market. The criteria include transaction volumes and quality of services, their loca- tion, the capability of handling major and exotic currencies, their offering of derivatives, and their research and consulting capabilities.15

Given the differing capabilities, large companies may use several banks to deal in for- eign exchange, selecting those that specialize in specific geographic areas, instruments, or currencies. At one time, for example, AT&T used Citi for its broad geographic spread and wide coverage of different currencies, Deutsche Bank for euros, Swiss Bank Corporation (now the Union Bank of Switzerland) for Swiss francs, NatWest Bank for British pounds, and Goldman Sachs for derivatives. Based on the criteria mentioned above, the major banks that deal in foreign exchange worldwide in a recent Euromoney survey are Citicorp, Deutsche Bank, Barclays, JP Morgan, UBS, BAML (Bank of America Merrill Lynch), and HSBC.16

top exCHanges For traDing Foreign exCHange In addition to the OTC market, foreign-exchange instruments, mostly options and futures, are traded on commodities exchanges. In the OTC market, companies work directly with their banks to enter into forward and options contracts. On the commodities exchanges, buyers and sellers enter into contracts with each other without going through banks. Three of the best-known exchanges are the CME Group, NASDAQ OMX, and NYSE:ICE (Intercontinental Exchange).

The top banks in the interbank market are chosen because of their location, expertise in major and specific currencies, and ability to deal in different financial instruments.

ConCept CHeCk

In Chapter 12, starting on p. 314, we explain why com- panies establish and maintain effective value chains—frame- works for dividing value- creating activities into separate processes. A reliable value chain permits a firm to focus on its core competencies—the unique skills or knowledge that make it better at something than its competitors. Because managing currencies and cross- trades is typically not among a firm’s core competencies, its bankers are key components of its value chain.

U.S. Company

Financial Institution

Money Center Bank

Financial Institution

U.S. Company

Broker

Euros Dollars

Options/ Futures

Exchange Broker

Figure 9.3 The Foreign-exchange Trading Process Let’s say that you’re U.S. Company A, that you’ve received euros in payment for goods, and that you want to sell your euros in return for dollars. To make the exchange, you may contact your local bank or go directly to a money center bank.

On the other hand, perhaps you’re U.S. Company B and you expect to receive euros as a future payment. To protect yourself against fluctuations in the exchange rate, you want to buy euros that you can subsequently trade back for dollars. You could choose, say, a forward or a swap, and your path would be essentially a mirror image of Company A’s. Finally, either Company A or Company B could choose to convert by such means as an option or a futures contract—in which case the trade could be made by an options and/or futures exchange, either directly or through a broker.

Chapter 9 Global Foreign-Exchange Markets 247

CMe group The CME Group was formed on July 9, 2007, as a merger between the Chicago Mercantile Exchange and the Chicago Board of Trade. The CME operates ac- cording to so-called open outcry: Traders stand in a pit and call out prices and quantities. The platform is also linked to an electronic trading platform, which is growing rapidly. The CME Group handles 3 billion contracts worth $1 quadrillion annual on average across a wide range of commodities, including foreign-exchange futures and options.17 Contracts are available for the dollar against a variety of currencies as well as cross-trades, such as the euro against the Australian dollar. CME uses three electronic trading platforms to trade different commodities, including currencies: CME Globex, DME Direct, and CME Clearport.

nasDaQ Prior to 2008, the Philadelphia Stock Exchange was one of the pioneers in trading currency options. In July 2008, PHLX merged with NASDAQ OMX, and in 2014, the name was changed to NASDAQ. NASDAQ trades options in seven currencies— the Australian dollar, the British pound, the Canadian dollar, the euro, the Swiss franc, the New Zealand dollar, and the Japanese yen.

nyse:iCe In 2013, Intercontinental Exchange (ICE) purchased NYSE Euronext, forming NYSE:ICE. The combined company is a giant in futures and options. ICE Futures US offers cross-trades in a number of currencies through ICE’s futures contracts on key currency pairs traded in the interbank market through an electronic trading platform.18

How CoMpanies Use Foreign exCHange Companies enter the foreign-exchange market to facilitate their regular business transac- tions and/or to speculate. Their treasury departments are responsible for establishing policies for trading currency and for managing banking relationships to make the trades. From a business standpoint, a company, first of all, trades foreign exchange for exports/imports and the buying or selling of goods and services.

When Boeing sells the new 787 Dreamliner commercial airplane to LAN, the largest airline in South America, it has to be concerned about the currency in which it will be paid and how it will receive payment. In this case, the sale is probably denominated in dollars, so Boeing will not have to worry about the foreign-exchange market (nor, in theory, will its employees). However, LAN will have to worry about the market. Where will it come up with the dollars, and how will it pay Boeing?

CasH Flow aspeCts oF iMports anD exports When a company must move money to pay for purchases, or receives money from sales, it has options as to the documents it can use, the currency of denomination, and the degree of protection it can ask for. Although transactions can be settled with cash in advance, it is more common to use a commercial bill of exchange or letter of credit.

Commercial Bill of exchange An individual or a company that pays a bill in a domestic setting can pay cash, but checks are typically used—often electronically transmitted. The check is also known as a draft or a commercial bill of exchange. A draft is an instrument in which one party (the drawer) directs another party (the drawee) to make a payment. The drawee can be either a company, like the importer, or a bank. In the latter case, the draft would be considered a bank draft.

Documentary drafts and documentary letters of credit are used to protect both the buyer and the seller. They require that payment be made based on the presentation of documents conveying the title, and they leave an audit trail identifying the parties to the transactions. If the exporter requests payment to be made immediately, the draft is called a sight draft. If the pay- ment is to be made later—say, 30 days after delivery—the instrument is called a time draft.

Major exchanges that deal in foreign currency derivatives are the CME Group, NASDAQ, and NYSE:ICE.

With a draft or commercial bill of exchange, one party directs another party to make payment.

A sight draft requires payment to be made when it is pre- sented. A time draft permits payment to be made after the date when it is presented.

248 part 4 World Financial Environment

letters of Credit With a bill of exchange, it is always possible that the importer will not be able to make payment to the exporter at the agreed-upon time. A letter of credit (L/C), however, obligates the buyer’s bank in the importing country to honor a draft presented to it, provided the draft is accompanied by the prescribed documents. Of course, the exporter still needs to be sure the bank’s credit is valid as well, since the L/C could be a forgery issued by a nonexistent bank. Even with the bank’s added security, the exporter still needs to rely on the importer’s credit because of possible discrepancies that could arise in the transaction. The L/C could be denominated in the currency of either party. If it is in the importer’s currency, the exporter will still have to convert the foreign exchange into its currency through its com- mercial bank.

Although a letter of credit is more secure than a documentary draft alone, there are still risks. For the L/C to be valid, all of the conditions described in the documents must be ad- hered to. For example, if the L/C states that the goods will be shipped in five packages, it will not be valid if they are shipped in four or six packages. It is important to understand the conditions of the documents, as well as counterparty risk. Although a forged L/C is an obvious danger, the global financial crisis has exposed counterparty risk when banks did not have sufficient capital to stand behind their L/Cs. In addition, letters of credit are irrevocable, which means they cannot be canceled or changed in any way without the consent of all par- ties to the transaction.

In addition, the L/C needs to specify the currency of the contract. If the L/C is not in the exporter’s currency, the exporter will have to convert the foreign exchange into that currency as soon as it is received.

Confirmed Letter of Credit A letter of credit transaction may include a confirming bank in addition to the parties mentioned previously. With a confirmed letter of credit, the ex- porter has the guarantee of an additional bank—sometimes in the exporter’s home country, sometimes in a third country. It rarely happens that the exporter establishes the confirming relationship. Usually, the opening bank seeks the confirmation of the L/C with a bank with which it already has a credit relationship.19

otHer FinanCial Flows Companies may have to deal in foreign exchange for other reasons. For example, if a U.S. company has a subsidiary in the United Kingdom that sends a dividend to the parent com- pany in British pounds, the parent company has to enter into the foreign-exchange market to convert pounds to dollars. If it lends dollars to the British subsidiary, the subsidiary has to convert them into pounds. When paying principal and interest back to the parent company, it has to convert pounds into dollars.

speculation Companies sometimes deal in foreign exchange for profit. This is especially true for some banks and all hedge funds. But sometimes corporate treasury departments see their foreign-exchange operations as profit centers and also buy and sell foreign exchange with the objective of earning profits.

Investors can use foreign-exchange transactions to speculate for profit or to protect against risk. Speculation is the buying or selling of a commodity—in this case, foreign currency—that has both an element of risk and a chance of great profit. Assume that a hedge fund buys euros in anticipation that the euro will strengthen against other currencies. If it does, the investor earns a profit; if it weakens, the investor incurs a loss. Speculators are im- portant in the foreign-exchange market because they spot trends and try to take advantage of them. They can create demand for a currency by purchasing it in the market, or they can create a supply by selling. However, speculation is also a very risky business. In recent years, the advent of eTrading has attracted a lot of day traders in foreign exchange. The problem is that day traders rarely make money speculating in exchange rates. Forecasting currency movements is a risky business.

A letter of credit obligates the buyer’s bank to honor a draft presented to it and assume payment; a credit relationship exists between the importer and the importer’s bank.

Speculators take positions in foreign-exchange markets and other capital markets to earn a profit.

Chapter 9 Global Foreign-Exchange Markets 249

arbitrage One type of profit-seeking activity is arbitrage, which is the purchase of for- eign currency on one market for immediate resale on another market (in a different country) to profit from a price discrepancy. For example, a dealer might sell U.S. dollars for Swiss francs in the United States, then Swiss francs for British pounds in Switzerland, then the British pounds for U.S. dollars back in the United States, with the goal of ending up with more dollars.

Here’s how the process might work: Assume the dealer converts 100 dollars into 150 Swiss francs when the exchange rate is 1.2 francs per dollar. The dealer then converts the 150 francs into 70 British pounds at an exchange rate of 0.467 pounds per franc and finally converts the pounds into 125 dollars at an exchange rate of 0.56 pounds per dollar. In this case, arbitrage yields $125 from the initial sale of $100. Given the transparency of exchange rate quotes globally, it is difficult to make a lot of money on arbitrage, but it is possible for an investor who has a lot of money and can move quickly.

Interest arbitrage is the investing in debt instruments, such as bonds, in different countries. A dealer might invest $1,000 in the United States for 90 days, or convert $1,000 into British pounds, invest the money in the United Kingdom for 90 days, then convert the pounds back into dollars. The investor would try to pick the alternative that would yield the highest return at the end of 90 days.

Arbitrage is the buying and selling of foreign curren- cies at a profit due to price discrepancies.

Interest arbitrage involves investing in interest-bearing in- struments in foreign exchange in an effort to earn a profit due to interest rate differentials.

Yes People trade in foreign ex- change for a number of reasons,

and one of them is speculation, which is not illegal or nec- essarily bad. Just as stockbrokers invest people’s money to try to earn a return higher than the market average; foreign currency traders invest people’s money in foreign exchange to make a profit for the investors. Speculation is merely tak- ing a position on a currency in order to profit from market trends.

Electronic trading has made it easier for a variety of in- vestors to speculate in foreign exchange. Hedge funds are an important source of this foreign-exchange speculation. However, the transparency in trading has driven the smaller players out of the market and allowed the large institutions and traders to earn profits on small margins that require large volumes of transactions. Hedge funds generally deal in minimum investments that are quite large, so the hedge fund managers that trade in foreign exchange trade in very large volumes. They might make long-term bets on a cur- rency based on macroeconomic conditions, or they might try to balance off buy-and-sell strategies in currencies so that one side offers protection against the other. In either case, the hedge fund manager is betting on the future posi- tion of a currency to earn money for the investors in the fund.

Political and economic conditions outside the specula- tors’ control can quickly turn profits to losses. Currencies are inherently unstable. Consider the problems of the U.S. dollar in 2007 and 2008, when it was quite weak against the euro and the yen. What should hedge fund managers do? They might expect the dollar to continue to weaken. But what if

it strengthens? Or they might think the dollar has reached its floor and is ready for a rise, which would argue that the managers should buy dollars. But when will it rise and by how much? By mid-March 2008, the dollar had declined by 15 percent in the prior 12 months; 2 months later, many ex- perts felt it had reached a low point and expected it to rise. This was based on the market expectations that interest cuts by the Fed were expected to stop and that the credit crisis was beginning to soften. Now the speculators had to decide what to do with those expectations. Sometimes speculators can buy a currency on the basis of good economic funda- mentals, or they can buy or sell currency because they feel that governments are following poor economic policies. In late 2012, the Japanese economy was very weak, but the yen was strong. As the new Japanese government an- nounced that it was considering policies to weaken the yen, many hedge funds jumped into the market and sold yen, helping to push down the value. At what point do they feel that the yen has fallen enough and that it will rise again? As long as markets are free and information is available, traders ought to be able to make some money on their predictions of the future. There is even a good argument that speculators help keep governments honest by betting in directions they feel reflect political and economic fundamentals.

The key is that currency speculation is a different way to invest money and allows investors to diversify their portfo- lios from traditional stocks and bonds. Just as foreign ex- change can be traded for speculative purposes, trading in shares is also speculation. Even though we call such trades “investments,” they are just another form of speculation.

Is It OK to Speculate on Currency?

Point Point

250 part 4 World Financial Environment

no It depends on whose money you are using to speculate, whether

the speculation is supposed to benefit the institution or the trader, and if positions and gains and losses are accurately re- ported. There are plenty of opportunities for a trader, whether in foreign exchange or securities, to make money illegally or contrary to company policy. The culture of individual traders trying to make money off trading foreign exchange or other securities, combined with lax controls in financial institutions, contributes greatly to these scandals.

One of the most publicized events in the derivatives mar- kets in recent years involved 28-year-old Nicholas Leeson and the 233-year-old British bank Barings PLC. Leeson, a dealer for Barings, went to Singapore in the early 1990s to help resolve some of the bank’s problems. Within a year, he was promoted to chief dealer, with responsibility for trad- ing securities and booking the settlements. This meant that there were no checks and balances on his trading actions, thus opening the door to fraud.

In 1994, Leeson bought stock index futures on the Sin- gapore International Monetary Exchange, or SIMEX, on the assumption that the Tokyo stock market would rise. Most dealers watching his feverish trading activity assumed Bar- ings had a large client that he was trading for. It turns out, however, that he was using the bank’s money to speculate. Because the Japanese economy was recovering, it made sense to assume the market would continue to rise, thus generating more profits for Leeson and Barings. Unfortu- nately, something happened that nobody could predict—the January 17, 1995, earthquake that hit the port city of Kobe.

As a result of the devastation and uncertainty, the market fell, and Leeson had to come up with cash to cover the margin call on the futures contract. A margin is a deposit made as se- curity for a financial transaction that is otherwise financed on

credit. When the price of an instrument changes and the margin rises, the exchange “calls” the in-

creased margin from the other party—in this case, Leeson.20

However, Leeson soon ran out of cash from Barings and had to come up with more. One approach he used was to write options contracts and use the premium he collected on the contracts to cover his margin call. Unfortunately, he was using Barings’ funds to cover positions he was taking for himself, not for clients, and he also forged documents to cover his transactions.

As the Tokyo stock market continued to plunge, Leeson fell further and further behind and eventually fled the coun- try, later to be caught and returned to Singapore for trial and prison. Barings estimated that Leeson generated losses in excess of $1 billion, and the bank eventually was purchased by Dutch bank ING.21

In 2012, Bruno Iksil, nicknamed the London Whale be- cause of the large positions he was taking in derivatives trades, engaged in a trading strategy that cost JP Morgan Chase $6.2 billion in losses, far exceeding Leeson’s losses. Iksil, a French citizen, was working for an investment unit of JP Morgan Chase in London, and he executed a trading strat- egy that he claimed was “initiated, approved, mandated, and monitored” by his supervisors. Although four regulators in two countries investigated the case, it was decided to drop charg- es against him. He supposedly alerted everyone internally about the concerns with the trading strategy and increasing exposure, someone had to shoulder the blame. Iksil, his boss, and his subordinate were all fired, and JP Morgan Chase paid over $6 billion in fines for fraudulently hiding the amount of the losses and using improper valuation procedures. Specu- lation is the name of the game, but the key is to make sure regulatory oversight is followed carefully. It’s one thing to lose money, and it’s another thing to hide the losses.22

Counterpoint

Is It OK to Speculate on Currency?

Chapter 9 Global Foreign-Exchange Markets 251

government due to corruption, so that will be a drag for the foreseeable future.

technological Developments

Technological developments may not cause the for- eign-exchange broker to disappear entirely, but they will certainly cause foreign-exchange trades to be executed more quickly and cheaply. The advent of technology clearly has caused the market to shift from phone trades to electronic trades.23

Cryptocurrency

In 2009, the Bitcoin was launched, ushering in the world of cryptocurrencies, also known as virtual or digital currencies. Although other virtual currencies, such as Ethereum, have been launched, Bitcoin is still the number one virtual currency—but Ethereum is gaining ground. These digital currencies are based on a blockchain in which every transaction is recorded publicly. Programmers write the software behind the currencies, and “miners” use computers to mint the digital currency. It is estimated that there are around $6 billion of Bitcoin outstanding, compared with $1 billion in Ether, and both systems are supported by thousands of computers or nodes. Both are small compared with foreign-exchange markets, but the blockchain concept is being strongly considered by banks and corporations for certain types of transac- tions. Bitcoin and Ethereum, therefore, are looking at different ways to use their digital currencies for legiti- mate transactions while at the same time working to get regulatory approval and protect their blockchains from illegal activities, including financing terrorism.24 ■

Significant strides have been made and will con- tinue to be made in the development of foreign- exchange markets. The speed at which transactions are processed and information transmitted globally will certainly lead to greater efficiencies and more opportunities for foreign-exchange trading. The im- pact on companies is that trading costs should come down and companies should have faster access to more currencies.

Although the dollar will continue to be the major player in the foreign-exchange market in terms of the total transactions as well as the top currency pairs, the euro and yen will continue to be strong. However, the big change in the future will be the increasing usage of the yuan in global transactions, especially for countries that trade with China. The yuan can only be successful as a major player in the global foreign-exchange market as it becomes more accepted as a reserve currency that countries have confidence in. The sheer size of the Chinese economy and the efforts of the Chinese government to move the yuan closer to becoming a reserve cur- rency will help the yuan become more accepted as a major player in the foreign-exchange market.

Presently, London and New York are the major financial centers for trading currencies. As the yuan increases in importance, it will be interest- ing to see how much Singapore and Hong Kong will increase in importance, and whether or not Shanghai will increase in importance. Currencies from emerging markets are in deep trouble and will continue to be so until the global economy begins to grow again. Many of these currencies, such as the Brazilian real, are tied to the strength of the Chinese economy. However, Brazil is also suffering from a collapse in confidence in the

Looking to the Future Where Are Foreign-Exchange Markets Headed?

Case Do Yuan to Buy some Renminbi? On November 30, 2015, the International Monetary Fund announced that the Chinese yuan, also known as the renminbi (RMB or “people’s currency”), would finally join the U.S. dollar, the euro, the British pound, and the yen in the basket of reserve currencies also known as SDRs or Special Drawing Rights. Although this will not become ef- fective until October 2016, the recognition of the yuan is due to China’s increasing dominance in the global economy and its moves in recent years to liberalize its financial mar- kets. However, what does all of this mean to China and the rest of the world, and will China continue down the road to liberalization of its currency and other financial markets?

A Little History In the currency markets, the sign for the yuan is ¥ (the same symbol used for the Japanese yen) and the code is CNY. On January 7, 1994, the Chinese government, after debat- ing what to do with its currency, decided to fix the value to the U.S. dollar at a rate of ¥8.690 per dollar.25 This was easy to do, given that currency trading was controlled by the Chinese government and not allowed offshore. In 2004, Hong Kong residents were allowed to exchange local Hong Kong dollars for yuan in a first move to allow some limited trading offshore. By early 2005, the yuan was trading at a fixed rate of ¥8.2665 per dollar. But pressure began to build in 2005 as both the European Union and the United States faced strong competition from imports from China as well as from Chinese exports to developing markets.

When China fixed the value of its currency in 1994, the country was not considered a major economic powerhouse. Then things began to change. By 1999, China was the larg- est country in the world in population, and in 2003 it was the seventh-largest in the world in GNI, exceeded only by the United States, Japan, Germany, the United Kingdom, France, and Italy. It was also growing faster than any of the top six countries. In the decade of the 1990s, China grew by an an- nual average of 9.5 percent and was above 8 percent every year in the first half of the 2000s.

Because of China’s low manufacturing wages, it was ex- porting far more to the United States than it was importing. In 2004, it had a trade surplus of $155 billion with the United States, compared with a surplus of only $86 billion with the EU. However, between 2002 and 2004, China’s surplus with the EU doubled, while growing by a little over one-half with the United States. Also during that time, there were capital controls on the flow of yuan in and out of China, so there was a tremendous inflow of yuan into the banking sector in China with no real way to move the money offshore. That meant that banks could lend money at very low interest rates, fueling a

real estate boom. Also, China had to do something with its building reserves. Initially it invested huge sums of money in U.S. treasury bills, helping to fund the growing U.S. budget deficit. Then it began encouraging foreign direct investment, especially in natural resources around the world.

However, the competitive pressure of China in Asia was not the same. Because most Asian currencies were also locked onto the dollar, the yuan traded in a narrow range against those currencies. Most of the Asian countries were using China as a new market for their products, and they were not anxious to have anything upset the Chinese econ- omy and reduce demand for their products.

Critics from the United States and EU argued that the yuan was undervalued by 15 to 40 percent and the Chinese government needed to free the currency and allow it to seek a market level. The pressures for and against change were both political and economic. The U.S. government had been work- ing with the Chinese for an extended period of time to get them to revalue their currency, but the Chinese government had found plenty of excuses not to do that.

Political Pressures in China China had its own political pressures. For one thing, a lot of people had been moving currency there in anticipation of a revaluation of the yuan, which was creating inflation- ary pressures. The Chinese government was forced to buy the dollars and issue yuan-denominated bonds as a way of “sterilizing” the currency—taking it off the market to reduce the pressures. The government was not very excited about revaluing the yuan and rewarding the speculators, so it kept saying it would not announce if, when, or how much the revaluation would be. It also did not want to revalue under pressure from foreign governments lest it appear to be bowing under pressure from abroad.

Finally, China has serious problems with employ- ment. Even though its billion-plus population grows at only 1 percent annually, it adds the equivalent of a new country the size of Ecuador or Guatemala every year. China needs to add enough jobs to keep up with its population growth and dis- placed workers from its agricultural sector and state-owned firms. That means adding 15 to 20 million new jobs per year, or about 1.25 million per month.

The Advent of the Currency Basket Given these pressures, China took an historic step on July 21, 2005, and de-linked the yuan from its decade-old peg to the U.S. dollar in favor of a currency basket. Although the dollar has been the dominant currency in determining

Chapter 9 Global Foreign-Exchange Markets 253

the value of the yuan, there are periods of time when some Asian currencies have also shown themselves to be influ- ential. So the currency basket was largely denominated by the dollar, the euro, the yen, and the South Korean won— currencies that were selected because of their impact on China’s foreign trade, investment, and foreign debt. Even when the basket grew to 11 currencies, these 4 dominated.

The People’s Bank of China (PBOC, the country’s central bank) decides a central parity rate daily and then allows a trading band on either side of the decided point. The move to the currency basket increased the yuan-to-dollar rate by 2.1 percent. Before the peg was de-linked, the yuan was kept around ¥8.2665; immediately afterward, it rose to ¥8.1011, an increase of 2 percent. The PBOC responded to the pressures by the international community to strengthen the yuan by widening the trading band on May 18, 2007, from 0.3 percent to 0.5 percent on either side of the fixed rate. Obviously, that small difference allowed little room for traders.

Playing it Safe Until the yuan began its ascent against the U.S. dollar, it was very easy to deal in foreign exchange in China because the rate was fixed against the dollar. It doesn’t take a lot of judgment for a trader to operate in a fixed-rate world. The exchange rate is managed by the State Administration of Foreign Exchange (SAFE), which is closely linked to the PBOC. SAFE is responsible for establishing the new foreign-exchange trading guidelines as well as for manag- ing China’s foreign-exchange reserves. A major concern of the PBOC is that China’s financial infrastructure might be capable of trading foreign exchange in a free market.

SAFE was moving to change that. When the PBOC made the decision to loosen up the value of the yuan in 2005, it opted to allow banks in Shanghai to trade and quote prices in eight currency pairs, including the dollar-sterling and euro- yen. Prior to that, licensed banks were only allowed to trade the yuan against four currencies: the U.S. dollar, the Hong Kong dollar, the euro, and the yen. Shanghai was being po- sitioned as the financial center of China, hopefully by 2020. However, all the trades were at fixed rates, and they did not involve trades in non-yuan currency pairs. SAFE also de- cided to open up trading to seven international banks (HSBC, Citigroup, Deutsche Bank, ABN AMRO, ING, Royal Bank of Scotland, and Bank of Montreal) and two domestic banks (Bank of China and CITIC Industrial Bank).

Fast-Forward However, the global financial crisis forced the Chinese gov- ernment to return the yuan to a peg against the U.S. dollar from July 2008 until June 2010, during which time the United States and China were embroiled in a war of words over the value of the currency. The United States wanted the Chinese to allow their currency to continue to rise to help solve the

trade imbalance, and the Chinese wanted the United States to get its economy under control and stabilize the value of the dollar, which had been falling in value against most other currencies. China was even calling for the creation of a new reserve asset to take the place of the dollar in the global economy. Why was China so worried about the dollar’s value? Because most of its reserves—the largest in the world at more than $3 trillion, fed largely by its huge trade surplus— are in U.S. dollars. The last thing China wanted was to have all of its dollar reserves losing value in the global economy.

China’s Economic Challenges By the end of 2010, not only had China replaced Japan as the second-largest country in the world in terms of GDP, it was closing fast on the United States. In addition, China surpassed Germany and the United States as the largest exporter in the world, which meant that it was continuing to generate large foreign-exchange assets that were exposed to losses in value as the dollar fell against other world currencies.

China, however, had its own set of problems, irrespective of what was going on in the West. When it decided to let the yuan gradually rise against the dollar in June 2010, the result was a 3.6 percent rise in the yuan’s value against the dollar by the end of 2010. However, inflation was rising in China faster than in the United States, so Chinese exports were becoming increasingly expensive. The rise in the currency compounded the loss in competitive position brought on by the rise in inflation. Powerful Chinese exporters were very upset with the idea that the government might free up the currency and speed up their competitive challenges. Because of inflation, Chinese workers were increasingly unhappy with their work- ing conditions, and they began to demonstrate, sometimes violently. As workers pushed for higher wages, manufactur- ers faced even greater cost pressures. With general inflation, higher wages, and the possibility of an even more expensive yuan, manufacturers were being forced to move further inland to find cheaper labor, or even move abroad. Many U.S. manu- facturers began moving manufacturing back to the United States or to cheaper Asian countries.

Improvement of the Trading Infrastructure In the meantime, the PBOC announced in 2009 that it was going to allow companies in Shanghai and four other major cities to settle foreign trade in yuan instead of dollars. If Chinese companies can get more exporters and importers to settle their obligations in yuan instead of dollars, they can save a lot of transaction fees and the yuan will gradually increase in importance.

Even though China wants to make Shanghai its future financial center, a lot of yuan transactions occur in Hong Kong. For a while, it was the only place outside of mainland China allowed to set up yuan bank accounts. Hong Kong is China’s testing ground for the liberalization of currency

254 part 4 World Financial Environment

What’s Next? As China moved closer to the yuan being accepted as a global currency in late 2015, it allowed the yuan to appreciate against a basket of currencies by more than 30 percent, and by 10 percent alone from mid- 2014 to mid-2015. The IMF finally said that the yuan changed from being undervalued to “roughly appropri- ate,” although that is disputed by the United States. The government is also moving to allow foreign investors greater access to Chinese securities and made it easier for Chinese to invest abroad. The yuan is still not freely convertible, but a number of central banks are using yuan as reserve assets. However, in August 2015, the PBOC allowed the biggest devaluation of the yuan in two decades in order to rekindle economic growth. The PBOC said it was doing this to show that the yuan was more flexible and that it could move both up and down. Every morning, the PBOC sets the value of the yuan, and the feeling is that the devaluation gives the market more freedom in setting rates. However, the devaluation resulted in many Chinese companies paying off foreign debts for fear that more devaluations would occur, and investors switched out of yuan to dollars and other cur- rencies. This forced the bank to spend over $100 billion in August 2015 to support the yuan.

In addition, 2015 saw more non-Chinese banks start us- ing yuan. More than 1000 banks in 100 countries were using yuan for payments with China and Hong Kong, up more than 20 percent compared with 2013. Although Hong Kong is still the major clearing center for yuan transactions, other clearing

trading. However, Singapore is also being considered as a place for yuan transactions, and it also trades about the same as Hong Kong in foreign exchange.

The PBOC permitted HSBC and the Bank of East Asia to issue yuan-denominated bonds in Hong Kong in 2007, al- lowing Hong Kong to increase in importance as an offshore financial center for yuan trading. As banks and companies issue bonds and securities in yuan, the amount of yuan in circulation outside China will steadily grow. In October 2010, ICAP PLC and Thomson Reuters began to trade yuan on their electronic-trading platforms and announced that they were working with banks in the United States and Europe to use their platforms to trade yuan. Before this, banks in Hong Kong were trading yuan with each other OTC or through brokers. The use of the electronic platform promises to increase trans- parency and traffic. In spite of these moves, the onshore mar- ket in mainland China still dwarfs the offshore trading, and the fixed exchange rate set by SAFE will be the most important rate. The onshore market in mainland China is far more tightly controlled. Even though major money center banks such as HSBC are allowed to trade currency in China, their volume dwarfs that of the large Chinese banks. As those banks gain greater expertise in global trades, they will become even more significant outside of China. And as China and Singapore explore the possibility of Singapore joining Hong Kong as another location for yuan trades, the international banks will ramp up their yuan trading competencies in both locations. As capital controls in China are loosened, the international banks will also have to ramp up their presence there to com- pete with the huge Chinese banks that are now starting to get involved in the global foreign-exchange trading game.

The Shanghai World Finan- cial Center is located in the Pudong district of Shanghai, a global financial center and the largest city in China. Source: Sean Pavone/Shutterstock

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Chapter 9 Global Foreign-Exchange Markets 255

centers are being set up around the world. In addition, several central banks have entered into swap agreements with China, including the Bank of England and the European Central Bank.

In spite of the current moves, the yuan is still not widely accepted, especially by consumers. In London, for example, the yuan represents only 1.8 percent of daily cur- rency turnover. Chinese tourists can’t use yuan for daily transactions, whereas the U.S. dollar and euro are freely accepted. London is trying to attract more yuan deposits, but banks there trail Hong Kong and Singapore by a signif- icant margin. Even though Canada and the U.K. have set up yuan-clearing hubs in Toronto and London, the United States is still lagging behind. Part of that is because U.S. companies can still use dollars to settle transactions with Chinese companies, so they don’t see a big demand to use yuan. But the United States will have to take the yuan seriously.

As China moves closer to being a global currency, it will achieve greater control over global decisions that used to be

made by the global reserve currencies. On the other hand, China will lose control over its ability to manage its economy and control its capital flows. It will also have to be more transparent in its financial dealings. Also, to be accepted as a global currency, it will need legal, political, and institutional reforms that will inspire confidence of foreign investors. Is it ready to do that?

Questions

9-3. Why is it important for the Chinese yuan to become a major

world currency? What are the risks for China?

9-4. What role do foreign banks like HSBC and electronic platforms

like Thomson Reuters and ICAP play in helping the yuan move

closer to becoming a global currency?

9-5. Why is the yuan being used more widely in global business

transactions? Do you think it will ever replace the dollar or the

euro? Why or why not?

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the following Assisted-graded writing questions:

9-6 What needs to take place for the yuan to be listed right along with the U.S. dollar and the euro as global currencies?

9-7 Why is the Chinese government so hesitant to open up the yuan to market forces to determine its value inside and outside of China?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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He that has no money has no friends.

—Arabian proverb

Objectives

After studying this chapter, you should be able to

10-1 Describe the international Monetary Fund and its role in determining exchange rates

10-2 Discuss the major exchange-rate arrangements that countries use

10-3 identify the major determinants of exchange rates

10-4 show how managers try to forecast exchange-rate movements

10-5 examine how exchange-rate movements influence business decisions

chapter 10 the Determination of exchange rates

Angel Falls is the world’s highest uninterrupted waterfall. The 807 meter drop (2,648 feet) is symbolic of the steep fall of the Venezuelan bolívar in 2015.

▶

http://www.economist.com/bigmac

Case Venezuela’s Rapidly Changing Currency1

ShortageS and ControlS

Hugo Chavez, the president of Venezuela from 1999–2013, imple- mented a program of nationalism, a centralized economy, a strong military, and a focus on social programs for the poor, the basis of his political support. His programs, known as chavismo, resulted in huge budget deficits that led to extensive external borrowing as well as a reliance on high oil prices to fund government programs. On March 7, 2007, Chavez announced that the currency would have three zeros dropped from the value so that the rate would be 1:1000, and the currency would be renamed the bolívar fuerte or VEF on January 1, 2008. Along with the devaluation of the currency, Chavez instituted foreign-exchange controls. On January 8, 2010, he deval- ued the currency from 2.15 VEV/$ to 2.60 VEF/$ for some imports and 4.30 for other imports. On April 11, 2011, he changed the VEF to 4.30 per dollar for all imports. The VEF was locked onto the U.S. dollar at a fixed rate known as a conventional peg, and it was not allowed to freely float. However, Chavez retained the right to devalue the VEF if he wanted to.

After Chavez died in 2013, his successor, Nicolás Maduro, contin- ued with chavismo. However, that was just before the plunge in oil prices. Shortages began to mount in Venezuela. Russia went through a similar transformation when perestroika was instituted in mid- 1980s: prices were controlled and shortages were the norm. The joke in Russia was that if you saw a line, you waited in it; when you got to the front of the line, you bought whatever was available; if you didn’t need it, someone in your family did. Subsidies on everything from rice to gas to rural homes may seem to make life easier, but it’s mak- ing things worse. Shortages in everything from pharmaceuticals and medical supplies to toilet paper to diapers have led to the creation of a thriving black market. One woman described how she bought a bag of washing powder for 400 VEF (when the controlled price was actu- ally VEF 32), and she sold it for 600 VEF. Even though this is illegal, it is the norm. Sometimes companies get around the price controls by changing the nature of the product. For example, if they add garlic to rice, they sell it as garlic rice and avoid the price controls on rice. This happens all over the world where there are price controls. You change the ingredients or you change the size of the package.

In February 2015, the VEF was devalued to 6.3 per dollar for most essential imports. Some imports, such as auto parts, could convert currency at an intermediate rate of 12 VEF per dollar, and a free rate which was about 50 VEF per dollar. The free rate replaced the third tier exchange rate that existed before. In 2016, President Maduro adjusted the VEF again. Whereas the devaluation of the VEF in 2013 resulted in 6.3 VEF per dollar, on February 18, 2016, the VEF was changed to 10.0 per dollar. However, the government adopted a sec- ond rate which allowed it to float against the dollar but was managed

Angel Falls is the world’s highest uninterrupted waterfall. The 807 meter drop (2,648 feet) is symbolic of the steep fall of the Venezu- elan bolívar in the past few years. Just as the mist rises from the floor of the falls, inflation is rising as well. In 2015 when inflation in the developing countries was 5.7 percent, inflation in Venezuela was 159.1 percent, the highest in the world by far. And the IMF expected inflation in 2016 to rise 720 percent. That may not be quite the re- cord of Zimbabwe which hit 80 billion percent in November 2008, but Zimbabwe figured it out got inflation under control, at least for a few years.

The rapid rise in inflation resulted in the precipitous drop of the Venezuelan bolívar fuerte (known at the VEF), which ironical- ly means the strong Venezuelan bolívar. The bolívar, named after Simón Bolívar, a Venezuelan military leader who was instrumental in South America’s revolutions against the Spanish empire in the early 1800s, wasn’t always so weak. In 1934, the bolívar (then known as the VEB) was fixed at 3.914 per U.S. dollar, and three years later, it strengthened to 3.18 per dollar. For the next 40 years, the VEB was one of the strongest and most internationally recognized curren- cies in the region. However, in 1983, the VEB was devalued, par- tially because of the drop in oil prices in the early to mid-1970s. The currency continued to slide, and oil prices took a big hit in the early 2000s as the terrorist attacks on September 11, 2001, led to a slowdown in the global economy. Then strikes in 2002 at PdVSA, the Venezuelan state oil company, cut production. The drop in produc- tion and softening of oil prices forced the government to devalue the VEB to 1600 VEB per dollar in 2003, and foreign-exchange controls were instituted to limit capital flight.

the ImportanCe of oIl

The key to the Venezuelan economy is oil. Venezuela, a founding member of OPEC, is the world’s fifth-largest oil-exporting country, and it has the world’s largest oil reserves. It relies on the shipment of crude oil for 95 percent of its export revenues and ½ of its gov- ernment’s revenue. However, massive budget deficits are pushing Venezuela closer to default on its sovereign debt. RBC Capital Mar- kets estimates that oil prices have to reach $121.06 per barrel for Venezuela to balance its budget, the second highest breakeven price after Libya. But that seems impossible. On June 20, 2014, oil prices reached $114.81 per barrel. An oversupply of oil, the development of shale oil and other alternatives to conventional oil, combined with a slowdown in the global economy, especially China, began a precipi- tous drop in oil prices. By January 1, 2015, oil prices were $50.17 per barrel. After a brief recovery, they fell again to $28.94 per barrel in mid-January 2016. Prices began to climb, but who knows high they will go and how long the recovery will last.

Chapter 10 The Determination of Exchange Rates 259

by the government and not freely floating. Unfortunately, this also resulted in black market for the currency. Instead of the fixed rate of 10 VEF per dollar, the black market rate at times was as high as 1,150 VEF per dollar.

IS dollarIzatIon the SolutIon?

Obviously, many of Venezuela’s problems could be solved with very high oil prices. However, that will take too long to solve the serious pain being inflicted on the Venezuelan economy. Riots at the end of April 2016 due to power and water cuts and shortages in food and medical imports led to petitions to recall President Maduro. In addition, Venezuela runs the risk of not having enough bills to circulate in the economy. It doesn’t print its own bills but has them printed by companies in France, Britain, and Canada, among others. In 2015, it ordered more than 10 billion banknotes, more than the United States ordered. Now, the companies that printed the bills are finding out that they aren’t receiving payment for the deliveries. Even the supply of printed money could dry up.

Even though Chavez said that he would never dollarize the econ- omy, meaning that he would never replace his currency with the U.S. dollar, he pegged the value of the VEF to the U.S. dollar. That is mostly because oil is priced in dollars. And while the VEF is pegged to the dollar, Venezuela has the flexibility to devalue against the dollar if it chooses to do so. That allows it to inflate the currency at will. But there are countries that have successfully replaced their currency with the dollar as their legal tender. As mentioned earlier, Zimbabwe dropped its currency and replaced it with the U.S. dollar, and after some eco- nomic pain, inflation dropped to 0.1 percent in 2015. But then it began to rise again in 2016 as the government started to print money.

In Latin America, both El Salvador and Ecuador dropped their currencies in favor of the dollar. In 1994, the government of El Sal- vador decided to peg its currency, the colón, to the U.S. dollar. In 2001, it did away with the peg and the colón altogether and adopted the dollar as the national currency, thus completing the transition to dollarization. El Salvador is now one of 13 countries that have entered into an exchange arrangement in which they do not have

their own currency; 8 of the 13 use the U.S. dollar. By switching to the dollar, Salvadoran companies and the government gained access to cheaper interest rates because the move eliminated, or at least reduced, the risk of devaluation, thereby infusing more confidence in foreign banks to lend to the country. Corporate borrowing rates in El Salvador are among the lowest in Latin America, and consumer credit rose as the lower rates made it more attractive to borrow.

Two other countries in Latin America have adopted the dollar as their currency: Panama did so when it gained independence from Colombia over a century ago. Ecuador tied its currency to the dollar in 2000. When Ecuador decided to dollarize its economy, the president was in the midst of a political crisis and the announcement was to- tally unexpected. In 1999, the country’s consumer price inflation was 52.2 percent, the highest in Latin America at the time. Until February 1999, the central bank had maintained a crawling peg exchange-rate system. However, pressure on the currency forced the central bank to leave the peg and allow the currency to float freely, upon which it promptly devalued by 65 percent. Finally, the president of Ecuador realized that the best thing to do was dollarize the exchange-rate system. Initially, Ecuador continued to use the sucre, but within a year, it decided to drop the sucre and use the dollar as its currency.

A World Bank official, discussing the rationale for Ecuador’s decision, noted that “most countries have a large amount of their debt in dollars, maintain a large percent of their reserves abroad in dollars, and write contracts indexed to the dollar.” Moreover, Ecuador, a member of OPEC, generates most of its foreign-exchange earnings from oil, which is also priced in dollars. In some respects, Venezuela is similar to Ecuador in its reliance on oil.

Questions

10-1. Do you think Venezuela should drop its currency, the VEF,

and adopt the U.S. dollar? Why or why not?

10-2. If Venezuela does not replace the VEF with the dollar, what

do you think will happen to the Venezuelan economy, infla-

tion, and the exchange rate?

IntroduCtIon As we learned in Chapter 9, an exchange rate represents the number of units of one cur- rency needed to acquire one unit of another. Although this definition seems simple, manag- ers must understand how governments set an exchange rate and what causes it to change. Such understanding can help them anticipate exchange-rate changes and make decisions about business factors that are sensitive to those changes, such as the sourcing of raw ma- terials and components, the placement of manufacturing and assembly, and the choice of final markets.

ConCept CheCk

Recall that we devote Chapter 9 to discussions of the foreign- exchange market, the ways in which currencies are quoted and traded, and the various instruments through which foreign exchange may be traded. In this chapter, we shift our focus to the ways in which currency values are deter- mined, considering especially the roles of governments and the vagaries of the market.

260 part 4 World Financial Environment

the InternatIonal monetary fund In 1944, toward the close of World War II, the major Allied governments met in Bretton Woods, New Hampshire, to determine what was needed to bring economic stability and growth to the postwar world. As a result of those meetings, the International Monetary Fund (IMF) came into official existence on December 27, 1945, with the goal of promoting exchange-rate stability and facilitating the international flow of currencies. The IMF began financial operations on March 1, 1947.2

orIgIn and objeCtIveS Twenty-nine countries initially signed the IMF agreement; there were 189 member countries as of April 28, 2016.3 The fundamental mission of the IMF is to:

• Foster global monetary cooperation, • Secure financial stability, • Facilitate international trade, • Promote high employment and sustainable economic growth, and • Reduce poverty around the world.4

Through a process of surveillance, the IMF monitors the global economy as well as the economies of individual countries and advises on needed policy adjustments. In addition to surveillance, it provides technical assistance—mainly to low- and middle-income coun- tries—and makes loans to countries with balance-of-payments problems.

bretton Woods and the principle of par value The Bretton Woods Agreement established a system of fixed exchange rates under which each IMF member country set a par value for its currency based on gold and the U.S. dollar. Because the value of the dollar was fixed at $35 per ounce of gold, the par value would be the same whether gold or the dollar was used as the basis. This par value became a benchmark by which each country’s currency was valued against others. Currencies were allowed to vary within 1 percent of their par value (extended to 2.25 percent in December 1971), depending on supply and demand. Additional moves from, and formal changes in, par value were possible with IMF approval. As we see later, par values were done away with when the IMF moved to greater exchange- rate flexibility.

Because of the U.S. dollar’s strength during the 1940s and 1950s and its large reserves in monetary gold, currencies of IMF member countries were denominated in terms of gold and U.S. dollars. By 1947, the United States held 70 percent of the world’s official gold reserves, so governments bought and sold dollars rather than gold. The understanding, though not set in stone, was that the United States would redeem dollars for gold. The dollar became the world benchmark for trading currency and has remained so, in spite of the move away from fixed rates to flexible exchange rates.

the Imf today the Quota System When a country joins the IMF, it contributes a certain sum of money, called a quota, broadly based on its relative size in the global economy. The IMF can draw on this pool of money to lend to countries, and it uses the quota as the basis of how much a country can borrow from the Fund. It is also the basis on which the IMF al- locates special drawing rights (SDRs). Moreover, the quota determines the voting rights of the individual members. The largest quotas are held by the United States (16.67 percent), Japan (6.21 percent), China (6.14 percent), and Germany (5.37). Moreover, the quota de- termines the voting rights of the individual members. On December 15, 2010, the Board of

ConCept CheCk

In Chapter 8, we report on the establishment of the United Nations and the subsequent creation of a number of UN satellite organizations, includ- ing the Imf. Today, the IMF is in a position to influence economic policy among UN- member nations.

The Bretton Woods Agree- ment established a par value, or benchmark value, for each currency initially quoted in terms of gold and the U.S. dollar.

The IMF quota—the sum of the total assessment to each country—becomes a pool of money that the IMF can draw on to lend to other countries. It forms the basis for the voting power of each country—the higher its individual quota, the more votes a country has.

Chapter 10 The Determination of Exchange Rates 261

Governors of the IMF approved a package of reforms that would double the total quotas to SDR 476.8 (about $750 billion at current exchange rates at the time) and shift more of the quota shares to dynamic emerging market and developing countries (EMDCs). According to the realignment, the United States would still have the largest quota, but China would be number three, and the four BRIC countries would be among the 10 largest shareholders in the Fund.5

Special drawing rights (Sdrs) To help increase international reserves, the IMF created the special drawing right (SDR) in 1969 to help reinforce the fixed exchange-rate system that existed at that time. To support its currency in foreign-exchange markets, a country could use only U.S. dollars or gold to buy currency. However, the collapse of the Bretton Woods system, the move to floating exchange rates by most of the major currencies, and the growth of global capital markets as a source of funds for governments lessened the need for SDRs. Thus, the SDR is an international reserve asset created to supplement members’ official holdings of gold, foreign exchange, and IMF reserve positions. In addition, the SDR serves as the IMF’s unit of account—the unit in which the IMF keeps its records—and can be used for IMF transactions and operations.

On January 1, 1981, the IMF began to use a simplified basket of four currencies for deter- mining valuation, the U.S. dollar, the euro, the British pound, and the Japanese yen. In 2016, however, the Chinese renminbi (or yuan) will be added to the basket. The new weights will be 42 percent for the dollar, 31 percent for the euro, 11 percent for the renminbi, 8 percent for the yen, and 8 percent for the pound. The weight of the dollar remained the same, but the weights of the other three currencies fell to make room for the renminbi.6

the role of the Imf In global fInanCIal CrISeS An important responsibility of the IMF is to monitor and assess vulnerabilities of the eco- nomic and financial policies of member countries in relation to domestic and global stabil- ity. Where necessary, the IMF can provide precautionary credit lines to countries that are in distress. These loans are short-term emergency assistance loans, and in order to receive a loan, a country has to ensure that it will follow sound fiscal and monetary policies as determined jointly with the IMF staff.7 Mozambique has major economic problems, and it was relying on medium- and long-term loans from commercial banks and the World Bank, a multi-lateral UN-based lending organization that is close to but separate from the IMF. The IMF had also been working with Mozambique on short-term relief on the assump- tion that they were accurately disclosing their external debt position. When it was revealed that the government had borrowed far more money than had been disclosed to the IMF, the World Bank and others scaled back their support until after the IMF could complete a study on Mozambique’s risk and vulnerability. This is important because donors and other lenders rely on IMF information when determining where and how much to give to emerging markets.8

evolutIon to floatIng exChange rateS The IMF’s system was initially one of fixed exchange rates. Because the U.S. dollar was the cornerstone of the international monetary system, its value remained constant with respect to the value of gold. Other countries could change the value of their currency against gold and the dollar, but the value of the dollar remained fixed.

On August 15, 1971, as the U.S. balance-of-trade deficit continued to worsen, U.S. President Richard Nixon announced that the United States would no longer trade dollars for gold unless other industrial countries agreed to support a restructuring of the international monetary system. That resulted in the Smithsonian Agreement in December 1971.

The SDR is

• an international reserve asset given to each country to help increase its reserves,

• the unit of account in which the IMF keeps its financial records.

Currencies making up the SDR basket are the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound. The Chinese renminbi (yuan) was added in 2016.

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the Smithsonian agreement The agreement resulted in:

• An 8 percent devaluation of the dollar (an official drop in the value of the dollar against gold)

• A revaluation of some other currencies (an official increase in the value of each currency against gold)

• A widening of exchange-rate flexibility (from 1 to 2.25 percent on either side of par value)

This effort did not last, however. World currency markets remained unsteady during 1972, and the dollar was devalued again by 10 percent in early 1973 (the year of the Arab oil embargo and the start of fast-rising oil prices and global inflation). Major currencies began to float against each other, relying on the market to determine their value. The period from 1972–1981 led to the end of the Bretton Woods system and the move to flexible exchange rates.

the jamaica agreement Because the Bretton Woods Agreement was based on a system of fixed exchange rates and par values, the IMF had to change its rules to accommodate floating exchange rates. The Jamaica Agreement of 1976 amended the original rules to eliminate the concept of par values and permit greater exchange-rate flexibility.

exChange-rate arrangementS As part of this move to greater flexibility, the IMF permitted countries to select and maintain an exchange-rate arrangement of their choice, provided they communicated their decision to the IMF. The formal decision of a country to adopt a particular exchange-rate mechanism is called a de jure system. In addition, the IMF surveillance program determines the de facto or actual exchange-rate system that a country uses.

The IMF consults annually with countries to see if they are acting openly and responsibly in their exchange-rate policies. Each year, each country notifies the IMF of the arrangement it will use, and the IMF uses information provided by the country and evidence of how the country acts in the market to place it in a specific category. Table 10.1 identifies the different exchange-rate arrangements that countries have adopted. The arrangements are ranked pri- marily on their degree of flexibility, from least to most.

three ChoICeS: hard peg, Soft peg, or floatIng

arrangement The IMF classifies currencies into one of three broad categories, moving from the least to the most flexible. Each category is subdivided into other categories as described below. If they have adopted a hard peg (13.1 percent of the total), they lock their value onto something and don’t change. If they have adopted a soft peg (43.5 percent), they are pretty rigid but not as rigid as the hard peg. If they have adopted a floating arrangement (34.0 percent), their value is based on supply and demand. Some countries are not classified.9

Exchange-rate flexibility was widened in 1971 from 1 percent to 2.25 percent from par value.

The Jamaica Agreement of 1976 resulted in greater exchange-rate flexibility and eliminated the use of par values.

The IMF surveillance and consultation programs are designed to monitor exchange-rate policies of countries and to see if they are acting openly and responsibly in exchange-rate policies.

The IMF requires countries to identify how they base their exchange-rate policy—hard peg, soft peg, or flexible.

table 10.1 exchange rate arrangements, october 2014

*includes 188 member countries plus 3 territories

Source: Based on International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, 2014 (Washington, DC, IMF, October 2014, p. 4–8).

Percent* Number Hard Peg 13.1 25 Soft Peg 43.5 83 Floating 34.0 65 Residual 9.4 18 Total 100.0 191

Chapter 10 The Determination of Exchange Rates 263

hard peg There are two possibilities for countries that adopt a hard peg. The first, called dollarization, can occur when a country like Zimbabwe or Ecuador does not have its own currency but has adopted the U.S. dollar as its currency.

The second example of the hard peg is a currency board, which is separate from a country’s central bank. It is responsible for issuing domestic currency, typically anchored to a foreign currency. If it does not have deposits on hand in the foreign currency, it cannot issue more domestic currency. Twelve countries now have currency boards, of which eight are anchored to the U.S. dollar.10 Hong Kong is a good example. Even though the HK dollar is locked onto the U.S. dollar, it moves up and down against other currencies since the U.S. dollar is a freely floating currency.

Soft peg There are several different types of soft pegs, but most countries in this category (44 out of 83) have adopted a conventional fixed-peg arrangement, whereby a country pegs its currency to another currency or basket of currencies and allows the exchange rate to vary plus or mi- nus 1 percent from that value.11 Most countries use the U.S. dollar and the euro to anchor their pegs. In the other soft peg categories, the degree of flexibility increases, but the IMF determines that the currencies are not floating.

floatIng arrangement Currencies considered to be in a floating arrangement are either floating (36 countries) or free floating (29 countries). Floating currencies are those that generally change according to market forces but may be subject to market intervention with no predetermined direction in which the currency should move. Free floating currencies are subject to intervention only in exceptional circumstances. The major trading currencies, including the U.S. dollar, the Japanese yen, the British pound, and the euro, are freely floating currencies. Brazil and India, two of the BRIC countries, are considered to have floating currencies.

the euro One of the most ambitious examples of a freely floating arrangement that resulted in coun- tries giving up their own currency to create a new one is the euro. Not content with the economic integration envisaged in the Single European Act, the EU nations signed the Treaty of Maastricht in 1992, which set steps to accomplish two goals: political union and monetary union. To replace each national currency with a single European currency, the countries first had to converge their economic policies.

the european monetary System and the european monetary union Monetary unity in Europe did not occur overnight. The roots of the system began in 1979, when the European Monetary System (EMS) was set up as a means of creating exchange-rate sta- bility within the European Community (EC). A series of exchange-rate relationships linked the currencies of most members through a parity grid. As the countries narrowed the fluc- tuations in their exchange rates, the stage was set for replacing the EMS with the Exchange Rate Mechanism (ERM) and full monetary union.

According to the Treaty of Maastricht, countries had to meet certain criteria to comply with the ERM and be part of the European Monetary Union (EMU). Termed the “Stability and Growth Pact,” the criteria outlined in the treaty are:

• Annual government deficit must not exceed 3 percent of GDP, • Total outstanding government debt must not exceed 60 percent of GDP,

Countries can adopt another currency in place of their own, as is the case with Zimbabwe or Ecuador.

Another form of a hard peg is a currency board.

There are many different kinds of soft pegs but the most common is a conventional fixed-peg arrangement.

Floating exchange-rate regimes include floating and freely floating.

ConCept CheCk

Each of these commitments to greater economic cooperation represents a step in the direc- tion of regional integration, a form of economic integration that we defined on p. 209 in Chapter 8 as the elimination of economic discrimination among geographically related nations. Here we emphasize that the EU has introduced a common currency to its already-existing internal free trade agreement and common external tariff policy.

The criteria that are part of the Stability and Growth Pact include measures of deficits, debt, inflation, interest rates, and exchange-rate stability.

264 part 4 World Financial Environment

• Rate of inflation must remain within 1.5 percent of the three best-performing EU countries,

• Average nominal long-term interest rate must be within 2 percent of the average rate in the three countries with the lowest inflation rates,

• Exchange-rate stability must be maintained, meaning that for at least two years the country concerned has kept within the “normal” fluctuation margins of the European Exchange Rate Mechanism.12

As of May 1, 2016, 19 members of the EU were officially in the Eurozone, two had opted out (Denmark and the U.K.), and 7 were still preparing to join the Eurozone. The ERM requires countries to have a budget deficit of 3 percent of GDP and public debt 60 percent of GDP. However, the economic crisis of 2008 created problems for countries. For example, Greece’s public debt is 182 percent of GDP, Italy’s is 135.8 percent, and France’s is 98.2 percent. Rather than levy major sanctions against these and other members of the Eurozone, there is an attempt to work with them to get them back into compliance.

The euro is administered by the European Central Bank (ECB). The ECB has been responsible for setting monetary policy and managing the exchange-rate system for all of Europe since January 1, 1999. Because the ECB is independent of the political process, it can focus on its mandate of controlling inflation. Of course, different economies are growing at different rates in Europe, and it is difficult to have one monetary policy that fits all. Because of slow economic growth in the EU, the ECB recently adopted a policy of negative inter- est rates and quantitative easing (printing euros to purchase government debt). Although a popular strategy among the southern European countries that were struggling with high unemployment and budget problems, it was less popular in countries like Germany and the Netherlands where the population was getting very low returns on their savings. But the president of the ECB could see no reason to raise interest rates when economic growth was so slow.13

the euro and the global financial Crisis During the financial crisis of 2008, the euro fell because investors were pulling money out of stocks and putting it into safe-haven currencies such as the Japanese yen and the U.S. dollar. When the stock markets recov- ered, the dollar fell in value and the euro rose. At the time, interest rates were higher in Europe than in the United States, so the euro was perceived to be an investment asset whose value was greater than the dollar. As interest rates fell in the major industrial countries to help stimulate their economies, the interest rate differential disappeared, and currency values began to reflect other factors, such as the perceived strength in their rela- tive economies. This was not helpful to the euro since the European economies were in serious financial trouble.

The role of the European Central Bank is to protect the euro against inflation. However, the weakness in European economies, especially countries like Greece, Italy, and Spain, forced the ECB to use monetary stimulus to attempt to boost economic growth. The hardest hit has been Greece. Because of Greece’s large sovereign debt and weak economic growth, it has been difficult for Greece to make debt payments to external creditors. As a result, the European Central Bank teamed up with the IMF and the European Commission, nicknamed the “troika,” to help increase financial liquidity and to pressure Greece to solve its budget problems. The ECB’s main mandate to control inflation expanded to include increasing li- quidity when they approved a European stability mechanism that would enable them to lend to struggling countries that met certain conditions. The idea was to allow the fund to buy bonds from troubled Eurozone governments to keep interest rates low. However, the con- cern in Europe is that if the ECB purchases bonds that default, the individual governments would be stuck with the bill, which means that taxpayers from the entire EU, especially pow- erful Germany, could be the ones to pay for Greek debt. Obviously, that is not a politically popular situation.

19 of 28 members of the EU are members of the Eurozone. The UK and Denmark have opted out of the Eurozone, and the other members are working to qualify for the Eurozone.

ConCept CheCk

When we get to Chapter 12, page 314, we’ll point out that when a country initiates a comprehensive policy change over which businesses (whether domestic or foreign) have no control, they should reexamine each link in their value chains— the collective activities re- quired to move products from materials purchasing through operations to final distribution. Here we observe that a change in a nation’s exchange-rate re- gime is just one of the changes in economic conditions that foreign firms can’t control.

The European Central Bank sets monetary policy for the adopters of the euro.

Chapter 10 The Determination of Exchange Rates 265

Yes So far, we’ve looked at the suc- cess of the EU in initiating a common

currency. But what about Africa, the continent of some of the world’s fastest-growing frontier economies? The success of the euro and the deep economic and political problems in Africa have caused many experts to wonder whether the continent should attempt to develop one common currency with a central bank to set monetary policy.14 In 2003, the Association of African Central Bank Governors of the African Union (AU) announced it would work to create a common currency by 2021. This would benefit Africa by hastening economic integration in a continent that desperately needs to increase market size to achieve more trade and greater econ- omies of scale. A common currency would lower transaction costs and make it easier to engage in intra-country trade.

Africa has several degrees of economic cooperation al- ready, including two forms of currency cooperation that are classified by the IMF as conventional pegs tied to the euro:

1. The Economic and Monetary Community for Central Africa (CAEMC), including Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon

2. The West African Economic and Monetary Union (WAEMU), including Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo

Both monetary unions are part of the CFA franc zone. Their respective currencies are the Central African CFA franc and the West African CFA franc. The French treasury guarantees the full convertibility of both currencies.15

In addition to the two regional monetary unions, Africa has five existing regional economic communities: Arab Monetary Union, Common Market for Eastern and South- ern Africa, Economic Community of Central African States, Economic Community of West African States, and South- ern African Development Community. These groups are working hard to reduce trade barriers and increase trade among member countries, so all they would have to do is combine into one large African economic union, form a central bank, and establish a common monetary policy like the EU has.

A major advantage of establishing a central bank and common currency is that institutions in each African nation will have to improve, and the central bank may be able to insulate the monetary policy from political pressures, which often create inflationary pressures and subsequent devalu- ations. The East African Council of Ministers announced in 2013 that it planned to establish an East African Bank to facilitate the development of a common currency within 10 years, but that assumes the countries can resolve issues of differences in GDP, currencies, and institutions.16

Should Africa Develop a Common Currency?

Point Point

no There is no way the coun- tries of Africa will ever establish

a common currency, even though the African Union hopes to do so by 2021 and the East African Council even sooner. The institutional framework in the individual African nations is simply not ready. Few of the individual central banks are independent of the political process, so they often have to stimulate the economy to respond to political pressures. If the process is not managed prop- erly and the currency is subject to frequent devaluation, there will be no pride in the region or clout on the inter- national stage. The only two regional economic groups that are successful at this point have adopted the euro as their reference point, and the French treasury is backing up their currencies, so they are acting as if they were the central bank.

Further, each country will have to give up monetary sov- ereignty and rely on other measures—such as labor mobility,

wage and price flexibility, and fiscal transfers— to weather the shocks. Even though there is

good labor mobility in Africa, it is difficult to imagine that the African countries will be able to transfer tax revenues from country to country to help stimulate growth. In addition, it is difficult to transfer goods among the different countries in Africa because of transportation problems.

The establishment of the euro in the EU was a monu- mental task that took years, following a successful cus- toms union and a gradual tightening of the ERM in Europe. For Africa to establish a common currency, there must first be closer economic integration. Thus, it is important to be patient and give Africa a chance to move forward. Maybe one way to move to a common currency is to strengthen the existing regional monetary unions, then gradually open them up to neighboring countries until there are a few huge monetary unions. These can then discuss ways to link together into a common African currency.

Counterpoint

Should Africa Develop a Common Currency?

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determInIng exChange rateS A lot of different factors cause exchange rates to adjust. The exchange-rate regimes de- scribed earlier in the chapter are either fixed (hard peg or soft peg) or floating, with fixed rates varying in terms of how fixed they are and floating rates varying in terms of how much they actually float. However, currencies change in different ways depending on the type of regime.

nonInterventIon: CurrenCy In a floatIng-rate World Currencies that float free respond to supply and demand conditions. This concept can be illustrated using a two-country model involving the United States and Japan. Figure 10.1 shows the equilibrium exchange rate in the market and then a movement to a new equilib- rium level as the market changes. The demand for yen in this example is a function of U.S. demand for Japanese goods and services, such as automobiles, and yen-denominated finan- cial assets, such as securities.

The supply of yen is a function of Japanese demand for U.S. goods and services and dollar-denominated financial assets. Initially, this supply of and demand for yen meet at the equilibrium exchange rate e0 (for example, 0.00926 dollar per yen, or 108 yen per dollar) and the quantity of yen Q1.

Assume that Japanese consumers’ demand for U.S. goods and services drops because of, say, high U.S. inflation. This lessening demand would result in a reduced supply of yen in the foreign-exchange market, causing the supply curve to shift to S’. Simultaneously, the rising prices of U.S. goods might lead to an increase in American consumers’ demand for Japanese goods and services, which in turn would lead to an increase in demand for yen in the market, causing the demand curve to shift to D’, and finally to an increase in the quantity of yen and in the exchange rate.

The new equilibrium exchange rate would be at e1 (for example, 0.00943 dollar per yen, or 106 yen per dollar). From a dollar standpoint, the higher demand for Japanese goods would increase the supply of dollars as more consumers tried to trade their dollars for yen, and the reduced demand for U.S. goods would result in a drop in demand for dollars, caus- ing a reduction in the dollar’s value against the yen.

Demand for a country’s curren- cy is a function of the demand for that country’s goods and services and financial assets.

Q2 Q1 Q3

Exchange rate (U.S. dollar/yen)

Quantity of yen

Equilibrium exchange rate moves from $0.00926 per yen at e0 to $0.00943 per yen at e1

Figure 10.1 The equilibrium exchange rate and How it Moves Let’s say that inflation in the United States is comparatively higher than in Japan. In that case (and assuming that Japanese consumers are buying U.S. goods and services), the demand for the Japanese yen will go up, but the supply will go down. What if Japan wants to keep the dollar-to-yen exchange rate at e0? It can increase the supply of yen in the market—and therefore lower the exchange rate—by selling yen for dollars.

Chapter 10 The Determination of Exchange Rates 267

InterventIon: CurrenCy In a fIxed-rate or managed

floatIng-rate World In the preceding example, Japanese and U.S. authorities allowed supply and demand to de- termine the values of the yen and dollar. However, assume that the United States and Japan decide to manage their exchange rates. Although both currencies are independently floating, their respective governments could intervene in the market. The U.S. government might not want its currency to weaken because its companies and consumers would have to pay more for Japanese products, which would lead to more inflationary pressure in the United States. Or the Japanese government might not want the yen to strengthen because it would mean unemployment in its export industries. Let’s examine the role of central banks in this process.

the role of Central banks Each country has a central bank responsible for the policies affecting the value of its currency, although countries with independent currency boards use them to control the currency value. In the United States, the New York Federal Reserve Bank, in close coordination with and representing the Federal Reserve System of 12 regional banks and the U.S. Treasury, is responsible for intervening in foreign-exchange markets to achieve dollar exchange-rate policy objectives and counter disorderly conditions in foreign-exchange markets. The U.S. Treasury is responsible for setting exchange-rate policy, whereas the Fed is the central bank and is responsible for executing foreign-exchange intervention. Further, the New York Fed serves as a fiscal agent in the United States for foreign central banks and official international financial organizations.17

In the European Union, the European Central Bank coordinates the activities of each member country’s central bank, such as the Bundesbank in Germany, to establish a common monetary policy in Europe, much as the Fed does in the United States.

Central Bank Reserve Assets Central bank reserve assets are kept in three major forms: foreign-exchange reserves, IMF-related assets (including SDRs), and gold. Foreign ex- change composes over 90 percent of total reserves worldwide. In fourth quarter 2015, the U.S. dollar represented 64 percent of total foreign-exchange reserves, followed by the euro at 19.9 percent, the British pound at 4.88 percent, and the Japanese yen at 4.08 percent. The IMF will begin to identify the Chinese renminbi in its official foreign-exchange reserves database and will publish the data in March 2017.18 The countries with the most foreign- exchange reserves are China, Japan, Europe (the Eurozone), Switzerland, and Saudi Arabia.

Having strong central bank reserve assets is essential to a country’s fiscal strength. When the financial crises in Asia, Russia, and South America hit in the late 1990s, very few countries had strong central bank reserve assets. As a result, they had to borrow a lot of U.S. dollars, which turned out to be devastating when they finally had to devalue their currencies. Since 2000, however, the picture has changed. Due to strong commodity prices, expanding exports, and restraint in incurring dollar debt, many of those same countries have strength- ened their financial position by increasing their reserves.

How Central Banks Intervene in the Market A central bank can intervene in currency markets in several ways. The U.S. Fed, for example, can use foreign currencies to buy dollars when the dollar is weak, or sell dollars for foreign currency when the dollar is strong. Central banks may coordinate actions with other central banks, make policy statements to influence markets, and intervene to reverse, resist, or support a market trend.

Different Attitudes Toward Intervention Government policies change over time, de- pending on economic conditions and the attitude of the prevailing administration in power, irrespective of whether the currency is considered to be freely floating.

The global financial crisis has roiled foreign-exchange markets and forced many central banks to intervene to support their currencies. During the crisis, Switzerland was forced to place a cap on its rate against the euro, and it kept it in place for 3 ½ years. However, in January 2015, the Swiss Central Bank was concerned about stability of the euro, coupled with falling energy prices

Central banks control policies that affect the value of curren- cies; the Federal Reserve Bank of New York is the central bank in the United States.

Central bank reserve assets are kept in three major forms: gold, foreign-exchange re- serves, and IMF-related assets. Foreign exchange is 90 percent of reserve assets worldwide.

Central banks intervene in currency markets by buying and selling currency to affect its price.

268 part 4 World Financial Environment

and a rising dollar, so it eliminated the cap on the exchange rate against the euro, causing a rapid rise in the SwF against the euro.19 On the other hand, although the United States has intervened in markets in the past, sometimes in conjunction with other countries, it did not intervene at all during the fourth quarter of 2015 when the dollar was strong against other currencies.

Challenges with Intervention In general, it is very difficult, if not impossible, for interven- tion to have a lasting effect on the value of a currency. Given the daily volume of foreign- exchange transactions, no one government can move the market unless its movements can change market psychology. Intervention may temporarily halt a slide, but the country cannot force the market to move in a direction it doesn’t want to go, at least for the long run.

blaCk marketS In many of the countries that do not allow their currencies to float according to market forces, a black market can parallel the official market and yet be aligned more closely with the forces of supply and demand. The less flexible a country’s exchange-rate arrangement, the more likely there will be a thriving black (or parallel) market, which exists when people are willing to pay more than the official rate for hard currencies, such as dollars and euros. In order for such a market to work, the government must control access to foreign exchange so it can control the price of its currency. The opening case on Venezuela demonstrated how the black market in currency existed because of an artificial exchange rate set by the government.

In 2009 when Zimbabwe was in a financial crisis, the government issued a $100 trillion banknote that was worth about US$5 on the black market. Prices were doubling every day, and food and fuel were in short supply. The currency was so worthless that most trades in Zimbabwe were in U.S. dollars or the South African rand. That led to the country converting to the use of dollars in place of their currency.20

foreIgn-exChange ConvertIbIlIty and ControlS Some countries with fixed exchange rates control access to their currencies. Fully convertible currencies are those that the government allows both residents and nonresidents to purchase in unlimited amounts.

A black market closely approxi- mates a price based on supply and demand for a currency instead of a government-con- trolled price.

Rampant inflation in Zimbabwe drove down the value of the currency so much that the Central Bank had to issue a 100 trillion Zimbabwe dollar banknote. It finally adopted the U.S. dollar as its currency. Source: Catchlight Lens/Shutterstock

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Chapter 10 The Determination of Exchange Rates 269

hard and Soft Currencies Hard currencies—such as the U.S. dollar, euro, British pound, and Japanese yen—are those that are fully convertible. Highly liquid and relatively stable in value over a short period of time, they are generally accepted worldwide as payment for goods and services. They are also desirable assets. Currencies that are not fully convertible, or soft currencies, have just the opposite characteristics: they are very unstable in value, not very liquid, and not widely accepted as payment for goods and services. A major reason why countries restrict convertibility of their currencies is that they are short on foreign-exchange reserves and try to use them for essential transactions.

Most countries today have nonresident (or external) convertibility, meaning that foreign- ers can convert their currency into the local currency and back into theirs as well. Tourists generally have no problems doing this, although sometimes countries put restrictions or conditions on trade from the local currency back to the hard currency when tourists leave the country.

Controlling Convertibility To conserve scarce foreign exchange, some governments im- pose exchange restrictions on companies or individuals who want to exchange money.

Licenses Government licenses fix the exchange rate by requiring all recipients, exporters, and others who receive foreign currency to sell it to its central bank at the official buying rate. The bank then rations the foreign currency it acquires by selling it at fixed rates to those needing to make payment abroad for essential goods. An importer may purchase foreign exchange only if it has obtained an import license for the goods in question.

Multiple Exchange Rates Another way governments control foreign-exchange convert- ibility is by establishing more than one exchange rate. This restrictive measure is called a multiple exchange-rate system. The government determines which kinds of transactions are to be conducted at which exchange rates. Countries with multiple rates often have a floating rate for luxury goods and financial flows, such as dividends, and a fixed, usu- ally lower rate for other trade transactions such as imports of essential commodities and semi-manufactured goods. The opening case on Venezuela illustrated how the government used multiple exchange rates. The IMF reported that out of 188 countries, only 16 use dual exchange rates and 6 use multiple rates.21

Import Deposits Another form of foreign-exchange convertibility control is the advance import deposit. In this case, the government tightens the issue of import licenses and requires importers to make a deposit with the central bank—often for as long as one year and interest-free—covering the full price of manufactured goods they would purchase from abroad.

Quantity Controls Governments may also limit the amount of exchange through quantity controls, which often apply to tourism. A quantity control limits the amount of currency a local resident can purchase from the bank for foreign travel.

exChange rateS and purChaSIng poWer parIty The next two sections examine the relationship between inflation and exchange rates and the relationship between interest rates and exchange rates. These relationships are important in helping to forecast exchange rates.

purchasing power parity (ppp) The PPP exchange rate is the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country.22 Examining the difference between the PPP exchange rate and the market exchange rate helps us understand how trade relations might be affected.

A hard currency is a currency that is usually fully convertible and strong or relatively stable in value in comparison with other currencies.

A soft currency is one that is usually not fully convertible and is also called a weak cur- rency.

In a multiple exchange-rate system, a government sets different exchange rates for different types of transactions.

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the “big mac Index” An illustration of the PPP theory is the “Big Mac index” of currencies used by The Economist each year. Since 1986, the British periodical The Economist has used the price of a Big Mac to estimate the exchange rate between the dollar and another currency (see Table 10.2 for a sample of countries). Because the Big Mac is sold in more than 36,000 McDonald’s restaurants in more than 100 countries every day, it is easy to use it to compare prices. PPP would suggest that the exchange rate should leave hamburgers costing the same in the United States as abroad. However, the Big Mac sometimes costs more and sometimes less, demonstrating how far currencies are under- or overvalued against the dollar.

The Big Mac price in U.S. dollars is found by converting the price in the local currency into dollars at the current exchange rate. For example, in Table 10.2, the dollar equivalent of a Big Mac in China is US$2.68 which is the price of the Big Mac in China (¥17.6) converted into dollars at the actual exchange rate (which was CNY6.56). Column 3, the implied PPP of the dollar, shows what the exchange rate should be if the price in dollars equals the price in the local currency. Continuing with China as the example, if you divide ¥17.6 by US$4.93 (the prices of the Big Mac in China and in the United States), you get ¥3.57 per dollar, which is what the exchange rate should be for a Big Mac to cost the same in the two countries. Column 4 shows the actual exchange rate, and Column 5 shows how much the currency is under- or overvalued. For the Chinese yuan, you take (3.57 - 6.56)/6.56 = - .04558, which shows that the yuan is undervalued against the dollar by 45.6 percent.

As you can see from Table 10.2, most currencies were undervalued against the dollar, so it was harder for U.S. companies to export during this period of the strong dollar. Conversely, it was easier for companies outside of the United States to export to the United States. However, these relationships change as the dollar weakens against other currencies.23

The Big Mac index, also known as “McParity,” has both supporters and detractors. Although it is an easy way to see how PPP works, the index only includes one product, the Big Mac, rather than a basket of commodities. The IMF goes to great lengths to identify a basket of goods that makes sense when determining its PPP index.24

The value of the Big Mac index is in understanding that price differences are not sustain- able in the long run. Exchange rates will eventually have to equalize price differences more closely, or the law of supply and demand will take over. Of course, nobody is going to import Big Macs from China to the United States because they are so cheap. Nor will people fly to Venezuela just to buy a Big Mac. But if Big Macs are cheap, so are other products, and trade

If the domestic inflation rate is lower than that in a particular foreign country, the domestic currency should be stronger than the foreign currency.

table 10.2 the big mac Index

Source: Based on The Big Mac Index, http://www.economist.com/bigmac (accessed January 7, 2016).

Country

Big Mac Prices

Implied PPP of the Dollar

actual exchange Rate: Jan 30, 2013

Under (− )/Over (+ ) Valuation against

the Dollar, % In Local

Currency In Dollars United States 4.93 4.93 - 1.00 0.00 Argentina 33.0 2.39 6.69 13.81 -51.5 Brazil 13.5 3.35 2.74 4.02 -32.0 China 17.6 2.68 3.57 6.56 -45.6 Euro area 3.72 4.0 0.75 0.93 -18.9 Hong Kong 19.2 2.48 3.89 7.75 -49.80 India 127 1.90 25.76 68.80 -61.4 Japan 370 3.12 75.05 118.65 -36.7 Mexico 49 2.81 9.94 17.44 -43.0 Russia 114 1.53 23.12 74.66 69.0 Switzerland 6.50 6.44 1.32 1.01 +30.7 Venezuela 132 .664 26.77 198.7 -86.58

Chapter 10 The Determination of Exchange Rates 271

flows could be influenced by price differences. For example, during the financial crisis in Venezuela, people were traveling from Brazil to Venezuela for plastic surgery because it was so much cheaper than it was in Brazil.

exChange rateS and IntereSt rateS Although inflation is the most important medium-term influence on exchange rates, interest rates are also important. Interest rate differentials, however, have both short- term and long-term components to them. In the short term, exchange rates are strongly influenced by interest rates. When the U.S. Federal Reserve Bank raised interest rates on December 16, 2015, the first time in nearly a decade, the result was hot money flowing into the United States to take advantage of the slightly higher interest rate. In early 2015, even before the rise in U.S. interest rates, money was flowing out of Europe at a rapid pace because of differences in interest rate policies, which also pushed down the euro against the dollar by 22 percent in less than a year. Investors were moving cash based on future expectations.25

In the long term, however, there is a strong relationship between inflation, interest rates, and exchange rates. To understand this, we need to examine two key finance theories: the Fisher Effect and the International Fisher Effect. The first links inflation and interest rates, while the second links interest rates and exchange rates.

the fisher effect The Fisher Effect is the theory that the nominal interest rate in a coun- try (r, the actual monetary interest rate earned on an investment) is determined by the real interest rate (R, the nominal rate less inflation) and the inflation rate (i) as follows:

(1 + r) = (1 + R)(1 + i) or r = (1 + R)(1 + i) - 1

According to this theory, if the real interest rate is 5 percent, the U.S. inflation rate 2.9 percent, and the Japanese inflation rate 1.5 percent, then the nominal interest rates for the United States and Japan are computed as follows:

rUS = (1.05)(1.029) - 1 = 0.08045, or 8.045%

rj = (1.05)(1.015) - 1 = 0.06575, or 6.575%

Thus, the difference between U.S. and Japanese interest rates is a function of the difference between their inflation rates. If inflation rates were the same (zero differential) but interest rates were 10 percent in the United States and 6.575 percent in Japan, investors would place their money in the United States, where they could get the higher real return.

the International fisher effect The bridge from interest rates to exchange rates can be explained by the International Fisher Effect (IFE), the theory that the interest-rate dif- ferential is an unbiased predictor of future changes in the spot exchange rate. For example, if the IFE predicts that nominal interest rates in the United States are higher than those in Japan, the dollar’s value should fall in the future by that interest-rate differential, which would be an indication of a weakening, or depreciation, of the dollar. That is because the interest-rate differential is based on differences in inflation rates, as we discussed earlier. The previous discussion on PPP also demonstrates that the country with the higher inflation should have the weaker currency. Thus, the country with the higher interest rate (and the higher inflation) should have the weaker currency.

Of course, these issues cover the long run, but anything can happen in the short run. During periods of general price stability, a country that raises its interest rates is likely to at- tract capital and see its currency rise in value due to the increased demand. However, if the reason for the increase in interest rates is that inflation is higher than that of its major trad- ing partners, and if the country’s central bank is trying to reduce inflation, the currency will eventually weaken until inflation cools down.

The nominal interest rate is the real interest rate plus inflation. Because the real interest rate should be the same in every country, the country with the higher interest rate should have higher inflation.

The IFE implies that the curren- cy of the country with the lower interest rate will strengthen in the future.

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other faCtorS In exChange-rate determInatIon Confidence: flight to risk versus flight to Safety Various other factors can affect cur- rency values. One not to be dismissed lightly is confidence: In times of turmoil, people prefer to hold currencies that are considered safe. When the banking crisis in Cyprus unfolded in March of 2013, investors moved money out of euros and invested in U.S. dollars (a flight to safety) because of concerns over the effect of the crisis on the rest of Europe, which was already very fragile in the banking sector.

On the other hand, sometimes the appetite for risk (which implies greater returns) is more important than safety. In early 2016, the dollar began to fall as oil prices stabilized and increased, and investors began to look at investments in emerging markets like Brazil which caused their exchange rates to rise against the dollar. Clearly, the flight to risk outweighed the flight to safety.

foreCaStIng exChange-rate movementS

fundamental and teChnICal foreCaStIng Managers can forecast exchange rates by using either of two approaches: fundamental or technical. Fundamental forecasting uses trends in economic variables to predict future rates. The data can be plugged into an econometric model or evaluated on a more subjective basis.

Technical forecasting uses past trends in exchange rates themselves to spot future rate trends. Technical forecasters, or chartists, assume that if current exchange rates reflect all facts in the market, then under similar circumstances future rates will follow the same patterns.26 However, research has shown that, except in the very short run, past exchange rates are not an accurate predictor of future ones. According to this theory, then, exchange-rate move- ments are a random walk, implying they cannot be predicted.27

dealing with biases Some biases exist that can skew forecasts:

• Overreaction to unexpected and dramatic news events; • Illusory correlation—that is, the tendency to see correlations or associations in data that

are not statistically present but are expected to occur on the basis of prior beliefs; • Focusing on a particular subset of information at the expense of the overall set of

information; • Insufficient adjustment for subjective matters, such as market volatility; • The inability to learn from one’s past mistakes, such as poor trading decisions; • Overconfidence in one’s ability to forecast currencies accurately.28

Good treasurers develop their own forecasts of what will happen to a particular currency and use fundamental or technical predictions of outside forecasters to corroborate them. Doing this helps them determine whether they are considering important factors and whether they need to revise their forecasts in light of outside analysis.

timing, direction, and magnitude Forecasting includes predicting the timing, direction, and magnitude of an exchange-rate change or movement. For countries whose currencies are not freely floating, the timing is often a political decision and not easy to predict. And though the direction of a change can probably be predicted, the magnitude is difficult to forecast. So, not only is it difficult to predict what will happen to currencies, it is equally dif- ficult to use those predictions to forecast profits and establish operating strategies.

fundamental faCtorS to monItor For freely fluctuating currencies, the law of supply and demand determines market value. Your ability to forecast exchange rates depends on your time horizon. In general, the best predictors of future exchange rates are interest rates for short-term movements, inflation for medium-term

Exchange-rate movements are also influenced by investors’ appetite for risk versus their appetite for safety.

Fundamental forecasting uses trends in economic variables to predict future exchange rates.

Technical forecasting uses past trends in exchange-rate move- ments to spot future trends.

Managers need to be concerned with the timing, magnitude, and direction of an exchange-rate movement.

Key factors to monitor—the institutional setting, fundamen- tal analysis, confidence factors, events, and technical analysis.

Chapter 10 The Determination of Exchange Rates 273

movements, and current account balances for long-term movements.29 Given that even those countries whose currencies are freely floating are concerned about the value of their currencies, managers can monitor the same factors the governments follow to try to make a prediction:

• Institutional Setting ■■ Does the currency float, or is it managed—and if so, is it pegged to another currency,

to a basket, or to some other standard? ■■ What are the intervention practices? Are they credible? Sustainable?

• Fundamental Analyses ■■ Does the currency appear undervalued or overvalued in terms of PPP, balance of pay-

ments, foreign-exchange reserves, or other factors? ■■ What is the cyclical situation in terms of employment, growth, savings, investment,

and inflation? ■■ What are the prospects for government monetary, fiscal, and debt policy?

• Confidence Factors ■■ What are market views and expectations with respect to the political environment, as

well as to the credibility of the government and central bank? • Circumstances

■■ Are there national or international incidents in the news, the possibility of crises or emergencies, or governmental or other important meetings coming up?

• Technical Analyses ■■ What trends do the charts show? Are there signs of trend reversals? ■■ At what rates do there appear to be important buy and sell orders? Are they bal-

anced? Is the market overbought? Oversold? ■■ What is the thinking and what are the expectations of other market players and

analysts?30

We have already discussed interest rates and inflation, but what about current account balances? A current account surplus means that a country exports more than it imports and is building foreign-exchange reserves from the countries that are buying its goods and ser- vices. For the long term, the expectation is that the currency of that country will strengthen vis-à-vis its trading partners. Conversely, a current account deficit means that a country im- ports more than it exports and is building up debt abroad as it struggles to find the foreign exchange to pay for its imports. In that case, the long-term expectation is that the currency will weaken vis-à-vis its trading partners.

buSIneSS ImplICatIonS of exChange-rate ChangeS As we will see in the closing case, exchange-rate changes can dramatically affect operating strategies as well as translated overseas profits.

marketIng deCISIonS Marketing managers watch exchange rates because they can affect demand for a company’s products at home and abroad. For example, in 2013, as the Indian rupee plunged in value against the U.S. dollar, Indian small importers were in trouble because they didn’t have the financial strength to deal with the currency fluctuations. In most cases, they had to pay their suppliers in U.S. dollars; when the rupee fell, they had to come up with more rupees to con- vert into dollars to pay the suppliers, and they were struggling to do so.31 On the other side, U.S. exporters struggled with a strong dollar as the prices in local currencies rose during a time when economic growth abroad was weak in the first place.

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produCtIon deCISIonS Exchange-rate changes can also affect the location of production, although it will be only one of many variables companies consider. A manufacturer in a country where wages and operating expenses are high might be tempted to relocate production to a country with a currency that is rapidly losing value. The company’s home currency would buy lots of the weak currency, making the company’s initial investment cheap. Further, goods manufactured in that country would be relatively low-cost in world markets.

fInanCIal deCISIonS Exchange rates can affect financial decisions primarily in sourcing financial resources, remit- ting funds across national borders, and reporting financial results. In the first area, a com- pany might be tempted to borrow money in places where interest rates are lowest. However, recall that interest-rate differentials often are compensated for in money markets through exchange-rate changes.

In deciding about cross-border financial flows, a company would want to convert local currency into its own home-country currency when exchange rates are most favorable so it can maximize its return. However, countries with weak currencies often have currency con- trols, making it difficult for MNEs to do so.

Finally, exchange-rate changes can influence the reporting of financial results. Procter & Gamble generates 65 percent of its revenues from outside of the United States. Because of the strong dollar in 2015, P&G found that its revenues and earnings generated in weaker curren- cies were lower than if the dollar were stable or a little weaker. On the other hand, sales and earnings in a strong currency result in higher profits when translated back into dollars; when they are generated in a weaker currency, they are lower when translated back into dollars.32

Companies might locate production in a weak-currency country because

• initial investment there is relatively cheap,

• such a country is a good base for inexpensive exportation.

Exchange rates can influ- ence the sourcing of financial resources, the cross-border remittance of funds, and the reporting of financial results.

ConCept CheCk

In Chapter 19, pages 527–528 and 536, we’ll explain how companies factor in foreign exchange in preparing financial statements, we’ll show how ex- change rates influence financial flows, and describe some of the strategies that companies enlist to protect themselves against exchange-rate risk.

Although the U.S. dollar is the main reserve asset used by central banks, the Chinese RMB is gaining steam. However, the three key determinants of the reserve status of a currency are size, stability, and liquidity.33 Will the RMB ever replace the dollar as the chief reserve asset, or will they share power? Or will there be three reserve assets—the dollar, the RMB, and the euro? And will the yen be part of that picture?

The RMB suffers in all three areas: size (although the Chinese economy is formidable), stability, and liquidity. The financial institutions in China are still very weak, even though they are improv- ing. Although the RMB became part of the SDR basket in 2016 and thus eligible to be a reserve asset, it has been struggling. It has the largest foreign-exchange reserves in the world, exceed- ing $4 trillion in mid-2014. However, the RMB is not a freely floating currency. In spite of that, there

The international monetary system has undergone considerable change since the early 1970s, when the dollar was devalued the first time. New countries have been born with the breakup of the Soviet empire, and with them have come new currencies. In addition, China has come of age.

The world has come out of the global financial crisis, but it is still weak. Inflation is relatively low, and so are interest rates. In some cases, rates are below zero, which was unthinkable not too many years ago. Deflation is a greater concern than infla- ton. Oil prices are low, which adds to low levels of inflation and is a result of slow economic growth. Estimated global growth in GDP was only 3 percent in 2015, and it was only 6.8 percent in China, the third consecutive year that GDP has fallen. Because of the slow economic growth, many countries, in- cluding Greece, are having budget crises that are affecting their ability to service debt.

Looking to the Future Changes in the Relative Strength of Global Currencies

Chapter 10 The Determination of Exchange Rates 275

has been a large outflow of RMB from China for several reasons. One is that the People’s Bank of China has been trying to support the RMB by us- ing its foreign-exchange reserves. In January 2016 alone, it used $100 billion in reserves to defend the RMB, pushing its reserves to about $3.23 trillion.34 Although that is still a large amount of reserves, it is clear that the outflow of money from China by private investors as well as the government is draining the reserves. Will the government have to

continue to support the RMB and further drain its foreign currency reserves?

The euro is a strong currency and represents the second-largest amount of allocated reserves behind the dollar. The major challenge of the euro is that its member countries are fragmented with numer- ous internal problems, such as Greek debt. In ad- dition, Britain, one of the strongest countries in the EU, never adopted the Euro, and in 2016 it voted to leave the EU. ■

Case Welcome to the World of sony— Unless the Falling Yen Rises (or Falls) again35

For five consecutive years, the yen was falling against the U.S. dollar, which actually was a good deal. The reason is because stronger revenues and earnings from abroad were translated into more yen. In addition, the weaker yen helped Sony in export markets. However, in early 2016, the yen began to strengthen against the dollar from ¥123 in November 2015 to ¥120 at the end of 2015, to ¥112.4 on March 31, 2016, the close of Sony’s fiscal year. Whereas Toyota disclosed in August 2015 that the weaker yen was fueling its profits, in the first quarter of 2016 it changed its tune and noted that the stronger yen was going to hurt sales and profits. What will the future bring for Sony and other Japanese companies?

The Past Before attacking the future, let’s look at the past, especially from the perspective of the Japanese yen. In the post–World War II years, the yen was extremely weak against the dollar, trading at ¥357.65 in 1970. At that time, in 1946, the Tokyo Tsushin Kogyo Corporation was founded, officially becom- ing known as Sony Corporation in 1958, the year its stock was first listed on the Tokyo Stock Exchange. It also became the first Japanese company to list American Depositary Receipts (ADRs) on the New York Stock Exchange in 1961, finally listing its own shares in September 1970.

In those early years of operation, Sony had the luxury of operating in a currency that was not only weak against the dollar, but also highly controlled by the government.

Japanese foreign-exchange policies favored companies and industries that the government wanted to succeed, especially in export markets. With a cheap yen, it was easy for compa- nies to expand exports rapidly.

The First Endaka From its 1970 high, the yen steadily strengthened until 1985, when it really shot up in value. Due to economic problems in the United States, the dollar began to fall during the latter part of 1985, and the yen ended the year at ¥200 per dollar (as the number of yen per dollar falls, the dollar gets weaker and the yen gets stronger). By the latter part of 1986, it was trading at ¥150, a steep rise from its historical highs. The Japanese called this strengthening of the yen endaka, which literally translates “high yen.” Endaka resulted in seri- ous problems for Japanese exporters and potential pain for the entire Japanese economy, which depended heavily on international trade. However, one advantage of endaka was that imports were cheaper, and Japan relied heavily on imports of virtually all commodities. Thus its input costs fell, even as it found its export prices rising.

The strong yen was due primarily to a strong Japanese economy, large trade surpluses, and the largest foreign-ex- change reserves in the world. In addition, Japan had low un- employment, low interest rates, and low inflation. But cracks began to show in its economy. A combination of a drop in the stock market, a rise in inflation, and a real estate bubble hurt

276 part 4 World Financial Environment

the economy and confidence in the yen. Since the interest rates in the United States were higher, investors pulled money out of Japan and put it into U.S. dollars to take advantage of higher returns. This drop in demand for yen and rise in de- mand for dollars pushed up the value of the dollar against the yen, and the yen closed out 1989 at ¥143.45, from ¥125.85 only a year earlier.

Both the United States and Japan were worried about infla- tion in the early 1990s, and they tried to coordinate exchange- rate policies, but the United States didn’t want to push down the value of the dollar too much and lose its own fight against infla- tion. The two nations tried to get the central banks of Germany, the United Kingdom, and other countries to intervene in the markets and sell their currencies for yen in order to strengthen it. But there wasn’t much they could do to move the market given that interest rates were driving market psychology.

In the ensuing years, many factors influenced the yen/ d ollar exchange rate, including a weak U.S. economy (favor- ing a drop in interest rates), the Persian Gulf War (which fa- vored the dollar as a safe-haven currency), a rise in Japanese interest rates relative to U.S. interest rates, and a lack of agreement among G8 countries in 1993 about whether the yen was too weak or about right.

A Second Endaka As if one endaka were not enough, a second one hit in 1995, when the yen rose to ¥80.63 per dollar. As they did with the first endaka, Japanese companies looked for ways to cut costs and remain competitive. During that period, the Japanese economy was in a recession, so the Bank of Japan cut interest rates to stimulate demand, and the yen fell against the dollar, favoring exporters once again.

Competitive Pressures During these decades of currency swings, Sony kept mov- ing along as one of the premier companies in the world in consumer electronics, games, music, and movies. Its wide array of product innovations earned it a premium in the market; then competition began to step in. Korean compa- nies like Samsung began to produce cheaper products that rose in quality as each year went by, and Samsung began to develop its own reputation for innovation in electronics. In addition, Samsung and other foreign competitors began setting up plants offshore, especially in China, to improve their cost advantage even more. Some of Sony’s Japanese competitors, including Toshiba and Panasonic, reduced their exposure to a strong yen by moving plants overseas to countries like Indonesia and the Philippines and by increas- ing the dollar-based imports of parts.

From the beginning of 2003 until the end of 2004, the dol- lar continued to weaken against both the euro and the yen. In an attempt to strengthen the dollar, the Japanese central bank spent a record 20 trillion yen in 2003 and 10 trillion yen in the first two months of 2004. Despite such efforts, the yen rose 11 percent against the dollar in 2003 and continued to strengthen through 2004. The Japanese finance ministry stopped its foreign-exchange intervention in March 2004, but the dollar’s continued weakening against both the euro and the yen at the end of 2004 sparked new threats of intervention by the Japanese and Europeans.

Fast-Forward to 2008 The collapse in the housing market in the United States and the ensuing credit crisis in 2007, followed by the bankruptcy

Tokyo Tower, modeled after Paris’ Eiffel Tower, is the world’s tallest self-supported steel tower. Located in To- kyo, home of the corporate headquarters of both Sony and the Bank of Japan (which serves as the Central Bank of Japan), the Tokyo Tower dominates the Tokyo skyline and offers a view of Mt. Fuji on a clear day. Source: Sean Pavone/Shutterstock

▶

Chapter 10 The Determination of Exchange Rates 277

of Lehman Brothers and the U.S. government takeover of global insurer AIG in September 2008, had a devastating ef- fect on the global economy. The U.S. stock market crashed, followed by similar crashes around the world, and inves- tors pulled funds out of risky emerging markets and placed them in safe-haven assets. As a result, the euro dropped against the U.S. dollar and the Japanese yen.

Why did this happen? In the case of the U.S. dollar, the market reaction was a standard flight to safety—which often happens when global events get scary—even though the U.S. markets started the collapse. Political stability and the size of the economy tend to make the United States an attractive place for investment. Thus, the fear factor seemed to be a critical vote for the dollar during the crisis. This was a short- term phenomenon, however, and was eventually replaced by economic fundamentals.

During the crisis, the dollar vacillated depending on what news was most important. When the crisis was the news, the dollar was strong. When the news favored a recovery of the U.S. economy, money flowed into equity markets in the United States and abroad, seeking higher returns and causing the dollar to drop in value. With the slowdown in the U.S. econ- omy, export-dominated countries, especially emerging mar- kets, were expected to suffer. Also, the credit crisis the United States was going through was expected to expand to other countries. One interesting effect of the crisis was that the euro tended to be very sensitive to the U.S. stock market. When the market was falling, so was the euro. When the market began to recover, so did the euro. The euro is obviously a strong and im- portant currency, but it lacks a strong central government that can coordinate a response to economic crisis. The European Central Bank can influence interest rates, but that’s about all.

What about the yen? Interestingly enough, the yen also became a safe-haven currency during the crisis, along with the dollar. At the time, the yen was Asia’s most important currency because Japan had the second-highest foreign-exchange re- serves in the region and the world (just after China) and because it is a freely convertible currency with high market liquidity, as well as an important trading currency. Also, with Japanese in- terest rates so low, many investors were borrowing in yen and investing their proceeds abroad to get access to higher returns. When the crisis hit, the money quickly left the emerging markets and returned to Japan, a practice called carry trade. Whenever volatility in currency markets goes up, investors unwind (re- verse) their trades; this gave strength to the yen.

The markets also demonstrated that the yen and U.S. stock market were inversely related. When markets are less risk-averse, stocks gain in value and the yen drops in value. When markets are more risk-averse, stock prices fall and the yen trades higher.

2011: The Year of Tragedy The earthquake and tsunami that struck Japan on March 11, 2011, were devastating in terms of lives lost and

overall human tragedy. In addition, there was a great deal of uncertainty over damage to nuclear reactors and disrup- tion to the global supply chain. (Consider that Japanese factories produce about 25 percent of the world’s semi- conductors and 40 percent of electronic components.) Plants in affected areas were shut down due to property damage, power outages, and a transportation infrastruc- ture that ground to a halt.

What happened to the Japanese yen during this crisis? Conventional wisdom would say that the yen fell against the dollar, but it actually rose in value. After the quake, there was a massive inflow of capital from the Japanese as they liqui- dated investments made with cheap Japanese money which were invested in emerging markets where returns are high (another example of carry trade). In addition, many Japanese companies brought money back to the country at the end of the fiscal year (March 31), so the need for capital resulted in a tremendous inflow of it, causing the yen to rise in value.

What Does All This Mean to Sony? Now we are in 2016 where the yen reversed years of weak- ness against the dollar and started an upward climb. In FY 2015, Sony generated 27.2 percent of its sales in Japan, 18.6 percent in the United States, 23.5 percent in Europe, 12.8 percent in Asia/Pacific, 6.7 percent in China, and 11.2 percent elsewhere. Thus, the company was well diver- sified geographically.

Sony’s production of electronics products was done 60 percent in-house and 40 percent outsourced. Of the in-house production, 35 percent was done in Japan, of which 75 per- cent was exported; 40 percent was manufactured in China, of which 75 percent was exported; 5 percent was manufactured in the United States and Europe for local consumption; and the rest was manufactured in other parts of Asia, of which 65 percent was exported to the Americas, Japan, Europe, and China, and the rest was sold in local markets. What is interesting about the location of sales and manufacturing is that are multiple kinds of exposure. For example, products manufactured in Japan and exported to other markets are af- fected by the value of the yen: When the yen is weak, exports benefit. When the yen is strong, exports suffer.

One major effect of the strong yen and the global slow- down was the sharp drop in exports from Japan. In January 2009, for example, exports dropped 49 percent compared to a year earlier. As exporters found their sales falling, they cut orders from their suppliers, so there was a ripple effect in the Japanese economy, affecting both production and employ- ment. These events caused a sharp contraction in Japan as GDP fell 12.1 percent in the fourth quarter of 2008 compared to a year earlier, and many experts felt that Japan was going through its worst recession since World War II. Deflation was also affecting the Japanese economy again, and consumers were delaying purchases hoping that prices would continue to fall, while companies were hesitant to invest more. Is it

278 part 4 World Financial Environment

possible that the opposite took place when the yen weak- ened in the past few years? Now that the yen is getting stron- ger, will Japan repeat its experience of 2009?

The strong yen was also hurting Sony’s financial state- ments. As Sony translates U.S. dollar or euro financial statements into yen, net assets and earnings are worth less in yen, dragging down Sony’s consolidated results. The only way to offset this drop is to sell more and improve profit margins, both of which are hard to do in a slow global economy. From a cash-flow point of view, Sony’s operations abroad are remitting dividends back to Japan, but they are worth less yen as the dollar and euro weaken against it. One silver lining is that the purchasing power of the yen rises as it strengthens compared to other currencies, so everything Sony imports into Japan for its manufacturing is cheaper. The same would be true for anything manufactured outside Japan, thus reducing costs and hopefully increasing mar- gins. As long as Sony is invoicing its exports in dollars to customers worldwide, it needs to match the dollar revenues with dollar expenses through investing more in the United States or in other countries in Asia, like Taiwan, where components are cheaper and where Sony can invoice its purchases in dollars.

A Reversal of Fortunes—Abenomics Just when things looked bleak due to the strong yen and weak demand in Europe and China, Japan elected a new prime minis- ter in November 2012, Shinzo Abe, who decided to fight

deflation at home and a weak domestic economy through loose monetary, fiscal, and structural policies. For most of 2012, the yen had been trading below ¥80/US$, but by the end of 2012 it was trading at 85.96; by May 6, 2013, it was at 99.10 and falling. At the end of the first quarter of 2013, Sony doubled its annual profit estimates due partly to the falling yen.

If the strong yen made it difficult for exporters to sell abroad and weakened foreign earnings, the weak yen was just the opposite. Exporters like Sony, Toyota, and Panasonic were ecstatic about the weaker yen (which had fallen by more than 20 percent since Abe took office) and the opportunity to expand their sales abroad. The full extent of their abil- ity to take advantage of the weaker yen still depended on economic recovery in the United States, Europe, and China, but at least the currency wasn’t an additional weight on their competitive position.

Questions

10-3. Why do you think it is important for Sony to manufacture

more products in the United States and Europe and to also

buy more from suppliers in other countries in Asia?

10-4. What are the major forces that affected the Japanese yen

over the years? What factors do you think are important to

monitor as you try to forecast what will happen to the value

of the yen in the future?

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the following Assisted-graded writing questions:

10-5 What were the major factors that led to the drop in Sony’s exports from Japan?

10-6 In what other ways has the strong yen affected Sony’s bottom line? What would be the effect of a weak yen?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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MyManagementLab® Improve Your Grade! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

To have money is a good thing; to have a say over the money is even better.

—Yiddish proverb

Objectives

After studying this chapter, you should be able to

11-1 Describe the finance function of an MNe in a global context

11-2 Define leverage and how it affects the choice of capital structure

11-3 explain the different ways to access debt internationally

11-4 summarize how foreign source income is taxed

11-5 Analyze how offshore financial centers provide financing opportunities for MNes

chApter 11 Global capital Markets

Businessman drawing statistics on a glass wall. ▶

http://www.world-exchanges.org/statistics/monthly-reports

Case Tax Wars: Pfizer Versus the U.s. Government1

its new Tim Hortons business in the United States, creating more American jobs as well as creating more wealth for Tim Hortons.

In the absence of tax reform, enterprising U.S. companies discov- ered tax inversion as a way to reduce their tax liability. Using Pfizer as an example, Pfizer would merge with Allergan and adopt Ireland as its tax domicile. Since the new firm would not be a U.S. company, it would not be subject to U.S. corporate income taxes. It could then use its tax savings to pay dividends to shareholders and use the ex- cess cash for global expansion. It is estimated that since 2012, there have been at least 20 such tax inversions, including Burger King and Tim Hortons, and many others were moving in that direction.

The FighT AgAinsT TAx inversions

The fight against inversions was taken up by the U.S. Treasury, not Congress. The problem with Congress is that the Democrats and Republicans couldn’t agree on comprehensive tax reform, so there wasn’t much incentive to take on one isolated issue. However, the Treasury was looking for money anywhere it could find it to fund government programs. In addition, there was a broader concern that U.S. companies wanted to have all the benefits of the United States without paying the taxes. As noted by the U.S. Treasury Secretary leading the fight against tax inversions, “These firms involved in these transactions still expect to benefit from their business location in the United States, with our protection of intellectual property rights, our support of research and development, our investment climate and our infrastructure, as funded by various levels of government. But these firms are attempting to avoid paying taxes here, notwithstand- ing the benefits they gain from being located in the United States.”

In September 2014, the Treasury Department announced its first set of rules to try to discourage tax inversions. The rules would pro- hibit companies from using offshore profits to finance the inversion deals. While President Obama said there is no substitute for Congres- sional action, and Senator Hatch who is on the Senate Finance Com- mittee said that “any solution that permanently addresses inversions must be legislated by Congress,” it was clear that Congress would not be part of the solution and that the Treasury Department would make the rules.

The FinAl BATTle

In spite of the rules announced in 2014, Pfizer and Allergan moved ahead in their plans to merge and for Pfizer to move its corporate headquarters to Dublin. If successful, it would have been the largest inversion yet. The $151 billion would also have been the largest merger in 15 years, as well as the largest corporate inversion. Pfiz- er’s CEO maintained that the reason for the inversion wasn’t just to save taxes. He maintained that some of Pfizer’s biggest global

In 2014, Pfizer, the U.S.-based pharmaceutical company, began look- ing at Allergan, the pharma headquartered in Ireland, for a possible merger. From one perspective, the deal made sense. Pfizer needed to expand its portfolio of new drugs, and Allergan had some high-profile drugs, like Botox. From another perspective, Allergan’s headquarters were located in Ireland, where the corporate tax rate is 12.5 percent, compared with the 35 percent U.S. corporate tax rate (39 percent for combined federal and local tax rate), the highest in the world. If the merger went though and Pfizer was able to move its corporate head- quarters to Ireland, it stood to significantly reduce its corporate tax liability and therefore free up more cash for its equity shareholders and for reinvestment into the development of new drugs.

TAx inversions

Pfizer and Allergan were caught in a war of words and phrases, like serial inverters, earnings-stripping, stuffing, cherry-picking, and the best of them all, skinny down. But let’s go back a few years to when tax inversions really took hold because of high U.S. corporate tax rates and the inability of Congress to make any progress on comprehensive tax reform. It’s easy to see the difference in corpo- rate tax rates between the United States and Ireland, but the rates are 30.18 percent in Germany, 20 percent in the U.K., 25 percent in the Netherlands, 21.5 percent in Switzerland, and 26.7 percent in Canada. However, tax loopholes in the U.S. tax code allow the 50 biggest MNCs to reduce their effective tax rate to 24 percent compared to 35 percent for their European counterparts. In order to reduce the U.S. corporate tax rate to be comparable with their European counterparts, comprehensive tax reform also needs to take place.

Burger King, a U.S.-based company that was owned by 3G Capi- tal Partners LP, a Brazilian private equity firm, was part of one of the first high-profile tax inversions that created tensions on both sides of the Canadian border, but for different reasons. In 2014, Burger King decided to merge with Tim Hortons, a coffee-and-doughnuts chain started in Canada. Burger King’s goal was to complete the merger with Tim Hortons, move the corporate headquarters to Canada, and change the name to Restaurant Brands International. In the pro- cess, it would save $117 million dollars in U.S. taxes since it would never have to pay U.S. taxes on foreign profits it holds offshore. Of course, Burger King announced that it was driven by growth opportu- nities, not tax savings, by completing the inversion. On the Canadian side, the concern was that Canada was losing another one of its corporate icons, Canada’s largest coffee-shop chain with a market cap about the same size as Burger King. In spite of Burger King being called “unpatriotic” by the U.S. government for completing the tax inversion, it has since proven its prediction that growth, not just tax- es, was the foundation of the merger. 3G Partners is now expanding

Chapter 11 Global Capital Markets 281

rivals, GlaxoSmithKline and AstraZeneca of Britain and Novartis of Switzerland are at a distinct advantage because of their lower tax rates which puts them at an advantage over Pfizer in acquiring other companies. The merger would give each company access to new technologies and would allow Pfizer the size and product diversity it needs to split the company into two parts—one emphasizing faster- growing, innovative drugs and the other for more mature products that have to compete with generics. However, tax issues are not in- significant. Not only was Pfizer interested in the tax benefits from the inversion, but it also had over $74 billion in profits kept overseas that would be subject to U.S. tax if brought back to the United States. If Pfizer became an Irish company, it would no longer have to worry about that. A merger between Pfizer and Allergan would probably not have been an issue for U.S. regulators from a competitive standpoint. However, the Treasury Department has a different mandate than the Federal Trade Commission. The issue for them is not a loss of com- petition; it’s a loss of tax revenues. The real question was, if the U.S. government eliminated the possibility of a tax inversion, would the merger still go through?

In 2016, the Treasury Department slammed the door shut on certain tax inversions, or at least made it more difficult for them, in a series of regulations aimed directly at Pfizer. The 300-page ruling included as its centerpiece the acquisitions of “serial invert- ers,” when determining whether a company is a foreign company. In the case of Pfizer and Allergan, Pfizer would have to own be- tween 50 and 60 percent of the combined company in order to obtain full benefits from the inversion. When the last three years of Allergan’s acquisitions were eliminated, Allergan shareholders

would have held only 20 percent of the shares, with Pfizer own- ing 80 percent. That meant that the merged company would be subject to U.S. tax and would not be a foreign company. A second change was the elimination of “earnings stripping” where the in- version company would lend money to its U.S. subsidiaries, allow- ing the subsidiaries to claim the interest paid as a tax deduction, thus lowering U.S. taxes. The interest earned by the inverted com- pany would be considered taxable income but at the lower rate in the inversion country.

What about the merger? After the new regulations were an- nounced in April 2016, Pfizer and Allergan followed up with their own announcement that the merger would no longer make sense. Who won the war? Obviously the U.S. government felt like it won since it eliminated another case of tax inversion. Congress didn’t win, be- cause it wasn’t part of the decision, and nothing was done to reform the tax code. However, the United States now has another 300 pages of regulations developed to solve one problem – tax inversions. ■

Questions

11-1. In the case of Allergan and Pfizer, there are two sovereign

powers in play – Ireland and the United States. Why was

Ireland interested in letting the inversion take place, and

why was the U.S. government against the inversion? Is the

decision by the United States a direct affront to the sover-

eignty of Ireland?

11-2. In what ways are tax inversions beneficial to both the

United States and the host country of the inversion?

The FinAnce FuncTion The role of the chief financial officer (CFO) and the financial management is to maintain and create economic value or wealth by maximizing shareholder wealth—the market value of existing shareholders’ common stock.2 The management activities related to cash flows can be divided into three major areas:

• Make financing decisions—especially regarding capital structure (the proper mix of debt and equity) and long-term financing (selecting, issuing, and managing long-term debt and equity capital, including location—home country or elsewhere—and currency—home or foreign)

• Make investment decisions—typically in the context of capital budgeting • Manage short-term capital needs managing the MNE’s currency assets and liabilities

(cash, receivables, marketable securities, inventory, trade receivables and payables, and short-term bank debt)

The role oF The cFo The CFO acquires financial resources—that is, the CFO is responsible for generating funds either internally or from external sources at the lowest possible cost—and allocates them among the company’s activities and projects. Allocating resources (investing) means

concepT check

In Chapter 19, page 520, we will discuss how the corporate con- troller reports to the CFO and is responsible for accounting and managing foreign-exchange ex- posure. In Chapter 15, page 407, we will show how the expansion of the MNE through FDI and other entry strategies requires financial resources that must be managed by the CFO.

The corporate finance function acquires and allocates financial resources among the company’s activities. The key functions are

• making financing decisions, • making investment

decisions, • managing short-term capital

needs.

282 part 4 World Financial Environment

debt, to fund operations. Firms in common law countries, such as the United States, the United Kingdom, Canada, etc., use less leverage and more long-term debt, and firms in countries with an explicit bankruptcy code have higher leverage and more long-term debt. When examining the median leverage ratio (in this case being defined as total debt over the market value of the firm), firms in developing countries tend to have the highest amount of leverage. The top most highly leveraged countries are Korea, Indonesia, Brazil, Portugal, and Pakistan. Firms in developed countries tend to be in the lower end of the leverage spectrum. The five countries with the lowest leverage are Australia, South Africa, Canada, the United States, Turkey (an outlier), and the United Kingdom.5 Firms that rely excessively on leverage often are in countries with less active securities markets, as opposed to those that rely less on debt which are often in countries with large, active, and liquid stock markets.

A separate study of the capital structure of U.S.-based MNEs’ foreign affiliates found that local tax rates strongly influenced the debt-to-equity ratios. Although the firm as a whole might have a debt-to-equity ratio based on U.S. capital-market expectations, its foreign af- filiates have to be sensitive to local conditions. The study noted:

Ten percent higher local tax rates are associated with 2.8 percent higher debt/asset ratios, with internal borrowing particularly sensitive to taxes. Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditor rights, reflecting significantly higher local borrowing costs. Instru- mental variable analysis indicates that greater borrowing from parent companies sub- stitutes for three-quarters of reduced external borrowing induced by capital market conditions. Multinational firms appear to employ internal capital markets opportunis- tically to overcome imperfections in external capital markets.6

Debt and exchange rates The global financial crisis of 2007–2009 highlighted foreign- exchange risk. Leading up to the crisis, many Asian companies borrowed in dollars at rela- tively low interest rates. But when the dollar rose in value, the companies couldn’t generate enough cash to convert into dollars to pay off their debts.

A similar phenomenon occurred in Iceland, a country with its own currency (the krona). The Central Bank of Iceland kept interest rates high, attracting lots of foreign in- vestment and keeping the krona strong. People’s standards of living, among the highest in the world, were supported by the strong currency and the ability to import products. They sustained their high consumption by financing houses and other purchases through borrowing in euros when interest rates were low. When the global crisis hit in 2007–2009, however, the krona plunged in value, the banks failed, and firms as well as consumers could not afford to service their debts. Sourcing debt in a currency with a lower interest seemed like a good idea, but the lower foreign interest rates were replaced by exchange- rate risk.7

regulatory risk A second factor that affects local borrowing is regulatory risk. Regulatory reform has complicated access to debt financing. As noted below, bonds are a great way for companies to raise capital for operations. However, companies also rely heavily on bank financing, and the failure of banks during the global financial crisis and resulting impact on the global economy has made countries very nervous about the financial stability of banks. The Basel Committee on Global Banking Supervision, which is a part of the Bank for International Settlements and comprises some of the world’s top regulators and central bankers, has worked hard to put together rules to ensure that banks will be able to withstand future economic crises. The basic idea is to set standards for stronger capital positions and increased liquidity. The most recent agreement is called Basel III; it is designed to strengthen regulation, supervision, and risk management of the banking sector.8 On the one hand, the world should be better off as banks comply with Basel III and increase their capital positions, but on the other hand, higher capital requirements also mean lower funds available to lend to companies that might not be able to raise capital through an IPO (discussed below) or by issuing bonds.

Choice of capital structure depends on tax rates, degree of development of local equity markets, and creditor rights.

MNEs tend to use debt in countries with relatively high tax rates and a high degree of corruption. Also, capital structure of foreign subsidiar- ies tends to be more sensitive to local conditions.

increasing stockholders’ wealth through the allocation of funds to different projects and in- vestment opportunities.

The cFo’s global perspective The CFO’s job is more complex in a global environment than in the domestic setting because of such forces as foreign-exchange risk, currency flows and restrictions, political risk, different tax rates and laws determining taxable income, and regulations on access to capital in different markets. The rest of this chapter examines the following areas:

1. Overall capital structure 2. Global capital markets 3. Taxation of foreign-source income and influence on capital markets 4. Offshore financing, offshore financial centers, and tax havens

cApiTAl sTrucTure A CFO must determine the company’s proper mix between long-term debt and equity—in other words, its capital structure. Many companies start off with an initial investment and then grow through internally generated funds. However, when those sources are inadequate to fund continued growth into new markets, the CFO’s office must decide the proper debt/ equity mix.

leverAging DeBT FinAncing The degree to which a firm funds the growth of business by debt is known as leverage. The degree to which companies use leverage instead of equity capital—known as stocks or shares—varies throughout the world. Country-specific factors are a more essential determi- nant of a firm’s capital structure than any others because a firm tends to follow the financing trends in its own country and within its particular industry there. Leveraging is often per- ceived as the most cost-effective route to capitalization because the interest that companies pay on debt is a tax-deductible expense in most countries, whereas the dividends paid to investors are not.

When is leveraging Not the Best option? Leveraging is not always the best ap- proach in all countries, for two major reasons. First, excessive reliance on long-term debt raises financial risk and thus requires a higher return for investors. This was very evident in Europe during the global financial crisis as companies and governments tried to raise capital through bond issues, and they either had to offer high interest rates to attract investors or they had difficulty getting any investors at all. Second, foreign subsidiaries of an MNE may have limited access to local capital markets, making it difficult for the MNE to rely on debt to fund asset acquisition.3

FAcTors AFFecTing The choice oF cApiTAl sTrucTure In a recent and extensive study on leverage of 36,767 firms in 39 countries over a 15-year pe- riod, it was shown that the financing choices available to a company depend on many factors, both unique to the firm itself as well as the environment in which they operate.4 The authors found that the most important determinants in capital structure are a country’s legal and taxation system, the level of corruption, and the preferences of capital suppliers (banks and pension funds). Where tax differences are critical, firms tend to use more debt since they can deduct interest expense and therefore lower their tax liability. However, that is not as signifi- cant as other factors. Firms in corrupt countries tend to use more debt, especially short-term

concepT check

The treasurer is responsible for controlling the company’s cash payments and the re- lated financial functions, both domestic and foreign. The treasurer’s functions fall under the overall responsibility of the chief financial officer (or the VP of finance), as we’ll describe in Chapter 19, page 520.

Leverage—the degree to which a firm funds the growth of business by debt.

Chapter 11 Global Capital Markets 283

Choice of capital structure depends on tax rates, degree of development of local equity markets, and creditor rights.

MNEs tend to use debt in countries with relatively high tax rates and a high degree of corruption. Also, capital structure of foreign subsidiar- ies tends to be more sensitive to local conditions.

284 part 4 World Financial Environment

gloBAl DeBT MArkeTs Companies have many ways of raising capital to fund operations, including debt and equity sources as well as domestic and international sources. Initially, we’ll examine sources of debt financing. As an example, NuSkin Enterprises, a company that specializes in personal care prod- ucts and nutritional supplements, sells products in more than 50 international markets, and Japan was initially their most important international market. Recently NuSkin entered into a Japanese yen denominated credit term loan facility for 6.6 billion yen at 2.3 percent variable interest rate. NuSkin pays its bank installments over a five-year period beginning in 2014. It hopes to use rev- enues in Japanese yen to pay off the debt in yen which helps eliminate the foreign- exchange risk. In addition to the long-term debt in yen, NuSkin also has a revolving line of credit in yen which is classified as short-term since it pays off the funds over a relatively short time. Many firms like NuSkin use banks in the local markets as an important source of financing.

eurocurrencies AnD The eurocurrency MArkeT The Eurocurrency market is an important source of debt financing to complement what MNEs can find in their domestic markets. A Eurocurrency or offshore currency, is any cur- rency banked outside its country of origin.

The Eurodollar market is the most significant eurocurrency market. A Eurodollar is a certificate of deposit in U.S. dollars in a bank outside the United States. Most Eurodollar CDs are held in London, but they could be held anywhere outside the United States, such as the Bahamas, the Cayman Islands, etc. A major advantage of the Eurodollar market is that it is outside of the control of national banking regulators. The Eurodollar market started with the deposit of U.S. dollars in London banks during the Cold War by the Soviet Union to avoid the possibility that their accounts could be frozen in the United States. As other curren- cies entered the offshore market, the broader “Eurocurrency” name was adopted for market use, although the market tends to use the name of the specific currency, such as Euroyen or Eurosterling. Eurodollars constitute a majority of the Eurocurrency market. Dollars held by foreigners on deposit in the United States are not Eurodollars, but dollars held at branches of U.S. or other banks outside the United States are.

Major sources of eurocurrencies There are four major sources of Eurocurrencies:

• Foreign governments or individuals who want to hold dollars outside the United States • Multinational enterprises that have cash in excess of current needs • European banks with foreign currency in excess of current needs • Countries such as China, that have large foreign-exchange reserves

characteristics of the eurocurrency Market Because the Eurocurrency market is a wholesale (companies and other institutions) rather than a retail market (individuals), transactions are very large. Public borrowers such as governments, central banks, and public- sector corporations are the major players. Since the late 1990s, however, London banks have shifted to using nonbank customers for Eurodollar transactions, partly because of the intro- duction of the euro and consolidation in the banking sector.9

The Eurocurrency market is both short- and medium-term. Short-term borrowing is composed of maturities of less than one year. Anything from one to five years is considered a Eurocredit, which may be a loan, a line of credit, or another form of medium- and long- term credit. This would include syndication, in which several banks pool resources to extend credit to a borrower and spread the risk. Short-term borrowings, called euro commercial paper, are unsecured loans issued by a bank or corporation in the offshore money market and typically in the currency that is different from the corporation’s domestic currency. For example, a German company can issue eurocommercial paper in London, denominated in U.S. dollars. Maturities are less than one year.

Two major sources of funds external to the MNE’s normal operations are debt markets and equity markets.

A Eurocurrency is any currency outside its country of origin, but it is primarily dollars banked outside the United States.

There are several sources of eurocurrencies, including governments, banks, and companies that have excess amounts of cash that they want to deposit in offshore locations.

Eurocredits are loans with a maturity of one to five years. Syndicated loans involve sev- eral banks.

Chapter 11 Global Capital Markets 285

interest rates in the eurocurrency Market A major attraction of the Eurocurrency mar- ket is the difference in interest rates compared to those in domestic markets. Domestic rates are a function of the monetary policies adopted by the central banks of each country. The rate a company must pay to get loans or issue bonds depends not only on benchmark rates but also its creditworthiness. The better the creditworthiness, the lower the rate compared to other borrowers.

London Interbank Offered Rate Because of the large transactions and the lack of con- trols and their attendant costs, Eurocurrency deposits tend to yield more than domestic deposits do, and loans tend to be cheaper than in domestic markets. Traditionally, loans are made at a certain percentage above the London Interbank Offered Rate (Libor), which is a short-term interest rate for loans priced in London. Until recently, the British Bankers’ Association published Libor rates in 10 currencies and 15 different maturities based on rates submitted by 18 different banks, reflecting the rate at which banks can bor- row from each other.10

However, in 2012, a scandal broke out in London over how Libor was set. There were rumors that bankers were collaborating to fix the rates, and since then, tens of billions of dollars in fines have been levied against the worst offenders. In 2014, the responsibility for setting Libor shifted to the Intercontinental Exchange or ICE. Now the ICE Benchmark Administration is responsible for setting interest rates for five currencies in seven different maturities. The most common ICE Libor rate is the three-month U.S. dollar rate. ICE Libor is the benchmark interest rate for a variety of debt instruments, including corporate bonds, mortgages, credit cards, etc.11 The Libor benchmark three-month rate is a reference rate for $160 trillion of loans in the United States and $350 trillion in global credit when Asia and Europe are included.12 More recently, a group of global banks has been working with U.S. regulators to come up with a replacement for Libor. Until then, ICE Libor is still the standard.

inTernATionAl BonDs Many countries have active bond markets available to domestic and foreign investors. The United States is the largest market in the world for domestic bonds, with $39.5 trillion out- standing in mid-2015, 1 ½ times the size of the U.S. stock market.13 Bonds are used by gov- ernments, financial institutions, and corporations, with corporate issues being the smallest segment.14 Seventy percent of the global bond market is composed of domestic bonds, and 30 percent are international bonds. Also, the global bond market in 2012 was almost twice the size of the global equity market as defined by market capitalization.

One reason the bond (and stock) markets in the United States are so influential is because the companies of continental Europe have traditionally relied on banks for finance. However, that began to change due to the economic crisis in Europe and the drop in avail- able bank funding. Emerging markets are increasingly turning to the bond market for fund- ing and now constitute about 10 percent of the market worldwide.15 MNEs can use their domestic bond market to raise capital in the local currency, and the bonds can be sold to both domestic and foreign buyers. The bond market in Europe is interesting. Since the coun- tries in the Eurozone use the same currency, a German firm could issue a bond denominated in euros and have it be a domestic bond and a Eurobond. If it’s listed in Germany, it would be considered a domestic bond. If it’s listed in London, it would be a Eurobond. When the European Central Bank announced that it would start buying corporate bonds of European companies as part of its quantitative easing strategy, bonds suddenly became cheaper for European companies to issue, thus opening up more possibilities for European firms to issue bonds.16

There are also three types of international bonds: foreign bonds, Eurobonds, and global bonds. The international bond market is primarily a wholesale market in which bond hold- ers are usually institutional investors while issuers are large companies, governments, and international organizations.

ICE LIBOR is an interest rate on five different currencies for seven different maturities, the most common of which is the three-month Eurodollar rate.

The United States has the largest domestic bond market in the world, and the bond market exceeds the stock market in size.

286 part 4 World Financial Environment

Foreign Bonds Foreign bonds are sold outside the borrower’s country but denominated in the currency of the country of issue. A French company floating a bond issue in London in pounds sterling would be issuing a foreign bond.

eurobonds A Eurobond is usually underwritten (placed in the market for the borrower) by a syndicate of banks from different countries and sold in a currency other than that of the country of issue. A French company issuing a bond in London, denominated in U.S. dollars, is an example of a Eurobond.

global Bond A global bond is issued outside of the country where the currency is denom- inated, such a U.S. dollar bond issued outside of the United States in multiple locations. For example, it could be a U.S. dollar bond issued by a U.S. company in London, Paris, Frankfurt, and Hong Kong. The goal is to get access to investors in multiple locations, sometimes in countries where the MNE is doing business or considering doing business.

Rising in importance are “dim sum” bonds, which are offshore bonds denominated in Chinese yuan. Although Chinese companies are issuing bonds in China that are available to foreign investors, capital outflow restrictions by the Chinese government are increasing the risk of raising capital in China.17 However, the bonds’ popularity rises as China looks for a way to capitalize on its immense foreign-exchange reserves. Foreign investors who want to buy debt denominated in Chinese yuan can purchase dim sum bonds, which are typically issued in Hong Kong.18

What’s so Attractive About the international Bond Market? The international bond market is a desirable place to borrow money. For one thing, it allows a company to diversify its funding sources from the local banks and the domestic bond market and borrow in ma- turities that might not be available in the domestic markets. It also tends to be less expensive than local bond markets and attracts investors from around the world.

U.S. firms first issued Eurobonds in 1963 as a means of avoiding U.S. tax and disclosure regulations. They’re typically issued in denominations of $5,000 or $10,000, pay interest an- nually, are held in bearer form, and are traded over the counter (OTC), most frequently in London.19 Any investor who holds a bearer bond is entitled to receive the principal and in- terest payments. In contrast, for a registered bond, which is more typical in the United States, the investor is required to be registered as the bond’s owner to receive payments. The secrecy of a bearer bond also makes the Eurobonds more attractive.

For example, Gazprom, Russia’s largest company, uses the Eurobond market exten- sively. In 2016, it issued a 500 million Swiss franc Eurobond maturing in November 2018 at a yield of 4.625 percent. The main purchasers of these Eurobonds were private banks managing the savings of wealthy individuals, whereas Eurodollar bonds are typically ac- quired by institutional investors. Approximately 39.4 percent of the bonds were bought by Swiss investors, 34.1 percent by Russian investors, and the rest by other European investors. Private banks and wealth management firms bought 58.6 percent of the bonds.20 In 2015, U.S. companies accounted for about 22 percent of all corporate Eurobond issues, taking ad- vantage of low interest rates in Europe resulting from the ECB’s easy-money policies. Apple Inc. floated two Euro-denominated Eurobond issues in 2015, for a total of €2 billion. Apple planned on using the proceeds for a variety of issues, including share buybacks, higher dividends (both directly benefitting shareholders), capital expenditures, investments, debt repayment, and working capital.21

gloBAl equiTy MArkeTs Another source of financing is equity securities, whereby an investor takes an ownership position in return for shares of stock in the company and the promises of capital gains and dividends. A company that wants to raise equity capital to fund operations may work with private investors who want to take an equity interest in the company rather than just loan

A foreign bond is one sold outside the country of the borrower but denominated in the currency of the country of issue.

A Eurobond is a bond issue sold in a currency other than that of the country of issue.

A global bond is a Eurobond which is issued in several loca- tions at the same time.

Chapter 11 Global Capital Markets 287

money to the company. Or it might raise equity capital through an Initial Public Offering where it goes directly to a stock market. If the company wants to issue an IPO, it has to de- cide if it wants to raise capital in its domestic market or abroad.

Sovereign wealth funds (SWFs) are also an important source of capital. An SWF is a state-owned investment fund that generates its resources from a variety of places, including revenues from the exports of natural resources such as oil.22 The top five SWFs in terms of as- sets are Government Pension Fund (Norway), the Abu Dhabi Investment Authority, the China Investment Corporation, SAMA Foreign Holdings (Saudi Arabia), and the Kuwait Investment Corporation. Five of the top 10 funds are based on oil revenues.23 The funds, which are profes- sionally managed, can invest in specific projects or stock markets. For example, Invest AD (the Abu Dhabi Investment Company) is one of the SWFs in the UAE, with a primary role of investing in the Middle East and Emerging Africa and providing investment opportunities to third-party clients. Its officers scour the capital markets in the region to find stocks to invest in, and it has developed several funds, including the Emerging Africa Fund and the GCC (Gulf Cooperation Council) Focus Fund. When SWFs invest in specific projects, they operate more like a venture capital firm. When they invest in stock markets, one of the strategies of Invest AD, they are not providing new capital but are taking advantage of shares already listed on stock markets.

MNEs can raise new capital in the equity capital market through an Initial Public Offering, or IPO, by listing their shares on a stock exchange, either in their home country or in another country. An example of the former is the 2012 IPO by U.S.-based Facebook when it raised $16 billion in the United States. However that was topped on September 14, 2014, when e-commerce giant Alibaba Group of China raised $21.8 billion in an IPO issued in the United States through American Depositary Receipts. An ADR is a negotiable certificate of deposit issued by a U.S. bank which represents a specific number of shares of the underlying stock. Although Alibaba could have issued the IPO in China or Hong Kong, it decided to go after funds in the U.S. market instead.24

The size oF gloBAl sTock MArkeTs Map 11.1 identifies the 10 largest stock markets in the high-income countries and top-10 largest stock markets in emerging countries in terms of domestic market capitalization in January 2016. Stock market capitalization worldwide dropped by 10 percent in January 2016 compared with the prior year, with Brazil’s market falling 45.4 percent and the Ukraine fall- ing 57.4 percent.25 The numbers in Map 11.1 represent each specific stock market rather than all of the markets in the country. The three largest stock markets in the world are the New York Stock Exchange, the Tokyo Stock Exchange, and the London Stock Exchange, closely followed by the Shanghai Stock Exchange.

political and economic Forces and Trends in global stock Market During the past few years, global markets have been in turmoil, and that will continue to be the case. There are several factors that are affecting markets, although the forces change from year to year and aren’t always consistent. In the first place, when oil prices began dropping in 2014, so did the stock markets. When oil prices began to rise, so did the markets. One possible explana- tion is that rising prices resulted from increased demand and possibly a recovery in economic growth.26 Second, weakness in the global economy hurt markets in general and caused money to flee to safety rather than gamble on returns from risk.27 Third, China has been a huge force. When the Chinese economy dropped, the impact was felt all over the world, from the drop in demand in commodities to the resulting drop in commodity prices. When China devalued the yuan, the ripple effect was felt worldwide and equity markets fell.28 Fourth, un- certainly in interest rates created uncertainty in markets. When the U.S. economy was weak, interest rates were low, but when it looked like economic activity was heating up, interest rates were predicted to rise. This caused a drop in the U.S. stock market, the largest in the world. On the other hand, as emerging markets reduced interest rates, investment money began to flood into the emerging markets on the bet that their economies would grow and provide higher returns than in the weaker industrial markets.

A Sovereign Wealth Fund is a state-owned investment fund that generates its resources from a variety of sources, with oil being the main source for many SWFs.

An IPO is the first sale of stock by a company to the public. It may be in the issuer’s home country or in another country.

The three largest stock markets in the world are in New York, Tokyo, and London, with the U.S. markets controlling nearly half of the world’s stock market capitalization.

Major sources of influence on global stock markets are oil prices, weakness in the global economy, weakness in the Chinese economy, and interest rates.

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An interesting example is Europe. In 2016, investors were pulling money out of Europe at a rapid rate. This was due largely to concerns about an unstable political situation in Europe, low interest rates (thus low returns on many investments), weak banks, and a broader European economy that continued to be weak. That was in sharp contrast to 2015 when it looked like Europe had recovered from the debt crisis of 2010–2012.29 It is clear that to understand trends in stock markets, it is important to understand trends in political and economic forces worldwide and that forces in countries or regions often vary.

The rise of the euroequity Market Besides domestic markets, there is also the euroequity market, the market for shares sold outside the boundaries of the issuing firm’s home country. A euroequity IPO occurs simultaneously in two countries different from the one where the com- pany is based.30 Another way to look at euroequity is when a company’s shares are made avail- able internationally rather than just in the country where the company is based.31 The Alibaba IPO mentioned above is an example of a euroequity IPO even though it was issued in the United States rather than in Europe. Another way to look at an IPO like Alibaba is to consider it an offshore IPO, or an IPO anywhere outside of its home country. Sometimes, an MNE will list its existing shares on multiple stock markets. For example, Ford lists its shares in the United States, Belgium, and France, but its shares are listed in euros in Belgium and France.32

The Trend Toward Delisting The trend of listing on more than one exchange began to reverse somewhat as more and more companies reduced the number of exchanges on which their stocks were listed. In 2013, Tata Communications, an Indian company, announced that it was going to delist from the NYSE due to low trading volumes and liquidity.33 Investors are finding that the best price for stocks is usually in the home market of the company in which they are investing.

Euroequities are shares listed on stock exchanges in countries other than the home country of the issuing company.

1000

NYSE 16,813,385

Nasdaq (US) 6,733,665

NASDAQ OMX 1,191,629 SIX Swiss Exchange

1,395,669

Japan Exchange Group 4,522,775

Australian SE 1,095,746

London SE Group 3,541,282

Hong Kong Exchanges & Clearing 2,808,049

Duetsche Boerse 1,563,410TMX Group

1,551,220

BME Spanish Exchanges 703,388 Shanghai SE

3,490,315

BSE India Ltd 1,387,358

National Stock Exchange of India

1,360,363

BM&FBOVESPA (Brazil) 450,188

Johannesburg SE 898,856

Mexico 386,633

Shenzhen SE 2,651,788

Korea Exchange 1,197,140

Singapore 600,551

Largest high income country stock markets Largest emerging stock markets

MAp 11.1 global Markets: Domestic Market capitalization, January 2016 Data reflects domestic market capitalization of the top 10 high-income countries and the top 10 emerging markets—total number of shares of stock listed multiplied by market price per share. Source: Based on World Federation of Exchanges, Statistics, www.world-exchanges.org/statistics/monthly-reports, (accessed May 7, 2016).

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Furthermore, companies pay annual fees to list on exchanges, so if trading is light on a certain exchange, as was the case with Tata Communications, they can save money by list- ing on an exchange with heavier trading volume. Other reasons for delisting shares include weak market returns (fewer investors are putting their money into stocks) and increased regulation (such as the U.S. Sarbanes–Oxley Act).

American Depositary Receipt In 2016, 513 foreign companies or 21.3 percent of the total listings on the NYSE34 were made through an American Depositary Receipt (ADR). As noted earlier in the chapter, an ADR is a negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country. ADRs are traded like stock shares, with each one representing some number of shares of the underlying stock. For example, Toyota has listed ADRs on the NYSE since 1999 at a rate of two per common Toyota share. They issue through a sponsored ADR facility operated by the Bank of New York. In addition to the NYSE and the Tokyo Stock Exchange, Toyota also lists its ADRs on the London Stock Exchange.

TAxATion oF Foreign-source incoMe Gaining access to capital is about more than interest rates and stock exchange listing re- quirements. Tax planning is a crucial responsibility for a CFO because taxes can profoundly affect profitability and cash flow. This is especially true in international business. As complex as domestic taxation seems, it is child’s play compared to the intricacies of international taxa- tion. The international tax specialist must be familiar with both the home country’s tax policy on foreign operations and the tax laws of each country in which the MNE operates.

Taxation has a strong impact on several choices:

• Location of operations • Choice of operating form, such as export or import, licensing agreement, or overseas

investment • Legal form of the new enterprise, such as branch or subsidiary • Possible facilities in tax-haven countries to raise capital and manage cash • Method of financing, such as internal or external sourcing, and debt or equity • Capital budgeting decisions • Method of setting transfer prices

inTernATionAl TAx prAcTices Differences in tax practices around the world often cause headaches for MNEs. Lack of familiarity with laws and customs can create confusion. In some countries, tax laws are loosely enforced. In others, taxes may generally be negotiated between the tax collector and the taxpayer—if they are ever paid at all. In still others, they must be rigidly followed.

Differences in Types of Taxes Countries differ in terms of the types of taxes they have (income versus excise), the tax rates applied to income, the determination of taxable income, and the treatment of foreign-source income. Although we focus in this section on corporate income taxes, excise taxes are another important source of income to governments. The value-added tax (VAT) is an example of an excise tax used in Europe as well as other parts of the world, including China. It is a percentage levied on products at the point of sale in every stage of the value chain, and is included in the final price of the product rather than added to the price at the final point of sale, as is the case with the sales tax in the United States. There are many other excise taxes, and the large number of taxes in some countries, like Brazil, is very confusing to both local and foreign investors.

Differences in generally Accepted Accounting principles (gAAp) Variations among countries in GAAP can lead to differences in determining taxable income. In countries where

Most foreign companies that list on the U.S. stock exchang- es do so through American Depositary Receipts, which are financial documents that represent a share or part of a share of stock in the foreign company.

With a value-added tax, each company pays a percentage of the value added to a product at each stage of the business process.

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tax laws allow firms to depreciate assets faster than accounting standards allow but where the firms must use the same standards for tax and book accounting, higher depreciation expenses result in lower income and therefore lower taxes. Revenue recognition is also an important issue. Some countries tax income from worldwide revenues of MNEs, whereas others only recognize income from revenues generated in the domestic environment.

Differences in Tax rates Corporate tax rates also vary from country to country. As noted in the opening case, corporate tax rates vary from 12.5 percent in Ireland to 35 percent in the United States, when considering the issue of tax inversion. However, tax rates vary depend- ing on whether the rate includes a combined central government and sub-central govern- ment (such as federal and state taxes in the United States).35

Two Approaches to corporate Taxation Taxation of corporate income is accomplished through one of two approaches in most countries: the separate entity approach (also known as the classical approach) or the integrated system approach.

Separate Entity Approach In the separate entity approach, which the United States uses, each separate unit—company or individual—is taxed when it earns income. For example, a corporation is taxed on its earnings, while stockholders are taxed on the distribution of earn- ings (dividends). The result can be double taxation.

Integrated System Approach Many other developed countries use an integrated system to eliminate double taxation. Australia and New Zealand, for example, give a dividend credit to shareholders to shelter them from double taxation. This means that when shareholders report the dividends in their taxable income, they also get a credit for taxes paid on that in- come by the company that issued the dividend. That keeps the shareholders from paying tax on the dividend because the company has already done so.

Germany used to have a split-rate system with two different tax rates on corporate earn- ings: one on retained earnings and one on distributed earnings. However, they abolished it in 2001 and adopted a classical system with an overall lower corporate tax rate on earnings of 15 percent (15.285 percent including the solidarity surcharge to help with the reunification with East Germany) plus a municipal trade tax ranging from 14 to 17 percent, resulting in an effective tax rate of 30 and 33 percent.36 Taxation of foreign-source income depends on the country where the parent company is domiciled. It is common for most developed countries to tax MNEs on their worldwide income and give them a credit for foreign corporate income taxes paid. That is not true everywhere, however. Hong Kong companies, for example, pay tax only on Hong Kong-source income, even if remitted to Hong Kong, and their corporate tax rate is only 16.5 percent.37

TAxing BrAnches AnD suBsiDiAries In order to innovate and expand, companies need to gain access to capital, both debt and equity, from home-country capital markets or markets abroad. However, companies can also raise capital through minimizing their tax liability worldwide so that they can use internally generated cash to expand. To illustrate how this is done, let’s look at how U.S.-based compa- nies tax earnings from a foreign branch and a foreign subsidiary.

The Foreign Branch A foreign branch is an extension of the parent company rather than an enterprise incorporated in a foreign country. Any income the branch generates is taxable immediately to the parent, whether or not cash is remitted by the branch to the parent as a distribution of earnings. However, if the branch suffers a loss, the parent is allowed to deduct that loss from its taxable income, reducing its overall tax liability.

The Foreign subsidiary Whereas a branch is a legal extension of a parent company, a for- eign corporation is an independent legal entity set up in a country (incorporated) according to

In the separate entity approach, governments tax each taxable entity when it earns income.

An integrated system tries to avoid double taxation of corporate income through split tax rates or tax credits.

Foreign branch income (or loss) is directly included in the parent’s taxable income.

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that country’s laws of incorporation. When an MNE purchases a foreign corporation or sets up a new one in a foreign country, it is called a subsidiary of the parent. Income earned by the sub- sidiary is either reinvested in the subsidiary or remitted as a dividend to the parent company.

Subsidiary income is either taxable to the parent or tax-deferred—that is, it is not taxed until it is remitted as a dividend to the parent. Which tax status applies depends on whether the foreign subsidiary is a controlled foreign corporation (CFC)—a technical term in the U.S. tax code—and whether the income is active or passive. This is a relatively unique concept for U.S. companies since most countries only tax income earned in their countries and do not tax foreign source income.

The controlled Foreign corporation A controlled foreign corporation (CFC), from the standpoint of the U.S. tax code, is any foreign company in which more than 50 percent of its voting stock is held by “U.S. shareholders,” which are U.S. citizens or companies that each hold 10 percent or more of the CFC’s voting stock. Any foreign subsidiary of an MNE would auto- matically be considered a CFC from the standpoint of the tax code. However, a joint venture company abroad that is partly owned by the U.S.-based MNE and partly by local investors might not be a CFC if the U.S. MNE does not own more than 50 percent of the JV’s stock.

To qualify as a controlled foreign corporation (CFC), more than 50 percent of a company’s vot- ing shares must be held by U.S. shareholders. A U.S. shareholder must be a U.S. person or com- pany holding at least 10 percent of the corporation’s voting shares. Assume three scenarios: foreign corporation A has one U.S. shareholder who owns 100 percent of the shares. Foreign Corporation B has 4 shareholders. One owns 45 percent of the shares, one owns 10 percent, one owns 20 percent, and one owns 25 percent. Foreign corporation C has 4 shareholders. One owns 30 percent, one owns 10 percent, two each own 8 percent, and one, a non-U.S. person, owns 44 percent. Which of these are CFCs? A definitely is. B is because all of the shareholders are U.S. persons who own at least 10 percent of the shares. C is not, because two U.S. persons own at least 10 percent of the shares, and they only own a total of 40 percent.

When former U.S.-based company Enron set up its shell companies in tax-haven coun- tries, it was careful not to own more than 50 percent of the stock so that it could avoid having to include the debt in those operations in its consolidated income.38

Active Versus Passive Income If a foreign subsidiary qualifies as a CFC, the U.S. tax law requires the U.S. investor to classify the foreign-source income as active or Subpart F (passive) income. Active income is derived from the direct conduct of a trade or business, such as from sales of products manufactured in the foreign country. Subpart F or passive income, which is specifically defined in Subpart F of the U.S. Internal Revenue Code, comes from sources other than those connected with the direct conduct of a trade or business, generally in tax- haven countries, and includes the following:

• Holding company income—income primarily from dividends, interest, rents, royalties, and gains on sale of stocks.

• Sales income—income from foreign sales corporations that are separately incorporated from their manufacturing operations. The product of such entities is manufactured and sold for use outside the CFC’s country of incorporation, and the CFC has not per- formed significant operations on the product.

• Service income—income from the performance of technical, managerial, or similar ser- vices for a company in the same corporate family as the CFC and outside the country in which the CFC resides.

Subpart F income usually derives from the activities of subsidiaries in tax-haven countries such as the Bahamas, the Netherlands Antilles, Panama, and Switzerland. The tax-haven subsidiary may act as an investment company, a sales agent or distributor, an agent for the parent in licensing agreements, or a holding company of stock in other foreign subsidiaries that are called grandchild—or second-tier—subsidiaries. This setup is illustrated in Figure 11.1. In the role of a holding company, its purpose is to concentrate cash from the parent’s foreign operations into the low-tax country and use the cash for global expansion.

Tax deferral means that income is not taxed until it is remitted to the parent company as a dividend.

In a CFC, U.S. shareholders hold more than 50 percent of the voting stock.

Active income is derived from the direct conduct of a trade or business. Passive income (also called Subpart F income) is usually derived from opera- tions in a tax-haven country.

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Determining a Subsidiary’s Income Figure 11.2 illustrates how the tax status of a subsid- iary’s income is determined. All non-CFC income—active and Subpart F—earned by the for- eign corporation is deferred until remitted as a dividend to the U.S. shareholder (the parent company, in this example). In contrast, a CFC’s active income is tax-deferred to the parent, but its Subpart F income is taxable immediately to the parent as soon as the CFC earns it, subject to some limitations and exceptions. If a foreign branch earns income, it is immedi- ately taxable to the parent company, whether it is active or Subpart F income.

TrAnsFer prices A major tax challenge as well as an impediment to performance evaluation is the extensive use of transfer pricing in international operations. Because the price is between related enti- ties, it is not necessarily an arm’s-length price—that is, a price between two companies that do not have an ownership interest in each other. The assumption is that an arm’s-length price is more likely than a transfer price to reflect the market accurately.

Transfer prices and Taxation Companies establish arbitrary transfer prices primarily because of differences in taxation between countries. For example, if the corporate tax rate is higher in the parent company’s country than in the subsidiary’s country, the parent could

A transfer price is a price on goods and services one mem- ber of a corporate family sells to another.

Tax-Haven Subsidiary

Grandchild Subsidiary

Parent Company in the

United States

Figure 11.1 The Tax-Haven Subsidiary as Holding Company A U.S. company has established a tax-haven subsidiary as a holding company in an offshore location. As such, the offshore subsidiary owns shares in three foreign subsidiaries called grandchild subsidiaries. The offshore holding company generates holding company income, which is recorded by the U.S. parent company as Subpart F income.

U.S. Stockholder (parent company)

CFC

Active income is tax deferred. Subpart F income is taxable to the parent when earned by the CFC.

Foreign Corporation (non-CFC)

Income is taxable to the parent when declared as a dividend, regardless of whether the income is active or Subpart F. Deferral applies.

Foreign Branch

All income is taxable to the parent when earned by the branch.

Figure 11.2 The Tax Status of u.S.-Owned Foreign Subsidiaries Both CFC and Subpart F provisions are designed to prevent U.S. firms from establishing tax-haven subsidiaries for the purpose of investing passive income indefinitely, thus earning tax-free income. Basically, these provisions treat tax income just as if it had been remitted to the U.S. parent at the time when it was earned.

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set a low transfer price on products it sells to the subsidiary to keep taxable profits low in its country and high in the subsidiary’s country. The parent could also set a high transfer price on products sold to it by the subsidiary.

The OECD is very concerned about the ways in which companies manipulate transfer prices to minimize their tax liability worldwide. For this reason, the OECD Centre for Tax Policy and Administration meets periodically to discuss the adoption of sound transfer pric- ing policies (along with a wide range of other tax issues). The OECD issued guidelines on transfer pricing in 1979 and updated the policies in 1995 to provide guidance on different transfer methods that could be used and how to tell if a transfer between independent firms is similar to a transfer within a group. To avoid transfer-price manipulation, it recommends determining the tax liability in each country by applying an arm’s-length price, and it has is- sued guidelines on the matter. Additional OECD policy revisions have been published since 1995 and continue to be published periodically.39

Companies can get into disputes with different tax jurisdictions over transfer pricing pol- icies. GlaxoSmithKline (GSK), the British pharmaceutical company, settled a transfer pricing dispute with the U.S. Internal Revenue Service in 2006 by paying $3.1 billion in federal, state, and local taxes and interest—slightly less than the $5 billion the IRS was seeking and nearly half of GSK’s operating cash flow. The IRS contends that GSK charged its U.S. affiliate too little for marketing services provided by the affiliate, which meant that U.S. earnings were low, resulting in lower taxes collected in the United States. The dispute arose over whether GSK should have paid for the marketing services at cost or at the price it would have paid an independent third party. These are complex issues that leave companies open to significant financial risks if they don’t price services or products correctly.40

DouBle TAxATion AnD TAx creDiT Every country has a sovereign right to levy taxes on all income, which could result in double taxation if both the home and host country tax the income.

In U.S. tax law, a U.S. MNE gets a credit for income taxes paid to a foreign government. For example, when a U.S. parent recognizes foreign-source income (such as a dividend from a for- eign subsidiary) in its taxable income, it must pay U.S. tax on that income. However, the IRS al- lows the parent company to reduce its tax liability by the amount of foreign income tax already paid. It is limited by the amount it would have had to pay in the United States on that income.

Assume, for example, that U.S. Company A earns $100,000 of foreign-source income and that it paid $40,000 (40 percent tax rate) on that income in the foreign jurisdiction. If that income is considered taxable in the United States, Company A would have to pay $35,000 in income taxes (35 percent tax rate). In the absence of a tax credit, Company A would have paid a total of $75,000 in income tax on the $100,000 of income, a 75 percent tax rate.

The IRS, however, allows Company A to reduce its U.S. tax liability by a maximum of $35,000—what it would have paid in the United States if the income had been earned there. If Company A’s subsidiary had paid $20,000 in foreign income tax (a 20 percent tax rate), it would be able to claim the entire $20,000 as a credit because it was less than the U.S. liability of $35,000. Company A will pay a total of $35,000 in corporate income tax on its foreign- source income—$20,000 to the foreign government and $15,000 to the U.S. government.

Tax Treaties: eliminating Double Taxation The primary purpose of tax treaties is to pre- vent international double taxation or to provide remedies when it occurs. The United States is an active participant in 75 different tax treaties involving 58 different countries.41 The general pattern between two treaty countries is to grant reciprocal deductions on dividend withhold- ing and to exempt royalties—and sometimes interest payments—from any withholding tax.

The United States has a domestic withholding tax of 30 percent for dividends, interest, and royalties for owners of U.S. securities issued in countries with which it has no tax treaty. When a tax treaty is in effect, the U.S. rate on dividends is generally reduced to 5 to 15 per- cent, and the tax on interest and royalties is either eliminated or reduced to 5 to 10 percent. The rate varies by country, however.

The IRS allows a tax credit for corporate income tax that U.S. companies pay to another country. A tax credit is a dollar- for-dollar reduction of tax liability and must coincide with the recognition of income.

The purpose of tax treaties is to prevent double taxation or to provide remedies when it occurs.

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DoDging TAxes Two things will always be true: governments will always try to figure out how to collect as much in taxes as they can and companies (and individuals) will try to avoid paying as much in taxes as they can. The challenge is that some countries provide tax incentives to at- tract investment, and these incentives can help MNEs lower their overall tax liability. Take Google, for example, a U.S.-based company that operates worldwide. Google established its European headquarters in Ireland where the corporate tax rate is 12.5 percent, as mentioned elsewhere in the chapter, and has its customers who buy advertising on Google’s search en- gine sign contracts with its Irish subsidiary rather than in the country where they reside. Thus Google generates revenues across Europe but pays taxes in Ireland rather than in the other countries whose tax rates are substantially higher. To reduce their tax liability even more, Google runs some of its royalty payments through a subsidiary in Bermuda, where there are no corporate income or withholding taxes.42 The EU is now forcing MNEs to pay tax in the countries where their sales are generated rather than in low-tax countries like Ireland.

There are many reasons why companies locate in Ireland, such as cheap workers and a busi- ness friendly environment, but the low corporate tax rate is not insignificant. To attract more knowledge-based firms, Ireland announced a 6.25 percent tax rate on revenue generated from patents and other intellectual property developed in Ireland.43 In some ways, this avoids the criticism that MNEs develop their R&D outside of Ireland but collect royalties in low-tax Ireland.

One advantage that MNEs have is that it may be hard for a country to figure out its own tax policy, but it is almost impossible for countries to come up with one global tax policy that everyone can agree on. As a result, companies do the best they can to exploit the differences. The EU is even fighting over differences in tax policies from country to country. Luxembourg and the Netherlands, in addition to Ireland, are criticized by the European Commission, which is trying to eliminate different tax policies as tools to attract investments from MNEs. And the United States is also getting involved in the criticism of the EU because U.S. tax treaties are made with individual countries, not the EU as a whole. They worry that the European Commission is bullying individual countries that have set their own tax policies.

oFFshore FinAncing AnD oFFshore FinAnciAl cenTers Companies are partly able to be successful in reducing their tax liabilities because of tax- haven countries and the ability to use them for a variety of offshore activities. Offshore financing is the provision of financial services by banks and other agents to nonresidents. In its simplest form, this involves borrowing money from and lending to the nonresidents.44 A good example of legitimate offshore financing is the use of the Eurodollar market. A U.S. company can raise Eurodollars in London by working with a bank to issue bonds or syndi- cate a loan. Or it could float Eurobonds in Bermuda where there are no withholding taxes on interest, which is more beneficial to the investor.

WhAT is An oFc? Offshore financial centers (OFCs) are cities or countries that provide large amounts of funds in currencies other than their own and are used as locations in which to raise and accumulate cash. Usually, the financial transactions are conducted in currencies other than that of the country and are thus the centers for the Eurocurrency market. An OFC could be defined as any financial cen- ter where offshore activity takes place, but a more practical definition is a center where the bulk of financial activity is offshore on both sides of the balance sheet, the transactions are initiated elsewhere, and the majority of the institutions involved are controlled by nonresidents.45

characteristics of oFcs The markets in these centers tend to be regulated differently— and usually more flexibly—than domestic markets. The centers provide an alternative, (usu- ally) cheaper source of funding for MNEs so the latter don’t have to rely strictly on their own national markets. Offshore financial centers have one or more of the following characteristics:

Offshore financing—the provi- sion for financial services by banks and other agents to nonresidents.

concepT check

We introduced the OECD in discussing the OECD Anti- Bribery Convention on p. 141 in Chapter 5. In addition, the OECD is concerned about a broader range of activi- ties that involve cross-border operations. We also mention the OECD’s earlier Guidelines for MNEs, which came out in 1976 and includes a code of conduct for MNEs engaged in cross-border opera- tions. Here we observe that, because offshore financing has proved conducive to such misbehavior as tax avoidance, the OECD and several other multilateral organizations have made efforts to strengthen ethical practices in offshore transactions.

Offshore financial centers (OFCs)—cities or countries that provide large amounts of funds in currencies other than their own.

Chapter 11 Global Capital Markets 295

• A large foreign-currency (Eurocurrency) market for deposits and loans (in London, say) • A market that functions as a large net supplier of funds to the world financial markets

(such as in Switzerland) • A market that functions as an intermediary or pass-through for international loan funds

(e.g., the Bahamas and the Cayman Islands) • Economic and political stability • An efficient and experienced financial community • Good communications and support services • An official regulatory climate favorable to the financial industry, in the sense that it pro-

tects investors without unduly restricting financial institutions46

However, the OECD prefers to differentiate between well and poorly regulated financial centers rather than offshore and onshore.47

operational versus Booking centers Operational centers have extensive banking ac- tivities involving short-term financial transactions; booking centers have little actual bank- ing activity taking place but transactions are recorded to take advantage of secrecy and low (or no) tax rates. In the latter case, individuals may deposit money offshore to hide it from their home-country tax authorities, either because the money is earned and/or to be used illegally—such as in the drug trade or to finance terrorist activities—or because the indi- vidual or company does not want to pay tax. London is an example of an operational center; the Cayman Islands is an example of a booking center.

oFcs as “Tax havens” A major concern with OFCs is the tax avoidance dimension of their activities. The OECD has been working closely with the major OFCs to ensure that they are engaged in legal activity. It uses the following key factors in identifying tax havens: (1) no or only nominal taxes, (2) lack of effective exchange of information (especially bank secrecy), (3) lack of transparency, and (4) no substantial activities.48 Although not trying to tell the sovereign countries what their tax rates should be, the OECD is trying to eliminate harmful tax practices in these four areas:

1. The regime imposes low or no taxes on the relevant income (from geographically mobile financial and other service activities).

2. The regime is ring fenced (i.e., separated) from the domestic economy.

OFCs offer low or zero taxa- tion, moderate or light finan- cial regulation, and banking secrecy and anonymity.

Offshore financing—the provi- sion for financial services by banks and other agents to nonresidents.

concepT check

Offshore financial centers (OFCs)—cities or countries that provide large amounts of funds in currencies other than their own.

Most tax haven countries are synonymous with beaches and easy living. Source: JFs Pic Factory/Shutterstock

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296 part 4 World Financial Environment

Yes The problem with OFCs is that they operate in a shroud of secrecy

that allows companies to establish operations there for il- legal and unethical purposes. In 2016, the so-called Panama Papers, a treasure trove of an estimated 11.5 million internal documents of a firm in Panama called Mossack Fonseca, were obtained by German newspapers and shared with others worldwide, including the New York Times. The papers showed how Mossack Fonseca helped wealthy clients evade U.S. tax laws in very creative ways. Mossack Fonseca set up over 2,800 companies for at least 2,400 U.S. clients in the British Virgin Islands, Panama, and the Seychelles, among other tax- haven countries. However, this scandal was worldwide. The prime minister of Iceland, who was named in the papers, even resigned because of the appearance of impropriety. Not all of the transactions were considered illegal, and no charges have been filed yet. But it’s probably just a matter of time.51

As another example, Italian company Parmalat set up three shell companies based in the Caribbean to capture cash. The companies allegedly sold Parmalat products, and Parmalat sent them fake invoices and charged costs and fees to make the sales look legitimate. It would then write out a credit note for the amount the subsidiaries supposedly owed and take

that to banks to raise money. Given the location of the sub- sidiaries, you would think the banks would have been suspi- cious, but Parmalat got away with these activities.

Off-balance-sheet financing was also used to hide debts. The company transferred over half of its liabilities to the books of small subsidiaries based in offshore tax havens such as the Cayman Islands. This allowed it to present a healthy balance sheet and a profitable income statement to investors and creditors by hiding large amounts of debt, un- derstating interest expenses (thus overstating income), and overstating revenues for false bookings. Parmalat’s actual debt was nearly double the amount disclosed to outsiders.

Terrorists and drug dealers also use OFCs to launder money. When the U.S. government went after the money of Osama bin Laden, it went after OFCs notorious for their secrecy. When a bank in the Bahamas refused to open its books to U.S. government investigators, the United States cut the bank off from the world’s wire transfer systems. Within two hours, the bank changed policies.52 Standard Chartered plc, a British bank, was fined $340 million for violating U.S. money-laundering laws involving an illegal scheme to hide more than 60,000 transactions worth $250 billion for Iranian clients.53 These kinds of activities must stop.

Should Offshore Financial Centers and Aggressive Tax Practices Be Eliminated?

Point Point

no OFCs are an efficient way for companies to use their financial re-

sources more effectively. They are good locations for estab- lishing finance subsidiaries that can raise capital for the parent company or its subsidiaries. And they allow the finance subsid- iaries to take advantage of lower borrowing costs and tax rates.

Not all types of tax-minimization activities are illegal because the companies are still subject to home- and host-country laws and tax regulations. It is true that some transactions may be illegal, but most are not. The key to policing truly illegal activi- ties, such as hiding drug money or engaging in corporate fraud

like the Parmalat case, is to improve transparency and reporting.

Why shouldn’t countries have the opportunity to attract business by offering tax-haven status to MNEs? Many don’t have other visible means of generating resources. They are too small to set up manufacturing operations, have too small a population base to offer low-cost labor, and don’t have nat- ural resources they can sell. So what can they do? Compa- nies and individuals need places to bank their wealth or raise capital, so the OFCs have decided to use the theory of factor proportions (discussed in Chapter 6) and develop the banking

Counterpoint

Should Offshore Financial Centers and Aggressive Tax Practices Be Eliminated?

3. The regime lacks transparency; for example, the details of it or its application are not apparent, or there is inadequate regulatory supervision or financial disclosure.

4. There is no effective exchange of information with respect to the regime.49

Obviously, there is a lot of overlap in these definitions. In a 2009 report, the OECD identified 28 tax-haven countries and 10 other financial centers that were moving to adopt their stan- dards for good tax behavior, while no national jurisdictions were reported that had not com- mitted to the internationally accepted tax standard. That is pretty significant progress.50 The OECD is trying to reduce harmful tax practices through improved translation and disclosure. Putting the spotlight on countries seems to be the best approach.

Chapter 11 Global Capital Markets 297

and financial infrastructure necessary to attract wealth. As long as they establish banking, privacy, and taxation laws that attract money, they should be allowed to do so. The Cayman Islands attract a lot of tourism, but the territory is also one of the world’s biggest financial centers, and one of the most secretive as well. It has worked hard to crack down on money laundering so it can use its financial expertise in legal ways to help companies and individuals.54

OFCs don’t rely on taxation to fund huge government ex- penditures because they don’t have a large military budget or significant welfare costs. Is there anything wrong with not collecting large amounts of taxes? Some countries are upset that OFC’s offer a tax-free environment for revenues gener- ated offshore, but that’s their business. Nobody should force them to collect higher taxes just because the high-tax coun- tries are at a disadvantage in attracting banking and finance. If

countries want to charge high taxes on financial transactions, let them do so, but don’t force the OFCs to play their game.

Even the chairwoman of the British Public Accounts Committee, in complaining about the tax policies of MNEs like Google, Amazon, and Starbucks, admitted that they are probably not doing anything illegal; she was accusing them of being immoral.55

Question

1. You can order a book from Amazon in the UK using a Brit- ish website (amazon.co.uk) and receive it from a British warehouse through the British Royal Mail. However, you will be paying an Amazon subsidiary set up in Luxem- bourg, which offers more favorable tax conditions than the UK. Is Amazon illegal, immoral, both, or neither for having a subsidiary in Luxembourg to minimize its tax bill?

Global capital markets are in disarray largely because of unstable macroeconomic forces—weak economic growth, low interest rates, low prices on commodities, and political instability. Stock markets are very volatile as they rise and fall with changing economic news. With low oil prices, many of the sovereign wealth funds don’t have the resources to invest in companies or take advantage of IPOs. In spite of this, companies are scouring the world in search of cheap capital. Because of low interest rates in Europe, there will be continued interest by corporate and sovereign buyers to issue bonds as a way to capture investment capital. The stock and bond markets will be increasingly important as banks deal with their own financial problems and increased regulations to protect against default.

Emerging markets can be great places to invest if their economies begin to recover. However, invest- ments in emerging markets will continue to be a flight to risk, assuming that the unstable global economy doesn’t favor the flight to safety in places like Japan, the United States, and Switzerland. China is in deep trouble and will continue to be so for several years because of mountains of debt and weak economic growth.

The competition for global capital will be fierce as companies are forced to shift funding from banks that are under great financial stress to issuing stocks and bonds as a way to grow and expand. In addition, stock markets will continue to compete with each other to attract companies that are looking for a place to raise capital. Mergers of stock markets to reduce costs and

expand their market potential will continue to be the wave of the future, barring regulatory concerns.

Another source of cash to MNEs will continue to be tax minimization schemes. However, the OECD countries are working hard to close tax loopholes used by MNEs as they expand abroad. As seen by the tax inversion scheme employed largely by U.S.-based MNEs, governments will continue to look at the eco- nomic rationale for expansion abroad and do whatever they can to go after companies that structure transac- tions to take advantage of low tax rates. On the other hand, there will be tension between those countries trying to close the loopholes and countries using loop- holes to attract investment. It is safe to say that govern- ments will continue to push for ways to increase their tax base, and companies will continue to react to the changing tax environment to find new ways to reduce their tax burden.

The OECD, the IMF, and the EU are three institu- tions that will help countries narrow their tax differ- ences and crack down on the transfer of money for illegal purposes. Although illegal financial transfers have occurred for years, drug trafficking and the fi- nancing of terrorist activities have created a more urgent need to reform the global financial system. As governments attempt to institute tax reform to collect more tax revenues from companies, they will have to perform a delicate balancing act of increasing reve- nues without stifling innovation and forcing companies to search for the next best tax-haven country. ■

Looking to the Future The Growth of Capital Markets and the Drive by Governments to Capture More Tax Revenues by MNEs

Case Does the Devil Really Wear Prada? Probably not, but the Italian Prada Group, clearly one of the top luxury businesses in the world, is designing, pro- ducing, and distributing luxury handbags, leather goods, footwear, ready-to-wear apparel, accessories, eyewear, and fragrances all over the world.56 It operates in 70 countries through 618 directly operated stores and se- lected, high-end multi-brand stores and luxury depart- ment stores.

Prada is a closely held firm in which the Prada family—led by Miuccia Prada, president and head designer, and her hus- band, CEO Patrizio Bertelli—holds 80 percent of the shares, with Italian bank Intesa Sanpaolo holding the rest. When Ber- telli and Prada realized that the future of luxury consumption would be in Asia, they had to decide how they were going to fund their expansion. Due to a string of debt-financed acqui- sitions in the early 2000s, Prada ran into liquidity problems and had to turn to Intesa for funding. Intesa purchased the 5 percent interest in the company in 2006 for €100 million, which put a valuation on Prada of €2 billion at the time. They had considered an IPO in 2001 and 2008, but the collapse in global stock markets both times forced them to pull back. However, 2011 seemed like a good time. Issuing stock to out- side investors would bring in new money, but it would also force Prada to deal with nonfamily shareholders and the finan- cial discipline of the market. Also, they had to figure out where to issue the IPO and how much of the company they should sell. Should they list on the Milan Stock Exchange, as they were being advised by nearly everyone in Italy? Or should they become the first Italian company to list in Hong Kong, where they could be closer to the future growth markets in China?

Who Is Prada? Prada began in 1913 when Mario Prada opened a luxury store in the Galleria Vittorio Emanuele II in Milan. Prada quickly built a strong reputation in luxury goods due to its exclusive designs, superior manufacturing techniques, and high-quality materials. By 1919, Prada had become an offi- cial supplier to the Italian Royal Family and a benchmark for fashion throughout Europe.

At the end of the 1970s, Mario’s great-granddaughter, Miuccia Prada, entered into a partnership with Patrizio Bertelli, a Tuscan businessman who was involved in high- quality leather goods. Initially, Bertelli’s company, I.P.I. SpA, had an exclusive license to produce and distribute leather goods using the Prada name, but in 2003 I.P.I. SpA and Prada merged into Prada SpA. (SpA—Società per An- zioni—is the same as “corporation” in the United States or plc in the U.K.)

In the 1990s and early 2000s, Prada began to expand by launching new brands (such as Miu Miu), acquiring new

businesses (such as Church’s Group and Car Shoe), and en- tering into licensing and joint venture agreements with Ital- ian eyewear manufacturer Luxottica and Spanish cosmetic manufacturer PUIG Beauty & Fashion Group. With these ac- quisitions, Prada expanded its product lines and opened new stores. It even launched a new phone by LG of South Korea.

In 2010, Prada was basically a European company, gen- erating nearly half of its revenues from Europe, including 19.5 percent from Italy. However, the importance of Asia was ex- panding. By 2012, European revenues were 22.7 percent, in- cluding 16.2 percent from Italy, but Asia–Pacific (excluding Japan) rose to 35.6 of total revenues. In spite of its acquisi- tions, the Prada brand still counted for nearly 80 percent of the company’s global revenues. The Asia–Pacific area had the highest growth rate of all geographic areas in which Prada was operating, benefitting from organic growth rather than acquisitions. Prada opened 17 new stores in the region and did a lot of work upgrading existing stores.

Why China? The luxury goods market, of which Prada is a member, is hard to define. It is typically composed of goods that are high-priced, high-quality, and high-status. Some of the oth- er largest luxury goods firms in the world are French-based LVMH, Christian Dior (which holds 42 percent of LVMH), PPR (which includes Gucci and Yves Saint Laurent), and Richemont (which includes Cartier, Chloé, and Alfred Dunhil, and has a JV with Polo Ralph Lauren). Of course, there are also luxury goods firms in many industries, such as fashion, automobiles, watches and jewelry, and drinks. It is clear, however, that Asia, especially China, is rapidly becoming the future of the luxury goods industry.

In addition to having the largest population in the world, China is now the world’s second-largest economy and grow- ing at a faster rate than any of the advanced countries and the rest of the BRICs. There are several reasons why China is becoming the target of the luxury goods markets. The country is expected to be the largest luxury market in the world by 2020, catering to both men and women. Until recently, the market in China was driven by men, but women are becoming increasingly important. Maserati SpA and Bulgari SpA have been successful in China because they have positioned them- selves as the ultimate male status symbols. Much of the luxury goods purchases were by men for women, but now women are starting to assert themselves as consumers. In 2009, for example, 30 percent of Maserati’s sales were to women, up from 7 percent in 2005. In the broader luxury market sales, women accounted for over half of the $15 billion in sales, compared with 45 percent in 2008. Also, the average female luxury consumer spent 22 percent more in 2010 than in 2008.

Chapter 11 Global Capital Markets 299

The upshot of the emerging female luxury goods con- sumer is that brands that have catered more to women are putting even greater emphasis on China. Female luxury con- sumers in China are a result of more women achieving suc- cess in business.

This is not lost on Prada, but it is interested in China for other reasons as well. As the head designer for the com- pany, Ms. Prada is especially drawn to Chinese influences on fashion, which she feels are more contemporary than conservative Europe. Her company has a design team of 60 designers that she feels are curious, excited, fresh, and innovative. To take advantage of this talent, Prada is open- ing a design center in Hong Kong and hopes to expand its stores by 10–12 per year from only 14 stores in 2011. Not only is China its market of the future, as it is for many other luxury goods companies, but it is also the location of ideas. It makes sense that Prada would need to set up a team to design products for the Chinese market, as well as get in- novative ideas that it can use for its products worldwide.

Where to Issue the IPO? As Prada considered how to expand, it looked at several op- tions. It could borrow from banks, issue bonds in the domestic and international bond markets, or bring in outside investors. In 2010, 51 percent of Prada’s assets were funded by equity and 49 percent by debt; compare that to a sample of Ital- ian companies, whose average debt/asset ratio in 2009–2010 was much higher at 57.4 percent. Of the debt, 57 percent was in current liabilities and 43 percent in long-term debt. Prada’s long-term debt is primarily bank debt, sometimes to a syndi- cate of banks. Although its largest exposure in long-term debt is in euros, it also has long-term debt in U.S. dollars, Chinese renminbi, Japanese yen, and British pounds. Apparently, Pra- da’s strategy in debt markets has been to work with banks

instead of relying on the Eurobond or Foreign Bond markets. The decision to raise capital in the form of equity is compli-

cated. As noted earlier, Prada is a closely held family company, so raising capital through an IPO is a major departure from the past. Would the Prada family be willing to give up a say in the future of the company? If so, where would be the best place to list the IPO? As an Italian company based in Milan, it would seem logical to list on the Milan Stock Exchange. But being the rebel she is, Ms. Prada had other ideas. Her feeling was that Hong Kong would be a better choice for several reasons. First, brand-name companies feel that having an important presence in the region is the best way to get your brand out to the consumer. Road shows attract a lot of press and attention from consumers as well as the financial community. Given the projected growth of China, Hong Kong makes sense. Second, Hong Kong was the world’s biggest IPO market in 2010, with US$57.7 billion raised from 87 listings.

Timing is everything, of course. Prada has tried to raise capital before, but the timing just wasn’t right, mostly due to factors out of their control. After the Japanese earthquake on March 11, 2011, there was a lull in market activity, but sales began to pick up again once markets quieted down. For instance, Glencore International plc raised more than $10 billion in a London-Hong Kong listing—the largest in 2011—which made the IPO market in general seem prom- ising. And the rapid influx of capital into Hong Kong from China coincided with Prada’s decision to go to the markets.

The IPO Finally, Prada decided to move forward with the IPO in Hong Kong, not Milan. The feeling was that since the proceeds would be used to fund expansion in China, why not bring in investors from Hong Kong, the gateway to China? Prada de- cided to sell a 20 percent stake in the company, significantly

Prada is moving aggressively in Asia to take advantage of the strong demand for luxury goods, as illustrated in this poster in Aberdeen Harbor in Hong Kong. Source: Lou Linwei/Alamy Stock Photo

◀

300 part 4 World Financial Environment

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

11-7 Why did Prada need to raise additional funds? 11-8 What types of foreign-exchange risk does Prada face, and what advice would

you give them to hedge against their risks?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

changing its ownership structure. But Ms. Prada knew it was the right move. Friends and advisors convinced her that in some respects the stock market and the discipline it imposes would help ensure the future of Prada and help with the succession. Prada hoped to raise 20 billion HK$ in the offering (about US$2.6 billion), a significant amount of money. The goal was to sell about 423 million shares at HK$36.50 to HK$48.00. If the demand were strong, Prada could sell an additional 63 million shares, or 15 percent of the offer on an over-allotment option. That goal was to list on the stock exchange on June 24, 2011, after beginning the process with institutional investors and then the wider investing public. As Prada got closer to the listing date, pric- es began to move down a little due to uncertainty in global markets from the European debt crisis, the U.S. debt cri- sis, and inflation in China. Prada adjusted its target price to consumers to a range of HK$39.50 to HK$42.25 per share (US$5.07 to US$5.42). This would put its value at 22.8 to 24.4 times 2011 expected earnings, which is still higher than LVMH, which trades at 20.1 times earnings. Pricing is clearly better in Hong Kong than elsewhere.

When the stock finally hit the exchange, retail inves- tors didn’t come into the market as much as anticipated, and Prada wasn’t able to sell all of the shares allotted to investors. In addition, prices didn’t really jump all that much initially. Within about two weeks, however, prices were up 13 percent over their HK$39.50 IPO price, or HK$44.64.

As we moved into 2016, Prada has suffered for a variety of reasons. Persistent weakness in Hong Kong has really hurt Prada sales. Tighter visa restrictions on Chinese shoppers who looked to Hong Kong as the place to shop pushed a lot of Chinese shoppers to Europe. However, the terrorist attacks in Paris dramatically reduced the flow of Chinese tourists to Europe. The economic slowdown in China coupled with a rise in the Hong Kong dollar which is pegged to the United States also hurt the sales of Prada and other luxury brands. Will China ever come back to the point that Prada will be as suc- cessful as it anticipated when it offered its IPO in Hong Kong?

Questions

11-3. Do you agree with the decision to list an IPO, or should Prada

have borrowed more money, possibly floating a dim sum

bond or a Eurobond in London or elsewhere?

11-4. What do you feel are the best justifications for Prada to is-

sue the IPO in Hong Kong? Are there any downsides to their

decision to list in Hong Kong?

11-5. Many of the other luxury fashion companies are also largely

family owned. What is the impact to Prada of diluting the family

ownership, and is this a model that other companies can be

expected to follow?

11-6. Given the downturn in the economy in Hong Kong and China,

what do you think Prada’s future is in the region?

Global Strategy, Structure, and Implementation Part FIve

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

Vision without action is a daydream. Action without vision is a nightmare.

—Japanese proverb

ObjectIveS

After studying this chapter, you should be able to

12-1 explain the idea of strategy in the MNe

12-2 Profile how executives make strategy

12-3 Differentiate resources, capabilities, and core competencies

12-4 assess approaches to create value

12-5 Diagram the features and functions of the value chain

12-6 compare global integration and local responsiveness

12-7 Differentiate the types of strategies used by MNes

chaPter 12 the Strategy of International business

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Case Zara’s Disruptive Vision: Data-Driven Fast-Fashion1

minism of industry structure, some managers bet on revolutionary visions and radical missions.5 A compelling example is the compres- sion of cycle times in the apparel-buyer chain. Traditionally, moving a garment from designer to brokers to factories to shops takes ap- proximately six months—three to design a new collection and an- other three to make and ship it. Now, a few companies, notably H&M, have cut the cycle to three to five months. One, Zara, has slashed the cycle to a phenomenal two weeks. Zara’s vision of data-driven fast-fashion, by outright rejection of sacred rules about strategy and success, has disrupted long-running principles and practices in the apparel industry.6 For instance, unlike its rivals, Zara makes most of what it sells, shuns advertising, avoids sales, and directs distribution and delivery. These choices, once seen as heresies, have propelled Zara to the world’s leading apparel company and made its founder, Amancio Ortega, the world’s second-wealthiest person with a fortune of nearly $70 billion.7

The Vision of fasT fashion

In 1975, Señor Ortega opened a small clothing shop, ‘Zara,’ in La Coruña, a small, shipbuilding town found in a remote section of Spain, far away from the fashion capitals of New York, London, Paris, Milan, and Tokyo.8 Now, in 2016, from its humble beginnings, there are more than 2,000 Zara storefronts strategically located in lead- ing cities spanning 88 countries.9 In the beginning, Ortega had a straightforward vision: “Give customers what they want, and get it to them faster than anyone else.”10 Over the years, Zara’s found- ing vision has held true, and today anchors its mission: “satisfying the desires of our customers . . . we plan to continuously innovate our business to improve your experience. We promise to provide new de- signs for quality materials that are affordable.”11 Others offer clever spins, characterizing Zara’s vision as “Armani at moderate prices,” or “Banana Republic priced like Old Navy.”12 No matter the nuance, Zara’s vision of data-driven fast-fashion anchors its strategy to inte- grate cutting-edge systems; state-of-the-art information technology; efficient, scale-driven production; astonishing logistics; and alluring distribution that designs, makes, moves, and sells sophisticated, yet affordable, apparel.

Building a sTraTegy of fasT fashion

Effectively disrupting a global industry requires radically rethinking what customers want, how you make and market it, and how you make money doing so. Zara, in starting and sustaining the data- driven fast-fashion revolution, translates its vision into a practical strategy through a range of ingenious choices in acquiring resources, developing capabilities, and creating competencies. Separately and collectively, these anchor Zara’s competitiveness.

Apparel and textile is one of the largest industries in the world. It employs approximately 75 million people and generates more than US$3 trillion in transactions.2 Its activities are global in scale and scope; design, branding, fiber production, fabric cutting, assembly, finishing work, logistics, merchandising, and marketing functions cir- cle the world. Traditionally, big retailers drive the market, determining what to make, where to make it, how to distribute it, and then, how to sell it. Operationally, global apparel companies and national retail- ers outsource apparel production via global brokers, such as Li & Fung. The latter, for instance, supplies billions of pieces of apparel to department stores, hypermarkets, specialty stores, and e-commerce sites worldwide. It owns no fabric mills, no sewing machines, and no clothing factories. Rather, Li & Fung oversees a network of 15,000 suppliers spanning 60 countries that can make virtually any clothing article.3

Historically, the typical garment maker is a small-scale, labor- intensive operation, usually located in a low-wage country that em- ploys a few to a few dozen workers. There, workers make specific pieces of apparel, often in a narrow range of sizes and colors, which global brokers then integrate with the output of hundreds of other such companies that span dozens of countries. As more companies in more countries make more specialized products (i.e., one factory makes zippers, one makes linings, one makes buttons, and so on), global brokers perform as cross-border intermediaries and supervise the logistics and assembly of components into finished goods. Ulti- mately, these goods are distributed to apparel retailers worldwide.

Responding to ever-changing fashion, markets relentlessly pres- sure apparel retailers to have the right style in the right sizes in the right quantities at the right time for the right price. In turn, they press global brokers to improve coordination among the many different players. By planning collections closer to the selling season, test- ing the market, placing smaller initial orders, and reordering more frequently, retailers can reduce forecasting errors and avoid the dreaded “death by inventory.”4

Industry wisdom and historic practice spurred apparel firms, no matter how big or small, to choose a “sliver” of a particular activity (i.e., make zippers, manage logistics, focus on retail operations) in- stead of creating value across multiple slivers. Effectively, the global apparel industry pressed firms to see strategy in terms of ‘doing what you do best and outsourcing the rest.’

Changing MarkeTs, Changing opporTuniTies

Steadily, globalization resets the global apparel industry. Fewer bar- riers, better logistics, and improving technologies create paths to disrupt industry standards. That is, rather than accepting the deter-

Chapter 12 The Strategy of International Business 303

resources Making and selling fast fashion calls for an exquisitely tuned set of technological expertise, designers, manufacturing systems, logistic know-how, and retail locations. Progressively, Zara has developed world-class resources in these functions.

Manufacturing Zara, as does virtually every other apparel firm, sources finished garments, like generic t-shirts, slips, and the like, from suppliers in Europe, North Africa, and Asia. Unlike its rivals, Zara employs more than 20,000 people, distributed across 23 factories circling La Coruña, to make more than half of its fashion garments. Zara’s production prowess stems from Ortega’s insight that exploit- ing short-lived fashion trends requires speedy designs and deci- sion—which, operationally, means making items close to home. Hence, Zara makes millions of its most time- and fashion-sensitive products in its own state-of-the-art factories on its own schedule based on its own market data that are then fed into its own logistic system to quickly deliver them to its own storefronts.

Logistics Garments flow through Zara’s distribution center in La Coruña—about the size of 90 football fields—or smaller satellite centers in Brazil and Mexico. In La Coruña, garments travel along 125 miles of underground rails that link its factories. Along the way, they are sorted in carousels capable of processing 45,000 folded garments per hour. Zara ships more than 2.5 million items per week to its stores worldwide. Custom orders reach its stores in Europe, the Middle East, and much of the United States in 24 hours, and 48 hours for Asia and Latin America.

Retail Sites If there is marketing at Zara, it’s done via high-profile real estate. “We invest in prime locations. We place great care in the presentation of our storefronts. That is how we project our image” explained Director Luis Blanc. Zara’s stores command high-profile slots in premier shopping venues such as the Champs-Elysées in Paris, Regent Street in London, Fifth Avenue in New York, and Nanjing Road in Shanghai. The opening photo, for example, showcases Zara’s flagship storefront in Barcelona. Its location strategy has created in- teresting tensions. Noted a consultant, “Prada wants to be next to Gucci, Gucci wants to be next to Prada. The retail strategy for luxury brands is to try to keep as far away from the likes of Zara. Zara’s strategy is to get as close to them as possible.”13

Capabilities Building factories and opening shops set the firm’s resources. Man- agers’ insight in how best to bundle them to complete an activity in a way that is integrative, consistent, and productive creates capabili- ties. Expectedly, Zara shines in translating ordinary aspects of a firm, such as factories and shops, into formidable capabilities.

Design Zara’s designers gather data from store managers, in- dustry publications, TV, Internet, and films. Its trend spotters focus

on university campuses and nightclubs. Its slaves-to- fashion staff snaps photos at couture shows and posts them to headquarters. There, designers sift the data, quickly converting the latest, great- est looks into affordable, hot fashion for the masses. Zara often translates a fashion trend from a catwalk in Paris to a blouse or ensemble ready for sale in Shanghai in as little as two weeks; its rivals, notably Gap and H&M, take months to do the same. For example, when Madonna played a series of concerts in Spain, teenage girls arrived at her final show sporting a Zara knockoff of the outfit that she had worn during her first show. Zara’s real- time sense of what people want to wear lets it tap the conver- gence of fashion and taste across national boundaries. It does not adapt products to a particular country’s preferences, but looks to standardize its designs for the global market. Executives reason that offering customers an affordable, quality garment with an edgy vibe, in effect a hard-to-resist value proposition, globalizes fashion trends.14

Scenery and Scarcity Attractive stores, both inside and out, are vital to Zara’s mystique. Explains Luis Blanc, “We want our clients to enter a beautiful store where they are offered the latest fashions. We want our customers to understand that if they like something, they must buy it now because it won’t be in the shops the following week. It is all about creating a climate of scarcity and opportunity.”15 Fitting in with fancy neighbors, like Prada and Gucci, requires that Zara put its best face forward. Retail specialists roam the globe, adjusting window displays, testing store ambience, and rethinking presentation schemes. Just as layouts are always changing, so too is the look of the inventory mix. Zara rejects the idea of conventional spring and fall clothing collections in favor of “live collections” that are designed, manufactured, and sold almost as quickly as custom- ers’ fleeting tastes—no style lasts more than four weeks.16

Promotion Zara’s product policy emphasizes reasonable quality, affordability, and high fashion. It has little use for advertising or pro- motion. Amancio Ortega saw advertising as a “pointless distraction”; he himself has never given an interview and rarely allows his picture to be taken.17 Zara spends just 0.3 percent of sales on advertising, compared with 3 to 4 percent for most fashion retailers. It avoids flashy campaigns, relying instead on word-of mouth among loyal shoppers. Like its founder, it does not promote itself; it leaves that to thrilled customers.

Core Competencies Just as bright managers combine resources into capabilities, they also transform capabilities into core competencies. Somewhat dif- ficult to pinpoint, one can think of a core competency as the special outlook, skill, or technology that, by synthesizing links between re- sources and capabilities, sets and sustains the firm’s ability to create superior value for its customers.

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countries that most are familiar with, such as Australia, China, France, Indonesia, and so on. The set of 26 includes some that many have likely heard of, such as Bermuda or Macau, but also others that many have not, such as the Isle of Man or Vanuatu.26 No matter the designa- tion, managers scan these markets, evaluating events and trends in mapping the ideal path to formulate and implement a value-creating strategy.

The scale and scope of opportunities and, inevitably, threats spanning 214 markets can overwhelm analysis. Complicating matters is ever-present resource scarcity. The reality of never enough time, talent, and capital means managers, at some point, must make choices: which opportunities to pursue, which to pass, and then, based on the targeted products and markets, what actions to take to do so. These tasks focus our attention on the idea of strat- egy. In principle, strategy is an integrated set of choices and commitments that supports and sustains an MNE’s competitiveness. It defines and communicates an MNE’s plan on how it will use its resources, capabilities, and competencies to compete in different countries (see Figure 12.1). Strategy maps an MNE’s plan to create value, both for itself and its stakehold- ers. Importantly, strategy specifies what an MNE will do and what it will not do. Strategy calls on managers to deal with the questions and complexities that follow from cross- checking opportunities with competencies, assessing competitive threats, and setting and sustaining superior performance. As tough as that sounds, the performance track record of MNEs consistently confirms that managers make it happen, formulating strategies that build endlessly clever new ways to build productive and profitable enterprises.27

geTTing sTarTed: Vision and Mission Strategy starts with a vision and a mission. The MNE’s vision, a future-oriented declara- tion of its purpose and aspirations, outlines its broad ambitions. It communicates to stake- holders, namely employees, stockholders, governments, partners, suppliers, customers, and society, what the MNE is, where it is going, and the values that will guide its efforts. The MNE’s mission complements its vision. Whereas the vision statement inspires people to dream, the mission statement inspires them to action. It communicates what the MNE is going to do, why it’s going to do that, and the general approach to doing so. Put differ- ently, the vision outlines the goals to pursue, while the mission specifies the objectives to attain. Combined, an MNE’s vision and mission define its purpose, values, goals, and direction.28

Superior performance requires managers to plan for the opportunities and threats in the global business environment.

Strategy is an integrated and coordinated set of commitments and actions that reflects the company’s present situation, identifies the direction it should go, and determines how it will get there.

Vision is the idealization of what an MNE firm wants to be. It expresses, in broad terms, its ultimate goal.

The MNE’s mission defines its business, its objectives, and its approach to achieve them.

Flexibility Zara has quick turnaround on fashion trends—many items you see in its stores didn’t exist a few weeks earlier. Explains Director Marcos Lopez, “The key driver in our stores is the right fash- ion. Price is important, but it comes second.”18 Zara aggressively prices its products, and adjusts pricing for the international market, making customers in foreign markets bear the costs of shipping products from Spain.19 Likewise, if the product line fails to excite customers, Zara can “scrap an entire production line if it is not sell- ing. We can dye collections in new colors, and we can create a new fashion line in days.”20 Integrating new ideas and new designs into reasonably priced, high-fashion garments that are available world- wide within two weeks is an awfully hard task. Zara’s capacity to blend its resources and capabilities successfully develops a value- creating, hard-to-copy competency—perhaps best seen in its rivals’ struggles to do so.

Fashion-Tech Zara’s stores, besides presenting its face to the world, function as grassroots marketing agents. Networked stores feed sales data and customer requests (the latter helping to local- ize otherwise globally standardized products) to headquarters in La Coruña. At the center of the Zara-web, physically and symbolically, is “The Cube,” the gleaming central command of the company. Here, designers, operations folks, and strategic planners bundle and blend resources and capabilities, experimenting with ways to leverage re- al-time data into real-time fashions. Designers, for instance, simulate product presentation and positioning (even testing the acoustics of the in-store soundtrack) on its “Fashion Street,” a Potemkinesque strip of mock storefronts that mimic the layout of its strategically significant storefronts around the world. Constant and continual re- finement of resources and capabilities fortifies Zara’s competencies.

Clothes Shopping as an Exciting Adventure Zara’s timeliness of its offerings, aura of exclusiveness, captivating in-store ambience, and positive word of mouth, fed by rapid product turnover, leverages

various resources and capabilities. Loyal shoppers learn which days of the week the latest, greatest fashions are delivered—so-called “Z-days”—and shop accordingly. Zara fuels the frenzy with small shipments—say, three or four dresses in a particular style—to a store. Small shipments make for sparsely stocked shelves. Moreover, products have a display limit of one month. Rapid turnover does the rest: even though consumers visit Zara frequently, when they return, things look different. The CEO of the National Retail Federation, re- flecting on Z-days, rapid turnover, and sparse inventory, marveled, “It’s like you walk into a new store every two weeks.”21

MoVing onward

The first Zara shop opened its doors in 1975 in La Coruña. Today, there are more than 2,000 outlets and, on average, a new one opens every day. The elegant clarity of Zara’s vision, mission, and strat- egy, translated into a compelling set of resources, capabilities, and competencies, supports its stunning success. Impressive in its own right, Zara’s choice to be great rejected the contrary imperatives of long-established strategic standards in the global apparel indus- try.22 Presently, no other apparel company comes close to designing, making, moving, and selling fashion as speedily as Zara. Its success leaves rivals with less time to figure out how to better configure and coordinate their operations. Some stay in the game, such as H&M, while others fall further behind, notably Gap. Ultimately, struggling rivals must follow Zara’s strategic lead—if they don’t, warns a lead- ing retail analyst, they “won’t be in business in 10 years.”23 ■

Questions24

12-1. Which element of Zara’s strategy do you believe best ex-

plains its success?

12-2. Assess the difficulty a competitor, such as Gap, faces try-

ing to re-create the resources, capabilities, and core com-

petencies that define Zara.

sTraTegy in The Mne Evolving customer preferences, innovative competitors, changing market structures, and shifting institutional contexts create opportunities and threats. The job of the strategist is identifying the implications of these situations to which products to make, where to make them, where to sell them, how to compete, and, all the while, earn a profit. Doing so, as we’ll see in this and subsequent chapters, centers on how managers assess and enter foreign markets, make investments, form alliances, and organize activities. Then, given these con- figuration choices, we profile how managers implement marketing, manufacturing, supply, accounting, finance, and human resource programs.25

For the strategist in the MNE, the global marketplace is often too much of a good thing. The World Bank identifies 214 discrete economic environments in the world today—188 countries and 26 economies with populations of more than 30,000. The former include

Chapter 12 The Strategy of International Business 305

Superior performance requires managers to plan for the opportunities and threats in the global business environment.

Strategy is an integrated and coordinated set of commitments and actions that reflects the company’s present situation, identifies the direction it should go, and determines how it will get there.

Vision is the idealization of what an MNE firm wants to be. It expresses, in broad terms, its ultimate goal.

The MNE’s mission defines its business, its objectives, and its approach to achieve them.

• Political and Legal Environments

• Cultural Orientations

External Influences

• Customer Expectations

• Market Conditions

• Industry Structure and Drivers

• Competitive Dynamics

• Integration Imperatives

• Technology Standards and Trends

Vision/Mission

Organize Operations

Firm Performance

Value Creation

Strategy

Figure 12.1 The role of Strategy in iB Chapter 1 showed that that the MNE’s operating environment includes physical, cultural, market, monetary, and competitive factors. Chapters 2 through 11 developed key features of each. This chapter discusses these features in relation to an MNE’s strategy. It highlights how managers configure operations to respond to opportunities and threats. These ideas anchor our discussions in Chapter 12 through 20.

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Table 12.1 profiles the vision and mission statements of various MNEs. This set shows how executives worldwide use these tools. Some look to communicate a message in clear, simple, and precise language—for instance, Google’s declaration “to organize the world’s information and make it universally accessible and useful.” Others, like Microsoft, Pearson, and Virgin Atlantic, take a more aspirational approach, appealing to the boundless spirit of humanity to set goals, identify direction, and inspire performance. Finally, others like Areva, Pearson, and Vale anchor the company with modest declarations of purpose and performance. No matter the scale or scope, the vision and mission statements guide man- agement’s thinking on strategic issues, promote buy-in, outline performance standards, and guide employee action. They also serve an external purpose, improving communication with customers, suppliers, and partners as well as courting public support. Likewise, they give analysts a perspective to interpret an MNE’s choices. Most importantly, MNEs with easily understood, plainly communicated, and collectively shared vision and mission out- perform those without them.29

rhetoric to reality Translating the lofty rhetoric of an MNE’s vision and mission into relevant programs and realistic performance standards, one can imagine, is tough. Increasing the challenge for the typical MNE is the fact that its vision and mission statements must work in many businesses run by many different people operating in many different envi- ronments. Nestlé, for instance, has operations in 197 countries, relies on 442 factories in 86 countries, directs more than 2,000 brands, and has 339,000 employees. Likewise, the 338,787 employees of Toyota make vehicles in 70 factories spanning 29 countries and then sell them in more than 170 countries. Lastly, Vodafone’s 101,443 employees direct telecom networks in 26 countries and work with partners in 50 more to provide telecom and IT services to clients in more than 150 countries. For Nestlé, Toyota, and Vodafone, like other MNEs, the vision and mission statements help everyone, from headquarters to the front lines, work purpose- fully toward common goals.

TaBle 12.1 Vision and Mission statements, leading Mnes

Company Home Vision/Mission statement30

Adidas Germany Creating the “new” by focusing on speed, cities and open source

BMW Germany World’s leading provider of premium products and premium services for individual mobility.

Google USA Organize the world’s information and make it universally accessible and useful.

Infosys India Provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people.

Microsoft USA Help people and businesses throughout the world realize their full potential.

Pearson England Help people make more of their lives through learning.

Virgin Atlantic England Embrace the human spirit and let it fly.

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MoVing onward: sTraTegiC planning Ensuring the consistency of interpretation and action spurs an MNE to systematize the ideals that anchor its vision and mission. Strategic planning does so, converting them into reasonable intellectual challenges, testable propositions, action programs, and measurable outcomes. Done well, strategic planning promotes a common understanding about how the world works and how the MNE will navigate it.31 Toyota, for instance, anchors strategic plan- ning in its so-called “Toyota Way,” and its specification of how managers define issues, solve problems, and make decisions.32

Operationally, the discipline of strategic planning sets a rigorous decision-making framework. Its goal—formalizing the actions that an MNE will take to achieve its vision and mission—has several benefits. Strategic planning organizes how managers deal with the routine as well as the unusual so that they can resolve situations consistent with the com- pany’s vision and mission. It promotes consensus on intended outcomes and results, har- monizes standards of interpretation, socializes managers to think longer-term, sets success standards, and increases confidence in the business’s direction. Each and all are fundamental facets of an effective, high-performance strategy.

Managers use various frameworks to organize strategic planning. No absolute standard prevails. Most frameworks follow a similar logic and share common steps, typically cycling through some variation of the following sequence: (1) identify potential product markets and assess each for opportunities and threats; (2) assess the preferences of targeted customer segments; (3) analyze internal strengths and weaknesses relative to customers’ expectations and competitors’ competencies; (4) formulate a strategy; (5) set clear and compelling objec- tives; (6) formalize programs, policies, and tactics; (7) acquire resources, create capabilities, and develop competencies; and (8) monitor thresholds and adjust standards given change in performance, rivals, or markets.

Making sense To Make sTraTegy The complexity of the global business environment can easily overtax strategic planning; think of, for a moment, the sorts of planning challenges regularly facing Nestlé, Toyota, or Vodafone. A common problem, in the face of the vast scale and scope of global operations, is overanalyzing a situation to the point that a decision or action is never taken, in effect, “analysis paralysis.” Consider, for instance, the typical sorts of question that face strategic planners in the MNE: How should we set global standards? When does local responsive- ness make sense? Where do we find design ideas? Should we make products here, there, or everywhere? How might host governments respond? Can our suppliers support our mission? What are our most effective marketing tools? What kind of people should we hire to run operations? Answering these, along with many similar questions, is tough for one market. It’s challenging, to say the least, for planners evaluating say, 2, 20, or even 200 markets.

Preempting analysis paralysis spurs managers to integrate sensemaking perspectives into strategic planning. Sensemaking involves studying shifting markets, competitors’ initiatives, and changing consumer behaviors in order to determine how economics, politics, culture, trade, and industry influence the company’s plans. Sensemaking transforms the complexities of the world into a “situation that is comprehended explicitly in words and that serves as a springboard into action.”33 These insights help strategic planners determine the correlates of success and the catalysts of failure in the global business environment. Managers apply a range of sensemaking perspectives. No standard governs which perspective is used in which situation. One commonly sees variations of the Industrial Organization and the Great by Choice outlooks.

industrial organization (io) The IO outlook sets the external environment as the pri- mary determinant of an MNE’s strategic plan. It emphasizes the determinism of industry

Planning is a comprehensive process that determines how the firm can best achieve its goals.

ConCepT CheCk

In Chapter 3, we used the dichotomy between democ- racy and totalitarianism to build a framework to assess political freedom. In Chapter 4, the differences among market, mixed, and command econo- mies built a similar frame- work that assessed resource allocation. A key framework in this chapter is the different ways managers make sense of strategy.

Sensemaking is collaborative process to promote a shared understanding.

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structure given the thesis that its characteristics (for instance, the threat of new entrants, scale of entry barriers, or power of buyers and supplies) directly influence the potential profitability of an MNE’s strategy. The IO model holds that markets tend toward perfect competition (e.g., many firms with small market shares are all price takers, sell identical products, and freely enter and exit the industry; buyers understand product features and competitors’ prices; and risk-adjusted rates of return are constant). Consequently, in situa- tions of high profits, new companies enter and compete on the basis of superior products or processes that lower industry profits. In situations of declining profits, more firms exit, fewer firms enter.

Over time, a market’s tendency toward perfect competition means that no firm or industry consistently outperforms others, no matter the innovativeness of a particular company or the imperfections within a particular industry (e.g., government subsidies to local rivals).34 Strategic planning processes anchored in the IO sensemaking perspective assess how an industry’s structural characteristics shape competitive dynamics that, in turn, determine the profitability of different choices.35 As a rule, an unattractive industry is one in which perfect competition drives down overall profitability. An attractive indus- try is one in which short-term imperfect competition lets companies earn above-average, risk-adjusted returns.

great by Choice outlook In reality, some industries are, and persistently remain, far- from-perfectly competitive. In these settings, proprietary advantages, high entry barriers, or oligopolistic dynamics, for instance, produce market imperfections. Consequently, some MNEs earn above-average, risk-adjusted returns, while others in the same industry under- perform. In this context, industry structure shapes, but does not determine, a firm’s strategic performance.36

These sorts of situations spotlight an alternative sensemaking perspective. That is, managers’ insight in terms of acquiring resources, organizing capabilities, and devel- oping competencies, rather than the structure of the industry, fundamentally shapes strategic success. This view, generally referred to as Great by Choice, highlights the power of bright managers and their keen sense of devising a strategy that is difficult, if not impossible, to copy. In contrast to the industry determinism of the IO model, this view holds that “Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice.”37 Think of, for example, the genius of Amazon’s e-commerce platform, LVMH’s luxury goods portfolio, Zara’s vision of affordable fast fashion, Tata’s industrial scope, or Google’s search expertise.38 Rather than emphasizing elements of industry structure, managers anchor strategic planning process in a sen- semaking perspective that engages tools such as BHAGs (Big Hairy Audacious Goals), Tyranny of the ‘OR,’ Genius of the ‘AND,’ Level 5 Leadership, or the Hedgehog Concept. Certainly, industry structure matters, but some MNEs thrive because of their executives’ choice to be great—and their keen ability to ingeniously bundle resources, capabilities, and competencies to make it happen.39

The role of resourCes, CapaBiliTies, and CoMpeTenCies The IO Model focuses sensemaking in terms of an MNE’s external environment. The Great by Choice outlook centers on the MNE’s internal setup. Each perspective, along with its variations, focuses strategic planning on articulating where the MNE is going and the actions it must take to get there. Granted, each represents a different dimen- sion of the MNE’s competitive advantage. Still, each speaks to the importance of re- sources, capabilities, and competencies in supporting a strategy that creates competitive advantages.

Firm conduct refers to the choices a company makes regarding research, manufacturing, marketing, distribution, and the like that influence its profitability.

Some firms find ways to exploit market imperfections to sustain success in spite of industry conditions.

An MNE’s strategy organizes its resource accumulation, capability development, and core competencies development.

The idea of industry structure represents the interdependent relationships among

• suppliers of inputs, • buyers of outputs, • substitute products, • potential new entrants, • rivalry among competing

firms.

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Resources drive the production of goods and services that are sold to customers. Resources of the sort seen in Table 12.2 develop the firm’s productive capacity. Resources are controlled by the MNE and are largely inaccessible to customers; these include manu- facturing systems, technological expertise, and information systems. For example, Zara’s manufacturing and logistics operations represent some of its resources. Its retail units are resources as well and, yes, they are accessible to customers, but only partially and on a regulated basis. Collectively, resources represent the stocks of available factors that managers bundle together into capabilities. Managers’ insight in organizing resources to engage an activity or complete an action in a way that is integrative, consistent, and pro- ductive creates firm-specific capabilities. As such, capabilities reflect how well an MNE productively bundles its resources. Although not directly used in the production process, capabilities directly support productive operations. Capabilities are found throughout the firm, as suggested in Table 12.3. Again, Zara developed powerful capabilities by in- geniously bundling its resources in market intelligence, design creativity, manufactur- ing flexibility, and logistics efficiency to sense, design, make, move, and sell affordable, cutting-edge fashion.

Just as bright managers combine resources into capabilities, they also transform re- sources and capabilities into core competencies. Difficult to define precisely, most see a core competency as the special outlook, skill, or technology that, by synthesizing links between resources and capabilities, sets and sustains the firm’s capacity to create superior value. Think of, for example, Zara’s blend of high-tech and high-fashion or, for that matter, Apple’s eye for design and delivery, the elegance of Google’s search algorithm, Walmart’s sophisticated information-management and product-distribution systems, Honda’s mas- tery of engine mechanics, or Nestlé’s marketing finesse.40 Core competencies emerge over time— managers accumulate resources, combine them into capabilities, and convert them into core competencies. The challenge of accumulation, combination, and conversion makes core competencies the ‘crown jewels’ of a company. With them, the MNE outperforms rivals. Without them, the MNE struggles. Furthermore, the fact that rivals find it difficult, if not impossible, to copy an MNE’s core competencies makes them the basis for superior, sustain- able competitive advantage.

Resources are inputs into an MNE production process. A capability is the capacity for resources to perform an activity in an integrated manner.

Managers bundle resources and capabilities to create a core competency.

TaBle 12.2 resources of the firm: specification and profile

Resources are available factors that are owned or controlled by the MNE. Here we see types of tangible and intangible resources.

Type example

Tangible: Physical resources that are observable and measurable.

• Creditworthiness in terms of Selling Equity or Debt • Employees Skills • Property Portfolio • Retail Network • Scale of Distribution Network • Scale of Manufacturing Facilities • Scope of Service System • Sophistication of Technology Systems

Intangible: Resources that lack physical form. • Brand Recognition • Corporate Goodwill • Decision-Making Process • Foreign Exchange Risk Management • Intellectual Property • Managerial Skills • Public Affairs Management

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compels exploiting scale, learning, and location economies. As a rule, the greater the quantity of a good produced, the lower its per-unit fixed cost, given that the firm allo- cates fixed costs over more units of output. Consequently, the cost leadership strategy spurs selling standardized goods or services to the broadest customer segment. Singular focus on cost reduction leads executives to acquire resources and develop capabilities that reduce its costs relative to rivals. Common methods include product innovations, such as frugal designs or enhanced materials, or process innovations, such as lean production or Six Sigma.

One routinely sees the cost leadership strategy in scale-sensitive industries, such as the airline, steel, mortgage, white goods, consumer credit, and package delivery markets. MNEs such as Southwest Airlines, UPS, Haier, Thai Union Frozen, Citigroup, ArcelorMittal, Cemex, Ranbaxy Laboratories, Virgin Mobile, and Foxconn apply it. Many emerging market com- panies apply the cost leadership strategy, outperforming rivals by combining state support, growing scientific and technological sophistication, efficient manufacturing, inexpensive labor, and expanding distribution.45

risk of the Cost leadership strategy The cost leadership strategy requires a single-minded commitment to standardizing processes and products. Disruptions, incremental or transformational, can change customers’ expectations or bolster com- petitors’ competencies, thereby obsolescing the MNE’s otherwise efficiently configured resources and capabilities. The relentless quest to lower costs may blind managers to evolving markets. For instance, a classic example is Henry Ford’s mission to make the lowest cost car, the Model A, and its translation into the strategy that “Any customer can have a car painted any color that he wants so long as it is black.” General Motors suc- cessfully exploited this fixation, making a comparably priced car that was available in different colors.

Disruptive innovations trigger secular shifts that displace established market leaders’ precisely engineered systems. For example, Walmart’s core competency of offering everyday low prices depends on the finely honed integration of its retail network resources and global supply chain capabilities. Increasingly, online retailers such as Amazon, by disrupting the traditional dynamic of the shopping experience, challenge Walmart’s low-cost leadership. Amazon’s improving capability to offer competing, if not the same, products at an equiva- lent, if not lower, price, threatens the sustainability of Walmart’s cost leadership. Similarly, success inspires emulation, and rivals invariably study market leaders, assessing their inno- vative ways and then tweaking their operations.

The differenTiaTion sTraTegy An MNE implements a differentiation strategy when it aims to do something no other firm can do, and, besides doing it, doing it effectively. Just like cost leadership, a differentiation strategy is an integrated set of choices to make a good or provide a service. Unlike the cost leadership strategy, the differentiation strategy requires designing and delivering products that customers see as different in ways that are important to them—and thus are willing to pay a premium price. Differentiation pushes managers to fixate on continuous innova- tion, not relentlessly reducing costs, as the basis for sustainable value creation. It compels developing resources, capabilities, and competencies that rivals find hard, if not impossible, to match. For instance, think of the sleek design of an Apple iPhone, the engineering sophis- tication of a Lexus sedan, the customer service at Ritz-Carlton, or the appeal of Coca-Cola’s secret formula.

Approaches to differentiation are many, including speedy product innovations, respon- sive customer service, prestige and status, and design and performance standards. The differentiation strategy is customary with high-profile products in high-margin markets. Still, differentiation dynamics play elsewhere. MNEs try to differentiate commodities, such as milk, aspirin, DRAM chips, cellphone plans, or debit cards, based on features some

The cost leadership strategy aims to make a product at a given level of quality for a cost below those of competitors.

ConCepT CheCk

Chapter 4 discusses features of emerging markets, notably the appearance of new companies looking to expand interna- tionally, the influence of the tens of millions of consumers who are experiencing rising incomes, and the emergence of the Base of the Pyramid. All indicate changing customer needs. These developments spur MNEs to rethink cost imperatives.

The cost leadership strategy has several risks, including

• disruptive technologies change efficiency standards;

• customer’s needs change; • cheaper, better products

from rivals.

The differentiation strategy champions developing products that customers value and that rivals find hard, if not impossible, to match or copy.

Products are differentiated on a variety of tangible and intangible dimensions.

The QuesT To CreaTe Value Fundamentally, strategy is doing what others are doing, but doing it more efficiently, or doing something no one else can do and doing it effectively. Successfully done, an MNE creates su- perior value by then selling products that competitors cannot duplicate or find too costly to imi- tate.41 In either scenario, one company successfully creates value while others scramble for solu- tions. Now, regarding the idea of value, one can define it in various ways, including economic, market, pro forma, social, book, insurance, use, par, or replacement. One can also define value from different perspectives, such as that of customers, employees, stakeholders, or sharehold- ers. We follow convention and define value in economic terms, specifying it as the difference between the cost of making a product and the price that customers are willing to pay for it. If an MNE can sell its product for more than the costs incurred to make it, it generates profits, and hence, creates value.42 The greater its ability to make and sell products that exceed customers’ value expectations, the higher the price it can charge, and the more value it creates. Consider, for instance, the popular iPhone 6. Technically, each unit costs approximately $200 in parts and labor. Apple also adds value through a strategy of cool design, ingenious features, and neat mar- keting. Ultimately, Apple sells the iPhone 6 for $549, thereby generating $350 in gross value.43

MNEs create value by developing a compelling value proposition (why a customer should buy its goods or use its services) that specifies its targeted markets (those customers for whom it creates goods or services). This analysis, whether done on a nation-by-nation, region-by-region, or worldwide basis, requires managers make and sell products that ex- ceed customers’ value expectations. In broad terms, an MNE can create value by perfecting processes and products in order to do things more efficiently than others, thereby making products for lower costs than can competitors (the strategy of cost leadership). Alternatively, an MNE can create value by doing something no one else can do, and doing it effec- tively, thereby making products for which consumers pay a premium price (the strategy of differentiation).44 In some situations, an MNE insightfully combines the two approaches (the strategy of integrated cost leadership/differentiation).

The CosT leadership sTraTegy An MNE implementing a cost leadership strategy aims to make a product at the lowest cost, relative to those offered by rivals, which appeals to the largest number of poten- tial customers. Minimizing cost inevitably requires maximizing efficiency, a quest that

Value is the measure of a firm’s capability of selling what it makes for more than the costs incurred in making it.

TaBle 12.3 Capabilities of the firm: specification and profile

Capabilities are the nontransferable, firm-specific bundles of an MNE’s resource. Here we see leading types.

Functional Orientation Capability

Decision-Making Envisioning strategic choices and consequences.

Design Capacity to translate insights into products and processes.

Distribution Mastering global logistics to support JIT design and delivery.

Management Information Systems Operationalizing platforms that translate big data analytics into planning tools.

Manufacturing Devising assembly line layouts that maximize efficiency.

Marketing Promoting brand recognition that inspires customer loyalty.

Product Technology Developing a product portfolio that leverages proprietary technology.

Research & Development Creation of cool, clever, functional designs.

Strategic Visioning Willingness to question current vision, mission, and strategy.

Chapter 12 The Strategy of International Business 311

The cost leadership strategy aims to make a product at a given level of quality for a cost below those of competitors.

ConCepT CheCk

The cost leadership strategy has several risks, including

• disruptive technologies change efficiency standards;

• customer’s needs change; • cheaper, better products

from rivals.

The differentiation strategy champions developing products that customers value and that rivals find hard, if not impossible, to match or copy.

Products are differentiated on a variety of tangible and intangible dimensions.

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customers value more than just low price.46 In either case, selling a product at a price that exceeds the cost of creating its unique attributes helps the MNE outperform its rivals. Interestingly, the effort to reduce costs ultimately hits hard boundaries, such as the price of inputs, physics of materials, or capacity for service. In contrast, anything a firm can do to produce value that no one else can do quite as effectively creates a virtually infinite basis for differentiation. Think of, for example, the powerful appeal of prominent brands, like Apple or Zara, to loyal fans.

risks of the differentiation strategy The ever-present threat to the differentiation strategy is shifting customer preference that provokes objection to the higher price of a product, particularly if a rival offers an alternative that provides more value, real or per- ceived, for the same or lower price. This threat is salient in poorer markets, where cost- conscious customers are particularly value sensitive. For example, Apple has adjusted its premium pricing strategy in emerging markets, notably India, to compete with far cheaper, full-function smartphones. Still, the perceived price-performance gap persists, resulting in Apple’s 1 percent share of India’s booming smartphone market versus its 44 percent market share in the United States.47

An ongoing threat to the differentiation strategy is the risk that today’s innovation is tomorrow’s relic. The presence of aggressive rivals worldwide makes sustaining the basis of differentiation a never-ending challenge. Innovations conceived in Germany quickly diffuse to rivals in Brazil, the United States, and China. Companies that battle on product features must, as the former CEO of IBM notes, tirelessly determine “what will cause work to move to me? On what basis will I differentiate and compete?”48

The inTegraTed CosT leadership/differenTiaTion

sTraTegy In principle, the asymmetric demands of cost leadership and differentiation make it difficult to pursue both simultaneously. In practice, some MNEs do, successfully blending stan- dards of efficiency and effectiveness to offer low-cost, high-performance products. Zara, for instance, implementing a vision of “Armani at moderate prices,” turns cool ideas into competitively priced, hot fashions. Lexus, likewise, delivers high-performance cars, replete with impressive features that customers see offering greater value, relative to price, than alternatives from other luxury carmakers. Lastly, Target, targeting higher-income, fashion- conscious yet price-sensitive customers, implements its integrated strategy of “Expect More. Pay Less” that “delivers greater convenience, increased savings and a more personalized shopping experience.”49 Zara, Lexus, and Target use an integrated cost leadership/dif- ferentiation strategy to design products and processes with differentiated features, make them efficiently, and sell them effectively. Successfully implementing the integrated cost leadership/differentiation strategy requires an MNE adapt quickly to change, particularly when disruptive innovations call for new capabilities. Production must optimize efficiency in order to generate the funds that support differentiation.

risks of the integrated Cost leadership/differentiation strategy Making inexpen- sive, unique products for which customers willingly pay a premium price is awfully difficult. Implementing it requires that an MNE manage a symbiosis of resources, capabilities, and competencies in developing mutually beneficial relationships that reconcile the asymmetric standards of efficiency and effectiveness. Some MNEs get “caught in the middle,” falling short of optimizing production or sufficiently differentiating. Trapped between competing goals, their cost structure neither supports suitably low prices nor delivers appealing prestige or performance.

The differentiation strategy has several risks, including

• customers’ expectations change;

• customers no longer see sufficient value to justify the price premium;

• a rival introduces a newer, cooler, higher-performing alternative;

• counterfeits that offer a cheaper imitation.

The differentiation strategy calls for continual innovation, whereas cost leadership champions sustainable efficiency. The integrated cost leadership/differentiation strategy aims to do both.

The integrated cost leadership/differentiation strategy provides customers with relatively lower-cost products that also have differentiated features.

Yes Strategic planning was once similar to playing chess. The board,

the players, and the moves were fairly well-defined, the pace of play permitted deliberative movement, and surprises were few and far between. Indeed, one needs only recall the infamous “3-6-3” rule in banking a generation or two ago: bankers gave 3 percent interest on depositors’ accounts, lent depositors money at 6 percent interest, and then planned to hit the golf links at 3 p.m.50 Today, the global business environment, turbocharged by innumerable causes and ef- fects, makes for a far more complex game. Technology, both routine and disruptive, resets efficiency frontiers and market boundaries. Competitors, both established and emerging, reinvent systems of production and distribution as well as experiment with entirely new business models. Governments, both democratic and authoritarian, change the rules of the game. Making sense of the situation and then acquiring re- sources, developing capabilities, and creating competencies is tough. Strategic planning makes it possible.

Strategic planning pushes managers to break free of day-to-day routines, look toward the horizon, and ask and answer big questions. Determining goals and mapping opti- mal paths pinpoints the potential of a business and directly links objectives to actions and required resources. Setting systematic criteria and imposing rigorous analytics, by or- ganizing the complexity of the global business environment, helps managers formalize goals, formulate strategies, de- termine programs, and define standards. Besides that, the planning process frames and facilitates coordination, com- munication, and learning. Promoting conversations among decision-makers about the future of the MNE and the re- sources, capabilities, and competencies required to reach it fortifies decision-making.

Strategic planning improves the flexibility to change as markets change. Few contest the importance of proactive executives, but, still, passivity often prevails. Planning push- es managers to get on with it, asking big as well as small questions. Purposeful debate helps reposition resources to new courses of action as well as estimate the urgency to reset or reverse commitments. Instituting strategic planning with an eye toward improving flexibility prior to the change, rather than after, sensitizes managers to alternative options.

The key threat to the integrated cost leadership/ differentiation strategy is getting “caught in the middle.”

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Yes Strategic planning was once similar to playing chess. The board,

The key threat to the integrated cost leadership/ differentiation strategy is getting “caught in the middle.”

Not surprisingly, strategic planning supports higher performance and improved competitiveness. The interplay of formal planning processes, greater flexibility, and im- proved innovativeness across multiple industries in mul- tiple countries shows that planning pays off. Performance effects do not vary significantly between different industry groups. Some empirical evidence indicates a positive and direct relationship—the more one plans, the better the firm performs.51

Unquestionably, the intrinsic complexity of mapping markets means that strategic planning often hits difficul- ties. Ironically, its shortcomings follow from its strengths. Planning imposes an analytical discipline that frames how managers assess markets. Acceptable for similar mar- kets (say, moving from the United States to Canada), this perspective may struggle to adjust analytics for dissimilar markets (say, moving from Australia to Venezuela). In theory, anchoring analysis in terms of the orderly progression of systematic planning procedures helps managers formulate optimal strategies. Still, as with any objective model, the template might encourage linear thinking that misinterprets markets and misdirects decision-making.

Enterprising executives, recognizing the messiness of internal conditions and external circumstances, stress-test their planning process. High-power brainstorming proce- dures identify “what-if” situations that help managers chal- lenge their planning model before committing to a course of action. In particular, managers incorporate elements of scenario analysis and contingency planning. In the former they assess alternative futures, interpreting likely outcomes of a variety of operating strategies and industry conditions. Alternatively, contingency planning helps managers esti- mate the effect of market disruptions and devise preemp- tive strategies.

Ultimately, performance records of leading MNEs worldwide show that tried-and-true strategic planning processes productively equip managers to deal with what the processes are best suited to deal with: the messy, ill- structured realities of IB. Strategic planning, by enforcing rigorous, disciplined, systematic decision-making, makes expanding into familiar markets or venturing into different territories manageable.

Is Strategic Planning Productive?

Point Point

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structure. Value chain analysis neatly represents resources and capabilities, emphasizing their linkage to the cost leadership, differentiation, or integrated strategy. In the case of cost leadership, it identifies the potential of resources and capabilities to streamline value activi- ties. In the case of differentiation, it highlights activities that support outperforming rivals in providing the latest, greatest products. In the case of the integrated mix, it helps reconcile the efficiency–effectiveness dialectic. Lastly, value chain analysis guides estimating rivals’ cost structures and, thus, their relative competitiveness.

Procedurally, the systemic perspective of value chain analysis deconstructs the abstrac- tion of creating value into a step-by-step model. This sequence specifies the value that is created as a product moves from conception in R&D through sourcing materials, organizing manufacturing, supervising logistics, applying marketing, and servicing.61 Put differently, value chain analysis maps the productivity of each functional activity, pinpointing how resources and capabilities improve efficiency or boost effectiveness. Figure 12.2 maps the discrete activities that define the value chain. Figure 12.3 profiles the characteristic of each.

Primary activities represent the core business functions that make and move products. Its organization follows from that of designing a product and building the operations that make it onward through the tasks of logistics, marketing, distribution, and service. Primary activities reflect classic business activities and managerial orientations. Thus, they carry func- tional labels such as operations or marketing. Figure 12.2 also identifies secondary processes called support activities. These represent the infrastructure of the firm, identifying the activities that support the work done in carrying out primary activities. Human resources, for example, are needed for each primary activity, from supervising warehousing materials, to directing production, to shipping products, to serving customers.

Configuring The Value Chain An MNE’s option to go anywhere in the world to perform a primary or support activity gives it tremendous choice of location. How an MNE distributes value activities around the world is the matter of configuration—essentially, the task of deciding which activity to do where. Besides the option to sell in the 214 markets that compose the global business environ- ment, the MNE has the option to install operations in each. For example, Nestlé operates 442 factories in 86 countries whereas Toyota runs 70 factories in 29 countries.62 Rather than happenstance, the decision to open a factory here, but not there, reflects their strategic plan- ners’ interpretation of the opportunities and constraints of a location.

Value-chain analysis helps managers understand the potential and performance of resources and capabilities, thereby clarifying cost structures and value creation.

The value chain is the set of linked activities the company performs to design, make, market, distribute, and support a product.

A value chain disaggregates a firm into

• primary activities that design, make, sell, and deliver the product;

• support activities that implement the primary activities.

Value-chain analysis helps managers evaluate their cost structure and identify the activities through which they can create value.

no The productivity of strategic planning rests on an appealing,

yet ultimately dubious, thesis: strategy is a science with immutable laws that, by reliably guiding decision-making toward optimal outcomes, lets bright strategists imagine bright plans that build bright futures. In actuality, the shifting dynamics of the global marketplace present overwhelm- ing challenges that suggest strategic planning is arguably ineffective. Correspondingly, after more than 40 years of empirical study, the data suggest an equivocal relationship between strategic planning and firm performance.52

Notwithstanding managers’ best intentions to map the future, many continually run into the problem that the future famously does not cooperate with pre-set visions, missions, and plans. Consider the less-than-inspiring record of firms that consistently invest great effort into strategic planning, namely the Standard & Poor’s 500 Index (S&P 500).53 The average time a company spends in the S&P 500 index has declined from 61 years in 1958 to about 18 years today; re- moval typically follows strategic shortfall. An average of 22 companies are replaced annually.54 Nearly 50 percent of the companies included in the S&P 500 index in 2000 no longer exist. Similarly, up to 90 percent of ventures fail shortly after start-up; venture-capital firms see more than 80 percent of their investments fail; more than 80 percent of equity mutual funds consistently underperform the S&P 500; the average business model life span has fallen from about 15 years to less than 5 over the past 50 years; and more than 75 percent of mergers and acquisitions never pay off.55 Many compa- nies committed to rigorous, objective, systematic planning processes, rather than reaping great success, struggle to survive.

Skeptics point to planning’s fundamental limit: the deception that a comprehensive strategic planning pro- cess, anchored in countless hours of assessing strengths, weaknesses, opportunities, and threats, fundamentally influences short-term competitiveness and long-term sus- tainability. Notwithstanding best intentions, strategic plan-

ning falls prey to deficiencies and delusions. It confuses the superficial trappings of rigor and

discipline with grand storytelling. It muddles managers’ abil- ity to think critically about the nature of success in business— including vastly underestimating the power of plain old good luck.56 Inevitably, planning devolves into glorified soothsay- ing that undermines the effectiveness of decision-making.57 Then, in the off chance that planning generates a genuine insight, it often runs into implementation problems—plans poorly connected to vague action steps that are just as likely to be a day late and a dollar short.

Scarcely tolerable under stable conditions, these ten- dencies prove damaging given the extreme sorts of chang- es that mark the global business environment. Significant trends and innovations reconfigure the global marketplace. Expansion in once peripheral, but now core markets (such as China, India, Indonesia) resets performance standards. Some 400 midsize emerging-market cities, many unfamil- iar in the West (e.g., Sanaa, Ouagadougou, Chittagong, Kinshasa), will produce about 40 percent of global growth over the next 15 years.58 Today’s market revolution spans the globe, includes far more people in far more countries, and represents the biggest change in the history of capital- ism. The Internet further turbocharges change. Already, it is the most powerful force for globalization, economic growth, and education in history. Indeed, say some, whatever the Internet touches, it transforms in ways that reset analytics and defy prediction.

The upshot is that no matter how sensitive their strategic compass, executives’ struggle to plan in the face of minor as well as momentous dynamism.59 Ultimately, managers intent on overlaying logical rules of cause and effect on mar- kets delude themselves that strategic planning is an effec- tive decision-making process. Beset by intractable decision biases—from generalizing halo effects, confusing correla- tion and causality, and connecting only the winning dots— strategic planning inevitably proves unproductive.60 Then, as before, impressive plans fall short of performance targets.

Counterpoint

Is Strategic Planning Productive?

organizing Value CreaTion: The Value Chain An MNE sets and sustains its competitive advantage when the value it creates, whether through cost leadership, differentiation, or a combination, is greater than the costs it incurs in doing so. In practical terms, an MNE faces issues, opportunities, and constraints in de- signing, making, moving, selling, and servicing products; each activity imposes costs that influence value creation. Just as strategic planning helps managers develop their strategy, value chain analysis helps them assess how activities create value.

Value chain analysis frames the evaluation of an MNE’s strengths and weaknesses. Doing so guides managers’ breakdown of the components and determinants of the internal cost

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Value-chain analysis helps managers understand the potential and performance of resources and capabilities, thereby clarifying cost structures and value creation.

The value chain is the set of linked activities the company performs to design, make, market, distribute, and support a product.

A value chain disaggregates a firm into

• primary activities that design, make, sell, and deliver the product;

• support activities that implement the primary activities.

Value-chain analysis helps managers evaluate their cost structure and identify the activities through which they can create value.

MarketingOutbound Logistics

ServiceOperations Product Design

Support Activities

Primary Activities

Materials & Equipment

Firm Infrastructure

Human Resources

Systems & Solutions

Figure 12.2 Visualizing the Value Chain The value chain is made up of primary activities that reflect classical business functions and managerial orientations. The value chain also specifies support activities, representing day-to-day tasks, which help implement the primary activities. Support activities apply to primary activities, as we see in their run along the breadth of the value chain.

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In theory, configuration ranges from concentrated (the MNE performs all value- chain activities in one location) to dispersed (the MNE performs different value-chain activities in different locations).63 The tension between which activities to concentrate and which to disperse follows from the fact that different activities impose different costs in different locations. Say a single market provides the lowest-cost, highest-productivity environment for all activities. An MNE would then concentrate its value chain there and serve its global market through exports. Conversely, a dispersed value chain makes sense when some activities cost less in country X, others cost less in country Y, and still others less in country Z. So, if the best industrial designers are in Taiwan, the company bases R&D there. If the most productive labor force for assembly is in Vietnam, that’s where it builds its plants. If the most creative minds are in Denmark, it develops its ad- vertising campaign there.64

location advantages Differing environmental conditions, given differing political, legal, and market features, means costs differ from country to country. The option to go anywhere to do anything pushes MNEs to exploit location advantages. Labor, capital, and resources costs are traditional determinants of location advantages. Increasingly, the matters of digiti- zation and cluster effects moderate configuration choices (see Table 12.4). The MNE pursuing a low-cost leadership strategy with a labor-intensive production process, for instance, is sen- sitive to the supply, cost, and productivity of workers. Locating primary and support activities operations in productive places optimizes the MNE’s operational efficiency and strategic effectiveness.

Increasingly, MNEs target international locations to exploit opportunities to cre- ate knowledge, boost innovation, and improve customer responsiveness. For instance, Halliburton, a U.S.-based oil field services MNE, opened a second headquarters in Dubai to better serve its Middle East customers. Likewise, IBM relies on workers in Shanghai to process accounts receivables, specialists in Manila to oversee human resources, accountants in Kuala Lumpur to keep the books, buyers in Shenzhen to procure components, and tech

Managers can either concentrate or disperse value activities.

Location economics influence an MNE’s decision to concentrate or disperse value activities.

ConCepT CheCk

3-D printing, introduces revolu- tionary production technologies. Besides resetting the economics of manufacturing, these sorts of innovations also change the IB domain. Similarly, the profile of “Scenarios That May Change Trade Patterns” in Chapter 6 (page 171) notes technological innovations can diminish world trade due to the efficiency and ease of manufacturing goods nearer to customers.

Figure 12.3 Specifying the Value Chain The primary and support activities of the value chain identify the steps an MNE takes to create value. By disaggregating activities into discrete responsibilities, as we see here, the value chain provides managers a powerful tool to plan strategically.

T he

V al

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Product Design Design the functions, features, and aesthetics of the product or process.

Operations Convert inputs into a finished product in terms of sourcing compo- nents, arrange supply chains, configure plant location, and optimize manufacturing processes.

Outbound Logistics Move finished product from operations to wholesalers, retailers, or end-consumers. Deal with distribution channels, inventory manage- ment, warehousing, and transportation logistics.

Marketing Inform buyers and consumers about products and services, develop a sales force, devise packaging schemes, define the brand, and devise promotions.

Service Service customers with installation support, after-sales assistance, training, and maintenance.

S up

p o

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Materials & Equipment

Manage the procurement, transportation, storage, and distribution of materials and equipment necessary to conduct the primary activities.

Human Resource Management

Recruit, develop, motivate, compensate, and retain workers.

Systems & Solutions

Manage information processing, oversee information systems, and integrate technology platforms.

Infrastructure Classic overhead functions, like accounting, finance, legal, safety and security, and quality control.

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TaBle 12.4 locating Value activities: key Moderators

The MNE assessing “where to go to do what” considers a variety of moderators.

Dimension Influence

Business Environment Quality

MNEs configure value chains to enter, or avoid, a country given its business environ- ment. Countries improve their location economics by reducing capital requirements for start-ups, streamlining property registration, expediting regulatory review, and liberal- izing labor regulations. Opportunistic governments recruit foreign investors, promising business-friendly markets that offer flexible operating requirements, lower tax rates, cheap financing, and responsive public policies.65

Cluster Effects

Competing, complementary, interdependent firms and industries that do business with each other and share overlapping needs for talent, technology, and infrastructure increasingly operate in close geographic proximity, namely clusters (e.g., New York City for global finance). Vibrant clusters attract related vendors, service providers, investors, analysts, skilled workers, trade association members, and consultants.66

Innovation Context

Host governments build knowledge-intensive, technology-enabled business environ- ments. Promoting technologies, expanding human capacities, streamlining organiza- tional capabilities, and improving institutional responsiveness develops locations that leverage knowledge into innovations.

Labor Costs Differences in wage rates, worker productivity, and workplace regulations mean that the labor cost of doing the same thing varies from country to country. MNEs configure value chains to exploit these differentials.

Logistics

Logistics, namely procuring, transporting, transshipment, and storing products, enables transactions among value-chain activities. Depending on the industry, logistics adds 5 percent to 50 percent to a product’s total landed cost.67 Hence, MNEs configure the location of value activities to minimize logistics expenses.

Political Risk

Distributing value activities across nations exposes an MNE to political risk, namely that local decisions, events, or conditions will cause it to lose some or all of the value of its investment or accept a lower than the projected rate of return. Political risks differ from market to market; some countries are less risky than others, given fair legal systems, stable institutions, and the rule of law.

The improving functionality of 3-D printing foreshadows a radical reset in our idea of of the scale and location of “factories” in the future. Source: Cultura Creative/Alamy Stock Photo

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analysts in Brisbane to run its help desk. Current trends in robotic technologies, as we see in our Looking to the Future profile, signal a brave new world that may radically reset our under- standing of location advantages.

economies of scale The degree that an MNE concentrates or disperses its value-chain activities reflects the importance of efficiency to its quest to create value. In the case of the MNE implementing a cost leadership strategy, efficiency is the foundation of its competitive- ness. This concern is less pressing for an MNE implementing a differentiation or integrated strategy. Still, overcoming the liability of foreignness—namely, the additional costs that an MNE operating outside its home country incurs above those experienced by a local firm— requires achieving some offsetting efficiencies, no matter which strategy an MNE chooses.68

Technically, an MNE captures economies of scale in terms of size, output, or scale of op- eration. Increasing output lets it distribute fixed costs across a higher number of units, thereby systematically decreasing per-unit cost. Technically, steep up-front capital costs create high po- tential for scale economies. Long production runs lower per-unit costs as marginal production cost decreases while cumulative output increases. Exploiting scale effects is a powerful driver of productivity and profitability. It’s an enduring explanation of value chain configurations.

An MNE implementing the cost leadership strategy concentrates its value activities among large-scale plants to capture available scale economies. A minimum efficient-sized factory for making integrated circuits, for instance, costs several billion dollars. As a result, Intel, the world’s largest semiconductor chipmaker, supplies customers from eight fabrica- tion plants located in four countries—five in the United States, and one each in Ireland, Israel, and China. Certainly, Intel could opt for smaller plants in more countries. The reduced productivity of dispersed, small-scale manufacturing activities would suboptimize scale ef- ficiencies, thereby inflating its operating costs and diminishing its capacity to create value.

experience and learning effects Industry and firm conduct confirms that low costs create strategic advantage.69 Hence, MNEs look to capitalize on the scale and scope of their operations to exploit potential cost minimization via experience and learning effects. Technically, as a worker, through repetition, progressively masters the intricacies of a job, im- proving mastery predictably lowers costs. On the factory floor, costs characteristically decline by 20–30 percent in real terms each time accumulated experience doubles. Experience and learning effects also extend to professional sectors. The more times that managers perform a task, the more they improve their mastery of that task, meaning less time is required for the next iteration (i.e., practice makes perfect). Continual learning translates ongoing experience effects into improving efficiencies. Hence, strategic planners bundle resources, capabilities, and competencies to optimize learning and leverage experience effect. Common methods include configuring value activities to arrange long-term contracts for inputs, developing know-how of a broader range of capital instruments in a wider range of countries, and dis- tributing marketing expertise over more markets.

The risks of Configuration Choices Configuration decisions face the risks of unpredict- able market change. Disruptions, such as a regime change, material shortages, labor unrest, or currency instability, can quickly convert an efficient location into a costly one. Civil unrest in Egypt in 2011, for example, paralyzed its economy. Foreign commerce and domestic busi- ness all but halted, markets seized, and supplies of all sorts vanished. Recurring disruptions complicate configuration choices. Following yet another gyration in the business environ- ment, Jack Welch, former chair and CEO of General Electric (GE), thought the best location for GE factories was a mobile platform, explaining, “Ideally, you’d have every plant you own on a barge, to move with currencies and changes in the economy.”70 The impracticality of an armada of barges ferrying factories through the seven seas requires that managers moni- tor how markets shift and environments evolve. Strategic planning tools, such as scenario analysis and contingency assessments, help managers estimate the implication of shifting location advantages to configuration choices.

ConCepT CheCk

In discussing “Elements of the Economic Environment” in Chapter 4 (page 123), we note labor costs and produc- tivity are key elements of an MNE’s strategy. In Chapter 6 (page 164), we discuss theories to explain the relative trade performance of different coun- tries. Here, we reiterate that location economics directly moderate how MNEs configure value activities.

Factors that influence the configuration of a value-chain include

• business environment, • digitization, • economies of scale, • innovation context, • logistics, • resource costs, • robotics.

Since business began, location advantages have influ- enced how MNEs configure value activities. Searching for raw materials, seeking productive, low-cost labor, arbitraging tax and tariff incentives, and the like have led MNEs to travel the world seeking optimal loca- tions. Often, they had to operate in faraway locations marked by instability, uncertainty, and risk. Moreover, making products there yet moving products here required an ever-expanding, often expensive trans- portation matrix. Today, in a bit of understatement, ‘the times they are a changin.’ Revolutionary develop- ments in digitalization, robots, and 3-D printers spur radically rethinking the implication of location advan- tages to configuring value activities.

Digitization

The representation of an object, image, sound, docu- ment, or signal into a series of numbers digitizes it. Increasingly, MNEs digitize products like software, music, and books, as well as services like application processing, financial consolidation, and legal assis- tance. Jacked into the network, MNEs move goods and provide services anywhere in the world at negli- gible cost and complication. The flexibility to locate digital activities virtually anywhere, particularly as the Internet expands, influences how and where MNEs do what. Options unavailable a generation ago—say, X-rays taken in Boston, but read in Bangkok—are now commonplace. Distance, historically represented in terms of geographic space, is now measured in terms of electronic time in the ether of cloud computing.

Ongoing improvements in digitization signal continuing disruption. Once, many activities could be done in a few specialized places. For instance, due diligence processes in mergers and acquisi- tions largely took place in New York City or London given the corresponding concentration of value activities such as regulatory registration or evalua- tion. Digitization disperses these activities. Indeed, it has created a new global model for financial services, unleashing disruptive innovations that change the rules of the game. One analyst main- tains that “there has never been an economic dis- continuity of this magnitude in the history of the world. . . . These powerful forces are allowing com- panies to rethink their sourcing strategies across the entire value chain.”71 Some see digitization

Mangers rely on scenario planning to anticipate reconfiguring the value chain to changes in customers, industries, institutions, and environments.

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“creating a second economy that’s vast, automatic, and invisible—thereby bringing the biggest change since the Industrial Revolution.”72

Similar trends disrupt location effects in the legal field. India’s legal outsourcing industry is growing from an experimental enterprise to a mainstream part of the global business of law. At Pangea3 and Lexadigm, Indian lawyers do the routine work tra- ditionally assigned to enterprising junior lawyers in the United States, but at a fraction of the cost. Moreover, amendments to the U.S. Federal Rules of Civil Procedure have expanded discovery to include electronic documents, such as e-mails, instant mes- sages, and voice mails. E-discovery further incents offshoring legal work to productive providers, if not moving into the cloud itself. Add it all up, and legal outsourcing “is not a blip . . . it is a big historical movement.”73

Going forward, the narrowing digital divide—the gap between those with regular access to digital technologies and those without—plugs more people into the network. Accordingly, location economics change and MNE’s configuration choices evolve. The diffusion of lower-priced technology to people worldwide means that fewer spots remain off the grid. As newly wired folks connect with counterparts worldwide, they develop proficiencies with vari- ous technology platforms. Consequently, MNEs re- think configuration options in order to tap emerging sources of capabilities.74

the rise of robots

Widgets, technically small, mechanical devices, sound benign. In the context of the rise of robots and the expansion of 3-D printing, the idea of wid- gets takes on an entirely new meaning. The rise of robots threatens to disrupt much of what we know about configuring activities. These decisions, origi- nally made based on hand labor, later based on fac- tory assembly lines manned by humans, increasingly follow the promise of robots getting the job done. In your daily life, think of the implications of ATMs, self-checkout tills, remotely guided trains, and the soon-to-arrive driverless cars. More pointedly, con- sider that the Philips Electronics factory in Zhuhai, China, employs hundreds of workers who work old- school, using hand tools to assemble electric shavers.

Digitization

Mangers rely on scenario planning to anticipate reconfiguring the value chain to changes in customers, industries, institutions, and environments.

Looking to the Future Digits, Widgets, and Changing Location Advantages

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Meanwhile, 128 robots do the same work making the same product at a sister factory in the Netherlands. The Dutch factory has several dozen workers per shift, about a tenth as many as the Zhuhai plant. Still, it out-produces its Chinese counterpart.75 Elsewhere, fear of rising wages drives others to do the same. Foxconn, the maker of “all things Apple,” has factories filled with tens of thousands of workers, but looks to install more than a million robots.

Change is not limited to manufacturing. In distri- bution warehouses, robots store, retrieve, and pack goods far more adeptly than people. In journalism, robot writers generate hundreds of millions of news reports annually—more than all human journalists in the world—at an increasingly diminishing cost.76 In accountancy, forecasters see computer systems replacing 99 percent of tax preparers, 97 percent of bookkeepers, 93 percent of budget analysts, and 93 percent of accountants and auditors.77 Machines’ ability to do things faster, cheaper, and more ca- pably anywhere in the world at any time makes them more productive than humans in an increasing number of applications.78 Says the founder of robot builder Industrial Perception, “We’re on the cusp of completely changing manufacturing and distribu- tion. I think it’s not as singular an event, but it will ultimately have as big an impact as the Internet.”79

Robots in the form of 3-D printing add fascinat- ing angles to future location decisions. Building big factories in low-cost labor markets to mass-produce standardized goods, long a determinant of plant lo- cation, slowly becomes secondary to smaller-scale,

3-D printer-equipped facilities that enable ‘mass customization.’ The capacity of 3-D printers to ef- ficiently make smaller batches of a wider variety of goods supports scenarios where products are made on-site, in real time, and tailored to a custom- er’s precise specification. Increasingly, 3-D printing, powered by progressive software and ingenious materials, supports small-scale factories “manned” by maker-bots located anywhere and everywhere in the world. And, given the advantages of proximity to customers, likely down the street, and, one day, likely in your home rather than in factories across the world.

implications

Digits and widgets push managers to increasingly question long-sacred strategic principles, such as “Exploit location advantages,” “Maximize production runs,” “Go big or go home,” or “Minimize unit-labor costs.”80 Locating value activities, based not on the availability of land, labor, or materials, but on network connectivity, robotics, and 3-D printers, lets MNEs radically rethink how they configure operations.81 We already see production activities that had been moved to low-cost labor locations now reshoring to devel- oped countries, and in the process expanding the notions of locations (see Table 12.5). Nearly half of U.S.-based manufacturing executives at companies with sales greater than $10 billion are planning to or are actively considering bringing production back to

One wonders, considering the rise of robots in workplaces worldwide, how unfolding tech trends will reset our understanding of strategy in the global business environment.

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TaBle 12.5 The expanding lexicon of locations

Options for configuring value activities expand in scale and scope. Once, discussion revolved around the issue of offshoring. Now, trends in digitization and automation, shifting location effects, intellectual property protection, and customer responsiveness expand interpretation. Consequently, the interpreta- tion of “shoring” evolves.

Form of shoring Characteristic Homeshoring Home-based staff handle activities that had previously been offshored to foreign

locations.

Nearshoring A less aggressive form of offshoring whereby an MNE transfers an activity to a neighboring or nearby country.

Offshoring Relocating a value activity to a different country that either remains within or moves outside the MNE.

Onshoring Relocating a business process or work unit to a more productive, lower-cost loca- tion in the home country.

Reshoring Returning an activity from the foreign location to the country where the work had originally been done.

the United States from China.82 Further, a third of the goods that the United States imports from China in transport, computer fabricated metals, and machin- ery industries could be made with robots and 3-D

printers, in the United States by 2020. These trends, unfolding worldwide, herald a widget-led, digitally fueled revolution that likely resets our ideas and inter- pretation of location advantages.83 ■

gloBal inTegraTion Versus loCal responsiVeness Competing in the global marketplace puts an MNE on the horns of a dilemma: should it sin- gle-mindedly standardize products and processes and resolutely exploit location effects in or- der to maximize the efficiency gains of global integration? Or, should it adapt products and processes to the unique situations in each market in order to maximize the effectiveness ben- efits of local responsiveness? As we see in Table 12.6, significant motivations endorse each imperative. The perpetual tug-of-war between global integration and local responsiveness fuels ongoing debate about the ideal bundle of resources, capabilities, and competencies that maximizes value creation. Few MNEs operate in an industry where either globalization or lo- calization pressure indisputably predominate. Rather, most MNEs, given their vision, mission, and strategy, navigate the competing demands of the dual imperative of IB.84

For instance, consider Nestlé’s situation. Its vision, “Good Food, Good Life,” anchors its mission to provide food that is a source of nourishment and satisfaction, but also pleasure, health, happiness, and peace of mind. These ideals, although universal in theory, differ in practice given that local habits, cultural traditions, and social norms shape the standards of preferred, palatable food from market to market. Moreover, food inputs are generally com- modities, production has limited scale potential, widespread distribution faces high costs given low value-to-weight ratios, and promotion is best done locally given differentiated tastes, regulations, rivals, and retail channels. Hence, Nestlé’s designers, regulatory spe- cialists, and consumer care representatives apply a local outlook to customize its activities so that they respond effectively to situations in the 197 markets in which Nestlé sells its products.

Offsetting its liability of foreignness, however, requires that Nestlé standardize some ac- tivities, such as information systems, brand names, advertising message, and packaging pro- cesses, which overlap across countries. To that end, Nestlé looks to its 5,000-plus scientists,

Global integration standardizes worldwide activities to maximize efficiency, whereas national responsiveness adapts local activities to optimize effectiveness.

Global integration combines differentiated parts into a standardized whole. Local responsiveness disaggregates the standardized whole into differentiated parts.

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engineers, and nutritionists who staff its worldwide network of 34 R&D facilities to set global standards for safe products of the highest quality that support its vision of ‘Good Food, Good Life.’ Granted, the executive leadership of Nestlé would prefer to do the same thing, the same way, everywhere—strategic planning would be far easier, operations would run far smoother, and complications would be far fewer. However, they cannot. Consequently, Nestlé, like many MNEs, manages the conflicting pressures of global integration and local responsiveness by standardizing some activities worldwide but adapting others to local situations.

Reconciling the competing imperatives of integration and responsiveness calls on managers to navigate a range of issues, constraints, and concerns. Strategic planning, in framing analy- sis and developing scenarios, helps managers assess resources, capabilities, and competencies relative to opportunities and threats. As a rule, planners monitor multiple aspects of the environ- ment. Key concerns center on interpreting the potential for standardization along with under- standing the characteristics of consumer preferences and the influence of institutional agents.

The poTenTial for sTandardizaTion The greater the potential to standardize value activities, the greater the importance of global integration to an MNE’s competitiveness. Presently, some see standardization offering im- mense potential, given the growing degree to which the “experience of everyday life is be- coming standardized around the world.”85 So put, people worldwide consume an increasing number of products increasingly in the same way. The stronger this tendency, the greater the imperative for MNEs to produce low-cost, high-quality products that differ little, if any, in features and functionality, in order to develop the most compelling value proposition.

The logic of standardization is straightforward. Repeatedly doing the same task the same way, by maximizing scale and learning effects, creates efficiencies that reduce costs without sacrificing quality. Efficiencies emerge across the value chain. An MNE, for example, can streamline product designs in order to rationalize assembly, negotiate quantity discounts on material purchases, rationalize materials management, and optimize outbound logistics. The MNE also realizes efficiencies in other value activities: R&D benefits by leveraging a

ConCepT CheCk

As seen in Chapter 4, fast- growing emerging economies spur big changes in global strategies. Here, we observe that one of these shifts moves companies to assess operating in different environments with a keen eye toward leveraging innovations across subsidiaries.

TaBle 12.6 Motivations of global integration and local responsiveness

Motivations for Global Integration Motivations for Local Responsiveness • Standardize products and processes to maximize

scale, experience, and learning effects

• Maximize productivity of resources, capabilities, and competencies

• Exploit location effects

• Capitalize on converging consumer preferences and universal needs

• Provide uniform service to all customers

• Accelerate consumers’ quest to maximize purchasing power parity

• Source materials and inputs globally

• Directly engage global competitors

• Build global image with universal message

• Exploit integration efforts of transnational institutions

• Leverage expanding cross-national technological connectivity

• Respond to the progressive, ongoing globalization of markets

• Customize products and process to local customer preferences to optimize scale, experience, and learning effects

• Satisfy host government requirements and regulations

• Tap local resources, capabilities, and competencies

• Promote a local profile to placate national stakeholders

• Directly engage local competitors

• Adjust to local political, economic, and cultural circumstances

• Increase sensitivity to new product and process options

• Tailor marketing message to local ideals

• Build local goodwill by supporting national agenda

• Accommodate differences in distribution channels and service systems

• Respond to historical or geographic imperatives

• Adjust products and processes to the digital divide

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common design platform, advertising benefits by communicating a universal message, and distribution benefits by streamlining channels.86

Our opening case profiles the power of standardization to create compelling competitive advantage in the global apparel industry. Zara saw that standardizing its product offerings supported longer production runs that translated into lower costs. This, in turn, enables Zara to offer attractive fashion at reasonable prices that neutralize stubborn local preferences. Relatedly, its global network, supported by its state-of-the-art logistics, gave customers worldwide real-time access to the newest, coolest fashion trends. Manufacturing standard- ized products for global markets, therefore, lets Zara leverage its investment in design, manufacturing, distribution, and retail activities. The resulting efficiencies, in turn, support making high-quality, competitively priced products that, in offering compelling value to cus- tomers worldwide, repowered the cycle.87

The CharaCTerisTiCs of ConsuMer preferenCes Responding to local customers’ preferences requires customizing products and processes. Adaptation reduces the efficiencies of standardization, thereby aggravating the liability of foreignness, inflating operational costs, and reducing value creation. Hence, MNEs oppose adapting operations unnecessarily. Still, local imperatives often compel them to do so. Differing cultural, political, legal, and economic circumstances shape unique busi- ness environments that press for commensurate customization of products and processes. Some differences surrender to the allure of higher-quality, lower-cost products—think of worldwide demand for an Apple iPod, Starbucks latte, or Facebook wall. In these sorts of situations, the appeal of the standardized products trumps local consumer preferences.

Others differences, however, press MNEs to tailor products and processes. Ceteris paribus, consumers prefer products that are sensitive to their particular lifestyle. Examples include de- signing and making products that local customers prefer (e.g., large cars in the United States, smaller cars in Europe, still smaller cars in emerging markets), tailoring channel structures to buyer preferences (e.g., web-based and 4G-driven content in South Korea, print and media promotion in France, personal selling in Brazil), modifying product features for local tastes (e.g., light coffee roasts in Germany and Scandinavia; dark coffee roasts in Italy and Spain; coffee flavored with spices, like cinnamon, cardamom, or cloves, in Ethiopia), and adapting marketing practices to consumption patterns (e.g., large package sizes in Australia, smaller sizes in Japan, single-unit sizes in poorer countries). In these sorts of situations, local prefer- ences often trump global standards.

Standardization advocates counter that expanding connections across borders steadily converges consumer preferences. Ultimately, they infer, we will consume the same brands in the same way. As Steve Jobs noted during his travels to Turkey, “All day I had looked at young people in Istanbul. They were all drinking what every other kid in the world drinks, and they were wearing clothes that look like they were bought at the Gap, and they were all using cell phones like kids everywhere else. It hit me that, for young people, the whole world is the same now.”88 Skeptics quickly reject this argument. They point out that about 1 percent of the world’s physical mail crosses borders, less than 2 percent of calling minutes are international, and a quarter of Internet traffic crosses national borders.89 Likewise, just 329 brands are recog- nized by consumers in 8 or more countries; only 16 percent of all brands are recognized in 2 or more countries.90 Furthermore, most people live their entire lives within one country, support- ing local production and consumption of goods and sustaining local politics, history, culture, and identity. Localism, not globalism, is the lifestyle of many people in many countries.

MNEs facing stubborn variation in consumer preferences across countries, therefore, adapt products and processes to local circumstances.91 Certainly, expanding connectivity encourages consumer behaviors that trump nationalism. Nevertheless, differences endure due to cultural predisposition, historical legacy, and latent nationalism (i.e., buy-local cam- paigns).92 Responding to cross-national differences presses MNEs to adapt products and processes to local consumer preferences; optimizing, rather than maximizing, standardiza- tion creates competitive advantage.

The convergence of national markets, standardization of business, and efficiency imperatives push MNEs to integrate activities.

ConCepT CheCk

In Chapter 2, we explain how globalization spurs a variety of managerial approaches. Similarly, in Chapters 3 and 4, we emphasize how compa- nies operating internationally encounter a variety of political, legal, and economic environ- ments. Likewise, here we highlight how globalization im- peratives and local constraints shape planning processes in the MNE.

Differences in local consumers’ preferences endure due to cultural predisposition, historical legacy, and latent nationalism.

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The effeCT of insTiTuTional agenTs Aspects of standardization endorses global integration whereas the issue of divergent consumer behaviors endorses local responsiveness. A third factor, institutional agents and their policy agendas, can, at different times, support either scenario. Various transnational institutions, such as the IMF, WTO, and World Bank, build an increasingly seamless global business environment. Systematically opening national borders to trade and investment creates greater potential for MNEs to build, expand, and integrate global operations. Presently, for instance, 162 nations are members of the WTO, the regulator of the rules of world trade.93 Membership requires replacing differentiated national regulations with global standards that liberalize trade and investment. Standardizing the rules of the glo- balization game, so to speak, supports standardizing the methods of play. Progressive liberalization permits MNEs to configure value activities in optimal locations without for- saking access to markets worldwide. Hence, business-process outsourcing firms in India, robot builders in Germany, solar-panel makers in China, or chip architects in Taiwan can design value chains that maximize efficiency without sacrificing access to consumers in other countries.

On the other hand, institutional agents, particularly host governments, often strongly encourage, if not compel, local responsiveness. In general, different countries take differ- ent paths to develop fiscal, monetary, and business regulations. Some champion economic freedom, others constrain it. Some recommend openness, others advocate insularity. Facing constraints and insularity, MNEs respond by localizing value activities or else forsake sales, if not market access.94 Routine pressures for local responsiveness, for example, require phar- maceutical MNEs to disperse value activities to meet a host government’s mandate that clinical testing, certification procedures, pricing policies, and marketing practices comply with local regulations. An MNE trades global efficiency for local access, and correspondingly adapts resources, capabilities, and competencies.

MNEs often face extraordinary pressures for local responsiveness. Brazil, for instance levies a 30 percent tax increase on imported cars with less than 65 percent local content. Likewise, it requires foreign energy firms to spend 1 percent of gross revenue on local R&D. Thailand’s Alien Occupation Act reserves many architecture and engineering ser- vices jobs for Thai nationals. Uber’s international expansion has hit speed bumps; in Paris and Madrid, protests mobilize public opposition while in Frankfurt and London, regulators mull stricter regulations to spur responsiveness.95 Consequently, host-country policies on, say, local content standards, buy-national policies, trade protectionism, hiring regulations, and currency repatriation, often require the MNE to localize value activities or else forsake market access.

gloBal inTegraTion and loCal responsiVeness:

Mapping Their inTeraCTion Operating internationally calls for configuring and coordinating operations in ways that reconcile the competing demands of global integration and local responsiveness. The Integration-Responsiveness (IR) Grid provides a straightforward framework to organize analysis (see Figure 12.4). Procedurally, it positions an industry in the quadrant that repre- sents its sensitivity to the dual imperatives. As such, it provides executives a framework to interpret the challenge.

Strong pressures to respond locally, but low pressures to integrate globally—the lower- right quadrant of the IR Grid—encourage adapting value activities to host-country condi- tions. In this context, MNEs that operate in industries with strong cultural sensitivities see higher returns from local responsiveness and fewer benefits from global integration. Alternatively, high pressure to integrate globally along with slight pressure for local responsiveness—the upper-left quadrant of the IR Grid—encourages standardization to support the low cost leadership strategy. MNEs in this context exploit location effects and

ConCepT CheCk

Chapter 8 (page 211) pro- files movements in national markets toward regional trade agreements while Chapter 10 (page 260) highlights the cross-national integration of capital markets. These trends, by standardizing key aspects of the global market, support the standardization of products and processes. Increasing stan- dardization, in turn, supports concentrating value chains.

The IR Grid relates the global and local pressures that influence an MNE’s strategy.

Chapter 12 The Strategy of International Business 325

maximize scale economies in order to provide consumers worldwide competitively priced, acceptably standardized products that meet universal needs. Flat-panel displays, for in- stance, are vital components for a range of products; few consumers care where they are made, as long as they are competitively priced. Thus, manufacturers like LG Philips, Chi Mie Optoelectronics, and Samsung respond to competitive pressures by concentrating value ac- tivities in economically superior locations.

A third class of MNEs compete in industries that simultaneously impose powerful de- mands for local responsiveness and strong pressures for global integration; we find these industries in the center zone of the IR Grid. MNEs operating in salient national sectors, such as telecommunications, information technology, automobiles, pharmaceuticals, and finan- cial services, face differing customer preferences, market structures, regulatory codes, and institutional settings. Still, investment requirements, scale economies, and learning effects set high productivity thresholds. Configuring and coordinating value activities to resolve this dilemma poses enduring challenges. MNEs like Dentsu, China Mobile, Vodaphone, or Infosys must develop complex configuration formats that support an intricate integrated- differentiation strategy.

In summary, the IR Grid helps managers map their strategic options given prevailing pressures for standardization and adaptation in their particular industry.96 It proves useful in making sense of competitive situations, helping to frame analytics as well as providing tools to track rivals’ moves in terms of the underlying cost structure in an industry, evolving institutional dynamics, and shifting consumer preferences. It maps how industry structure sets the context, strategy specifies the end, and managers configure operations to mediate the two.

ConCepT CheCk

Globalization, though a power- ful force, is not inevitable. Chapters 3 and 4 developed this thesis by noting that political and economic free- doms are in flux. Similarly, both consumer preferences and host-government pressures prompt companies to adapt their value chains to local conditions.

Industry Pressure for Local Responsiveness

Civil Aircraft

Semiconductors

Bulk Chemicals

International Banking

Consumer Electronics

Corporate Banking

E-Commerce

Paint & Pigments

Automobiles

Goods or services that the opportunistic company sells to

foreign customers.

Apparel

Legal Services

Retail Banking

Telecommunications

Accounting

Management Consulting

HIGH Standardization and

centralization are imperative across

international operations

LOW Standardization and

centralization are useful but not necessary across international operations

LOW Adaptation and decentralization are

unnecessary to sell generic products to similar markets

HIGH Adaptation and decentralization are needed to sell customized products

to diering markets

In du

st ry

P re

ss ur

e fo

r G

lo ba

l I nt

eg ra

tio n ITServices

Energy

Financial Services

Logistics & Transportation

Advertising

Software

Health Care

Food & Beverages

Figure 12.4 The integration-responsiveness grid Each strategy archetype embodies a unique concept of value creation that reflects its resolution of the asymmetric pressure for global integration versus local responsiveness. The Integration-Responsiveness Grid maps this response, highlighting the interaction between each pressure that confronts an MNE in a particular industry. As such, it helps managers reconcile the competing imperatives of standardization and adaptation.

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inTernaTional CorporaTe-leVel sTraTegies Earlier, we profiled business-level strategies—namely, the cost leadership, differentiation, and the integrated cost leadership/differentiation strategy. These ideas explain how a com- pany competes in a given market. Going international, by diversifying an MNE’s operation from a single nation to multiple nations, introduces the idea of corporate-level strategy. This idea helps us make sense of how managers unite the individual parts of the MNE, whether spanning 2 to 214 markets, into a cohesive, coherent whole. For example, Apple implements a differentiation strategy in its home market, the United States. As Apple expands into for- eign markets, it aspires to apply the same business strategy in each additional market. Doing so consistently supports its vision and mission and productively uses its bundle of resources, capabilities, and competencies. As Apple expands strategic planning from one to many markets, it sets its corporate-level strategy to manage issues, such as the respective decision- making roles of headquarters and subsidiaries, which span multiple markets.

Similarly, think of the executives at Nestlé headquarters in Vevey, Switzerland, directing 442 factories in 86 countries to make products that are then sold in 197 countries. Or, also, Toyota’s leaders in Toyota City, Japan, overseeing 70 factories spanning 29 countries making vehicles that are then sold and serviced in more than 170 countries. The leaders of Nestlé and Toyota, as do their counterparts at other MNEs, organize worldwide operation with a corporate-level strategy that helps everyone, no matter where they are or what they are do- ing, support the MNE’s vision and mission. Absent this unifying logic, workers worldwide may make decisions that support different, even contradictory, strategies, thereby undermin- ing the collective success of the global enterprise.97 In addition, think again of the opera- tional scope of Nestlé and Toyota. Their global span imposes costs and complications beyond operating in a single market—the so-called liability of foreignness. HQ executives, surveying their far-flung operations, develop a corporate strategy to specify how they will leverage ownership, location, and asset advantages to generate the value that offsets the additional expenses of international operations.

Therefore, a corporate-level strategy (1) articulates how managers plan to reconcile global integration and local responsiveness in ways that support the MNE’s vision and mission, (2) stipulates how managers will integrate the MNE’s various parts into a strategic whole, and (3) specifies the decision-making role the headquarters and subsidiaries take doing so. The international, localization, global standardization, and transnational strate- gies anchor contemporary interpretation. Table 12.7 profiles the principles and practices of each archetype.

The inTernaTional sTraTegy MNEs competing in markets marked by low pressures for global integration and local re- sponsiveness (the lower-left quadrant of the IR Grid) have the flexibility to sell products designed for their home market, with minimal, if any, customization for foreign markets. Moreover, they often face few, if any, rivals that offer a competitive product. In addition, their superior competitiveness creates the flexibility to arbitrage location effects. Given this sce- nario, managers position the MNE to implement the international strategy.

The international strategy transfers home-country-based competencies, such as produc- tion expertise, design skills, or brand power, to foreign markets. Ultimate control resides with headquarters, since senior executives understand the optimal bundling of the company’s resources and capabilities. The testing ground of new ideas is the home market, not foreign countries. Headquarters-based strategic planners regulate foreign units’ market moves and operating choices, directing local managers to leverage home-country competencies. This outlook gives local managers limited authority to adapt plans, processes, or products. MNEs implementing an international strategy include Airbus, Apple, and Google.

Google, for example, develops the core architecture of its web products and platforms at the Googleplex, its headquarters complex in Mountain View, California. It allows national

Corporate-level strategy determines the actions an MNE takes to gain a competitive advantage by selecting and managing its business across a group of nations.

The international strategy transfers a company’s resources, capabilities, and core competencies into foreign markets where they do not exist, or do exist but are less efficiently made or less effectively delivered.

Chapter 12 The Strategy of International Business 327

TaBle 12.7 Characteristics of the strategy Types used by Mnes

The strategy gamut of “international-localization-global-transnational” anchors IB theory. Each archetype speaks directly and differently to how an MNE reconciles the tension of global integration versus local responsiveness as well as the respective decision-making authority of headquarters and subsidiaries. Managers, mindful of industry structure and drivers of value creation, trade-off the characteristics of the four archetypes in making their strategic choice.

International strategy Localization strategy Global strategy Transnational strategy Orientation Leverage core competencies

and home-country innova- tions into superior competi- tive positions abroad.

Differentiate products to re- spond to national differences in customer preferences, industry characteristics, or government regulation.

Target universal needs or wants that support sell- ing standardized products worldwide. Emphasize volume, cost minimization, and efficiency.

Simultaneously manages the tensions of global integration and local differentiation in ways that leverage special- ized knowledge and promote worldwide learning.

Value Chain Configuration

Concentrated; value activi- ties are set and directed by headquarters.

Dispersed; subsidiaries com- mand discretion to adapt value activities.

Concentrated; value activities exploit location economics.

Concentrated to tap loca- tion economies. Dispersed, subject to minimum efficiency standards, to meet local preferences.

Decision-Making Outlook

Centralization as HQ retains control of resources and capabilities to apply, regulate, and protect core competencies.

Decentralization as subsidiar- ies operate quasi-indepen- dently, tailoring activities to local circumstances.

Centralization as HQ directs activity to maximize standardization, enforce con- sistency, regulate the global matrix of inputs and outputs, and contain costs.

Simultaneous goals of integra- tion and responsiveness calls for sharing decision-making between headquarters or subsidiaries.

Key Advantage

Directly transfers expertise from headquarters to interna- tional units.

Reduced need for central support to manage local activities. Sensitivity to local preferences.

Make low-cost, high-quality, standardized products that differ little, but appeal to consumers worldwide.

Supports efficiency, compels effectiveness, and leverages learning that drives innova- tions through units worldwide.

Key Disadvantage

Centralizing decision-making in the home country can misread local innovations.

Encourages “mini-me” phenomenon that replicates value activities across sub- sidiaries. Fuels accountability and allegiance conflicts.

Reduced learning opportuni- ties given the dominance of the global standard.

Elaborate decision-making mechanisms integrate dis- persed operations. Difficult to configure, tough to coordi- nate, and prone to perfor- mance shortfalls.

IR Grid Positioning

High pressure for global inte- gration. Low to mid-pressure for national responsiveness.

Low pressure for global integration. High pressure for national responsiveness.

High-pressure for global inte- gration. Low to mid- pressure for national responsiveness.

High pressure for global integration. High pressure for national responsiveness.

Examples Google, P&G, Nucor, Harley Davidson, Baidu, Apple, Tesco, Facebook, Carrefour.

Unilever, Nestlé, McDonald’s, Johnson & Johnson, Pfizer, Embraer, Ranbaxy.

Toyota, Canon, Haier, Caterpillar, Cemex, Infosys, Walmart, Huawei, Haier, American Express, Cisco.

GE, Tata, Zara, IBM, SAP.

subsidiaries to customize aspects of its web pages to deal with local differences in language and alphabet. Executives in the Googleplex safeguard the search algorithms and platform systems that build its competitive advantage. Planners in the Googleplex direct product de- velopment and set business processes for overseas operations. Hence, headquarters transfers principles, practices, and processes to foreign operations. It does not, however, transfer control.

advantages The international strategy works well when an MNE’s products or processes speak to a universal customer preference. Again, think of Apple or Google operating over- seas; no matter the market, each offers an appealing option that transcends product prefer- ence or price elasticity. Each MNE’s products, by setting the global standard, benefits from few rivals (the result of superior competitiveness), moderate operational costs (the efficiency of direct product transfer), and high profits (the yield of international leverage).

limitations Headquarters’ confidence in the superior competitiveness of its competen- cies discourages local adaptation. Initially, this outlook does not carry high risks. But, as an

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MNE expands its global operations, a one-way view of the world may miss opportunities or misread threats in foreign markets. Moreover, the international strategy sustains strong performance as long as foreign rivals scramble futilely. Companies in many foreign mar- kets, especially those in emerging economies, are reinventing systems of production and distribution, experimenting with new business models, and resetting the standards of in- novation. An unexpectedly enterprising competitor may disrupt industry structure or market dynamics. Google, for example, faces increasingly adept local rivals in South Korea and China, Naver and Baidu, respectively, whose native sensitivities to local search tendencies strongly position them in fast-growing Asian markets.98 The centralization ethos of the in- ternational strategy, consequently, can struggle reconciling local responsiveness pressures.

The loCalizaTion sTraTegy Some MNE faces higher pressure for local responsiveness, but lower pressure to reduce costs via global integration (the lower-right quadrant of the IR Grid). Cultural, political, legal, and economic conditions in foreign markets require MNEs, like J&J, McDonald’s, Nestlé, or HSBC, adapt products and processes to local circumstances. Cost pressures shape, but do not determine, local competitiveness. Still, offsetting the liability of foreignness as well as providing a reasonably priced alternative to local products requires an MNE to optimize pro- ductivity. Efficiently customizing products and process from market to market, if headquar- ters aims to direct activity despite high responsiveness pressures, is costly and complicated. Instead, an MNE adopts a localization strategy, orienting its vision, mission, and plans to provide customers products that fit their distinctive preferences.

The localization strategy decentralizes strategic planning. National subsidiaries, not global headquarters, organize the resources and capabilities needed to design, make, and sell prod- ucts that respond to preferences, practices, and the mélange of politics, law, and culture in the local marketplace.99 At J&J, for example, headquarters’ recognizes that health-care regulations and patient care standards vary across countries. The scale and scope of differences preclude universal planning from headquarters. Optimizing global performance requires J&J let its 275 business units worldwide behave like innovative, entrepreneurial firms, directing strategic planning and organizing value activities to fit local circumstances.100

advantages The localization strategy superbly speaks to the unique features of consumer preferences, market situations, and environmental context found in a national market. It drives MNEs to customize products and processes. Starbucks, which began international- izing operations in 1996 and now has nearly 23,000 outlets in 65 countries, expands by lo- cally adapting its blend of coffee, aesthetics, and aura. Boosting performance in Europe, for example, relies on edgy architecture, including chandeliers and stages for poetry readings, in order to lure customers socialized to a high-touch café culture. In contrast, Starbucks runs its 75 outlets in India through a 50/50 joint venture with Tata Global Beverages. These outlets sell coffee from beans grown and roasted in-country, brewing a distinct Indian blend. Too, it alters its menus to Indian tastes, offering a unique dish in each city that hosts a franchise.101 Likewise, Starbucks taps the expertise of its joint venture partner to design outlets that, be- sides respecting historical architecture and ideals, incorporate the local culture.

The localization strategy gives the MNE’s local units a distinctive advantage against in- country competitors who lack the benefits provided by the parent company. Industries of the sort found in the lower-right corner of the IR Grid, such as apparel, food, health care, and retail banking, historically had local companies that operated nationally. Although competitive, many cannot match the pools of resources, capabilities, and competencies found in successful MNEs. For example, J&J’s headquarters configures and coordinates global activities that support local units that leverage its world-class research, executive, financial, marketing, and logistics competencies. Hence, the localization strategy helps subsidiaries build superior competitive positions in local markets on the strength of the parent’s global advantages.102

The localization strategy encourages decentralized decision-making so that local subsidiaries can adjust value activities to local circumstances.

ConCepT CheCk

Chapter 4 (page 110) profiles the idea of state capitalism, Chapter 6 (page 187) discussed the economic rationales for governmental trade interven- tion, and Chapter 8 (page 211) notes how trade agreements shape markets. In these and similar cases, state interven- tion into the market reduces the freedom MNEs have to pursue the efficiencies of global integration. On the other hand, state intervention also benefits those MNEs that stress local responsiveness.

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limitations The customer centricity of localization requires replicating value activities from subsidiary to subsidiary. Essentially, an MNE implementing localization builds “mini-me” units around the world. Customizing products or processes requires different resource and capabilities, thereby increasing costs along the value chain. Different product designs neces- sitate different materials, smaller markets make for shorter production runs, different chan- nel structures call for dissimilar distribution formats, and divergent technology platforms complicate information exchange. Hence, the localization strategy is practical for the MNE competing in largely price inelastic markets.103

Likewise, localization promotes management styles and value chains that differ from unit to unit. Allocating authority to local decision-makers can, over time, develop powerful subsidiaries. Eventually, some may opt to ignore headquarters’ lead, instead maintaining that the unique features of their situation warrants a different, even contradictory, vision and mission. Left to their own devices, they may design programs that, by nullifying potential scale effects of cross-national integration, escalate costs. If a subsidiary evolves into a virtual stand-alone operation, resource and power dynamics may neutralize headquarters’ author- ity. Ensuing contests over visions, mission, and plans blunt competitiveness.104

gloBal sTraTegy MNEs competing in industries of the sort found in the upper-left quadrant of the IR Grid face high pressures for global integration yet low pressures for local responsiveness. Industry effects press these firms to adopt a global strategy that is keenly sensitive to the economics of efficiency, advantages of standardization, and the imperative of integration. Productivity pressures push an MNE to, ideally, be the cost leader or, minimally, be competitive with the industry pacesetter. Either objective compels it to exploit potential scale economies, learning effects, and location advantages. Operationally, an MNE concentrates value activities in a few, ideal locations; standardizes products to simplify design and support long production runs; and rationalizes marketing to back aggressive pricing and direct distribution.

The global strategy has stark implications to value-chain design. Units operate in favor- able locations that maximize productivity (e.g., a shoe factory in Vietnam, an auto-parts maker in China, a service call center in the Philippines). Value activities need not take place in the same location; a fully optimized global value chain locates an activity in the most ef- ficient locale. IBM, for instance, supports its Asian value chain with HR specialists in Manila, accounts receivable experts in Shanghai, accountants in Kuala Lumpur, and procurement of- ficers in Shenzhen.105 Headquarters directs decision-making by standardizing the practices and processes used in overseas units. Relentless cost pressures from rivals require headquar- ters to continually raise productivity thresholds.106

For some products, notably commodities, the global strategy is essentially the only profit- able option. Commodities serve a universal need (think of gasoline, steel, aspirin, memory chips, debit cards, sugar, and so on). Consumer preferences in different countries, if not iden- tical, are similar. Choosing between basically identical products (i.e., Company X’s gasoline versus Company Y’s gasoline) makes price a key point of competitiveness. The global strategy is not restricted to commodity markets. The globalization of markets encourages MNEs like Zara in apparel, IKEA in home furnishings, or LVMH in luxury goods to standardize features of historically differentiated products, manufacture them on a global scale, market them with a global brand, and sell them through focused distribution channels. Unquestionably, cross-national differences in consumer preferences exist, but they necessitate minor, if any, customization.

Some MNEs, such as Caterpillar or Tesla, reason that even if there are significant differences, target customers will sacrifice their preference to buy local and switch to a higher-quality, competitively priced, substitute—even if it’s foreign made. Anchoring this view is the outlook that no matter the society, money exhibits three inalienable fea- tures: it is hard to acquire (one typically must work for it), transient (it is quickly used), and scarce in supply (no matter the amount, it inevitably seems too little). Consequently,

The localization strategy, by encouraging operational overlap, increases overhead expenses.

A global strategy champions worldwide standardization of value activities.

Money has three inalienable features: It is

• difficult to acquire, • transient, • scarce.

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consumers worldwide pursue a common quest: maximize utility by buying the highest- quality product for the lowest possible price.107 Ultimately, economically rational con- sumers disregard a product’s national origin, buying a foreign-made product rather than a local substitute, as long as it delivers superior value. The sweep and scope of technol- ogy intensifies this tendency. Consumer preferences converge as connections proliferate across countries. The shrinking digital divide exposes more people to common media, thereby promoting universal consumption ideals, and, in turn, standardizing consumer behaviors. Ultimately, consumers’ disposition to discount nationalism in the quest for a product offering superior value girds the global strategy.

advantages The global strategy exploits economies of scale, learning effects, and loca- tion economies in order to translate the MNE’s resources and capabilities into core com- petences that support cost leadership worldwide. Efficiently configuring value activities competes with like-minded rivals as well as persuades consumers, given the product’s superior value proposition, to switch from a local to a global brand. The global strategy benefits from the ongoing integration of national markets; emerging global standards fan demand for universal goods and services. Institutional developments progressively reduce the trade frictions and investment restrictions that had historically constrained location economics. MNEs increasingly move anything anywhere in the pursuit of maxi- mizing efficiency. The globalization of markets, quite simply, expands opportunities for cross-national integration. Lastly, the global strategy clarifies sensemaking and decision- making. Single-minded focus on improving efficiency imposes an absolute logic on stra- tegic planning.

limitations The cost sensitivity of the global strategy leaves MNEs little latitude to cus- tomize processes or products to local conditions; each change reduces efficiency. Hence, an MNE’s success is a function of the validity of the ‘one type product fits all customers’ needs worldwide’ thesis. A single bet on a single approach for a single global market is risky. Disruptive change can turn the laser focus of a globally tuned value chain into a mal- adapted delusion. The fallout of the global financial crisis, for example, saw big banks such as Citibank, Royal Bank of Scotland, and Fortis foiled by their previously high-performance global strategies. Despite leadership in global capital markets, the crisis and ensuing demand for local responsiveness turned many of their strengths into liabilities. Finally, concentrat- ing value activities in a few productivity-maximizing locations exposes the MNE to a host of risks, such as political change, legal manipulations, trade conflicts, and exchange-rate instability.

TransnaTional sTraTegy The asymmetric demands of maximizing efficiencies through cost leadership and ef- fectiveness via differentiation make it difficult to pursue both simultaneously. Still, some companies successfully adopt an integrated cost leadership/differentiation business- level strategy. The corporate-level analogue, the transnational strategy, takes this idea globally.

The MNEs operating in the sort of industries we see in the upper-right quadrant of the IR Grid, notably, airlines or e-commerce, must simultaneously integrate globally in order to reduce costs as well as adapt to national circumstances to appease local stakeholders. Resolution requires managers standardize some activities while differentiating others. Choosing to optimize both objectives, rather than maximize one, reduces efficiency and caps effectiveness. Offsetting high costs, given the ever-present liability of foreignness, requires that an MNE develop firm-specific capabilities and competencies that cre- ate difficult-to-copy points of competitive advantage. Hence, the transnational strategy

ConCepT CheCk

Several points in previous chapters profile the growing potential and performance of emerging economies, such as China, India, and the Philip- pines. Fast-rising MNEs in these countries develop prod- uct and process innovations to frugally engineer goods and services that respond to the Base of the Pyramid phenom- enon. These innovations push Western MNEs to rethink the economics of value creation.

Standardization drives improving the efficiency of effort, which, in turn, supports charging lower prices while still earning profits.

The transnational strategy targets the efficiency of global integration, the effectiveness of local responsiveness, and the systematic diffusion of innovations.

Chapter 12 The Strategy of International Business 331

champions interactive “global learning,” leveraging local insights developed in meeting “particularizing tendencies” to upgrade resources and improve capabilities and then diffusing them worldwide to respond to “universalizing tendencies.”108 Systematically diffusing local insights earned via adaptation in one locale to others enables the transna- tional strategy to optimize location economics and scale efficiencies.

The transnational strategy does not centralize authority in headquarters or decentralize it to local units. Instead, its advocates communication and collaboration between idea gen- erators and idea adopters, no matter where each resides. Implementing the transnational strategy requires a sophisticated value chain that simultaneously supports integration, re- sponsiveness, and learning. Managers configure value activities, ideally satisfying minimum efficiency standards, on a country-to-country basis given prevailing cultural, political, legal, and economic conditions. Location choices are neither biased toward concentration nor dispersal. Rather, they balance the universalizing tendencies that endorse global integration with the particularizing tendencies that push local responsiveness, effectively shifting the MNE toward a ‘glocal’ orientation.109 Successfully implementing the transnational strategy opens tremendous opportunities to optimize productivity, create value, and sustain competi- tiveness ‘glocally.’ Hence, for MNEs in the upper-right quadrant of the IR Grid, this strategy is obligatory. For those facing similar trends in technology, competition, and globalization, it’s crucial.

advantages Some see the transnational strategy, in contrast to the international, localiza- tion, or global strategy, better suited to optimally respond to the emerging requirements of the global business environment. Charging strategic planners to gain location economies and experience effects without sacrificing the flexibility to customize processes and products pushes for an innovative integration of vision, mission, resources, capabilities, and com- petencies. The transnational strategy recognizes the payoff of multidirectional knowledge exchange between units to develop this mix. Essentially, as we saw in the opening profile of Zara, strategic planning presumes that neither headquarters nor local subsidiaries know best, but collectively they develop ‘glocal’ innovations that help each reconcile the dual imperative. Validating the vitality of learning throughout the MNE’s global network helps managers make sense of optimizing headquarters’ resources and local subsidiaries’ capabili- ties given particularizing and universalizing tendencies.

limitations The transnational strategy is tough to direct, difficult to configure, and prone to shortfalls. Reconciling integration and responsiveness pressures, further complicated by the necessity to generate knowledge locally but diffuse it worldwide, can overwhelm the best-intentioned MNEs. Simultaneously developing integration and differentiation advan- tages requires converting resources and capabilities into competencies that support a broad cross-section of value activities. Developing a network mindset among employees, install- ing the requisite communication network, and navigating the ambiguity of multi-criteria decision makes strategic planning challenging. The complexity of the transnational strategy means the MNE may fall short of sufficiently integrating global activities and/or differentiat- ing local operations—essentially, getting caught in the dreaded middle zone where costs run too high and responsiveness runs too low.

The transnational strategy reconciles global integration and local responsiveness in ways that leverage the MNE’s core competency throughout worldwide operations.

The transnational strategy is difficult to implement in practice, given the challenges of complicated agendas, high costs, and cognitive limits.

Case The Multinational enterprise of the Future: Leading scenarios Evolving workflows, technology platforms, and market dy- namics intensify globalization trends. MNEs respond in kind, rethinking visions, clarifying missions, adjusting strategies, and reconfiguring value chains to compete in the brave new world.110 Forecasts of accelerating change due to digitiza- tion, frugal innovations, robotic cells, and activist transna- tional institutions, among others, spur MNEs to assess the best path to bundling resources, capabilities, and compe- tencies. Let’s take a look at some high-concept visions of the MNE of the future.

The Globally Integrated Enterprise The evolutionary perspective sees MNEs responding sys- tematically to the steadily unfolding imperatives of global- ization. As policies and practices progressively connect countries, MNEs similarly respond, progressively integrating their cross-national operations. Sam Palmisano, the past CEO of IBM, has a provocative take. Reflecting on IBM’s evolution, he contends that it has passed through three stra- tegic phases, each fitting the prevailing circumstances and collectively foreshadowing the MNE of the future.

First, there was the nineteenth-century “international model, whereby the company was headquartered both physically and mentally in its home country; it sold goods, when it was so inclined, through a scattering of overseas sales offices.”111 Headquarters focused on business activi- ties in its home country and configured international opera- tions with little input from overseas units. As such, it used an international strategy to engage a world composed of unevenly connected countries.

Phase two of the evolution ushered in the classic multi- national firm of the late twentieth century. Echoing the local- ization strategy, this phase saw HQ build smaller versions of itself abroad. Steadily, the expanding connection among countries, by supporting concentrated value chains geared toward exploiting location economics and scale economies, highlighted the inefficient economics of the “mini-me” op- tion.112 The cost of redundancy—each country essentially ran a stand-alone operation—grew unacceptable in the face of intensifying competition.

The third phase, the “globally integrated enterprise,” speaks to the dawn of globality in which “business flows in every direction. Companies have no centers. The idea of foreignness is foreign. Commerce swirls and market domi- nance shifts.”113 Competing with everyone from everywhere for everything requires putting investments, people, and work anywhere in the world “based on the right cost, the right skills and the right business environment [with] work flow[ing] to the places where it will be done . . . most efficient-

ly and to the highest quality.”114 Earlier models saw configu- ration and coordination barriers constrain knowledge flows, production opportunities, and organizational options. Now, like the Internet, the globally integrated enterprise designs its strategy, configures its activities, and coordinates its pro- cesses to connect everything, everywhere, 24/7.

The Metanational In the future, goes this scenario, world-class operational efficiency will no longer determine an MNE’s competitive advantage. Nor will an MNE build superior competitive- ness from unique features of its home country or, for that matter, from a set of national subsidiaries. Rather, victory will go to those who move from designing multinational operations to synthesizing metanational competencies. The metanational seeks unique ideas, activities, and in- sights that complement its existing operations as well as create new leverage points. It expands its mission from selling stuff worldwide to mining the treasure trove of ideas, resources, and capabilities that emerge anywhere and everywhere. Its managers scan the world, identifying and interpreting the untapped potential of the specialized knowledge that lays latent in unique market situations. Exploiting these opportunities positions managers to “build a new kind of competitive advantage by discover- ing, accessing, mobilizing, and leveraging knowledge from many locations around the world.”115

Metanationals, goes the theory, orient strategic planning to:

• Prospect for and access untapped technologies and unidentified consumer trends.

• Leverage globally the specialized knowledge scattered throughout local subsidiaries.

• Mobilize fragmented knowledge to generate innova- tions that produce, market, and deliver value on a global scale.

• Apply superior project management skills across teams to foster a strong collaborative culture and to engage a robust array of communications tools.116

MNEs like Shiseido, ARM, McDonald’s, STMicroelec- tronics, Acer, Procter & Gamble, SAP, Tata, and PolyGram are emergent metanationals, able to turn underused knowl- edge into global-dominant innovations. Consider the experi- ences of McDonald’s in its fast-growing market—Russia. It has more than 500 outlets and plans to add hundreds more, given that Russia is one of its fastest-growing and most- profitable markets.117 Successfully building its Russian op- erations required McDonald’s to rethink its value chain. In the West, it buys ingredients from third parties, rather than

Chapter 12 The Strategy of International Business 333

producing its own. Upon entering Russia, the lack of local suppliers required opening the McComplex, a full-scale pro- duction system outside of Moscow. Making virtually every ingredient from scratch at the McComplex required rethink- ing how to reconfigure activities to tap Russia’s unique market.118 Besides building better burgers, McDonald’s lev- eraged its Russian experiences worldwide to develop new competencies. In metanational style, McDonald’s began its worldwide pushback against coffee chains by tapping knowledge it developed with test runs in Russia. It opened McCafés there in 2003, fine-tuned its espresso-style drinks, and then successfully moved the concept to the United States in 2009 and, from there, to the world.119

Which sorts of MNEs aspire to be a metanational? Gen- erally, those facing pressures for global integration and lo- cal responsiveness yet seeing opportunities in prospecting, leveraging, and mobilizing knowledge that is fragmented across countries. Until recently, the metanational option attracted few companies. Communication and collabora- tion barriers complicated sharing knowledge. Moreover, significant national differences, although shrinking, posed problems. Today, environmental conditions, institutional agendas, and technology trends, by easing sensing, mobi- lizing, and operationalizing knowledge, steadily support the metanational’s emergence.120

The Micro-Multinational The future frontier for the MNE is set by the matter of size, say others.121 Historically, MNEs were colossi that straddled the globe. Today, the number of MNEs grows worldwide, but the average size is falling—many of the 80,000 plus firms that operate internationally employ fewer than 250 people.122 This anomaly signals the era of so-called “mi- cro-multinationals”: nimble, small firms that are born global, operating internationally from day one.123 Unlike their big- ger counterparts that expanded internationally by gradually entering new markets, micro-multinationals go global im- mediately. They go where they wish, typically following the circuit paths of the Internet, but always targeting markets with plentiful customers and innovative environments. The born-global does not see international markets as a refuge when sales slow at home. Rather, it begins with the belief that the domestic market is just one of the many opportuni- ties in the world.124

The micro-multinational’s distinctive break from the past follows from its global focus at start-up. Folks who found born-global firms often have a strong international orien- tation gained from living or studying abroad. Logitech, the Swiss-based maker of computer devices like mice, key- boards, and speakers, was founded by a Swiss and an Italian who met while studying at Stanford University in the United States. Soon after start-up, Logitech was selling its products worldwide and now does business in more than 100 countries.125 Often, too, we see a seasoned executive,

motivated by an entrepreneurial vision, leaving a large MNE and launching a firm that goes global from the get-go.126

The micro-multinational moves from theory to practice precisely because circumstances let it do so. The ongoing globalization of markets, marked by falling trade barriers, expanding demand for specialized products, and improving technologies, enables born-globals to implement their vi- sion cheaply and quickly. Micro-multinationals exploit these circumstances, building powerful platforms to develop and deliver innovations in niche markets that span the world.

The Glorecalizized MNE Advocates of regionalization endorse the awkward term “Glorecalization” as the next logical step of global strat- egy.127 Glorecalization, a portmanteau of Globalization- Regionalization-Localization, champions a global vision and customized local tactics through a value chain con- figured to exploit location economies within a regional market. The glorecalized MNE leverages its regional net- work to gain the necessary operational efficiencies without forsaking local flexibility. Various conditions support the glorecalized MNE. First and foremost, regional trade blocs (e.g., AU, ASEAN, CARICOM, EU, NAFTA, and TPP) create ample location effects in terms of institutional structure, regulatory framework, and market integration. The Euro- pean Union, for example, unites 28 countries and creates a common “home” for more than 500 million who share simi- lar outlooks, overlapping national interests, and conver- gent consumption preferences. Efficient flows of people, capital, information, products, and processes throughout the EU streamline how an MNE acquires resources, de- velops capabilities, and crafts competencies. Similarly, re- gionalizing production exploits location effects and scale economies, but without sacrificing the flexibility to adapt goods and services.

The Cybercorp The cybercorp, a form unimaginable a generation ago, is increasingly a reality today.128 The cybercorp does not or- ganize products, consumers, or markets to reflect or re- spect the physical geography of lines on a map. Instead, the connectivity network of the Internet, not national bor- ders, defines its operational boundaries. Facebook, for in- stance, exists physically in its California headquarters, but its workforce of about 13,000 run a company that serves more than 1.5 billion “customers” in more than 150 nations through a website interface translated into more than 100 languages.129

Cybercorps develop competencies that help them react in real time to changes in customers, markets, and environ- ments. They engage perspectives and strategies that bias value chains toward virtuality in order to link capabilities

334 part 5 Global Strategy, Structure, and Implementation

and competencies within dynamic networks. For instance, Reebok owns no plants, instead relying on contract man- ufacturers to make and distribute its products. Similarly, Nike, Apple, Cisco, and Qualcomm outsource production to manufacturers in low-cost labor locations in order to do what each does best: maximizing value creation through R&D and marketing. Though nominally independent, com- munications and collaboration systems integrate agents into the network, thereby creating virtual capabilities. Nike, for example, focuses on increasing value creation by leverag- ing its competencies in design and marketing, confident in manufacturers’ expertise to adjust product mixes as con- sumer preferences evolve.

The cybercorp builds on crowdsourcing, swarm intelli- gence, and artificial intelligence to tap the collective insight developed in self-organizing systems that are remotely ex- ecuting, global, always on, and endlessly configurable. It, in collaboration with partners, operates here, there, and every- where. Many of these agents were, just a decade earlier, far off the global grid. Now, innovations enact a techno-utopia that connects everyone to the “evolving nervous system of civilization.”130 The cybercorp, built to engage strategies that learn, evolve, and transform, moves business toward the emerging standards of the Singularity Principle.131

Make the Call Yes, the ideal MNE of the future is more speculation than stipulation. No matter the standard that ultimately emerges, we expect it will showcase the historic markers of compa- nies that are built to last: a down-to-earth, pragmatic, com- mitted-to-excellence framework run by bright people who articulate an insightful vision, practical mission, and clever strategy that change the game.132 Still, we watch, tracking the emergence of the contenders, waiting to see which form sets the standard.

Questions

12-3. You have a choice to work for a globally integrated enterprise,

a metanational, a glorecalized MNE, a micro- multinational,

or a cybercorp. Which would you choose? Why?

12-4. Looking out over the next decade, estimate the likely stan-

dards of how an MNE will create value. In your opinion,

which form of MNE is best designed for this scenario? Why?

12-5. The MNE of the future, in whatever form it takes, will face

pressures for global integration along with those clamoring

for local responsiveness. In your opinion, which form will

best reconcile that challenge?

MyManagementLab Go to mymanagmentlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

12-6 What environmental conditions, institutional agendas, and technology trends support the emergence of the cybercorp? Do the same apply to a metanational?

12-7 What sort of management skills and executive perspectives make someone an attractive candidate for a micro-multinational?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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The place to get top speed out of a horse is not the place where you can get top speed out of a canoe.

—African (Hausa) proverb

Objectives

After studying this chapter, you should be able to

13-1 elaborate on the significance of location in ib operations

13-2 illustrate why comparing countries through scanning is important and how it connects to final location choices

13-3 Discern major opportunity and risk variables and how to prioritize and relate them when deciding whether and where to expand abroad

13-4 summarize the sources and shortcomings of comparative country information

13-5 explain alternative considerations and means for companies to allocate resources among countries

13-6 Recognize why companies make noncompara- tive decisions when choosing where to oper- ate abroad

chapteR 13 country evaluation and selection

A Burger king restaurant in Tokyo, Japan.

▶

Case Burger King®

because of having entered markets too small to support the necessary infrastructure, such as slaughterhouse and beef-grinding facilities.

Over time, Burger King has taken a more systematic approach toward restaurant expansion. It still sees substantial U.S. growth op- portunities but considers it to be a more mature market than other countries. In seeking new places to enter, Burger King looks most fa- vorably at countries with large populations (especially young people), high consumption of beef, availability of capital to franchisees for growth, a safe pro-business environment, growth in shopping cen- ters, and availability of a potential franchisee with experience and resources. Recently its model has been to grant franchise rights by pairing a private equity firm with an experienced restaurant operator in a joint venture (JV). In some cases, Burger King has become the third party in the JV without committing capital to it.

Overall, Burger King has expanded abroad later than its primary rival, McDonald’s. On the one hand, later entry is a drawback in very small markets due to an inadequate number of suppliers, such as only one slaughterhouse whose owners may be unwilling to work with more than one customer. On the other hand, its later entry into larger markets allows Burger King to benefit from earlier entrants’ creation of product demand and a supply infrastructure. In Latin America and the Caribbean, McDonald’s and Burger King compete in almost all countries and territories, with Burger King currently lead- ing in the number of restaurants in about half of those markets.

Burger King’s Latin America and Caribbean group has many sparsely populated countries (e.g., the Cayman Islands, Aruba, and Saint Lucia) in which Burger King developed a presence long before

In 2016 Burger King Worldwide (referred to hereafter as Burger King) was the world’s largest flame-broiled fast-food hamburger chain. Figure 13.1 shows Burger King’s four geographic divisions in terms of the number of restaurants and amount of sales.1 The chapter’s opening photo shows a Burger King in Tokyo, Japan.

A Bit of History

Starting out as Insta-Burger King in 1954, the company grew to five restaurants in the next five years. In 1959, with its name shortened to Burger King, it began domestic franchising. Beginning in the early 1960s the company expanded internationally to the Bahamas and Puerto Rico. Then it entered Europe, Asia, and Latin America in the 1970s.

Since 1967, Burger King has at times been publicly owned, a divi- sion of other companies, a holding company owned by private equity firms, and a privately owned company. In fact, over a 20-year period it had seven different parents and corporate structures. The years of transformed ownership caused changes in its emphasis, and its inter- ests have sometimes been secondary to those of its parent company. Nevertheless, some of its international moves turned out to be highly successful, and a few did not. It entered and then retreated from opera- tions in such countries as Colombia, France, Israel, Japan, and Oman. (It has reentered some of these.) Much of Burger King’s early interna- tional forays came about either because someone in another country approached it or because a corporate manager was familiar with a particular country and thought it would offer opportunities. Its retreats have occurred because of not receiving adequate payments and

United States and Canada

52%

Percentage of restaurants Percentage of sales

United States and Canada

Europe, Middle East and Africa (EMEA)

Latin America and the Caribbean (LAC)

Asia Pacific (APAC)

EMEA 26%

LAC 12%

APAC 10%

United States and Canada 58%

EMEA 29%

LAC 8%

APAC 5%

United States and Canada

Europe, Middle East and Africa (EMEA)

Latin America and the Caribbean (LAC)

Asia Pacific (APAC)

Figure 13.1 regional emphasis of Burger King Based on data from 2015 Burger King 10K Report. The sales figures are for 2013, and the restaurant figures are for 2014.

Chapter 13 Country Evaluation and Selection 337

entering more abundantly populated countries such as China, Russia, and South Africa. The reason is largely due to its headquarters loca- tion in Miami, which is often called “the capital of Latin America.” Because so many people from that region go to or through Miami, the Burger King reputation spilled over there early on, which simplified gaining brand recognition and acceptance. Further, Miami’s nearness to Latin America and the Caribbean enhances the ability of Burger King’s executives and franchisees to visit each other.

reentering ColomBiA And frAnCe

Colombia Burger King entered Colombia in the early 1980s but departed because of Colombian royalty expatriation restrictions and prolonged economic and political turmoil. By the time Burger King reentered the country in 2008, the cities were safe for people to go out to eat, the peso was strong, families had disposable income to eat out, and all the major cities had large new shopping centers with food courts. Although in- comes were unevenly distributed, the richest 20 percent of the popula- tion (almost 9 million people) had a per capita expenditure in 2007 of over US$17,000. In addition, Burger King was able to sign franchise rights with two well-established and experienced companies.

france Burger King entered France in 1979, departed in 2001, and reen- tered in 2013. When entering, Quick (a Belgian fast-food operator) and McDonald’s were already well established there. Burger King’s British parent, Grand Metropolitan, also owned Wimpy, a chain of U.K. hamburger restaurants, and required Burger King to absorb the chain. This sapped resources needed for French expansion. When Burger King left the French market, it had grown to only 16 restau- rants there, whereas McDonald’s had about 450.

When reentering France, Burger King was determined to put in enough effort to compete. By 2015, it grew to 50 restaurants there, and it then acquired Quick, which had about 500 restaurants. Those in France will be re-branded as Burger King; whereas those in Belgium and Luxembourg will maintain the Quick brand.

tHe BriCs

The possibilities in the BRIC countries are too great to ignore. Burger King opened its first Brazilian and Chinese restaurants in 2004. While Burger King has had success in both these countries, it has been able to expand much faster in the former due largely to its recognition advantage in Brazil. A half million Brazilians fly into Florida each year, where Burger King’s restaurants abound. In addition, about 300,000 Brazilians live in South Florida, most of whom maintain contact with relatives and friends back home.

In China, Burger King encountered laws requiring it either to form a JV with a Chinese firm or own and operate two or more stores for at least a year before starting franchise operations. The company chose

the latter alternative, which delayed its start of franchising. After doing so, finding potential franchisees with sufficient financial and restaurant capabilities was difficult, particularly since the franchise concept was rather new to China. (Some of its competitors, mainly Yum! Brands and McDonald’s, made joint venture investments and expanded with owned stores.) In 2012 Burger King entered a three- partner JV to serve the Chinese market. One partner, the Carpesian Capital Group, is a global private equity company specializing in de- veloping country investments. The other is the Korduglu family from Turkey, which is Burger King’s largest non-U.S. franchisee.

In 2010 Burger King entered Russia, an attractive country not only because of its large population and growth potential, but also because of integration possibilities with operations in Eastern Europe. Indeed, Burger King entered Slovenia in 2011 and now depends on supplies from the Russian operation. In addition, concluding the essentiality of finding the right franchisee, Burger King’s managers spent over a year getting to know the eventual franchisee, who owns a chain of about 200 Russian coffee shops. Although the franchise has resulted in growth in Moscow and St. Petersburg, the franchise formed a JV with Russia’s VTB Capital in 2013 to gain resources needed to expand outside those cities.

In 2014 India became Burger King’s 100th operating country. It partnered with Everstone Capital, a private equity firm that also holds controlling interest in India’s largest restaurant group. India’s fast- food segment has recently been growing at 26 percent per annum. Because of the large number of vegetarians in India, Burger King has delegated much of the menu selection to its partner. At the same time, it has done extensive market research to develop a vegetarian menu to accompany its nonvegetarian one.

tHe future

Burger King’s recent growth in its U.S. and Canada region has lagged its growth elsewhere. To counter McDonald’s faster growth in breakfast sales, Burger King merged in 2014 with Tim Hortons, a Canadian coffee and doughnuts chain with about 4500 (almost all franchised) restaurants.

At the same time, Burger King is planning unprecedented expan- sion. The fact that some of its competitors have expanded abroad much more than Burger King may indicate that it has untapped international potential. However, Burger King’s management faces a number of questions regarding location priorities; such questions of location pri- orities dog managers in any company with international operations. ■

Questions

13-1. Discuss the risks that an international restaurant company

such as Burger King would have by operating abroad rath-

er than just domestically.

13-2. How has Burger King’s headquarters location influenced

its international expansion? Has this location strengthened

or weakened its global competitive position?

338 part 5 Global Strategy, Structure, and Implementation

tHe importAnCe of loCAtion The adage that “location, location, and location” are the three most important factors for business success rings true for IB. The world has a bit more than 200 countries, each offering distinct opportunities and risks. Thus some fit companies’ capabilities and strategies better than others. By comparing the external environment with a company’s objectives and capa- bilities, managers might ask: Where can we best leverage our existing competencies? And where can we best sustain, improve, or extend our competencies? Because companies have limited resources, they must be careful in choosing among countries when making the fol- lowing decisions:

1. The location of sales, production, and administrative and auxiliary services, such as R&D 2. The sequence for entering different countries 3. The portion of resources and efforts to allocate to each country where they operate

Committing human, technical, and financial resources to one locale may mean forgoing or delaying projects elsewhere. In actuality, a company may first set a strategy of domestic versus international emphasis, such as General Electric’s objective of making 60 percent of its sales internationally.2 Afterward, a company may sequence its entry by country or region. Once operating in multiple countries, it must allocate efforts among them. This chapter emphasizes the country decision process.3 Taking time to pick and emphasize the more out- standing locations affects firms’ ability to gain and sustain competitive advantage.4

The choice of country sales may or may not coincide with the choice of country to pro- duce. On the one hand, they may be the same, particularly if transport costs or government regulations require production in the countries where you sell. Many service industries, such as restaurants (like Burger King), construction, and retailing, must locate most production facilities near their foreign customers.

On the other hand, large-scale capital-intensive production technology favors producing in only a few countries and exporting to others, such as with automobiles and steel. Further, production locations are complex, such as sourcing raw materials and components from different countries and dividing operating functions among countries (e.g., headquarters in one, a call center in another, an R&D facility in still another, and so on).

Location flexibility is essential because conditions change. A company must respond to new opportunities and withdraw from less profitable ones. There is no one-size-fits-all theory for picking operating locations because product lines, competitive positions, re- sources, and strategies make each company unique.5 Moreover, hiring the right people to analyze country differences and implement company operations is critical. Highly skilled managers can sometimes compensate for location deficiencies, and poor managers can sometimes cause poor performance in the best locations. However, having skilled manage- ment in the most appropriate locations is the best possible combination. Figure 13.2 shows the major steps IB managers should take in making location decisions. The following discus- sion examines those steps in depth.

CompAring Countries tHrougH sCAnning Managers use scanning techniques to examine and compare countries on broad indicators of opportunities and risks.6

WHy is sCAnning importAnt? Scanning is like seeding widely and then weeding out; it is useful insofar as a company might otherwise consider too few or too many possibilities. However, comparison among countries is not always practical. We discuss later in the chapter when noncomparative deci- sions are appropriate.

Companies lack resources to take advantage of all international opportunities.

Companies need to

• determine the order of country entry,

• allocate resources among countries.

In choosing geographic sites, a company must decide

• where to sell, • where to produce.

Without scanning, a company may

• examine too many or too few possibilities.

Chapter 13 Country Evaluation and Selection 339

sCAnning Versus detAiled AnAlysis

step 1: scanning In scanning, managers examine many countries broadly—using in- formation that is readily available, inexpensive, and fairly comparable—to narrow detailed analysis and travel to only the most promising ones. They analyze publicly available informa- tion and communicate with experienced people on conditions that could significantly affect the success and fit for their business. Because of using fairly easy-to-find information, they may consider a large group of countries, such as all those within a global region.

Keep in mind, though, that information gathered at this point may be of four types:

1. Yes or no For a question like, “Does the country allow 100 percent ownership of foreign direct investments?” the answer is “yes” or “no.”

2. Direct statistics For a question such as, “What is the highest marginal tax rate on corpo- rate earnings?” direct information is available from tax schedules.

3. Indirect indicators For a question such as, “What are the potential sales for my product?” estimates must use indirect indicators, such as those based on per capita GDP and population size.

4. Qualitative assessment For a question akin to, “What will be the future political leaders’ philosophy about IB?” a qualitative assessment is necessary based on different opinions and indirect indicators.

Scanning answers questions through “yes” or “no,” direct statistics, indirect indicators, and qualitative assessment.

Choosing new locations

Scan for alternatives Choose and weight variables Collect and analyze data for variables Use tools to compare variables and narrow alternatives

OBJECTIVES

STRATEGY

• • • •

Making final decisions

Conduct detailed feasibility study for new locations Estimate expected outcome for reinvestments Make location and allocation decisions based on company’s financial decision-making tools

• •

•

Allocating among locations

Analyze e�ects of reinvestment versus harvesting in existing operating locations Appraise interdependence of locations on performance Examine needs for diversification versus concentration of foreign operations

•

• •

Overlaying Tactic: Choice of Countries Selection of operating forms

Organization and control mechanisms

Figure 13.2 The Location Decision Process Location, location, location: Committing resources to a foreign location may entail risky trade-offs—say, forgoing or abandoning projects elsewhere. The start of the decision-making process is essentially twofold: examining the external environments of proposed locations and comparing each of them with the company’s objectives and capabilities.

340 part 5 Global Strategy, Structure, and Implementation

step 2: detailed Analysis Once narrowing the number of countries, managers need to compare them in greater detail. Unless they are satisfied to outsource all their production and sales, they almost always need to go on location to collect and evaluate more specific information.

Let’s say that managers need to decide where best to emphasize sales. They will likely need to visit the shortlisted countries to observe the market and visit with distributors. Or let’s say managers need to decide where best to locate production. If outsourcing, they may want to inspect potential contractors’ facilities. If planning to own facilities themselves, they will need to collect such specific on-site information as availability and cost of land and supplies.

Intel’s manufacturing expansion into Latin America illustrates this process. Intel used scanning to limit visits to a few Latin American countries. The follow-up visits sought much more detailed information—even the availability of suitable housing, medical services, and food products for the personnel Intel would need to transfer. The visitors were also able to gain qualitative information, such as impressions of the welcome they might get from gov- ernment officials and business leaders.

The more time and money companies invest in examining an alternative, the more likely they are to accept it, regardless of its merits—a situation known as an escalation of com- mitment. A feasibility study should have clear-cut decision points, whereby managers can discontinue the commitment before they invest too much.

opportunity And risk VAriABles Managers should first identify country conditions they will not accept. Companies differ in what these conditions are, such as prohibitions of 100 percent foreign ownership or the common use of child labor in hazardous jobs. By eliminating countries with unacceptable conditions, they simplify the task of scanning. Companies then need to consider opportunity and risk indicators that could significantly affect their success or failure. Keep in mind that some conditions may be viewed by one company as an opportunity, but by another as a risk. We discuss a sample of these below.

opportunities: sAles expAnsion Sales expansion is probably companies’ most motivating factor for IB engagement because managers assume that more sales will lead to more profits.

Managers would like to have country sales figures for what they want to sell, but such information may be unavailable, especially if they want to introduce a new product. In such instances, they can estimate sales potential roughly by examining what has happened to sales for a similar or complementary product, such as projecting potential 3-D television sales based on past sales for HD units. They can also use economic and demographic data to project sales potential, the most common of which are a combination of income and population size.

Of course, you should examine indicators related directly to your products. If you’re try- ing to sell, say, luxury products, GDP per capita may tell you very little. Instead, you need to know how many people have income above a certain level. If you are trying to reach a youth market or an elderly market, total population figures will not help you as much figures on the number of people by age category. Moreover, although your product or service may not appeal to the average customer, you may seek out niches. Guatemalan-based Pollo Campero identified countries and then cities with large Central American populations, which led it to enter the United States by going first to Los Angeles.7

examining economic and demographic Variables Some primary considerations when examining economic and demographic variables are listed below:

• Obsolescence and leapfrogging of products. Demand estimation in one country based on occurrence in others, should take into account that emerging economy consumers do

On-site visits follow scanning and are part of the final location decision process.

Companies may simplify scanning research by first eliminating countries with conditions unacceptable to them.

Expectation of a large market and sales growth are probably a potential location’s major attractions.

Companies must consider variables other than income and population when estimating potential demand for their products in different countries.

Chapter 13 Country Evaluation and Selection 341

not necessarily follow the same patterns as those in higher-income countries. Chinese consumers have largely leapfrogged landline telephones by going from phoneless to cell phones.8

• Demand for necessities versus discretionary products. People buy necessities, such as food, before making discretionary purchases, thus the cost of necessities influences the de- mand for optional ones. For example, expenditures on food in Japan are high because food is expensive and work habits promote eating out, thus food purchases displace some discretionary purchases.

• Substitution. Consumers may substitute certain products or services differently in one country than in other countries. In India, increased gasoline prices relative to diesel prices forced companies such as Suzuki, Toyota, and General Motors to alter their mix of vehicle production to include a higher portion of diesel-powered cars.9 In Venezuela, an economic downturn caused a huge switch from traditionally popular expensive Scotch whisky to rum, which was less expensive.10

• Income inequality. Where income inequality is high, the per capita GDP figures are less meaningful. Many people have little to spend, while many others have substantial spend- ing money. For example, high income inequality has resulted in a very small middle class in most sub-Saharan African countries.11

• Cultural factors and taste. Although cultural factors affect overall country sales for certain products, such as Hindu restrictions on meat in India, one needs to examine cultural sub- segments. There is a large market for Indian meat sales among people who are neither Hindu nor vegetarian.

• Existence of trading blocs. A country’s small population and GDP obscure its potential if it is in a regional trading bloc.12 For instance Uruguay has a small domestic market, but its production has duty-free access to other countries in Mercosur unless countries leave the bloc.

Although managers cannot project potential demand perfectly, they can make workable estimates that help them narrow detailed studies to a reasonable number.

opportunities: resourCe ACquisition When undertaking IB to secure resources (e.g., labor, raw materials, knowledge), companies are limited to those locales that likely have what they want, such as securing petroleum only where there are prospective reserves. Even among these countries, some offer better opportunities than others (e.g., petroleum cost variations from extraction, transportation, and taxes). When considering cost differences, a particular resource may be overriding for specific industries or companies, such as sugar for candy companies or low-cost water power for aluminum companies.

Cost Considerations A company’s total cost is made up of numerous sub-costs, many of which are industry- or company-specific. Nevertheless, several of the factors affecting these sub-costs—labor, infrastructure, external connections, and government incentives—apply to a large cross-section of companies.

Labor Although capital intensity, especially through the use of robotics, is growing in most industries, labor cost remains important for most companies. Scanning allows companies to examine such factors as labor market size, minimum and ongoing wages, required and cus- tomary fringe benefits, education levels, and unemployment rates. These help in comparing labor cost, skills, and availability. Analyses should also include likely changes, such as cost increases in China that have been making such countries as Myanmar and Mexico more attractive.13

Neither labor nor companies’ needs are homogeneous. Take call centers. U.S. and French companies have different language needs (English and French respectively), which have led

ConCept CHeCk

In Chapter 8 (page 219), we explain that when trade barriers come down within a regional bloc, the size of the market available to small member nations typically increases quite dramatically.

Costs—especially labor costs—are an important factor in companies’ production- location decisions.

342 part 5 Global Strategy, Structure, and Implementation

many U.S. companies to the Philippines and French companies to Senegal. Or, take the desire to acquire R&D personnel as opposed to inexpensive manufacturing labor. Figures on the number of science and engineering graduates have given a rough idea of where needed skills are available and have influenced companies to set up R&D facilities in China, Hungary, India, and Israel.14

Entering a country with a shortage of required labor skills will require MNEs to train, redesign production, or add supervision—all of which are expensive. Keep in mind also that a country’s wage rates (and education) may differ by sector and region and may change be- cause of emigration and health conditions.

Note also that when companies move into emerging economies because of low labor- wages, their advantages may be short-lived for one or more of three reasons:

• Competitors follow leaders into low-wage areas. • There is little first-mover advantage for this type of production migration. • The costs may rise quickly as a result of pressure on wage or exchange rates.

Infrastructure Poor internal infrastructure escalates costs. Consider Nigeria where em- ployees spend extra hours commuting for work on congested roads, which decreases their productivity. Many companies, such as Cadbury and Nestlé, use their own costly power generators because of erratic publicly provided power so as to prevent assembly line stop- pages and spoilage of food products. Because phone reception is often unreliable, they must send people out to visit customers and suppliers. Delivery of goods must again face the congestion on inferior roads.15 The photo below shows traffic on a Nigerian highway.

External Connections IB requires diverse levels of cross-national integration, all of which incur time and costs. At a minimum, headquarters personnel visit foreign locations to support control efforts. Further, companies need a smooth flow of shipments as they import and ex- port among their facilities in different countries. Because distance roughly correlates with time and cost, a geographically isolated country like New Zealand does not fit as easily into a com- pany’s global integration strategy as one located near the headquarters or various suppliers.16 Relatedly, countries with few trade restrictions and efficient customs offer advantages of reduced tariff costs and shorter clearance times.17

ConCept CHeCk

We show in Chapter 6 that, in applying factor proportions theory to locate production, a company needs to consider that factors of production are not homogeneous. We also show (page 178) that new technologies can change optimal production locations.

Infrastructure problems add to operating costs.

The need to integrate operations among countries influences location decisions.

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A congested highway in Nigeria.

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Chapter 13 Country Evaluation and Selection 343

Governmental Incentives and Disincentives Governments promote inward foreign in- vestment to create jobs, enhance competitiveness, and improve trade balances. They do so through ads, investment missions, and foreign consular activities. In addition, many provide incentives that cut investors’ costs, such as lower taxes, employee training, loan guarantees, low-interest loans, exemption of import duties, and subsidized energy and transportation. For example, the European Structural Funds program has helped finance projects for such companies as Coca-Cola, Fiat, and GlaxoSmithKline.18 However, incentives and entry con- ditions often depend on company–government negotiations (i.e., how much each needs and offers the other). When a company wants limited resources, such as prime areas for build- ing beach resorts, governments are in a strong bargaining position when ceding rights to a foreign firm.19 When companies have hard-to-duplicate assets, such as unique technology, access to foreign markets, and well-known global brands, they are in a strong position.

Companies prefer operating in countries where red tape and corruption are minimal and where legal transparency and law enforcement are high.20 In contrast, when manag- ers must spend excessive time to satisfy government agencies on taxes, labor conditions, environmental compliance, and other matters because of uncertainty about the legal conse- quences of their actions, they take time away from their primary responsibility of overseeing production and sales.21

Poor protection of intellectual property rights is a double-edged sword. On the one hand, international companies might relinquish technology to competitors where protection is poor. On the other hand, these locations may enable international companies to more easily gain access to competitors’ technologies.22

risks Company decisions should weigh opportunity against risk. For example, a company may forgo the country with the highest sales potential or the cheapest assets because decision- makers perceive that risks are too high. In this section we examine four types of risks: politi- cal, foreign exchange, natural disaster, and competitive.

factors to Consider in Analyzing risk Keep in mind several factors as we discuss specific types of risk:

1. Companies and their managers differ in their perceptions of what is risky, how tolerant they are of taking risk, the returns they expect, and the portion of their assets they are willing to put at risk.23

2. One company’s risk may be another’s opportunity. For example, companies offering security solutions (e.g., alarm systems, guard services, insurance, and armaments) may find their biggest sales opportunities where other companies find only risks. Companies offer- ing risk-assessment services do better when the perception of risk increases.24

3. Companies may reduce their risks by means other than avoiding locations, such as by insur- ing. But all these options incur costs.

4. There are trade-offs among risks. Avoiding a country where, say, political risk is high may leave a company more vulnerable to competitive risk if another company earns good profits there.

5. Risks may occur for suppliers and within suppliers’ supply chains, thus companies need to examine the complex external dependencies and vulnerabilities of its suppliers.25

political risk Changes in political leaders’ opinions and policies, civil disorder, and ani- mosity between the host and other countries, particularly the firm’s home country, may lead to a company’s loss of or damage to property, disruption of operations, and adjustment to changes in operating rules. For example, Unilever encountered foreign executives’ refusal to work in Pakistan because of security concerns; Chiquita Brands had to pay Colombian revo- lutionaries to protect its employees there; Owens-Illinois’s investments were nationalized

Government practices may increase or decrease companies’ costs.

ConCept CHeCk

In Chapter 3 (pages 185-186), we detail country differences in red tape (i.e., the time and steps necessary to start-up, operate, and close down businesses).

Estimation of risk varies because of different perceptions, company situations, product lines, and operating forms.

ConCept CHeCk

Recall from Chapter 3 (pages 74–75) that political risk is the possibility that political decisions, events, or conditions will reduce investors’ value or force them to accept lower- than-projected profits.

344 part 5 Global Strategy, Structure, and Implementation

payments, such as for dividends, unexpected contingencies (such as stockpiling materials before a threatened strike), and shifting of funds to possibly more profitable opportunities.28

A greater facility to access funds is affected by active capital markets and an absence of governmental exchange controls. An active capital market, particularly a stock market, helps a company sell its assets, especially if it wishes to sell a portion of ownership on a local ex- change or dispose of its operations. An absence of exchange controls enables companies to convert their local currencies. Thus, it’s not surprising that companies prefer operations in countries with strong and convertible currencies.

natural disaster risk Adverse “mother nature” catastrophes and widespread debilitating diseases have existed throughout history, but their relationship to choosing optimal IB loca- tions has emerged only recently as comparative data have become more obtainable.

“Mother Nature” Catastrophes Each year, hundreds of millions of people are exposed to risks from earthquakes, cyclones, flooding, drought, volcanic eruptions, rising ocean lev- els, mudslides, and tornados. These disasters upset markets, infrastructure, and production while damaging companies’ property, injuring their personnel, and increasing their insur- ance costs. They also play havoc with global supplies; the Japanese earthquake-induced tsunami in 2011 disrupted the world auto industry’s production by creating auto parts shortages.29

These events are spread unevenly. Parts of Asia are heavily exposed to earthquakes; some African countries are most vulnerable to drought. However, exposure must be examined alongside countries’ abilities to cope. Although only 11 percent of people exposed to such disasters are in the world’s poorest nations, those nations account for 55 percent of the deaths because so much of their population live in poor housing and lack adequate medical assistance. Likewise, their rural-to-urban migration is largely to dangerous mountainsides, ravines, and low-elevation areas ill-equipped to deal with earthquakes, mudslides, and cy- clones. Map 13.1 shows the most and least vulnerable countries, taking into account both their potential exposure and their coping abilities.

Debilitating Diseases The World Health Organization has developed global atlases of infectious diseases,30 many of which occur where medical facilities are weakest because of the diseases’ association with poverty. They are also associated with catastrophic events, such as cholera and malaria outbreaks after flooding, and tend to follow geographic patterns. For example, malaria kills about 2 million people a year, mainly in Africa.

The incapacitating effects of disease have an impact on several facets of business op- erations. For example, during the West African Ebola outbreak, the financial performance of many Sierra Leone firms declined in tandem with economic deterioration from the reduced workforce. In turn, international firms with Sierra Leone clients, such as KPMG, saw weakened sales.31 During the Zika crisis in Latin America and the Caribbean, many companies, such as Kimberly-Clark, set up costly education programs for employees in affected areas to educate them regarding how to protect against the virus.32 At the same time, companies faced new ethical and legal decisions, such as whether to advise employ- ees about dangers of pregnancies. Further, because of both Ebola and Zika, companies decreased business travel to distressed areas, thus hindering their buying programs and oversight of subsidiaries there.33

Competitive risk We now examine four factors affecting companies’ competitive posi- tions through location decisions: compatibility for companies’ operations, diversification of loca- tions, following competitors or customers, and heading off competitors.

Compatibility for Companies’ Operations Because companies encounter less familiar environments abroad than at home, their operating risks are normally higher abroad. Thus, managers initially prefer to operate where they perceive conditions to be more similar to their home country—provided, of course, that the location also offers sufficient opportunities.34 In

Companies may accept a lower return in order to move their financial resources more easily.

ConCept CHeCk

On page 269 of Chapter 10, we review the methods countries use to control currency con- vertibility in order to conserve scarce foreign exchange.

Natural disasters and debilitating diseases upset operations and are spread unevenly around the world.

Companies are highly attracted to countries that

• share the same language, • have institutions similar

to those in their home countries,

• are located nearby.

in Venezuela; Marriott’s Indonesian hotel was bombed; and Coca-Cola’s Angolan services required police to protect its trucks and telephone services.

Managers use three approaches to predict political risk: analyzing past patterns, evaluating opinions, and examining potentially risky social and economic conditions.

Analyzing Past Patterns Predicting political risk based on past patterns is problematic be- cause situations may change. Moreover, a country’s overall political situation masks differences within countries and for different firms. For example, unrest may be limited geographically, such as Slovenia’s avoidance of damage during Yugoslavia’s civil war. Nationalizations have generally been highly selective, primarily affecting only operations with a visibly widespread effect on the country because of their size or monopoly position. Further, state-owned MNEs from countries with strong ties to the host country appear to be less subject to expropriation risk.26

Property damage or asset takeover does not necessarily cause investors a full loss. First, insurance may cover damage. Second, most nationalizations have begun with formal decla- rations of intent and have followed with legal processes to determine the foreign investor’s compensation, such as the settlement between Venezuela and Holcim.27 (Past settlements serve as indicators of likely compensation.) In addition to the settlement value, there may be side agreements that affect the adequacy (or not) of compensation. For example, the former investor may continue to manage an operation for a fee and receive output at a favorable price.

Evaluating Opinions Because influential people may sway future political events, managers should evaluate statements by political spearheads to determine their philosophies on private business, foreign business relations, means of effecting economic changes, and feelings toward given foreign countries. They should also access polls showing different leaders’ likelihood of gaining political office. Opinions from a cross-section of embassy officials, foreign and lo- cal businesspeople, journalists, academicians, middle-level local government authorities, and labor leaders often reveal their attitudes, which often reflect current and future political condi- tions. These opinions may be gathered through publications and conversations or, if the firm is already operating within a country, through reports from its managers working therein.

Examining Social and Economic Conditions Unrest may occur if population segments have unmet social and economic aspirations. Frustrated groups may disrupt business by calling general strikes, destroying property and supply lines, and causing the downfall of government leaders. And political leaders sometimes harness support by blaming problems on foreigners and foreign companies, which could lead to boycotts, property damage, expro- priation, or changes in operating rules. Thus, the examination of social and economic condi- tions in relation to aspirations helps companies foresee deteriorating political situations.

foreign-exchange risk Let’s examine two types of risk: exchange-rate changes and im- mobility of funds. In both, companies should consider current situations along with condi- tions that can lead to changes.

Exchange-Rate Changes The change in foreign currency value is a two-edged sword, depending on whether you are going abroad to seek sales or resources. Let’s say a U.S. company exports to India; deterioration in the Indian rupee’s value makes the exports less competitive because it takes more rupees to buy them. If it produces within India to serve the Indian market, its competitiveness within India will likely change insignificantly, but its rupee profits will buy fewer U.S. dollars to bring back to the United States. If, however, it is seeking resources from India, such as Indian personnel to staff a call center, a fall in the ru- pee value lowers the dollar cost.

Immobility of Funds When a company exports to or invests in a foreign country, it prefers international mobility of its sales receipts, earnings, and capital there. Without the mobility, many firms either forgo operations or expect a higher rate of return there than elsewhere. Simply, their liquidity preference results from their needs or desires to make near-term

To predict political risk, companies can

• examine views of government decision-makers,

• get a cross-section of opinions,

• use expert analysts, • examine unsatisfactory

social and economic conditions.

ConCept CHeCk

In Chapter 10 (page 266), we discuss some of the causes of exchange-rate changes and explain methods of forecasting exchange-rate movements.

Chapter 13 Country Evaluation and Selection 345

payments, such as for dividends, unexpected contingencies (such as stockpiling materials before a threatened strike), and shifting of funds to possibly more profitable opportunities.28

Companies may accept a lower return in order to move their financial resources more easily.

ConCept CHeCk

On page 269 of Chapter 10, we review the methods countries use to control currency con- vertibility in order to conserve scarce foreign exchange.

Natural disasters and debilitating diseases upset operations and are spread unevenly around the world.

Companies are highly attracted to countries that

• share the same language, • have institutions similar

to those in their home countries,

• are located nearby.

346 part 5 Global Strategy, Structure, and Implementation

fact, MNEs have a lower survival rate than local companies for many years after they begin operations, a situation known as the liability of foreignness.35

This perception of similarity helps explain why more U.S. companies put earlier and greater emphasis on Canada and the United Kingdom than is indicated by the opportunity and risk variables discussed so far. In short, managers feel more comfortable doing business where the per capita GDP is comparable and where there is a similar language, culture, and legal system.36 Following early entries, companies also find usefulness in creating an expan- sion pattern that allows a portfolio of countries to work interdependently.37

Similarity also occurs among adjacent nations because of the ease of travel and com- munications among them. For example, marketing programs in one country often result in product awareness elsewhere, particularly in an adjacent country, an occurrence known as a spillover effect. For example, U.S. television ads regularly reach Canadians, making it easier for U.S. firms to do business there.

Positive historical home and host countries’ ties also help explain companies’ loca- tion preferences because companies perceive lower risk therein.38 A company may also reduce risk by choosing countries where it can employ products, plant sizes, and practices familiar to its managers and which are crucial for its competitive advantage. For instance, Blockbuster failed in Germany partially because of laws preventing store-openings in evenings and on Sundays and holidays—popular times for last-minute impulse video rentals.39

Diversification of Locations Operating in economically diverse countries whose business cycles are not highly interrelated may enable companies to smooth their sales and profits,

ConCept CHeCk

In Chapter 2 (page 46), we ob- serve that a company usually expects fewer differences— and must make fewer adjust- ments— when moving to culturally similar countries. In Chapter 6 (pages 167–168), we explain that country similar- ity helps support patterns of trading partners.

ConCept CHeCk

Recall from Chapter 6 (page 168) that a positive his- torical relationship, especially between a former colonizer with its former colonies, helps explain trade patterns.

Highest Risk

Lowest Risk

Other Countries

Vanuatu Fiji

Kiribati Solomon Islands

Papua New Guinea

Philippines Vietnam

Japan

Brunei Darussalam

Singapore

Timor-Leste

Cambodia

Mauritius

Oman

United Arab Emirates

Bahrain Qatar

Egypt

Saudi Arabia

Seychelles

Luxembourg

Estonia

Finland Sweden

NorwayIceland

Switzerland

Malta Israel

Bangladesh

Guatemala Costa Rica Guinea-Bissau

Grenada

Barbados Nicaragua

Jamaica

El Salvador

Chile

Tonga

MaP 13.1 The 20 Countries at Highest and Lowest risk from Natural Disasters The calculations are based on a combination of exposure (number of people exposed or threatened by earthquakes, storms, floods, droughts, and sea level rise), susceptibility (infrastructure, housing conditions, nutrition, poverty and dependencies, and economic capacity and distribution), and coping and adaptive capacities. Source: Based on data from United Nations University Institute for Environmental and Human Society, World Risk Report 2013, 46–67.

Chapter 13 Country Evaluation and Selection 347

which, in turn, is an advantage in raising funds.40 They may further guard against the ef- fects of currency value changes by locating in countries whose exchange rates are not closely correlated with each other.41 These diversifications are in many ways opposite to what we just discussed about advantages of operating in countries similar to the home country. Thus management must weigh the importance of one type of risk reduction versus the other.

Given the growth in product complexity, technology content, and companies’ product spe- cialization, there is a need to tap knowledge emanating from multiple companies. At the same time, such knowledge may be country-specific because of long-term country dominance in some industries. Thus, there is a need to tap knowledge in different countries. Although knowledge flows internationally and from one organization to another, MNEs enhance their speed of access to it by having foreign subsidiaries that serve as information access points in source countries.42

Following Competitors or Customers Managers may purposely crowd a market to pre- vent competitors from gaining advantages there that they can use to improve their positions elsewhere—a situation known as oligopolistic reaction.43 In other words, a company’s location decision is made on the basis of a competitor’s action rather than on location-based characteristics such as the cost of labor or market size and growth. It looks at performance relative to that of competitors rather than on its absolute performance.

At the same time, companies may gain absolute performance advantages by locating where competitors are. First, they may follow competitors that have performed the costly task of evaluating locations and building market acceptance for a particular type of product, thus getting a so-called free ride. Second, clusters of competitors (known as agglomeration) attract multiple suppliers, personnel with specialized skills, and buyers who want to com- pare a number of product and service options in a single trip. In agglomeration, a company also gains better access to information about new developments because it has frequent contact with its competitors’ personnel, customers, and suppliers.44 The photo below shows a portion of the diamond district in Antwerp, Belgium, where numerous diamond cutters, wholesalers, and retailers locate in close proximity to each other.

Agglomeration by nationality occurs when firms from the same home country, regard- less of industry, cluster in a location. The cluster provides expatriate employees with a

In terms of location strategies, some options are to go

• first to a few versus many foreign countries,

• to similar versus dissimilar countries,

• to places to prevent competitors from gaining advantages,

• into markets that competitors have not entered versus where there are clusters of competitors.

ConCept CHeCk

In Chapter 6 (page 167), we explain how countries’ tradi- tional specialization has led to long-term production advan- tages over other countries.

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Part of the diamond business agglomeration in Antwerp, Belgium.

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348 part 5 Global Strategy, Structure, and Implementation

sales potential is given more weight than infrastructure as an opportunity indicator and political is given more weight than competitive as a risk indicator, different companies will choose indicators and weight them differently. Table 13.1’s description shows how this exer- cise helps managers choose countries for a more detailed analysis.

matrices To more clearly show the opportunity/risk relationship, managers can plot values on a matrix such as the one shown as Figure 13.3. The plotting of this type matrix also allows a company to make a more precise distinction in weighting and comparing variables.

But how can managers plot values on such a matrix? As in the case of grids, they must determine unacceptable factors so as to eliminate countries from consideration and choose indicators for their companies’ risk and opportunity. Then, they weight them to reflect their importance. For instance, using the same risk factors as we used for the grid explanation, they might give 35 percent (0.35) of the weight to political risk, 30 percent (0.30) to foreign- exchange risk, 20 percent (0.2) to natural disaster risk, and 15 percent (0.15) to competitive risk, for a total allocation of 100 percent. They would then rate each country on a scale, such as from 1 to 10 for each variable, with 10 indicating the best score (note that more than one country may have the same score), and multiply each variable by the weight they allocate to it. If they rate Country A as 8 on the political risk variable, they would multiply 8 by 0.35 (the weight they assign to expropriation) for a score of 2.8. They would then sum all of Country A’s risk-variable scores to place it on the risk axis, and similarly plot the location of Country A on the opportunity axis.

But how might managers come up with a score of 8 for a country’s political risk? They would likely divide the maximum score of 10 into subcategories, such as expropriation, civil unrest, relationship with the company’s home government, and likelihood of negative regu- latory changes. They might even weight these subcategories before totaling them to secure the score for political risk. They would do similarly for each of their variables.

Grids are tools that

• may depict acceptable or unacceptable country conditions,

• rank countries by important variables.

With an opportunity–risk matrix, a company can

• decide on factors to consider and compare them.

more familiar environment to live and work. However, this gathering may shield MNEs from the interactions with competitors from elsewhere, thus delaying their ability to innovate and adapt.45

Following customers into a foreign market may secure sales with them and help se- cure relationships in their home market. For example, Bridgestone Tires followed one of its Japanese customers, Toyota, into the United States. First, its track record with Toyota gave it an advantage over other tire companies in the U.S. market. Second, if another tire manufac- turer were to develop a strong U.S. relationship with Toyota, it might use this to undermine Bridgestone’s sales to Toyota in Japan.

Heading Off or Avoiding Competition Companies may seek competitive advantage by (1) being first into a foreign country, (2) avoiding country entry where competition is strong, and (3) moving quickly by whatever operating mode into as many markets as possible. We now discuss each of these.

First, being first into a country enables a firm to more easily gain the best partners, best locations, and best suppliers—a strategy known as a first-mover advantage. This strategy may also support attaining strong relations with the government, such as Volkswagen did in China and Lockheed in Russia.46

Second, a company may try to avoid significant competition, especially if competitors are much larger. PriceSmart, a U.S.-based discount operator, has all its warehouse stores outside the United States and has succeeded by targeting locations in Central America, the Caribbean, and Asia that seemed too small to attract early entry of competitors like Walmart, Carrefour, and Tesco.47 However, its Central American success has drawn Walmart into that market.

Third, moving as quickly as possible by whatever operating mode into many markets is advantageous within an industry with very rapidly changing technology. In other words, waiting to enter a country increases the risk of competitors’ superseding one’s technol- ogy and securing markets with it. However, as we discuss later in the section, “Geographic Diversification Versus Concentration,” there are other considerations for entering markets quickly or slowly.

AnAlyzing And relAting tHe opportunity

And risk VAriABles After companies have completed the data collection for their scanning process, they must scrutinize that data to prioritize among countries. Using a team of people from different functions—marketing, finance, etc.—will more likely uncover the best fits with companies’ resources and objectives. Dividing data collection based on team-members’ functional exper- tise (e.g., having the finance member examine all the countries’ foreign exchange situations, having the accounting member examine tax rates, etc.) allows for more uniform analysis of data across the spectrum of countries. (If responsibility is divided, instead, by having each member examine a subsection of countries in their entirety, there is a risk that optimistic members will rate their countries more favorably than pessimistic members, thus diminish- ing the equivalence of the assignment.)

Obviously, the team will consider some conditions as more important than others, say that political risk is more important than natural disaster risk. Thus some variables need to be weighted more heavily than others. Two common tools to help at this stage are grids and matrices. We now illustrate each of these with abbreviated and simple examples.

grids Table 13.1 is a simplified example of a grid with information placed into three categories: (1) acceptable/unacceptable conditions, (2) opportunity indicators, and (3) risk indicators. Note in this example that country I can be immediately eliminated because the company will go only where it can take 100 percent ownership. Although, in this example,

Teams comprising people from different functional areas are useful in choosing and rating indicators of countries’ opportunity and risk.

Chapter 13 Country Evaluation and Selection 349

Grids are tools that

• may depict acceptable or unacceptable country conditions,

• rank countries by important variables.

With an opportunity–risk matrix, a company can

• decide on factors to consider and compare them.

tABle 13.1 simplified Country Comparison grid

This table is merely an example. In reality, a company chooses the variables and countries to consider (usually many more than this table demonstrates) and weights some variables as more important than others. Here managers eliminate Country I because the company will go only where 100 percent foreign ownership is allowed. Country II is the most attractive because it’s regarded as having high opportunity and low risk. (With a larger number of scanned countries, several should end up with these characteris- tics and become the ones for detailed analysis.) Country III offers low opportunity and risk, and Country IV has high opportunity and risk. (One of these may be chosen for further analysis, depending on the company’s tolerance for risk.) Country V is eliminated because of having low opportunity and high risk.

Country Variable Weight I II III IV V 1. Acceptable (A), Unacceptable (U)

a. Allows 100% foreign ownership – U A A A A 2. Opportunity

a. Sales potential 0–5 – 4 3 3 3 b. Labor conditions 0–3 – 3 1 2 2 c. Infrastructure 0–2 – 2 1 2 2 d. Ease of external integration 0–4 – 3 2 4 1 e. Possibility of governmental incentives 0–3 – 2 1 3 1 f. Tax rate 0–2 – 2 1 2 0 Total – – 16 9 16 9

3. Risk (lower number = preferred rating) a. Political 0–4 – 2 1 3 2 b. Foreign exchange 0–3 – 1 0 3 3 c. Natural disaster 0–4 – 0 0 4 3 d. Competitive 0–2 – 0 1 2 2 Total – – 3 2 12 10

350 part 5 Global Strategy, Structure, and Implementation

programs (e.g., they may give priority, for example, to spending on health and literacy programs rather than on measuring health and literacy rates).

2. Governments must depend on estimates and revisions. Although both are important, there is a trade-off between accuracy and timeliness of data. Estimates, for example of countries’ GDP growth, are initially made without the full range of sample returns so as to honor timeliness. But then revisions (sometimes several) are necessary to improve accuracy as more sample information is available. For example, the United States revised its GDP downward by an amount about the size of Sri Lanka’s total output.48

3. Governments may omit or purposely publish misleading information. Government research- ers sometimes publish false or purposely deceptive information designed to mislead their superiors, the country’s rank and file, or companies and institutions abroad. For instance, Venezuela suspended release of data on mosquito-borne diseases, GDP, and balance of payments to prevent the public from receiving bad news.49

4. Respondents may give false information to data collectors. Mistrust of data usage may lead respondents to answer questions falsely, particularly if questions probe financial details or anything else that respondents either consider private or to be used by government authorities against them.

5. Official data may include only legal and reported market activities. Nationally reported in- come figures seldom include illegal income from such activities as the drug trade or cash transactions to avoid tax payments. EU countries have begun estimating these within their GDPs, but they admit that the math can be fuzzy.50

6. Questionable methodology may be used. Inaccuracies may occur because of methods use to collect and analyze information. For instance, by using two different methods (both generally acceptable) to estimate Chinese consumption in 2012, there was a difference of more than the entire GDP of Australia.51

noncomparability Countries do not necessarily publish reports for the same length of time periods or at the same time as each other. So a company must extrapolate in order to estimate how countries compare. Countries also differ in accounting rules and how they de- fine items, such as family income, literacy, and FDI. Activities taking place outside the market economy, such as within the home, do not show up in income figures. Because people in developing countries are more prone to produce for their own consumption (growing veg- etables, preparing meals at home, sewing clothes, cutting hair, and so on), developing coun- tries’ official income figures tend to understate economic levels.

Further, exchange rates must be used to convert countries’ financial data to some com- mon currency, usually U.S. dollars. Although 10 percent appreciation of the Japanese yen in relation to the U.S. dollar results in a 10 percent increase in the dollar value of Japanese per capita GDP, it does not mean the Japanese are suddenly 10 percent richer. Because Japanese use about 85 percent of their income to make purchases in yen within Japan, they have little additional purchasing power for 85 percent of what they buy.

externAl sourCes of informAtion Companies need information for making good location decisions. Chances are, at least for scanning purposes, the Internet will be the source for most of the information. Some of the information there is free, and some requires payment. Apart from the Internet, the most costly sources are marketing research and consulting companies, but the advantage is that they can target more closely what companies want. Some of the major Internet sources are prepared by service companies (e.g., banks, transportation agencies, accounting firms), gov- ernment agencies (e.g., the U.S. Department of Commerce, CIA), international organizations (e.g., the UN, the WTO, the IMF, the OECD, and the EU), and trade associations. In any case, it is wise to know how sources generate their information and, in the case of those offering advice (e.g., a risk-assessment company), what their past success rates have been.

Information inaccuracies result from

• difficulty in collecting and analyzing data,

• purposefully misleading data,

• exclusion of nonmarket and illegal activity.

ConCept CHeCk

In Chapter 2 (pages 31–32), we discussed that false responses hinder accuracy when compar- ing cultures.

Problems in information comparability arise from

• differences in definitions and base years,

• distortions in currency values.

Information sources differ by cost and detail.

Once managers plot each country’s values on the matrix, they may sometimes have to choose between a country with high risk and high opportunity and another with low risk and low opportunity, thus making a decision based on their tolerance for risk. Further, although A, B, C, and D are less appealing than E and F in Figure 13.3 the company may nevertheless find opportunities in A, B, C, and D—perhaps licensing or shared-ownership arrangements—without necessarily making a large commitment.

A key element of this kind of matrix, and one that managers do not always include in practice, is the projection of where countries will be in the future, or at least the direction in which they are expected to move. Such a projection is obviously useful, but the farther one forecasts into the future, the less certain the projection.

sourCes And sHortComings of CompArAtiVe Country informAtion Companies undertake business research to reduce uncertainties and to assess performance. Our emphasis here is on information to aid in choosing the location decision. Because man- agers can seldom get all the information they want, they should compare information costs with the probable payoff it will generate in revenue gains or cost savings.

some proBlems WitH reseArCH results And dAtA Because of the lack, obsolescence, and inaccuracy of data on many countries, research can be problematic. Let’s discuss the two basic problems: inaccuracy and noncomparability.

inaccuracy We list six basic reasons why reported information may be inaccurate:

1. Governmental resources may limit accurate data collection. Countries’ resources may limit budgets for data collection, the latest computer hardware, software, and training

Information is needed at all levels of control.

• Companies should compare the cost of information with its value.

Opportunity–Risk Matrix

D ec

re as

ed ri

Increased opportunity

D C

Figure 13.3 Opportunity–risk Matrix Countries E and F are the most desirable because they boast a combination of a high level of opportunity and a low level of risk. But what if the decision came down to Countries A and B? The level of opportunity in Country A may not be as high as a company would like, but the low level of risk may be attractive. Country B, however, promises a high level of opportunities but also threatens a high level of risk. A decision between Countries A and B will probably take the firm’s risk tolerance into consideration.

Chapter 13 Country Evaluation and Selection 351

programs (e.g., they may give priority, for example, to spending on health and literacy programs rather than on measuring health and literacy rates).

Information inaccuracies result from

• difficulty in collecting and analyzing data,

• purposefully misleading data,

• exclusion of nonmarket and illegal activity.

ConCept CHeCk

In Chapter 2 (pages 31–32), we discussed that false responses hinder accuracy when compar- ing cultures.

Problems in information comparability arise from

• differences in definitions and base years,

• distortions in currency values.

Information sources differ by cost and detail.

352 part 5 Global Strategy, Structure, and Implementation

internAlly generAted dAtA MNEs may have to collect much information themselves, sometimes simply by observing keenly and asking many questions. During visits to countries, investigators can see, for ex- ample, what kind of merchandise is available, determine who is buying and where, and un- cover hidden competition—such as seamstress-made clothes in homes versus ready-made clothing in stores. They might also discover that surreptitiously sold contraband is a competi- tive factor in the market.

Companies may also seek out information from companies already experienced in the country. Limited Brands, for example, met with Apple’s managers in China to ascertain experiences they encountered during entry.52

Yes Where there’s risk, there are usually rewards. Companies should

not shun areas with violence. Businesspeople have always taken risks, and employees have always gone to dangerous areas. As far back as the seventeenth century, immigrants to what are now the United States, India, and Australia encoun- tered disease and hostile native populations. Had compa- nies and immigrants not taken chances, the world would be far less developed today.

Violence is only one type of risk. Although we lack histori- cal data, most locations are probably safer today. Disease is still a bigger danger than violence, but medical advances against a number of historic killers (polio, measles, smallpox, tuberculosis, etc.) have reduced that risk, while evacuation in case of a real emergency is much faster.

But let’s assume that we decide to avoid countries with the potential for violence against our facilities and employ- ees. Is there any such place? To answer this question, you need to consider an array of indicators that include overall crime and murder rates, terrorism, kidnapping, and political violence. Because so many occurrences go unreported, sta-

tistics are unreliable. Further, situations change quickly, such as the sudden outbreak of violence in Syria. Opinions from so-called risk experts are conflicting. Finally, countries that we think of as safe—France, Belgium, the United States— have had recent fatal violence.

Some industries don’t have the luxury of avoiding vio- lent countries. Take the petroleum industry. Oil companies have to go where there is a high likelihood of finding oil. Most of the credible alternatives have had recent bombings, kidnappings, or organized crime—the Middle East, West Af- rica, the Central Asian former Soviet republics, and Colom- bia. If companies didn’t go to these places, they’d be out of business.

In effect, we’ll keep operating anywhere there are oppor- tunities. If a place seems physically risky, we’ll take what- ever precautions we can. We’ll share intelligence reports, put people through safety training courses (there are plenty of these available now), and take security actions abroad. And perhaps we won’t transfer spouses and children to the “risky” areas so we don’t have to be on top of what is hap- pening with as many people.

Should Companies Operate in and Send Employees to Violent Areas?

Point Point

no We’re no longer concerned simply with being caught in the

crossfire between opposing factions. Antiglobalization groups want international publicity, and they also target MNEs’ per- sonnel and facilities so that they’ll leave or pay ransoms. Still others are against foreigners or people of another religion, re- gardless of their aims. Such groups have killed staff members from Médecins sans Frontières and the Red Cross who were abroad to treat sick and injured people.53

At the same time, getting caught in the crossfire has be- come a bigger risk. Arms trafficking has risen and has lowered

prices not only to revolutionaries but also to drug and alien smugglers and money launderers.54

MNEs can’t help being visible, and thus vulnerable. In essence, if MNEs operate where risk of violence is

great, they put their personnel in danger. Even if no violence comes to them, they endure stress that negatively affects their performance.55 Although local personnel may be at a lesser risk of, say, kidnapping, experience shows that they too are not immune. Further, MNEs must send personnel to areas where they operate. Some go as managers or tech- nicians on long assignments; others go short-term to audit

Counterpoint

Should Companies Operate in and Send Employees to Violent Areas?

Chapter 13 Country Evaluation and Selection 353

AlternAtiVes for AlloCAting resourCes Among loCAtions We now examine three complementary strategies for international expansion: alternative gradual commitments, geographic diversification versus concentration, and reinvestment versus harvesting.

AlternAtiVe grAduAl Commitments As we’ve discussed, liability of foreignness influences companies to minimize risk by favor- ing operations in countries similar to their own. Nevertheless, Figure 13.4 illustrates alterna- tive expansion patterns for minimizing this risk. As you examine this figure, note that the farther a company moves from the center on any axis, the deeper its international commit- ment. However, a company does not necessarily move at the same speed along each axis. In fact, it may jump over some of the steps. A slow movement along one axis may free up resources and lower risk that allows faster expansion along another.

Let’s examine Figure 13.4 more closely. Axis A shows that companies may move gradu- ally from a purely domestic focus to one encompassing operations in countries similar and then dissimilar to one’s own country. However, an alternative when moving quickly along the A axis (and even jumping the intermediate step) is to move slowly along the B axis.

The B axis shows that a company may use intermediaries—especially ones that already know how to operate in a dissimilar foreign market—to handle operations abroad during early stages of international expansion. Doing so minimizes the resources the company puts at risk abroad and, thus, its degree of liability of foreignness. A related example is the international expansion of some high-tech companies from emerging economies. Rather than first targeting nearby countries with characteristics similar to their home markets, they have gone to high-income countries while relying heavily on intermediar- ies and foreign acquisitions to utilize personnel who know the markets they are targeting. However, over time the company may want to move farther out on the B axis by handling the operations with its own staff. This is because, by learning more about foreign opera- tions, it perceives them as less risky than at the onset, and it realizes that its growth in business may justify the inclusion of internal capabilities, such as a department to handle foreign sales or purchases.

Axis C illustrates companies’ beginning IB by importing or exporting, forms that require the placement of few company resources abroad. Again, as the company gains experience it might commit capital, personnel, and technology abroad by making a direct investment.

Axis D shows that companies can move internationally one country at a time, which keeps them from being overwhelmed by learning about many countries all at once. However,

Companies may reduce risks from the liability of foreignness by

• going first to countries with characteristics similar to those of their home countries,

• having experienced intermediaries handle operations for them,

• operating in formats requiring commitment of fewer resources abroad,

• moving initially to one or a few, rather than many, foreign countries.

books, ensure control, and offer staff support. The dangers are not inconsequential. There are thousands of reported kidnappings per year as well as countless unreported ones. Many of these target foreign workers and their families.

It’s simply unethical to put employees in such situations. Of course, they are not forced to go to dangerous places, and firms can get enough people to work there. However, experience shows there are three types of people who want or are willing to work in such areas, and none are ideal. First are those who simply want the high compensation and big insurance policies, some of whom are experienced in military or undercover activities. They tend to be highly independent

and hard to control. Second are the naïve who don’t under- stand the danger and are difficult to safeguard through train- ing and security activities. Third are the thrill seekers who find that adrenaline is like an addictive drug; they are most at risk because of the thrill of danger and their reluctance to leave when situations worsen.56

High risk to individuals is indicative of a political situation out of control—a harbinger of additional risks that may oc- cur through governmental changes, falls in consumer con- fidence, and a general malaise that damages revenues and operating regulations. This is not the kind of country in which to conduct operations.

354 part 5 Global Strategy, Structure, and Implementation

as we discuss in the next section, there may be operational reasons to move to a number of countries almost simultaneously.

geogrApHiC diVersifiCAtion Versus ConCentrAtion Ultimately, a company may gain a sizable presence in most countries; however, there are dif- ferent paths to that position. Although any move abroad means some geographic diversifica- tion, the term diversification strategy in the context of IB location describes a company’s rapid movement into many foreign markets, gradually increasing its commitment within each one. A company can do this, say, through an initial liberal licensing policy that enables widespread expansion, followed by increasing involvement that takes on activities it first contracted to other companies.

At the other extreme, with a concentration strategy, the company will first move to only one or a few foreign countries, not going elsewhere until it develops a very strong involve- ment and competitive position. There are, of course, hybrids of the two strategies—for ex- ample, moving rapidly to most markets but increasing commitment in only a few.57 We now outline reasons for using one strategy versus the other.

1. Need for Rapid Growth in Country Within industries requiring a high entry cost because of capital intensive technology or mass marketing, companies may lack resources enabling

Strategies for ultimately reaching a high level of commitment in many countries are

• diversification—go to many fast and then build up slowly in each,

• concentration—go to one or a few and build up fast before going to others,

• a hybrid of the two.

LOW

MEDIUM

HIGH

Quite similar

Limited foreign functions, usually export /import

Limited foreign production and multiple functions

Other firms handle external contracts

Company handles its own foreign operations

Internal versus external handling of foreign operationsB

Extensive production abroad with FDI and all functions

C Mode of operations

Moderately similar

Very dissimilar

Degree of similarity between foreign and domestic countries

One

Number of foreign countries in which a firm does business

Several

Many

DOMESTIC BUSINESS

Figure 13.4 The usual Pattern of internationalization The farther a company moves outward along any of the axes (A, B, C, D), the deeper its international commitment. Most companies move at different speeds along different axes.

Chapter 13 Country Evaluation and Selection 355

them to enter many countries simultaneously, thus a concentration strategy is usually preferred. Similarly, if country markets are all growing rapidly, companies may need to invest heavily in each to build and maintain a threshold market share, thus straining re- sources if simultaneously entering a large number of countries.58

2. Competitive Lead Time We have discussed that in cases where technology obsolesces rapidly, companies need to enter many markets quickly before competitors usurp their advantages, thus being in situations that favor a diversification strategy. Born-global companies are particularly prone to follow diversification strategies because so many of them depend on new and quickly obsolescing technologies that require fast market penetration.59

3. Need for Product, Communication, and Distribution Adaptation When companies must tailor their products and operating methods for each country they enter, they incur ad- ditional costs. They may need to follow a concentration strategy to minimize the costs of entering multiple countries simultaneously.

4. Program Control Requirements The more a company wants to control its operations in a foreign country, such as because of fear that a partner will become a competitor, the more favorable a concentration strategy is. This is because the company will need to use more of its resources to maintain that control, such as by taking a larger percentage of ownership in the operation.

reinVestment And HArVesting So far, we’ve discussed the sequencing of country entry. Then, once operating abroad, a company must evaluate how much effort to allocate to each location. With successful FDI, the company earns money that it may remit back to headquarters or reinvest to increase the investment value. However, if the investment returns are inadequate, the company may con- sider transferring capital and diverting efforts elsewhere.

reinvestment decisions Once committed to a given locale, a company may need to re- invest its earnings there. The failure to expand might result in not attaining its target growth objectives. Moreover, headquarters management may delegate certain investment decisions to experienced foreign subsidiary managers because they believe that subsidiary manage- ment is the best judge of what the operation needs.

Harvesting Companies commonly reduce commitments in some countries because they have poorer performance prospects than do others—a process known as harvesting (or divesting). Burger King, for example, sold off underperforming operations in Korea and Slovakia so as to have funds for more promising ventures in the Chinese and Russian mar- kets. There are other reasons as well. Dana sold its U.K. facility to use funds to concentrate on developing different automotive technologies.60 Goodyear sold its Indonesian rubber plantation because of its decision to stop producing rubber.61

Evidence suggests that companies might benefit by planning divestments better and by developing divestment specialists. Companies have tended to wait too long before divest- ing, instead trying expensive means, usually suggested by subsidiary managers, to improve performance. After all, these managers’ performance evaluations typically depend heav- ily on growth in their areas of responsibility, but they have no such incentive to propose divestments.62

A company may divest by a sale or closure of facilities, usually preferring a sale because it receives some compensation. If it considers divesting because of a country’s well-publicized political or economic situation, it may find few potential buyers except at very low prices. In such situations, it may try to delay divestment, hoping that the situation will improve.

A company cannot always simply abandon an investment either, and leaving may take years. Governments frequently require performance contracts, such as substantial severance packages to employees that make a loss from divestment greater than the direct investment’s

A company may have to make new commitments in a locale to maintain its competitiveness.

Companies must decide how to get out of operations if

• they no longer fit their overall strategy,

• there are better alternative opportunities.

356 part 5 Global Strategy, Structure, and Implementation

net value. Further, many MNEs fear adverse international publicity as well as difficulty in re- entering a market if they do not sever relations with a foreign government on amicable terms.

nonCompArAtiVe loCAtion deCisions One might expect companies to maintain a storehouse of ranked foreign operating propos- als, undertaking the best, second best, etc. until they could make no further commitments, but this is usually not the case. They make go-no-go decisions by examining one opportu- nity at a time and pursuing it if it meets some threshold criteria.

To begin with, companies sometimes need to respond quickly to prospects they had not anticipated, such as unsolicited proposals to sell abroad, to enter a joint venture, or sign a licensing contract. In fact, many companies initiate export activity passively—that is, foreign companies approach them to be suppliers. Similarly, undertakings may be onetime op- portunities because a government or another company solicits bids, requests collaboration, or changes rules to encourage competition and foreign acquisitions, such as Mexico did for telecommunications.63 Moving fast enables a company to acquire the best assets. Further, there may be a chance to buy properties that another company divests.

Another factor inhibiting country operating comparison is their interdependence. Profit figures from individual operations may obscure the real impact on overall company per- formance. For example, placing a production facility abroad may either increase or reduce exports from the home country. Moreover, headquarters may have to incur additional costs to oversee the foreign facility, particularly if it coordinates the movement of components between the home and foreign countries. These costs are difficult to estimate and to allocate among the different countries. Further, a supplier’s dealings with a global customer may cause it to suboptimize profits in one country in order to satisfy the customer in a second country. Finally, interdependence occurs because much of the sales and purchases of foreign subsid- iaries are among units of the same parent company. The prices the company charges on these transactions will affect the relative profitability of one country’s unit compared to another’s.

Clearly, companies cannot afford to conduct very many feasibility studies simultane- ously. Even if they can, the studies are apt to be in various stages of completion at any given time. Can the company afford to hold off on making a decision about a study that has been completed? Probably not. Waiting would likely invalidate much of the completed data, thus necessitating added expense and further delays to update it. In sum, three factors inhibit companies from comparing investment opportunities: cost, time, and the interrelation of operations on global performance.

Most companies examine proposals one at a time

• and accept them if they meet minimum-threshold criteria,

• because unforeseen opportunities give little time to make decisions,

• because of difficulty in incorporating global performance into single country analyses.

and the most robust growth in developing economies, particularly those in sub-Saharan Africa. The projection is that the percentage of people living in currently developed countries is expected to fall to 13.7 percent from a 2000 figure of 19.7 percent. Given the importance of population size for sales potential, these changes, if they materialize, will be profound.

Further, because the world’s population will con- tinue to age and people will pursue education for more years, the share of what we now consider the working-age population should fall for developed countries and increase in many developing ones. Because there is a positive relationship between

Will prime Locations Change?

Future sales- and resource-seeking opportunities and risks may shift among countries because of a variety of demographic, sociocultural, political-legal, techno- logical, and economic occurrences. We will concen- trate here on population changes and where people can and will prefer to work.

Comparative Market Growth In Chapter 6, we discussed how demographers expect a slowing in the growth of global population through 2050, with some countries experiencing declining populations

Looking to the Future Conditions That May Cause Prime Locations to Change

Chapter 13 Country Evaluation and Selection 357

the proportional size of the working-age population and per capita GDP, the growth in per capita GDP should be higher in today’s developing economies than in today’s developed countries unless we rede- fine working age.64 If these demographic changes occur, they will affect the location of both markets and labor forces.

Where Will People Work? An intriguing possibility is the near-officeless headquarters for international companies. Technology may permit more people to work from anywhere as they e-mail and teleconference with their colleagues, customers, and suppliers. In fact, they can live anywhere in the world and work from their homes, as is already occurring at least part-time within some professions. However, if people can work from home, they may situate their homes where they want to live rather than living near their employers. Highly creative, innovative, self-motivated people can usually get permission to live in almost any country of the world.

A leading researcher on urbanization and plan- ning has shown that beginning at least as early as the Roman Empire these types of people have been

drawn to certain cities that were innovation centers. This attraction is due to people’s desire to improve through interchange with others like themselves— like “a very bright class in a school or a college. They all try to score off each other and do better.” Thus, if he’s correct, the brightest minds may work more at home but still need the face-to-face interaction with their colleagues.65 The continued attraction of young technical people to places like Silicon Valley seems to confirm this viewpoint.66 The researcher further suggests that these people will be drawn to the same places that attract tourists.

These arguments are provocative, particularly be- cause we now have technology to allow people to communicate without traveling as much. Yet the continued increase in business travel shows that there is still a need for face-to-face interaction.

Concomitantly, another view is that in leading Western societies the elite, made up of intellectuals and highly educated people, is increasingly using its capability to delay and block new technologies. If successful, their efforts will result in the emergence of different countries at the forefront of technologi- cal development and acceptance.67 ■

Case Carrefour Founded in 1959 and headquartered in France, Carrefour is the largest retailer in Europe and Latin America and the second-largest worldwide.68 By 2015, Carrefour had stores in 33 countries, which it divided into 5 geographic areas. These areas and the number of stores were as follows: France, 5680; Other Europe, 4711; South America, 840; Asia, 396; and Other Countries, 283. Map 13.2 shows the countries with operations and the number of stores in those countries that are most important for Carrefour.

Carrefour’s Retail Types Although Carrefour sells in different types of retail out- lets, its hypermarkets account for by far the largest por- tion of its sales, retail space, and number of countries

with retail operations. A hypermarket combines a depart- ment store and a supermarket that inhabits approximate- ly 330,000 square feet, compared to 40,000 in a typical supermarket. As a general rule, a hypermarket requires a half million households within a 20-minute drive for suf- ficient business.

Early Success in France Carrefour’s hypermarket operation in France was an early success, due largely to the timing for introducing the con- cept. Supermarket operations there were not yet well devel- oped; consumers generally shopped for foods in different outlets, such as bread, meat, fish, cheese, and fresh veg- etables in different specialty stores or markets. Moreover,

358 part 5 Global Strategy, Structure, and Implementation

few retailers had convenient or free parking, so custom- ers made frequent and time-consuming shopping trips. Carrefour came along when more French families had cars, refrigerators large enough to store a week’s supply of fresh products, and higher disposable incomes to spend on nonfood items. Further, more women were working and wanted one-stop shopping. So French consumers flocked to Carrefour’s suburban hypermarkets, where they could park for free and find discounted prices on a very wide se- lection of merchandise.

The Decision to Move Internationally French government restrictions on new hypermarkets to safeguard town centers, protect small businesses, and prevent visual despoliation of the countryside influenced Carrefour to expand internationally. Its first two foreign ven- tures were a partnership in 1969 in Belgium, and a wholly owned foreign store in 1973 in Spain. Both entries were with hypermarkets, and both countries had consumers who were going through lifestyle changes similar to those found in France. Managing these ventures was facilitated because Carrefour’s French suppliers provided much of the stores’ stock, and its French managers could easily travel to over- see the operations.

Group 3: South America

Group 2: Other Europe

Group 4: Asia

Others

Group 1: France

France 5,013

Belgium 744

Luxembourg

Spain 582

Poland 702

Slovakia

Italy 1,158

Romania 174 Bulgaria

Greece

Argentina 572

Brazil 258

China 236

Taiwan 71

Albania Serbia

Macedonia Cyprus

MaP 13.2 Carrefour Stores by region and Number of Stores in its Most important Countries Source: Based on data from Registration Document: 2014 Annual Report, Carrefour.

Major Country Selection Criteria Since entering Belgium and Spain, a guiding principle for most of Carrefour’s international expansion has been coun- tries’ economic evolution. A former CEO indicated that two market opportunity conditions were important for choosing the right countries to expand: (1) to pick countries with prob- able economic growth so as to grow with the country and (2) to enter a country before competitors so as to gain first- mover advantages. For example, these criteria influenced Carrefour to enter Brazil in 1975 and Argentina in 1982.

Nevertheless, Carrefour has sometimes deviated from this principle, with poor results. For instance, it opened its first Russian store in 2009 and announced in four months that it was pulling out because of the unlikeliness of being able to compete effectively against chains that had entered earlier—Metro from Germany and Auchon from France. The story was similar for its entries into the United States, the United Kingdom, Mexico, Japan, Korea, and Chile. Never- theless, being first is not always enough. Though Carrefour was first in some Southeast Asian countries, it lacked suf- ficient understanding of their different market needs.

Other factors have contributed to problems as well. In the United States, customers simply did not want to spend the time shopping in a hypermarket where they had to walk long distances before reaching even the first aisle. In the

Chapter 13 Country Evaluation and Selection 359

United Kingdom, though Carrefour did well on food sales, consumers preferred to shop for durables in city centers where they could compare different distributors’ offer- ings. In Mexico, Carrefour was up against an established Walmart, which could integrate buying and distribution with its successful U.S. operations. In Japan, consumers were disappointed not to find a French shopping experience. In both Hong Kong and Chile, Carrefour was unable to build enough stores to gain the needed economies of distribution.

Although Carrefour first relied on countries with expected market growth, it has since added an extensive risk program of over 20 categories organized within 4 groups to help it decide where to operate, place emphasis, and deal with risk conditions. The four groups are the business environment, strategy and governance, operations, and financial market risks. For instance, its business environment group includes a category on risks from environment pressure and regula- tory change. Its strategy and governance group includes a category on how to deal with environmental concerns about water, air and ground, noise, and visual pollution.

At the same time, Carrefour must decide what to do with underperforming stores and locations, including whether and how to sell the stores and depart the countries that of- fer lower potential profits than elsewhere. Between 2006 and 2008 it divested its operations in eight countries. For one, Carrefour needed the resources to put more empha- sis on Poland, which its management perceived would offer greater opportunities. In addition, its share price was fall- ing in parallel with its market share drop in France. Analysts believed its problems stemmed largely from expanding too fast internationally, thus sapping resources needed to com-

pete and adjust to changes in its primary market in France. Further, they believed it had entered too many countries before building a large enough presence in each. Carrefour has since shored up its French operation, expanded within existing countries, and moved to new countries. However, in 2015, Carrefour faced slowing growth in France and weak consumption in China. Fortunately, the weakness was large- ly offset by better performance in South America.

Another factor influencing Carrefour’s choice of country has been the ability to find a viable partner familiar with local operating needs. Taiwan, Turkey, and China provided this requirement; Mexico and Japan did not. In fact, Carrefour lasted only four years in Japan before selling out.

Carrefour’s Contribution to Partners Why would another company want to partner with Carre- four? Aside from financial resources, Carrefour brings to a partnership expertise on store layout, direct links with suppliers that substantially reduce inventories and travel costs, the ability to export unique bargain items from one country to another, and clout in dealing with global suppli- ers (for example, for its global sales campaign “Most Await- ed Month,” the largest manufacturers of global consumer goods provide its stores with lower prices for a one-month sale). Carrefour also considers whether a country can jus- tify enough additional stores to gain distribution economies. To help gain these economies, Carrefour has recently been expanding via acquisition.

Carrefour has pushed global purchasing. When its stores in one country find an exceptional supplier, such as a maker

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360 part 5 Global Strategy, Structure, and Implementation

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

13-6 Refer back to the Burger King case at the beginning of the chapter. Compare the applicability of the first-mover advantage in international expansion for Burger King versus Carrefour.

13-7 Carrefour has recently given store managers more autonomy in selecting merchandise to sell in their stores. What are the advantages and disadvantages of this policy?.

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

of disposable gloves in Malaysia, management passes on the information to the merchandising group in Brussels, which then seeks markets within stores in other countries. However, this approach implies a great deal of uniformity in store offerings and does not take into account demographic and cultural differences. Carrefour has recently given store managers more authority to alter inventories, such as car- rying higher quality luggage in Monaco for upscale custom- ers, more brands of chickpeas in French stores catering to a large North African population, and more cured meat and lo- cal cheeses in Italy. At the same time, a Carrefour team helps to design, test, and develop products for specific markets, such as a range of fruit juice formats for the Brazilian market.

The Future Carrefour means “crossroads,” which is apropos because the company has been facing tough choices for improving its performance. For instance, although its hypermarkets have been the crux of its operations, demographic chang- es—a larger portion of older and single consumers—have

shifted more purchases to smaller outlets. At the same time, a wide range of specialty retailers are competing on nonfood items. Finally, some analysts feel that Carre- four will never become the world’s largest retailer without a significant presence in the United States and the United Kingdom. However, the company’s choice of countries will play a big role in its success, whether or not it becomes the world’s largest retailer.

Questions

13-3. What advantages and disadvantages would Carrefour likely

have compared with domestic retailers where it operates?

13-4. Evaluate the reasons for following a geographic concentra-

tion versus diversification strategy as they apply to large

retailers such as Carrefour.

13-5. When the three big global retailers—Walmart, Carrefour, and

Tesco—have entered the same country, only one has gener-

ally succeeded. Are the markets in China and India so big

that all can succeed there? Support your conclusion.

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MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

When one is prepared, difficulties do not come.

—Ethiopian proverb

Objectives

After studying this chapter, you should be able to:

14-1 explain the principles and practices of exporting

14-2 Articulate the motivations and methods of exporting

14-3 Understand export startup and expansion

14-4 explain the principles and practices of importing

14-5 Articulate the motivations and methods of importing

14-6 Describe the problems and pitfalls that challenge international traders

14-7 Differentiate the resources and assistance that help international traders

14-8 Define the standards of an export plan

14-9 Distinguish the principles and practices of countertrade

chApter 14 export and import

http://data.worldbank.org/data-catalog/world-development-indicators

Case spinCent: The Decision to export1

from foreign suppliers. Increasing price competition was inevitable. Knepper knew the day of reckoning was at hand: SpinCent must (1) focus on the domestic market and exploit every possible efficiency to sustain productivity or (2) expand aggressively into export, look- ing to fast-growing overseas markets. Ultimately, Knepper conceded, market trends forced his hand. The slow-moving deindustrialization of the United States, forecast to continue for years, would steadily reduce domestic demand. Meanwhile, quickly industrializing emerg- ing economies, particularly in Asia, signaled rich opportunities. Hence, Knepper accepted, somewhat grudgingly, that SpinCent must export to promising markets.

AsiA CAlls

Big market trends signaled big opportunities in Asia. “Industries were coming online everywhere and seemingly overnight,” observed Knepper. Pro-market reform, improving economic freedom, and ac- celerating economic development spurred industrialization through- out Asia. Moreover, the types of goods moving through Asia’s seaports signaled budding industries that used SpinCent’s sorts of centrifuges. And, unlike the United States, which was in the mature part of the product life cycle, emerging economies looked set to grow for years.

GettinG stArted

New to the idea of the Asian market, SpinCent sought help on how best to access the large, diverse region. Knepper feared wasting resources flying solo. Moreover, he was not looking to generate a single-shot export burst, but aimed to build relationships that would support long-term growth. Hence, the primary challenge was finding competent and trustworthy distributors who would develop, make, and service local sales. “We were looking for a long-term partner and not a quick export sale,” said Knepper. “The right partner for SpinCent needed to be as confident and competent about the product as we are, and able to promote, educate, and serve consumers in the respective territories.” The key, he added, was partnering with respected firms. On the flip side, SpinCent had to convince potential agents that partnering with it made long-term sense.

Knepper began by seeking information on potential distributors, confirming their reputation and resources. A few of the company’s earlier export transactions, for instance, had run into problems with agents who struggled financially. As Knepper warned, “Getting paid is a huge part of running a business, and unless a company has the right payment policies in place with the right partners, it will get scammed.”

Mindful of these issues, Knepper attended a trade seminar spon- sored by the U.S. Commercial Service’s Export Assistance Center of

More than 300,000 U.S. companies export goods. Some 7,000 of these, such as Caterpillar, Boeing, General Electric, and Intel, gen- erate about 65 percent of total exports.2 Their smallest shipments are typically larger than the largest shipments of smaller companies. Still, some 297,000 small and medium-size enterprises (SMEs)— specifically, companies with fewer than 500 workers—account for nearly 98 percent of all U.S. exporters.3 One such SME is SpinCent of Pennsylvania.

SpinCent manufactures laboratory and industrial centrifuges. Companies in chemical, pharmaceutical, food, environmental, and mining industries use them to spin a substance into high-speed rota- tion around a fixed axis, thereby moving heavy elements to the bot- tom, lighter objects toward the top, and liquid in between. SpinCent’s 56 employees—43 workers, 8 product and process engineers, and 5 managers—operate out of its 90,000-square-foot facility in subur- ban Philadelphia. SpinCent began operations in 2010 with one goal in mind: create high-performance centrifuges that inspire absolute confidence. Its patented technology anchors a full line of automatic and manual centrifuges recognized for quality and value. To this day, management believes it builds “centrifuges for which there simply are no equals.”

to export or not to export: thAt is the Question

From inception, SpinCent approached export passively. Its interna- tional sales often resulted from other U.S. firms’ orders that were set for export, occasional sale leads received at trade shows, or an unsolicited order from a foreign buyer. Export sales generated high gross margins; occasionally, unexpected complications, such as customs or credit problems, increased administrative costs. Still, SpinCent’s net margins on export sales ran about 15 percent higher than domestic sales.

Paul Knepper, CEO and founder, explained that recurring problems had dampened his interest in exporting. First, he and his colleagues were skeptical about the likelihood of international success. Previous efforts, they felt, had spent more time on unfocused searching or solv- ing situations than on purposefully growing export activity. Moreover, serving customers in the domestic market had kept them quite busy. As a result, developing exports stretched their already thin management structure. Going international, they feared, would pose tough challenges, especially heading into direct competition with seasoned exporters from Germany and Japan.

Still, as time passed, market pressures raised concerns about SpinCent’s ongoing productivity and profitability. The struggling U.S. manufacturing sector had slowed SpinCent’s growth and pushed some of its customers to import cheaper, lower-end centrifuges

Chapter 14 Export and Import 363

Philadelphia. On the agenda were market analysis and trade reports on the emerging economies of Asia. Taking his seat, he couldn’t help but wonder about the opportunities. Sure, he conceded, they sound- ed great. However, he had seen hype like this come back to bite, not to mention the horror stories he’d heard of the problems and pitfalls of exporting. Indeed, he reflected, a key reason for attending was reconciling his sense of the opportunities and threats.

GettinG help

Since exports promote economic growth, government agencies of- fer extensive assistance, such as trade seminars, market research, training programs, and financial planning. Trade officials encourage SMEs like SpinCent, seeing them as the primary beneficiaries of ini- tiatives to initiate and accelerate international trade activity. Given that 60 percent or so of all SME exporters posted sales to only one foreign market, many could boost performance by entering just one or two others. Expanding SMEs’ market horizons through trade semi- nars, official reasoned, bolstered their confidence to do so.

After a full morning of profiles and presentations, Knepper believed Asian markets held far more opportunities than risk. He had learned quite a bit about Asia, as well as some technicalities of exporting. Still, his unfamiliarity of local business practicalities, compounded by the lack of local sales representatives, bothered him. Filling in these blanks, he concluded, called for some on-the- ground research. So, before leaving, he spoke to Commercial Ser- vice agents and arranged to join a 12-day trade mission that was heading to Hong Kong, the Philippines, Vietnam, and Taiwan the following month.

GoAl settinG

Knepper’s trip had straightforward goals: assess market potential, identify competitors, get a sense of reasonable price points, and re- cruit local sales representatives and distributors. Although he had never visited Asia, he believed he had prepared well. His time with the trade representatives in Philadelphia gave him a good sense of the general characteristics and industry conditions in Asian markets. Also, in the past, SpinCent had received inquiries from Asian dis- tributors ordering centrifuges; some had inquired about representing the company locally. Depending on how busy it was with domestic customers, SpinCent tried to respond yet nothing substantial had ever come of it. Still, these contacts had been saved, thereby giving Knepper a start on potential distributors and likely customers.

Knepper also tapped the Commercial Services’ Gold Key pro- gram to prescreen potential distributors. This program helps SMEs enlist Commercial Services agents overseas to scan local markets for qualified agents, distributors, and representatives. Gold Key agents will prescreen and prequalify potential partners, conduct background checks, and customize local market research. Exporters report that the Gold Key program ensures that when a firm adds a partner to its network, it is a respected company in the target country.

Thinking back to his days as a Boy Scout, Knepper believed that he met the sacred command: “Be prepared.” With a briefcase full of brochures, a laptop loaded with profiles of his product line, and the sense of doing something potentially great, he headed to Asia. Over the next two weeks, he interviewed potential agents, chatted with likely customers, scouted competitors’ offerings, test called their service support, spoke to freight forwarders and logistics companies, and visited local government officials and customs agencies.

AsiA CAlls, spinCent Answers

On the flight home, tired but charged, Knepper realized that his mis- givings about exporting had been unfounded. There were risks, but the opportunities outweighed them. Exporting was no longer an op- tion for SpinCent—it was an imperative. Besides a new sense of commitment, Knepper had a bit more confidence, given the newly signed distributors in the Philippines and Taiwan as well as promising sales leads there and in Hong Kong.

Back in Philadelphia, Knepper tested the Asian market a bit more, advertising in trade publications as well as running banner ads on trade sites in tandem with his newly signed distributors (he handled the English ads, they, the Mandarin versions). In addition, he began working with an agent from Commercial Services on an export plan. This work helped SpinCent secure its largest overseas partner to date, a distributor in Hong Kong who served the fast-grow- ing Chinese market. Commercial Services arranged meetings with others, eventually signing a distributor in Singapore and generating leads in Australia.

Allied with strong partners, SpinCent continues tapping the sup- port provided by government agencies. The more he has dealt with them, the more Knepper appreciates a friend’s advice: “Let the gov- ernment do what it can for you. This is their niche and they’re the best at it.” Now, with an export plan in hand, Knepper has begun working with the Export-Import Bank to secure financing options for overseas distributors and customers.4 And, with a gleam in his eye, he’s set to attend a U.S. Commercial Service’s profile of the emerging markets of sub-Saharan Africa.

GoinG ForwArd

Steadily, as SpinCent gains experience in Taiwan, the Philippines, Hong Kong, and Singapore, it looks onward and upward. Although ex- porting creates challenges, it helps SpinCent boost productivity and profitability. Indeed, overseas sales provided the firm with a grow- ing stream of business during the economic downturn in the United States, while rivals who had not diversified via exports struggled. More important, exporting taps a low-cost, high-return opportunity to leverage SpinCent’s centrifuge technology.

This experience, reflects Knepper, has straightforward lessons: “If you are thinking about exporting internationally, do it. Get going, do your homework, utilize low-cost resources, participate in trade missions, learn about business cultures, and build relationships.

364 part 5 Global Strategy, Structure, and Implementation

Always verify your potential business partners. Gather as much information as you can. Stress-test your assumptions; the wrong guess costs you time and money. Above all, no matter the prob- lems that you’ll run into, stay committed. All of these seem tough, but they only cost pennies on the dollar and the returns can be substantial.” ■

Questions

14-1. Analyze two challenges that SpinCent overcame in devel-

oping its export activity. Describe how it overcame them.

14-2. Based on its Asian experiences, map a sequence to guide

SpinCent’s export expansion to sub-Saharan Africa.

introduCtion Exports and imports have always been an important facet of the global economy. Expanding consumer demand, cross-national linkages, and free trade agreements progressively open more markets, thereby increasing the ease of international trade. Figure 14.1 shows that the value of trade as a share of world GDP has steadily risen over the past 50-plus years. This trend, while hitting air pockets now and then, has been relentless. Even the recent drop in world trade, the consequence of the global financial crisis in 2008, has already faded.5

Earlier chapters report that companies engage in international business through several modes. The choice a company makes, say, choosing exporting rather than licensing, joint ventures, or FDI, follows from its analysis of market factors as well as its resources, capa- bilities, and competencies (see Figure 14.2). Export and import are, by far, the most common modes of international business. The scale and scope of firms that trade steadily increases.6 Exports and imports are a major part of the global economy, a critical driver of nations’ eco- nomic performance, and a strategic choice for companies of all sizes in countries worldwide.

Exporting and importing are among the fastest-growing economic activities in the world.

65 World Trade as a Percent of World GDP, 1960–2014

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Figure 14.1 World Trade as a Percent of World gDP, 1960–2013 Here we see the sum of exports and imports of goods and services measured as a share of gross domestic product on a global basis over the past 55 years. Despite periodic ups and downs, the dominant trend in international trade, as a share of global business activity, has been steady expansion. By the way, these trade data combine imports and exports (i.e., a bit of double counting). Still, the upward trend powers on.

Source: Assembled from data reported in the World Bank’s World Development Indicators, particularly Trade ( percent of GDP), Series NE_TRD_ GNFS_ZS, retrieved June 16, 2016, from http://data.worldbank.org/data-catalog/world-development-indicators.

Chapter 14 Export and Import 365

The popularity of export and import follows from their key advantages. Both are straight- forward, low-cost, and quick means to engage foreign markets. Both impose minimum busi- ness risk and require relatively low resource commitment. Moreover, whether large or small, international trade helps companies improve productivity, increase profits, and diversify risk. Finally, trade effectively deals with the fact that most people live elsewhere in the world than in any one country. In the case of Germany, an export powerhouse, nearly 99 percent of potential consumers live outside it and, by the way, they command more than 95 percent of the world’s purchasing power. Therefore, a German company selling domestically can reach a maximum of some 81 million consumers; selling internationally reaches 7.3 billion more.

In sum, international trade presents opportunities to enterprising companies. It also ex- poses them to threats. Still, as this chapter shows, there are useful approaches to interpret options and tried-and-true methods to overcome challenges.

exportinG: prinCiples And prACtiCes Exporting is the sale of goods or services produced by a firm based in one country to cus- tomers that reside in another country. The idea of exporting manufactured goods presents a clear situation, as in the case of Indian carmaker Tata Motors shipping (exporting) automo- biles made in Pune to customers (importers) in Bangladesh. Hence, exports involve any good or service that is traded from sellers in one country to buyers in another country.

Service exports occur across a range of industry sectors. However, the sometimes hazy standards of a service make it a bit tougher to define what qualifies as an export. For in- stance, engineering contractors—such as Bechtel, Skanska AB, or Kajima—export services when they construct buildings, roads, utilities, airports, or seaports in a foreign country. Management consultants, such as McKinsey & Company, export when they perform advi- sory services for foreign clients. Investment banks, such as Goldman Sachs and UBS, export when they help a foreign client to arrange financing or navigate capital markets. Similarly, services are exported indirectly when the Japanese advertising firm Dentsu, the world’s larg- est single-brand agency, creates a marketing campaign for Sony that is then used outside of Japan. Hydraulx Visual Effects, designers of digital monsters, exports its services when it

Exporting sends products to another country; importing brings products in from another country.

ConCept CheCk

As we saw in Chapter 1 (page 14), “Why Companies Engage in IB” emphasized three operating objectives: expanding sales, acquiring resources, and minimizing risk. To achieve one or more of these objectives, compa- nies choose from various “IB Operating Modes.” Among these modes, exporting and importing are the most prevalent, especially among small and medium-sized enterprises (SMEs).

COMPETITIVE ENVIRONMENT

OPERATING ENVIRONMENT

PHYSICAL AND SOCIAL FACTORS

OBJECTIVES

MEANS Functions Overlying

Alternatives

OPERATIONS

STRATEGY

Modes

Marketing Exporting and importing Global manufacturing and supply-chain management Accounting and taxation Finance Human resources

• • •

Figure 14.2 Factors influencing export and import Operations Assessing export and import highlight the environmental and operational factors that influence practice and performance.

366 part 5 Global Strategy, Structure, and Implementation

leveraging its core competency in designing, manufacturing, and servicing centrifugal equip- ment. These advantages, “owned” by SpinCent due to its proprietary technology and exper- tise, guided its export expansion. Companies that command weak ownership advantages, anticipating fierce struggles with foreign rivals, typically disregard export.

location Advantages The combination of high sales opportunity and low investment risk in foreign markets creates favorable export locations. Stable markets with many consumers increase the odds that someone wants your product. Favorable business environments such as Canada, Japan, or Germany attract exporters, though high-potential markets throughout the world interest aspiring and experienced traders. Again, SpinCent saw the industrializa- tion of emerging economies creating favorable locations marked by strong demand and pro- business policies.

internalization Advantages Companies often respond to uncertainties caused by market imperfections by internalizing market processes—that is, conducting a transaction within the controlled confines of the company rather than in the open, imperfect market. Migrating market activities into the company reduces the risks as well as exploits gaps resulting from say, incomplete information, arbitrary regulation, or unfair competition. Internalizing activi- ties, for instance, enables executives to safeguard their core competency within the company rather than licensing it in markets that poorly protect intellectual property.

Again, SpinCent could have bypassed exporting, instead opting to license its proprietary centrifuge technology to Asian manufacturers. While cheap in the short term, this choice would likely prove costly over the long haul as SpinCent inadvertently helped local licens- ees evolve into rivals. Chapter 3’s profile of the rule of man as the basis of law, such as that prevailing in several Asian markets, highlighted the corresponding poor protection of intel- lectual property. This sort of market imperfection leads companies to retain control of their core competencies by internalizing manufacturing and relying on export.

ChArACteristiCs oF exporters The quest to promote international trade spurs officials to identify the characteristics of suc- cessful exporters. Pinpointing important attributes helps officials improve support programs that, in turn, help companies develop the necessary competencies. Identifying the correlates of export success often starts by examining the influence of firm size, comparing and con- trasting the trading activities of big and small companies.

Company size has interesting relationships with export activity. Large MNEs like Samsung, Boeing, and Hon Hai are big exporters. Their ownership, location, and internal- ization advantages help them identify markets, leverage organizational capabilities, and manage market risks. The difficulty of these tasks leads many to presume that export is an option best left to large companies. This inference does have face validity. The largest com- panies routinely account for the lion’s share of exporting throughout countries worldwide. In the United States, the 500 biggest firms accounted for nearly 60 percent of total export value, the 250 biggest accounted for more than half, and the 100 biggest contributed just under one-third.12

Nevertheless, many see export potential in small and medium-sized enterprises (SMEs)—those firms that, by definition, have fewer than 500 employees. In the United States, SMEs account for 97.8 percent of all exporters and 97.2 percent of all importers. Too, SMEs claim 33.7 percent and 31.6 percent of the total value of export and import, respectively.13 This situation is not unique to the United States. Worldwide, more than two-thirds of exporters have fewer than 20 employees. More than 98 percent of com- panies in the Asia–Pacific region are SMEs. China registered SMEs account for about 99 percent of all companies, exceeded 4.3 million in number, and contributed 59 percent of GDP, 50 percent of tax revenues, 68 percent of exports, and 75 percent of new jobs.14 Likewise, Pakistan has more than 3.2 million SMEs; they contribute almost 30 percent to

Ownership advantages of the company, location advantages of the market, and internalization advantages from controlling transactions shape how firms enter foreign markets.

Resource-constrained or risk- averse companies that have strong ownership advantages often enter foreign markets through export.

ConCept CheCk

The complexity posed by dif- fering cultural, political, legal, and economic environments imposes a so-called “liability of foreignness.” This idea holds that foreign companies, by virtue of their spotty familiar- ity, incur additional economic and social costs of doing business overseas. Companies offset this liability by capital- izing on their advantages as well as selecting the mode of international business that best reflects their resource profile and risk tolerance.

The largest companies are the biggest exporters. SMEs, however, are steadily expanding export activity.

helps overseas clients add visual effects to feature films, commercials, and music videos. In these examples, the seller is the exporter while the buyer is the importer.7

Technically, a service need not physically leave a country to qualify as an export. Rather, it need only earn foreign currency. For example, you may not think of the foreign national students sitting alongside you in class as part of your country’s export strategy. However, higher education ranks among the top 10 service exports for several Western nations. Tuition, fees, and living expenses paid by some 900,000 international students and their families supported 340,000 jobs and contributed $27 billion to the U.S. economy in 2014.8 Besides education, leading types of service exports include financial, information, profes- sional, scientific, and technical services; telecommunication; travel and tourism; insurance; transportation; and entertainment.

who Are exporters? Many companies intend to export, anticipating it will accelerate growth, improve productiv- ity, and boost profits. In reality, not all companies export, and among those that do, a few do far more than others. Recurring market patterns identify the following types.

non-exporter This sort of company commands little to no knowledge about exporting and often has no interest in international trade. This is not necessarily a deficiency. Many firms grow in their domestic market without exporting simply because they make goods or provide services that do not travel well to foreign markets. Some firms, even though making products that customers elsewhere demand, disregard exporting for various reasons, includ- ing general disinterest or insufficient resources.

sporadic exporter This type of company takes a passive approach to assessing inter- national trade options.9 It fills an unsolicited order from the occasional foreign buyer, but prefers to focus on the domestic market. Think of SpinCent’s international activities prior to Knepper’s realization of the imperative to export. It filled export orders as they arrived, but generally, though, saw them as anomalies. Sporadic exporters understand the basics of the export process, but assign it low priority.

regular exporter The company that aggressively pursues export sales as a productive, profitable, strategic activity is a regular exporter. It’s experienced with the technicalities of international trade. Regular exporters look to international markets for growth, invest re- sources to expand export operations, and proactively respond to export signals.10 Again, think of SpinCent’s evolution following Knepper’s realization—corroborated by his chats with Commercial Service agents and travels to Asia—of the importance of exporting. Each step demystified aspects of the experience, steadily supporting Knepper’s progression from a sporadic to regular exporter.

the MAtter oF AdvAntAGes The question of who is likely to start and sustain exporting directs us toward a broader pro- file of a company’s choice of how best to go international. Earlier materials identified several options that firms consider, most notably licensing, joint venture, alliances, or FDI. They also profiled the influence of ownership, location, and internalization advantages on a firm’s preferred entry mode into foreign markets.11 Here, we apply these discussions to the export decision.

ownership Advantages Managers bundle resources and capabilities to develop core competencies that, in defining the firm’s competitive advantage, influence if and how it enters foreign markets. For instance, SpinCent capitalized on its ownership advantages by

Types of exporters include

• non-exporter, • sporadic exporter, • regular exporter.

Chapter 14 Export and Import 367

Ownership advantages of the company, location advantages of the market, and internalization advantages from controlling transactions shape how firms enter foreign markets.

Resource-constrained or risk- averse companies that have strong ownership advantages often enter foreign markets through export.

ConCept CheCk

The largest companies are the biggest exporters. SMEs, however, are steadily expanding export activity.

368 part 5 Global Strategy, Structure, and Implementation

GDP, employ over 70 percent of the nonagricultural workforce, and generate 25 percent of export earnings.15 As do others, Pakistan sees SME as a catalyst to generate jobs, boost exports, and reduce poverty.

Unquestionably, firm size helps explain who exports. It does not, however, determine who exports. SpinCent, a typical SME, marshaled resources and made export a part of its strategy. Its size guided its decision to seek assistance from federal and state agencies, but it did not determine its decision to export. Rather than size, research finds that char- acteristics such as core competencies, competitive prices, efficient production, executive leadership, and effective marketing better predict export activity than does firm size.16 For instance, production efficiency was the best predictor of Swedish companies’ export activity; those firms with higher productivity targeted foreign markets while those with lower productivity focused on domestic customers.17 Chinese SMEs’ labor costs, R&D ad- vantages, and state ownership better predicted their export activity than did their size.18 Likewise, high-performing Taiwanese firms, no matter how large or small, were more likely to become exporters than low-performing firms.19 Similarly, firm competencies, not size, better explained Canadian companies’ export propensity, the number of countries they exported to, and their export intensity (the ratio of a firm’s revenue from its export sales to its total revenue). Finally, top management’s favorable perception of exports, based on its anticipated contribution to growth and profits, powered exporting in British companies.20

In summary, firm size influences a company’s inclination to initiate or escalate export- ing. Oftentimes, however, other features matter far more than firm size. For example, Texas- based Coffee & More, a small company selling premium coffee and related products, looked to boost growth through export. Its CEO’s reasoning captures many common themes: “People thought we were cutting our throats by exporting, and I admit we had our own doubts. However, we knew the customer base for our product outside the United States was large, and so was the potential for success. Perseverance and commitment paid off. Now in- ternational exporting has become an integral part of the company.”21

exportinG: MotivAtion And Methods Why companies export has received extensive study. Analysis studies the influence of external (e.g., unsolicited orders, profit potential, large market size, physical proximity of the foreign market) and internal (e.g., diversification, excess capacity, growth prospects) motivators. Companies that are capital and research intensive, such as those making pharmaceuticals or avionics equipment, export products to amortize the steep costs of development and production. Others in less capital-intensive enterprise, such as adver- tisers, lawyers, and consultants, export their services to meet clients’ overseas needs; they follow clients abroad or risk losing them to rivals. Relative size matters as well, as smaller firms in their domestic markets may export to counter the production advantage com- manded by the industry leader. Finally, some companies export rather than invest abroad because the latter, done via licensing, joint ventures, or FDI, strikes them as too risky. Furthermore, serving foreign markets via export imposes fewer operational requirements than these modes.

Study of export scenarios identifies many motivators. Ultimately, the export decision cen- ters on improving profitability, boosting productivity, and achieving diversification.

proFitAbility Exporting opens opportunities to increase profits. Often, companies sell their products for higher prices abroad than at home. Foreign markets may lack competitive alternatives. Or, they may be in different stages of the product’s life cycle. Mature products at home often face price competition, whereas growth stages in foreign markets tolerate premium prices.

A firm’s characteristics moderate its export activity. Size matters, but often management commitment, efficiency, and cost structure matter more.

Exporting helps companies

• increase profitability, • improve productivity, • diversify activities.

Chapter 14 Export and Import 369

Also, exports enable a firm to expand its sales frontier efficiently. Though not quite decisive for firms in large markets, such as the United States, accessing bigger markets is a make-or- break factor for those in small markets, such as Belgium or Switzerland. “By not exporting, we were not tapping our full sales potential—sort of like leaving money on the table,” said the Director of Business Development for Certified Worldwide.22 Too, the Office of International Trade for the U.S. Small Business Administration found that “companies that export are more resilient, and they are more likely to stay in business.”23 Beside growing sales, creating more jobs, and paying employees higher wages, U.S. exporters are less likely to go out of business than non-exporters.24

produCtivity Exporting helps companies improve productivity, creating options to use scarce resources, such as capital and labor, more efficiently. Productivity is often linked to increasing econo- mies of scale; exploiting capacity or spreading costs over more customers improves ef- ficiency. Hence, selling more products to more people in more markets drives productivity gains. The U.S. International Trade Commission reports that despite facing trade barriers and other impediments, SMEs that export outperform those that do not. Besides more than doubling the total revenue of their non-exporting counterparts, their revenue per employee, a rough measure of labor productivity, was more than 70 percent higher than that of the non-exporters.25

Exporting improves productivity by inspiring innovation. Research reports a “dynamic virtuous cycle” between export and innovation in which each positively reinforces the other.26 Exporters often run into ideas and practices that are absent in their domestic market. New, different knowledge promotes learning, thereby helping managers develop higher-quality products. Ingenious products and processes, in turn, open more export markets, thereby boosting productivity. For instance, when Mississippi-based Domes International, maker of inexpensive housing, decided to expand internationally, it headed to India. Early experiences spurred innovations that improved its productivity and fortified its competitiveness. Its CEO explained, “There’s no doubt that Domes International is a better company as a result of our experience in India. We are much more flexible and innovative. The client wanted a less ex- pensive structure, so we went back to our labs and came up with an insulation solution that met their needs. Now we use these discoveries to improve core products and to offer more variations. We are much more confident going into new situations—listening, adapting, and finding the best solution.”27

diversiFiCAtion Exporting diversifies activities, thereby fortifying a firm’s adaptability to business cycles and disruptive innovations. Serving customers in different markets reduces a firm’s vulnerability to the loss of a local buyer while safeguarding its bargaining power with suppliers. Different growth rates in different markets enable an exporter to use strong sales in one country to off- set weak sales in another. SpinCent, for example, saw export markets in faster growing Asia as a means to reduce its overdependence on the slowing U.S. economy.28

The shift in economic power from the West to the East is often portrayed as a threat to developed countries. Alternatively, it likely signals export opportunities. The industrial and infrastructure ambitions of emerging economies push them to import tools and tech- nologies from wealthier, developed countries. In fact, imports into emerging economies have grown twice as fast as those into richer nations over the past decade.29 The United States, for instance, saw 30 percent of its export go to emerging markets in 1990; by 2015, nearly 60 percent did. Western companies from, for instance, the United States and Germany, diversify sales by exporting to faster-growing, increasingly prosperous emerg- ing countries.30

ConCept CheCk

The attraction of trade as a means of internationaliza- tion has been enhanced by the improving efficiencies of import and export. Chapter 7 (page 187) and Chapter 8 (page 209) note how the lib- eralization of the cross-border movement of resources and the development of ser- vices that support trade make these modes more attrac- tive to a broader range of companies.

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export: stArt-up And expAnsion Research studies how, when, and why a company initiates and develops exporting. Reports cover a lot of territory, evaluating the influence of managerial attitudes, product features, organizational resources, firm strategy, competitive circumstances, market trends, technol- ogy platforms, public policy, and so on. Although there is some consensus, wide-ranging interpretations persist. Indeed, as far back as 1991, research identified more than 700 vari- ables as credible drivers of export initiation and expansion.31 Presently, making sense of this situation relies on two perspectives: “incremental internationalization” and the “born-global phenomenon.”

inCreMentAl internAtionAlizAtion This view, developed in the 1980s and 1990s, sees physical distance, cultural ties, and market circumstances fundamentally shaping how a company approaches and engages export.32 Specifically, export activity follows a sequential process that leads a company to sell initially from its home market to geographically and psychologically proximate countries. From there, it methodically expands, systematically exporting to more dis- similar and distant countries. So, for example, a U.S. company would initiate export by looking first toward Canada and, if successful, then onward to the United Kingdom, and then into Europe.

Initially, companies find it easier and less risky to trade with customers in countries that share geographic, cultural, linguistic, political, and legal commonalities. As one would expect, trading with folks in similar markets—such as the United States and Canada—who speak the same or similar languages and share historical legacies puts less stress on manag- ers’ competencies. Trade data confirm these effects: two countries will engage in 42 percent more trade with each other if they share a common language than if they do not, 47 percent more if both countries belong to a trading bloc such as the European Union or NAFTA, 114 percent more if they share a common currency, and 188 percent more if they have a common colonial past.33

The dynamic of incremental internationalization is straightforward: Initial success trading with similar foreign customers, by developing managers’ confidence and com- petencies, encourages export activity. Practically, the firm’s country-by-country export expansion follows a learning process through which managers’ growing experience with and knowledge of increasingly dissimilar foreign markets develop the self-assurance to export to countries that share fewer commonalities and are farther afield. Essentially, as the company exports more, managers’ perception of the severity of challenges declines and their sense of opportunities expands. Rising confidence leads them to assess increasingly distant and dissimilar markets.

Consider the experiences of Analytical Graphics of Pennsylvania, a manufacturer of software applications that support cost-effective development and deployment of space, defense, and intelligence missions. It began exporting in the late 1990s, targeting oppor- tunities in Europe. Gradually, success there encouraged management to pursue export opportunities in Japan and South Korea. Its growing experience with the various business cultures in the Asian region, particularly regarding language customization and local training equirements, led it to open an office in Singapore to coordinate its increasing Asian sales.34

The interaction of managers’ experiential learning and the market features of vari- ous countries results in common export expansion scenarios. SMEs in the United States, for example, typically export first to Canada or the United Kingdom, then move on to Europe, Mexico, and eventually countries in South America, Asia, Africa, and the Middle East.35 Conversely, an SME in Vietnam, Thailand, or Malaysia would follow a different path, exporting first to countries in Southeast Asia, moving on to greater Asia, and then, as business practices improved based on lessons learned, looking to the United States, Europe, and Africa.

Two views of export shape interpretation: the deliberate, sequential dynamic of incremental internationalization and the instant internationalization of the born global.

Progressively gaining experience in successfully dealing with dissimilar markets encourages managers to expand their international horizon to include increasingly different markets.

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the born-GlobAl phenoMenon The international entrepreneurship literature reports that that some firms initiate exporting as a born global (also known as an “instant international,” micronational, or “international new venture”). Rather than methodically engaging a sequence of increasingly dissimilar foreign markets, born globals step onto the world stage immediately upon their founding or soon after. They regard their home as just one of many opportunities in the world.36

We find born globals worldwide, in markets big and small, looking beyond their borders from the get-go. A key characteristic is their executives’ international focus. Logitech, the Swiss-based maker of such computer devices as mice, keyboards, and speakers, was founded by a Swiss and an Italian who met while studying at Stanford University in the United States. It began exporting products worldwide soon after start-up.37 Similar examples indicate that folks who start born globals have a strong international orientation owing to insights gained from living or studying abroad. Often, too, we see a seasoned executive leave an MNE and launch a born global.38

The born-global phenomenon largely follows the ongoing globalization of markets, fall- ing trade barriers, growing demand for specialized products, and, perhaps most decisively, improving communication and logistics technologies—essentially, changing times change the game. Managers of born globals internationalize quickly because environmental cir- cumstances let them. Technological advances along with expanding, cross-national linkages enable managers to implement global visions, quickly and cheaply delivering innovations in markets spanning the world.

Consider the moves of Zady, a New York–based online retailer of clothing, accessories, and household goods that prides itself as a provider of high-quality products that had been manufactured mindful of environmental and labor standards. Launched in August 2013, by 2014, 20 percent of its website sales traffic came from Canada, France, Japan, and the United Kingdom. Then in summer 2015, Zady enlisted Borderfree, the global e-commerce subsidiary of Pitney Bowes, to manage its international shopping experience, including site localiza- tion, multicurrency pricing, payment processing, fraud management, customs clearance, and global logistics. Supported by Borderfree, Zady’s products are available, via its website, to shoppers in 220 countries and territories who use 74 currencies.39 Our closing case profiles the performance and potential of Borderfree.

Likewise, Evertek Computer, a U.S. SME started in 1990, quickly began exporting. By 2009, it was exporting to customers in 105 countries, 30 percent of which were in South America, 20 percent in Europe, and 20 percent in the Middle East and North Africa. Its suc- cess comes from selling refurbished computers and parts, for which worldwide demand is booming because buyers, particularly poorer ones, don’t need the latest, greatest tech. “They want cheap,” says Evertek’s international sales manager, John Ortley. “The firm’s business model,” he adds, “matches these folks with those who want to sell their used personal com- puter equipment.”40

At first glance, liquidating obsolete pieces and parts seems an unlikely basis for success- ful exporting. Also, Evertek does not command the intimidating ownership advantages that usually supports exporting. However, the international orientation of its top management creates a powerful driver. Mr. Oxley’s enthusiasm for international business, for example, fortifies the firm’s belief that a big part of its business is found abroad: “For me,” he says, “it started with being curious about the world. I enjoy learning about other cultures and respecting people who have a different background than mine.”41 Then, speaking like a true born global, he adds, “We’re thriving. The world is shrinking, and it’s getting easier and less expensive to do business on a global basis.”42

the inFluenCe oF tiMe And plACe Neither the incremental-international nor born-global perspective definitively represent how companies initiate and increase exporting. Company practices confirm that each cred- ibly interprets elements of the export process. For instance, U.S. companies’ exports travel

Born globals, owing to their executives’ international orientation and improving technological options, begin trading internationally at inception.

ConCept CheCk

Change in the structure and dynamics of world business endorses new and novel standards. A flat world, billions of new capitalists, emerging economies, the global financial crisis, and so on, challenge many conventional theories. Consequently, scholars study trends, such as those dealing with incremental internation- alization and the born-global phenomenon, to assess the direction and momentum of change.

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to 233 countries and territories around the world.43 Many paths reflect long-running trade relationships, such as that between the United States and Canada. Others reflect newer links, such as the United States and Kyrgyzstan. The scale and scope of this export universe support scenarios in which companies have developed the competencies to service more markets (the incremental-internationalization perspective) and can reach faraway markets with greater ease and immediacy (the born-global view).

Going forward, we anticipate stronger interaction effects between the incremental-in- ternationalization and born-global perspectives. First, e-commerce continues turbocharging the latter. A generation ago, going global involved slow-acting trade officials directing slow- moving flows between tough-to-understand markets that differed on countless regulations and routines. Hence, incremental, market-by-market export expansion was not only feasible, it was arguably the only practical option.44 Now, e-commerce tools and platforms, fortified by social media and supply-chain networks, immediately give small start-ups global reach, providing a platform that efficiently overcomes historic barriers to internationalization. Second, exporters inclined toward incremental expansion find the Internet enables cheap, easy, and effective means to analyze and access dissimilar markets. Hence, their progressive expansion to dissimilar markets fits the incremental view, whereas the acceleration of this process fits the born-global perspective.

the wildCArd oF serendipity It’s appealing to depict export initiation and development, whether done incrementally or im- mediately, as a purposeful strategy designed and delivered by proactive executives. However, reports tell of accidental exporters who, responding to happenstance or odd circumstances, unexpectedly but successfully enter foreign markets. Essentially, some companies start exporting because of fortuitous events rather than purposeful intent. Perhaps the most com- mon trigger is the arrival of an unsolicited order from a foreign buyer. Others include a new hire that has connections to foreign markets, an international contact made at an industry conference, or personal travel abroad that alerts one to opportunities. Thus, serendipity— making fortunate discoveries by accident—is not an uncommon export trigger.

Edward Cutler is such a case. He is the owner and founder of Pennsylvania-based Squigle, a unique brand of toothpaste for people who cannot tolerate mass-produced variet- ies.45 Upon launching Squigle, Mr. Cutler exclusively focused on the U.S. market. Internet posters spread news of his product, and Squigle soon received inquiries from Canada, France, Turkey, and elsewhere. One customer, a canker-sore sufferer in England, was so en- thusiastic about it that he began importing Squigle into England for local sale. That was good news for Mr. Cutler because it lets him expand abroad at little cost and low risk. Now he is eager to export more, explaining, “We’re looking to sell overseas for the same reason the big companies do: Most of the world’s population lies outside the United States.”46

Similarly, Vellus is a small Ohio-based company that makes a line of high-end pet grooming products. It began its export odyssey when a Taiwanese businessperson, after trying its customized shampoos, bought $25,000 worth of the company’s products to sell in Taiwan. Soon, word spread from show to show on the global canine circuit. Recounted Vellus’s CEO, “I started receiving calls from people around the world who would hear of our products at dog shows and ask organizers how they could get in touch with me to buy our products.”47 Today, Vellus exports its products to more than 30 countries.

ApproAChes to exportinG Granted, export sounds straightforward—‘make it, sell it, pack it, ship it.’48 This holds true for many trades. Others, though, impose stiffer requirements. Generally, the ease of export- ing reflects how a company chooses to serve foreign customers. As we now see, there are several options.

Trade data suggest an increasing interaction between the incremental-international and born-global perspectives.

Exporters are often proactive decision-makers. Sometimes, however, serendipity—making fortunate discoveries by accident—initiates export activity.

ConCept CheCk

The Internet influences political change, improves the operations of foreign- exchange markets, and changes the location econo- mies that drive value chain configurations. Similarly, the Internet reshapes export and import activity by opening new markets, supporting new strat- egies, and providing new tools.

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direct exporting In this scenario, the company directly sells its products to an indepen- dent intermediary, such as an agent, distributor, or retailer outside its home country. The intermediary then sells the product to the local consumer. Direct exporting requires a com- pany manage the export process, minding all aspects of making and marketing the product. Likewise, it supervises the exporting process from market research to foreign distribution and collections. Done well, direct exporting maximizes a company’s sales growth and profits. Direct exporting requires executive commitment and company resources to get the show started and then to sustain activity.49

indirect exporting Some companies prefer to do what they do best and outsource the rest. In this situation, they enlist independent distributors, agents, or export management compa- nies to ship, market, and sell their goods abroad. Operationally, the company sells its products to an independent intermediary in the domestic market, which then exports the product to its foreign agents, who then sell it to the end consumer. This process results in indirect exporting whereby an exporter makes its product, but relies on an intermediary to supervise marketing, terms of sale, packaging, distribution, and credit and collection procedures. This approach is relatively stress-free. Explained Edward Cutler, maker of Squigle toothpaste, “It is just easier to deal with distributors. We prefer to deal in master shippers of 144 tubes. We don’t have to do anything then but slap a label on it.”50 However, unlike direct exporting, where the company handles all the work and retains all the profits, indirect exporting lowers margins and reduces returns. Moreover, indirect exporting constrains developing customer relationships.

The intersection of retail and globalization trends makes indirect selling increasingly practical, especially for SMEs. Global retail chains such as Walmart, Carrefour, and Ahold easily move products from exporters to storefronts. Think of, for example, a DVD manufac- turer in Vietnam who supplies Walmart International with a product that Walmart then sells in its retail locations worldwide. Though not as lucrative as direct exporting, indirect export- ing imposes fewer demands. Too, it is often a transition phase whereby the neophyte can gain familiarity with foreign consumers and competitors.

Service companies often export their product indirectly rather than directly. Technically, an indirect service export results when a non-exporting firm provides services to another company that ultimately exports its products abroad. An indirect service export on the part of, say, a Swedish accounting firm occurs when it prepares the books of a Swedish company that exports to foreign markets. We commonly see indirect services exports with professional and business services such as accounting, advertising, consulting, and legal services. But, they occur in many industries, including audiovisual providers to film and television studios whose media are viewed overseas, or a hedge fund that sells shares to foreign investors through a wealth management advisory firm.

passively Filling orders from domestic buyers who then export the product In this mode, a company supplies inputs to other firms who then use that as a component in making a product that they then export. Essentially, a buyer contacts Firm A, submits an order, takes delivery, uses that good as an input into its product, which it then exports. From the perspective of Firm A, these sorts of international sales are indistinguishable from domestic sales. The supplier may be unaware that its product has been exported.51

whiCh ApproACh when? No export approach is intrinsically superior. At the broadest level, a company’s particu- lar ownership, location, and internalization advantages determine the optimal approach. Generally, large MNEs serve foreign customers directly through their foreign affiliates, while SMEs may export directly or indirectly.52 There is no hard-and-fast rule that one option is superior—approximately half of SMEs’ exports are direct (i.e., produced by the exporting SME immediately before export) while the other half are indirect (i.e., supplied by the SME to other companies that then ultimately export it).53

Exporting directly involves independent representatives, distributors, or retailers outside of the exporter’s home country.

Indirect exports are products sold to an intermediary in the home market, which then exports those products to other countries.

Several factors shape an SME’s preferred approach to export, notably its mix of ownership, location, and internalization advantages.

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Several factors shape an SME’s preferred approach. Protecting ownership advantages endorses exporting directly. SpinCent, for example, saw direct selling as the best means to retain control of its core competency. Similarly, top management experience as well as com- pany resources endorse some choices while discouraging others. A regular exporter is more likely to export directly. Firms new to exporting or those that lack sufficient resources gener- ally prefer indirect methods.

the influence of technology Technology influences the relative merits of the various export approaches. The Internet makes direct exporting increasingly efficient and effective by providing immediate, low-cost means that lets regular exporters, particularly born globals, easily access more markets.54 Too, e-commerce helps companies, both big and small, over- come capital and infrastructure limitations.55 For example, exporters in Chile use extranets to communicate with importers around the world, while exporters in Costa Rica use online shops to export directly.56 Likewise, tapping Borderfree’s global platform made Zady’s prod- ucts quickly available to international shoppers in 220 countries and territories. Electronic magic at innumerable sites, from Alibaba to Amazon, helps SMEs easily, efficiently, and effectively engage buyers and sellers worldwide. Twenty years ago, firm resources, commu- nication channels, and trade logistics mattered immensely if you were an SME in Patagonia trying to reach markets in Europe. Today, Internet tools and platforms make them matter far less.

Mix-and-Match Export approaches are not mutually exclusive. A firm can engage differ- ent methods to trade different products to serve different markets. A Canadian company may export directly to similar markets such as the United States, Australia, and Britain, while using indirect methods to handle exports to dissimilar markets in Asia or Africa. For example, Analytical Graphics, which began exporting in the late 1990s, had expanded sales into 13 countries, serving them through a mix of methods. It uses direct exporting in Canada and the United Kingdom, and indirect exporting via reseller partners in Japan, South Korea, India, Russia, and Brazil.57 Hence, the optimal choice(s) fits the firm’s competencies, its ex- ecutives’ outlook, and the market characteristics of the targeted countries.

Internet marketing helps companies—large and small— engage in international trade quickly, easily, and cheaply.

The four approaches to exporting are not mutually exclusive; company and market circumstances moderate whether managers opt to apply one or a mix.

Yes Exporting is always and every- where a win-win situation: The more

companies and countries export, the more they improve market efficiency. Exporting enables companies to increase sales, improve productivity, and diversify activities. Likewise, exporting helps countries generate jobs, accelerate inno- vation, and improve living standards. In broader terms, it promotes connections among countries that improve foreign relations and stabilize international affairs.

Despite these virtues, some contend there is a dark side of exporting, namely the trade of hazardous waste in the form of obsolete tech equipment. E-waste—trash composed of computers, monitors, electronics, game consoles, hard drives, television, smartphones, and other items—inexorably increases as the Information Age rolls on. In 2006, nearly 66 million used electronic components were collected for reuse or recycling in the United States; most were exported. By 2016, e-waste was pushing several hundred million pieces,

representing more than 4 million tons.58 Ongoing trends crank out newer, cooler, faster, smaller, fancier devices that, in replacing their predecessors and then eventually being replaced themselves, will increase e-waste nearly 500 per- cent over the next decade.

Where Should E-waste Go? Where to put all this e-trash is a tough question. Many countries and municipalities in the United States, for example, ban outright dumping of e-waste in local landfills. This legislation means that disposing of e-waste products, when possible, in any given industrialized country costs from $2,500 to $4,000 a ton. In contrast, untreated waste can be sold to countries in Africa and Asia—where it will be recycled, reused, or dumped—for reportedly as little as $50 a ton.59 Low costs are a result of cheap labor, different environmental regulations, and growing processing capacity. Plus, the absence of public opposition reduces processing expenses and desperate

Exporting E-waste: A Fair Solution?

Point Point

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folks seeking work dampens public objections. As might be expected, major e-waste shipping routes show that the industrial nations export the bulk of their e-waste to developing countries, notably China, Malaysia, India, Mexico, Nigeria, and Bangladesh (see Map 14.1).60

Benefits for All Exporting e-waste to recycling centers throughout the world is an efficient solution to an escalating problem. First and foremost, recycling sustains our resources and helps us protect the environment. In developing countries, industries have sprung up to recycle old computers, monitors, circuit boards, scanners, printers, routers, cell phones, and network cards. While rudimentary, these industries create jobs in places where jobs are hard to find and difficult to sustain. To their credit, developing countries have converted their superior location economics into vital jobs, income, and markets. There are more than 6,000 businesses employing 100,000 workers at ground zero of the e-waste trade: Guiyu, China. Previously subsistence farmers and fishermen, they now process an endless stream of truckloads of e-waste that arrive daily.61 Mexico has similar spots, many waiting for the 18-wheelers full of spent batteries from cars, phones, computer, solar appliances, and tools that cross the U.S.–Mexican border each day. Again, the locals benefit. Despite the dangerous,

dirty work of recycling spent batteries, people living near the Acumuladores de Jalisco plant find opportunity. As the wife of one worker said, “There are not many other jobs around here.”62

Similarly, exporting e-waste helps entrepreneurs in devel- oping countries create value by recovering, recycling, and reusing scarce resources. Copper, a valuable commodity, can represent nearly 20 percent of a mobile phone’s total weight. Rising commodity prices have made these activities quite profitable. Atul Maheshwar, owner of a recycling depot in India, says of U.S. exports, “If your country keeps send- ing us the material, our business will be good.”63 In addition, some of the equipment shipped to Asia helps improve the local standard of living. Graham Wollaston of Scrap Com- puters, a recycler in Phoenix, claims that virtually every com- ponent of old electronic devices is reusable. Old televisions turn into fish tanks in Malaysia, while silicon shortage cre- ates demand for old monitors elsewhere. “There’s no such thing as a third-world landfill,” Mr. Wollaston explains. “If you were to put an old computer on the street, it would be taken apart for the parts.”64 Similarly, Luc Lateille of the Canadian firm BMP Recycling says, “We don’t send junk—we only send the materials that they are looking for.”65

Exporting hazardous waste also helps MNEs improve their social responsibility. Samsung, Mitsubishi, and Nokia,

UNITED STATES

MEXICO HAITI

VENEZUELA

BRAZIL

CHILE

ARGENTINA

NIGERIA

EGYPT

UAE

KENYA

TANZANIA

EUROPEAN UNION UKRAINE

RUSSIA

SOUTH KOREA

JAPAN

PAKISTAN INDIA

CHINA

THAILAND

MALAYSIA

VIETNAM

THE PHILIPPINES

SINGAPORE

INDONESIA

AUSTRALIA

Known sources

Known destinations

Suspected destinations

MAp 14.1 the patterns of trade of electronic waste When computers, cell phones, and other electronic equipment become obsolete, they are no longer worth much in rich countries. E-waste, however, has some value in developing countries. That is exactly where, as exports, it usually ends up. Proponents note it promotes productive recycling as well as local economic development. Critics charge it is viciously hazardous and callously exploits cheap labor and lax regulations. Source: Data from Basel Action Network; Silicon Valley Toxics Condition, www.ban.org/about/.

http://www.ban.org/about/

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Here we see an enterprising Nigerian child running a grassroots e-recycling facility. Although junk to many, scavenging and selling useful parts creates value for him, his community, and the world. Source: Enrique Soriano-Silverlens/ ZUMA Press/Newscom

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among others, increasingly take a cradle-to-grave responsi- bility for their products. The eCycling Leadership Initiative, launched in 2010, commits makers of consumer electronics to recycle a billion pounds of e-waste responsibly by 2016; in 2011, members spent more than $100 million to recycle about 500 million pounds of old electronics. Elsewhere, state regulation spurs laggards to support green recycling. Since 2004, more than 20 U.S. states have required manufacturers to recycle used electronics. Like-minded laws are on deck in other states. Companies often comply by exporting their e-waste to countries that have an interest in recycling and the infrastructure to do it.

A Tough Solution Certainly, callous companies dump useless, toxic e-waste around the world. And, yes, some of it pollutes landfills, poisons waterways, and fouls the air. Overall, though, exporting e-waste works for citizens, consumers, companies, and countries. Ultimately, nations really don’t have a choice. The U.S. Environmental Protection Agency, for example, concedes inappropriate practices have occurred in the recycling of e-waste, but suggests stopping its export is not truly practical. Likewise, poor nations really have no choice; they must generate income some way or condemn themselves to poverty.

no In theory, recycling is benefi- cial and exporting e-waste does

improve efficiency. Still, recycling your e-waste does not always mean you’re doing the right thing. Explained the director of the Basel Action Network, “The dirty little secret is that when you take [your electronic waste] to a recycler, instead of throwing it in a trashcan, about 80 percent of that material, very quickly, finds itself on a container ship going to a country like China, Nigeria, India, Vietnam, Pakistan— where very dirty things happen to it.”66 Added the chief

executive of RSR, a Dallas-based lead recycler that operates solely in the United States, “We’re

shipping hazardous waste to a neighbor ill-equipped to process it, and we’re doing it legally, turning our heads, and pretending it’s not a problem.”67 Growing exports of hazardous waste encourage dangerous recycling industries in many developing countries. Going forward, exports will accelerate as e-waste increases far faster than other sorts of rubbish. Collectively, the tsunami of e-trash imposes far more costs than the pittance that recycling it generates.

Counterpoint

Exporting E-waste: A Fair Solution?

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A Witch’s Brew Most developing countries lack the regulatory codes or disposal infrastructure to safeguard against such dangers. Locals often use crude methods that, besides being illegal in the United States, expose workers and residents to a witch’s brew of toxins. For example, some e-waste contains trace amounts of precious metals like copper and silver. Extracting them encourages cash-strapped, loosely regulated recyclers to use unsafe, antiquated open-air incineration methods. Burning electronic parts to separate copper, solder, or other metals from plastic coatings releases dioxins and other hazardous chemicals. Indeed, snagging that sliver of silver unleashes a mixture of more than a thousand chemicals, including toxic metals (e.g., lead, barium, and mercury), flame-retardants, cadmium, acids, plastics, and chlorinated and brominated compounds. Local air quality suffers as “circuit boards are burned after acid washing, spewing deadly smoke and exposing workers and people living around these facilities.”68 Once local scrap shops finish disassembling equipment, the trash goes into public landfills, the acid runoff flows into groundwater, and the noxious fumes follow air currents—all mercilessly contaminating the environment.

Casual Inhumanity Madhumita Dutta of Toxics-Link Delhi argues that these problems are less disturbing than the “appalling” working conditions in recycling facilities: “Everything from dismantling the computer to pulling out parts of the circuit boards to acid-washing boards to recover copper is done with bare hands without any protective gear or face protection.” Rare is the worksite that uses proper

disposal practices. Workers and society, to say nothing of environmental sustainability, suffer.

What, then, of the premise of charity—that is, sending computer equipment from countries where it has little use to countries where it can make a difference? Critics shred this straw man, asserting that wealthier countries and pow- erful companies conveniently donate obsolete equipment to dodge high recycling expenses. “Too often, justifications of ‘building bridges over the digital divide’ are used as excuses to obscure and ignore the fact that these bridges double as toxic waste pipelines,” said one critic.69 Moreover, most of the computer equipment sent is worthless trash—waste that can be neither repaired nor resold.70

Institutional Gaps Some argue that manufacturers need to step up and take full responsibility for the hazardous materials they used to build products that had earned them profits.71 Companies have moved in this direction, sponsoring green campaigns to recycle e-waste. Substantive progress has been slow, however. Environmentalists recommend that countries set tougher standards to monitor, control, and certify cross-border shipments of e-waste. That has proven disappointing. Inspections of e-waste cargo headed from European seaports to developing countries, for example, found that nearly half was illegal.72

Then again, presumed solutions can lead to unintended problems. The fact that many U.S. states require companies to take responsibility for recycling electronic equipment has cur- tailed the export of e-waste to developing countries—but only of the more valuable components. Processors cherry-pick parts

Here we see a frightful wasteland near Lagos, Nigeria. Notwithstanding the toxic threats of this witch’s brew, desperation spurs people to scavenge for anything of value. Source: n86/ZUMA Press/Newscom

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iMportinG: prinCiples And prACtiCes Together, importing and exporting is the foundation of international trade. Importing is the purchase of a good or service by a buyer in Country X—the importer—from a seller in Country Y—the exporter. Effectively, importing is the reverse of exporting. Practically, Samsung’s shipment of a smartphone made in Seoul to a buyer in Montreal registers as an import for Canada and an export for South Korea. Service imports, given their intangi- bility, take various forms. Financial services provided by foreign banks to U.S. customers qualify as service imports. Similarly, when Lloyd’s of London writes an insurance policy for a client in Brazil, trade authorities in Brazil record an import. The import of services has subtle characteristics. For example, the installation of nuclear power equipment in Sweden by French firm Areva, even though it is tangible, qualifies as a service import for Sweden. The standard to keep in mind is that the import of a service consists of any transaction that (1) does not result in ownership and (2) is rendered by nonresidents to residents.

ChArACteristiCs oF iMporters Wide-ranging research has assessed the characteristics of exporters; for various reasons, however, importers receive less attention. Still, data indicate that importers are also likely to be exporters, and that these firms account for the bulk of the world’s exports and imports.75 In the United States, for instance, 405,000 U.S. companies traded goods internationally and, of those, 83,199 both exported and imported merchandise.76 On fun- damental points, then, the characteristics of exporters apply to importers. For instance, as do exporters, importers tailor international activities to reflect their ownership, localiza- tion, and internalization advantages. Similarly, importers exhibit incremental and born- global characteristics, and firm size, efficiency, innovation, and management commitment moderate their trading activity.

Several points qualify the degree of overlap. Historically, importers traded relatively few products with relatively few developing countries.77 Essentially, the bulk of im- ports tended toward opportunism or arbitrage (i.e., cheap oil in Saudi Arabia became expensive oil in the United States). Fast-growing economies, such as the Philippines, Peru, Nigeria, and Indonesia, accelerate and alter this relationship. These countries pro- duce more goods and services that outperform, in price and function, local choices in developed markets. They also provide higher-end products that once were the exclusive province of advanced markets—for example, think of Western companies now importing business process services from Indian MNEs like Infosys and Cognizant. Finally, global- ization supports differentiated supply chains that are longer, have more links, and cross more markets. Their growth commensurately increases the import of inputs among an increasing number of nations.

Together, imports and exports are the foundation of international trade.

A service import is a service transaction that does not result in ownership and is rendered by nonresidents to local residents.

The scale and scope of goods and services imported steadily expands.

that can be refurbished for reuse. The remainder is disassem- bled, with urban miners targeting silver, gold, and palladium. The final batch of trash, the worst of the worst, has no reuse market and is shipped to developing countries for disposal.73

Who to Turn To? Others endorse stronger enforcement of the Basel Convention on the Transboundary Movement of Hazardous Wastes and their Disposal, a United Nations

treaty that regulates the generation, management, movements, and disposal of hazardous waste. It proposes aggressive measures, including an international ban on the export of all toxic waste, no matter whether for recovery, recycling, reuse, or final disposal. As of 2015, 182 states and the European Union are parties to the Convention. Haiti and the United States have signed the Convention but not ratified it.74

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iMportinG: MotivAtion And Methods Various factors spur a firm to start and sustain importing. Research emphasizes the impor- tance of high-quality products, lower prices, reliable logistics, and local market imperfec- tions. These factors, singly and collectively, push importers to scan foreign markets in search of lower-priced, higher-quality, or locally unavailable products. This situation inevitably raises the question: Why do these anomalies exist? Absent these gaps, there is little need to import or, for that matter, export. Other parts of our text, particularly materials in Chapters 6 and 12, speak to this issue. For our purposes, the following conditions clarify key import motivations.

iMport drivers

specialization of labor Managers usually divide a production process into a sequence of separate yet interdependent steps and assign workers to particular steps so that one worker does one task, another does another task, and so on. The specialization of labor organizes production to achieve economies of scale (i.e., the inverse relationship between the quantity produced and per-unit fixed costs) as well as exploit location economics (i.e., different wage rates and material costs across countries). The resulting efficien- cies reduce costs, thereby enabling a company to offer higher quality products at lower costs to consumers locally and abroad. Sales to the latter, naturally, lead to imports. For instance, Nike buys shoes manufactured by companies in several Asian countries, where local companies make higher quality shoes for lower cost. Nike finds it impossible to manufacture the same products in its home market, sell them for a reasonable price, and still make a profit. As a result, it profitably imports shoes made in Asian factories into markets worldwide.

input optimization Companies import goods from foreign suppliers in order to lower costs. This is imperative in industries where competitive rivalry imposes persistent cost pres- sures, such as we see in telecommunications and business services. Many industrial and consumer goods, such as aircraft or cars, rely on thousands of parts produced in factories around the world. Likewise, many services, such as finance, information, and customer, hire back-office support or call-centers in foreign markets. Importing lets companies efficiently tap lower-cost inputs.

local unavailability The WTO identifies the expanded scope of choice as the chief ben- efit of import. Importing lets local markets improve the variety of their offerings, providing consumers with products that are either unavailable locally or that can serve as competitive substitutes to local options. Practically, think of the seasonal consequence of geography to trade flows; Canada imports bananas from tropical climates because of its unsuitable cli- mate; absent imports, Canadians would not enjoy fresh bananas. The same goes for eating seasonal fruits and vegetables out of season (e.g., grapes from Chile grace Christmas dinner in Denmark).

diversification Importers, like exporters, diversify by tapping international markets to develop options. Diversification through importing lets companies find higher-quality, lower-cost products and services, thereby making it less vulnerable to the dictates of a local supplier or business cycle. For example, customers of U.S. steelmakers, such as automobile companies, diversified their purchases to include Chinese, European, Indian, and South Korean suppliers. Developing alternative suppliers reduces the consequence of local supply shortages or unilateral price hikes by U.S. steelmakers.

Several reasons motivate importing:

• Specialization of labor • Global rivalry • Local unavailability • Diversification • Top management’s outlook

The specialization of labor is a powerful force to improve productivity. It benefits the import potential and performance of SMEs and large firms.

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who Are iMporters? Importers process a wide range of goods and services. Moreover, importers operate in mass markets, such as apparel or food, and niche markets, such as medical devices or legal discov- ery. No matter the product or business, one commonly sees three broad types.

input optimizers This type of importer uses foreign sourcing to optimize, in terms of price or quality, the inputs fed into its supply chain. Essentially, a company scours the globe for optimal inputs, then directs them to its various production points that it has configured worldwide. Its various factories then assemble them into finished goods that are then im- ported by markets worldwide. Logically, the flow of inputs and finished goods from country to country, besides representing imports, also qualifies as exports.

opportunistic This type of importer looks for products around the world that it can import and profitably sell to local citizens. It identifies imperfections in the local marketplace, whether real (customers prefer higher-quality or lower-cost options) or perceived (the presumption that foreign products are superior to local substitutes). It then opportunistically exploits a gap by finding, buying, transporting, and distributing those products from foreign suppliers to local customers. To a large degree, the specific product is secondary; rather, the game is using import channels to fill gaps in the local marketplace profitably. For instance, Utah-based SME ForEveryBody began making bath and body products locally. It began importing upon discovering low-cost home decora- tions from Asian manufacturers that were competitive with premium products in the United States.

Arbitrageurs In theory, a good sold in one market should sell for the same price in another. In practice, prices vary due to gaps resulting from market regulations, trade inef- ficiencies, political risks, and other factors. These imperfections, by creating supply gaps, create the basis for import arbitrage. Effectively, an enterprising firm in one country looks to others for locally unavailable products, and then imports and sells them. For example, the release of the latest, greatest iPhone typically triggers a consumer frenzy, including scalpers aiming to exploit a temporary market gap given that it is only available in the United States for the first several weeks. Demand in other countries creates compelling opportunities. Buyers in China, for instance, hire shoppers in Los Angeles, Chicago, and New York to buy as many iPhones as they can and overnight them to Beijing, Chengdu, or Shanghai, where they are then marked up twice or thrice more.78 Eventually, once Apple sells the ‘latest, greatest’ iPhone directly in China, through its local retail outlets and licensed resellers, the gap closes.

iMportinG And exportinG: probleMs And pitFAlls Companies identify many problems that complicate international trade. The types, char- acteristics, and impact of trade barriers vary considerably. The United States International Trade Commission polled more than 8,400 U.S. firms—both big companies and SMEs from the manufacturing and service sectors—about the influence of 19 potential barriers to trade.79 The data confirm that international traders deal with a battery of impediments (see Table 14.1).

As SMEs export more, their perception of the severity of barriers declines—much as one would expect, given the earlier discussion of the role of managerial confidence in the internationalization process.80 Likewise, SMEs that export sporadically to fewer markets see barriers as far more burdensome than do regular exporters. However, trade experience is not a panacea. Regular, as well as sporadic, exporters struggle with various barriers. Let’s take a look at persistent concerns.

There are three general types of importers:

• Input optimizers • Opportunistic • Arbitrageurs

In principle, arbitrage is the simultaneous buying and selling of the same product in different markets in order to exploit differences in price.

ConCept CheCk

As straightforward as the con- cept of exporting may seem on the surface, whether you are a born-global entrepre- neur or an established Mne, it is fraught with challenges. Behavioral barriers compli- cate international operations. Political and legal codes pose pitfalls, government regulation impacts trade relationships, and foreign-exchange instru- ments necessitate financial sophistication.

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FinAnCiAl risks Financial constraints pose tough impediments to international traders. A survey of 978 SMEs asked their perceptions of trade barriers—the greatest problem was the shortage of working capital to finance export.81 Financial concerns, such as payments and taxation, consistently affect companies, big and small, in both manufacturing and services. Some traders reason that export or import offers low profitability given higher costs and financial risks, both of which are aggravated by fluctuating exchange rates. Managing these problems involves cur- rency and credit processes that call for sophisticated expertise. Furthermore, completing in- ternational sales often requires helping foreign customers obtain credit, whether in the form of trade credits, government-financed support, or bank guarantees.82 Firms accustomed to offering financing in terms of the traditional 30- or 60-day trade-credit cycle at home under- standably dislike developing alternative arrangements, particularly when involving different currencies.83

CustoMer MAnAGeMent Historically, exports and imports were arm’s-length, ship-it-and-forget-it transactions. Contact with customers relied on documents either faxed or posted overnight. This situ- ation created useful time lags with which to deal with questions and complaints. Now,

SMEs regularly rate financial constraints as the most daunting barrier to trading internationally.

An enduring barrier to exporting is misunderstanding the difficulty of profitably serving consumers in foreign markets.

tAble 14.1 the relative influence of Common barriers to export84

International trade presents a range of difficulties. Here we see how managers of SMEs and large companies, either making a good or providing a service, rate the challenge of common barriers. Note: The higher the percentage, the greater the perceived severity of the impediment.

Barrier to export Manufacturing service

sMe Large Firm sMe Large Firm Transportation/shipping costs 88.5 93.6 53.6 35.1 Language/cultural barriers 82.2 86.8 53.4 42.2 Difficulty locating sales prospects 79.1 83.2 55.8 45.2 Foreign regulations 78.0 90.0 51.1 48.3 U.S. regulations 73.4 86.8 45.4 37.8 Foreign sales not sufficiently profitable 72.5 84.4 58.7 46.2 Customs procedures 71.9 87.4 44.6 35.5 Difficulty receiving or processing

payments 67.9 87.9 39.3 41.1

U.S. taxation issues 62.8 80.7 37.4 39.2 Lack of trained staff 62.6 85.7 36.7 46.5 Insufficient intellectual property

protection 61.8 71.6 43.6 27.3

Foreign taxation issues 60.4 80.5 36.1 40.6 Preference for local goods/services in

foreign market 57.4 81.7 37.8 35.8

Difficulty establishing affiliates in foreign markets

57.2 76.9 29.8 33.8

High tariffs 56.6 81.6 36.8 28.8 Lack of government support

programs 56.4 70.3 29.2 29.4

Obtaining financing 51.6 63.8 38.5 31.9 Unable to find foreign partners 50.5 66.6 33.0 36.0 Visa issues 30.1 67.8 34.9 33.5

Source: “Small and Medium-Sized Enterprises: Characteristics and Performance,” United States International Trade Commission, Investigation No. 332–510, November 2010.

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contacting vendors via e-mail or voice-over-Internet-protocol (VoIP) gives customers, no matter how far away, real-time access. The resulting rise in customers’ service expectations diminishes the appeal of international trade to some. “The new notch in the bar for us is the requests from our customers for additional services beyond the port of delivery,” said the materials manager of Seco/Warwick, a manufacturer of heat-treating equipment. “In previ- ous years, I would be responsible for cost, insurance, and freight (CIF) to the port of import, but now I’m often tasked with all aspects of delivery to the customer’s plant location. Now we’re often involved in the installation and start-up of the equipment, so we have service engineers and cranes waiting for the on-time delivery.”85 Customer management concerns particularly challenge SMEs. Their orientation toward specialized opportunities and narrow market segments often prompts them to apply niche strategies. Increasing expectations push them to customize services and marketing support to fit overseas segments in ways that can exceed those offered in the home market.86

internAtionAl business expertise International traders, like most managers dealing with foreign markets, must understand local business practices. Ordinary as well as idiosyncratic problems include limited knowl- edge of local rivals, unfamiliarity with local regulations, uncertainty about the prevailing price-to-quality standards, difficulty optimizing transportation and insurance options, and questions about market channels, promotion tactics, and consumer behavior. Firms that struggle to interpret export markets typically exit international trade. Still, as evident in the steady expansion of trade, enterprising managers find solutions. Think back, for example, to our opening profile of SpinCent. Fear of misunderstanding export markets led its CEO to hire local agents and distributors as well as consult with trade officials, both at home and overseas.

MArketinG ChAllenGes Traders regularly complain about high shipment costs and logistic demands, weak foreign market connections, difficulties in matching foreign rivals’ prices, effectively promoting prod- ucts and establishing distribution networks, and tailoring after-sales service programs. Non- exporters express greater anxiety about these marketing uncertainties, particularly when they benchmark them against the comparatively easier demands in their home markets. In addition, shifting economics opens markets in places where different market structures and consumer behaviors pose new challenges. Going from the United States to Canada is one thing; going from the United States to Turkmenistan, Zambia, or Kosovo, for example, is entirely another.

top MAnAGeMent CoMMitMent Management characteristics, especially executives’ international outlook and risk orientation, influence export and import activity. For many reasons, companies, particularly SMEs, focus on domestic rather than foreign markets. In the United States, for instance, SMEs compose 97 percent of all exporters, yet less than 1 percent of all SMEs export. Of those that do, nearly two-thirds export to just one foreign market.87 Asked why, managers’ preference for the pre- dictable familiarity of the home market diminishes their overseas interest. Even when they concede the benefits of trade, the riskiness and resource demands of internationalization dissuade many.

Exporting and importing put tough demands on management. Rare is the firm that eagerly adjusts its customary practices for foreign business standards. As a result, top management often emphasize domestic sales, duly noting the intention to export down

The problems and pitfalls of international trade consistently frustrate the sporadic and regular exporter.

Persevering in the face of problems and pitfalls requires executives committed to internationalization.

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the road. Recall Paul Knepper’s original export outlook at SpinCent; at best, he was a sporadic exporter who saw risks outweighing rewards. Eventually, productivity, profit- ability, and diversification concerns forced him to reconsider. From then on, ownership advantages, support from public agencies, and trustworthy distributors fortified his export commitment.

GovernMent reGulAtion Export and import inefficiencies persist due to delays, documents, and administrative fees. The rules and regulations governing trade, notwithstanding the success of the WTO, endure. New Jersey–based Spectra Colors, manufacturer and distributor of high-quality, customized dyes and colorants, runs into problems because import regulations differ from one country to the next. “In Europe, REACH regulations (Registration, Evaluation, and Authorization of Chemicals) have caused us lengthy delays and expense,” said Spectra’s business manager.88 Occasionally, shipments to various markets require government clearance. Refusals come easily to officials facing product constraints at home or political tension abroad. REACH dis- proportionately affects SME exporters, given staff and resource constraints to ensure com- pliance. Worse still, Canada, China, Japan, Switzerland, Taiwan, and Turkey are developing regulations like those of REACH.89

Similar regulatory situations emerge elsewhere. Exporters of medical devices face complex regulations and lengthy approval times that require extensive test data. Many countries, including Australia, Canada, China, certain EU member states, Japan, and the United States, impose approval procedures that require firms to implement an ISO- certified production quality management system. Firms must pay various fees to obtain and maintain certification. Many exporters, particularly SMEs, struggle to fund such efforts.

Table 14.1 shows that service exporters run into other problems. Professional service providers, such as the sort found in engineering, legal, finance, and entertainment sectors, regularly send employees abroad to perform contracted services. In Malaysia, however, foreign engineers cannot work on building projects unless the hiring company convinces the Malaysian Board of Engineers that a Malaysian engineer cannot do the job.90 It’s harsher in Thailand—its Alien Occupation Act reserves architecture and engineering ser- vices jobs for Thai nationals.91 Morocco prohibits foreign architects from registering with its National Association of Architects, then mandates that only Association members can legally practice architecture. The Philippines goes even further, reserving the practice of most licensed professions to Filipino citizens.92 Finally, India restricts the right to practice law to persons who are both Indian citizens and on the advocates’ roll in the particular Indian state where legal services will be provided. Furthermore, to qualify as an advocate, candidates must be either an Indian citizen or a citizen of a country that allows Indian nationals to practice law on a reciprocal basis, hold a degree from a university recognized by the Bar Council of India, and be at least 21 years of age.93 Similar situations in Brazil, Bahrain, and Hong Kong, to name just a few, challenge the legal firm with international ambitions.

E-commerce, while a powerful trading platform, does not let companies circumvent barriers. Government regulations may lag company actions, given the speed by which e-commerce evolves, but they eventually regain their authority. For example, Chinese law holds that an enterprise seeking to operate in its national digital publishing field must obtain at least one of the four licenses for publishing, copying, distributing, or importing e-books. Within a day of Amazon announcing its Kindle store launch in China, for instance, the Chinese authorities challenged its legality, claiming its licensing agreement with its Chinese partner, Chineseall.com, was insufficient.94

In the United States, security issues constrain international trade. Ensuring a homeland that is safe, secure, and resilient against terrorism and other hazards inevitably limits business free- dom. The logistics manager at Schott North America, for example, explained that the real danger

ConCept CheCk

“Legal Issues Facing Interna- tional Companies,” profiled in Chapter 3 (page 84), notes how a country’s legal system influences operating decisions. Chapter 7 (page 195) shows how governments influence import flows with instruments of trade control. Here, we add revenue collection and homeland security to the list of moderators.

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these obstacles requires that traders manage the paper trail that documents, certifies, and legalizes transactions.

The fact that paperwork tracks international trades means that missing or inaccurate documents boost costs, disrupt schedules, or halt the transaction. Many loss-and-damage challenges follow from incorrect use of International Commercial Terms, or Incoterms.101 Sometimes, exporters fail to classify their products accurately in terms of the tariff schedule of the country of destination. Goods that arrive with commercial invoice descriptions that do not match those of the importing country’s tariff classification are registered under a catchall description, such as “machinery, other.” Besides slowing the transaction, imprecise descrip- tions often incur higher duty charges.

Importers face similar, yet also different, difficulties. Some importers receive products prior to purchasing them—that is, they take the title of ownership without laying out any money, waiting to see if the shipment actually arrives and is as contracted. Its arrival in- country requires the importer deal with various offices and agencies to settle accounts, take title, settle duty charges, and arrange delivery. Required documents vary by country. Typically, customs agencies require an importer to provide an entry manifest, bill of lading, commercial invoice, valuation statement, and packing list.

iMportinG And exportinG: resourCes And AssistAnCe Globalization spurs companies to expand their market frontiers. Liberalizing markets and opening borders increases the potential for trade. Generally, big companies outperform their smaller counterparts pursuing these opportunities. Their ownership and internal- ization advantages as well as superior resources expedite expansion. Many SMEs lack the competencies and connections to pursue trade opportunities straightforwardly.102 These constraints might not matter greatly in some places, but in others, they are deci- sive. Quite simply, there is wide variability in the ease of exporting and importing among countries (see Table 14.3).

In some countries, trading is easy. For example, several of the top 10 countries on the ease-of-trading list are European. Trading across Europe has become progressively seamless due to the ongoing integration efforts of the European Union. Free trade pacts in other parts

Governments require international traders to thoroughly document trade transactions. ConCept CheCk

In Parts I and II of the text, we note that international business creates jobs, gener- ates income, and raises living standards. Parts II and III show how governments shape trade relationships through trade policies and regulations. Here, we observe that governments provide a variety of programs to improve the ease and efficiency of exporting and importing.

to international trade these days is not tariffs; rather, it’s “that your containers are stuck down at the terminal in New York [harbor] waiting for inspection” by radiation detection instruments before being allowed to enter the United States.95 Likewise, moving goods across borders takes far longer today given expanding security procedures: processing a truckload of goods across the Canadian–American border, for instance, takes three times as long as it did pre–September 11, 2001.96 The United Kingdom, likewise, replaced its “account consignor scheme” that had allowed logistics groups to accept goods for cargo planes from self-certified businesses in order to im- prove its air cargo safety. As a result, importers and exporters must have all shipments scanned by the freight firms, such as FedEx, TNT, and UPS, or establish high-security sites.97

Governments work toward common standards, adopting similar screening methods, and harmonizing security measures. For example, concern for views like that expressed by the logistics manager at Schott North America led the U.S. Customs and Border Patrol to imple- ment the Container Security Initiative (CSI). This program negotiates bilateral cargo security agreements with trading partners to set procedures for inspecting high-risk maritime cargo containers before they are loaded aboard vessels bound for the United States. Presently, CSI is operational at nearly 60 ports in North America, Europe, Asia, Africa, the Middle East, and Latin and Central America.98

trAde doCuMentAtion A battery of documents regulates international trade; Table 14.2 profiles a few. Keep in mind that customs regulations, though overlapping, invariably differ across countries. Tariff classifications, value declarations, and duty management create questions and boost costs. Furthermore, homeland security adds other regulations in the belief that protecting territory, sovereignty, citizens, and infrastructure requires more, not less, information.99 Navigating

tAble 14.2 types of export documents

Many concerns motivate a government to monitor export activities, ranging from tracking transactions to safeguarding national security. The burden of reporting trade flows largely falls upon the trader. Here we see a small subset of the forms that exporters complete to comply with U.S. Customs and Border Protection and Homeland Security.

Type specification Bill of Lading A receipt for goods delivered to the common carrier for transportation, a

contract for services rendered by the carrier, and a document of title. The cus- tomer usually needs the original as proof of ownership before assuming title.

Certificate of Origin Indicates the product’s origination and is usually validated by locally desig- nated agency, such as a Chamber of Commerce. It helps customs officials determine the appropriate tariff schedule.

Commercial Invoice A bill for the goods from the buyer to seller describing the goods, buyer/seller addresses, and delivery and payment terms. Governments use it to determine the value of goods when assessing customs duties.

Consular Invoice Sometimes required by countries to monitor imports; it’s used by governments to track trade flows.

Electronic Export Information (EEI)

The most common export document whereby an exporter declares key elements of the transaction, such as the involved parties, dates, ultimate consignee, forwarding agent, ultimate destination, and loading pier. Provides export statistics and enables export control.100

Export-Packing List Itemizes the material in each individual package, indicates the type of pack- age, and is attached to the outside of the package. Used by the shipper and customs officials to verify the cargo.

Pro Forma Invoice A document from the exporter to the importer that outlines the selling terms, price, and delivery as if the goods had actually shipped. If the importer accepts the terms and conditions, it sends a purchase order and arranges for payment. At that point, the exporter issues a commercial invoice.

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these obstacles requires that traders manage the paper trail that documents, certifies, and legalizes transactions.

Governments require international traders to thoroughly document trade transactions. ConCept CheCk

Here, we see those countries that lead and lag the world in increasing the ease of export and import. These rankings reflect a country’s performance in terms of the time and cost (excluding tariffs) involved in exporting and importing a standardized cargo of goods by sea transport. Key indicators include the number of documents customs requires traders to complete and the length of time and overall cost required to complete a transaction.

easiest Rank Hardest Rank Singapore 1 Haiti 180 New Zealand 2 Angola 181 Hong Kong SAR, China 3 Venezuela 182 Denmark 4 Afghanistan 183 South Korea 5 Congo, Democratic Republic 184 Norway 6 Chad 185 United States 7 South Sudan 186 United Kingdom 8 Central African Republic 187 Finland 9 Libya 188 Australia 10 Eritrea 189

Source: Doing Business in 2015: Going Beyond Efficiency, 2014 International Bank for Reconstruction and Development/The World Bank.

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of the world have similar effects, such as NAFTA expediting trade among Canada, Mexico, and the United States. In contrast, trading is hard elsewhere. For example, irregular customs practices in African and South Asian markets routinely hamper exports and imports. Moving from port to port in these markets finds a hodgepodge of hazy regulations that can veer to- ward illegality. One Zambian trader noted, “My cargo of copper wire was held up in Durban, South Africa, for a week. The port authorities required proof that the wooden pallets on which the wire was loaded were free of pests. After some days, the Ministry of Agriculture’s inspector checked that the wood was fumigated—for a $100 fee.”103 No matter the locale, importing requires understanding relevant customs regulations and policies, knowing how to clear goods through customs, assigning the appropriate customs duties, and complying with special procedures.

Many firms find themselves in situations where assistance can meaningfully influence the productivity and profitability of their international activities. They can enlist aid from various public or private agents.

publiC AGenCies Public officials champion export given its macroeconomic and microeconomic benefits. Exporting helps countries generate jobs, build foreign-exchange reserves, improve the balance of trade, develop foreign relationships, and raise living standards. In the United States, for example, exports support more than 10 million jobs. Notably, export-related jobs accounted for 22 percent or more of total employment in 10 U.S. manufacturing industries. Overall, manufacturing exports support more than one of every five jobs in the United States.104 From a microeconomic perspective, exporting helps firms leverage core competen- cies, improve financial performance, diversify risk, and fortify competitive positioning. New markets open paths to higher productivity and profitability. Consequently, governments assist potential and active exporters, offering trade counseling, market intelligence, business matchmaking, and commercial diplomacy. To a lesser degree, given regulations set by cross- national trade agreements, they protect the interests of their struggling importers.105

Agents and services In the United States, SMEs can start at the nearest Commercial Service office, the trade promotion arm of the U.S. Department of Commerce’s International Trade Administration. In Japan, one contacts JETRO, while in the United Kingdom, UKTI. Like similar organizations worldwide, they are government-related units that promote trade and investment, particularly helping SMEs exploit export potential. In terms of the U.S Commercial Services, its representatives in more than 100 U.S. cities and 70 countries help U.S. companies tap export opportunities. Its global network helps SMEs target markets, organize operations, and overcome barriers.106

Companies look to the International Trade Administration (ITA) for negotiation exper- tise and commercial diplomacy in order to resolve trade complications. Remember, imports replace local production; labor pressures often spur public officials to install import barri- ers. Garmine Marine, for example, asked the ITA to help clear its navigational GPS through Turkish customs, asking the ITA to advise Turkish government officials that the units can be self-certified by an accredited independent lab, in compliance with the relevant EU stan- dard.107 The ITA, here and elsewhere, works with government officials and, as needed, the WTO Technical Barriers to Trade Committee to promote fair trade.

U.S. government agencies provide information and share advice on the practicalities and technicalities of exporting. Its official gateway, www.export.gov, offers many services. SMEs also tap personal help at export centers run by various branches of the Commerce Department, ITA, and the Small Business Administration. These agencies promote trade and investment, help U.S. companies compete at home and abroad, and ensure fair trade through the rigorous enforcement of trade laws and agreements.108 Similarly, local government offices run export financing programs, including pre- and post-shipment work- ing-capital loans and guarantees, accounts receivable financing, and export insurance. The

In the United States, as in most countries, public agencies help firms initiate and develop exports and imports.

http://www.export.gov

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limited reserves of some agencies requires proof of adequate safeguards from the exporter. For instance, authorities usually require a letter of credit or confirmed credit insurance. In return, they stipulate that the exporter then transact part of the funded activity within their jurisdiction.

privAte AGents Companies routinely enlist private agents to help navigate international trade. Prominent types include export intermediaries, freight forwarders, customs brokers, World Trade Centers, and international banks. These agents offer an operationally easier and less risky approach to export than going alone.109 Their expertise provides skills and advantages that companies, especially SMEs, typically lack. Likewise, their experience with regulations, du- ties, insurance, and transportation preempts common problems.

export Management Company (eMC) An EMC, by acting as the international trade arm of a company, helps firms establish overseas markets. An EMC helps SMEs enter for- eign markets, overcoming otherwise daunting start-up barriers. It often acts as an unofficial marketing department, generating orders, organizing distribution channels, and developing promotions. Likewise, it verifies credit information, clarifies foreign accounts and payment terms, and even uses the firm’s letterhead in communicating with foreign sales representa- tives. An EMC oversees trade documents, schedules transportation, and arranges patent and trademark protection.110 Finally, it can expedite resolutions and, if needed, represent its cli- ent in customs investigations.

EMCs operate on a contractual basis, providing exclusive representation in a formally defined market. Their contract with a company specifies pricing, credit, and financial poli- cies, promotional services, and method of payment. An EMC might operate on a commission basis (unless it takes title to the merchandise) and charge fees for other services. It usually concentrates on complementary and noncompetitive products from various companies in order to market a full product line.

In the United States, most EMCs specialize by product, function, or market area. Some are large concerns, handling lines from many manufacturers that cut across several indus- tries. Others are smaller and work with fewer clients. Some specialize in certain products or focus on particular places, while others are generalists. The Federation of International Trade Associations (FITA) estimates that more than 1,000 EMCs operate in the United States, each representing, on average, about 10 companies. Although few U.S. companies use them, FITA reasons that many would benefit.111 Still, though versatile, EMCs are not a panacea. Some EMCs have limited resources and may struggle to warehouse a company’s product or de- velop financing options.

export trading Company (etC) In 1982, the United States instituted the Export Trading Company Act, thereby permitting U.S. firms to collaborate with each other to reduce their export costs, improve export efficiency, and, in turn, compete more effectively in export markets.112 Exemption from U.S. antitrust laws let’s exporters coordinate overseas activities with rivals. They often collaborate to share expertise, reduce shipping costs, boost negotiat- ing power, and fill larger orders. An ETC differs from an EMC in that it operates based on demand rather than supply. Operationally, an ETC brings buyers and sellers together, func- tioning as a trade matchmaker. It creates value by determining foreign customers’ prefer- ences, identifying domestic suppliers, and facilitating transactions. Rather than representing a single manufacturer, an ETC works with many. Operating as independent distributors, they avoid carrying inventory in their own name or performing post-sales service.

Freight Forwarders Popularly known as the “travel agent of cargo,” freight forwarders are the largest export/import intermediary in terms of the value and weight of products shipped internationally.113 Operationally, upon finalizing a foreign sale, an exporter hires a freight

ConCept CheCk

In Chapter 1, we suggest that international business is chal- lenging for people who like to operate solo. Collecting infor- mation about foreign markets, navigating export regulations, mastering foreign-exchange procedures, or complying with homeland security policies can prove overwhelming. Consequently, some com- panies prefer help in finding information about potential markers. International trade intermediaries often command sophisticated knowledge of international trade.

Trade intermediaries are third parties that provide exporters a variety of services.

Many EMCs are entrepreneurial ventures that specialize by product, function, or market area.

The United States exempts ETCs from antitrust provisions, thereby permitting competitors to combine forces in foreign markets.

ETCs operate based on demand rather than supply. They identify suppliers who can fill orders in overseas markets.

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forwarder to arrange the fastest, cheapest transportation method. More often than not, freight forwarders look to the pack mules of globalization. Container ships, like those seen in the above photo transport nearly 90 percent of non-bulk cargo worldwide. Balancing the constraints of space, speed, and cost, a freight forwarder identifies the optimal path to move the shipment from the manufacturer to an air, land, or ocean terminal, supervises clear- ing customs, and schedules delivery to the foreign buyer. A freight forwarder also arranges pre-shipping storage, verifies credit-worthiness, obtains export licenses, pays consular fees, processes documentation, and prepares manifests. It may also advise on packing and labeling, transportation insurance, repacking of shipments damaged en route, and ware- housing products. It does not take ownership title or act as a sales representative— those tasks fall in the realm of an EMC or ETC. As a rule, freight forwarders offer fewer services than those agents.

Freight forwarders are particularly important when the cost or timing of freight can make or break a deal. One straightforward solution, advises the director of business devel- opment of Certified Worldwide, is “seek out your local Commercial Service office and find a freight forwarder, interview different freight forwarders, and remember that the com- pany chosen will be responsible for shipping your product.”114 A freight forwarder usually charges the exporter a percentage of the shipment value, plus a minimum charge depend- ing on the number of services provided. It also receives a brokerage fee from the carrier. Most companies, especially SMEs, find international logistics costly and complex. Freight forwarders’ expertise enables them to secure shipping space at better rates and efficiently organize shipments.

third-party logistics (3pls) This agent is a fast-growing force in international trade. Like freight forwarders, 3PLs move cargo across global markets. Unlike freight forwarders, 3PLs collaborate with manufacturers, shippers, and retailers to relieve them of the logis- tics responsibilities of transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding. 3PLs, such as Mohawk Global Logistics, UPS, or FedEx, simplify the complexities of international logistics through seamless, end-to-end solutions in transportation, customs brokerage, cargo insurance, and most everything else needed to move cargo across the globe on time, cheaply, and worry-free. Think of, on a very small scale,

A freight forwarder specializes in moving goods from sellers to buyers.

A 3PL is a trade intermediary that applies sophisticated technologies and systems to supervise trade logistics.

The Pack Mules of Globalization Container ships, of the sort seen here lined up in the Port of Hamburg, are the patient, sure-sailing, hardy and long-lasting movers of imports and exports. Pound for pound, they are the most efficient means of transporting goods between countries. Source B Christopher / Alamy Stock Photo,

▶

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your last UPS experience; just as you did, an SME relies on UPS to track and transport the product, all the while providing access to real-time information to chart its progress. 3PLs also consolidate billing inclusive of all transportation, customs brokerage, duties, taxes, and package delivery services. Finally, they handle product returns, warranty claims, parts ex- changes, and reverse logistics.

Expanding globalization and trade liberalization accelerate the growth of 3PLs.115 They are particularly helpful to the born-global company. Rather than building its own logistics operation, it need only tap the services of a 3PL. Big companies also benefit: nearly 80 per- cent of Fortune 500 companies use 3PLs to manage logistics and supply chains. Procter & Gamble, Walmart, PepsiCo, and Ford, for example, use them. Overall, 3PLs have been grow- ing their business at the expense of freight forwarders. In response, the latter expands its historical role as the travel agents of cargo to provide logistics support.

Customs brokers Trading internationally requires understanding relevant customs reg- ulations and policies, knowing how to clear goods through customs, assigning the ap- propriate customs duties, and complying with special procedures. The United States has nearly 10,000 classifications in its Harmonized Tariff Schedule. Approximately 60 percent of these are open to interpretation—that is, a particular product fits more than one clas- sification. Often, it is an art form to determine the tariff classification that minimizes duty assessment. Importing requires considerable expertise to manage this and other processes. Trade paperwork is extensive, involving document preparation and/or electronic submis- sions; calculating and paying taxes, duties, and excises; and overseeing communications between government authorities and traders. Not every company commands these profi- ciencies, especially SMEs. Consequently, some hire a customs broker to navigate customs regulations.116

the Costs and Constraints of private Agents Expectedly, private intermediaries charge for their services. Many variables influence fees. For freight forwarders, the mode of trans- port, distance/destination, weight and volume, value, contract type, handling requirements, and security needs influence charges. Changing the degree of collaboration and interde- pendence, as is the case with hiring a 3PL or an EMC, changes the fee structure. 3PLs often charge upfront costs based on the complexity of the service. This cost reflects the planning and development of material handling, operational and information systems required for distribution, and implementation of the proposed system. Similarly, ETCs and EMCs operate on (1) a commission rate ranging from 10 percent for consumer goods to 15 percent or more for industrial products, (2) a buy-sell basis that asks for a firm’s best home-country discount plus an extra discount for a product that is marked up when sold abroad, and/or (3) contri- butions for special events such as exhibiting products in a foreign trade show or an advance payment for advertising and promotion.

Besides payments, hiring a trade intermediary requires an exporter relinquish some, or even considerable, decision-making control regarding shipping, buyer segments, price policies, quality of promotion materials, delivery schedules, or customer service. Depending on the contract, the intermediary oversees some to all of these matters. The intent to retain control leads some traders to use intermediaries less comprehensively. But, as in any make- versus-buy situation, companies balance their control preference relative to the demands of managing the activity.117

Longer terms, supportive governments, fading language barriers, improving communi- cations and connections, harmonizing finance practices, and efficient electronic exchange steadily diminish the appeal of fee-based trade agents. In response, private intermediaries innovate and upgrade their services. Some focus on exporting high-value products within the context of a single industry to select markets, rather than exporting bulk and commodity products. Others improve industry expertise in order to boosts effectiveness, whereas oth- ers offer multiple product lines to optimize efficiency. These sorts of innovations, by moving SMEs into foreign markets faster, help justify their fees.

A customs broker helps an importer navigate the regulations imposed by customs agencies. It helps importers in matters of

• valuation, • qualification, • deferment,

• liability.

Enlisting the support of a trade intermediary requires the trader surrender some degree of operational control.

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reConCilinG opportunity And ChAllenGe: An export plAn Beginning with identifying attractive markets, and moving onward through negotiating an international sale to shipping and receiving products, an exporter/importer manages an array of marketing, financial, logistic, and regulatory responsibilities. At times, some activi- ties press more than others, such as financial concerns prior to shipment, delivery concerns post-shipment, and so on. The decision to engage or escalate these activities, given their implication to profitability, is one that few companies take lightly. It is one thing to consider exporting and quite another to take the first steps in doing so. Going international imposes many demands that, collectively, influence resource allocation, executive effectiveness, operational flexibility, and financial stability. Successful exporters, citing the notion that “companies don’t plan to fail, they fail to plan,” indicate that developing an export plan manages these demands.

An export plan prioritizes markets, formalizes top management buy-in, organizes trade activities, and forecasts market scenarios. The process of defining objectives, sequencing tac- tics, and setting timelines pushes the firm to assess resources, develop competencies, assign responsibilities, and stipulate controls. A rigorous export plan helps executives track perfor- mance in the face of the ongoing, if not seemingly endless, decisions. At first glance, compil- ing an export plan may appear daunting. Remember, though, it need only be just a few pages to start. It steadily expands as it evolves.

Managers report that developing an export plan in a transparent, collaborative process improves its effectiveness.118 By no means does that guarantee success. Strategic planning in any context is challenging, especially when one must abandon the familiarity of domestic routines for the contingencies of international trade. External validation goes a long way to- ward preempting blind spots as well as potential delusions about the likely success of export ventures. More practically, a well-specified plan is a precondition for export financing assis- tance from public agencies.

Successful exporters note that consulting government agencies and third-party interme- diates helps clarify opportunities and preempt problems. Noted the CEO of Coffee & More, “My advice to other companies considering exporting is to go for it, but be smart and do your homework first. Educate yourself and use your local U.S. Commercial Service office.”119 Added the Manager of International Operations at Analytical Graphics, “Don’t just strike out on your own; take advantage of the U.S. Commercial Service. They are familiar with the ways of doing business in your market destination and know how U.S. companies can succeed there. It’s saved us valuable time and resources.”120

An export plan defines a company’s intent to leverage resources and manage constraints in initiating and developing export activity.

Traders stress-test an export plan by consulting trade specialists along with public and private agents.

tAble 14.4 improving the effectiveness of the export planning process

Strategic planning is a challenging but rewarding process. Considering the following questions throughout the process improves the quality of analysis:

• Is exporting consistent with our vision and mission? • Do we see ourselves as sporadic or regular exporters? • Would our resources be better utilized in developing our domestic businesses? • Will exporting put undue demands on management, production, finance, and marketing? • Does exporting leverage our ownership advantages? • Do our internalization advantages support export activity? • Do targeted export markets provide location advantages? • Does exporting fit our current mix of resources, capabilities, and competencies? • What is the relative price performance of competitive products? • How much will it cost to get the product to the foreign market? • Do the financial and strategic benefits of exporting exceed its direct and indirect costs? • What is the best mix of public and private assistance?

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information, source products, find suppliers, market products, and tap new markets. Some companies build virtual value chains, running export transactions from start to finish without ever leaving their home- town. The inexorable expansion of the Internet gives potential and practicing international traders nearly in- finite resources. They browse government trade data, online catalogs, business-to-business exchanges, electronic trade boards, consumer surveys, trade journals archives, and virtual trade shows to find a product to import or a market for their export.

The emergence of country-specific portals and web exchanges accelerates this trend. Replicating the dy- namics of consumer-to-consumer e-commerce, sev- eral sites offer online bazaars for international traders. Here, exporters can lay out their wares on the digital carpet and haggle with potential buyers from the far corners of the world. For instance, potential import- ers looking for products from South Korea can access www.koreatradeworld.com; those targeting India can check out www.trade-india.com; those focusing on Europe need only visit www.bizeurope.com to tap into high-quality trade boards. One can also shop the world at www.tradekey.com or www.alibaba.com.

These and similar sites promote the commer- cial potential of a country or region. They provide services to large and small international traders, such as export training, cyber-trade infrastructures, international special exhibitions, virtual trade shows, and trade strategies. Conceptually, their mission is direct: connect sellers here to buyers there. Operationally, they provide powerful business- to-business tools that improve the mechanics of trade, creating flexible and dynamic platforms that

The transaction costs of international trade steadily decrease. Advances in transportation and communi- cations systems, by making it easier and cheaper to trade, expedite exporting and importing. The Internet helps individuals engage each other easily and quickly. Online filing of cargo manifests, customs documents, and transit forms expedites shipments. Customs soft- ware that works in Hamburg or Sydney is used in Hong Kong and Long Beach. More parties, from the originating shipper, transit depots, and customs agents, along with the buyer and seller, easily monitor trade flows. All in all, greater flexibility and improving efficiency let companies engage an expanding range of export and import options.

Synchronizing import or export activities redefine how companies, both big and small, connect with foreign buyers and sellers. Historically, big com- panies reaped the biggest rewards. Their superior resources, capabilities, and competencies enabled them to directly move goods, funds, and informa- tion. Now, the technology of trade seems to offer bigger benefits to smaller companies. Improving technologies create online, software, and logistics platforms that blur the distinction between the big, global giant and the small, neighborhood start-up. In fact, it has become harder to tell the difference between an SME operating on a shoestring budget and its larger, richer counterpart.

online platforms

Companies look to online technologies to start or expand exporting. They rely on the Internet to get

Looking to the Future Technology Transforms International Trade

The element of an export plan that routinely stymies companies, particularly SMEs, is selecting the “right” foreign market. SMEs are often discouraged when their first foray fails. Instead of applying the standards of sound strategy that made them successful in the first place, many follow hunches about foreign markets (i.e., “China is growing so fast that there must be many people there who want my product”). Likewise, it is tough to try to conquer customers from Bonn to Beijing to Benares in a day. A useful rule is to look at a few markets where the odds favor success rather than trying to sell to the world.121 Table 14.4 identifies productive questions to frame the planning process. Last, like yin and yang, import and export are complementary opposites within the greater whole of international trade. Strategic and practical aspects of the import process mirror those of the export process. Changing the terminology from “export” to “import” does not require changing the contents of the plan. Rather, companies adjust their analytics, interpreting events from a particular perspective.

http://www.koreatradeworld.com

http://www.trade-india.com

http://www.bizeurope.com

http://www.tradekey.com

http://www.alibaba.com

392 part 5 Global Strategy, Structure, and Implementation

let buyers and sellers of everything from bamboo toothpicks to crawler bulldozers find each other, negotiate the terms of trade, and seal the deal.

Increasingly, as SMEs worldwide gain Internet access, they use online platforms to build their ex- port businesses. Besides introducing mom-and-pop shops throughout the world to each other, websites open a vast and largely uncharted small-business hinterland. Long the unseen production sites for many pieces of the global economy, these small companies had to trade within the context of global supply chains directed by large MNEs. Now, going online plugs them into the matrix, letting them go straight to buyers.

software platforms

A burst of business software in the past few years has “created a total revolution in what small businesses are able to accomplish overseas.”122 Collaborative software lets entrepreneurial exporters with single- digit headcounts track foreign vendors without trav- eling the world. For example, Edgar Blazona of True Modern used to log 100,000 miles annually visiting factories in the Far East. Now he uses two factories— one in Thailand and one in India—to manufacture his modernist furniture designs that he then imports into the United States. A meeting and document-sharing program lets him work in real time with his overseas factories. At a price of less than $100 per month, this software coordinates workflows, expedites ex- changes, and eases communications.

Similarly, Evertek Computer Corporation, a U.S. SME, has capitalized on software innovations to build e-commerce websites and portals that ex- pand its market frontier. In 1990, Evertek began selling new and refurbished computers and parts; by 2008, it had become the world’s largest close- out computer wholesaler, clearance computer sup- plier, and closeout electronics wholesaler. Within a year of purchasing BuyUSA.com, an Internet-based program from the U.S. Commerce Department that identifies buyers around the world, Evertek began selling in 10 new countries, with single purchases reaching up to $75,000. By 2010, it reported exports to 105 countries. Today, Evertek serves customers, principally via the web, in over 200 countries.

Companies use innovative programs to man- age overseas factories with tools that once were reserved for big MNEs. Global Manufacturing Network, for instance, relies on its 10-person staff in California to coordinate production of industrial de- vices among more than 100 independent factories in China, Malaysia, and Singapore. It uses on-demand,

scalable enterprise software to track activity orders, monitor build rates, and manage inventory across its manufacturing network.

Logistics platforms

Improving logistics help SMEs move products more cheaply and easily to more places. High-tech, low- cost shipping services rob big firms of a long-running advantage. Now, the no-name, one-person exporter down the street from you, because of its big-name shipping partners spanning the globe, has many of the same logistics capabilities commanded by a large MNE, but at a fraction of the cost. In fact, SMEs in- creasingly have as much, if not a bit more, logistic flexibility. Unlike big companies that rely on their in- house systems, SMEs arbitrage solutions from freight forwarders to 3PLs—think of the ease of using FedEx or UPS, for example. The small international trader can hire any of these sorts of intermediaries to ware- house, truck, ship, fly, and deliver goods from fac- tories in Asia to customers in Europe—all the while never taking physical possession of the goods.

South West Trading in Arizona, a family-owned start-up, imports yarns made from bamboo, corn, and soy fibers by fabric plants in China. South West Trading’s recurring problems importing products from China led it to consult UPS. The latter organized its Shanghai facility to consolidate orders from vari- ous Chinese factories into one container which other units then supervised, shipped, and trucked to South West Trading’s warehouse. South West Trading’s bottom line immediately benefited. Where it once paid $9,400 to run four China-to-Arizona shipments per month, its once-a-month UPS shipment costs about $3,600 and reliably takes 21 days to travel.

the Great Leveling

Improving online, software, market, and logistics plat- forms, by improving the technology of buying and selling, levels the playing field of international trade.123 The combination of ubiquitous Internet connections and cheap cloud-based computing makes it easier to export and import. Big and small companies respond, confident that technology creates tools that let them jump hurdles and capture opportunities. SMEs, in particular, prosper from the improving technology of trade. Perhaps most significantly, technology decou- ples the issues of size and capability. Observed the CEO of China Manufacturing, “Our customers can’t really tell how big we are. In a way, it’s irrelevant. What matters is that we can get the job done.”124 ■

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CountertrAde Currency or credit—easy, fast, and direct—are the preferred payment options for export or import transactions. Sometimes, though, companies face the harsh reality that a buyer can- not pay in cash because the home country’s currency is nonconvertible or the nation holds scant reserves, has insufficient credit, or imposes strict currency controls. Consequently, if they wish to trade, they must resort to other means.

Consider the following transactions. Coca-Cola has traded its syrup for cheese from the Soviet Union, oranges from Egypt, tomato paste from Turkey, beer from Poland, and soft drink bottles from Hungary. Malaysia swapped palm oil for fertilizer and machinery with North Korea, Cuba, and Russia and negotiated similar deals with Morocco, Jordan, Syria, and Iran. Thailand, the world’s largest exporter of rice, uses rice-for-oil deals with Middle Eastern countries. Boeing exchanged ten 747s for 34 million barrels of Saudi Arabian oil. Chinese companies agreed to build a coal mine, a power station, and a dam in Zimbabwe, with revenue from the mine being used to repay the loan.125 These sorts of trades fall under the umbrella term countertrade. Any one of several different arrangements that parties use to trade products via transactions that use limited or no currency or credit qualify as a coun- tertrade. Table 14.5 identifies its principal forms.126

Inconsistent disclosure hinders estimating the volume of countertrade. Secretive government-to-government deals and disguised transactions are not unusual. Roughly, more than 80 countries nowadays use or require countertrade. These transac- tions compose anywhere between 5 to 15 percent of the world trade.127 Countertrade generally increases as countries experience economic difficulties. Boom-bust market dynamics, particularly in commodity markets, makes countertrade an enduring feature of international trade.

Costs Countertrade is an inefficient way of doing business. Companies prefer straightforward cash or credit to settle a transaction. That sort of deal only requires consulting foreign-exchange tables to set exchange rates. Countertrade, instead, requires buyers and sellers rely on non- market factors to set the value of the trade, negotiating some standards such as how many tons of rice for how many farm tractors. Negotiating “payment” is not the only hurdle. Goods may be of poor quality, packaged unattractively, or difficult to sell and service. Consequently, countertrade deals are prone to price, financing, and quality problems. Ultimately, coun- tertrade and its variations threaten free market forces with indirect protectionism and price-fixing.

Companies and countries often use countertrade to build mutually beneficial relationships.

Countertrade is an umbrella term for several sorts of trade, such as barter or offset, in which the seller accepts goods or services, rather than currency or credit, as payment.

Countertrade has several disadvantages:

• Inefficiency • Risk • Complicated

tAble 14.5 Common Forms of Countertrade

Barter Products are exchanged directly for products of equal value without the use of cash or credit.

Buyback A supplier of capital or equipment agrees to accept future output generated by the investment as payment. For example: The exporter of equipment to a chemical plant may be repaid with output from the factory to whose owner it “sold” the equipment.

Offset An exporter sells products for cash and then helps the importer find opportuni- ties to earn hard currency for payment. One often sees offsets with big-ticket (e.g., military equipment) deals.

Switch or Swap Trading One company sells to another its obligation to purchase something in a foreign country. Typically, the arrangement involves switching the documentation and destination of merchandise while it’s in transit.

Counter-purchase A company sells products to a foreign country, promising to make a future purchase of a specific product made in that country.

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beneFits Countertrade is often unavoidable for companies that want to do business with buyers who have limited or no access to cash or credit. Companies and countries in tough binds use it to generate jobs, preserve foreign-exchange holdings, and develop trade relationships. Countertrade helps countries reduce their need to borrow working capital and gives them access to companies’ technological skills and marketing expertise. Companies also benefit; they can resolve bad debts, repatriate blocked funds, or develop customer relationships. Accepting countertrade signals a seller’s good faith and flexibility, often positioning it to gain preferential market access in the future.

ConCept CheCk

Recall our discussions of pov- erty in Chapters 4 and 5. Here, we point out that shortages of resources impoverish nations as well as individuals. Some countries struggle to acquire the foreign reserves they need to purchase goods from other nations. If unsuccessful, they may resort to countertrade.

Case128 The Borderfree Option: Going Global—simplified E-commerce, by changing the way companies around the world do business, makes international trade easier and cheaper. Before the Internet, tracking down a product to import, or finding foreign customers to export to, over- whelmed the typical SME. Some relied on occasional trade shows and expensive, time-consuming foreign travel to identify possible products or assess potential suppliers. Certainly, traders could tap local embassies or consulates to support export promotion or provide import assistance. Although sounding straightforward, in practice these sorts of options typically proved expensive and cumbersome. Consequently, international trade was largely limited to big companies that could afford to attend trade shows, trans- late marketing materials, travel internationally, hire inter- mediaries, and supervise the many activities that make up international trade.

Today, the Internet gives SMEs cost-effective means to manage these demands. It makes information on any conceivable product from virtually any market readily and inexpensively accessible. Falling trade barriers (due to expanding cross-national trade agreements) along with improving logistics options (courtesy of enterprising freight forwarders and 3PLs), offer an array of trade possibilities.

The Internet, simply put, transforms whatever it touches. It’s already the most powerful force for globaliza- tion, democratization, economic growth, and education in history. The same, we see, applies to the game of inter- national trade. As such, e-commerce is now inherently global—just as the Internet knows no physical boundaries,

so too with Internet sales. Consumers’ growing dispos- able income and interest in global brands, especially in a screen-saturated world, highlights the potential of global e-commerce.

Still, national markets differ in different sorts of ways— ranging from market structure and growth dynamics to consumer preferences and media consumption practices. Staying ahead of trends, both national and global, is no small task. It calls for companies to study the demographics, psy- chographics, preferences, and behaviors of the global con- sumer landscape, identify how to manage payments and collections, and organize supply chains that reflect when, where, what, and how consumers buy. Tough in just one market, the task can grow stunningly complex when looking at the 200-plus national markets or territories that compose the global business environment.

Launch a Website, Go Global Capturing those sales, along with riding expanding tech- nologies, has led many retailers to open websites with an eye to opening export markets far and wide. Now, opening a website, whether you like it or not, means you are global. Consumers from anywhere and everywhere can go to your website and, when there, do business. Done well, enterpris- ing companies can leverage cross-border e-commerce into powerful international expansion. Done poorly, a retailer wastes energy, effort, and equity. Despite best intentions,

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the challenges of international inexperience, currency ills, payment problems, logistics challenges, and cultural con- tingencies can prove daunting.

E-commerce’s growing potential spurs vendors to make going global as simple as linking your current website with their behind-the-scenes, back-office expertise. They develop end-to-end solutions that break down barriers and borders, thereby enabling a company to sell its products worldwide with reduced effort.

These companies are not your typical e-commerce, business-to-consumer model retailer, like Amazon, eBay, or Alibaba. Moreover, they are unlike traditional logistics com- panies, such as FedEx, DHL, UPS, and their core business of delivering packages. Rather, these companies, such as BorderJump, Venda, International Checkout, and Border- free, provide proprietary technology that enables retailers to transact with customers in virtually every country and terri- tory worldwide.

Borderfree: Fine-Tuning the Global Game Founded in 1999, Borderfree is headquartered in New York City. It has offices in Dublin, London, Tel Aviv, Toronto, and Shanghai. From these, Borderfree helps more than 200 retail- ers—such as Neiman Marcus, Lands’ End, and Harrods— conduct cross-border online sales in more than 220 countries that are transacted in 74 currencies.

Borderfree manages a retailers’ international shopping experience, suggesting real-time merchandising insights and marketing strategies to help it target international consum- ers, whether through web, mobile, or in-store channels. Then, Borderfree’s systems seals the deal, administering multicur- rency pricing and payment processing, tending to fraud and tax management, calculating landed costs, arranging cus- toms clearance and brokerage, and supervising logistics.

Borderfree’s mission, declared its CEO, “is to make it as simple as possible for online retailers to reach new con- sumers and sell their products around the world globally.” Added its chief technology officer, the rise in global con- sumerism means that “There’s a lot of growth still out there for companies in the industry. Growth from a revenue per- spective, growth from a coverage perspective.”

Capturing that growth requires companies, both large and small, overcome the barriers to buying and selling internationally. Borderfree, by linking customers and com- panies through tap-web and mobile platforms, helps con- sumers worldwide shop across geographies and devices while enabling companies to leverage their brand, inven- tory, and expertise.

Arranging the Pieces Borderfree’s turnkey installation system integrates with the retailer’s e-commerce infrastructure. Moreover, its plug-in

modules connect a retailer’s existing e-commerce infra- structure and international operations. The end result is that customers enter international markets quickly after system rollout. Moreover, Borderfree’s software helps its clients lo- calize the website experience, supporting country- specific marketing messages, pricing strategies, international checkouts with translation, local payment options, and fully landed delivery quotes.

Operationally, a retailer can add plug-ins that track what people are buying, where and when they are buying it, and adjust promotions in real time. On the service side, Border- free also manages international fraud, customs clearance, and all global logistics. Collectively, Borderfree enables the internationally ambitious retailer to quickly move from do- mestic today to global tomorrow.

Borderfree works with retailers to optimize international site experience based on local preferences, best practices, and marketing customization. It provides targeted marketing campaigns, data analysis and insight into prospective mar- kets, website localization, duty and tax compliance, pricing in different currencies, customs clearance, and customer care. Harrods’ e-commerce director, for instance, explained, “We were drawn to Borderfree’s ability to further enhance our capacity to serve our customers seamlessly across ge- ographies. We also were particularly interested in partnering with Borderfree to extend our reach into China and Russia, two markets that hold great consumer promise for us.”

The director of e-commerce at The Dune Group, a fash- ion footwear and accessories company that has over 300 stores and concessions in 24 countries, said that Borderfree provides “potential growth opportunities in markets such as South America, Africa, and Asia.” Likewise, head of digital at Trunci planned to use Borderfree’s platform to further its growth in India, Japan, Ireland, Mexico, Pakistan, South America, and South Korea.

Promising Solutions In 2014, Borderfree generated more than $125 million in rev- enue. It is paid by its clients based on a percentage of sales, generally up to 12 percent, that take place on Borderfree’s platform. It generates additional revenue from fulfillment services, foreign exchange, and other transaction-related fees. Looking to the future, as more countries champion international trade, as more executives target international sales, as more consumers develop global brand awareness, and as more technologies improve connectivity, shoppers worldwide will make more purchases on the Internet.

Capturing these opportunities pushes some companies to go alone in the world of import and export. Others, man- aging a differing mix of ownership, location, and internal- ization advantages, see that the growing competencies of companies such as Borderfree make going global with the help of an intermediary the superior choice.129

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Questions

14-3. Explain what Borderfree does. Why would an SME find that

appealing?

14-4. What mix of ownership, location, and internalization advan-

tages would encourage a company to hire Borderfree?

14-5. Borderfree’s clients expect it to be knowledgeable about the

key markets in which they operate and to be able to advise

on how to prioritize, budget, and compete. How does Bor-

derfree make that happen?

14-6. Borderfree promises to help its partners drive international

growth. What sorts of marketing and sales techniques help it

do so?

14-7. Do you think most international trade might eventually take

place through intermediaries like Borderfree.com? Does that

influence your interest in importing and exporting?

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

14-8 Provide two recommendations that you would offer an SME, based on the opportunities and constraints of electronic websites like Borderfree, as it considers engaging in exporting or importing.

14-9 Visit www.alibaba.com and www.europages.com. Compare and contrast these websites.

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

http://www.alibaba.com

http://www.europages.com

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Objectives

After studying this chapter, you should be able to

15-1 comprehend why export and import may not suffice for companies’ achievement of ib objectives

15-2 explain why and how companies make wholly owned foreign direct investments

15-3 Ascertain why companies collaborate in international markets

15-4 compare and contrast forms of and considerations for selecting an international collaborative arrangement

15-5 Grasp why ib collaborative arrangements fail or succeed

chApter 15 Direct investment and collaborative strategies

ME By Meliá Hotel in Madrid, Spain. ▶

If you can’t beat them, join them.

—American proverb

http://www.meliahotelsinternational.com/sites/default/files/informes-financieros/Informe_anual_RSC_14_completa_en.pdf

Case Meliá Hotels International1

God bless the inventor of sleep. (Miguel de Cervantes Saavedra, Don Quijote de la Mancha)

Li Feng arrived in London after a 13-hour flight from Beijing, her first company trip since completing her MBA and her first time out- side China. Upon entering her room at the Meliá White House, she felt too exhausted to do much more than shower and enjoy the comfort and amenities in her room. (The quote from Don Quijote was certainly applicable.) However, her excitement kept her from sleeping right away. So she perused the attractive hotel directory on her bedside table and was surprised to read that her hotel belonged to a Spanish company with more than 300 hotels all over the world. The photos showed an array of attractive hotels, ranging from those in big cities (primarily to serve businesspeople) to others on pristine beaches (primarily to serve vacationers).

She was also intrigued by a small picture of Gabriel Escarré, who founded the chain in 1956. At only 21, he leased his first hotel in Majorca (Mallorca), Spain, with only his savings and the expertise gained from his job at a travel agency. Li Feng fell asleep and dreamt of holidaying in a Meliá beach resort, but she awoke curious as to how Mr. Escarré had built Meliá’s position in the global hospitality industry. For the next five days, she worked long hours, squeezed in a little sightseeing, and then returned to Beijing. Despite jet-lag, she worked the next day and began catching up with the accumulated papers on her desk. In her spare time she did some research on Meliá. What she learned is described below. (The chapter’s opening photo shows the tower of a Meliá Hotel in Madrid.)

Growth in Spain

That Gabriel Escarré’s first hotel was in Majorca is not surprising be- cause most entrepreneurs begin in familiar surroundings. His timing was good—European incomes were rising and package tours for sun-loving tourists were gaining popularity. Most important, Escarré exhibited both a knack for hotel management and a motivation to expand. He grew by acquiring other properties in Spain’s Balearic and Canary Islands, branding them first as Hoteles Mallorquines, later as Hoteles Sol, still later to Sol-Meliá, which many people still call it, and finally to Meliá Hotels International in 2011. The early hotels aimed sales at beach-seeking tourists. In 1982, three years before its first foreign entry, the company began diversifying with urban hotels targeted to business travelers.

In 1984, the company rebranded hotels as Sol and bought 32 hotel properties of a Spanish chain, Hotasa, which expanded the company into more Spanish cities. Three years later, Sol acquired

Meliá from Paretti, an Italian group, which led to further client-based diversification—most Sol Hotels were three- and four-star beach properties, whereas most Meliá’s were four- or five-star urban hotels. In 2000, Meliá merged with another Spanish hotel chain, TRYP, thus adding 45 hotels in Spain. Meliá is now the largest hotel operator in Spain, and Spain is the largest location for Meliá.

international expanSion

Despite the importance of Spain to Meliá, where it still concentrates 49 percent of its hotels, 75 percent of its current income is from in- ternational operations. Some international expansion came from the acquisitions. The TRYP agreement included eight leased arrange- ments in Tunisia and three management contracts in Cuba. Meliá has used its 1999 purchase of the White House in London and the 2007 acquisition of the Innside Inns in Germany to bolster its Euro- pean urban presence. (Map 15.1 shows the regional breakdown of Meliá’s hotels.)

Having acquired experience and expertise within Spain, the firm’s first start-up abroad was a joint venture for the Meliá Bali in Indonesia. This start-up was long and complicated, involving diffi- culty in finding local suppliers. There were also logistics and import problems in sending materials from Majorca. Soon after, the com- pany focused on Latin America and eventually on other areas. Let’s examine some major international forays that demonstrate different modes of operations.

Cuba In terms of the number of hotels, Cuba’s 28 composed Meliá’s largest foreign presence until its recent growth in Germany. Yet the company has no ownership in hotels there because Cuba’s central- ized economy disallows full ownership by foreign hotel groups. Thus, Meliá had to establish an agreement with a public agency, which usually owns the properties. Meliá has a contract to manage proper- ties owned by Cubanacán.

Operating in Cuba slowed Meliá’s access to the U.S. market be- cause the U.S. government maintained restrictions on companies doing business with Cuba, such as on those managing expropriated assets once owned by U.S. citizens. Meliá had to prove that the hotels it managed were not expropriated from U.S. citizens before it could enter the U.S. market, where it currently operates.

China Despite more than 25 years of international expansion, Meliá’s Asian expansion has been slow. In 2009, Meliá signed a 10-year contract renewable for 10 more to manage The Gran Meliá Shanghai. This became the first Spanish-branded hotel in China,

—Fidel León-Darder and Cristina Villar2

Chapter 15 Direct Investment and Collaborative Strategies 399

even though the country had long been an important growth market for many international hotel chains, such as Hyatt, Marriott, Radisson, and China’s largest hotel chain, Jin Jiang. This anomaly is not due to Spanish hotel chains’ unawareness of the Chinese market poten- tial; indeed, many projects were developed to conquer the market as much as 10 years earlier. However, the unsuccessful experience of Spain’s Barceló Hotels discouraged other Spanish hotel chains from carrying out Chinese operations.

Barceló, one of Meliá’s main competitors, reached an agree- ment in 2000 with a Chinese state-owned company to manage the Shanghai International Convention Center & Hotel. Surprisingly, after operating eight months and bringing the hotel back into the black within six, the owners unilaterally terminated the contract by stating that the results were inadequate. Although Barceló won a two-year court battle on breach of contract and received some compensation, the affair left Spanish hoteliers with a bitter aftertaste and the sus- picion that Chinese government partners would break agreements once they learned enough from their foreign partners.

Meliá’s entry into China was facilitated by its favorable 20-year relationship with Cubanacán, which shares the Shanghai hotel own- ership with the Chinese company Xintian (Suntime). Still, getting the deal was not easy; it took more than five years from the time talks began to the hotel’s opening. Further, from almost the beginning, there was friction between Meliá and the hotel’s owners, which led to cancellation of the agreement in 2013. The hotel is now operated by the Swiss chain, Kempinski.

During the period of friction, Meliá began seeking other means of growth in China. In 2011 it opened a representative office in Shang- hai in order to boost its brand image and broaden its alliances within China. Subsequently, Meliá announced comanagement plans with Jin Jiang and Greenland, a Chinese real estate company. The plans provide for management sharing in six hotels, of which each part- ner had previously managed three. This allows the Chinese partners to extend their operations into three hotels—one each in Germany, Spain, and France—in exchange for Meliá’s comanagement of ho- tels in three Chinese cities. The partners share knowledge and best practices as well as integrate and develop training, information, and booking systems.

Relationship with Wyndham Meliá’s motivation for a 2010 agree- ment with Wyndham was largely to facilitate North American expan- sion by using Wyndham’s knowledge of that market and reputation with developers who are potential hotel investors. (Wyndham is one of the world’s largest hospitality companies and hotel franchisors, with 7700 hotels and 15 brands in 75 countries.) Through the agree- ment, Meliá sold its TRYP brand to Wyndham, but sold no real estate. The hotels in the transaction were re-branded as TRYP by Wynd- ham. Meliá became the franchisee for all the hotels using the TRYP by Wyndham brand for a 20-year period. Wyndham gained by in- creasing its reservations offerings for a mid-market brand in Europe and Latin America, even though the same hotels are also included in Meliá’s reservation system. Of the hotels in the 2010 agreement,

Map 15.1 regional Breakdown of Meliá hotels The numbers refer to the number of hotels within each region at the end of 2014. Source: The regional breakdown is taken from Meliá Hotels International Annual Report 2014, page 6, http://www.meliahotelsinternational.com/sites/default/files/informes-financieros/ Informe_anual_RSC_14_completa_en.pdf, (accessed December 4, 2015).

400 part 5 Global Strategy, Structure, and Implementation

Meliá maintains ownership of 6, leases 49, has management con- tracts in 24, and re-franchises 12 to other parties. Subsequently, TRYP by Wyndham has opened hotels in 21 countries.

international hotel operatinG ModeS

The hotel industry is included in the so-called “soft services” sector because production and consumption cannot be separated. There is usually a need to adapt operations locally—tourist clientele usually want an ambiance that resembles their perceptions of the foreign country, but at the same time, they expect a similar threshold level of service and amenities wherever a hotel brand operates.

The industry presents some unique characteristics, such as high investment costs and the possibility of separating ownership and management through contractual operating modes. Thus, firms have a wide range of feasible operating modes, especially management by third parties for all or a part of necessary hotel services.

To classify hotel operating modes, it is necessary to look at a chain’s degree of exercised control over the foreign operation. This control involves four non-mutually exclusive dimensions:

1. The daily operation of the hotel (e.g., the hiring and scheduling of personnel and the securement of supplies).

2. Physical assets (primarily property ownership and the maintenance thereof).

3. Organizational routines and tacit elements of the company, such as the culture and systems to gain both efficiency and effectiveness.

4. Codified assets, such as the brand and reservations system.

The responsibility for controlling these elements may lie with the international hotel chain or with contractual parties, depending on the operation mode used. The capital contribution for each of the above four dimensions may be categorized as controlling owner- ship (usually direct investment), shared ownership (usually equity joint ventures, though non-equity joint ventures also exist, such as the one between Meliá and Jin Jiang to comanage hotels in Europe and China), and no ownership (licensing, management contracts, turnkey operations, franchising, and leasing).

Operating modes can be combined. For instance, for the TRYP by Wyndham brand, Meliá owns some hotels, pays a franchise fee to Wyndham for using the brand name, and depends both on its own and Wyndham’s reservation systems. In some other cases, it has no property ownership and is paid for managing the operation. The former Gran Meliá Shanghai is a joint venture between Chinese and Cuban organizations that, in turn, granted a management contract to Meliá (and subsequently to Kempinski) for day-to-day operations and signed a franchise contract to use its name and reservations services.

In partnering with other companies, regardless of operating mode, one increases the chance of developing competitors because

partners may gain access to critical and core resources, especially knowledge. Thus, Meliá, like other companies, seeks ways to pre- vent partners’ opportunistic behavior. Meliá’s main control is over its codified resources, especially brands and reservations system, which are protected legally and which Meliá does not cede to other companies. Meliá has developed the recognition and reputation of its brands over decades, so new brands cannot easily overcome its advantage. The codified resources are tied closely as well to Meliá’s tacit resources because the value of the brands is depen- dent on clients’ hotel experience, and both physical resources and human behavior influence their opinions. Competitors can easily copy the physical resources if they have enough money. However, the human behavior is harder to emulate because learning must take place on a person-to-person basis (tacitly). Such learning in hotel operations is substantial—everything from greeting guests to making beds to assuring the flow of supplies—and affects ef- ficiency and reputation. Over time, the actions become the essence of the company’s culture.

Meliá’S evolvinG operatinG ModeS

As we have seen, Meliá has made and continues to make use of various operating modes. However, it has not always had discretion in choosing a mode. When Gabriel Escarré established his first hotels, he had no track record to entice other hotel owners to pay him to manage their facilities or use his brand name and reservations sys- tem. He developed a positive reputation through his successful ex- pansion over nearly 30 years in Spain before moving internationally.

Nevertheless, most of Meliá’s early international growth resulted from acquisitions, such as its purchase of the Spanish chain TRYP that already had foreign operations and of Innside Inns in Germany. The success of these ventures built Meliá’s reputation as a quality hotel operator, allowing it to keep expanding its hotel portfolio with shared or no capital investment, including growth in countries that place restrictions on foreign ownership.

Why grow? There are economies in handling larger hotel portfo- lios because of the clout and logistics in dealing with suppliers and the spreading of reservation and training system costs over more properties. There are also marketing advantages because potential customers are more familiar with the larger chains.

Meliá now and in the Future

Currently, Meliá Hotels International comprises strong brands such as Meliá, Gran Meliá, ME by Meliá, Paradisus, Innside by Meliá, TRYP by Wyndham, Sol Hotels, and Club Meliá. The maintenance of different brands is important because of existing brand recognition and value when Meliá made acquisitions. Nevertheless, Meliá is linking that recognition with its name (hence Innside by Meliá and Meliá White House). In fact, the company includes “Meliá” in almost all its brands

Chapter 15 Direct Investment and Collaborative Strategies 401

because the name has long been associated with luxury hotels and thus brings a certain cachet to its hotels. Additional brand linkage comes from handling all of them in the same reservations system (currently 37% of its beds are sold directly to customers through the corporate website). Further, the different brands are aimed at differ- ent market niches.

Meliá suffered the effects of the global crisis of 2007. Growth based on acquisitions had increased Meliá’s debt to more than €1 billion. In turn, it sold some of its flagship hotels, such as the Meliá Mexico Reforma to help reduce the debt. The company resumed its growth with 120 new hotels from 2012 to 2015.

In recent expansion, such as in Africa and the Middle East, Meliá has used alliances with local or international partners. Typically, the partners develop and own the properties while Meliá participates in the design and the subsequent management of the new hotels. In the United States, Meliá has signed long-term lease agreements with property owners that guarantee a source of income to the owners. In these agreements the developer assumes the risk associated with the ownership while Meliá assumes the operational risks.

In Venezuela, where Meliá has owned the Gran Meliá Caracas since 1997, the company announced a management contract agree- ment for five new hotels starting from 2016. Foreign companies in Venezuela face high inflation rates and frequent currency deprecia- tions and devaluations (e.g., a devaluation of 88 percent in 2014). Currency conversion and repatriation is sometimes authorized only after strong devaluations. However, Meliá’s international reserva- tion system allows it to receive payments in hard currency. Meliá expects more international growth by entering additional countries and adding hotels in those where it now operates. It has also indi- cated an interest in linking with brands held by other companies, such as the Hard Rock Café and Flintstones. Its ambitions seem too great to do everything alone. And it might not want to, even if it

has the capital resources. For instance, it has so far been reluctant to make big commitments in countries, such as those in Southeast Asia, where it perceives the operating environment to be too differ- ent from its European (especially Spanish) experience. Thus, the use of non-equity operations is the crux of Meliá’s future.

As part of its growth strategy in high-potential markets, Meliá has recently entered several African and Middle Eastern countries and has indicated an interest in others by focusing on both the lei- sure and business traveler. In Asia, it has doubled its presence in recent years and has announced agreements in new countries such as Mongolia and Myanmar. In Latin America, recent growth has been carried out through the TRYP by Wyndham brand in Brazil, which has wide experience in that market.

Its strategic plan for 2015–2017 calls for 99 percent of new proj- ects outside Spain, 65 percent of which will be in emerging coun- tries. However, so far, Meliá has no presence in Russia and India, nor do any other Spanish chains.

Fast-forwarding to nearly a year since Li Feng returned to Beijing, we find that she has worked almost nonstop and has taken no more trips. Contractually, physically, and emotionally she is ready for a vacation. She looks back at the hotel directory she brought from London and focuses on a picture showing a hotel half hidden among the foliage in front of a white sand beach and turquoise waters. “Who knows,” she thought, “maybe I should forget my laptop and spend some time in such a beautiful place.” ■

Questions

15-1. After reading the chapter, explain the advantages for Meliá to

own its hotels versus managing them for other organizations.

15-2. After reading the chapter, discuss the advantages and risks

for Meliá in its non-equity joint venture with Jin Jiang.

introduction As Figure 15.1 shows, companies must choose an international operating mode/form to fulfill their objectives and carry out their strategies. These are sometimes referred to as entry strategies, however, we prefer to refer to them as operating modes because companies fre- quently enter with one and change to another later on.3 The preceding chapter examined exporting and importing—the preferred and most common modes of IB. Nevertheless, compelling factors can make these choices impractical. When companies depend, instead, on foreign production, they may own it in whole or in part, develop or acquire it, and/or use some type of collaborative agreement with another company.

Figure 15.2 shows the types of operating modes associated with each of these options, categorized by whether the company’s IB activity involves foreign production and, if so, whether the company owns equity in the foreign production or depends on a collaborating company to own the equity. Experienced MNEs with a global orientation commonly use most of the operational modes, selecting them according to company capabilities, specific product, and foreign operating characteristics. The modes may also be combined, as with

To tap foreign market opportu- nities, firms may

• not be able to depend entirely on home-country production,

• rely on most types of operating modes,

• combine different operating modes for their foreign production.

402 part 5 Global Strategy, Structure, and Implementation

Meliá’s contract to manage the Shanghai hotel owned by a joint venture between Chinese and Cuban organizations. This chapter first examines why exporting/importing may not suf- fice, thus leading to foreign production.

why export and iMport May not SuFFice Companies may find more advantages to locate production in foreign countries than export to them. The advantages occur under six conditions:

1. When production abroad is cheaper than at home 2. When transportation costs are too high for moving goods or services internationally 3. When companies lack domestic capacity 4. When products and services need to be altered substantially to gain sufficient consumer

demand abroad 5. When governments inhibit the import of foreign products 6. When buyers prefer products originating from a particular country

COMPETITIVE FACTORS

OPERATING ENVIRONMENT

PHYSICAL AND SOCIAL FACTORS OBJECTIVES

MEANS Functions Overlying Alternatives

OPERATIONS

STRATEGY

Modes

* Self-conducted operations * Collaborative operations

Figure 15.1 Factors Affecting Operating Modes in iB Companies may conduct IB operations independently or in collaboration with other companies. The choice will be determined both by external factors in the firm’s operating environment and by internal factors that include its objectives, strategies, and means of operation (e.g., such modes of IB as exporting, franchising, etc.).

PRODUCTION OWNERSHIP

Equity arrangements

a. Exporting

a. Wholly owned operations b. Partially owned with remainder widely held c. Joint ventures* d. Equity alliances

a. Licensing b. Franchising c. Management contracts d. Turnkey operations

Non-equity arrangements

PRODUCTION LOCATION Home country Foreign country

Figure 15.2 Foreign expansions: Alternative Operating Modes A firm may choose to operate globally either through equity arrangements (e.g., joint venture) or through non-equity arrangements (e.g., licensing). Exporting operations are conducted in the home country, while all other modes entail production in foreign locations. The modes listed in the shaded area are collaborative arrangements. Note that, in any given location, a firm can conduct operations in multiple modes.

*Joint ventures may also be non-equity, but equity joint ventures are by far the more common.

Chapter 15 Direct Investment and Collaborative Strategies 403

when it’S cheaper to produce aBroad Although companies may offer products or services desired by consumers abroad, producing them in their home markets may be too expensive. For example, Turkey has been a growing market for automobiles. However, it is generally less expensive to produce the vehicles in Turkey than to export them there because the country’s skilled laborers and sophisticated engineers cost less and are willing to work more days per year and longer hours per day than workers in the home countries. Thus, automakers (e.g., Toyota, Renault, Fiat Chrysler, Ford) and many of their parts suppliers have established Turkish production to serve that market.4

when tranSportation coStS too Much The cost of transportation added to production costs makes some products and services impractical to export. Generally, the more distant the market, the higher the transportation costs; the higher those are relative to production costs, the harder it is for companies to de- velop viable export markets. For instance, the international transportation cost for a soft drink is a high percentage of the manufacturing cost, so a sales price that includes both would be so high due to exporting that soft-drink companies would sell very little of the product.

However, products such as watches have low transportation costs relative to production costs, so watch manufacturers lose few sales through exporting. The result is that companies such as Universal Genève and Seiko export watches from Switzerland and Japan, respec- tively, into the markets where they sell them.

when doMeStic capacity iSn’t enouGh A company with excess capacity may export effectively as long as the excess exists. In fact, its average cost of production per unit usually falls as it uses more of its capacity, such as by selling abroad, because of spreading fixed costs over more sales units. But this decrease continues only as long as there is unused capacity. Volkswagen, for instance, located its first plant to build the new Beetle at its Mexican facilities, which served global markets. When demand pushed that plant toward capacity, Volkswagen built a second plant in Europe to serve the markets there, thus freeing Mexican capacity to serve nearby markets while reduc- ing transport costs for European sales.5

when productS and ServiceS need alterinG Altering products to gain sufficient sales in a foreign market affects production costs by requiring firms to make an additional investment, such as adding an assembly line to put automobile steering wheels on the right as well as on the left. As long as they must make an investment to run an added assembly line, they may place it near the market they wish to serve.

The more a product must be altered for foreign markets, the more likely some production will shift abroad. Whirlpool finds that most U.S. washing machine demand is for top-load- ing, large-capacity washing machines using 110 electrical voltage, whereas most European demand is for front-loaders with less capacity using 220 volts.6 Given the differences in pref- erence, Whirlpool produces in both the United States and Europe.

when trade reStrictionS hinder iMportS Despite worldwide reduction in overall import barriers, there are still many import restric- tions. As a result, companies may find that they must produce in a foreign country if they are to sell there. This has been the case with many auto companies, which manufacture, or at least assemble, in India because it charges a high duty on fully built imported cars.7

Managers must view import barriers along with other factors, such as the market size of the country imposing the barriers and the scale of production technology. For example,

ConCept CheCk

In Chapter 6 (page 164), we explain the concept of non- tradable goods—products and services that are seldom practical to export because of high transportation costs.

Excess home-country capacity

• usually leads to exporting rather than direct investment,

• may lead to competitive exports because of declining unit costs.

Product alterations for foreign markets

• require additional investment,

• may lead to foreign production of the products.

ConCept CheCk

In Chapter 8 (pages 212–213), we explain why governments are reciprocally reducing trade restrictions. Nevertheless, exporters still face regula- tory restrictions, of which some encourage them to produce abroad.

404 part 5 Global Strategy, Structure, and Implementation

import trade restrictions have been highly influential in enticing automobile producers to locate in Brazil’s large market. Similar restrictions by Central American countries have been ineffective because of their small markets. However, Central American import barriers on products requiring lower amounts of capital investment for production, such as pharmaceu- ticals, have successfully enticed direct investment because these industries can be efficient with smaller-scale technologies and markets.

Regional or bilateral trade agreements may also attract direct investment because they create expanded markets that may justify scale economies.

when country oF oriGin BecoMeS an iSSue Exporting to countries where consumers prefer to buy goods from certain countries (per- haps preferring domestic products because of nationalism) is difficult.8 These consumers may push for country-of-origin labels, such as those for many Australian- and U.S.-made products.9 Consumers may also believe goods from certain countries are superior, like German cars and Italian fashion.10 They may also fear that service and replacement parts for imported products will be more difficult to obtain. Finally, companies using just-in-time manufacturing systems favor nearby suppliers who can deliver quickly and reliably. In any of these cases, companies may find advantages in placing production where their output will best be accepted.

why and how do coMpanieS Make wholly owned Fdi In situations where exporting is not feasible, a company may choose to “go it alone” or con- tract another company to produce or provide services on its behalf. In this section, we discuss the reasons and methods for making FDI for the two arrangements in Figure 15.2 that do not require collaboration: wholly owned operations and partially owned with the remainder widely held.

reaSonS For wholly owned ForeiGn direct

inveStMent Generally, the more ownership a company has, the greater its control over decisions. However, if equity shares are widely held, a company may be able to effectively control with even a minority interest. Nevertheless, governments often protect minority owners so that majority owners do not act against their interests; thus, companies may opt for 100 percent ownership if they want control. There are four primary explanations for companies to make a wholly owned FDI: market failure, internalization theory, appropriability theory, and freedom to pursue global objectives.

Market Failure Collaboration is appealing as an entry strategy because it is a means whereby a firm may reduce its liability of foreignness. But this works only if management can find an associate knowledgeable about the host country at acceptable terms, which may be impossible since such companies may be inadequately equipped to deal efficiently with the entry company’s technology.11 Or, they may know too little about the entering company to entice them to consign sufficient resources to a collaboration. In these instances, com- panies must control foreign activities within their own management structures (internal hierarchies) rather than depending on the external market to do it for them.12 Of course, the failure of the market to connect firms as collaborators will entice a company to enter with wholly owned operations only if it perceives having operating advantages to overcome its liability of foreignness.

Consumers sometimes prefer goods produced in certain countries because of

• nationalism, • a belief that these products

are better, • a fear that foreign-made

goods may not be delivered on time.

Chapter 15 Direct Investment and Collaborative Strategies 405

internalization Internalization is control through self-handling of operations.13 The con- cept comes from transactions cost theory, which holds that companies should seek the lower cost between self-handling of operations and contracting another party to do so for them. Self-handling may reduce costs for the following four reasons:

1. Different operating units within the same company are likely to share a common corporate culture, which expedites communications. Executives have concluded that a lack of trust, common terminology, and knowledge are major obstacles to successful collaboration.14

2. The company can use its own managers, who understand and are committed to carrying out its objectives. When GE acquired a controlling interest in the Hungarian company Tungsram, it was able to expedite control and changes because it put GE managers in key positions.15

3. The company can avoid protracted negotiations with another company on such matters as partner responsibilities and how each will be compensated for contributions. Negotiations for establishing a collaboration may go on for years, with no guarantee that an agreement will be reached.16

4. The company can avoid possible enforcement problems. Such companies as L’Occitane and Burberry’s have had to fight licensed manufacturers from selling production overruns to non-prestige distributors, which cheapens their brand image.17

appropriability The idea of denying rivals access to resources is called the appropriabil- ity theory.18 Companies are reluctant to transfer vital resources—capital, patents, trade- marks, and management know-how—to another organization for fear of their competitive position being undermined. In fact, Chinese automakers that have collaborative arrange- ments with major global auto competitors make no secret of their desire to learn from their partners so as to become global competitors.19 The fear of turning over know-how has led Germany’s Faber-Castell to manufacture abroad only where it can own its factories.20 This does not imply that the transfer of know-how to firms abroad is unnecessary. In fact, such transfer improves suppliers’ efficiency, and companies use formal and informal mechanisms to speed and improve the comprehension of transferred knowledge.21 Nevertheless, com- panies are less concerned about appropriability of non-strategic than of strategic resources. For instance, Coca-Cola collaborates with partners all over the world, but it steadfastly refuses to collaborate in concentrate production because its formula is too critical to the company’s competitive viability.

Freedom to pursue a Global Strategy A wholly owned foreign operation permits a company to more easily participate in a global strategy. For instance, a U.S. company owning 100 percent of its Brazilian operation might be able to take actions that, although suboptimizing Brazilian performance, could deal more effectively with competitors and customers globally, such as by decreasing prices to an industrial customer in Brazil to gain that customer’s business in Germany. Or it might standardize its product to gain global cost savings even though this loses some sales in Brazil. But if the company shared ownership in Brazil, its partners would balk at such practices.

acquiSition verSuS GreenField Companies acquire FDI by transferring abroad financial and/or other tangible or intangible assets. They can either acquire an interest in an existing operation or make a greenfield (start-up) investment. The reasons for each are discussed below.

acquisition One reason for a company to invest abroad via acquisition is to obtain some vital resource that may otherwise be slow or difficult to secure.22 Let’s say a company acquires knowledgeable personnel that it cannot easily hire at a good price on its own23—or perhaps it could hire them, but lacks experience in managing them effectively. For instance, many Russian companies with good scientific inventions and innovative products have recently expanded in- ternationally to acquire management with experience in transforming innovation to successful

Companies may want control through FDI to lessen the chance of improving competi- tors’ capabilities.

ConCept CheCk

In Chapter 12 (pages 321–323), we explain the difference between a global and a local responsiveness strategy.

The advantages of acquiring an existing operation include

• gaining vital resources that are otherwise hard to develop,

• making financing easier at times,

• adding no further capacity to the market,

• avoiding start-up problems.

406 part 5 Global Strategy, Structure, and Implementation

product sales.24 Acquisitions allow a company to get not only labor and management, but also an existing organization with experience in coordinating functions such as product develop- ment and the subsequent marketing of the developed products.

In addition, a company may gain goodwill, brand identification, and access to distri- bution. Recently, much Chinese investment in the United States has been by acquisition, seemingly because of Chinese companies’ desire to secure well-known brand names that will help them sell.25

There are also financial considerations. First, a company depending substantially on local financing rather than on transferring capital may find local capital suppliers more willing to put money into a known ongoing operation than to invest in a new facility owned by a less familiar foreign enterprise. Second, a company may be able to buy facilities, particularly those of a poorly performing operation, for less than the cost of new operations. For example, Brazil’s José Batista Sobrinho (JBS), the world’s largest meat company, bought U.S. companies Swift and Pilgrim’s Pride at opportunistically low prices because they were in financial trouble.26 Third, if a market does not justify added capacity, acquisition enables a firm to avoid the risk of depressed prices through overcapacity. Finally, by buying a company, an investor avoids start-up inefficiencies and gets an immediate cash flow rather than tying up funds during construction.

Making Greenfield investments Foreign companies may face local roadblocks to acqui- sitions. For example, local governments may want more competitors in the market because of fearing market dominance. In addition, a foreign company may find that development banks prefer to finance new operations because they create new jobs.

Acquisitions often don’t succeed.27 First, turning around a poorly performing operation is difficult because of potential personnel and labor relations problems, ill will toward its prod- ucts and brands, and inefficient or poorly located facilities. Second, managers in the acquir- ing and acquired companies may not work well together because of different management styles and organizational cultures or because of conflicts over decision-making authority.28 For instance, after acquiring IBM’s PC division, Lenovo had to overcome cultural differences between its Chinese and U.S. managers (e.g., the former thought the Americans talked even when having nothing to say, and the latter disapproved of publicly shaming latecomers to meetings).29 Intuition tells us that acquisitions in more culturally distant countries, such as in the Lenovo example, would perform less well than those in more culturally similar coun- tries; however, some evidence shows the contrary. Evidently, there are performance gains from added diversity. In addition, acquiring companies take greater care in culturally distant countries to get a better match between organizational cultures, thus easing their integration into the corporate culture.30

leasing We saw in our opening case that Meliá operates extensively by leasing hotels. This mode is much like an acquisition, but one that forgoes the need to invest. While common in the hospitality industry, it is not common in others. Although companies in other industries might lease certain assets abroad—computers, vehicles, buildings—such arrangements are quite different from leasing an entire operating facility.

why coMpanieS collaBorate Companies collaborate (use alliances that are often called strategic alliances) abroad for much of the same reasons they do so domestically. However, there are some reasons specific to international operations. Figure 15.3 shows both the general and internationally specific reasons for collaborative arrangements.

General MotiveS For collaBorative arranGeMentS Both domestically and internationally, companies collaborate to spread and reduce costs, enable them to specialize in their competencies, avoid competition, secure vertical and hori- zontal links, and gain knowledge.

Companies may choose greenfield expansion if

• host governments discourage acquisitions,

• it is easier to finance, • available acquisitions are

performing poorly, • personnel in acquiring and

acquired firms may not work well together.

Chapter 15 Direct Investment and Collaborative Strategies 407

to Spread and reduce costs Producing and selling incur fixed costs. At a small volume of business, contracting to a specialist rather than self-handling may be cheaper because a specialist can spread the fixed costs to more than one company. If business increases enough, the contracting company may then be able to handle the business more cheaply itself.

A company can use excess production or sales capacity to handle the activities for a client company. This may lower average costs by covering fixed costs more fully, and it can prevent the client from having to incur fixed costs and longer delays for start-up and receipt of cash flows.

Companies may lack resources to “go it alone”—especially small and young ones.31 By pooling efforts, they may be able to undertake activities that otherwise would be beyond their means. But large companies may also benefit when the cost of development and/or investment is very high. Disney’s theme park in Hong Kong cost so much to develop that Disney and the Hong Kong government share ownership and expenses.32

One of the fastest collaborative growth areas has been for projects too large, both in capital and technical-resource needs, for any single firm to handle, such as new aircraft and communication systems. From such an arrangement’s inception, different firms (sometimes from different countries) take on the cost and risk of developing different components. Then a lead company buys the components from the companies. A good example is the Boeing 787 aircraft, which involves companies from around the globe.

to Specialize in competencies The resource-based view of the firm holds that each company has a unique combination of competencies. A company may improve its perfor- mance by concentrating on those activities that best fit its competencies, depending on other firms to supply it with products, services, or support activities in which it is less competent. However, a collaborative arrangement has a limited time frame, which may allow a company to exploit a particular product, asset, or technology at a later date if its core competencies change.

to avoid or counter competition When markets are too small to accommodate many competitors, companies may band together so as not to compete. Companies may also combine resources to combat competitors (e.g., Sony and Samsung combined re- sources to move faster in the development of LCD technology).33 Or they may simply

Sometimes it’s cheaper to get another company to handle work, especially

• at small volume, • when the other company

has excess capacity.

Granting asset rights to another company can yield income when the asset does not fit the yielding company’s strategic priority based on its competencies.

By banding together, companies may move faster, raise profits, and fight larger competitors.

OBJECTIVES OF INTERNATIONAL BUSINESS Sales expansion Resource acquisition Risk reduction

• • •

MOTIVES FOR COLLABORATIVE ARRANGEMENTS

• • • • •

Spread and reduce costs Specialize in competencies Avoid or counter competition Secure vertical and horizontal links Learn from other companies

General MOTIVES FOR COLLABORATIVE ARRANGEMENTS

• • • •

Gain location-specific assets Overcome legal constraints Diversify geographically Minimize exposure in risky environments

Specific to International Business

Figure 15.3 Collaborative Arrangements and international Objectives A company may enter into an international collaborative arrangement for the same reasons that it does so domestically (e.g., to spread costs). In other cases, it may enter into a collaborative arrangement to meet objectives that are specific to its foreign-expansion strategies (e.g., to diversify geographically).

408 part 5 Global Strategy, Structure, and Implementation

collude to raise everyone’s profits. For example, Canpotex, a group of Canadian companies accounting for more than a quarter of the world’s potash market, joined together so as not to compete on export sales.34 Only a few countries take substantial actions against the col- lusion of competitors.35

to Secure vertical and horizontal links Vertical integration provides potential cost savings and supply assurances. However, companies may lack competences or resources necessary to own and manage the full value chain of activities, thus they ally themselves closely with other companies to handle their gaps. Horizontal links may provide econo- mies of scope in distribution, such as by offering a full line of products, thereby increasing the sales per fixed cost of customer visits. For example, in many parts of the world Avon representatives market such products as books and crayons in addition to the company’s cosmetics fare. An example of gains from both vertical and horizontal links involves a group of small and medium-sized Argentine furniture manufacturers. By allying horizontally, they pool resources to gain manufacturing efficiencies. In turn, their vertical alliance enables them to deal more effectively to sell abroad and to gain supplies.36

to Gain knowledge Many companies pursue collaborative arrangements to learn about a partner’s technology, operating methods, or home market so as to improve their com- petitiveness.37 Sometimes each partner can learn from the other, a motive driving joint ventures between U.S. and European winemakers—such as the Opus One Winery owned by Constellation Brands’ Robert Mondavi from the United States and Baron Philippe de Rothschild from France.38

international MotiveS For collaBorative

arranGeMentS In this section, we continue discussing why companies enter into collaborative arrange- ments, covering those reasons that apply only to international operations. Reasons include gaining location-specific assets, overcoming legal constraints, diversifying geographically, and minimizing risk exposure.

to Gain location-Specific assets Cultural, political, competitive, and economic dif- ferences among countries create barriers for firms operating abroad. Those ill-equipped to handle the differences may seek help through collaboration with local firms. When Walmart first entered the Japanese market on its own, it gave up after having disappointing sales. It has since returned with a Japanese partner, Seiyu, which is more familiar with Japanese tastes and rules for opening new stores.39 In fact, most foreign companies in Japan need to collaborate with Japanese firms that can help in securing distribution and a competent workforce—two assets that are difficult for MNEs to gain on their own there.

Collaborations may also facilitate companies’ learning about markets they enter. However, there is some danger that they assume wrongly that they can apply this learning effectively when entering subsequent countries—even those that appear to be similar to their previous entries.40

to overcome Governmental constraints Recall that in centrally planned economies (e.g., China and Cuba) Meliá cannot own its hotels, so it must collaborate with local organi- zations. In addition, virtually all countries limit foreign ownership in some sectors. India, for example, sets maximum foreign percentage ownership in an array of industries.41

Government procurement policies also sometimes lead to collaboration because they favor bids that include national companies. Taiwan does this with purchases by the state en- terprise monopoly, Taiwan Power (Tai Power).42

Protecting Assets Many countries provide little protection for intellectual property rights such as trademarks, patents, and copyrights unless authorities are prodded consistently.

Allying to gain vertical and horizontal links may enable companies to fill competency gaps, reduce costs, and deal more effectively with custom- ers and suppliers.

A company can improve its competence by learning from partners.

Local companies may more easily access competitively important country-specific knowledge than foreign companies can.

Legal factors may

• prohibit certain operating forms, such as wholly owned foreign facilities,

• favor locally owned firms.

Collaboration may hinder nonassociated companies from pirating an asset.

Chapter 15 Direct Investment and Collaborative Strategies 409

To prevent pirating of these proprietary assets, companies sometimes collaborate with local companies, which can more effectively monitor the local market and deal with authorities.

In addition, some countries provide protection only if the internationally registered asset is exploited locally within a specified period. If not, then whatever entity first does so gains the right to it. In some cases, local citizens, known as trademark squatters, register rights to the not-yet-exploited trademarks, then negotiate sales to the original owners when they do try to enter the market. One Russian company registered over 300 foreign trademarks, including Starbucks’s trademark. Foreign companies then have to pay to regain their rights or go through lengthy and expensive court proceedings.43 Or they enter under a different name. Burger King sells under the Hungry Jack brand in Australia for this reason.44

to diversify Geographically For a company wishing to pursue a geographic diversifica- tion strategy, collaborative arrangements offer a faster initial means of entering multiple markets because other companies contribute resources. Arrangements will be less appealing for companies that have ample resources for such extension.

to Minimize risk exposure One way to lessen a company’s international political and economic risk is to minimize its assets located abroad, which may be possible through collaboration. Further, if the company’s foreign assets are spread among countries, there is less chance that they will all encounter political adversity or economic downturns at the same time.

Local partners may also be effective at thwarting governmental takeover of assets. Further, partnerships with other foreign companies, especially from different countries, may inhibit host governments’ takeovers because each can elicit support from its home government.

ForMS oF and choice oF collaBorative arranGeMentS Now that we have discussed reasons for collaborating in IB, we shall first discuss some fac- tors to consider when choosing among collaborative forms, also known as alliances. Then we shall describe each of the forms.

SoMe conSiderationS in chooSinG a ForM trade-offs and limitations Recall from Figure 15.2 that operating modes for foreign operations differ in the amount of resources a company commits and the proportion of the resources it locates abroad. In this respect, keep in mind that there are trade-offs. A decision, let’s say, to take no ownership abroad, such as by licensing another company to handle for- eign production, may reduce exposure to political risk. However, learning about that envi- ronment will be slow, delaying (perhaps permanently) the ability to reap the full profits from producing and selling the product abroad.

Furthermore, a company may be limited in entering a market with its preferred operating mode. Governmental actions and potential partners have a great deal to say. However, if a company has a desired, unique, difficult-to-duplicate resource, it is in a much better position to choose its preferred operating form and to increase its compensation therein.

what’s the purpose?: alliance types Alliances vary by objective and by place in the value chain. These variances have led to terms that describe different types. Scale alliances aim to provide efficiency for partners by pooling similar operations, such as airlines have done by combining their lounges. In a link alliance, firms use their partners’ complementary resources to expand into a new business.45 Nokia did this to develop and market cellular phones.46 A vertical alliance connects firms in different links of their value chains, such as a food franchiser with a franchisee. A horizontal alliance, such as the Mexican joint venture between Mercedes and Infiniti, enables each partner to extend its product offerings (in this

ConCept CheCk

In Chapter 13 (pages 354–355), we explained the differences between and reasons for pursuit of a geographic diversification versus concentration strategy.

Collaborative arrangements reduce risk by allowing for greater asset-spreading among countries.

ConCept CheCk

In Chapter 1 (pages 15–16), we defined the different forms of collaborative arrangements.

Each operating mode brings both advantages and disadvantages.

Companies have a wider choice of operating mode when they hold unique and needed capabilities.

Terms differ for alliances depending on their purposes, whether they extend cooperation vertically or horizontally, and whether they involve competitors.

410 part 5 Global Strategy, Structure, and Implementation

case, a new compact car) on the same level of the value chain.47 Coopetition, such as the Mercedes-Infiniti example, refers to collaboration while competing (i.e., although these partners closely collaborate at every development stage, their end products are different and competitive with each other).48

prior company expansion Each time a company adds products or businesses that it wishes to internationalize, it must decide on an operating form. If it already has operations (especially wholly owned ones) in a foreign country, some of the advantages of collabora- tion are no longer as important. It knows how to operate within that country and may have excess plant or human resource capacity it can use for new production or sales. However, much depends on the compatibility between existing foreign operations and the new ones the company is planning abroad. The less similarity between them, the more that collabora- tion may be advantageous.

compensation Collaboration also implies sharing revenues and knowledge—an impor- tant consideration when profit potentials are high. How to divide revenue is not clear-cut because many variables influence the outcome. Certainly, the bargaining power of the col- laborative partners is important in any agreement, but such factors as government mandates, partners’ perception of risk, and competitive constraints are all important.49 Further, the mode of collaboration guides normal practices. As we discuss the different modes, we will introduce some of these practices.

Companies’ experience and assets in a foreign country influence their choices of oper- ating mode when introducing new products or businesses.

Collaboration in foreign opera- tions implies less control and a sharing of profits.

Yes I believe they should, because a key industry affects a very large

segment of the economy by virtue of its size or influence on other sectors. I’m not talking about either foreign con- trol of small investments or noncontrolling interest in large investments. If countries need foreign firms’ resources— technology, capital, export markets, branded products, and so on—they can get them by requiring collaborations without ceding control to foreigners. In turn, the foreign companies can still achieve their objectives, such as gain- ing access to markets.

Of course each country should and does define key indus- tries. For instance, the United States prohibits foreign control of television and radio stations and domestic transportation because of security concerns. Canada limits foreign control of sectors that are sensitive to maintenance of its culture. Chile prohibits foreign investment in its economically dominant copper industry because of negative experiences with past foreign control therein.

The rationale for protecting key industries is supported by history, which shows that home governments have used powerful companies to influence policies in the foreign coun- tries where they operate. During colonial periods, firms such as Levant and the British East India Company often acted as the political arm of their home governments.

More recently, governments, especially the United States, have pressured their companies to leave certain

areas and to prohibit their subsidiaries from doing busi- ness with certain countries, even though the prohibition is counter to the interests of the countries where the subsid- iaries were located.50

At the same time, some companies are so powerful that they can influence their home-country governments to intercede on their behalf. Probably the most notorious example was United Fruit Company (UFC) in so-called banana republics, which persuaded the United States to overthrow governments to protect its investments. Miguel Angel Asturias, a Nobel laureate in literature, referred to UFC’s head as the “Green Pope” who “lifts a finger and a ship starts or stops. He says a word and a republic is bought. He sneezes and a president . . . falls. . . . He rubs his behind on a chair and a revolution breaks out.”51

Whenever a company is controlled from abroad, its decisions can be made there. Such control means that corporate management abroad can decide such factors as personnel staffing, export prices, and the retention and payout of profits. These decisions might cause different rates of expansion in different countries as well as possible plant closings, sometimes with subsequent employment disruption.

Finally, by withholding resources or allowing strikes, MNEs may affect other local industries adversely. In essence, the MNE looks after its global interests, which may not coincide with what is best for an operation in a given country.

Should Countries Limit Foreign Control of Key Industries?

Point Point

Chapter 15 Direct Investment and Collaborative Strategies 411

licenSinG The rights for use of intangible property may be for an exclusive license (the licensor can give rights to no other company for the specified geographic area for a specified period of time) or a nonexclusive one.

The U.S. Internal Revenue Service classifies intangible property into five categories:

1. Patents, inventions, formulas, processes, designs, patterns 2. Copyrights for literary, musical, or artistic compositions 3. Trademarks, trade names, brand names 4. Franchises, licenses, contracts 5. Methods, programs, procedures, systems

Usually, the licensor is obliged to furnish sufficient information and assistance, and the licensee is obliged to exploit the rights effectively and pay compensation to the licensor.

Major Motives for licensing A product or process may affect only part of a company’s total business, and then only for a limited time. In such a situation, the company may foresee

Licensing agreements may be

• exclusive or nonexclusive, • used for patents, copyrights,

trademarks, and other intangible property.

Licensing often has an eco- nomic motive, such as to gain faster start-up, lower costs, or access to additional resources.

no The passionate arguments against foreign control of key in-

dustries don’t convince me that such control leads to corporate decisions that are any different from those local companies would make. Nor do they convince me that limits on foreign ownership are in the best interests of people in host countries.

Certainly, companies make strategic global decisions at headquarters, but typically they depend on a good deal of local advice beforehand. Further, MNEs staff their for- eign subsidiaries mainly with nationals of the countries where they operate, and these nationals make most rou- tine decisions.

Regardless of the decision-makers’ or companies’ na- tionalities, managers decide based on what they think is best for their firms’ business, rather than based on some home-country or local socioeconomic agenda. At the same time, their decisions have to adhere to local laws and con- sider the views of their local stakeholders. Of course, MNEs sometimes make locally unpopular decisions, but so do lo- cal companies. In the meantime, governments can and do enact laws that apply to both local and international compa- nies, and these laws can ensure that companies act in the so-called local interest.

Although preventing foreign control of key industries may be well intentioned, the resultant local control may lead to the protection of inefficient performance. Further, the key-industry argument appeals to emotions rather than reason. That’s why arguments in the United States for security make little sense on close examination. Although foreign propaganda through for- eign ownership of radio and television stations is the rationale

for ownership restrictions, there are no such re- strictions on foreign ownership of U.S. newspa-

pers or on material appearing on the Internet. (Is this because people who read the news are presumed to be less swayed by propaganda?) The protection of U.S. domestic transportation for security reasons is a sham, just to protect the shipbuilding industry and maritime employees. For instance, U.S. merchant flagships must employ only U.S. citizens as crews because of ships’ vulnerability to bombs in U.S. waters, but foreign flag carriers regularly use U.S. ports, while foreigners can join the U.S. Navy.

The banana-republic arguments are outdated and go back to dependencia theory, which holds that emerging economies have practically no power in their dealings with MNEs.52 More recent bargaining school theory states that the terms of a foreign investor’s operations depend on how much the investor and host country need each other.53 In effect, companies need countries because of their mar- kets and resources, while countries need MNEs because of their technology, capital, access to foreign markets, and expertise. Through a bargaining process, they come to an agreement or contract that stipulates what the MNE can and cannot do.

I completely disagree that either countries or companies can necessarily gain the same through collaborative agree- ments as through FDI. Although collaborative agreements are often preferable, there are company and country advan- tages from foreign-controlled operations. For example, with wholly owned operations, companies are less concerned about developing competitors, so they are more willing to transfer essential and valuable technology abroad.

Counterpoint

Should Countries Limit Foreign Control of Key Industries? Counterpoint

412 part 5 Global Strategy, Structure, and Implementation

insufficient sales to warrant establishing or continuing its own manufacturing and sales facilities. Meanwhile, a licensee may be able to produce and sell at a low cost and within a short start-up time. In turn, the licensee’s cost may be less than if it developed the product or process on its own.

For industries in which technological changes are frequent and affect many products, companies in various countries often exchange technology or other intangible property rather than compete with each other on every product in every market—an arrangement known as cross-licensing. An example is Google (U.S.) and Samsung (Korea) entering a cross-licensing agreement for access to each other’s current and future patents.54

payment considerations The amount and type of payment for licensing arrangements vary, as each contract is negotiated on its own merits. For instance, the value to the licensee will be greater if potential sales are high. Potential sales depend, in turn, on such factors as the size of the sales territory and the longevity of the asset’s market value.

Putting a Price on Intangible Assets Valuing partners’ contributions and rewards is com- plex and negotiable. Companies commonly agree on a “front-end” payment to cover tech- nology transfer costs. Licensors of technology do this because there is usually more involved than simply transferring explicit knowledge, such as through publications and reports. The move requires the transfer of tacit knowledge, such as through engineering, consultation, and adaptation. To understand the difference between the two, think of giving a novice cook only a recipe for a chicken pot pie (explicit knowledge) versus going with the novice cook to choose a chicken, feel and smell produce in the market, and work together on the manual chores, such as chopping ingredients and rolling out dough (tacit knowledge). Of course, the license of some assets, such as copyrights or brand names, has much lower transfer costs.

Intangible assets may be old or new, obsolete or still in use in the home market when a company licenses them. Many companies transfer rights to assets at an early or even a de- velopmental stage so products hit different markets simultaneously. This is important when selling to the same industrial customers in different countries and when global advertising campaigns can be effective. On one hand, a licensee may be willing to pay more for a new intangible asset because it may have a longer useful life. On the other hand, a licensee may be willing to pay less for a newer one because of its untested market value.

licensing to Subsidiaries Although we think of licensing among unassociated companies, it is also common between parents and their foreign-owned companies. One reason is that operations in a foreign country, even if 100 percent owned by the parent, are usually subsid- iaries, which are legally separate companies. As such, taxes may differ depending on whether funds transferred to the parent are in the form of dividends or royalties. When a company owns less than 100 percent, a separate licensing arrangement also helps compensate the licensor for contributions beyond the mere investment in capital and managerial resources.

FranchiSinG In franchising, a specialized form of licensing, the parties act almost as a vertically integrated company because they are interdependent and each creates part of the product or service that ultimately reaches the consumer.

Today, franchising is mostly associated with U.S. fast-food operations, although many international franchisors are from other countries and in many other sectors, such as Meliá’s hotel franchises discussed in the opening case. To illustrate how diverse franchising can be, consider the Danish company Cryos International, which franchises sperm banks in about 40 countries.55

Franchisors once depended on trade shows and costly visits to foreign countries to promote their expansion. While such trade shows are still important, especially for young franchising operations that are not well-known, the Internet has given companies another channel to exchange information.

Licensing to subsidiaries is common because of parent and subsidiary legal separa- tion and the potential effect on taxes.

Franchising includes provid- ing an intangible asset (usually a trademark) and a continual infusion of necessary assets.

Many types of products, companies, and countries participate in franchising.

Chapter 15 Direct Investment and Collaborative Strategies 413

Franchise organization A franchisor may deal directly with individual franchisees abroad or set up a master franchise that has rights to open outlets on its own or to develop subfranchisees in the country or region. Subfranchisees pay royalties to the master franchi- see, which then remits some predetermined percentage to the franchisor. Companies are most apt to use a master franchise system when they are not confident about evaluating potential individual franchisees and when overseeing and controlling them directly would be too expensive.56 Picking good franchisees is, of course, essential for success.57

operational Modifications Franchising success generally depends as well on product and service standardization, high identification through promotion, and effective cost con- trols. The latter two are pretty straightforward, but transferring the home country’s product and service, especially for food franchising, is often difficult, first, because of local supplies. McDonald’s, for instance, had to build a plant to make hamburger buns in the United Kingdom, while in Thailand it had to help farmers develop potato production.58 Second, foreign country taste preferences may differ from those in the home country—even within regions of large countries. In China, for example, Yum! Brands offers regionally different food in its KFC and Pizza Hut outlets.59 However, the more adjustments made for the host consumers’ different tastes, the less a franchisor has to offer a potential franchisee.

ManaGeMent contractS An organization may pay for managerial assistance under a management contract when it believes another can manage its operation more efficiently than it can, usually because the contractor has industry-specific capabilities. British Airport Authority (BAA) has these for airport administration, and it manages some airports in the United States, Italy, and Australia.60

Such contracts are common when host governments want foreign expertise, but do not want foreign ownership. In turn, the management company receives income without having to make a capital investment. Contracts are also popular in the hotel industry. (Recall the Meliá case.) In essence, host-country real estate owners may have good hotel locations, but know little about running a hotel. At the same time, many hotel chains have been shying away from property ownership abroad because of the perceived risk.61

turnkey operationS Companies handling turnkey operations are usually industrial-equipment manufacturers, construction companies, or consulting firms. Manufacturers also sometimes provide turnkey services when they are disallowed to invest. The customer for a turnkey operation is often a governmental agency. Recently, most large projects have been in those developing countries that are moving rapidly toward infrastructure development and industrialization.

contracting to Scale One characteristic setting turnkey business apart from most other IB operations is the size of most contracts, frequently for billions of dollars. This means that a few very large companies—such as Vinci (France), Bechtel (U.S.), and Hochtief (Germany)—account for a significant market share. Recently, several Chinese firms have become major players62 Some projects are so large that they are handled by a consortium of turnkey operators, such as the additional wider channel for the Panama Canal, led by Spain’s Sacyr Vallehermoso. (The following photo shows that channel’s construction.) Often, smaller firms serve either as subcontractors for primary turnkey suppliers or special- ize in a particular sector, such as the handling of hazardous waste.

Making contacts The nature of these contracts places importance on hiring executives with top-level governmental contacts abroad, as well as on ceremony and building goodwill, such as opening a facility on a country’s national holiday or getting a head of state to inaugu- rate a facility. Although public relations is important to gain contracts, other factors—price,

Franchisors face a dilemma:

• Inadequacy of local supplies may hamper global product uniformity.

• The more global standardization, the less acceptance in the foreign country.

• The more adjustment to the foreign country, the less the franchisor is needed.

Foreign management contracts are used primarily when the foreign company can manage better than the owners.

Turnkey operations are

• most commonly performed by industrial-equipment, construction, and consulting companies,

• often performed for a governmental agency.

Turnkey operations generally differ from other IB collabora- tions because they

• may be so large, • depend on top-level

governmental contacts, • are often in very remote

areas.

414 part 5 Global Strategy, Structure, and Implementation

export financing, managerial and technological quality, experience, reputation, and so on— are necessary to sell contracts of such magnitude.

Marshaling resources Many turnkey contracts are in remote areas, necessitating massive housing construction and importation of personnel. Projects may involve building an en- tire infrastructure under the most adverse conditions, such as Bechtel’s complex for Minera Escondida high in the Andes, so turnkey operators must have expertise in hiring people willing to work in remote areas for extended periods and in transporting and using supplies under very difficult conditions.

If a company has a unique capability, such as the latest refining technology, it will have little competition. As the production process becomes known, however, competition in- creases. Companies from developed countries have moved largely toward projects involving high technology, whereas those from such countries as China, India, Korea, and Turkey can compete better for conventional projects requiring low labor costs. The Chinese companies, China State Construction Engineering and Shanghai Construction Group, have worked on subway systems in Iran and Saudi Arabia, a railway line in Nigeria, a tourist complex in the Bahamas, an oil pipeline in Sudan, and office buildings in the United States.

Joint ventureS (Jvs) Although usually thought of as 50/50 companies, JVs may nonetheless involve more than two companies and ones in which a partner owns more than 50 percent. For example, Flagship Ventures (U.S.), AstraZeneca (U.K.-Sweden), Nestlé Health Science (Switzerland), and Bayer CropScience (Germany) have joined together to develop health-care innova- tions.63 When more than two organizations participate, the venture is sometimes called a consortium. JVs may also involve a partner owning over 50 percent, such as ANA’s owner- ship of 67 percent in AirAsia Japan.64

possible combinations Examples of the many combinations of JV partnerships include:

• Two companies from the same country joining together in a foreign market (e.g., NEC and Mitsubishi [Japan] in the United Kingdom)

• A foreign company joining with a local company (e.g., Barrick [Canada] and Zijin Mining Group in China)

• Companies from two or more countries establishing a joint venture in a third country (e.g., Mercedes-Benz [Germany] and Nissan [Japan] in Mexico)

Joint venture ownership may vary by type of participants and the portion of ownership they hold.

So ur

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B ol

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Construction on Panama’s wider canal channel.

▶

Chapter 15 Direct Investment and Collaborative Strategies 415

• A private company and a local government forming a joint venture, or mixed venture (e.g., Mitsubishi [Japan] with the government-owned Exportadora de Sal in Mexico)

• A private company joining a government-owned company in a third country (e.g., BP Amoco [private British-U.S.] and Eni [government-owned Italian] in Egypt)

The more companies in the JV or any alliance, the more complex its management be- comes. Development of the Boeing 787 (the Dreamliner) and the Airbus A380 were joint efforts among numerous companies from several countries.65 The projects were difficult to control, and a delay or performance hitch by any participating company delayed the others and caused project problems. Figure 15.4 shows that as a company increases the number of partners and decreases its portion of equity in a foreign operation, its ability to control that operation decreases.

equity allianceS An equity alliance is a collaborative arrangement in which at least one of the companies takes an ownership position (almost always minority) in the other(s). For instance, the Port of Antwerp (Belgium) took a minority position in Essar Ports (India) when the two signed a long-term alliance to mutually improve quality and productivity.66 In some cases, each party takes an ownership in the other, such as occurred with Panama-based Copa and Colombia- based AeroRepublic (airlines).67

The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier–buyer contract, so that it is more difficult to break—particularly if the ownership is large enough for the investing company to secure a board membership.

why collaBorative arranGeMentS Fail or Succeed All collaborative arrangement parties must be satisfied with performance; otherwise, the arrangement may fail.

Equity alliances help solidify collaboration.

OWNERSHIP CONTINUUM

Wholly owned

None

Many

Equity (Greater degree of ownership)

Sharing Nonequity (Lesser degree of ownership)

N U

M BE

R O

F PA

RT N

ER S

Equity alliance

Joint venture

Sales contract

License

Franchise

Turnkey

Management contract

Consortium Tight control

Little control

Medium control

Figure 15.4 Collaborative Strategy and Complexity of Control The more equity a firm puts into a collaborative arrangement, coupled with the fewer partners it takes on, the more control it will have over the foreign operations conducted under the arrangement. Note that non-equity arrangements typically entail at least one and often several partners.

Source: Based on Shaker Zahra and Galal Elhagrasey, “Strategic Management of International Joint Ventures,” European Management Journal 12:1 (March 1994): 83–93. Reprinted with permission of Elsevier.

416 part 5 Global Strategy, Structure, and Implementation

reaSonS For Failure Problems can develop that lead partners to renegotiate in terms of objectives, responsi- bilities, ownership, performance criteria, or management structure. Despite renegotiation to restructure, many agreements break down because at least one partner becomes dissatis- fied with the endeavor. Frequently, a partner buys out the other’s interest and the operation continues as a wholly owned foreign subsidiary. In other breakups, companies agree to dissolve the arrangement.

The major strains on the arrangements are due to five factors:

• Relative importance to partners • Divergent objectives • Control problems • Comparative contributions and appropriations • Differences in culture

relative importance Partners may give uneven management attention to a collaborative arrangement. If things go wrong, the more active partner blames the less active partner for its lack of attention, while the latter blames the former for making poor decisions. Difference in attention may be due to disparity in the partners’ sizes. For example, a smaller partner may take more interest in the venture because it is using a larger portion of its resources therein.

Further, the smaller firm may be disadvantaged in fighting its bigger partner legally. For example, Igen, a small U.S. firm, licensed its technology to Boehringer Mannheim of Germany, whose sales were more than 100 times greater. When the two companies dis- agreed over royalty payments, Igen fought four years and spent the equivalent of one year’s sales on legal fees before winning a settlement.68 This example is unusual, however, because few small firms can or will fight a much larger company so effectively.

divergent objectives Partners’ initial complementary objectives may evolve differently as a result of competitive forces and product dynamics. Thus, a partner may no longer perceive collaboration to be in its best interest. For instance, IBM partnered with Toshiba, but later it shifted its product line. At that point, it required a type of monitor with which Toshiba lacked expertise.69 Further, one partner may want to reinvest earnings for growth while the other wants to receive dividends. Or one partner may want to expand the product line and sales territory while the other may see this as competition with its wholly owned operations (a point of disagreement between BP and its Russian partner, TNK.)70 If one partner wants to sell or buy from the venture, the other may disagree with the price.

questions of control Sharing assets with another company may generate confusion over control. Such confusion is rife with gray areas and may cause anxiety among employees. In a proposed JV between Merrill Lynch and UFJ, a Japanese senior manager queried, “Who is going to be in charge—a Japanese, an American, or both?”71 Moreover, when companies license their logos and trademarks for use on products they do not make, they may lack the ability to discern and control quality. Pierre Cardin’s licensing of its label for hundreds of products—from clothing to clocks to toilets—led to some poor-quality goods that hurt the image of the high-quality ones.72

In collaborative arrangements, even though control is ceded to one of the partners, both may be held responsible for problems. In a joint venture to make baby formula between the Israeli company Remedia and the German firm Humana Milchunion, Humana Milchunion’s removal of Vitamin B1 from the formula concentrate led to the deaths of three infants.73 Remedia was jointly responsible even though it had not been notified of the removal.

comparative contributions and appropriations Partners’ relative capabilities may change, thus one partner may no longer contribute as much as the other or as much as was expected initially. In addition, one partner may suspect that the other is taking more from the operation than it is (particularly knowledge-based assets or key JV personnel).

Partners’ uneven attention to a collaborative arrangement is often due to their disparate sizes.

As partners’ capabilities and strategies evolve, their collab- orative objectives may change.

“Who’s in charge?” plagues collaboration despite all par- ties being held responsible.

If one partner perceives that the other is contributing too little or taking out too much, the collaboration may weaken.

Chapter 15 Direct Investment and Collaborative Strategies 417

To counteract this appropriability, the suspicious firm may withhold information, eventually weakening the operation. In fact, there are many examples of companies “going it alone” after they no longer needed their partners—particularly if the purpose of the collaboration was to gain knowledge.

culture clashes Both national and company cultural differences can affect the relation- ship between partners.

Differences in Country Cultures Managers and companies are affected by their national cultures, and collaborative arrangements bring them directly together. For instance, prefer- ences may vary in the method, timing, and frequency with which they report on performance and whether they evaluate primarily on the operations’ effect on shareholders or on stake- holders in general.74 These differences may mean that one partner is satisfied while the other is not. Such a clash led to the dissolution of a joint venture between Danone and its Chinese government-owned partner because the latter put employment maximization ahead of efficiencies and profits.75

Trust is another factor. There are national differences that influence interactions with foreign partners. In fact, some companies don’t like to collaborate with those of very differ- ent cultures.76 Nevertheless, JVs from culturally distant countries can thrive when partners learn to deal with each other’s differences.77

Differences in Company Cultures Similar company cultures aid companies’ ability to communicate and transfer knowledge to each other, whereas collaborations can experi- ence problems when these cultures differ.78 For example, the joint venture between Japan’s ANA and Malaysia’s AirAsia broke up as the former wished to emphasize its culture of “meticulous service,” whereas the latter had a culture of cutting costs.79 One partner may be accustomed to internal managerial promotions while the other opens its searches to outsiders. One may use a participatory management style and the other an authoritarian style. One may be entrepreneurial, the other risk-averse. This is why many companies delay JV collaboration until they have had long-term positive experiences with each other, such as through distributorship or licensing arrangements which involve lower levels of commit- ment. In fact, there is evidence that a gradual increase in commitment, such as developing an alliance with a company before acquiring it, is a means of improving performance.80 Of course, as with marriage, a good prior relationship between two companies does not guar- antee a good match in a joint venture.81

helpinG collaBorative operationS Succeed Despite our discussion on problems and failures of collaborative operations, we do not mean to imply that there are no success stories. There are. The JV between Xerox (U.S.) and Rank (U.K.) is a case in point: not only has it performed well for a long period, it even has a JV in Japan with Fuji Photo, which has also performed well.

Aside from awareness of and adjustment to the pitfalls we have discussed, the following considerations help assure success when choosing among and managing operating forms:

• Fitting modes to country differences • Finding and evaluating partners • Negotiating agreements: The question of secrecy • Controlling through contracts and trust • Evaluating continually • Adjusting the internal organization

Fitting Modes to country differences Country conditions influence the operating forms that best suit companies’ IB operations. To begin with, regulations (such as prohibi- tions on 100 percent foreign-owned FDI) and national conditions (such as political risk)

Differences in country and company cultures may cause one partner to be satisfied and the other dissatisfied.

ConCept CheCk

In Chapter 2 (page 41), we discussed differences in trust among cultures and explained that in high trust cultures, the cost of doing business tends to be lower.

Companies should make their highest commitments in terms of operating modes where markets are most attractive and best fit their competences and strategies.

418 part 5 Global Strategy, Structure, and Implementation

influence what companies can’t and won’t do in a foreign country. Concomitantly, countries offer different opportunities that mesh differently with companies’ capabilities and strategies. Thus, choosing the best operating form for each country helps companies succeed.

A company should ordinarily commit more of its IB resources to those markets that are most attractive and fit best with its strategies and competence. The choice of operating mode directly affects this resource allocation inasmuch as different modes commit different levels of resources and different portions of those resources abroad. Figure 15.5 illustrates a matrix relating country attractiveness, a company’s competitive strength per country, and operating forms. Step one for a company is to evaluate countries’ general attractiveness (high, medium, or low) irrespective of the company’s fit with that country. Step 2 is to assess the company’s competitive strength to fulfill its objectives (high, medium, or low) for each of the countries. By using results from the two steps to plot each country within the six sectors of the matrix, one has a visual description of preferred mode per country.

Although such a matrix may serve to guide decision-making, managers must use it with caution. First, separating the attractiveness of a country from a company’s position is often dif- ficult; the country may seem attractive because it fits with the company. Second, some of the recommended actions take a defeatist attitude toward competitive capability. Many companies have built competitive strength in markets where they initially were weak competitively.

Finding and evaluating potential partners Contracting with a satisfactory partner is significant for success in collaborative agreements. Managers can identify potential partners by monitoring journals, attending technical conferences, developing links with academic institutions—even through social acquaintances.82

Whether seeking a partner or reacting to a partnership request, a company must evalu- ate the potential partner’s resources, motivation, and compatibility. The potential partner’s proven ability to handle similar types of collaboration is a key professional qualification. A good track record may indicate trustworthiness that could negate the need for expensive control mechanisms to carry out interests.

ConCept CheCk

In Chapter 13 (pages 348–350), we discussed how risk and opportunity differ among coun- tries and how (pages 353–354) the choice of operating mode may reduce a company’s risk.

Partner pairing should depend on mutual assessment of each other’s resources, motivation, and compatibility.

Maximize commitment,

such as wholly owned operations

Competitive strength

High

Medium

Low

Medium Low

C ou

nt ry

a ttr

ac tiv

en es

Individualized strategies

Collaborations/ joint ventures to dominate

Minimize commitment,

such as through nonequity

arrangement

Figure 15.5 Country Attractiveness/Company Strength Matrix In a given scenario, a country in the upper left-hand corner may be the most attractive place for a company to locate operations. Why? Because its market is well suited to the company’s greatest competitive strength and thus to its highest level of commitment (e.g., establishing a wholly owned subsidiary). A country in the upper right-hand corner also boasts an attractive market but poses a problem for a company whose competitive strengths don’t quite match the opportunity (perhaps it has no experience in this particular market). It needn’t forgo the opportunity, but it will probably prefer a joint venture or some other form of collaborative operation. Finally, note that because everything is subject to change—both a company’s capabilities and the features of a country’s market—firms try to be dynamic in their approach to potential operating modes.

Chapter 15 Direct Investment and Collaborative Strategies 419

At the same time that you are looking for and evaluating potential partners, those potential partners are doing the same. You can boost your visibility and partnership potential through trade fair attendance, brochures, websites, and contacts in the potential collaboration locale. If you are new to foreign operations and to collaboration, you have no track record and you may have to negotiate harder and make more concessions.

negotiating the arrangement: the question of Secrecy Numerous collaborative arrangements involve technology transfers. Because the value of many technologies would diminish if they were widely used or understood, technology owners have historically in- sisted on including contract provisions whereby recipients will not divulge such information. Some have also held onto the ownership and production of specific components so recipients would not have full knowledge of the product or the capability to produce an exact copy.

Often companies want to sell techniques they have not yet completed, much less com- mercialized. A buyer is reluctant to buy what it has not seen, but a seller that shows the work in process to the potential buyer risks divulging the technology. For these and other reasons, it is common to set up pre-arrangement agreements that protect all parties.

A controversial negotiation area is the secrecy surrounding the financial terms of arrange- ments. In some countries, for example, licensing contracts must be approved by governmental agencies, which consult their counterparts in other countries about similar agreements in order to improve their negotiating position. Many MNEs object, believing that contract terms between two companies are proprietary information with competitive importance, and market conditions usually dictate the need for very different terms in different countries.

controlling through contracts and trust Contracts with other companies entail some loss of control over the asset transferred. This creates two concerns—the partner’s perfor- mance competency and the partner’s integrity so as not to act opportunistically.83 A host of potential problems must be settled as well as possible by setting mutual goals and spelling out all expectations in the contract, but not everything can be included in a contract. The par- ties need to develop sufficient rapport so that common sense also plays a part in running the operation.84 Once operating, partners can also build trust through actions.85 At the same time, national culture influences how much a partner wants to cover in a contract. Thus, if parties from cultures with similar levels of trust come together, they can more likely agree on what must be incorporated in detailed contractual arrangements and what must be left to trust.86

Partnering with a firm that highly values its reputation is probably a plus as well, inas- much as it may prefer to settle differences quietly rather than having them exposed in the press. Frank communications may help determine potential partners’ underlying expec- tations, which may otherwise come as a surprise. One study of local firms in China and Russia discovered that they had expected their foreign partners to deal much more with the Chinese and Russian governments (such as to alleviate bribery payments) than the foreign partners realized or actually did.87

Although contracts cannot cover everything, their provisions should at least address the following issues:

• Will the agreement be terminated if the parties don’t adhere to the directives? • What methods will be used to test for quality? • What geographic limitations should be placed on an asset’s use? • Which company will manage which parts of the operation outlined in the agreement? • What will be each company’s future commitments? • How will each company buy from, sell to, or otherwise use assets that result from the col-

laborative arrangement? • How will revenues be divided?

evaluating continually Contracting with a capable and compatible partner is necessary but insufficient to ensure success. An agreement, once operational, must be run effectively. Management should estimate potential sales and costs, determine whether the arrangement

In technology agreements,

• sellers do not want to give information before assuring an agreement can be reached,

• buyers want to evaluate information before committing to an agreement,

• the contract terms may be considered proprietary.

Although both trust and contracts have control limita- tions, there are provisions that should be included in any collaborative agreement.

When collaborating with another company, managers must

• continue to monitor performance,

• assess whether to change the form of operations,

• develop competency in managing a portfolio of collaborations.

420 part 5 Global Strategy, Structure, and Implementation

is meeting quality standards, and assess servicing requirements to check whether goals are being met and whether one’s partners are doing an adequate job. In this respect, the rela- tionship among partners may evolve positively or negatively, thus necessitating operational changes or even the termination of an agreement.

In addition to continually assessing partners’ performance, a company must periodi- cally assess the need for change in the type of collaboration, such as whether to replace a licensing agreement with a joint venture. Such modifications may be warranted because of companies’ changes in resources and strategies and because of external conditions such as host-country political and economic conditions.

adjusting within the internal organization As companies enter into and grow their international collaborative arrangements, they gain competencies. As they change operating modes, they encounter pressures necessitating organizational adjustments. These include organizational application of what they have learned and the need to alter group and indi- vidual evaluations as operating forms change.

Learning and Its Applications Evidence suggests that companies’ collaborative perfor- mance improves with experience. However, improvement is most associated with similar types of collaborations, such as applying what a firm has learned from JV operations in one country to JVs in another country.88 With experience, companies learn to choose partners better and to improve synergies with them. Thus, as a company’s number of collaborations grows, it should work toward developing competency in managing the portfolio of arrange- ments so that it applies what it learns in one situation to others.89 Nevertheless, companies should take into consideration that effective alliance management has been undergoing significant changes, thus they may not necessarily replicate their past successes.90

Pressures from Switching Collaborative Modes Changes in operating mode, such as from exporting to foreign production to serve a market, cause some individuals to gain and others to lose responsibilities. For example, the size of domestic marketing and manu- facturing divisions may contract, thus disadvantaging people who lost responsibilities if bonuses and promotions are based largely on their sales or profits. Given that lower perfor- mance is due to decisions outside their control, companies will need to revise performance evaluations.

The evolution to a different operating mode may

• be the result of experience, • create organizational

tensions.

More than a half century ago, John Kenneth Galbraith wrote that the era of cheap invention was over “ because development is costly, it follows that it can be carried out only by a firm that has the resources associated with considerable size.”91 The statement seems pro- phetic in terms of the estimated dollars needed to bring a new commercial aircraft to market, eliminate death from diseases, develop defenses against unfriendly countries and terrorists, guard against cyberspace in- trusions, and develop means to counteract adverse effects of climate change. However, Galbraith’s conclu- sion overlooks several factors.

First, can firms reach the “considerable size” to solve the problems just mentioned? This is doubtful. Some of the largest companies in the world are in the

auto industry, but they are finding that they have to work with each other (e.g., Toyota with BMW, to meet ever-stricter rules on carbon-dioxide emissions).92 Further, governments constrain mergers and acquisi- tions because of antitrust concerns, thus inhibiting companies’ growth.

Second, can companies internalize the breadth of technology necessary to solve these big problems? This is also doubtful. The recent mantra in strategy is to do what you do best and outsource the rest. Thus large companies’ breadth of technology has been receding rather than growing. Consequently, we are apt to see more horizontal and vertical linkages among firms from many industries in many coun- tries. On the downside, some evidence indicates

Looking to the Future Growth in Project Size and Complexity

Chapter 15 Direct Investment and Collaborative Strategies 421

that collaborations slow the speed of innovation because firms consider internalization and appro- priation factors.93

If we see greater horizontal and vertical linkages, will these linkages be traditional? Some will probably not be. For instance, in recent years, some of the fast- est-growing start-ups, such as Uber and Airbnb, have been companies that link with outsiders who provide most of the investment. Thus, collaboration will proba- bly increase, but it will involve new forms and may not attack the big developments that Galbraith envisioned.

At the same time, most product development is much more modest than required to unravel the gigantic projects. Concomitantly, although busi- ness strategists have advised companies for some time to specialize on what they do best (which fosters collaboration), there is growing evidence that many customers prefer to deal with one rather than multiple suppliers. The result, especially in emerging economies, may be the return in popu- larity of conglomerates.94 Thus smaller companies may be able to handle much development for their domestic markets alone, even if they are conglom- erates. Nevertheless, they lack all the product- and market-specific resources to go it alone everywhere

outside their home markets, especially if national differences dictate operating changes on a country- to-country basis. Thus we may see them embracing more collaboration as they move internationally.

Collaborative arrangements will bring both oppor- tunities and problems as MNEs move simultaneously to new countries and to contractual arrangements with new companies. Differences must be overcome in a number of areas:

• Country cultures that may cause partners to obtain and evaluate information differently

• National disparities in governmental policies, in- stitutions, and industry structures that constrain companies from using operating forms they would prefer

• Distinct underlying ideologies and values affect- ing corporate cultures and practices that strain relationships

• Different strategic directions resulting from partners’ interests that cause disagreement over objectives and contributions

• Diverse management styles and organizational structures that cause partners to interact inef- fectively95 ■

Case The oneworld airline alliance 96

The airline industry is almost unique in that its need to form collaborative arrangements has been important almost from the start of international air travel because of cost, regula- tory, and competitive factors. In recent years, this need has accelerated because of airlines’ difficult profit performance.

In effect, the airlines have been squeezed. First, costs have become uncertain, particularly due to fluctuations in oil prices. Second, there is a need for greater security. In addition to airport passenger-security checks, airlines must provide advanced passenger information to governmen- tal agencies and work with freight forwarders and supply- chain operators to ensure the safety of cargo shipments on passenger aircraft. Third, a long-term trend toward greater

price competition has hindered airlines’ ability to pass on increased costs to passengers—a situation exacerbated by discount airlines and customers’ ability to search for lower fares on the Internet.

Although growth in international passenger travel has largely spurred globalization, no airline has sufficient financ- es or aircraft to serve the whole world. Yet passengers are traveling the whole world and want airline connections that will minimize both distances and connecting times at air- ports while offering reasonable assurance of reaching des- tinations with checked luggage more or less on schedule. Thus, airlines have increasingly worked together to provide more seamless experiences for passengers and to cut costs.

422 part 5 Global Strategy, Structure, and Implementation

This discussion, however, should not imply that all cost cuts necessitate collaboration. Airlines have implemented cost-saving changes that cover the gamut from ticket pur- chase to arrival at destination. Online purchases of elec- tronic tickets have largely replaced airlines’ need to pay travel agency commissions and to issue and maintain cost- ly inventories of paper tickets. Self-service check-in at air- ports reduces the need for agents. On board, especially on short flights, less is included in the price of a basic ticket, such as generous leg space between rows of seats, food, pillows, and headphones.

A Bit of History: Changing Government Regulations Historically, governments played a major role in airline ownership. Many government-owned airlines were mo- nopolies within their domestic markets, money losers, and recipients of government subsidies. However, although some airlines remain subsidized, there has been a subse- quent move toward privatization.

What Governments Can Regulate Despite the move toward privatization, governments still regulate airlines and agree on restrictions and rights largely through reciprocal agreements. Specifically, they control:

• Which foreign carriers have landing rights • Which airports and aircraft the carriers can use • The frequency of flights • Whether foreign carriers can fly beyond the country (for

instance, whether Iberia, after flying from Spain to the United States, can then fly from the United States to Panama)

• Overflight privileges • Fares airlines can charge

Several notable regulatory changes have occurred in recent years. First, the U.S. domestic market has been de- regulated, which means that any approved U.S. carrier can fly any U.S. domestic route in any frequency while charging what the market will bear. Once deregulation was instituted, many U.S. airlines were competitively forced out of busi- ness. Second, similar deregulation within Europe influenced the demise of some airlines. Third, several open-skies agree- ments permit any airline from countries in an agreement to fly from any city in one signatory area to any city in the other signatory area. Further, these flights have no restrictions on capacity, frequency, or type of aircraft. For instance, an open-skies agreement between the United States and Japan spurred American Airlines (AA) to begin previously unapproved service between New York and Haneda Inter- national Airport. Fourth, European countries have permitted cross-national acquisitions, such as German Lufthansa’s acquisition of Swissair.

Why Governments Protect Airlines Three factors influence governments’ protection of their air- lines:

1. Countries believe they can save money by maintain- ing small air forces and relying on domestic airlines in times of unusual air transport needs (e.g., the U.S. gov- ernment using U.S. commercial carriers to help carry troops to and from Iraq and Afghanistan).

2. Public opinion favors spending at home. The public sees, for example, the requirement that government employees fly on national airlines as foreign-exchange savings.

3. Airlines are a source of national pride, and aircraft (sporting their national flags) symbolize a country’s sovereignty and technical competence. This national identification has become less important, but it still per- suades some developing countries.

Regulatory Obstacles to Expansion Even if airlines had the financial capacity to expand ev- erywhere in the world, national regulations would limit this expansion. With few exceptions, airlines cannot fly on lu- crative domestic routes in foreign countries. For example, Japan Airlines (JAL) cannot compete on the New York to Los Angeles route, nor can AA fly between Tokyo and Nagoya. These restrictions prevent airlines from develop- ing domestic routes abroad to feed into their international routes (e.g., JAL has no U.S. flights into Chicago to con- nect to its Chicago–Tokyo flights, but AA does). Further, the U.S. government limits foreign ownership in a U.S. air- line to 25 percent of voting stock.

Finally, airlines usually cannot service pairs of foreign countries. AA cannot fly between Brazil and South Africa be- cause those governments give landing rights on such routes only to Brazilian and South African airlines. To avoid these restrictions, airlines must ally themselves with carriers from other countries.

Collaboration Examples Related to Motives

Cost Factors Certain airlines have always dominated certain internation- al airports, thereby amassing critical capabilities in them, such as baggage handlers and aircraft-handling equipment. Sharing these capabilities with other airlines may spread costs. For example, British Airways (BA) has long handled passenger check-in, baggage loading, and maintenance for a number of other airlines at London’s Heathrow Airport.

The high cost of maintenance and reservations systems has led to JVs involving multiple airlines from multiple coun- tries, such as ownership in the Apollo and Galileo reservation systems. Actually, the reservations systems are motivated by

Chapter 15 Direct Investment and Collaborative Strategies 423

more than cost savings, inasmuch as the pooling of resourc- es provides customers with better service.

Connecting Flights Given that governments restrict routes, airlines have long had agreements whereby passengers can transfer from one to another with a through ticket. However, people tend to select from among the first routings that show up on com- puter screens, and routings from one airline to another often appear on screens after those involving only one airline. Fur- ther, when passengers see that they must change airlines, they worry more about making those connections across great distances within ever-larger airports. To help avoid this worry, airlines have agreed to code sharing—a procedure whereby the same flight may have a designation for more than one carrier. For instance, the same flight operated by Iberia from Miami to Madrid is listed as AA 8636, Finnair 5642, and Iberia 6118. Hence, AA passengers originating in, say, Tampa and connecting at Miami may worry less about the connection because they see themselves on the same airline all the way. However, they may still need to go from one departure section to another to make the plane-change. In such a situation, airlines must adhere to a longer minimum connecting time when showing a through/connecting flight.

The oneworld Alliance The oneworld Alliance comprises 15 airlines: airberlin, American Airlines, British Airways, Cathay Pacific, Finnair,

Iberia, Japan Airlines, LAN Airlines, Malaysia Airlines, Qan- tas, Qatar, Royal Jordanian, S7 Airlines, SriLankan Airlines, and TAM. At this writing, Aer Lingus is negotiating to be- come the 16th member, and Qatar has indicated it may leave the alliance. oneworld competes largely with two other alli- ances: Star and SkyTeam. Airlines in these alliances coop- erate on various programs, such as allowing passengers to earn credits for free or upgraded travel on any one of them. In the case of oneworld, all members flying into Narita Air- port in Tokyo have moved into terminal 2, which shortens legal connecting times among them. They also advertise their affiliation; you may have seen aircraft painted with the airline’s name and logo along with the oneworld name. These alliances allow for considerable cooperation, such as code-sharing; however, antitrust regulations (unless given immunity) prohibit their members from coordinating routes, schedules, and prices.

Antitrust Immunity AA has received antitrust immunity that allows it to coop- erate more in both a joint venture across the Atlantic and one across the Pacific. In both cases, the agreements allow representatives from each airline to jointly manage capacity, sell and promote space on flights operated by each other, divide revenues, and schedule connecting flights. The major thrusts for these ventures are to cut operating costs by bet- ter controlling capacity, to avoid disruptive price competi- tion, and to improve scheduling so that there are more and better departure times and connections for passengers.

So ur

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The adjacent photo shows an aircraft bearing both the oneworld and British Airways identifications.

424 part 5 Global Strategy, Structure, and Implementation

Los Angeles

San Francisco

Vancouver

Honolulu

Non-joint Business Routes Operated by JAL

Joint Business Routes

New York

Boston

Chicago

Dallas/ Fort Worth

Beijing

Shanghai Osaka Nagoya

Tokyo/ Narita

Tokyo/ Haneda

Map 15.2 american airlines and Japan airlines: transpacific routes Note that the joint activity involves only flights from mainland North America into East Asia.

The Transatlantic Joint Venture Three airlines—AA, BA, and Iberia—have a combined net- work of over 400 destinations in over 100 countries and account for more than 6,000 daily departures. When their JV and antitrust immunity were approved, they collectively had 48 different routes between Europe and North America that included 22 North American and 13 European cities. Of these 48 routes, they competed directly on only 9.

Since these airlines entered this JV, they have been able to coordinate schedules better for the convenience of passengers. For instance, whereas AA and BA used to have flights leaving between New York-JKF and London- Heathrow within minutes of each other, they now operate 16 flights per day between those two airports and have been able to coordinate departure times so that the flights leave approximately one hour apart. This gives passengers more options in finding a departure time convenient to them and allows for more connecting flight alternatives in either di- rection. Further, the participating airlines can now designate their own flight numbers on domestic connections when they connect to transatlantic destinations. For instance, Ibe- ria shows one of its routes as San Diego to Madrid, even though both the San Diego–Chicago and Chicago–Madrid flights are operated by AA.

Because of dual or multiple designations and the shar- ing of revenue, more than one airline’s sales force is trying to fill seats on the same route. The result is boosted sales,

which allows the JV members to offer new routes—nonstop service between Chicago and Helsinki and between New York and Budapest have come about since the JV’s forma- tion.

The AA–JAL Joint Venture JAL is also a large airline, serving 85 cities in 20 countries and territories. Its joint venture with AA has the same advan- tages and objectives as the JV across the Atlantic. Some changes since inaugurating the JV are notable. By altering each company’s flight times between Chicago O’Hare and Tokyo Narita and tweaking schedules of connecting flights in both cities, many more passengers can make connections within two hours. For instance, 22 more flights from 20 more departure cities can make such connections for travel from O’Hare to Narita. Map 15.2 shows the joint AA–JAL routes and illustrates that flights between Honolulu and Japan are not included in the agreement.

JAL moved its O’Hare flights from the international termi- nal to be adjacent to AA. Meanwhile, AA moved its Japanese offices to JAL’s headquarters building, a move that eases communications between the two airlines. Both are helping each other with cultural questions, such as JAL aiding AA with public address announcements in Japanese to make them more meaningful to Japanese passengers. Meanwhile, the airlines have greatly increased code sharing between

Chapter 15 Direct Investment and Collaborative Strategies 425

them, especially to points beyond gateway cities, such as showing a JAL flight as Tokyo–Salt Lake City and as an AA flight beyond Tokyo to JAL-served cities such as Hanoi.

Why Not a Merger or an Acquisition? To begin with, government regulations such as ownership requirements would prevent a merger or acquisition between U.S. and non-U.S. carriers. Even if they didn’t, fusing compa- nies together creates daunting problems, even for domestic mergers and acquisitions. To complete the merger between AA and US Airways, the companies had to merge different operating and compensation systems between their respec- tive pilots’ unions. US Airways transatlantic routes had to interface with AA’s agreements with BA and Iberia. US Air- ways had to sever its membership in the Star Alliance, and AA and US Airways had to combine their accrued frequent flyer passenger points.

The Advantages of JVs In the JVs, each company keeps its own identity and oper- ates independently except for the coordination of the trans- oceanic routes. In addition, each airline in the JVs and within oneworld has developed its own culture and brand to appeal to its own nationality. BA is still strongest with British passen- gers, JAL with Japanese passengers, etc. By keeping sepa- rate identities, despite sharing flights, the member airlines can capitalize on the differences. Nevertheless, natural extensions

are possible by strengthening collaboration, such as having check-in counters worldwide that handle all oneworld pas- sengers and combining more airport lounges as a cost-saving measure. It is probably safe to say that future cooperation will strengthen rather than weaken among oneworld members.

Questions

15-3. Companies within the oneworld, Star, and Sky Team alliances

have also engaged in major mergers and acquisitions (M&A):

American and US Air (oneworld), Delta and Northwest (Sky

Team), and Continental and United (Star). What are the advan-

tages and disadvantages of M&A versus non-equity alliances

in this industry?

15-4. Some airlines, such as Southwest, have survived as niche

players without extensive international connections. Can

they continue this strategy?

15-5. Why should an airline not be able to establish service any-

where in the world simply by demonstrating that it can and

will comply with the local labor and business laws of the

host country?

15-6. The U.S. law limiting foreign ownership of U.S. airlines to no

more than 25 percent of voting shares was enacted in 1938.

Is this law an anachronism, or are there valid reasons for

having it today?

15-7. Many airlines have sometimes been no more than margin-

ally profitable. Is this such a vital industry that governments

should intervene to guarantee survival? If so, how?

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

15-8 What will be the consequences if a few large airlines or networks domi- nate global air service?

15-9 What methods could JAL and AA use to divide revenue and expenses on code-shared routes?

Scan for Endnotes or go to www.pearsonhighered.com/daniels

Endnotes

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Words have no wings but they can fly many thousands of miles.

—South Korean proverb

Objectives

After studying this chapter, you should be able to

16-1 Profile the evolving idea of organization in the MNe

16-2 interpret classical organization structures

16-3 interpret neoclassical organization structures

16-4 Differentiate the systems used to coordinate international activities

16-5 Differentiate the systems used to control international activities

16-6 explain the purpose and characteristics of organizational culture

chaPter 16 the Organization of international business

So ur

ce : D

an ie

l P . S

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Organizing Global Operations: The “Gore Way”

groups above others according to status or authority. He installed a flat organization whereby everyone could freely talk with anyone else, no matter their role or rank. Making this happen, he figured, meant eliminating obstacles to communication: hence, no one in the company, not even Bill himself, had an authoritarian title like boss, supervisor, manager, director, controller, etc.4 Everyone was and, to this day, is an “Associate.” As an aside, Gore’s opposition to boxing in, either an individual or an idea, anchors the symbolism of its corporate logo. The obtuse triangle has three vertices; the one toward the furthest left represents the past, the one midway represents the present, and the one that has broken through the box represents the future.

In 1976, Bill Gore set forth his manifesto, “The Lattice Organization—A Philosophy of Enterprise.” It articulates the Gore Way, beginning with a flat, network-like structure that rejects the standard that one person (the boss) should specify who oth- ers (workers) may talk to.5 In addition, it models a team-based, non-hierarchical organization that promotes personal initiative by rejecting conventional structural formats, replaces an authoritar- ian chain of command with connections and collaborations, and lets channels of communication emerge naturally. Gore’s lattice organization enacts an interlaced system of relationships among Associates. Operationally, leaders attract team members based on their effectiveness in getting things done, and Associates, based on their read of opportunities and colleagues, self-organize into mul- tifunctional teams. Associates play a role in choosing what they work on, aligning their talents and interests with business needs. Associates create value that supports business goals—and their fellow Associates, by directly assessing each other, corroborate their performance.6

Liberated from a rigid bureaucracy, Associates make decisions based on knowledge and initiative rather than seniority and titles. Success translates into credibility to define and drive projects. Gore’s lattice organization frees the flow of information and spurs the sorts of personal communications that drive productive col- laboration—and, as report after report indicates, makes for a great workplace. No matter where in the world, no matter what an Asso- ciates works on, the Gore Way champions entrepreneurial innova- tion. Notwithstanding considerable personal autonomy, Associates stay mindful of Bill Gore’s four basic guiding principles: (1) Fair- ness to each other and everyone with whom we come in contact; (2) Freedom to encourage, help, and allow other Associates to grow in knowledge, skill, and scope of responsibility; (3) The ability to make one’s own commitments and keep them; and (4) Consulting other Associates before undertaking actions that could impact the reputation of the company.7

Since 1958, W. L. Gore & Associates have found ways to convert the versatile polymer polytetrafluoroethylene (PTFE) and related fluoropolymers into pioneering materials and products that are used in all sorts of ways by all sorts of people to do all sorts of jobs.1 Best known for its waterproof, breathable, high-performance GORE- TEX® fabric, the company’s portfolio includes medical devices, pharmaceutical processing, consumer products, cables and cable assemblies, fibers, sealants, industrial components, and aerospace electronics. Its ingenuity and imagination has earned it more than 2,000 patents worldwide. Analysts often point to Gore as the “the world’s most innovative company.”2

Notwithstanding its discoveries, many contend that Gore’s supreme invention is setting and sustaining a stunningly effective global organization. Report after report confirmed something spe- cial goes on. In 2016, Gore ranked 12th on the “Fortune 100 Best Companies to Work For”; it has appeared on every Fortune list since the rankings began in 1984. Gore’s locations in China, France, Ger- many, Italy, Korea, Sweden, and the UK have been named one of the respective nation’s best workplaces. Globally, Gore gains accolades. For instance, nearly 3,000 MNEs worldwide participated in the 2015 Great Place to Work® review. Assessment centered on issues of mutual trust, esprit de corps and camaraderie, and supportiveness of the work environment. From the global pool, the review identified the 25 World’s Best Multinational Workplaces—Gore ranked third.3

Start-up

Gore and its subsidiaries employ more than 10,000 Associates, based at research labs, manufacturing facilities, and sales offices in the United States, Germany, the United Kingdom, Japan, China, and else- where. Gore, headquartered in Newark, Delaware, is one of the 200 largest privately held companies in the United States; it had more than $3 billion in sales in 2016. The Gore family, along with its Associates (the official designation of its employees), owns the company. Private ownership, Associates profess, helps them to “take a long-term view.”

In 1958, Bill Gore quit DuPont, a U.S. chemical MNE, and started a business to explore new uses for PTFE. Beyond that, he aspired to create a company that puts into play then, and still today, far-reaching management ideas on organization, enterprise, accountability, and authority. Or, in company shorthand, the “Gore Way.”

Setting the gore Way

Philosophically opposed to the customary chain of command found in a top-down organization, Bill Gore rejected any sort of classi- cal hierarchy. He shunned an organization that ranked people or

Case

Chapter 16 The Organization of International Business 429

SuStaining the gore Way

A vibrant element of the Gore Way is its organizational culture. Inten- tionally humanistic, its foundational belief holds that the innate moti- vation of each Associate, given the opportunity, drives one and all to stretch toward their full potential. To that end, Associates collectively commit to foster a safe and healthy work environment in which they develop their talents, enjoy their work, and responsibly direct their activities—as founder Bill Gore once noted, “The objective of the Enterprise is to make money and have fun doing so.”8 Gore continues championing that cause—and, the results suggest, it pays off. Asso- ciates find ingenious ways to meet the needs of customers through innovative products. They aim to improve the communities in which they work and live, all the while sustaining the company’s legacy of taking a long-term perspective.

Shared norms and values help facilitate coordination and col- laboration between Associates as well as support informal inte- grative mechanisms. Explained CEO Terri Kelly, who joined Gore as an engineer more than 30 years ago, “At Gore, we take great pride in our culture and recognize the very important role it plays in driv- ing business success. By fostering an environment where people feel motivated, engaged, and passionate about the work they do, we are better able to tap into our potential and create innovative products that truly make a difference in the world.”9 Added Mar- cie Lee, leader of a company-wide culture initiative, “Our global teams bring together the best knowledge by collaborating across the enterprise to take on opportunities where we can make the biggest impact. Our strongly embedded values, passionate Associ- ates, and winning teams are instrumental to creating a rewarding environment and great experiences for our customers. This is our culture in action.”10

Changing for Changing timeS

Continuing growth, fueled by expanding internationalization, has led Gore to formalize some elements of its organization. Today, it has a CEO, several product divisions, numerous product-focused business units, and the usual business support functions. Each has a recognized leader. Coordinating far-flung global operations mean Associates use e-mail, phone and video conferencing, and the like. Still, teams regu- larly convene, physically and virtually, to plan, assess gaps, and fortify the relationships that anchor the Gore Way.11 Too, at its core, Gore is a flat organization, with no traditional management layers and no offi- cial organization chart. Multidisciplinary teams, freed from layers of supervisory “management,” protect the innovative spirit of individuals that power the company’s entrepreneurialism.

Certainly, one wonders how these principles and practices can organize the work of 10,000 employees running 50 facilities spanning 30 countries. Gore prefers opening new subsidiaries,

rather than acquiring an existing enterprise. It reasons that it’s easier to set and sustain its unique vision and values in a new enterprise than transforming workers’ legacy mindsets. Gore’s commitment to keeping units small and informal plays a vital role. Gore generally prefers that a unit, whether research, manu- facturing, or sales, grow to no more than 200 Associates. Cross- ing that threshold, whether in the United States, Germany, or China, insidiously turns decision-making from “we decided” to “they decided,” and sets a company on the path to hierarchy, bureaucracy, control, and coercion. Likewise, Gore mobilizes its plants into clusters, like the dozen plants located in Arizona or the multiple plants interspersed throughout the Delaware Valley. Then, within a cluster, Gore maximizes opportunities for cross- functional collaboration by having R&D specialists, engineers, marketers, chemists, and machinists work in the same plant or on the same campus. Even Gore’s headquarters has remained simple and intimate: several low-rise buildings built not far from Bill’s house in the Delaware countryside, each housing small, autonomous teams. And, outside of many, one finds a volleyball court, picnic areas, horseshoe pits, and other areas that promote teamwork, fun, and camaraderie. Unofficially the company’s offi- cial sport, volleyball has the unique feature whereby every player plays every position, unlike, say, in baseball or football, where players specialize in a particular slot.

melding the lattiCe and the net

Going forward, Associates look to meld the Gore Way with the transformational connection, communication, and collaboration technologies unleashed by the Internet. Explained Brad Jones, an enterprise leader, “Twenty or thirty years ago, markets in different parts of the world were still somewhat distinct and isolated from one another. At that time, we could have pretty much the entire global business team for a particular market niche located in a building. Today, as our markets become more global in nature, we are increasingly seeing the need to support our customers with global virtual teams. How do our paradigms and practices have to change to accommodate those changing realities?”12 Answering these questions inevitably had big implications. Still, Gore’ 50-year record of insight and adaptation signaled that, come what may, its Associates would develop ingenious solutions that leveraged the ideals of the Gore Way. ■

Questions

16-1. Identify three advantages of working for Gore. Do you find

them appealing?

16-2. What mix of knowledge, skills, and abilities would make

you a high-performing Associate at Gore?13

430 part 5 Global Strategy, Structure, and Implementation

introduCtion Designing an organization that adeptly runs global activities is an enduring concern of multinational firms. Managers must decide how employees get work done, minding how they coordinate activities spanning many markets, apply controls when situations go awry, and sponsor values that support a common cause. Overhanging these issues are the contingencies of international operations: How does it balance global standards with local circumstances? How should workers communicate with colleagues? How does it promote a universal outlook among different units doing different jobs in different coun- tries? Worldwide, executives engage these sorts of questions, determining how to configure subsidiaries, coordinate and control activities, and develop a unifying esprit de corps. These tasks, the crux of organizing an MNE, require managers specify the structure that arranges the workflow, install the systems that get and keep it moving, and promote the culture that sustains it (see Figure 16.1). Effectively done, managers convert strategic ambitions into performance outcomes.14

Changing timeS, Changing organizationS In the early twentieth century, companies responded to the emerging technologies of railroads, telephone, and telegraph by engaging then unusual organizational ideas.15 The global titans of the day, such as General Motors, Ford, DuPont, and Sears, developed hierarchical structures, reasoning that this then-novel organizational format would best implement their novel strategies that had been made possible by emerging technologies. Succeeding generations of managers refined these designs, better determining who did what job, who made which decision, who worked in which unit, who reported to whom, and who told whom what to do. The output of these analyses, codified in the “lines and boxes” that represent an MNE’s structure, instituted a hierarchical system of command, control, constraint, and contract. It directed the efforts and ensured the compliance of workers worldwide.16

The hierarchical model has routinely organized MNEs’ operations. For many, it defines work life in the modern-day corporation. Now, market trends, design revolutions, and work- place resets pose both opportunities and challenges.

Environmental differences, technology trends, executive practices, and labor markets challenge how managers organize an MNE.

Physical and Social Factors

Competitive Environment

Operating Environment

Organize Operations

Specify the Structure of Roles, Responsibilities, and Relationships

Develop Coordination and Control Systems

Promote Shared Understanding of the Company's Culture

Formulate a Strategy

Figure 16.1 Factors Affecting Organizing Operations The idea of an organization refers to the activities through which managers build the structure, systems, and culture needed to implement their strategy. The resulting organization, by arranging roles, responsibilities, and relationships, directs an MNE’s operations.

Chapter 16 The Organization of International Business 431

expanding SCope of iB The growth of global business changes MNEs’ opportunity sets and efficiency frontiers. Markets once predominant, like the United States, Japan, and Germany, transition to new positions. Markets once on the periphery, such as China, Indonesia, and Rwanda, move toward center stage. For instance, 400 midsized emerging-market cities, many unfamiliar in the West, such as Ghaziabad, Chittagong, Sanaa, Kano, and Bamako, will generate about 40 percent of global growth over the next 15 years.17 MNEs respond by redeploying operations and engaging strategies that impose intricate workflow patterns. Implementation requires new approaches to coordination, collaboration, and control. These choices demand far more sophisticated organizations than MNEs have tradition- ally used.

IBM’s transition into its third organizational phase illustrates this process. It’s read of market conditions and corresponding organizational requirements spurs it to build a “glob- ally integrated enterprise” that puts investments, people, and work anywhere in the world based on the optimal mix of costs, skills, and location effects. Explained IBM’s vice president of global strategy, “Instead of taking people to where the work is, you take work to where the people are.”18 Resetting workflows within the context of transforming technologies pushes IBM to rethink how to reboot its organization to run the new show. Managing increasingly sophisticated strategies, made possible by transforming technologies, calls for managing increasingly sophisticated organizations.

the internet aS a deSign Standard The invention of the telephone and telegraph, by expanding connections and improving communication, reset the standards of workflow in the early twentieth century. At the time, corporations responded with formats that reflected the organizing logic of these technolo- gies. We see the same processes in play today. The Internet, by efficiently and effectively organizing knowledge and resources, pushes managers to rethink their assumptions of how they arrange work, roles, and responsibilities. Incongruously, the Internet has no for- mal structure, no board of directors, and no official administrator. Its self-organizing and self-regulating capabilities prompt rethinking conventional notions of design, coordination, and control. Consider, for example, that contemporary global juggernauts like Facebook, Red Hat, Yandex, Alibaba PayPal, Naver, and Baidu could not have existed a generation ago. Therefore, just as novel strategies called for innovative structures in the early 1900s, so too do we see similar circumstances today. Managing new workplace arrangements calls for man- aging new structural formats.

managerial StandardS The evolving nature of work changes the conduct and context of employees’ jobs, whether done at the biggest headquarters or the smallest subsidiary. Change in the nature of work changes the nature of management. Historically, the higher one’s level in the hierarchy, the more one knew about the various jobs in the company. Hence, a generation ago, MNEs could rely on an elite set of executives making the big deci- sions. Today that thesis is increasingly debatable–and, at MNEs like Gore and Johnson & Johnson (J&J), invalid. Similarly, at one time frontline employees were the masters of their local marketplace, yet far removed from the global drama. That, too, no longer holds. Real-time access to information, facilitated by cheap, powerful telecommunica- tions, closes the global–local gap. Consequently, there are far fewer jobs that senior executives can script or that subsidiary managers cannot do. The intrinsic dynamism of

Implementing increasingly sophisticated strategies requires increasingly sophisticated organizations.

The Internet, in developing new workplace arrangements, calls for managing new structural formats.

Managing new workplace standards calls for managing new forms of coordination and control.

432 part 5 Global Strategy, Structure, and Implementation

the global market along with evolving workplace standards calls for a finer distribution of authority between headquarters and subsidiaries. Therefore, managing new work- place standards calls for managing novel coordination and control systems.

SoCial ContraCt Competitive changes and performance expectations alter the social contract between high- performance workers and MNEs. Traditional concerns for security, pay, and benefits have expanded to expectations of participating in decision-making, devising solutions to unique problems, and receiving challenging assignments.19 Furthermore, employees working with information technologies create value of astonishing variety, problem solving, and intel- lectual content. “Controlling” workers charged with reasoning or problem-solving tasks is problematic; the bright, self-motivating, self-organizing people who staff these sorts of slots generally oppose direct supervision. Whether “knowledge workers” or the “creative class,” these individuals aim to behave as if they are the CEO.20 Moreover, social contracts increasingly rely on the fit between worker’s outlook and the norms and values that anchor a company’s organizational culture. Google’s worries about brain drain to rivals, for instance, led it to identify why people quit; it found that executives left when they no longer felt con- nected to the company’s mission.21 Managing new expectations calls for managing the social dynamic of the organization’s culture. Consequently, MNEs develop organizational cultures that people do not want to merely work for, but aspire to belong to.

Change and Challenge: mneS reSpond These trends push MNEs to test the best mix of structure, systems, and values when build- ing, as we’ll see in our closing case, what J&J calls a “magical” organization. Different MNEs apply different approaches to create magic. Some, like Nestlé in Switzerland, Cemex in Mexico, Toyota in Japan, Infosys in India, and Walmart in the United States, apply and refine classical hierarchical formats. Walmart, for example, relies upon a tried-and-true international division, based in Arkansas, to oversee operations in 27 countries that col- lectively generate nearly $150 billion in sales. Walmart, as does Nestlé, Infosys, Toyota, and Cemex, fine-tunes its classical organization, process-mapping activities to rationalize the work environment and improve system standards. Reengineering workflows, streamlining information technology, tightening planning sequences, and minimizing duplication are key tools of organization design.

Others, like Oticon in Sweden, Gore in the United States, Belcorp of Peru, Grupo Empresarial Antioqueño of Colombia, Mitsui of Japan, and Li & Fung in Hong Kong, engage neoclassical heterarchial formats. Li & Fung, the world’s largest sourcing and logistics company, supplies billions of pieces of apparel to department stores, hypermarkets, spe- cialty stores, and e-commerce sites worldwide. However, it owns no fabric mills, no sewing machines, and no clothing factories. Rather, Li & Fung oversees a network of 15,000 suppli- ers spanning 60 countries that make virtually any clothing article.22 Li & Fung, like Oticon, Gore, and Mitsu, replaces the command-and-control ethos of the classical hierarchy with the goals of coordinating and collaborating in the context of the neoclassical heterarchy. Cross-functional task forces, knowledge networks, flat structures, virtual formats, and social networking methods are key tools of organization design.

Subject to its vision, mission, and strategy, the classical or neoclassical approach effec- tively organizes an MNE’s workflow. This chapter examines the intricacies of each approach. We study how an MNE builds an organization in terms of the (1) structure it specifies to arrange its workplace, (2) the systems it installs to coordinate and control what it does, and (3) the culture it promotes to shape and sustain its collective effort.

Changes in the market environment and nature of work push managers to evaluate the effectiveness of their organization.

ConCept CheCk

Designing an organization’s structure requires fitting it to conditions in the external environment. These conditions involve, among many others, legal regulations on ownership structures, degree of economic freedom, location economics, and expectations of alliance partners.

Organizing is the process of building the structure, systems, and culture that implement the MNE’s strategy.

The MNE specifies its organization to arrange its domestic and international units and activities, and the relationships among units.

Chapter 16 The Organization of International Business 433

ClaSSiCal organization StruCtureS The formal arrangement of roles, responsibilities, and relationships in the MNE represents its organization structure. Managers configure the elements of the company’s workflow to stipulate the lines of authority and communication, assign rights and duties, and set connections between units. These decisions often spell the difference between success and failure.23 Executives of J&J, for example, see its decentralized structure as the bedrock of its “magical” organization. Similarly, Zara’s CEO says the company’s structure anchors its com- petitiveness. Innovatively combining vertical integration, tech-choreographed coordination, just-in-time manufacturing, finely tuned logistics, and state-of-the-art merchandising poses tough challenges. Zara’s structure, by arranging jobs, roles, rules, and responsibilities, organizes its workflows to implement its strategy.

Designing an organization typically begins by determining the ideal structure for arrang- ing individuals and units to implement the MNE’s strategy—indeed, a long-running thesis in management theory holds that “structure follows strategy.” Does the MNE’s vision, for instance, champion global integration or local adaptation? In the former, centralization is crucial, while, in the latter, decentralization is decisive. Operationally, has its mission led it to concentrate value activities in a few nations or disperse them across many countries? Concentration requires precise controls, whereas dispersal calls for robust coordination sys- tems. Moreover, organizing domestically lets one reasonably set technology level, cultural orientation, and workplace practices as constants. Organizing internationally requires treat- ing them as variables. Collectively, these sorts of circumstances endorse the usefulness of some, while rejecting other, forms of structure.

Making sense of the strategy-structure situation forces a cascade of decisions. Many managers begin by resolving (1) the degree of vertical differentiation (deciding who has what authority to make which decision) and (2) the degree of horizontal differentiation (the task of specifying which people in which units do which jobs).

VertiCal differentiation No matter the mix of markets, products, or ambitions, MNEs face competing calls for global integration and local responsiveness. The questions run the gamut: Who should decide to close a factory in Switzerland or open one in Malaysia? Does only headquarters decide whom to hire and whom to fire, both at home and overseas? How often and in what format do foreign subsidiaries report to headquarters? In classical terms, the company’s structure rec- onciles these sorts of questions by specifying who has the authority to make what decision. If the plan is to make those issues headquarters’ call, then managers must build an organiza- tion that supports that outlook. Conversely, if the plan is to have those calls made by local subsidiaries, then, again, managers must build an organization to support that outlook. More formally, managers reconcile this tension by vertically differentiating the company’s structure in terms of the centralization (how high up) versus the decentralization (how low down) of decision-making.

Generally, decisions made above the subsidiary level signify centralization, whereas those made at or below that level signify decentralization. Operationally, a centralized struc- ture concentrates decision-making authority among the executives staffing the top levels of the MNE. A decentralized structure pushes decision-making authority down to the folks on the front lines, namely those running local subsidiaries. Resolving the tension between centralization versus decentralization, as seen in Table 16.1, endorses different principles, advocates different practices, and emphasizes different objectives.

Structure follows Strategy The choice of centralization versus decentralization is not an either-or proposition. Some activities spur centralized decision-making, such as

Structure is the formal arrangement of jobs that specifies roles, responsibilities, and relationships.

ConCept CheCk

International business is marked by recurring dialectics; for example, global versus local, pro- versus anti-globalization, democracy versus totalitarian- ism, economic freedom versus state capitalism, standardization versus adaptation. Here we add another, namely, centralization versus decentralization.

Differentiation means that the company is composed of different units that work on different kinds of tasks with different degrees of authority.

434 part 5 Global Strategy, Structure, and Implementation

configuring value activities worldwide to exploit location economies or rationalize pro- duction systems. Likewise, other activities encourage decentralized decision-making, such as adapting products or negotiating with local officials. Again, in the context of the “structure follows strategy” thesis, the requirements of the MNE’s strategy deter- mine its ideal structure and, by extension, how managers balance centralization and decentralization.24

An MNE implementing an international strategy, for instance, centralizes most decision- making. Headquarters, in its role as overseer of global operations, retains control of the firm’s resources, capabilities, and core competencies, and makes the decisions that the troops run- ning the local subsidiaries then implement.25 For example, Google, given its international strategy, centralizes strategic planning at the Googleplex in Mountain View, California, but decentralizes some elements of the marketing mix to local subsidiaries. Alternatively, the MNE implementing a multi-domestic strategy decentralizes extensive authority to the troops in the field, reasoning that those closest to the customer have a superior understand- ing of the situation than do far-removed generals.

technology, Balance, and globality Technology increasingly alters the calculus of who should have the authority to make which decision. The Internet, for example, pro- gressively makes it easier for executives at headquarters as well as subsidiaries to track global conditions and local performance in real time. Not long ago, each relied upon

Centralization is the degree to which high-level managers, usually above the country level, make strategic decisions and delegate them to lower levels for implementation.

taBle 16.1 the principles and practices of Centralization and decentralization

Centralization Decentralization Premise Premise

• Decisions should be made by senior managers who have superior expertise and broader experiences.

• Effective configuration and coordination of the value chain requires headquarters direct local activities.

• Centralized decision-making ensures local operations support the MNE’s vision and mission.

• Decisions should be made by managers closest to customers. • Effective configuration and coordination of the value chain requires

adaptation by local managers. • Success achieving local objectives anchors global performance.

Advantages Advantages

• Ensures decisions support objectives. • Retain authority with HQ to regulate change. • Preempts duplicating activities. • Reduces the risk lower-level managers make strategic errors. • Simplifies coordinating activities • Promotes consistent relationships with stakeholders.

• Managers that directly deal with customers, competitors, officials, and markets make decisions.

• Encourages lower-level managers to behave entrepreneurially. • Improves the allegiance and accountability of frontline employees. • Links subsidiary managers’ choices directly to performance.

Disadvantages Disadvantages

• Requires top executives monitor and manage multiple activities. • Discourages initiative among lower-level employees. • Demoralizes lower-level employees who must wait to be told what to do. • Information flows ‘top-down,’ thereby preempting bottom-up

innovations.

• Risks subunits making counterproductive decisions. • Subsidiaries champion local interests at the expense of global

performance. • Slows the company’s response to global innovations. • Information flows ‘bottom-up,’ thereby obstructing top-down innovations.

Factors Encouraging Centralization Factors Encouraging Decentralization

• Environment and industry conditions push for worldwide uniformity of products, methods, and policies.

• Interdependent subsidiaries share activities, segments, and rivals. • Strategy calls for exploiting location economics globally. • Lower-level managers are less experienced decision-makers than

upper-level executives. • Decisions are important and downside risk is great.

• Environment and industry conditions require adapting products and policies.

• Local production fully exploits location affects. • Lower-level managers are effective decision-makers. • Speed and flexibility drive performance. • Little need to develop managers for positions elsewhere in the world. • Supports rapid expansion into new markets. • Goal to develop executive talent at the local level.

Decentralization is the degree to which lower-level managers, usually at or below the country level, make and implement strategic decisions.

Chapter 16 The Organization of International Business 435

slow-moving reports provided by counterparts. Now, ERP, e-mail, VoIP, teleconferencing, social networks, and the like eliminate the lag. Economical, off-the-shelf platforms, such as Microsoft’s Skype, Google’s Hangout, Polycom’s RealPresence, or Cisco’s TelePresence, make the magic of being in many places simultaneously happen effortlessly. The click of a mouse lets one “meet” anyone, anywhere, anytime. Consequently, MNEs fine-tune decision-making for growing globality in which “business flows in every direction. Companies have no centers. The idea of foreignness is foreign. Commerce swirls and mar- ket dominance shifts.”26 Competing with everyone from everywhere for everything makes historically blunt decisions to centralize this activity or decentralize that responsibility far more intricate issues.

horizontal differentiation Vertically speaking, MNEs run from top (the CEO) to the bottom (the entry-level worker). Horizontally speaking, MNEs run sideways from function to function, such as research to production to marketing to finance. Horizontal differentiation involves assigning specific tasks to specific people in specific functions. Disaggregating tasks makes manageable the scale and scope of international operations. Technically, an MNE horizontally differentiates its structure to (1) specify the set of tasks that must be done; (2) specify who does what by dividing those tasks among a mix of business units, divisions, subsidiaries, departments, committees, teams, jobs, and individuals; and (3) stipulates superior and subordinate rela- tionships within a unit.

In theory, managers can horizontally differentiate a structure in terms of function, pro- cess, product, service, location, or client. For an MNE, the standards of function, product, area, or some combination have traditionally dominated. Horizontally differentiating on the basis of business activity anchors the functional structure; doing so on the basis of product or geography installs a divisional structure; and doing so on the basis of a combination results in a matrix or mixed structure. The long-running use of these formats by MNEs designates them as classical structures. By no means does that characterization suggests they are an anachronism. Rather, it signifies the use of traditional design tools to specify the roles, responsibilities, and relationships in the MNE. As had many 50 years ago, many MNEs today rely on classical structures.27

the funCtional StruCture The functional structure, as depicted in Figure 16.2, arranges the workplace by business functions (i.e., production people work with production people, marketing people work with marketing people, finance people work with finance people). MNEs with a narrow range of products, particularly those whose capital-intensive operations create steep scale effects, find functional structures appealing. Efficiently arranging responsibilities and relationships streamlines decision-making. Energy and extraction MNEs, such as ExxonMobil, Vale, or Rio Tinto, as well as aircraft manufacturers such as Airbus, Boeing, or Bombardier commonly use it. They, like others who install a functional structure, see global integration (and its demands to leverage core competencies, capture experience economies, and exploit location effects) trumping local responsiveness (and its demands to adapt products and processes to national circumstances).

limits Horizontally differentiating people and processes by business function constrains the development of cross-functional knowledge-generating and decision-making relationships. Consequently, coordinating different functional units, in response to a market disruption or strategic change, is difficult. The often-extreme vertical differentiation found in the functional structure, represented by a multi-layered chain of command, bureaucratizes decision- making. Finally, classical structures, such as the functional format, fuel zero-sum battles for

In principle, decision-making should occur at the level of those who (1) are most directly affected by its outcome and (2) have the most direct knowledge of the situation.

Vertical differentiation deals with the chain of command that runs from the “top to the bottom” of the organization. Horizontal differentiation deals with the separate tasks or skills that run “sideways” in the organization.

A classical structure uses explicit vertical and horizontal differentiation to organize the workplace.

Functional structures

• group people based on common expertise and resources,

• fit the organizational demands of MNEs that have narrow product lines.

436 part 5 Global Strategy, Structure, and Implementation

control among divisions, groups, and people. The goal of maximizing organizational power, to say nothing of the all-too-often imperative of organizational survival in a compartmental- ized hierarchy, hinders collaboration.

diViSional StruCtureS Whereas executives specify roles and relationships in a functional structure in terms of inputs (e.g., oil, natural gas, solar, and coal for an energy producer), they use a divisional structure to specify them according to product (e.g., soap, toothpaste, and cosmetics for a consumer products firm) or markets (e.g., North America, Europe, Africa, and Asia). Each division is responsible for its assigned products or markets. The MNE’s strategy determines if it adopts an international, a global product, or a worldwide area divisional structure.

international division An MNE prefers this format when its international activities represent a small share of its total activity. It charges a separate, stand-alone operating unit with responsibility for overseas activities (see Figure 16.3). Domestic units supervise the home market, while the international division takes responsibility for the less strate- gic foreign sector. Consolidating international personnel within a single unit, by promot- ing knowledge-generating and decision-making relationships, improves decision-making effectiveness.

Divisional structures

• divide employees based on the product type, customer segment, or geographical location,

• duplicate functions and resources across divisions,

• fit the organizational demands of the MNE that manages conventionally differentiated activities.

An international division

• creates a critical mass of international expertise,

• competes with powerful domestic divisions for resources,

• fits the demands of the MNE that generates most sales in a single nation.

Marketing

Headquarters

Production

Marketing, North America

Marketing, Asia

Production, Asia

Production, North America

Figure 16.2 The Functional Structure Rationale: Structure is set by business functions that reflect the firm’s value-chain activities. Organizing workflow according to common tasks captures scale and location effects. Centralized decision-making usually prevails.

Headquarters

Subsidiary, European

Community

Subsidiary, India

Subsidiary, Mexico

Subsidiary, China

Domestics Division Alpha

Domestic Division Beta

International Division

Figure 16.3 The international Division Structure Rationale: Structure is set by organizing the various activities related to the firm’s international operations into a self- contained, relatively autonomous unit. The international division is charged with directing value activities outside of the home market.

Chapter 16 The Organization of International Business 437

Limits Disaggregating an MNE into domestic-international divisions can fan “us versus them” tensions, thereby blocking cross-division connections. Conflict between domestic and international units obstructs sharing competencies, leveraging best practices, and exploiting experience effects. Domestic managers, evaluated based on their home market performance, may withhold resources from the international division in order to boost their relative per- formance. Likewise, performance suffers when domestic and international counterparts see little incentive to collaborate. Historically, U.S. MNEs found the international division appealing, given that the scale of their home market often exceeds their overseas activity. This format finds less use among European MNEs, given the small size of their domestic markets relative to their international activity.

Worldwide product division The product division format is the most widely used struc- ture among MNEs. Its usefulness follows from the fact that many MNEs make and sell a broad portfolio of similar products based on overlapping competencies in multiple markets.28 For example, Gore’s structure sets four product divisions: electronics, fabrics, industrial, and medical. Each division serves different industries, but each makes and sells products based on Gore’s proprietary PTFE expertise. The electronics product division, for example, makes PTFE-based high-performance cables and assemblies. Alternatively, the fabrics division makes PFTE-based materials for the outdoor clothing, military, law-enforcement, and fire protection markets.29 The worldwide product division structure provides MNEs the flexibility to support differentiated product groups that share resources, capabilities, and competen- cies.30 In turn, each division’s global mandate orients managers toward consolidating and coordinating activities to tap location and experience economies (see Figure 16.4).

Limits The autonomy of each product division means that different subsidiaries from different product divisions within the same foreign country often report to different execu- tives at headquarters. Unless safeguarded, coordination problems create inefficiencies.31 At one point, Nestlé’s various product divisions had configured more than 500 factories in nearly 90 countries to produce some 8,000 brands. Headquarters in Switzerland struggled to determine the costs of the raw materials its factories purchased from suppliers. In an extreme case, Nestlé’s 40 U.S. factories procured raw materials independently. Lack of cross-division coordination, compounded by the fact that Nestlé product divisions used five different e-mail systems, meant that its U.S. factories, affiliated with different product divisions, unwittingly paid more than 20 different prices for vanilla extract to the same sup- plier.32 Improving communication systems, by supporting better exchange, steadily reduced cross-divisional barriers.

Worldwide area division An MNE uses geographic divisions, as depicted in Figure 16.5, when its sales are not dominated by a single country or region (including the home

The worldwide product divisional structure centralizes decision-making authority.

Divisional structures

• divide employees based on the product type, customer segment, or geographical location,

• duplicate functions and resources across divisions,

• fit the organizational demands of the MNE that manages conventionally differentiated activities.

An international division

• creates a critical mass of international expertise,

• competes with powerful domestic divisions for resources,

• fits the demands of the MNE that generates most sales in a single nation.

Headquarters

Worldwide Product

Division Alpha

Alpha, North America Alpha, Asia

Alpha, Europe

Omega, North

America Omega, Asia Omega,Europe

Worldwide Product Division

Omega

Figure 16.4 The Worldwide Product Division Structure Rationale: Structure is set by organizing the various activities related to a product within a self-contained, relatively autonomous unit. Each product division is charged with configuring and coordinating value activities in its assigned product area.

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country). Typically, its activities are evenly distributed across multiple markets. In this scenario, an MNE horizontally differentiates activities by geography, whereby Division Alpha is responsible for region/country A, Division Beta takes region/country B, and so on. Historically, European MNEs preferred the area structure. Based in small countries, they expanded into bigger markets worldwide. Then, the size of one market, such as the United States, or proximity of several smaller markets, such as the Middle East/North Africa, sup- ported a self-contained area division. For example, Swiss-based Nestlé organizes most of its food and beverage business geographies by disaggregating the globe into Zones EMENA (Europe, Middle East and North Africa), Americas, and Asia/Oceania/Africa. England-based Diageo similarly organizes in terms of North America, Europe, Africa, Latin America and the Caribbean, and Asia–Pacific territories.

Emerging markets push MNEs to tweak the worldwide area structure. Once small in scale and scope, markets in Asia, Africa, and South America command greater attention. For example, the rising strategic importance of China and Eastern Europe led Nike to reset its four-region structure into six areas: North America, Western Europe, Eastern/Central Europe, Japan, Greater China, and Emerging Markets. Nike also announced that China and Eastern Europe would operate separately from the other divisions. Their growing share of the com- pany’s total sales, comparatively faster growth rates, and superior long-term potential called for different degrees of vertical and horizontal differentiation.

The geographic division structure is commonly used by MNEs pursuing multi- domestic strategies—as seen in Nike’s reorganization to better respond to Eastern Europe and China. The decentralization of the area structure—North America tends to North America, Europe tends to Europe, and so on—gives local managers more authority to adapt value activities. As Nike explained, “We are confident these changes will best posi- tion us for future growth . . . . This model allows our global categories to connect directly with consumers at the local level.”33 Boosting local subsidiaries’ responsiveness spurs headquarters to decentralize decision-making authority. Typically, headquarters retains strategic and financial controls.

Similar moves by other MNEs highlight a key trend afoot. Historically West-centric companies rethink the horizontal differentiation of their structures given the emer- gence of larger, faster-growing markets. For example, Panasonic adjusted its worldwide area structure given sales trends in its emerging versus developed markets. Historically, Panasonic had maintained a conventional geographic format organized in terms of North America, Europe, and Asia. Now, given the equatorial proximity of many emerging econ- omies, it differentiates operations by organizing in terms of temperature and tropical cli- mate zones—longitude, not latitude, matters more in setting its structure. Operationally, executives from Brazil, who previously collaborated with colleagues in South America, now swap ideas with counterparts in Malaysia, who previously had conferred with col- leagues in Asia.34

Limits Conducting similar organizational activities in several places increases adminis- trative inefficiency. Each area division, say EMENA, Americas, and Asia/Oceania/Africa, essentially builds a “mini-me” operation in order to make and sell products in its assigned

The worldwide product divisional structure decentralizes decision-making authority.

Geographic divisions fit the demands of MNEs who have extensive international operations that are distributed across many countries.

Area: Africa/Middle

East

Area: Asia Asia/Oceania Area: Europe

Area: North America

Area: South America/

Caribbean

Headquarters

Figure 16.5 The Worldwide Area Division Structure Rationale: Structure is set by organizing the various activities related to a product within a set geographic area. Each area division is charged with configuring and coordinating value activities in its assigned territory.

Chapter 16 The Organization of International Business 439

territory. Replication, besides expensive, complicates integration and coordination. Some MNEs accept this inefficiency as the cost of a locally responsive organization. Rather than a structural deficiency, the requirements of its strategy necessitate replicating business opera- tions across markets.

gloBal matrix StruCture The worldwide product division structure centralizes decision-making to improve opera- tional efficiencies. Alternatively, the worldwide area structure decentralizes decision-making to improve local responsiveness. The MNE implementing a global strategy, given its empha- sis of integration and standardization, would opt for the former, while an MNE implement- ing a multi-domestic strategy, given its emphasis of adaptation and responsiveness, would opt for the latter. As we saw in Chapter 12, some MNEs implement the transnational strat- egy, aiming to ingeniously reconcile global integration and local responsiveness. Organizing workflows to implement this strategy directs management’s attention to the global matrix structure (see Figure 16.6).

A global matrix structure horizontally differentiates the MNE along two dimensions; in Figure 16.6, those dimensions are geography and product. Interlacing different types of divi- sions integrates units that are sensitive to competing pressures. Requiring managers from both divisions to negotiate mutually agreeable plans, goes the reasoning, infuses both perspectives into decision-making, thereby more effectively reconciling integration and responsiveness pressures. Operationally, the matrix format means that a manager running a subsidiary now has two bosses: one represents the product side, the other represents the geographic domain. Since the matrix structure assigns equal authority to the product and area managers, both must work together to set relationships, coordinate resources, and share rewards.35

limits In principle, the global matrix structure promotes cross-divisional communication and multifunctional collaboration. In practice, organizational politics fans competition for resources and rewards. Unchecked, gamesmanship threatens collaboration, thereby short- circuiting the knowledge-generating and decision-making relationships that were the origi- nal promise of the matrix. A matrix structure also institutes a dual hierarchy that runs afoul

A matrix organization

• institutes overlap among functional and divisional forms,

• gives functional, product, and geographic groups a common focus,

• has dual-reporting relationships rather than a single line of command,

• fits the demands of MNEs that cannot easily reconcile competing market pressures.

Area, Asia

Product Division Alpha

Product Division

Beta

Product Division Gamma

Area, Europe

Area, North America

Area, South America

Headquarters

Figure 16.6 The Matrix Structure Rationale: Structure is set by organizing a dual relationship among different divisions in order to integrate complementary activities. Product divisions direct value activities in mutually beneficial collaboration with the choices made by area divisions.

440 part 5 Global Strategy, Structure, and Implementation

of the unity-of-command principle. This notion holds that an unbroken chain of command should flow through the levels of the hierarchy, beginning with the CEO down to the entry- level employee. Giving one worker two bosses, by blurring lines of responsibility, creates conflicting lines of command and nebulous accountability.36 The CEO of Dow Chemical, an early adopter of the matrix structure, explained, “We were an organization that was matrixed and depended on teamwork, but there was no one in charge. When things went well, we didn’t know whom to reward; and when things went poorly, we didn’t know whom to blame.”37 Persistent problems coordinating responsibilities and resources have led MNEs to question its practical usefulness.

mixed StruCture Few MNEs set a structure that neatly applies the precise characteristics of a functional, divisional, or matrix format. Most face situations where different market conditions pre- vent instituting a single format—recall, for example, Nike’s dilemma organizing its regional operations given their different performance prospects. Thus, some MNEs combine features of the functional, geographic, and product structures into a mixed structure. This format does not signify indecisiveness. Rather, some MNEs see no superior single organizational model given changing industry conditions, market trends, strategic capabilities, and com- pany legacies (e.g., some conditions support a geographic format in Area A but fit a func- tional structure for business activity in Area B). Again, Nike installed vertical and horizontal arrangements in China and Eastern Europe that were unsuitable for organizing its activities in North America, Western Europe, and Japan. Likewise, Dell Computers horizontally dif- ferentiated its Asian headquarters in Singapore by business function, aiming to improve its regional financial, operational, and tax efficiency. Nestlé organizes most of its food and beverage business in terms of geographies (Areas EMENA, Americas, and Asia/Oceania/ Africa) but runs some businesses globally (e.g., Nestlé Waters, Nestlé Nutrition, Nespresso). Although executives prefer structural consistency, organizing for differing market conditions often results in mixed structures.38

neoClaSSiCal StruCtureS MNEs, looking to implement increasingly sophisticated strategies, look for commensu- rately sophisticated structures that support the emerging communication and collaboration patterns.39 Some find the hierarchical architecture of classical structures, designed to maxi- mize command, control, coercion, and compliance, more commonly promotes complexity, bureaucracy, conformity, and inflexibility. As some argue, the “models and frameworks that shaped our leading organizations from the end of the second world war through the con- clusion of the cold war are clearly obsolete in this new era of e-business, perpetual innova- tion, and global competition.”40 In recourse, some MNEs adopt neoclassical structures to organize different approaches to horizontal and vertical differentiation that broaden relationships, expand communication, and promote collaboration. In absolute terms, neo- classical formats serve the same purpose as do their classical counterparts. They stipulate how an MNE organizes its workplace, utilizes resources, administers systems, and specifies authority, rights, and responsibilities. However, neoclassical structures do so in ways that differ radically, notably moving from organizing the boundaries that define a hierarchy to achieving the boundarylessness that marks a heterarchy.

the Challenge of BoundarieS In practical terms, boundaries are (1) vertical divisions that separate employees into specific slots, each marked by explicit superior-subordinate roles, in the hierarchy and (2) horizontal divisions that follow from having specific employees do specific jobs in specific units.41 In a

Each MNE’s structure reflects its particular

• market circumstances, • strategic choice, • value chain configuration, • administrative legacy, • executive preferences.

ConCept CheCk

Discussion of the “Types of Economic Systems” in Chapter 4 (page 111), noted that a mixed economy combines some of the characteristics of a free market with certain features of command systems. A mixed organizational struc- ture reflects a similar choice to sacrifice purity for practicality. Managers customize “model” organizational configurations to accommodate their mix of businesses and countries.

Classical structures emphasize the principles of command and control. Neoclassical structures emphasize the principles of coordinate and cultivate.

ConCept CheCk

“The Forces Driving Global- ization and IB”, profiled in Chapter 1 (page 11), explains that market drivers such as expanded technology, liberal- ized trade, and increased cross- national cooperation reset the external environment of international business. Recog- nizing changes as opportunities moves MNEs to experiment with neoclassical structures that reset degrees of vertical and horizontal differentiation.

Chapter 16 The Organization of International Business 441

classical structure, vertically and horizontally differentiating the workflow leads to specify- ing precise rules, responsibilities, and relationships—each, in turn, institutes a boundary. Think of, for example, the schematic of boxes and lines shown in Figures 16.2 through 16.6; each demarcate the boundaries that hierarchically segregate the people who run the various functions, markets, and businesses. The boundaries that establish the command-and-control format of classical structures, by instituting divisions between people, pose organizational challenges. Divisions typically slow communication, discourage collaboration, create rigidi- ties, and bureaucratize decision-making.

Sony’s CEO, for example, blames his company’s poor performance not on the wrong strategy, but the reality that rivalry and conflict between its differentiated businesses obstructs individual effort and collective effectiveness.42 Removing the boundaries that block communication, coordination, and collaboration among divisions, he added, would position Sony to engage its expanding diversity of markets, customers, and rivals. In recourse, Sony, like other MNEs, looks to a heterarchial structure whose fewer boundaries speed coordina- tion and spur collaboration.

the goal of BoundaryleSSneSS A neoclassical structure directs MNEs to the issue of boundaries and, more importantly, how to dismantle as well as avoid them. It urges busting boundaries between vertical ranks and roles; between horizontal units in different functions, products, and areas; and between the firm and its suppliers, distributors, JV partners, strategic allies, and customers. General Electric’s performance highlights the process. Directing GE’s far-flung global operations led former CEO Jack Welch to experiment with progressively flatter organizational formats. He aimed to build a heterarchial organization that eliminated the vertical and horizontal boundaries that put barriers between company, managers, customers, suppliers, and stake- holders. As Welch explained, “The simplest definition of what we are trying to create—what our objective is—is a boundaryless company, a company where the artificial barriers and walls people are forever building around themselves or each other—for status, security, or to keep change away—are demolished and everyone has access to the same information, everyone pulls in the same direction, and everyone shares in the rewards of winning—in the soul as well as in the wallet.”43 Radical then, less so today, moves by Welch and Gore, as we saw in our opening profile, pioneer the transformation of ‘Organization Man’ into ‘Network Person.’44

Gore’s lattice structure and its egalitarian workplace philosophy exemplify boundaryless- ness practices. The Gore Way sees the hierarchy suppressing creativity and innovation and hence avoids organizational charts, chains of command, predetermined communication channels, and job titles. Rather, Associates share information, as opposed to controlling it. Instead of a few telling the many what to do, multifunctional teams self-organize around opportunities. Collaboration compels communication, and high-performance validates lead- ers. “We work hard at maximizing individual potential, maintaining an emphasis on product integrity, and cultivating an environment where creativity can flourish,” says CEO Terri Kelly. She added, “A fundamental belief in our people and their abilities continues to be the key to our success, even as we expand globally.”45

Loosely connected networks of self-organizing and self-governing agents are key features of neoclassical structures. Likewise, the flexibility of these formats promotes fewer rules and regulations. Employees act as entrepreneurial owners rather than as risk-averse bureaucrats. At Gore, for example, every Associate is a shareholder after one year. Unlike classical structures, in which the formal attributes of managers (i.e., title, location, number of direct reports) matter most, neoclassical formats make the managers’ relationships with other agents in the network matter more. Again, at Gore, team members evaluate one another. In summary, the boundarylessness of a neoclassical structure spurs people to share rather than control informa- tion; collaborate rather than compete on projects; promote rather than suppress innovation; cultivate rather than command relationships; and engage rather than resist change.

Increasingly sophisticated strategies require minimizing the internal structural, systemic, and interpersonal boundaries that constrain collaboration in the MNE.

Boundarylessness refers to eliminating vertical, horizontal, and external boundaries that hinder the flow of information and formation of relationships.

Each MNE’s structure reflects its particular

• market circumstances, • strategic choice, • value chain configuration, • administrative legacy, • executive preferences.

ConCept CheCk

Classical structures emphasize the principles of command and control. Neoclassical structures emphasize the principles of coordinate and cultivate.

ConCept CheCk

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the netWork StruCture The network structure, a leading neoclassical format, arranges roles, relationships, and responsibilities in a patterned flow of activity that allocates people and resources to decen- tralized projects (see Figure 16.7).46 It is anchored by a core unit that outsources activities in which it has no core competency to firms that do—or, put differently, “do what you do best and outsource the rest.”47 For example, MNEs like Nike, Apple, Qualcomm, and Cisco concentrate on value creation in R&D, product design, or marketing. They then contract external suppliers and independent manufacturers, like Pegatron, Foxconn, Kyocera, or Yue Yuen Industrial, to make their products. Operationally, cross-partner arrangements share production, distribution, and service resources. The latest and greatest communication sys- tems, leveraging the Internet, e-mail, file sharing, social media, and teleconferencing tools, support coordination and expedite collaboration. Admittedly, its difficult to visualize the ever-expanding connections in a network organization. The adjacent photo provides one view of the scope of connectivity created by an expanding set of links.

The network structure minimizes rules and regulations processes in order to preempt potential boundaries. Cross-partner linkages emphasize transactional efficiency, but also advocate developing specialized decision-making relationships based on long-term com- mon interests. Units link self-organizing and self-regulating teams into loosely connected networks. They act as entrepreneurial owners rather than as risk-averse bureaucrats. Unlike classical hierarchical structures, in which the formal attributes of managers matter most, in the heterarchial network structure, relationships with other agents matter more.

networks aren’t new The network structure is not unprecedented. Japanese MNEs have long used the so-called keiretsu format, an integrated collective of nominally inde- pendent companies in which each owns a share of the others.48 Keiretsus rely on long-term personal relationships among the companies’ executives. Sometimes they are vertical, such as the seisan keiretsu, a manufacturing network in which managers connect the factors of production of a certain product (e.g., Toyota and its parts suppliers), or the ryūtsū keiretsu, a

A network structure anchors a dynamic organization that outsources value activities to firms whose core competency supports greater innovation at lower cost.

ConCept CheCk

The notion of a network shapes discussions of IB: Chapter 1, for instance, notes the idea of connectography and the expanding cross- national infras tructure links, Chapter 7 describes the trade networks formalized by the WTO, Chapter 9 discusses financial networks composed of global capital markets, and Chapter 14 analyzes the effort of MNEs to network with partners through collaborative alliances.

Di�erentiated units to which headquarters delegates decision- making authority. These units, whether a local marketing subsidiary, international production center, or suppliers, are the front line of the network. They have responsibility for sensing, processing, and acting upon specialized as well as generalized information in entrepreneurial fashion.

The channels of exchange that facilitate and fine-tune the volume, content, and flow of hard data and soft information. These linkages animate the network by setting paths of interaction, coordination, collaboration, and integration among the di�erentiating yet interdependent functional, area, and product units.

The formal center of the network that coordinates and controls strategic objectives and operational policies across the di�erentiated units. This unit ensures the ecient flow of resources, supplies, components, and funds throughout the network. It creates value by e�ectively collecting, sorting, and brokering the network’s accumulated wisdom, knowledge, and experiences.

Core Firm

Marketing

Producer

Designers Producer

Suppliers

Distribution

Figure 16.7 A Network Structure A network structure connects people, products, and processes into a coherent, collaborative system. At its center is a core unit that aims to “do what it does best and outsource the rest.” Similarly, network partners focus on their core competencies. A network structure uses extensive communication channels to maximize the connections that energize collaboration. Dynamic coordination and control methods set, regulate, and integrate the interactions among members, the latter motivated by common goals and specific objectives.

Chapter 16 The Organization of International Business 443

distribution network. Or they can be horizontal, like a kigyō shūdan, essentially a diversified business group that links companies across related and different industries; at its center is a sogo shosha (trading company), like Mitsubishi, or a financial institution, like Sumitomo. In both vertical and horizontal keiretsus, the network center coordinates marketing and controls financing among the allied units.

Worldwide, MNEs exhibiting elements of the keiretsu form include IKEA, Scania, Virgin Group, Cisco, and Grupo Empresarial Antioqueño.49 South Korean companies like Samsung, LG, or Hyundai share some of the characteristics of the keiretsu in their chaebol format; the ten main chaebols list nearly 600 affiliated companies.50 German firms, such as Deutsche Bank, are similarly intertwined, but no formal term describes the format.51 Like their Japanese counterparts, these groups have extensive, self-sustaining connections. Unlike the Japanese, they formalize central control.

Virtual organization A virtual organization uses technologies to connect otherwise detached entities (from employees to entire enterprises). The neoclassical arrangement between independent companies, suppliers, customers, and even rivals enables them to “work across space, time, and organizational boundaries with links strengthened by webs of communication technologies.”52 Instead of command and control, a virtual organization uses associations, agreements, and alliances.53

Deemphasizing formal rules, responsibilities, and procedures promotes informal commu- nication that disregards hierarchical boundaries. Improving technologies support coordination among people working from different locations, making it easier to cultivate relationships, acquire resources, and develop capabilities.54 Market mechanisms, such as contracts, formalize relationships. Strong performers replace poor performers.55 Analysts point to MNEs like British Telecom, Reuters Holdings, and Aventis as virtual organizations. The film industry provides an

A network organization emphasizes lateral decision processes, horizontal linkages, and extensive collaboration.

MNEs worldwide use various forms of the neoclassical network structure.

A virtual organization arranges roles, responsibilities, and relationships to deemphasize boundaries.

One View of Network Connectivity.

It’s difficult to pinpoint the ever-expanding connections in a network organization. Here, though, we see a take on the likely configuration of links. This network, set by major air routes among key geographic nodes in Africa, Europe, the Middle East, and Asia, depicts the principles of connectivity. Source: Anton Balazh/Shutterstock

▶

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divestures. Nokia’s consensus-seeking leaders promoted esprit de corps among its loosely bounded units; that, though, did not stop the company’s gradual collapse.

Similarly, the egalitarianism of network formats works well organizing small firms, but struggles doing the same for larger ones. Some firms devise means to preempt these threats. Srijan, an Indian software company, lets employees monitor coworkers’ compen- sation. Others, such as SumAll or Zappos, institute a corporate constitution that formal- izes the rights of employees to participate in decision-making. The jury is still out on their effectiveness. Boundary-busting could prove detrimental in knowledge-intensive firms, like McKinsey or Google, that already struggle to measure individual productivity.62

Lastly, some executives champion self-organization to the troops but still regulate decision-making. When push comes to shove, they pull rank, intervening in workers’ inde- pendence. Recurring gaps between policy and practice fans motivation problems. Hidden hierarchies can arise as workers forsake management’s rhetoric and organize around the reality of rules, rewards, and punishments.63 Said one observer, “I’ve been inside a lot of companies that espouse flat organizational structures and self-management. But when you really start looking at how things actually work, you find that there is in fact a hierarchy—just one that is not explicit.”64

Neoclassical structures, like their classical counterparts, run into operational problems.

extreme model. “Employees” are free agents who move from project to project, applying their skills (i.e., directing, acting, talent search, animation, costuming, and set design) as contracted. Temporary arrangements let them organize, disband, and reorganize as projects emerge.56

neoClaSSiCal StruCtureS in aCtion Some 400 midsized emerging-market cities, many unfamiliar in the West, will generate nearly 40 percent of global growth over the next 15 years. MNEs respond in kind, opening high-profile corporate centers in places that, although far from home, are close to the action. Company history, CEO preference, or legal constraints make some prefer less dramatic change, opting instead to create a global virtual headquarters from which to locate key func- tions in high-priority markets: finance and tax may go to Singapore, as Dell did, while global procurement goes to Shenzhen, as Walmart chose.57 Similarly, P&G moved the headquar- ters of its global skin, cosmetics, and personal-care unit from its Cincinnati headquarters to Singapore while Philips Electronics moved the headquarters of its domestic appliances busi- ness from Eindhoven to Shanghai. Finally, IBM relies on its workers in Shanghai to process accounts receivables, specialists in Manila to oversee human resources, accountants in Kuala Lumpur to keep the books, buyers in Shenzhen to procure components, and customer spe- cialists in Brisbane to run its help desk. Each unit, responding to IBM’s quest to move work to places where it will be done most efficiently and to the highest quality, manages projects that arise throughout the global market. Nearly half of its employees worldwide are “mobile,” meaning that they do not report daily to an IBM site.58

Customers, meanwhile, care less where work is done provided the results satisfy contract specifications. Within this context, IBM’s decision to reset its structure to reflect its changing workflow, in turn, reflects the fact that markets and technologies meant it now could build a globally integrated enterprise. Instead of a classical hierarchy, IBM organizes a conglomera- tion of loosely connected, cloud-based, dynamic suppliers of IT services. Implementing this vision—intensified by competitors such as SAP, Infosys, Wipro, Cognizant, and others trav- eling the same path—spurs IBM to champion the coordination, collaboration, and control ethos of a neoclassical structure. Redesigning its organization to suit its changing workflow fortifies its ability to manage its strategy, costs, people, and risk on a global basis.59

Likewise, consider the choices made by Cisco. Changing markets and enterprising rivals put it at a structural crossroads. Rather than give a classical divisional hierarchy another go, Cisco developed an elaborate system of cross-functional, cross-market, and cross-business committees, some of which go without a formal leader in order to promote a culture of collaboration. Cisco relies on cross-national teams to bust the structural, cultural, and pro- cedural boundaries that separated colleagues. Social-network analyses map the frequency and effectiveness of communications, thereby clarifying the flow of information among personnel. These results connect different functional roles, across multiple countries, through multiple languages, and in dozens of areas of domain knowledge. Asked why he led Cisco into uncharted organizational territory, its CEO replied that he had no choice. He needed a structure that would react quickly to new opportunities, develop entire solutions rather than stand-alone products, and help Cisco “become a globally integrated company by making it easier for executives from all around the world to weigh in.”60 Going forward, he expects increasingly cheaper, easier communication technology will move more MNEs from the clas- sical standards of command and control to the neoclassical ideals of coordinate and cultivate.

pitfallS of neoClaSSiCal StruCtureS Like its classical counterparts, neoclassical structures have limits. Networks are intrinsically dynamic structures, spurring adaptive reconfiguration, responsive coordination, and real-time control.61 Organizing something that continually evolves poses problems. Gore worries that the internal workings of its many management committees may prove too socially complex as well as physically tiring. Cisco struggles to manage teams amid its ongoing acquisitions and

A virtual organization is a dynamic arrangement among partners that efficiently adapts to market change.

The flexibility of virtual organizations expedites the replacement of poor performers.

Chapter 16 The Organization of International Business 445

divestures. Nokia’s consensus-seeking leaders promoted esprit de corps among its loosely bounded units; that, though, did not stop the company’s gradual collapse.

Neoclassical structures, like their classical counterparts, run into operational problems.

Yes The hierarchy is the enduring foundation for how MNEs optimally

arrange the roles, responsibilities, and relationships of its structure for a simple reason—it is the superior format for doing so. It sets a clear chain of command, functional span of control, effective allocation of authority, and precise assignment of tasks. It specifies the ideal degree of rules, routines, policies, and procedures. Its vertical and horizontal differentiation spells out, as we see in Figure 16.8, who’s who in the organization. It effectively organizes planning, coordination, and control systems.

An advocate of the hierarchy, Harold Geneen of ITT, argued correctly that it “makes people as predictable and controllable as the capital resources that they’re responsible for.”65 The hierarchy’s strengths rightly made it the sine qua non of the professional management model since the early twentieth century. Given the strong preference for hierarchi- cal organizations in countries such as India and China, it will flourish through the twenty-first century. While neoclassical structures emerge here or there in the West, the East has many companies whose lofty leader, many rungs removed from the factory floor, uses a hierarchical structure to com- mand and control activity.

Ongoing Refinements Contemporary technological, regu- latory, and competitive trends, we agree, have interesting implications for organizing a company. We concede that as environments change, so too must companies’ strategies and structures. However, the Counterpoint’s call to discard the classical principles of the hierarchy strikes us as reckless. Yes, gaps emerge in the hierarchy, but managers need only reengineer processes to fill them. Powerful programs, like Total Quality Control, Six Sigma, and the Balanced

Scorecard, effectively modernize the hierarchy. Fine-tuning workplace arrangements through these and similar methods equips the organization to meet the challenge of changing markets.66

What then, you ask, do we think of the neoclassical alter- native of a heterarchy that the Counterpoint champions? We see radical tinkering with the day-to-day reality of organizing international operations exhibiting commendable courage but questionable judgment. Avoiding failure requires thoughtful adjustment to the way organizations run, not the wistfulness of a brave new cyberworld powered by newfangled social networking tools.

Leading Indicator Google, we submit, foreshadows the approach to designing a classical hierarchy that respects the past but engages the future. Google organizes its senior executives and work groups by business function, with the largest functions represented by engineering, product management, and marketing divisions. Despite the founders’ description of Google as engineering-centric, they see virtue in chaos by design. Insiders’ tales of orderly disorder, purposeful disarray, and certain uncertainty signal its plans to thrive on the edge of controlled chaos, all the while firmly anchored in the functional order of a classical hierarchy.

Rather than retreat to the hierarchical conventions com- monly found in engineering-centric companies, such as DuPont and General Motors in earlier times, Google stretches its hierarchy as much as possible. Asked why, Larry Page (Google’s co-founder, CEO, and unofficial thought leader) explained, “I want to run a company where we are moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risk.”67

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Figure 16.8 A Classical Hierarchy Although quite simple, this depiction effectively communicates the organizing logic of a hierarchy— different people of different rank at different levels do different jobs. As such, the various shades of folks speak to the matter of horizontal differentiation while the top-down flow highlights the idea of vertical differentiation.

Source: Paperboat/Shutterstock

no Although imperfect, history is often a useful interpreter of the

present and predictor of the future. So, think back to the early 1900s, when emerging technologies signaled to some the superiority of the then-heretical hierarchy. One sees the same today, as emerging technologies endorse new structural heresies. Expanding digital infrastructures allows MNEs to organize their activities in new ways, letting them efficiently diffuse information and effectively integrate its flows. Today, just as a century earlier, astute executives break free of the shackles of the status quo, building organizations that lever- age the expanding waves of information flowing in, though, and out of the MNE.

The Crux of Change Unquestionably, the tried-and-true classical hierarchy has virtues. Nevertheless, market trends spotlight its increasing limits. It organizes workplace activities and information flows in ways that thwart integration. Even when turbocharged with matrix overlays and mixed adjustments, the hierarchy slows relationships, confuses accountability, and complicates collaboration.68 McKinsey & Company, for example, report that struggling MNEs’ reliance on traditional organization formats imposes a steep penalty. By leashing the intrinsic motivation of employees, stifling adaptation, and squelching entrepreneurialism, hierarchies impede common cause, discourage innovation, and erode relationships.69

The Heterarchy Looking around today one sees examples of networks, virtual organizations, lattice structures, flat formats,

or peer-to-peer formats. These neoclassical forms exhibit the general properties of a heterarchy:

namely, “a large-scale, self-organizing community that sets free unusually high degrees of energy and engagement— despite the lack of clear or direct economic payoff for participants.”70 The heterarchy is a constellation of actors and relationships that follow from the interactions of technology, knowledge, social relations, administrative routines, and legal ties. Figure 16.9 conveys these properties. A heterarchy is “infinitely large, never balanced, never optimal and has unique perspectives for all members.”71 Agents connect to others through direct and indirect channels. “Information flows along multiple and intermediate paths; this allows for multiple and overlapping points at which information can be sorted and interpreted. It makes it possible to process an abundance of information effectively.”72 By remedying the bias toward instituting bureaucratic boundaries, the heterarchy provides the framework to build a truly integrated enterprise.

A notable heterarchy is the open-source model, a soft- ware movement in which program source code is given to volunteers who fix bugs and design new features with no compensation. Operationally, it applies basic rules to increase transparency, coordinate efforts, and control performance. Programmers’ ability to monitor peer produc- tion encourages collaboration. Similar situations unfold with the ecosystems that power the Apple and Android “app” phenomena. Others point to Technology, Entertainment, Design (TED), a nonprofit devoted to “Ideas Worth Spread- ing,” which hosts conferences that are then distributed in video format via the Internet. Absent central direction, an

Counterpoint

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informal, loosely coupled network of several thousand vol- unteers has translated subtitles for thousands of videos into more than 90 languages.73

The Test The standards of organization are fundamentally shifting. The precision of vertical and horizontal differ- entiation gives way to loosely coupled, less-bounded neoclassical formats.74 Moreover, it’s over-optimistic to think that one need merely apply organizational band-aids, such as Six Sigma or the Balanced Scorecard, to update an increasingly anachronistic, command-and-control classical structure. Quite simply, “today’s big companies do very little to enhance the productivity of their professionals. In fact,

their vertically oriented organizational structures, retrofitted with ad hoc and matrix overlays, nearly always make professional work more complex and inefficient.”75

Andy Grove, once CEO of Intel, foreshadows how the apparent chaos of the heterarchy will reset the presumed order of the hierarchy. A structure must encourage and ener- gize constructive confrontation in ways that let workers agree and disagree, but, ultimately, commit to the same goals. The challenge, he advises, is developing a structure that will “let chaos reign and then rein in chaos.”76 In our view, the neo- classical heterarchy, not the classical hierarchy, meets the challenge of changing market situations, shifting technologi- cal frontiers, and radical workflow resets.77

Figure 16.9 A Neoclassical Heterarchy This depiction of a heterarchy, again quite simplified, highlights key features. Dynamic patterns of relationships, in place of the ranks and divisions found in a classical hierarchy, mark a heterarchy. Communication, coordination, and collaboration links, aided and abetted by technology, integrate equivalent “blue” managers.

Source: Paperboat/Shutterstock

Coordination SyStemS Configuring resources, capabilities, and competencies arranges the strategic architecture of the firm. Making it perform requires, as we saw earlier, setting a structure, and as we see now, coordinating how people and processes work. One way to engage this idea is to think of the configuration process as the MNE placing its pieces atop the global game board. An MNE moves its R&D piece to Sweden, factory piece to Vietnam, logistics piece to the United States, marketing piece to Italy, and the service piece to Malaysia. Once configured, executives specify how these pieces link to and relate with each other. In other words, MNEs develop coordination systems to link the people and processes that run its various ‘pieces.’ Coordination ranges from nonexistent (each piece is independent) to comprehensive (all pieces are interdependent).

The shifting pressures of global integration and local responsiveness, fueled by dynamic industry structures and evolving market conditions, push MNEs to devise sophisticated strategies.78 Pioneering plans to reset value activities require commensurately innovative coordination methods. Coordinating activities requires adeptly moving ideas, materials,

The MNE uses coordination and control systems to synchronize, integrate, and regulate value activities across the units of its organization.

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people, and capital. For example, IBM, GE, Microsoft, and Accenture opened R&D facili- ties in India, reasoning that the productivity of the local scientific community coupled with its unique outlook of frugal innovation offered promising points of value creation. Breakthroughs at GE’s Technology Center in Bengaluru, owing to adroit coordination pro- cesses, spread to GE’s operations in Hungary, Brazil, China, the United States, and onward. In one instance, GE’s Indian technology center developed a low-cost electrocardiograph machine for doctors and hospitals in rural communities. Coordination links diffused it else- where, and soon GE’s German and U.S. subsidiaries began selling it in their home markets.79

Improving communications systems, made faster by cheaper voice, video, and data options, help link people and processes. Still, MNEs run into problems due to time zones, differing languages, and ambiguous interactions. Picture a company whose resources, capabilities, and competencies span the globe. Parts and products flow from South Africa and Chile to their ultimate destination in Malaysia, Germany, Canada, the United States, and China. Each transfer, from mines to depots to plants to ships to warehouses to store- fronts, creates links that require coordination. Toss into the mix multiple time zones and multiple languages, and the potential for misalignment escalates. Coordination systems maximize alignment by synchronizing rules, responsibilities, and relationships. Therefore, organizing activities, whether the structural format is classical or neoclassical, requires man- agers develop the requisite coordination methods. Today, prevalent coordination frameworks revolve around the ideas of standardization, planning, or mutual adjustment.

Coordination By Standardization Standardizing rules and routines to compel operational consistency has a straightforward mandate: do the same thing, the same way, everywhere. Coordination by standard- ization attains this goal by specifying the way employees do their jobs, work with one another, and deal with customers. Aspects range from the mundane (i.e., dress and deco- rum requirements stipulated in employee manuals) to the strategic (i.e., decision-making heuristics, protocols for entering new markets). Asked why it standardizes its processes and procedures worldwide, Starbucks notes the need to replicate the aesthetics, aura, and performance of its coffee shop concept in the thousands of Starbucks spanning the globe—Starbucks in Seattle is interchangeable with Starbucks in Sydney.80 Coordination by standardization, by precisely specifying workplace standards and workflow scripts, achieves this goal.

Coordination by standardization is ideally suited for the MNE implementing an inter- national or global strategy. Each strategy’s imperative for worldwide consistency advocates a universal approach. For an international strategy, transferring, applying, and protecting core competencies promotes unswerving rules and regulations. For the global strategy, running densely linked, interdependent activities leaves little slack for deviations. Clear lines of accountability, centralized decision-making, and codified knowledge prescribes who, when, why, and how one does a job. Resources and components, for instance, are needed at specific plants at specific times. Standardizing coordination methods—such as the format for processing information and supervising logistics—preempts disruptive irregularities.

Standardizing coordination processes reduces the influence of national cultures in the workplace. The performance of an integrated value chain depends on links between inter- connected activities satisfying precise schedules. A unit office in a monochronic culture likely sees deadlines as hard promises while its counterpart in a polychronic culture likely sees them as guidelines. Coordination by standardization synchronizes how both interpret time in the workplace. Similarly, an MNE might have factories in Japan and Mexico that manufac- ture the same product, but, because of cultural legacies and location economics, each applies a different production model. The Mexican factory uses a traditional assembly-line operation because of inexpensive local labor, patchy transportation infrastructure, and a high marginal cost of technology. The Japanese factory, in contrast, uses a lean production system due to

Coordination by standardization

• sets universal rules and procedures that apply to units worldwide,

• enforces consistency of activities among dispersed units.

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Earlier discussion of the “Rise and Application of Technol- ogy” in Chapter 1 (page 7) notes that technology fosters new ways of communicating among worldwide operations. New technologies enable MNEs to experiment with options, many of them unprecedented, to coordinate dispersed value activities.

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local labor competency, manufacturing expertise, efficient logistics, and high warehouse expense. Coordination by standardization, in synchronizing their activities, enables the MNE to harmonize different manufacturing orientations.

Challenges Differences in industry conduct and host-government attitudes complicate coordination by standardization. Market circumstances, strategic goals, or workflow patterns often prevent specifying universal policies and procedures. Too, often they do not fit every situation in every unit in every country. Some MNEs, especially those implementing a multi- domestic strategy, decentralize authority to let subsidiaries adapt activities to local condi- tions. Ongoing calls to adjust this rule or change that procedure undermine the authority of standardization.

Coordination By plan Applying general objectives, extensive guidelines, and sequences and schedules to link peo- ple and processes implements coordination by plan. Generally, plans set success factors, specify expectations, assign accountability, and formalize deadlines. They regulate how units accept, adopt, and, where legitimate, adjust tactics. Plans identify participating managers and programs, establish timing and format, and set communication schedules. Unlike coordina- tion by standardization, managers of interdependent units have the latitude to mutually adjust goals and schedules—provided they still hit targets. In a sense, then, coordination by standardization helps the MNE maximize operational efficiency while coordination by plan helps it optimize organizational effectiveness.

Coordination by plan requires synchronizing people and processes across countries.81 Red Hat’s Global Support Services, for example, solves technical problems facing users of its intricate software products. Red Hat’s support engineers and account managers work from 16 countries, support 3,600 coworkers in 65 offices distributed across 35 countries, and provide round-the-clock customer service in 9 languages. Improving technologies fortify the practicality of coordination by plan by improving the ease of analyzing, exchanging, and synthesizing information. Faster travel, expanding exchange options, and teleconferencing technologies overcome long-running barriers to multinational planning. Teleconferencing, for instance, lets those who prefer dealing with counterparts through face-to-face contact do so in ways that let them capture the nonverbal nuances of body language. The historic bane of IB has been the necessity of visiting faraway colleagues, partners, and customers, often at a moment’s notice, high expense, and considerable effort. Now, teleconferencing creates the magical ability to be many places at once, thereby boosting the practicality of coordination by plan.

Innovative management methods bolster coordination by plan. Six Sigma, a rigorous and disciplined planning process, uses data and statistical analysis to coordinate practices and systems. Credit Suisse, Siemens, GE, Korea Telecom, Wipro, Nortel Networks, Air Canada, and DuPont have all used it to improve their planning processes. The analytics of similar pro- grams, such as the Balanced Scorecard or Total Quality Management, are used worldwide. Likewise, MNEs apply other methods. Some locate international and domestic personnel in proximity to each other—say, by placing the international division in the same building as product divisions—to promote networks that facilitate communication and collaboration. Others build cross-national teams of people with different responsibilities to debate objec- tives and bridge gaps.82

Challenges Notwithstanding a plan’s brilliance, the unexpected is ever-present; recall, for example, the aphorism, “the best-laid plans of mice and men often go awry.” Market disruptions, government regulations, mergers and acquisitions, to name just a few, cause big changes. Adjusting objectives and schedules requires communication among dif- ferent groups spanning multiple borders. Cultural differences routinely pose complica- tions. Coworkers differ in their orientations toward trust, exchange, accountability, and

Coordination by plan requires that interdependent units meet common deadlines and objectives.

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No matter the coordination approach adopted by an MNE, none are immune to the com- plications posed by national cultures. Different national cultures differently influence the social, workplace, political, legal, and economic contexts. Differences in cultural condi- tions, first introduced in our profile of “Major Behavioral Practices Affecting Business” Chapter 2 (page 35) also influ- ence a company’s strategic options, shaping its choices regarding coordination by standardization, planning, or adjustment.

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allegiance.83 Units anchored in individualistic cultures may disagree over information shar- ing or task responsibilities with their collectivist counterparts; ensuing uncertainty muddles coordination. Absent rules regulating relationships, cultural divergence increases the time, expense, and errors in cross-national exchange.

Coordination By mutual adjuStment Some MNEs coordinate people and processes with a personal touch, socially engineering their systems to cultivate relationships among workers that, in turn, promote coordination. Rather than rules and routines in the context of standardization, or objectives and schedules in the context of planning, coordination by mutual adjustment relies on social network- ing outlooks and methods. Promoting collaboration among coworkers, goes the reasoning, builds systems that support sophisticated strategies.

Consider 3M’s technology experts in its 100-plus laboratories worldwide. 3M links its innovativeness to developing systems that help its lab workers form robust knowledge- generating and decision-making relationships. The system then supports exchanging ideas, coordinating programs, and integrating activities. The abstraction of the scientific process along with the complexity of product development are intrinsically challenging. 3M realizes that productive communication among bright, independent-minded knowledge workers, distributed across more than 100 laboratories worldwide, requires robust, personal, and fre- quent interactions to set the trust that sustains collaboration. Hence, 3M uses coordination by mutual adjustment.

Key tools include a Technical Council, which comprises the heads of the major labs, meets monthly, and has a three-day annual retreat to boost exchanges across units. A broader-based Technical Forum, composed of scientists and technical experts chosen as rep- resentatives of various units, extends the social network.84 Both methods cultivate the per- sonal exchange of ideas, a key precondition of coordinating activities by mutual adjustment. Similarly, Gore relies on coordination by mutual adjustment. And, as does 3M, Associates conduct monthly technical meetings during which scientists and engineers from differ- ent divisions share ideas with fellow Associates. Reflecting on the process, Jack Kramer, an enterprise leader, explained “we put a lot of effort into trying to make sure that we connect informally and formally across a lot of boundaries.”85

The personalized dynamic of coordination by mutual adjustment resets the official trap- pings set by formal roles, status, and power. Adjustment processes blur positional relation- ships among superiors, colleagues, and subordinates. Coordination by standardization or plan, in contrast, explicitly recognizes and reinforces vertical and horizontal differentiation. Coordination by mutual adjustment puts big demands on senior executives. Collaboration requires resetting executives’ roles from telling people what to do to facilitating their success. Hence, coordination by adjustment is philosophically and practically compatible with neo- classical structures.86

Coordination by mutual adjustment taps various methods. Commonly, MNEs assess opportunities or check threats by building cross-national, cross-functional, and cross- business teams. Assembled and explicitly charged with collaborating, these teams share viewpoints and champion cooperative efforts while establishing liaisons among subsidiar- ies. Similarly, MNEs rotate managers among various slots in the company, reasoning that personal familiarity cultivates productive relationships. In addition, rotation across divisional, business, or functional lines promotes relationships that weaken insular thinking and rein- force idea sharing.87

Challenges Coordination by mutual adjustment imposes tough demands, especially as globalizing markets press companies to support customers through traditional methods as well as virtual formats. The MNE opting for coordination via mutual adjustment must facili- tate collaboration among associates in different parts of the world. The scale and scope of the

Coordination by mutual adjustment depends on managers interacting extensively with counterparts.

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typical MNE, naturally, pose logistical obstacles. Leading-edge social networking technolo- gies provide only a partial solution. Ordinary geographic constraints, for example, require teams alternate meetings between early morning and late evening to accommodate various time zones. It is not unusual, over the course of the day, for a manager in the United States to teleconference with folks in Asia at 2 a.m., colleagues in Western Europe at 9 a.m., and coworkers and South America at 3 p.m.. Senior executives working on three to five coordina- tion groups, and often many more, may have teleconferencing meetings around the clock. Often, decision-making slows as views adjust and readjust. Managers’ commitment may waver as some tire of ongoing negotiations.

Control SyStemS A key function of management is making sure workers are doing what must be done. If not, and productivity is sliding, schedules are slipping, and resources are wasting, then managers step in and correct problems. Control systems, the methods and means of problem correction, are part of a well-designed organization.88 Managers apply them to compare performance to plans, identify differences, and, where found, analyze the gap and impose adjustments. Control systems regulate executive efforts, resource allocation, and self-interest. They directly complement coordination processes and structural designs. Prominent control systems include bureaucratic, market, and clan.

BureauCratiC Control Explicit rules and routines that govern activities install bureaucratic control. This con- trol system supports operations that lend themselves to universal rules and exact scripts and, importantly, fits workplaces where rules regiment behaviors. It effectively supports organizations using programs like Six Sigma or Total Quality Management to specify procedures. Bureaucratic controls also partition authority and accountability, thereby stipulating connections among relevant workers. The scale and scope of global operations, executives consistently report, means rules and regulations can vary unintentionally across cultures and countries; bureaucratic controls reduce this problem.89 Bureaucratic control shares organizing principles with coordination by standardization and supports classical structures.

market Control Establishing performance benchmarks with external market mechanisms, such as profitability or market share, installs market controls. Objective standards, not subjective interpretations, control activities. Control systems escalate when a unit deviates from inde- pendent benchmarks—say, a market share drop or productivity decrease. Relying on mar- ket standards creates universal metrics that work in all countries (e.g., we measure market share the same way, everywhere). The objective indicators of market control help executives track a subsidiary’s performance. This is particularly useful when executives decentralize decision-making. For instance, MNEs such as Gore, Nestlé, and Nike decentralize consid- erable authority to local subsidiaries. The home office supports subsidiaries with techno- logical, financial, administrative, and legal resources, and waits for superior results. If not forthcoming, control systems activate and senior executives step in. Market control metrics simplify tracking performance across different units in different countries. The principles of market control overlap with those of coordination by plan and fit the principles of the clas- sical and neoclassical structures.

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“Guidelines for Cultural Adjustment,” profiled in Chapter 2 (page 45), notes that managers deal with dif- ferences in the ways in which colleagues and subordinates, especially those with differ- ent cultural outlooks, respond when it comes to issues like task motivation, relationship preferences, and workplace behavior. Here we observe that, to accommodate these differences, MNEs mind cul- tural orientations when setting coordination systems.

Control system are policies and procedures that command, direct, or regulate workplace behavior.

Bureaucratic control emphasizes organizational authority and relies on rules and regulations.

Market control uses external market mechanisms to set standards that regulate performance.

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Clan Control Clan control relies on values, beliefs, shared norms, and informal relationships to regulate employee behaviors. Its goal is socializing employees to personally identify with the MNE’s vision and mission as they go about their day-to-day routines, thereby necessitating mini- mal control.90 Clan control is especially difficult in an MNE. A unifying vision that regulates a dispersed, diverse global workforce inevitably conflicts with some employees’ values and norms. Certainly, there are notable successes, like the social aspects of renowned clan con- trol systems, such as J&J’s Credo, the Toyota Way, Matsushita’s Seven Spiritual Values, or the Gore Way. Clan control shares organizing principles with coordination by mutual adjust- ment and supports neoclassical structures.

Control meChaniSmS Effective control requires objective mechanisms. A generation ago, the costs of travel, data exchange, and communication technologies endorsed certain control mechanisms. Improving economics, courtesy of expanding infrastructures and revolutionary technologies, make control cheaper, faster, and easier. This process has reduced the productivity of some tools, boosted the usefulness of others, and created the possibility for new mechanisms. Presently, MNEs support their control system with the following sorts of tools.

reports The intricacies of IB make reports a vital control method. Frequent, accurate, and real-time reports help managers allocate resources and monitor performance. Reports function as early warning systems, alerting managers to deviations from plan or market standards. Often, MNEs use report formats for foreign operations that resemble those used domestically, reasoning that they have worked here so they should work there. International operations, by expanding the volume of performance data, call for sophisticated informa- tion technologies to support control processes. The global diffusion of standardized software packages, often in the form of enterprise resource planning platforms, from SAP, Oracle, IBM, Microsoft, and Red Hat, organize many report systems. Standardizing the format worldwide, by leveraging corporate management’s familiarity, improves the real-time per- formance of reporting controls. Also, reports that share the same format ease comparing the performance of different units.

Visiting Subsidiaries Intrinsic boundaries limit the usefulness of reports. Senior execu- tives, especially those applying coordination by adjustment and clan control, amplify con- trol by visiting subsidiaries. Face-to-face meetings, formal budget reviews, and planning seminars fortify responsibility and accountability. Old-school subsidiary visits, awash with strategizing and socializing, promote communication between headquarters and local man- agers.91 Increasingly, technologies expand managers’ options. Teleconference innovations, supported by wikis, social networking, and web-based collaboration services, help MNEs reduce travel, save time, boost productivity, and tighten controls. Cisco, for instance, aver- ages several thousand teleconferences a week. Besides cutting its annual travel budget by more than half, teleconferencing significantly increased “face time” among managers.92

information Systems Technology platforms, by expediting information exchange, provide useful control tools. MNEs use enterprise resource planning to monitor activities, such as product planning, parts purchasing, maintaining inventories, customer service, and order fulfillment.93 Most MNEs apply browser-based communication tools to coordinate data flows. Electronic transactions boost efficiency by streamlining exchanges among links in the chain. In larger markets, this interface is prevalent among manufacturers and their first-tier suppliers, such as the relationship between Costco and Procter & Gamble. Many MNEs set the open-source language protocol of the Internet—specifically, hypertext markup language (HTML) or XML—as the global standard. So far, though, there is evolving consensus on interface standards, as evidenced in the proliferation of web service composition standards.94

Clan control uses shared values and ideals to moderate employee behavior.

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In discussing measures for “Degrees of Cultural Differences” in Chapter 2 (page 45), we explain how different attitudes toward cultural distance and different responses to culture shock frustrate the efforts of manag- ers to coordinate value activi- ties that span different cultural environments. Here, we add that they can create problems beyond the corrective capacity of a coordination system. In such cases, managers use con- trol measures to impose order.

Timely reports allow managers improve the speed and insight of decision-making.

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However, the increasing simplicity, generality, and usability of information exchange over the Internet spurs global standards. Still, MNEs face constraints in acquiring information, notably the cost of that information compared to its value and the difficulty of identifying redundancies and excluding the irrelevant.95

WhiCh Control SyStem When? Like most operational decisions in IB, there are few hard and fast rules about which control system when. Generally, as structure follows strategy, so too does control. MNEs following a global strategy prefer market controls, given that they can apply standard, objective bench- marks to evaluate performance in any market. Alternatively, transnational companies find value in clan control; the necessity of open exchange among geographically diffuse workers encourages control based on common values and norms. In any scenario, managers adjust their control system for the contingencies posed by the competing pressures of global inte- gration and local responsiveness.

Likewise, implementing sophisticated strategies requires managers craft commensu- rately sophisticated control methods that reflect the different operating circumstances of different units. Consequently, few MNEs rely on a single control method. J&J and Gore, for instance, uses market and clan control to regulate performance. Certainly, both would prefer the efficiency of a universal system. But, both adjust to the contingencies imposed by the for- mal structure, coordination approaches, and, as we now see, organizational culture.

organizational Culture Having profiled the roles played by structure and systems in organizing an MNE, we turn to the final design element: organizational culture. In theory, one could profile it from an applied perspective, specifying it as the way things are done in an MNE and evaluating how workers organize around rules, rewards, and punishments.96 Alternatively, we could adopt a philosophical view and assess how organizational culture, as an embedded set of shared val- ues and normative principles, guides actions and sanctions behaviors within the MNE. We opt to integrate these perspectives and define organizational culture as the coherent, con- sistent system of workplace norms and idealized values that describe the goals and endorse the practice shared by employees. This system legitimates standards, endorses common beliefs about how the world works, and frames how workers make decisions, take actions, and sustain a common cause.

a key pieCe of the performanCe puzzle Analyses and anecdotes of corporate performance indicate that building a resourceful orga- nization is a challenging balancing act: an MNE must find ways to inspire employees world- wide to develop and apply new ideas but ensure that they implement them in ways that fit the MNE’s vision and mission. Few MNEs strike and sustain this balance solely by designing the structure, coordination, and control systems. They also look to their organizational cul- ture to complete the trick. On this point, Jack Welch, former CEO of GE, advised that “In real life, strategy is actually very straightforward. You pick a general direction and implement like hell…. But objectives don’t get you there. Values do.”97

Assessment of strategic successes and failures spotlights the performance implications of organizational culture. Executives apply a progressively expansive view, seeing it as a powerful tool to shape the workplace, integrate decision-making, and implement strategy. Recognition follows from a series of studies confirming a significant link between an MNE’s organizational culture and its strategic success. Facets of its culture, such as the values and principles of management, nature of the work climate and atmosphere, and traditions and ethical standards, always and everywhere influence a firm’s performance.98

A system that relies on a combination of control policies and systems is more reliable than one that does not.

Organizational culture refers to the ideologies, symbols, and core values that employees, no matter their location in the MNE’s worldwide operations, regard as legitimate.

Everywhere and always, organization culture influences how employees do their job.

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Sophisticated Strategy, Sophisticated Culture The importance of organizational cul- ture grows as the rise of emerging economies and maturing growth in the West push man- agers to rethink strategies and reset operations. Expanding to increasingly diverse markets with increasingly diverse workplace norms calls for boosting the flexibility and versatility of an organization. For example, GE has reconfigured its value chain to reflect market trends. Notably, these changes have required adjusting its historic West-centric orientation for the accelerating rise in emerging economies. Asked about GE’s future, CEO Jeffery Immelt replied, “We’ve globalized around markets, not cheap labor. The era of globalization around cheap labor is over. Today we go to Brazil, we go to China, and we go to India because that’s where the customers are.”99 On a related front, emerging rivals from fast-growing econo- mies devise strategies to navigate bustling markets that run the gamut from the billions of poor people who populate the Base of the Pyramid to the millions enjoying surging afflu- ence. Companies from both the East and the West pursue new, often astounding opportuni- ties. Capturing them involves reinventing systems of production and distribution as well as experimenting with new business models.

Managing sophisticated resources, capabilities, and competencies escalate demands on MNEs’ structure and systems. There are low odds of successfully meeting those demands without a supportive organizational culture. Poorly understood, partially shared cultural values impose boundaries that distort the communication and collaboration that gird coor- dination and control systems. Certainly, MNEs could opt to develop elaborate constraints, controls, and contracts in order to compel employees to do their job. And, granted, the notion that “beatings will continue until morale improves” may boost short-term perfor- mance. But improving compatibility between an MNE’s culture and its strategy has proven a far more powerful driver of superior performance.

the poWer of Common CauSe Successful MNEs develop a culture that instills in their employees the engagement and enthusiasm beyond that justified solely by economic rewards. Certainly, pay motivates per- formance. An effective organizational culture, however, stimulates people to identify with the company’s vision, do their jobs well, and collaborate with others while lessening the need to regulate their behaviors with elaborate structures and systems. Its capacity to power indi- vidual performance beyond that motivated by monetary incentives puts the onus on execu- tives to build a company that people do not want to merely work for, but aspire to belong to. Employees no longer check in to get a check, but become vision-led and principle-driven. Google’s worries about brain drain to rivals, for instance, led it to identify why people quit; it found that executives left for another company not for higher pay, but when they identified with its vision and mission.100

The shared values that enact an organization’s culture, goes the reasoning, influence what employees perceive, how they interpret, and how they respond to their world. Convergent cultural values ease the exchange of ideas, thereby improving communication, coordination, and collaboration. J&J, for example, anchors its vision of value creation in the principles of its Credo. This manifesto unequivocally champions the values that embody J&J’s responsibilities to its stakeholders worldwide. When employees are confronted with opportunities or threats in the world, the Credo helps them define, analyze, and resolve them in ways that respect and reinforce J&J’s culture and, by extension, its strategy.101

A vibrant organizational culture helps explain why some companies make the leap from good to great and, likewise, why others do not.102 Unquestionably, product develop- ment, marketing ingenuity, and financial stewardship moderate progress. Attaining great- ness, however, depends on a culture of unwavering faith and passion; rigorous discipline and focus; clearly communicated and practiced core values and timeless principles; strong work ethics; and finding and promoting people with the right outlook.103 Great compa- nies purposefully promote an integrated system of overarching values, perspectives, and practices—much as J&J does with its Credo, Toyota with its Toyota Way, and Gore with the

An organization’s culture, by endorsing workplace values, shapes the behavior patterns of current workers as well as new hires.

The shared meaning and beliefs that shape how employees interpret information, make decisions, and implement actions define an organization’s culture.

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The accelerating comeback of emerging economies indicates an “inflection point” at which old strategic patterns of thought give way to new. Our discussion of different national perspectives on value creation in Chapter 12 argues that such problems challenge coordinat- ing increasingly sophisticated value chains. Evidence indi- cates that developing a sup- portive organizational culture provides a powerful tool.

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Gore Way—in order to give employees a consistent way to relate to their jobs, to each other, to customers, to shareholders, and to stakeholders. Perhaps most decisively, it legitimates the company’s vision and mission in the eyes of employees worldwide.

deVeloping an organizational Culture Historically, uncertainty about the dynamic of social engineering led managers to adopt a benign perspective, letting the organization’s culture naturally emerge and evolve. Information and advice on “how things work around here” spread by word of mouth on fac- tory floors or coffee-break chats. Today, MNEs proactively manage culture’s emergence and evolution.104 Organizing a globally integrated enterprise requires extensive coordination and collaboration among workers. The importance and intricacies of setting and sustaining com- mon values among employees worldwide turn our attention to how an MNE develops, dif- fuses, and sustains its organizational culture.105 The overlapping practices of cultural exem- plars, notably Gore, J&J, Google, Infosys, and Toyota, highlight the importance of hiring, rewarding, and promoting people who support the MNE’s vision and then, “walk the talk” implementing its mission. Leading through example, they promote socialization processes and communication practices that diffuse as well as fortify the idealized values and norms.

tools and techniques In reality, the values and norms of managers, especially those from culturally dissimilar countries, often differ.106 Furthermore, many workers, especially those in markets far removed from the home office, have slight, if any, exposure to the behaviors of senior managers. Even on the standards of the MNE’s strategy, a far more objective con- cept than the values and norms of its culture, executives struggle to unify interpretations across boundaries. Barely half of the managers in a cross-section of MNEs believed that they communicated their strategy clearly to their workers worldwide.107 Rather than relying on chance encounters among employees to develop common cause, MNEs proactively set and sustain their idealized organizational culture with fascinating methods.

Setting the System Overcoming hurdles calls for arranging closer contact among man- agers from different countries to unify values. Cross-national teams are a prevalent tool.108 Consensus depends on coworkers sharing common values, rather than coerced compliance through coordination routines or control systems. Executives also advocate interpersonal approaches, notably rotating high-performing executives from headquarters and subsidiar- ies throughout global units. Wipro, an Indian technology company, employs 54,000 people in 35 countries, more than 11,000 of whom work for units outside of India and more than 90 percent of whom are Indian. Explained the chief executive of global programs, “We sprinkle Indians in new markets to help seed and set up the culture and intensity.”109 Others endorse focused methods. GE’s Leadership Development Center thrusts managers from different businesses and different parts of the world into a classroom; there, they challenge and clarify the principles of the company’s culture.

Sustaining the System Ad hoc approaches effectively set the standards of an organiza- tion’s culture. Sustaining that calls for instituting outlooks and systems. Instead of letting the organization’s culture emerge naturally, many managers do as they do with structure and systems: purposefully and proactively develop the system of shared values that supports the MNE’s vision and mission. Reflected Gore CEO Terri Kelly, “we take great pride in our culture and recognize the very important role it plays in driving business success. By foster- ing an environment where people feel motivated, engaged, and passionate about the work they do, we are better able to tap into our potential and create innovative products that truly make a difference in the world.”110

Toyota relies on its Technical Skills Academy, its corporate university, to fortify its culture as well as firmly anchor its next generation of leadership in it. Some sessions teach factory controls and assembly procedures, others develop management skills, but all inculcate

MNEs proactively develop their organizational culture, just as they purposefully design their structure and systems.

Key features of a company’s organization culture include

• values and principles of management,

• work climate and atmosphere,

• patterns of “how we do things around here,”

• traditions, • ethical standards.

ConCept CheCk

Chapter 12 explains that MNEs face various obstacles building communication chan- nels among the links in their value chains. Not long ago, inefficient transportation and expensive communications hindered efforts to coordi- nate global activities. Today, improving social networking tools make clan control an increasingly practical option.

456 part 5 Global Strategy, Structure, and Implementation

the principles of the esteemed “Toyota Way.”111 Directly familiarizing employees with its renowned methods, top management believes, helps them base decisions on a “philo- sophical sense of purpose, to think long term, to have a process for solving problems, to add value to the organization by developing its people, and to recognize that continuously solv- ing root problems drives organizational learning.”112 Toyota posts graduates to its offices worldwide, acting as missionaries who spread the Toyota Way. Long a fundamental feature of the company, the Toyota Way steadily plays a bigger part in developing the organizational culture. Expanding international operations, particularly into emerging economies, fueled concern among senior management that the key principles of its organizational culture were weakening.113 Now, the company relies on the Toyota Way to socialize workers world- wide with its core values, thereby harmonizing its organizational culture throughout its global operations.

Executives apply a variety of methods to set and sustain the organizational culture. An intriguing development is the rise of the corporate university as a key change agent. Within the bounds of a university setting, both physical as well as virtual, managers lead training efforts, facilitate learning, and upgrade competencies with an eye toward setting and sus- taining the philosophical ideals that anchor the organization’s culture. Our Looking to the Future profiles their rising prominence.

An organization’s culture shapes the success of its strategic moves.

employees with its evolving strategy. To date, it has trained more than 125,000 “Infoscians.”

Whereas some MNEs attach their university to headquarters, others sprinkle them worldwide. Unisys, for example, has campuses in its key market regions. Increasingly, MNEs break free of geography, running virtual online universities where employees e-learn via live webcasts, online discussion groups, webinars, video-conferences, and interactive ses- sions. Going forward, the issue of who teaches what and where will test unprecedented platforms and pedagogies. The potential disruptive innovation of online education will likely reset our understanding of corporate universities. Presently, we see players, such as Coursera and Instructure, offering services to students, institutions, and, increasingly, com- panies.115 Vendors offer courses, designed by or tailored to the company’s situation, through their proprietary learning management system.116

an expanding Mission

Unlike customary universities, corporate universi- ties emphasize practical skills and workplace sys- tems rather than grand theories. Too, they rarely confer degrees. The founding goal of McDonald’s Hamburger University, for instance, was preparing

Worldwide, more than a thousand companies have opened universities over the past decade. By region, they are steadily expanding in the United States, thriv- ing in Europe, and accelerating in Asia. The number of U.S. corporate universities grew from around 400 in 1993, to 2,000 in 2001, to nearly 4,000 today. Prominent MNEs with corporate universities include Apple, Walt Disney, Infosys, General Electric, J.P. Morgan Chase, and SAP.114

The first big one, McDonald’s Hamburger University, began operating in 1961 in the base- ment of a McDonald’s restaurant in Elk Grove, Illinois. Hamburger University now consists of a 130,000-square foot facility on an 80-acre campus located at McDonald’s Corporate Offices in Oak Brook, Illinois. It has trained more than 80,000 restau- rant managers and owner/operators in 28 languages from 119 countries in “hamburgerology.” Now, McDonald’s runs Hamburger Universities in Sydney, Munich, London, Tokyo, São Paulo, and Shanghai. Elsewhere, like-minded MNEs develop similar set- ups. ArcelorMittal, a steelmaker, has six corporate university campuses, including sites in Ukraine and South Africa, and is opening others in Kazakhstan and Brazil. Infosys’s 337-acre campus houses the world’s largest corporate university in Mysore, India. Its 400-plus faculty annually socialize thousands of new hires to the ways of Infosys as well as align

Looking to the Future The Rise of Corporate Universities

Chapter 16 The Organization of International Business 457

people to run the day-to-day operations of a franchise. Today, reports the American Society for Training and Development, “training isn’t just a nice thing to do anymore. Companies are now thinking of training as a strategic imperative.”117 Mattel, for instance, runs executive development programs via a global e-learning system that puts its people and its princi- ples into play. Improving managers’ understanding at both headquarters and subsidiaries means its “global management is more closely aligned with the corpo- rate strategies and goals.”118

The challenges of changing global markets require continually upgrading managers’ competen- cies with a curriculum that fits the MNE’s strategy. Some look to their universities to give new hires a big-picture view of global operations and to reener- gize current workers’ commitment to its vision and mission. Others amplify this theme, declaring that their corporate university “inculcates everyone, from the clerical assistant to the top executive, in the cul- ture that makes the organization unique and special and defines behaviors that enable employees to ‘live the values.”’119

the Crucible of Change

Corporate universities target several goals, including maximizing return on educational investments, tailor- ing training to its workplace systems, and upgrad- ing employees’ skill sets. On a larger stage, they look to start and support strategic change, inspiring executives to develop the insights and cultivate the personal relationships that energize the globally inte- grated enterprise. Its rise as the forum of the MNE’s future increasingly makes it the crucible of company strategy. Some foresee it becoming the MNE’s thought center that sets, rather than follows, its strategy.120

Linking executive learning with the company’s strategy drives the recent and projected growth of corporate universities. The CEO of Unipart, a British auto parts maker, notes that his center “is at the very heart of the business” and a “key enabler for future growth of the business.”121 Like many other CEOs, he runs a monthly course on his company’s philosophy and practices. On this measure Jack Welch set the standard. Over his 20-year run as GE’s CEO, he appeared more than 300 times at the company’s training center at Croton-on-Hudson. Holding forth in “the Pit,” he socialized some 20,000 GE managers to the ways of the company.122

Senior executives who take on the hat of teacher generate great benefits. The director of LVMH’s uni- versity believes that putting top people into the pit

“gives them access to people they would never get access to . . . . It is the role of our top senior execu- tives to get a feel for what is going on.”123 Benefits accrue to attendees too. Activities, seminars, and training sessions fortify skills, build networks, and improve analytics. Attendees return home with new ideas and a better sense of how their professional development stacks up to counterparts. Indirect benefits emerge. For instance, less than a fifth of ArcelorMittal workers use English as a first language; hence, coworkers require training in local tongues. Improving local managers’ skills, ArcelorMittal found, reduces the necessity of posting expensive expatriates to support those units.

Sophisticated strategies push MNEs to involve more employees, both those staying home and those heading abroad, in general international develop- ment. Few question the need to generate, transfer, and adopt ideas from wherever they originate to wherever they add value. Still, this goal calls for preparing employees to do so. Growing globaliza- tion spurs MNEs to help employees, both national and international, to understand worldwide opera- tions, opportunities, and constraints. IB content once reserved for international executives is shared with all workers. Examples include Procter & Gamble’s train- ing on globalization issues, programs at Honda of America to improve cultural awareness, and Mattel’s and Infosys’s regional training centers, where manag- ers from several countries convene to study specific topics.

integrating Diversity

A rising mandate for corporate universities is integrat- ing diverse workforces. Hiring people from around the world expands the mix of nationalities and ethnicities. Organizing engineers in Mumbai or Sophia to collabo- rate with folks in Redmond makes compelling eco- nomic sense. Preempting a Tower of Babel requires socializing the mix of people to the sensitivities and skills needed to navigate multifunctional, multicultural, multinational teams. Tempting as it is to rely upon happenstance to manage the process, benign neglect is risky.124 Executives turn to corporate universities, seeing in them a robust platform for integrating diver- sity in a purposeful setting. The vice president of Unisys University explains that getting people into the classroom aligns employee development with the company’s strategy and fortifies their identification with the organization’s culture.125

Expanding operations into dissimilar emerg- ing markets challenges sustaining common values.

458 part 5 Global Strategy, Structure, and Implementation

Toyota, for example, saw the globalization of its business steadily diluting the principles of the Toyota Way. When the firm was primarily Japan-centric, it relied upon spontaneous chats on the factory floor and informal networking in the executive suite to sus- tain its organizational culture. Explained the director

of the Toyota Institute, “Before, when everyone was Japanese, we didn’t have to make these things explicit,” “Now we have to set the Toyota Way down on paper and teach it.”126 To that end, it relies on its Toyota Institute in Toyota City, Japan, along with sat- ellite centers in Thailand and the United States. ■

Case

The typical pharmaceutical MNE emphasizes global integra- tion, given its steep product development costs and potential scale economies. However, it must respond to local market conditions, obtaining government approval for its product in various countries and establishing local sales, support, and distribution systems. Consequently, headquarters and sub- sidiaries jointly implement the company’s strategy. Building an organization that can meet this mission is tough. One standout that does is Johnson & Johnson (J&J).

Since the start of its U.S. operations in 1886, J&J has evolved into the most broadly based health-care company in the world. International activity began in 1919 with J&J Canada. Headquartered in New Brunswick, New Jersey, J&J now lists some 275 operating units in 60 countries. Approxi- mately 55 percent of its $75 billion in sales occurs outside of the United States. Its diversified portfolio of anti-infective, cardiovascular, dermatology, immunology, and oncology products rests on more than 55,000 U.S. and foreign pat- ents. Some, though, believe the intricacy of the company’s organization, in terms of its decentralized structure, sophis- ticated coordination and control systems, and Credo-based culture, anchors its superior performance.

The “Magic of Decentralization” Decentralized management is the heart of J&J’s organi- zation. It allows managers who are closest to customers and competitors to make decisions. As the company says, it aims to be big and small all at once, building its global

Building a Magical Organization at Johnson & Johnson127

reach from the integration of many small units. By design, each of its 275 units operates with substantial autonomy, commanding the authority to act as it believes best given its read of local conditions. Each performs as its own busi- ness, entrepreneurial in character, and aware that success depends on anticipating local customers’ needs and deliv- ering solutions.

Decentralization, explains Ralph Larsen, former CEO, “gives people a sense of ownership and control—and the freedom to act more rapidly.”128 His successor, William Weldon, concurs, adding that reducing bureaucracy, liber- ating initiative, and rewarding enterprise—the hallmarks of a decentralized organization—is the wellspring of the “magic around J&J.”129 Moving decision-making from headquar- ters to the front lines helps a large, globe-spanning MNE capture the qualities typically found in smaller compa- nies. Certainly, a top-down hierarchy delivers benefits. Still, J&J reasoned that centralization reduces the magic cast by entrepreneurial drive, close customer contact, and agile decision-making. Shortening chains of command, increasing spans of responsibilities, and breaking down boundaries in a decentralized organization gives everyone a strong sense of ownership of action and accountability for outcomes.

These outlooks, Larsen explains, make the managers running J&J’s 275 operating units intensely competitive, both with each other as well as rivals. Furthermore, man- agers that directly shape their future are driven to inno- vate, translating ideas into new products and insights into

Chapter 16 The Organization of International Business 459

better processes. Backstopping their efforts are the deep pools of resources and capabilities that one finds in a large, successful MNE.

J&J’s successful decentralization attracted talented, bright, and motivated people. The authority to make deci- sions, Weldon noted, encouraged them to dream big dreams, keen to test new ideas that improved their skills. While often found in small companies, these entrepre- neurial outlooks and orientations are seldom seen in large MNEs. As such, senior leadership believes the company’s ability to simultaneously achieve local effectiveness and global efficiencies sustained its competitiveness.

The Dilemma of Decentralization J&J’s philosophy held that people who understand how the company creates value, are familiar with the company’s competencies, and are culturally and physically close to the market ought to run the local business. Thus, for example, baby oil managers in Italy decide how big a bottle to use, even if that bottle differs from the one sold in Germany, Japan, or Mexico, given their sense of the local marketplace.

J&J entered markets by adding subsidiaries through investment, alliance, or acquisition. New units do not fear being overrun by legions of expatriates directed by headquarters-based generals because, with few exceptions, host-country citizens direct local subsidiaries—indeed, a common view holds that “companies love to be acquired by J&J because they don’t mess with you.”130 Granted, headquarters installs coordination and control systems and negotiates performance targets. But, then it steps aside, supporting subsidiaries as needed, patiently awaiting supe- rior results, yet always prepared to intervene in the event of shortfalls.

High degrees of autonomy created dilemmas for local management. At one point, the centralization– decentralization balance had tipped so unevenly that the direc- tors of J&J’s foreign subsidiaries acted as kings of their own countries. For example, J&J launched Tylenol in 1960 as an over-the-counter pain reliever in the United States. Although it was available to local operating units shortly thereafter, the Japanese unit did not begin local sales until 2000.131

This sort of situation no longer exists. Yes, the com- pany’s commitment to decentralization endorses delegat- ing authority to local managers. Headquarters however, increasingly relies on coordination and control systems to ensure that subsidiaries optimize local activities while sup- porting global performance.

Herding 275 SBUs Decentralization enables J&J to respond to local needs but slows the global diffusion of products and programs. Preserv- ing the magic of decentralization, given the contest between

local autonomy and global integration, spurs tightening coordination and control systems. Communication channels cut across the organization, thereby helping far-flung units share ideas. Self-directed councils—for research, engineer- ing, and operations, among others—meet regularly to swap ideas. Headquarters negotiates planning formats, sched- uled mandatory reports, and formally reviewed budgets and interim results. Senior executives push a global perspective into local decision-making. Likewise, local objectives influ- ence global discussions.

Pressures to integrate operations due to market trends, competitors’ moves, and shifting technologies push J&J to centralize some activities. These changes, while under- stood, are not entirely welcome. Some local units resist integration, arguing that global standards poorly fit their unique circumstances. Senior executives acknowledges these concerns and reiterates their commitment to decen- tralize decision-making. They argue, however, that leverag- ing core competencies, as well as capturing location and scale effects, means that when J&J rolls out a key product or process, country operations worldwide roll with it.

J&J has recentralized some activities from operating units. Senior executives set standards for issues common to all operating units, such as finance, science and technology, government affairs, and quality management. It has installed centralized reporting processes for key business functions, including manufacturing and quality control. Centrally manag- ing common support activities, senior executives reason, frees operating units to focus on their day-to-day performance.

Culture and the Credo Inconsistent market development and duplicated efforts fan friction between headquarters and subsidiaries. Tempting as it was to adopt a policy of benevolent tyranny J&J’s proud leg- acy encourages otherwise. It relies on its organizational culture to add a global orientation to local entrepreneurialism. From the CEO to the employees of the smallest unit, management believes that the people and their values are the firm’s greatest assets.

Senior executives note that rank-and-file workers have created product breakthroughs, process innovations, and customer insights. In and of itself, such praise is not ter- ribly unusual. Many companies—perhaps even some that you have worked for—have likely expressed similar senti- ments. Separating J&J from the pack is the primacy of its organizational culture, as embodied in “Our Credo.” Crafted in 1943 by Robert Wood Johnson, company chair from 1932 to 1963, this one-page ethical code of conduct states how J&J fulfills its responsibilities. Former CEO Larsen called it the “glue that binds this company together.”132

The Credo specifies who and what to care about and in what order. J&J’s “first responsibility is to the doctors, nurses, patients, mothers, and fathers who use our products

460 part 5 Global Strategy, Structure, and Implementation

and services.” It addresses the communities where J&J oper- ates and the roles and duties of employees. Notably, share- holders come last, long after customers, suppliers, and dis- tributors. It declares that shareholders will get a reasonable return if other stakeholders are treated fairly. Collectively, the “Credo underscores J&J’s personal responsibility to put the needs . . . of the people we serve first. It liberates our passion and deepens our commitment to delivering mean- ingful health innovations.”133 J&J steadfastly maintains that the Credo is more than just a moral compass; it anchors its long-running success.

Despite its direct message, executives worry that differ- ing outlooks in different markets might blur its interpretation. Consequently, J&J periodically surveys employees on how well the Credo fits their world. Where there are shortcom- ings, senior management steps in. They have modernized aspects of the Credo given rising environmental concerns and work/family balance tensions. Despite occasional revi- sions, though, management believes the founding spirit of the Credo transcends time and place.

The Power of Organization J&J’s long list of accomplishments, earned by developing, adjusting, and improving its structure, systems, and culture, has built an organization that confidently leverages bright ideas, no matter if global executives or local subsidiary lead- ers champion them. Ultimately, the power of decentraliza- tion, the balance of coordination and control systems, and the clarity of the Credo anchors a magical organization that lets employees capitalize on their initiative, develop their capabilities, enrich their perspectives, and quite possibly change the game.

Questions

16-3. Would you prefer to work in a decentralized or centralized

company? What outlooks and competencies would make

you a high-performing executive in your preferred choice?

16-4. Explain how Johnson & Johnson makes its structure,

systems, and culture work in synchronicity.

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

16-5 Identify and explain benefits of decentralized decision-making within J&J. 16-6 How might decentralization create strategic and operational difficulties?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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Objectives

After studying this chapter, you should be able to

17-1 classify international marketing strategies in terms of marketing orientations, segmenta- tion, and targeting

17-2 Discuss the pros and cons of adaptation versus global standardization of products

17-3 Describe pricing complexities when selling in foreign markets

17-4 Recognize the advantages and problems of using uniform promotional marketing practices among countries

17-5 explain the different branding strategies com- panies may employ internationally

17-6 Discern major practices and complications of international distribution

17-7 illustrate how gap analysis can help in manag- ing the international marketing mix

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

chapteR 17 Marketing Globally

A Tommy Hilfiger store in Manchester, England, U.K.

▶

Markets have customs and communes have traditions.

—Vietnamese proverb

Managing international Operations paRt six

Case Tommy Hilfiger For it’s Tommy this, an’ Tommy that

—“Tommy” from Department Duties: Barrack Room Ballads (1890),

United States Book Company, New York.

Mark Twain said, “The finest clothing is a person’s skin, but, of course, society demands more than this.”1 Tommy Hilfiger, a no- table international clothing brand, now owned by Phillips-Van Heu- sen (PVH), exemplifies efforts to respond to these demands. Its 2015 retail sales exceeded $8 billion, with over half coming from abroad. Europe, to which it began its push in 1997, accounts for the largest portion of international sales, and China is the fast- est-growing area. (The opening photo shows one of its stores in Manchester, England.) As the company moved internationally, it learned that applying every U.S. marketing strategy abroad did not work because country markets are very different. Our discus- sion centers on contrasting Hilfiger’s U.S. and foreign (mainly Eu- ropean) operations.

Product

The Hilfiger brand’s early success was largely due to two men: U.S. designer Tommy Hilfiger and Indian clothing magnate Mohan Murjani. Murjani sought Hilfiger as a designer for a new brand of clothing by offering a line of slightly less preppy and less expen- sive clothes than those offered by Ralph Lauren to attract a young mass-appeal audience. From the start, Hilfiger clothes have been casual, of good quality, and distinctive enough in color and shape (along with their little red, white, and blue logos) that the public can usually distinguish them from those of competitors. Never- theless, this is an industry in which product lines must evolve. Maintaining that “Fashion brands have to reinvent themselves, just like Madonna does,” Hilfiger has gone from preppy to urban and back again.

In addition, Hilfiger has encountered some different national pref- erences. To accommodate European tastes, Hilfiger has added wool sweaters, adjusted to the European partiality for slimmer-looking jeans and smaller shirt logos, and created a line of added-luxury items, such as leather jackets and cashmere sweaters for the Ital- ian market. It has also developed brighter colors for Italy, tartans and plaids for Japan, and sleeker designs for Chile.

During the late twentieth and early twenty-first century, Hilfiger’s U.S. sales fell each year, apparently because its product lines had become faddish (e.g., baggy jeans and large logos on clothing) and no longer compatible with its established image. This led to discount- ing, compromising on quality, and a resultant lower brand image. Meanwhile, the autonomously operated European division refused to go along with the U.S.’s faddish moves, and its sales grew in tandem with U.S. decreases.

In response, Hilfiger set up a European design staff that has led to more harmonization in its U.S. and European products, a move more up-market, and a turnaround of its U.S. performance.

Pricing

Whereas the early U.S. pricing strategy was to sell a shirt for $79 that looks like an $89 shirt, Hilfiger learned that its brand cachet warranted selling a shirt in Europe for $99 that looks like a $150 shirt. For instance, in Germany, its largest European market, men don’t mind paying $50 more than the highest-priced Hilfiger shirts in the United States, but they want them in a higher-quality cotton. In addition, European department store margins can be 50 percent to 100 percent higher than those in the United States, thus impacting price differences.

Promotion and Branding

Hilfiger’s promotion and branding have been so intertwined that sep- arating them is almost impossible. At the company’s inception, there were two primary needs: to convince stores to stock a new brand and to convince customers to want it. Although the first year’s (1985) ad budget was US$1.4 million, quite small for an unknown brand in a mass consumer market, the ads were aimed strictly at getting Tommy Hilfiger’s name known. These ads were in leading magazines and newspapers, along with a billboard in New York’s Times Square. They showed no clothes or models. Instead, they included Hilfiger’s face, the logo for the clothes, and words describing Hilfiger as being on a par with such well-known designers as Ralph Lauren, Perry Ellis, and Calvin Klein.

The bizarre ads resulted in free publicity through newspapers around the world and quips on popular late-night TV shows. The publicity showed an eclectic group of celebrities—Bill Clinton, the Prince of Wales, Michael Jackson, Elton John, and Snoop Dogg— wearing Hilfiger clothes. This fed into the image that Hilfiger clothes had cachet; thus the company’s brand was quickly known nationally and internationally. Soon, New York surveys revealed that the public thought of Hilfiger as one of the four or five most important U.S. designers. And the logo-loving public rushed to buy the brand, especially young managers who were eager to be seen in upscale sportswear during the newly popular “casual Friday” workdays.

Despite Hilfiger’s early publicity in Europe, its acceptance was not as quick as it expected. Because Europeans tend to see France and Italy as the upscale fashion centers and the United States as a

Chapter 17 Marketing Globally 463

trendsetter in jeans, Hilfiger initially encountered some negative reac- tions to being a U.S. upscale brand. However, Hilfiger has since played up its Americanism, and the perception that the brand and price are a step below the pure luxury brands has successfully helped its Euro- pean sales find a niche.

Hilfiger has used celebrity advertising, such as Sheryl Crow, Jewel, Beyoncé, Rafael Nadal, and the husband and wife team of the late David Bowie and supermodel Iman. The company has used “delebs” (dead celebrities), such as Grace Kelly and James Dean. To help advertise its children’s clothes, Disney artists have drawn Pluto and other Disney characters wearing the line. However, aside from celebrities, Hilfiger learned that the type of models it uses to sell successfully in the United States may not work well in Europe. For example, its models for men’s underwear in Europe, including those on point-of-purchase package displays, must be thinner and less muscular than those in the United States. Hilfiger also found that its average European consumer was older than that in the United States, so it dropped the Tommy Jeans name because it sounded too much like a teen product.

Advertising has been a cornerstone of Hilfiger’s success, depend- ing on multimedia campaigns that include indoor and outdoor print placements, digital and social media promotions, and webisodes.

distriBution

Early on, Hilfiger relied mainly on wholesaling to about 1,800 U.S. department stores, many of which contained stand-alone Hilfiger departments. It has avoided chains considered more low-end, such as JCPenney and Sears, though it does sell its outdated stock to discount chains T.J. Maxx and Marshalls. However, in 2007, Hilfiger gave Macy’s exclusive rights to sell its sportswear lines. Although Macy’s has about 800 stores, the move required Hilfiger to pull sales from other department stores, such as Dillard’s.

Distribution is perhaps the biggest difference Hilfiger found when entering Europe. Because of the company’s U.S. department stores success, it put an early European emphasis on such department stores

as Galeries Lafayette in France and El Corte Inglés in Spain. How- ever, Hilfiger found the European market to be one of fragmentation (sending small amounts to small stores that carry select pieces) as opposed to the U.S. market’s concentration (sending a lot to depart- ment stores). European operational costs are about three times those in the United States because of this more fragmented retail and wholesale system.

Hilfiger has inaugurated large flagship stores in prime locations within large markets, such as in New York City, Paris, and Tokyo. These stores not only make sales, but also demonstrate the variety of Hilfiger merchandise. Non-U.S. stores are decorated to emphasize an American image, while simultaneously connecting the United States to the host country, such as including a poster of a U.S. magazine with the Eiffel Tower on the cover in the Paris store. By locating in prestige areas, Hilfiger promotes an aura of having high-end prod- ucts, yet its aim is to be a high-margin brand with prices a notch lower than luxury brands. Nevertheless, this concept did not work in London, where Hilfiger closed its Bond Street store a year later. In effect, Hilfiger over-promoted to retailers and under-promoted to final consumers. Thus, too much merchandise was in stores, which forced them to get rid of excess inventory. Further, a cheap lookalike brand called Tommy Sport confused consumers, tarnished Hilfiger’s image, and forced the company to buy it out.

There is an old adage that clothes make the man. Hilfiger, while making and selling clothes, has succeeded in convincing customers that its merchandise will help boost (or make) their positions. ■

Questions

17-1. The chapter explains five international marketing orientations.

Which one most applies to Tommy Hilfiger? Explain why.

17-2. The chapter explains five elements in the marketing mix

(product, price, promotion, brand, and distribution). In

which of these have Tommy Hilfiger’s operating practices

been the most standardized globally? Explain why this has

been possible and desirable.

international marketing strategies: orientations, segmentation, and targeting Marketing brings revenue, without which a firm cannot survive. Similar principles apply globally (i.e., a company must have desirable products and services, tell people about them, and offer them at appropriate prices at consumers’ favored locations). However, companies may apply these principles differently abroad, such as by customizing products to corre- spond with local preferences. Hilfiger’s experience in the opening case emphasizes the need to find the right balance between the benefits of local responsiveness and the efficiency gains of standardization.

Although marketing principles are global, companies need to apply them differently abroad.

464 part 6 Managing International Operations

have sometimes had positive international sales results through differentiation that builds favorable consumer perceptions such as with the Chiquita brand on bananas. In addition, oil producers, such as Venezuela’s PdVSA have bought branded gasoline-distributors, such as CITGO, to extend operations in their value chains and help them sell an otherwise undiffer- entiated product. Commodity producers also put effort into business-to-business marketing by providing innovative financing and ensuring timely, high-quality supplies.

Passive Exports Many companies export passively by filling unsolicited foreign requests and adapting their products very little, if at all. This suffices for companies that view foreign sales simply as a means to dispose of excess inventory they can’t reasonably sell domesti- cally. In fact, if they cover fixed costs through domestic sales, they can quote lower export prices to liquidate inventories without disrupting their domestic markets.

Foreign-Market Segments or Niches A company may aim a product at a large share of its domestic market and then find a few consumers abroad who will also buy it. Inca Kola, a major soft drink brand in Peru, has only niche markets abroad, primarily among people who consumed it in Peru. However, a niche market abroad may become a mass market, as is the case with Mexico’s Corona beer.

Similarly, a company may sell in countries with minimal market potential and little competition from firms that adapt to local market preferences, particularly in small developing nations. In effect, the market size does not justify the alteration expense—for instance, not even changing plugs on electrical products to fit local sockets, which local purchasers must convert.

sales orientation In a sales orientation, a company sells abroad what it sells domestically by assuming that consumers are sufficiently similar. Hilfiger launches much of its children’s collection simultaneously in multiple countries this way.3 Similarly, some products need no international adaptation, such as razor blades, aircraft, and cat food. For others, however, a company may succeed best with a sales orientation by selling to culturally similar countries with a great deal of spillover in product information, such as between the United States and Canada.4

This orientation differs from the production orientation because of its active rather than passive approach to promoting sales. However, there is much evidence of failures because of a mismatch between managers’ perception and the reality of what will be accepted abroad.5 To help alleviate this mismatch, product development teams composed of different nation- alities can create customer solutions that apply globally from the start.6 Additionally, a strong information exchange between foreign subsidiaries and headquarters can help develop products that can be sufficiently standardized and still fit the needs of consumers in different countries.7

customer orientation In a sales orientation, management is usually guided by answers to such questions as: Should the company send some exports abroad? Where can it sell more of product X? That is, the product is held constant and the sales location is varied.

In contrast, management in a customer orientation asks: What and how can the company sell in country A or to a particular type of consumer? In this case, the country or type of consumer is held constant and the product and marketing method vary. An MNE may most likely take this approach because the country’s size and growth potential or the consumer type is attractive. In an extreme case, it would move to completely different products—an uncommon strategy that some MNEs nonetheless have adopted. Compañía Chilena de Fósforos, a Chilean match producer, wanted to tap the Japanese market because of its growth and size. However, because its matches were too expensive in Japan, it successfully entered the market by making chopsticks, a product that would use its forest resources and wood-processing capabilities.8

Business-to-business suppliers may be concerned primarily with promoting their pro- duction capabilities, prices, and delivery reliability rather than determining what will sell in

ConCept CheCk

In Chapter 7 (page 190), we explain that commodity prices rise less than manufacturers’ prices, partially because of differentiation difficulty. Here, we demonstrate success in differentiation.

Passive sales occur when foreign buyers seek new products.

Serving niche markets abroad may forgo the need to be nationally responsive.

The unaltered product may have appeal at home and abroad because of

• globally similar demand, • spillover in product

information from its home country,

• foreign and domestic input in development.

ConCept CheCk

In Chapter 2 (page 30), we discuss that companies may gain competitive advantages by nurturing cultural diversity, such as within teams.

A customer orientation takes geographic areas as given and seeks products to sell there.

Although international marketing approaches should be compatible with companies’ overall aims and strategies, they need not standardize every practice for every product where they sell. For instance, market differences may call for pursuing cost leadership through standardization in some countries and more costly differentiation in others. A mass-market orientation may be appropriate in one country and a focused strategy in another. Finally, the degree of global standardization versus national responsiveness may vary within the marketing mix, such as standardizing the product as much as possible while promoting it differently among countries.

Figure 17.1 shows marketing’s place in IB. As we first discuss the orientations that commonly describe companies’ marketing strat-

egies, keep in mind that they are not entirely mutually exclusive. We emphasize product policy in our discussion because it is central to a firm’s strategy, whereas the other elements in the marketing mix are supportive to it.2

marketing orientations Five common marketing orientations can be applied around the world: production, sales, cus- tomer, strategic marketing, and social marketing. Each is discussed below.

Production orientation Rather than analyzing foreign consumer needs to a high degree, managers concentrate on production by assuming that customers simply want products with lower prices, higher quality, or whatever they sell domestically. Although this approach has largely gone out of vogue, it is used internationally for certain cases (as described in the following sections).

Commodity Sales Companies sell many undifferentiated commodities primarily on the basis of price because of universal demand. However, even for commodities, companies

ConCept CheCk

In Chapter 12 (pages 321–323), we describe the strategies of global integration versus local responsiveness and explain how a company can save money by standardizing many of its poli- cies and practices.

Under certain circumstances, the assumptions that consum- ers simply want lower prices or higher quality are valid.

COMPETITIVE ENVIRONMENT

OPERATING ENVIRONMENT

PHYSICAL AND INSTITUTIONAL FACTORS

OBJECTIVES

MEANS Functions

OPERATIONS

STRATEGY AND STRUCTURE

Modes

Marketing Global production and supply chain management Accounting and taxation Finance Human resources

• •

• • •

Figure 17.1 Marketing as a Means of Pursuing an international Strategy Recall that we used Figure 15.1 to introduce the various modes and means by which a company can pursue its international objectives and strategy. Among those means we included functions, and here we focus on one of the most important of those functions: marketing.

Chapter 17 Marketing Globally 465

Business-to-business suppliers may be concerned primarily with promoting their pro- duction capabilities, prices, and delivery reliability rather than determining what will sell in

ConCept CheCk

In Chapter 7 (page 190), we explain that commodity prices rise less than manufacturers’ prices, partially because of differentiation difficulty. Here, we demonstrate success in differentiation.

Passive sales occur when foreign buyers seek new products.

Serving niche markets abroad may forgo the need to be nationally responsive.

The unaltered product may have appeal at home and abroad because of

• globally similar demand, • spillover in product

information from its home country,

• foreign and domestic input in development.

ConCept CheCk

In Chapter 2 (page 30), we discuss that companies may gain competitive advantages by nurturing cultural diversity, such as within teams.

A customer orientation takes geographic areas as given and seeks products to sell there.

466 part 6 Managing International Operations

foreign markets. Instead, they depend on other companies to give them product specifica- tions. For example, Hong Kong’s Yue Yuen Industrial is the world’s largest branded-footwear manufacturer, making athletic shoes to the specifications of companies such as Nike, New Balance, and Adidas.

strategic marketing orientation Companies committed to continual rather than spo- radic foreign sales usually adopt a strategy that combines production, sales, and customer orientations. They customize to accommodate foreign customers so as not to lose too many sales to aggressive competitors while, at the same time, considering their own competencies so as not to deviate too much from what they do well. Thus, they rely on product variations. Hermès, known for its luxury silk products, has introduced limited edition luxury silk saris for the Indian market.9 Thus, Hermès uses its competency in prestige design clothing to produce something that fits the unique Indian market. Such personal care firms as Procter & Gamble and Henkel have altered their cosmetics’ content by eliminating pork derivatives and alcohol on sales to the Islamic (Halal) market.10

social marketing orientation Companies with social marketing orientations pay close attention to the potential environmental, health, social, and work-related problems that may arise when selling or making their products. Such groups as consumer associations, politi- cal parties, labor unions, and NGOs are becoming more globally aware—and vocal. Because they can quell demand when they believe a product somehow violates their concept of social responsibility, companies must consider how a product is made, purchased, used, and dis- carded. Such considerations led Coca-Cola to use returnable glass containers for Argentina and Brazil.11

segmenting and targeting markets Seldom can a company convince virtually an entire population to consume its product. Thus, based on the orientations just discussed, companies must segment markets for their products and services and then decide which to target and how. The most common way to do this is through demographics, such as income, age, gender, ethnicity, religion, or a com- bination of factors. Companies may further refine these segments by adding psychographics (attitudes, values, lifestyles). Internationally, segmentation and targeting may take place at a global or country level.12

By global segment An MNE may identify some global segments that transcend coun- tries.13 For instance, Red Bull targets a global, athletically minded, young-adult market.14 Ferrari targets high-net-worth individuals who want the exclusivity of having a product whose demand exceeds supply.15 Thus, each country may have some people within the same segment, but the proportional and actual size of the segment will vary by country.

By country Let’s say a company decides to go to the Canadian market. It may modify its global segmentation to fit Canadian nuances, for example by including regional ethnic differ- ences such as Quebec’s and British Columbia’s French and Chinese speakers, respectively. It must decide whether to target one or multiple segments there, whether to use the same mar- keting mix to sell to all segments, whether to tailor the products separately to each segment, and whether to vary the promotion and distribution separately as well. The company may also compare these Canadian segments with those in other countries in order to gain possible economies through standardization that serves market segments that cut across countries.

mixing the marketing mix A company may hold one or more elements of its market- ing functions—prices, promotion, branding, and distribution— constant while altering the others. For instance, Chanel aims its cosmetics sales at a segment that transcends national boundaries. It uses branding, promotion, pricing, and distribution globally, but adapts the cosmetics to local ethnic and climatic norms.16

The most common product strategy is to adapt by degree.

Companies consider the effects on all stakeholders when producing and selling their products.

ConCept CheCk

Chapter 5 (pages 132–133) illustrated the problem in trading off the interests of diverse stakeholders.

Companies must decide on their target markets, which may include segments that exist in more than one country.

ConCept CheCk

Chapter 13 (pages 340–341) describes the importance of demographics in selecting countries for operations, and much of these data are valid in marketing decisions.

Chapter 17 Marketing Globally 467

mass markets Versus niche markets At the same time, most companies have multiple products and product variations that appeal to different segments; thus, they must decide which to introduce abroad and whether to target them to mass markets or niche segments. For example, General Motors aims at most income levels in the United States with models ranging in price from its Chevrolet Spark through its Cadillac Escalade SUV, but it entered China by aiming only at a high-income segment—first with Buicks and later with Cadillacs.

Because the percentage of people who fall into any segment varies among countries, a niche market in one country may be a mass market in another. An MNE may be content to accept a combination of mass and niche markets; however, if it wishes to appeal to mass markets everywhere, it may need to change elements in its marketing program.

Product Policies: country adaPtation Versus gloBal standardization Although cost is a compelling reason to globally standardize any part of a company’s mar- keting mix, product standardization generally gains the biggest savings.17 Nevertheless, product adaptations are common.

Why Firms adaPt Products Companies have legal, cultural, and economic reasons for adapting their products to fit the customers’ needs in different countries.

legal considerations Obviously, explicit legal requirements, usually meant to protect consumers, cause companies to customize products for foreign markets. If they don’t comply with the law, they won’t be allowed to sell. Pharmaceuticals and foods are particularly sub- ject to regulations concerning purity, testing, and labeling, while automobiles must conform to diverse safety, pollution, and fuel-economy standards.

When standards (such as for safety) differ among countries, firms may either con- form to the minimum standards of each country or make and sell products fabricated to the highest country standard everywhere. Managers must consider cost along with public opinion by having lower standards in some countries. Critics have complained, for example, about companies’ sales—especially in developing countries—of such products as toys, automobiles, contraceptives, and pharmaceuticals that did not meet safety or quality standards elsewhere.

Labeling Requirements One of the more cumbersome product alterations concerns laws on labeling, such as for origin, ingredients, and warnings. Labeling differences on food products include their bioengineered content and whether they are organic or fairly traded. Countries have varying requirements for warnings on cigarette packages; Australia requires all companies to use the same drab dark brown packages and standardized type for their brand names.18

Environmental-Protection Regulations Another problem concerns laws that protect the environment, such as Denmark’s onetime ban on aluminum cans and a current requirement for a refundable deposit on them. Other countries restrict the volume of packaging materi- als to save resources and decrease trash. There are also differences in national requirements as to whether containers are reusable and whether packaging materials must be recycled, incinerated, or composted.

Indirect Legal Considerations Indirect legal requirements also affect product content or demand. In some nations, companies cannot easily import certain raw materials or compo- nents, forcing them to construct a product with local substitutes that may modify the final

Direct and indirect legal factors are usually related to safety, health, and environmental protection.

468 part 6 Managing International Operations

However, even packaging changes may necessitate costly research if the aim is to help build a certain product image in the minds of a target market. For example, packaging can par- tially sway consumers in buying decisions, but the image needed to do this may differ by target market.26

MNEs can compromise between products’ uniformity and diversity by standardizing them a great deal while altering some characteristics. Whirlpool does this by putting the same basic mechanical parts in all its refrigerators while changing such features as doors and shelves for different countries.27

the Product line: extent and mix When a firm introduces a range of its products abroad, the percentage share of sales for each commonly differs from the shares in its home country. For instance, a tire manufacturer may sell all its car tire sizes everywhere, but the share for each size depends on sales of different automobile models in each market. Cultural factors may also be important. Most of Nike’s specialty sports shoes have sold well in China, but its running shoes have not. Why not? Running in China has been associated with unpopular school exercise programs and with people being chased.28

In many cases, not all an MNE’s multiple products can generate sufficient sales to jus- tify the cost of penetrating each market with each product. Even if they can, the company might offer only a portion of its product line, perhaps as an entry strategy or because of limited space and high inventory costs when handling a very broad product line. Walmart’s Canadian stores, for instance, have only 20 percent of the merchandise variety available in its U.S. stores.29

sales and cost considerations In reaching product-line decisions, managers should consider the sales and cost of having a large versus small family of products. Sometimes a firm must produce and sell a wide variety of products to gain distribution with large retail- ers. Further, if the sales per retailer are small, fixed distribution costs may cause delivery costs per sales unit to be high. In such a case, the company can broaden the product line it distributes, either by introducing a larger family of its products or by grouping sales of several manufacturers.

international Pricing comPlexities A price must be low enough to gain sales but high enough to guarantee the flow of funds required to cover expenses and make sufficient profits to achieve long-term competitive viability.

Potential oBstacles in international Pricing Pricing is more complex internationally than domestically, and we’ll now examine the major reasons.

government intervention Every country has laws that affect the prices of goods. Minimum prices are usually set to prevent companies from eliminating competitors and gaining monopoly positions. Maximum prices are usually set so that poor consumers can buy products and services.

market diversity Country-to-country variations in demand and competition create natu- ral segments and limitations in pricing possibilities. In terms of culture, a seafood company would sell few sea urchins or tuna eyeballs in the United States at any price, but it can export them to Japan at a high price, where they are considered delicacies. In terms of competition, the more there is, the less discretion a firm has in setting its prices.

The cost of product alterations should be compared with their sales generation.

Broadening the product line may gain distribution econo- mies, but not all of a com- pany’s line has sales appeal everywhere.

Governmental price controls may

• set minimum or maximum prices,

• prohibit certain competitive pricing practices.

Some countries’ consumers simply like certain products more and are willing to pay more for them.

result. Laws, such as high taxes on heavy automobiles, also shift companies’ sales to smaller models, thus indirectly altering demand for tire sizes and grades of gasoline.

Issues of Standardization Countries’ legal differences require firms to incur costly product adjustments. Although governments have reached agreements to standardize some prod- uct aspects (technical standards on mobile phones, bar codes to identify products), other products (railroad gauges, power supplies) continue to vary. A global standard has usually resulted from companies wanting to emulate a dominant producer, such as making blades to fit Gillette razors.

In reality, there is both consumer and economic resistance to uniformity—such as the U.S. reluctance to adapt to the metric system. Economically, a changeover would be cost- lier than simply educating people and relabeling. Containers would have to be redesigned and production retooled so that sizes would be in even numbers. (Would U.S. football have a first down with 9.144 meters to go?) Even for new products or those still under development, companies and countries are slow to reach agreement because they want to protect the investments they’ve already made. At best, international standards will come very slowly.

cultural considerations Religious differences obviously limit the standardization of product offerings globally, such as the limitation of pork product sales by food franchises in Islamic countries. These franchises, such as McDonald’s and Burger King, also add items to fit local tastes, such as squid oil on buns in Japan.19 However, cultural differences affecting product demand may not be so easily discerned. Toyota failed to sell enough pickup trucks in the United States until it redesigned the interior with enough headroom for drivers to wear cowboy hats. Home Depot left the Chinese market after it could not overcome consumers’ preference for hiring people to do jobs rather than embracing the do-it-yourself concept.20 International food marketers substantially alter ingredients (especially fat, sodium, and sugar) to fit local tastes and requirements, such as Kellogg’s All-Bran bar having more salt in the United States than in Mexico.

economic considerations Income Level and Distribution If a country has many consumers with low incomes, com- panies have an opportunity to sell to them differently than to higher-income consumers. For instance, in Peru, Unilever sells deodorants in aerosol cans to more affluent consumers, and it sells cream sachet in small containers to those with lower incomes.21 Diageo and SABMiller have lowered beer prices to low-income consumers in several African countries by brewing with local ingredients, such as yams, and convincing governmental authorities to remove excise taxes because of the agricultural jobs created by the ingredient change.22 When segmenting sales by economic levels, a company may need to distinguish its products by giving them different brand names, such as what Procter & Gamble does in China with both a Duracell and Nanfu brand of batteries.23

Infrastructure Poor infrastructure may also require product alterations, such as making them to withstand rough terrain and utility outages. Whirlpool sells washing machine models in remote areas of India with rat guards to protect hoses, extra-strong parts to survive transporta- tion on potholed roads, and heavy-duty wiring to cope with electrical ebbs and surges.24 Japan, has adapted its excellent infrastructure to crowded conditions and high land prices, which limits sales of some large foreign automobile models (i.e., they are too wide to fit into elevators that carry cars to parking areas on upper floors or to make narrow turns on back streets).

alteration costs Some product alterations, such as package labeling, are cheaper to make than others, such as designing a different car model. Further, some will increase sales more than others, thus potential costs versus sales generation should be evaluated for each type of change.25

Although some global product standardization would elimi- nate wasteful alterations, there is resistance because

• a changeover would be costly,

• people are familiar with the “old.”

Examination of cultural differ- ences may pinpoint possible product problems.

Personal incomes and infrastructures affect product demand, thus firms may

• aim product variations at different income levels,

• tailor products to compensate for infrastructure differences.

Chapter 17 Marketing Globally 469

Potential oBstacles in international Pricing Pricing is more complex internationally than domestically, and we’ll now examine the major reasons.

The cost of product alterations should be compared with their sales generation.

Broadening the product line may gain distribution econo- mies, but not all of a com- pany’s line has sales appeal everywhere.

Governmental price controls may

• set minimum or maximum prices,

• prohibit certain competitive pricing practices.

Some countries’ consumers simply like certain products more and are willing to pay more for them.

470 part 6 Managing International Operations

When a company has considerable pricing discretion, it may use any of the following tactics:

• A skimming strategy—charging a high price for a new product by aiming first at con- sumers willing to pay that much, then progressively lowering the price to sell to other consumers

• A penetration strategy—introducing a product at a low price to induce a maximum number of consumers to try it

• A cost-plus strategy—pricing at a desired margin over cost

Country-of-origin stereotypes also limit pricing possibilities. For example, exporters in developing economies must often compete primarily through low prices because of negative perceptions about their products’ quality. The danger is that a lower price may weaken the product image even further.

Diversity in buying on credit affects sales, especially through impulse buying.30 For example, the average consumers in some countries, such as Japan, are less willing to under- take debt (e.g., they have a feeling of insecurity when incurring debt) than consumers in other countries, such as the United States. In the former, it is harder to generate sales by offering credit.

export Price escalation If standard markups occur within distribution channels, length- ening the channels or adding expenses somewhere in the system will further raise the price to the consumer—a situation known as export price escalation. Figure 17.2 shows price escala- tion in export sales.

There are two main implications of price escalation. Seemingly exportable products may turn out to be noncompetitive abroad if companies in the value chain use cost-plus pricing— which many do. To become competitive in exporting, a company may have to sell its product to intermediaries at a lower price or convince intermediaries to lower their margins to lessen the amount of escalation.

Fluctuations in currency Value For companies accustomed to operating with one relatively stable currency, pricing in highly volatile currencies can be extremely troublesome. Managers should price to ensure the company enough funds to replenish its inventory and still make a profit. Otherwise, it may be making a “paper profit” while liquidating itself—that is, what shows on paper as a profit may result from the failure to adjust for inflation while the merchandise is in stock.

The weaker the competition, the more discretion a company has on its pricing strategy.

Preference for cash versus credit buying affects demand.

ConCept CheCk

In Chapter 14 (pages 387–389), we discuss the importance of export intermediaries and the process of indirect selling (page 373) through independent companies that facilitate international trade.

Export prices generally rise by more than incremental transport and duty costs, thus exporters may have to lower margins to make sales.

ConCept CheCk

In Chapter 10 (pages 262–263), we point out why foreign- exchange values fluctuate, and in Chapter 13 (pages 344–345), we describe how fluctuations affect companies’ operations either positively or negatively.

Cost of Production =

$1.00 and Selling Price = $1.50

Importer’s Cost =

$1.90 and Selling Price = $2.85

Transport Cost = $.25

Tari� = $.15

Tari� Wall

Country A Country B

Figure 17.2 Why Cost-Plus Pricing Pushes up Prices Let’s say that a product is being exported from Country A and imported into Country B for purchase by consumers there. Let’s also say that both the producer/exporter and the importer/distributor tack on 50 percent markups to the prices they pay for the product. If you add in the costs of transport and tariffs, the product is substantially more expensive in Country B than in Country A—perhaps too expensive to be sold competitively.

Chapter 17 Marketing Globally 471

Two other pricing problems occur because of inflationary conditions:

1. The receipt of funds in a foreign currency that, when converted, buy less of the com- pany’s own currency than had been expected

2. The frequent readjustment of prices necessary to compensate for continual cost increases

In the first case, the company sometimes can specify within sales contracts an equiva- lency in some hard currency. For example, a U.S. firm’s sale to a company in Venezuela may specify that payment be made in dollars or in bolívars at an equivalent price in terms of dol- lars at the time payment is made.

In the second case, frequent price increases may hamper the ability to quote prices very far in advance in the currency that is losing value. Further, it would be difficult to make vending-machine sales because of having to recalibrate machines and come up with coins or tokens that correspond to the new prices. Another alternative is to change the product’s quality, which few firms are willing to do, or its size, which is what Coca-Cola did to its canned soft-drinks in Hong Kong when aluminum prices rose.31

Currency-value changes also affect pricing decisions for any product that has potential foreign competition. For example, when the U.S. dollar is strong, companies can sell non- U.S.-made goods more cheaply in the United States because their prices in dollars decrease. In such a situation, U.S. producers may have to accept a lower profit margin to be competi- tive. When the dollar is weak, however, producers in foreign countries may have to adjust their margins downward.

The Gray Market The gray market, or product diversion, is the selling and handling of goods through unofficial distributors. Such unauthorized selling can undermine the longer-term viability of the distributorship system, induce a company’s operations in differ- ent countries to compete with each other, and prevent companies from charging what the market will bear in each country. However, transport costs as a percentage of product costs are important in determining whether product diversion is feasible. If transport costs are a high percentage, such as for ice cream, large-scale movements across borders are impractical. But for many other products, the movements are practical. Let’s say a firm sells its product in Asia at a lower price than in the United States because of different market conditions. If an unauthorized distributor buys it in Asia and resells it at a lower price in the United States, the authorized U.S. distributor either loses sales or can no longer sell at the U.S. market- bearing price. Traditionally, for example, publishers sold texts at substantially different prices in different countries, but the U.S. Supreme Court ruled the legality of buying lower-priced textbooks abroad to resell in the United States. In essence, maintaining large price differ- ences among countries has become more difficult as consumers have gained access to more global price information and more access to buying abroad because of lower trade barriers.

Fixed Versus Variable Pricing MNEs often negotiate their export prices with importers. Small firms, especially those from developing countries, frequently give price concessions too quickly, limiting their ability to negotiate on a range of marketing factors that affect their costs:

• Discounts for quantity or repeat orders • Deadlines that increase production or transportation costs • Credit and payment terms • Service • Supply of promotional materials • Training of sales personnel or customers

Some people, regardless of culture, avoid price negotiation even when they know they may gain economically by doing so.32 In essence, many people fear being perceived as too aggressive or too poor. Or, they may not want to take the time, preferring to develop long- term relationships that bargaining might upset. Regardless of cause, there is a substantial

When companies’ prices are significantly different among countries, consumers are tempted to buy in the cheapest country.

There are country-to-country differences in

• whether prices are fixed or bargained in stores,

• where and for what products bargaining occurs.

472 part 6 Managing International Operations

variation among countries in whether, where, and for what products consumers bargain in order to settle on an agreed price. In the United States, consumers commonly bargain for automobiles, real estate, and large orders of industrial supplies but not for grocery items. However, some auto dealerships sell only on a fixed-price basis, while bargaining for smaller items is growing as buyers more easily obtain alternative prices through the Internet. In con- trast, consumers in most developing countries commonly bargain for both large and small items, but more routinely in traditional markets than in retail stores.33

Supplier Relations Dominant companies with clout can get suppliers to offer lower prices, thereby gaining cost advantages over competitors. But they may lack this ability when enter- ing foreign markets because of not dominating the market there. Walmart, Marks & Spencer, and Carrefour have such clout in their respective domestic markets, but they have been hard pressed to gain the same advantage when entering the others’ home markets.

The Internet is also causing more companies to compete for the same business, especially for sales of largely undifferentiated materials. Thus, many industrial buyers are claiming large price decreases through Internet buying. However, sellers can improve their positions by negotiating and by combining the Internet with face-to-face interaction.34

should Promotion diFFer among countries? Promotion is the presentation of messages intended to help sell a product or service. The types and direction of messages and the methods of presentation may be extremely diverse, depending on the company, product, and country of operation.

the Push–Pull mix Promotion may be push, which uses direct selling techniques, or pull, which relies on mass media. (The photo shows a street in Hong Kong lit with neon signs to pull customers to buy.) Most companies use combinations of both. For each product in each country, a com- pany must determine the mix between push and pull within its total promotional budget.

Markets’ dominant companies have strong negotiating power.

One type of pull promotion is a sign in a public place. Here we see neon advertisements on a busy street in Hong Kong. Source: Getty Images

▶

Chapter 17 Marketing Globally 473

Factors in Push–Pull decisions Several factors help determine the mix of push and pull:

• Type of distribution system • Cost and availability of media to reach target markets • Consumer attitudes toward sources of information • Price of the product compared to incomes

Generally, the more tightly controlled the distribution system, the more likely a company is to emphasize a push strategy to distributors because it requires a greater effort to get them to handle a product. This is true where most distributors can carry few brands because they are small and highly fragmented, thereby forcing companies to concentrate on making their goods available.

Also affecting the push–pull mix is the amount of contact between salespeople and con- sumers. In a self-service situation, in which customers have few or no salespeople to turn to for opinions on products, it is more important for the company to use a pull strategy by advertising through mass media or at the point of purchase.

Finally, consumers react to word-of-mouth opinions, especially where uncertainty avoid- ance is high.35 To enhance word-of-mouth opinions, companies need to persuade existing customers that their purchases have been of high quality and at reasonable prices, such as by providing after-sales support and service. Social media platforms are rapidly becoming more important in conveying independent experiences for products and services because they allow users to interact, such as by rating their recent hotel stays and sharing information about their experiences.

some ProBlems in international Promotion Diverse national environments create varied promotional challenges. For example, over half of China’s population is rural, most are poor, and many lack access to traditional media to view advertisements. Thus, PC makers such as Lenovo and Hewlett Packard promote in rural areas, such as in local markets, by providing variety shows and films to demonstrate their products.36 In rural Nigeria, Kuwait’s Mobile Telecommunications Company first tried direct marketing, but lost its billboards to thefts and found its salespeople facing too many dangers. The company then turned successfully to small shop owners—tailors, retailers, etc.—and established a mini-franchise system with them.37

In many areas, government regulations pose additional barriers, such as in Scandinavia where television cannot broadcast commercials aimed at children. In China, ads cannot interrupt dramas, thus they are all bunched together between shows, which companies claim make the ads less effective. Other countries may put legal constraints on what a company says. For instance, the United States allows pharmaceutical firms to advertise prescription drugs directly to consumers, but European countries do not. Thus, in the former, pharma- ceutical companies describe physical symptoms, such as erectile dysfunction, in television ads and tell viewers to ask their physicians about a particular brand, such as Viagra or Cialis. However, Pfizer’s and Eli Lilly’s European ads simply tell TV viewers, without mentioning their brands, to talk with their physicians about problems.38

Finally, when a product’s price compared to consumer income is high, consumers usually want more time and information before making a decision. In these situations, information is best conveyed in a personal selling situation that fosters two-way communication. Thus, in developing economies MNEs will often use push strategies for more products because of lower incomes.

advertising standardization: Pro and con Standardizing advertising among countries reduces costs, may improve the quality at the local level (because local agencies may lack expertise), prevents internationally mobile consumers from being confused by different images, and speeds the entry of products into different countries.

Push is more likely when

• self-service is not predominant,

• advertising is restricted, • product price is a high

portion of income.

ConCept CheCk

In Chapter 2 (pages 40–41), we discuss the cultural concept of uncertainty avoidance.

Advantages of standardized advertising include

• some cost savings, • better quality at the country

level, • a common image globally, • rapid entry into different

countries.

474 part 6 Managing International Operations

However, globally standardized advertising usually refers to similarity among markets rather than being identical. For example, Red Bull’s ad campaigns are similar in that they focus on sports, but the sports differ among countries.39 Standardization typically involves using the same ad agency globally. By doing this, MNEs such as Colgate and Tambrands can quickly introduce good ideas from one market into others without legal and ethical problems that could arise over agency copying. Other companies, like Procter & Gamble, prefer to use more than one agency to promote competition and to cover one agency’s weak spots by drawing on another’s strong points.

Finally, the issue of standardization in advertising raises problems in a few other areas— namely, translation, legality, and message needs.

Translation Selling in a country with a different language necessitates translation unless the advertiser tries to communicate an aura of foreignness. Because voice dubbing of TV ads creates sound tracks that never quite correspond to lip movements, companies are turning to voice or print overlays of commercials in which actors do not speak.

Another type of advertisement dubbing involves product placement in books, movies, and television shows, especially those that are widely distributed internationally. Because the product may not be available everywhere, it may be replaced for given markets. Spider- Man 2 had Cadbury Schweppes’s Dr. Pepper logo on a refrigerator for U.S. screenings and PepsiCo’s Mirinda logo in Europe.40

On the surface, translating a message would seem easy. However, some messages, particularly plays on words, don’t translate—even between countries that have the same language. Sometimes an acceptable word or direct translation in one place has a nuance that is offensive, misleading, or meaningless in another. An additional issue lies in choosing the language when a country has more than one. For instance, many companies use Creole in Haiti to reach the general population but French to reach the upper class.

Legality The legality of advertisements varies mainly because of diverse national views on consumer and competitive protection, civil rights promotion, standards of morality and behavior, and nationalism. For example, there are products that some societies view as being in sufficiently bad taste that they restrict their advertising.41

In terms of consumer protection, policies differ on the amount of deception permitted and what can be advertised to children. Mexico, for example, limits using TV advertise- ment of products high in sugar content directed at children.42 The United Kingdom and the United States allow direct comparisons with competitive brands, while the Philippines prohibits them. Only a few countries regulate sexism in advertising. Elsewhere, governments restrict ads that might prompt misbehavior or law-breaking (such as promoting automobile speeds that exceed the speed limit), as well as those that show barely clad women.43

Message Needs An advertising theme may not be appropriate everywhere because of country differences in consumers’ product awareness and perception, the people who make the purchasing decision, and what appeals are most important. At one time fewer Italians owned dishwashers than would be expected from Italian income levels because of a belief that buying for the sake of convenience reduces cleanliness; hence, a group of dishwasher manufacturers teamed up to advertise that dishwashers clean better because they use hotter water.44 Because of economic differences, Home Depot promotes its U.S. stores by appealing to hobbyists, whereas in Mexico it promotes the cost savings for do-it-yourselfers.45

The reaction to messages may also vary. Leo Burnett Worldwide produced a public service ad to promote breast exams that showed an attractive woman being admired in a low-cut sundress. The voice-over message said, “If only women paid as much attention to their breasts as men do . . . ” Japanese viewers found this a humorous way to draw attention to breast cancer, whereas French viewers found it offensive because cancer should not be viewed humorously.46 Given the increase in television and Internet transmissions that reach audiences in multiple countries, advertisers must find common themes and messages that will appeal to potential consumers everywhere their ads are viewed.

ConCept CheCk

In Chapter 2 (pages 42–43), we emphasize the problems in translating messages and the role of nonverbal communica- tions (pages 43–45) in compre- hending messages.

Differences in nations’ values have led to advertising differ- ences among them.

Effective promotional messages may be different among countries because of

• cultural factors, • economic levels of target

markets, • stages of products in their

life cycles.

Chapter 17 Marketing Globally 475

Countries may differ in either the shape or the length of a product’s life cycle. Thus, a product facing declining sales in one country may have growing or sustained sales in another. Consider cars: They are a mature product in Western Europe, in the late growth stage in South Korea, and in the early growth stage in India. At the mature stage, auto- mobile companies must emphasize characteristics that encourage people to replace their still-functional cars, such as lifestyle, speed, and accessories. In the early growth stage, they need to appeal to first-time buyers who worry more about cost, so they emphasize fuel con- sumption and price.47

the internet Estimates vary widely on the current and future number of worldwide online households and the electronic commerce generated through online sales, but Internet ads may now account for about a quarter of advertising business.48 The Internet has done more in recent years than any other innovation to alter international promotion. Through e-commerce, customers worldwide can quickly compare prices from different distributors, which drives prices down. Through the growing use of social media, they can obtain better information to compare the quality and reliability of products and distribu- tors. The main characteristics of global online shoppers are they want convenience, they use e-mail and the Internet heavily, and they have favorable attitudes toward direct mar- keting and advertising.49

Opportunities There are certainly many e-commerce success stories. These include pro- motion for direct sales as well as information to pre-sell and inform shoppers where they may buy the products. One such success story is the New Zealand prefab housing com- pany Tristyle International, for which about 95 percent of sales are export and 40 percent are through the Internet.50 Another is Lee Hung Fat Garment Factory of Hong Kong and Bangladesh. It flashes pictures of merchandise samples to apparel companies abroad that tinker with and return them so that it produces exactly what they want. For some products and services, such as airline tickets, hotel space, and music, the Internet has largely replaced traditional sales methods. But even here, companies may need to adapt to country differ- ences, such as providing access through various languages.51

Problems Global Internet sales are not without glitches. A company that wants to reach global markets may need to supplement its Internet sales with other means of promotion and distribution, which can be very expensive. Further, a switch to Internet sales may risk upsetting existing distributors and, if unsuccessful, make future sales more difficult.52

On the Internet, an MNE cannot as easily differentiate its marketing program for each country in which it sells even if it channels customers to local sites. In many instances, the same web ads and prices reach customers everywhere, even though different appeals and prices for different countries might yield more sales and profits. Making direct sales over the Internet requires expeditious delivery, which may require warehouses and service facili- ties abroad. Finally, the MNE’s Internet ads and prices must comply with the laws of each country of sales. This is problematic because of the web’s global reach. Clearly, although the Internet creates opportunities for companies to sell internationally, it also creates chal- lenges for them.

international Branding strategies A brand is an identifying mark for products or services. If it is legally registered, it is a trade- mark. A brand gives a product or service instant recognition and may save promotional costs. Because companies have spent heavily in the past to create brand awareness, many brands are worth billions of dollars and are the most valuable assets firms possess.53 From a consumer standpoint, a brand conveys a perception of whether firms will deliver what they promise; however, the importance is more crucial in countries with strong cultural character- istics of uncertainty avoidance.54

The growth in products’ online availability through the Internet creates new promotional and distributional opportunities and challenges.

476 part 6 Managing International Operations

Keep in mind that a company may use the same brand globally while altering the brand image for different markets. For example, individualistic cultures offer greater advantages in creating an image of innovativeness than collectivist cultures. However, within the latter, images of social responsibility apparently contribute more to brand commitment than in the former.55

gloBal Brand Versus local Brands International marketers must decide whether to adopt a global brand or use different brands for different countries.

advantages of a global Brand Some companies, such as Apple, use the same brand and logo for most of their products around the world. This helps develop a global image, espe- cially for customers who travel internationally. In addition, there is evidence that the use of global brands helps identify companies as global players, which many consumers view more favorably.56 Other companies, such as Nestlé, associate many of their products under the same family of brands, such as Nestea and Nescafé, to share the positive perception of the Nestlé name.

some Problems with global Brands A number of problems are inherent in using global brands.

Language A brand name may carry a different association in another language. GM renamed its Buick LaCrosse to Allure in Canada after discovering, through a pre-entry focus group, that the word was slang in Quebec for masturbation.57 Coca-Cola uses global brand- ing wherever possible, but given that the word diet in Diet Coke had a connotation of illness in Germany and Italy, the brand became Coca-Cola Light outside the United States.

Pronunciation presents other problems, since a foreign language may lack some of the sounds of a brand name, or give it a different meaning. Marcel Bich dropped the h from his name when branding Bic pens because of fearing mispronunciation in English. Microsoft’s search engine Bing became Biying in China so that it sounded like the word for “seek and ye shall find” instead of “illness.” IKEA, which uses Scandinavian names for its products, hired Thai speakers to modify its catalogue to prevent misinterpretation of names when pro- nounced in Thai.58

When alphabets use pictograms, such as in China, brands should both look and sound appealing. Thus, MNEs take great pains to ensure not only that the translation of their names is pronounced roughly the same in Mandarin or Cantonese Chinese as elsewhere but also that the brand name is meaningful in pictograms. Coca-Cola is pronounced Ke-kou-ke-le in Mandarin Chinese and means “tasty” and “fun.” Tide became Tai-zi in Mandarin, which means “gets rid of dirt.”59 Companies seek names and prices using sym- bols considered lucky in China, such as one with eight strokes in it and displayed in red rather than blue.60

Brand Acquisition Much international expansion is through acquisitions of companies with established brands, such as Bimbo’s Sara Lee of various Brazilian coffee roasters. Although Sara Lee became the coffee-market leader in Brazil, stretching the promotional budget over many brands has been challenging.61 Overall, the proportion of local to global brands is declining; however, companies lose the recognition and goodwill of strong local brands if they displace them.62 Similarly, having a combination of global and local brands that appeal to different segments can sometimes be advantageous, such as those used for Anheuser-Busch InBev’s beers.63

Country-of-Origin Images Consumers have limited knowledge of the nationality of most brands, and they often misclassify the production origins.64 Such confusion is compounded

Using the same brand name globally

• helps develop a common image,

• may increase consumers’ demand if they think global products are better,

• is hampered by language differences,

• has a drawback in the case of acquisitions.

Images of products are affected by where they are made.

Chapter 17 Marketing Globally 477

with the increased mixed source of the components that make up products. In addition, both the country of origin and the brand images interact so that a positive brand image can help overcome a negative country-of-origin image.65

Nevertheless, a minority of consumers, although an important segment, are influenced by their emotional affinity toward certain countries; their affinity affects their images of cer- tain countries and buying decisions based on where products are made.66

But influences are complex, depending on such factors as type of product, the economic level of and nearness of the producing country to the consumers, consumers’ national cul- ture (such as effects of individualism versus collectivism), and consumers personalities (such as how materialistic they are).67 Despite the complexity, companies may play up positive and play down negative country-of-origin images. For example, because many Japanese believe that clothing made abroad is superior to clothing made in Japan, Burberry has created separate labels for its products made in Japan and the United Kingdom. South African wineries, La Motte and Leopard’s Leap, have a wine brand, L’Huguenot, for the Chinese market because the French-sounding name is perceived positively by Chinese consumers.68

Still, images can change. For many years various Korean firms sold abroad only under private labels or in contract with foreign companies. On the one hand, some of these, such as Samsung, now emphasize their own trade names and Korean product quality. On the other hand, the Korean LG Group, best known for its Gold Star brand, has introduced a line of high-end appliances with a European-sounding name, LG Tromm.69

Locational Origin of Names One ongoing international legal debate concerns product names associated with location. The EU protects the names of many European products based on location names, such as Roquefort and Feta cheeses, Parma ham, and Chianti wine.70 It has also pushed for protection against the foreign use of regulated names associ- ated with wines, such as clos, chateau, tawny, noble, ruby, and vintage.71

Generic and Near-Generic Names Companies want their brands to become household words, but not so much that they become generic, a situation whereby competitors can use the names to call their products. In the United States, the brand names Xerox and Kleenex are nearly synonymous with copiers and facial tissue, but they have nevertheless remained proprietary brands. Some other names that were once proprietary—cellophane, linoleum, Cornish hens—are now generic.

In this context, companies sometimes face differences among countries that may either stimulate or frustrate their sales. For example, aspirin and Swiss Army knives are proprietary names in Europe but generic in the United States—a situation that impairs European export sales of those products to the United States, since U.S. companies can produce them.

When the country of origin affects consumers’ opinion of a product,

• a positive brand image may help overcome a negative country-of-origin image,

• these opinions can change over time.

If a brand name is used for a class of product, a company may lose its trademark.

Yes MNEs advertise, promote, and sell products in developing markets

that their home countries have banned. If they’ve made a decision not to sell these products domestically because of their dangers or ethical implications, they have a moral obligation to prevent the same consequences abroad. This statement may smack of extraterritoriality, but let’s face it: Too many consumers in developing countries lack the education and reliable information to make intelligent deci- sions about products, and/or they are saddled with corrupt

political leaders who don’t look after their interests. We must ensure that they spend on upright needs rather than on wants engendered by MNEs’ clever promotion programs. If developed countries don’t regulate to protect consumers in developing countries, who will?

Companies also export products that don’t meet qual- ity standards at home or are potentially dangerous. Take DDT: It’s so dangerous to the environment that all devel- oped countries banned its use, but exports to developing countries have continued. Or consider battery recycling:

Should Home Governments Regulate Their Companies’ Marketing in Developing Countries?

Point Point

478 part 6 Managing International Operations

no The answer here is educa- tion rather than limiting people’s

choices by regulating MNEs. In fact, there are many ex- amples of behavior change in both consumers and govern- ments when they learn the facts. For example, antismoking radio and television ads in a three-country African study showed a decrease in propensity to smoke.77

Your argument that products banned at home should not be sold abroad assumes that the home government knows best. Even among developed countries, there are different scientific opinions. For example, the EU produces many pesticides and chemicals that are banned for EU usage, but are allowed to be used in the United States.78 Further, differ- ences may reflect variations in a difference in morals rather than a problem of creating physical danger. For instance, some countries have banned the sale of the morning-after pill RU-486 on moral grounds. But to ban sales in other countries that accept a different morality would smack of cultural imperialism.

Conditions between rich and poor countries are some- times so different that they need different regulations. Take your example of DDT exports. Developing countries are aware of DDT’s adverse long-term effect on the environ- ment, but in the short term many of them face mosquito cri-

ses that cause Zika, dengue, chikungunya, and malaria.79 When South Africa was persuaded to

ban the use of DDT and turned instead to a different pesti- cide, the number of new malaria cases tripled in four years; renewing DDT spraying brought that number down again.80 Until there is a better solution for mosquito controls, DDT bans will do more harm than good. Certainly, if one govern- ment has found a product dangerous, it should pass on this information to other governments; in terms of DDT and toxic materials exports, this is already being done.

Yes, tobacco companies are promoting more heavily in developing countries. Keep in mind, though, that a good part of that promotion is for smokeless tobacco products, which are safer than cigarettes and can help smokers stop.81 In fact, Philip Morris is developing a product that will produce an aerosol without the combustion that causes most harm.82 Nevertheless, if MNEs’ home governments were to limit their companies’ sales or promotion of tobacco abroad, develop- ing countries’ citizens would still be able to buy cigarettes. Many developing countries have indigenous tobacco com- panies, some of which are even government-owned, such as the China National Tobacco Company.

How far can we go to try to protect people? Obesity, considered a growing health problem in the developed

Counterpoint

Should Home Governments Regulate Their Companies’ Marketing in Developing Countries?

Counterpoint

Developed countries have pretty much abandoned that business because of strict antipollution requirements to pre- vent lead poisoning, which shows up only after slow, cumu- lative ingestion through the years. So now companies export the batteries to developing countries that have either weak or weakly enforced pollution laws.72

With the World Health Organization (WHO) estimating that tobacco is the leading cause of preventable death in the world, we have also attempted to limit tobacco use through warning labels and ads, restrictions on sales to minors, and smoking bans in certain public areas. While tobacco use has been declining in developed countries, it is burgeoning in developing ones, especially those in Africa, where tobacco companies have increased their promotions.73

MNEs also pay too little attention to the needs of con- sumers in developing markets. Instead, they primarily create products suitable to the needs of wealthier consumers who can afford them, but these products are often superfluous for low-income consumers, to whom MNEs introduce and pro- mote them heavily. Thus, the poor end up buying products they don’t need instead of spending their money on nutri- tional and health items. Bottled water, sold mainly in plastic bottles by such companies as Nestlé, Danone, Coca-Cola,

and PepsiCo, is an example. It is often no better than tap water (in fact, it often is tap water), but it sells for 10,000 times more in bottles that are thrown out and take 1,000 years to biodegrade.

Finally, MNEs spend little to make products to fit the needs of developing countries. Consider that little of the global health research budget is spent on diseases that account for most of the global disease burden—mainly those that largely bypass developed countries.74 Instead of spending heavily on life-threatening illnesses like malaria, Chagas disease, and sleeping sickness, they spend on lifestyle treatments, such as penile erectile dysfunction and baldness. Although Ebola had long-plagued African countries, pharmaceutical compa- nies spent little to develop a vaccine until there was danger of its spread to developed countries.75 The U.S. Food and Drug Administration (FDA) did institute an incentive in 2008—faster approval of potential “blockbuster drugs”—for pharmaceuti- cal companies that research previously neglected diseases. However, there is skepticism about whether faster approval is enough of an incentive.76 Surely we can find the regulatory means to force companies to meet real needs in the develop- ing world rather than concentrating on selling dangerous and superfluous products there.

Chapter 17 Marketing Globally 479

distriBution Practices and comPlications A company will not likely reach its sales potential unless its products are conveniently avail- able. Distribution is the course—physical path or legal title—that goods take between pro- duction and consumption. This section discusses distributional differences and conditions within foreign countries.

deciding Whether to standardize Distribution is one of the most difficult marketing functions to standardize globally. Each country has its own distribution system, which is difficult to modify because of its intertwine- ment with the country’s cultural, economic, and legal environments. In fact, most companies take a country’s distribution system as a given and try to adapt to it. Although there are some large multinational distributors, such as Arrow and Grainger, wholesalers and retailers have generally lagged manufacturers and service companies’ entries into foreign markets because of difficulty in breaking into these systems. Nevertheless, many retailers have more recently moved successfully abroad.

Some factors that influence countries’ retail distribution include citizens’ attitudes toward owning their own store, the cost of paying retail workers, legislation restricting store sizes and operating hours, laws on chain stores and individually owned stores, the trust owners have in employees, the efficacy of delivery systems, the quality of the infrastructure sys- tem, and the financial ability to carry large inventories. An example should illustrate how widespread differences are. Compare grocery distribution in Hong Kong with the United States: Hong Kong food stores carry a higher proportion of fresh goods, are smaller, sell less per customer, and are closer to each other, which means that companies selling canned, boxed, or frozen foods in Hong Kong encounter less demand per store, have to make smaller deliveries, and have a harder time fighting for shelf space.

At the same time, a company’s system of distribution may give it strategic advantages not easily copied by competitors, such as Avon’s selling directly through independent reps and Amazon.com’s through Internet sales. Even these companies have had to adjust to national nuances. For instance, Avon does a thriving mail-order business in Japan because of the popularity of that distribution, has beauty counters in China because of regulations on house-to-house sales, has franchise centers in the Philippines because of infrastructure inef- ficiencies, and has beauty centers in Argentina because many customers want services when they purchase cosmetics.

Because distribution reflects different country environments,

• it may vary substantially among countries,

• it is difficult to change.

world, is being attacked through education—the same way we should attack problems in developing countries. I can’t imagine a widespread rationing or banning of sugars, fats, and carbohydrates. Certainly, products such as soft drinks and bottled water seem superfluous when people are ill- nourished and in poor health. But the lack of access to sani- tary water is one of the world’s biggest health problems, which the sale of soft drinks and bottled water are helping in the short term. In a longer term, Coca-Cola is working to distribute small scale purifying systems to mitigate the problem.83 Moreover, there is no clear-cut means of draw- ing a line between people who can and can’t afford these so-called superfluous products.

Companies do alter products to fit the needs of poor people—everything from less expensive packages to less

expensive products. The pharmaceutical firms you criticized for not attacking low-income health needs spend heavily to find solutions to diseases that attack all people, such as cancer and diabetes. In fact, they have seen, and expect to see, huge prescription drug growth in emerging markets.84 However, they must recoup their expenses if they are to survive, so they concentrate on drugs for which they can be paid. Governmental research centers and nonprofit foun- dations are better candidates for solving the developing countries’ health problems. Some are working jointly with pharmaceutical firms to find solutions, while the National Institutes of Health (NIH) in the United States has instituted a program to find treatments for some of the 6,800 dis- eases for which there is likely insufficient revenue to recoup research expenditures.85

480 part 6 Managing International Operations

internalization or not? Should companies handle their own distribution? Or should they contract other companies to do it for them?

sales Volume and cost When sales volume is low, a company usually must rely on exter- nal distributors to be more economical. As sales grow, it may handle some distribution itself to gain more control. However, such internalization may still be difficult for small firms that lack necessary resources.

Nevertheless, companies may limit early distribution costs if they are able to sell region- ally before moving nationally. Many products and markets lend themselves to this sort of gradual development. For example, many foreign companies enter the Chinese market by first going to Beijing, Shanghai, and Guanghou, then to provincial capitals, then to other large cities, and finally to smaller cities. Often, geographic barriers and poor internal trans- portation systems divide countries into very distinct markets. In fact, within developing countries most wealth and potential sales may lie in a few large metropolitan areas.

Factors Favoring internalization Circumstances conducive to internalization include not only high sales volume but also the following factors:

• When a product has the characteristic of high price, high technology, or the need for complex after-sales servicing (such as aircraft), the company will probably have to deal directly with the buyer, but may simultaneously use a distributor to identify sales leads.

• When the company deals with global customers, especially business-to-business (such as an auto-parts manufacturer selling original equipment to the same automakers in multiple countries), sales may go directly to the global customer.

• When the company’s main competitive advantage is its distribution methods, it may control distribution abroad, such as Avon’s direct selling through independent representatives.

distriBution PartnershiP If a company wishes to collaborate with a distributor abroad, it can usually compare a number of potential companies. While trying to find the best distributors, it must also con- vince them to handle its products.

Which distributors are Best Qualified? The choice of international distributor depends on the same criteria as for domestic options. These criteria include the distribu- tor’s financial strength, its good connections, the extent of its other business commitments, its current status (e.g., personnel, facilities, and equipment), and its reputation as an honest performer.

Promoting to Potential distributors Companies must evaluate potential distributors, but distributors must choose which companies and products to represent and emphasize. Wholesalers and retailers alike have limited storage facilities, display space, money for inventories, and transportation and personnel to move and sell merchandise, so they try to carry only those products with the greatest profit potential.

In some cases, distributors are tied into exclusive arrangements with manufacturers that impede new competitive entries. This is true in Japan, where many manufacturers have arrangements with thousands of distributors to sell only their products.

Any company that is new to a country and wants to introduce similar products to those that competitors are already selling may meet difficulty in finding distributors. Additionally, even established companies can find distribution difficult for new products, although they have the dual advantage of being known and being able to offer existing profitable lines only if distributors accept the new unproven goods. Companies may need to offer effective

A company may enter a market gradually by limiting geographic coverage.

Distribution may be handled internally

• when companies have sufficient resources,

• when there is a need to deal directly with the customer because of the product’s nature,

• when the customer is global, • when the distribution form is

a competitive advantage.

Distributors choose which companies and products to handle. Companies

• may need to give incentives, • may use successful products

as bait for new ones, • must convince distributors

that product and company are viable.

Chapter 17 Marketing Globally 481

handling incentives (higher profit margins, after-sales servicing, promotional support, and so on). In the end, however, incentives will be of little use unless the distributors believe the company is reliable and its products viable.

distriBution challenges and oPPortunities Although international distribution involves many challenges and opportunities, the follow- ing discussion highlights two: the need for after-sales service, and some often overlooked cost advantages and disadvantages.

how reliable is after-sales service? Consumers are reluctant to buy products that may require future replacement parts and service unless they feel sure that these will be readily available in good quality and at reasonable prices. This reluctance is especially keen for imported products because of concerns that distance and customs clearance will delay needed replacement parts. For fairly mature products, there are usually multiple service companies to which consumers can turn in case of problems. However, for products en- compassing new technology, especially complex and expensive products, producers may face the downside of having to invest in or develop service centers. Nevertheless, the upside is that earnings from sales of parts and after-sales service may sometimes exceed those of the original product.

The question of after-sales service is especially important for the growing number of technologically oriented entrepreneurial companies from developing countries. Many face multiple problems in selling abroad because they are young, small, fairly unknown, perhaps suffering negative country-of-origin effects, and often assumed to be laggards in technologi- cal development.86

hidden distribution costs and gains Several factors often contribute to country differ- ences in distribution costs.

Infrastructure Conditions Where roads and warehousing facilities are in bad condi- tion, getting goods to consumers quickly, cheaply, and with minimum damage or loss is problematic. For example, Nigeria has no rail links to its ports, has fallen behind in road construction, and has poor connections between big and small cities.87

Levels in the Distribution System Where there are multitiered wholesalers that sell to each other (e.g., national wholesalers sell to regional ones, which sell to local ones, and so on) before the product reaches the retail level, each intermediary adds a markup and prices escalate. For example, Japan, though changing rapidly, has many more levels of distribution than, say, France and the United States.

Retail Inefficiencies Where low labor costs and owners’ distrust of nonfamily members cause counter- rather than self-service merchandise examination, there is less productivity in serving customers. (In fact, some retailers require payment to a cashier before customers receive the merchandise.) On the one hand, the additional personnel add to retailing costs, and the added time people must be in the store means fewer people being served in the given space. On the other hand, most of these retailers tend to be small and dispersed near clients, which reduces the time, cost, and effort for customers to shop.88 In addition, many retailers (mainly in developing economies) lack equipment that improves the efficiency of handling customers and reports, such as electronic scanners and payment systems linked to inventory-control records and to credit-card companies.

Inventory Stock-Outs Costs rise where governments restrict the ability of some retailers from using more productive distribution practices. For example, France, Germany, and Japan have laws protecting small retailers, effectively limiting the efficiencies large retail establish- ments can bring to sales. Most countries have patchwork systems that limit days or hours of

Confidence in securing replacement parts and service are important for sales, espe- cially for imported products.

Distribution costs increase when there is

• poor infrastructure, • many levels in the

distribution system, • inefficient retail distribution, • inadequate carrying of

inventory by retailers.

ConCept CheCk

In Chapter 2 (pages 38 and 41), we describe societies in which people tend to distrust people outside their families.

482 part 6 Managing International Operations

operations because of religious observances or protection of employees from having to work late at night or on weekends. Although these systems serve social purposes, they limit retail- ers from covering the fixed cost of their space over more hours, and they usually pass costs on to consumers.

Where most retail establishments are small, there is little space to store inventory. Wholesalers must incur the cost of making small deliveries to many more establishments, sometimes visiting each retailer more frequently because of stock outages. However, these latter costs may be diminished through labor and transport cost savings that result from low-paid delivery personnel who may carry small quantities of merchandise on bicycles. (The following photo shows delivery by foot and bicycle in Vietnam.) Further, the retailers themselves incur lower costs because their inventory-carrying costs are low compared to sales.89

gaP analysis: a tool For helPing to manage the international marketing mix Although every element in the marketing mix—product, price, promotion, brand, and distribution—is important, the relative importance of one versus another may vary from product to product, place to place, and over time.

A company should calculate how well it is doing in each country, how it might do better, and how to gain synergy among marketing activities in different countries. One such tool is gap analysis, whereby a company estimates potential sales for a given type of product

Emphasis in the marketing mix

• should be on the functions that account for major lost sales,

• may differ by country, • may combine needs from

different countries.

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Chapter 17 Marketing Globally 483

and compares how emphasis on different marketing mix elements can better help it serve prospective customers.90

The difference between total market potential and a company’s sales is due to several types of gaps:

• Usage—collectively, all competitors sell less than the market potential • Product line—the company lacks some product variations • Distribution—the company misses coverage by geography or type of outlet • Competitive—competitors’ sales are not explained by product-line and distribution gaps

Figure 17.3 is a bar showing these four types of gaps. To construct such a bar, a company first needs to estimate the potential demand for all competitors in the country for a relevant period—say, for the next year or the next five years. This figure gives the height of the bar. Second, a company needs to estimate current sales by all competitors, which is point A. The space between point A and the top of the bar is a usage gap, meaning that this is the growth potential for all competitors in the market for the relevant period. Third, a company needs to plot its own current sales of the product, point B.

Finally, the company divides the difference between points A and B into types of gaps— distribution, product line, and competitive—based on its estimate of why sales are lost to competitors.

usage gaPs Companies may have different-sized gaps in different markets. Large chocolate companies, for instance, have altered their marketing programs among countries because of this. In some markets, they have found less chocolate being consumed than expected on the basis of population and income levels. This has been the case in India, which has per capita con- sumption of less than one percent of that in Germany. Although low incomes and the inabil- ity to use certain animal fats (thus affecting taste) contribute to India’s low consumption, it

Usage gap

Potential sales for all companiesSales lost

to competitorsActual sales for all companies

Competitive gap

Product line gap

Distribution gap

Company’s current sales

Figure 17.3 gap Analysis Why aren’t sales as high as they could be? That’s the question asked by a company’s managers when they undertake gap analysis. The arrow at the top represents total sales potential for all competitors during a given period. The arrow at A indicates actual sales. Notice that there’s a gap between the product’s potential and actual sales—the so-called usage gap. But there are other gaps as well. The arrow bracketing points A and B, for example, designates all sales lost by the company to its competitors—the gap, that is, between what the company did sell and what it could have sold if, for a variety of reasons, it hadn’t lost so many sales to competitors. Finally, remember that in the real world, gap sizes will fluctuate.

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has been the world’s fastest growth market in recent years. Why? Chocolate companies have developed small affordable chocolates to reach the masses, and they have promoted choco- late as a more hygienic and longer-lasting confection than alternative products.91 Industry specialists estimate that in many developing economies, much of the population has never even tasted chocolate, leading companies to promote sales in those areas for chocolate in general.92

The U.S. market shows another type of usage gap. Nearly everyone in this market has tried most chocolate products, but per capita consumption has fallen because of concern about weight. Further, U.S. per capita consumption is much lower than in most European countries. Mars has concluded that the main reason for the different consump- tion is cultural (i.e., U.S. consumers usually take wine or flowers to dinner hosts, whereas Europeans usually bring chocolates). To counter this, Mars has a campaign of “Share your favorites with your favorites,” to promote taking chocolate to friends and joining with them to eat chocolate at movies. Earlier, Nestlé promoted chocolate as an energy source for the sports-minded to build U.S. demand for chocolate. However, building general consumption is most useful to the market leader. With U.S. chocolate sales below those of Mars and Hershey, Nestlé actually benefited its competitors during its short-lived campaign.

Product-line gaPs Chocolate companies have also found that they have product-line gaps. Several have recently added sugar-free, high cocoa content, and fair-traded chocolate products to their repertoire. In addition, they have added such ingredients as bacon, chia, green tea, and qui- noa to some of their offerings.93 Godiva has introduced specialty products in China to com- pete with local companies that sell theme products for the Chinese Zodiac year and for the Mid-Autumn Festival.94

distriBution and comPetitiVe gaPs A company’s products may be sold in too few places, creating a gap in distribution. To combat this, Ferrero Rocher has recently emphasized product placement in more main- stream outlets. There also may be competitive gaps—sales by competitors that cannot be explained by differences between product lines and distribution. That is, competitors are selling more because of their prices, advertising campaigns, goodwill, or any of a host of other factors. In markets where per capita chocolate consumption is high, companies exert most of their efforts in gaining sales at the expense of competitors. For instance, Switzerland has the world’s highest per capita consumption of chocolate. In that mar- ket, such competitors as Migros, Lindt, and Nestlé’s Cailler go head to head in creating images of better quality.95

aggregating countries’ Programs Although gap analysis prioritizes elements in the marketing mix within countries, it is also possible to use the tool by aggregating needs among countries. Let’s say the product-line gap is too small in a single country to justify the expense of developing a specific new product, such as a heat-resistant chocolate bar. Nevertheless, the combined market potential among several countries for this product may justify the product- and promotional-development costs. Thus, comparing the importance of the different elements within the marketing mix may help managers improve country-level performance along with enhancing synergy among the countries where they operate.

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Recall the discussion on how both demographics and psychographics affect market segmentation. How both of these will unfold in future years will likely af- fect international marketing. There are, of course, many more global trends that may affect future in- ternational marketing than we can possibly highlight (e.g., aging population, growing obesity, increasing use of social media), thus the following discussion highlights only one key demographic and one key psychographic area.

income Demographics

Most projections are that disparities between the “haves” and “have-nots” will grow in the foreseeable future, both within and among countries. Furthermore, because haves will be more educated and more connected to the Internet, they will be better able to search globally for lower prices. Therefore, glob- ally, the disparate purchasing power of the afflu- ent segment will be even more than indicated by incomes.96

As discretionary income increases, some luxury products will become more commonplace (partly because it will take less work time to purchase them), and seemingly dissimilar products and ser- vices (such as cars, travel, jewelry, and art) will compete with each other for the same discretionary spending. Japan was the premier importer of luxury clothing during the 1980s and early 1990s, but competition from an array of other luxury services, such as spas and expensive restaurants, eroded those imports.97 In addition, many Japanese con- sumers have moved down-market during Japan’s stagnated economic growth, and there is specula- tion that they may not move up-market again when their economy improves. Nevertheless, because of better communications and rising educational levels of the haves, they will want more choices. However, market segments may not fall primar- ily along national lines. Rather, companies may depend more on identifying consumer niches that cut across country lines.

At the other extreme, because of the large num- ber of poor people with little disposable income, companies will have opportunities to develop low- cost standardized products to fit the needs of the have-nots. In reality, low-income households

collectively have considerable purchasing power and will likely spend mainly on housing, food, health care, education, communications, finance charges, and consumer goods.98 Thus, companies will have conflicting opportunities: develop luxury to serve the haves and cut costs to serve the have-nots. Some producers are already responding to this mar- ket dichotomy. Frito-Lay calls it the “bifurcation” of the snack market and is emphasizing new products for the high and low ends, but not the middle.99 The president of the Wine Academy of Spain pointed out this market split for wine sales in China. He indi- cated that there is no middle market; rather there is a high-end where people spend thousands of dollars per bottle as an investment or as an ostentatious drink and a low-end where people spend no more than the equivalent of a few dollars per bottle while buying in large containers.100 Despite the growing proportions of haves and have-nots, demographers project that the actual numbers of people moving out of poverty levels and into middle-income levels will increase. This is largely because of population and income growth in a few low-income countries, especially in Asia. Such a shift raises questions: Will sales growth in poorer countries mainly be for products that are mature in industrial countries, such as many consumer electronics and household appliances? Or, will consumers in poorer countries leapfrog to newer products as they have done by bypassing landline phones and going directly to cel- lular ones?

Will national Markets Become passé?

In addition to demographic differences, especially re- garding income, attitudinal differences affect demand in general as well as for particular types of products and services. Although global communications are reaching far-flung populations, different people react differently to them. At least three—not mutually ex- clusive—types of personality traits interact and affect how potential consumers react.101 They exist in all countries (thus creating a segment that cuts across the globe), but the portion of people who are strongly influenced by one versus the other presently varies by country. How these factors evolve will likely have a profound influence on the future of international marketing.

Looking to the Future How Might International Market Segmentation Evolve?

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The first of the traits is materialism, which refers to the importance of acquiring possessions as a means of self-satisfaction and happiness, as well as for the appearance of success. There is evidence of this trait’s growth and spread. However, there is also evi- dence that people who have always been affluent may exhibit lower materialistic behaviors than those who have recently become affluent, the so-called nouveau riche. The second of these traits is cosmopolitanism,

which refers to openness to the world. While there is debate on whether this is a learned or an inborn trait, some of the characteristics include comparing oneself with what is in the whole world rather than with what is local. Cosmopolitanists may actually seek out for- eign products and services. The third of these traits is consumer ethnocentrism, which refers to preference for local to global, such as seeking out local alterna- tives when buying products and services. ■

Case

In 1932, U.S. President Franklin D. Roosevelt referred to an impoverished person as “the forgotten man at the bottom [base] of the economic pyramid.” Later, the term—short- ened to “BoP”—became business jargon after publication in 2010 of The Fortune at the Bottom of the Pyramid.

Few places have more impoverished people than Bangla- desh. With 169 million people in 2015, its per capita GDP at PPP was $3,581, with 43.3 percent of the population below the international poverty line of $1.25 per day. Thus, Ban- gladesh has conditions that correlate closely with poverty: an adult illiteracy rate of 42.3 percent, a high incidence of infectious diseases, a poor infrastructure, high underemploy- ment, crowded conditions (imagine half the U.S. population squeezed into the state of Iowa), and more than its share of natural disasters—especially periodic flooding—that impede development. In the face of these ominous conditions, two companies—the Grameen Foundation from Bangladesh and Groupe Danone from France—formed a joint venture (JV) social business to serve Bangladesh’s BoP.

What Is a Social Business? Mohammad Yunus, founder of the Grameen Bank in 1974 and winner of the Nobel Peace Prize in 2006, originated the social business concept, which aims to generate social benefit by creating a sustainable business. The Grameen Danone Foods JV was established to make a profit but pay no dividends. All earnings are reinvested, except that

Grameen Danone Foods in Bangladesh102

Professors Jon Jungbien Moon and John D. Daniels

investors may recoup their original capital input. Unlike NGOs, charities, and not-for-profit organizations, a social business must sustain itself by earning profits competitively rather than receiving new contributions to carry on.

The Grameen Bank and Foundation The Grameen Bank (GB) began when Yunus lent $27 to a group of indigent villagers who repaid the money even though he had required no collateral from them. This small beginning, contrary to Bangladeshi bank practices, led to GB’s micro- financing program. It has competed primarily with usurious money lenders who charge as much as 10 percent interest per day. GB’s typical rate of 20 percent per year may sound high, but Bangladesh has had an inflation rate of nearly 9 per- cent, and GB supports many noninterest loans as well. Some banks outside Bangladesh, such as Citigroup and Deutsche Bank, have since used GB’s example as a model.

Before GB, hardly any Bangladeshi loans went to women, and Yunus had to convince religious opposition that the Prophet Muhammad would have supported what he was doing. Today, about 97 percent of GB’s loans go to women, and audits show a repayment rate of 98 percent. (Borrowers must repay a loan in order to get a new one.) GB uses repayments and interest to make additional loans and to support the Grameen Foundation’s poverty-fighting proj- ects. Its loans, which in 2015 came to almost $1.18 billion, have included initial financing for street vendors and construc- tion of more than 600,000 houses. It provides more than

Chapter 17 Marketing Globally 487

20,000 student loans and 50,000 scholarships per year. It has given noninterest loans to more than 70,000 beggars so they can sell trinkets during their house-to-house begging. The Foundation’s activities have expanded into a variety of businesses, such as telephone service, solar power genera- tion, and health care. The above photo shows a Grameen bank member collecting money from borrowers.

Groupe Danone France’s largest food company, Groupe Danone (spelled “Dannon” for the U.S. market) operates in four product divisions: dairy (world’s largest, with Danone being almost a generic word for yogurt); bottled water (ranked second globally, including such brands as Evian and Volvic); baby food (second globally under the Blédine brand); and medical nutrition (largest in Europe). It operates worldwide and had 2015 sales of €22.4 billion ($25.2 billion). Before its JV with Grameen, it had no Bangladeshi operations. In fact, it aimed most of its products, such as its Activia and Actimel brands of yogurt, at higher-end consumers.

Why Invest in a Social Business? Why would Danone, or anyone, want to invest in an opera- tion that yields them no dividends or capital gains? Yunus contends that people are multidimensional and thus may desire more than economic gains for themselves. He points to business leaders (e.g., Carnegie, Gates, Rockefeller) who turned their attention to philanthropy after amassing large fortunes. Danone’s JV participation fits this multidimen- sional vision. In fact, it has a history of socially responsible

behavior, with a corporate mission “to bring health through food to as many people as possible.” Nevertheless, Danone must generate profits, and its management must answer to shareholders. The Bangladeshi JV could offer several poten- tial economic advantages.

Maturing of Traditional Markets The demand for Danone’s products has been maturing in wealthier countries, which have been Danone’s traditional markets. Hence, its management has been shifting more emphasis to poorer countries. Between 1999 and 2010, the share of its sales coming from LDCs increased from 6 percent to 49 percent. Yet, even there its sales have centered on affluent segments, about which its chairman, Frank Riboud, said, “It would be crazy to think only about the peak of the pyramid.” Thus, Bangladesh could serve as a laboratory for learning about customers and ways of operating at the BoP.

Promoting LDC Growth Critics complain that MNEs contribute to economic under- development by pushing poor consumers to purchase superfluous products instead of nutritious food. In contrast, Danone’s products are all healthful and sanitary. Although one company’s successful marketing of such products is not likely to have a significant impact on development, it is a potential catalyst, which perhaps also leads to favorable publicity. Further, as BoP consumers move upward eco- nomically, they will have more to spend on other Danone products and may favor them because of their earlier expe-

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rience. Riboud said, “When poverty is on the rise, my own growth prospects shrink. [This] means that combating pov- erty is good for my business.”

Building Sales and Loyalty Abroad Being perceived as socially responsible may improve busi- ness performance in various ways. However, there are an almost infinite number of competing ways to be socially responsible. The amount Danone invested in the JV was $500,000, a small outlay for a company of that size, and Danone stood to get the money back if the operation became sufficiently profitable. Moreover, the fact that it would become one of the first major corporations to invest in a social business could generate free positive publicity globally.

Preceding the Bangladeshi JV At a 2005 lunch in Paris, Riboud asked Yunus what Danone might do to help the poor. When Yunus explained the social business concept, Riboud immediately said, “Let’s do it,” and the two shook hands on setting up their JV. Although this JV is one of the first social businesses established in partnership with a major MNE, Roosevelt’s “forgotten man” was not completely forgotten in the interim. Many organi- zations have marketed to the BoP (most notably in India during the 1970s’ heyday of the appropriate technology movement), with such devices as dung-powered stoves.

These experiences offer the following lessons for com- panies wishing to tap the BoP, especially with a nutritious product:

• Price—Low and stable prices help create and sustain sales, so companies gain an advantage by finding new means to cut and stabilize their own costs, which they then pass on to customers.

• Product compatibility—High nutrition at a low price alone is insufficient. Products must be compatible with the target market’s accustomed habits and visually appealing and flavorful to them. So it is vital to pick the right products and adapt them to local markets.

• Education—Within some countries the BoP is largely illiterate, has low access to popular media, and is unconvinced about cause-and-effect scientific relation- ships. Hence, it may be important to reach people in this segment by nontraditional means, convince them that changes from nutrition are important and take time, and convey information that they will believe.

• Promotion—Publicity prior to the start of sales is quite valuable, so the use of opinion leaders (those that the target market group accepts) is essential in developing credibility.

• Competition—Given efforts to help the poor, competi- tion may come from government programs, not-for-profit organizations, and charities. Thus, companies need to outperform this competition or find means of working cooperatively with it.

Strategic Thrust and Orientation After their 2005 Paris handshake, the JV began production in less than two years. The partners started with a small rural factory to serve only its surrounding poverty-stricken area. Given the JV’s social objective, the partners agreed that product and production would be as green as possi- ble. Even though the factory is the size of only one percent of Danone’s standard factories elsewhere, it has the latest equipment, treatment of both incoming and outgoing water, and solar panels to generate renewable energy.

Product Policies The introductory plant and two more built by 2015 make only yogurt, a product of high nutritional value for children. It relies on efficient small-scale production and nearby sup- plies of the main ingredient (milk).

Through market testing, Danone decided to sell a sweeter and thinner yogurt, drinkable directly from the con- tainer (subsequent market feedback led the JV to include spoons as well). It fortifies the yogurt with 30 percent of the daily need for vitamin A, zinc, and iodine, and it uses bio- degradable technology so that containers can be converted to fertilizer.

Pricing To keep costs and prices low, the plant uses mostly local ingredients, mainly from small suppliers such as farm- ers with only one or two cows, who collect and deliver milk in jugs (thus saving refrigeration and transportation costs). Because of fluctuating milk prices, the JV nego- tiated longer-term contracts with farmers to better stabi- lize prices; hence, the JV pays higher than market price sometimes and less at other times. Fixed sales costs are kept low by selling only on commission (about 20 percent to saleswomen and 80 percent to small local stores). To minimize saleswomen’s commissions, the company suc- cessfully suggested their selling additional products dur- ing house-to-house visits. Personnel costs have been kept low since completion of its start-up phase by employing only Bangladeshis. Although the yogurt plant lacks scale economies, its unit costs are equivalent to Danone’s larger plants elsewhere.

Chapter 17 Marketing Globally 489

Danone’s investment

Transfer of base of the pyramid technology

Bangladesh

Indonesia

France

Senegal

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maP 17.1 grameen danone Foods Joint Venture Groupe Dannon from France joined the Grameen Foundation to form a social business joint venture in Bangladesh. Subsequently, Group Dannone learned about serving the base of the pyramid and has transformed this knowledge to help it operate in Indonesia and Senegal.

Promotion Most promotion is word of mouth; however, one promotional event was noteworthy. Riboud arranged for the best-known Frenchman in Bangladesh, the soccer star Zinédine Zidane (Zizou), to visit the plant’s opening, an event that made large headlines in newspapers throughout the country. While in Bangladesh, Zizou played with youth in the national stadium, signed the cornerstone of the plant, and contributed to instant national recognition for the new JV and its yogurt.

Branding The JV name put Grameen first because of its high recogni- tion. The yogurt brand is Shokti Doi, meaning “yogurt for

power,” and its symbol is a muscled lion that appears on the product and in ads. Lion-dressed mascots also visit youth areas to describe the value of eating yogurt.

Distribution Bangladesh’s high underemployment attracted more than enough women—mainly poor mothers from the target sales market—to work part time selling yogurt. However, the JV had to overcome a backlash similar to the one GB faced when lending to women; the complaint this time was about the impropriety of women going house-to- house. The next big task was to train the saleswomen on (1) the significance of selling yogurt other than to earn a

490 part 6 Managing International Operations

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

17-9 What marketing pitfalls might Danone face if it tries to duplicate its Bangladesh experience to serve BoP customers in other countries?

17-10 Assume a company, such as Danone, wishes eventually to serve all income segments within a country. What advantages and disadvantages might it encounter by first serving the BoP? How might it later deal with any disadvantages?

commission and (2) the essentiality of the yogurt’s quality and how to maintain it.

First, the significance for selling was primarily nourish- ment. The company engaged doctors who explained that children could regain any physical loss from previously deprived nutrition within 9 to 10 months by consuming only two cups of yogurt per week. Second, selling would help improve the economy by using suppliers who would then hire more people and spend within the community.

Maintaining yogurt quality was essential because few homes had refrigeration, and eating a spoiled product could cause illness and future sales losses. The company dem- onstrated to saleswomen how it makes yogurt, provided them with insulated bags, showed them how to use the bags properly, and stressed the need for them to carry only a minimum inventory to lessen the chance of spoilage.

Evaluation Evaluating the JV’s financial performance is straightforward; however, assessing its social effects is challenging. For this, the JV has hired a Swiss-based nutrition organization (GAIN) to develop, test, and validate its performance in terms of meeting the objectives for poor people. Preliminary findings have compared children who have consumed yogurt with and without micronutrient fortification and conclude that the former have grown more in height. In addition, psycho- metric tests show that the former are significantly better at important mental functions such as planning, concentration, problem solving, and conceptual flexibility.

The Future Grameen Danone Foods’ sales have increased steadily, from 150,000 cups in 2008 to 35.2 million cups in 2013. The number of employees at the end of 2013 was 976, including 697 sales- women. Further, Danone has learned much in Bangladesh about running small-scale production efficiently and is trans- ferring this knowledge to help with its operations in Indonesia

and Senegal. (Map 17.1 illustrates the international connec- tions.) Inspired by this new model of collaboration, other major MNEs are establishing social businesses with the Grameen Foundation (e.g., Intel plans to create software applications on handheld computing devices that address, for example, low agricultural output and lack of prenatal care; BASF plans to produce long-lasting insecticide-impregnated nets to fight the spread of malaria). Despite the publicity and promise of these high-profile collaborative ventures, however, Danone will need to evaluate how brand recognition and goodwill at the BoP can be harnessed for sales farther up the pyramid in order to expand to more affluent market segments.

Questions

17-3. What advantages might Danone receive from the Grameen

Danone joint venture?

17-4. How much do you think Danone’s decision to set up a social

business was motivated by wanting to be socially respon-

sible versus believing the move would help its performance?

Does the answer to this make any difference?

17-5. If Danone were to add products to sell to the BoP, which of

its products would be the best candidates? Why?

17-6. Since establishment of the Grameen Danone Foods social

business, the number of social businesses worldwide has

grown so much that there is now an annual global summit in

Wolfsburg, Germany. Are there types of companies that might

not be good candidates to establish social businesses? If so,

what are they and why?

17-7. Can you think of any other MNEs that can collaborate suc-

cessfully with the Grameen Foundation and help solve specific

problems in Bangladesh? How can they do this?

17-8. Initially, Grameen Danone Foods JV was expected to make a

profit by 2012. Although no official numbers are published, it

seems that they had not reached that point by 2016. Should

Danone continue to invest in this JV? If so, what can be done

to improve the financial outlook of the JV going forward?

Chapter 17 Marketing Globally 491

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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Objectives

After studying this chapter, you should be able to

18-1 Define what is meant by global supply-chain management

18-2 Describe the different facets of global operations strategies

18-3 show how global sourcing is an important aspect of global supply-chain and operations management

18-4 explain how information technology is used in global operations and supply-chain management

18-5 summarize how quality management is important in global operations and supply- chain management

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

chapter 18 Global Operations and supply-chain Management

Apple store in Shanghai. ▶

A cheap thing doesn’t lack defect, nor an expensive thing quality.

—Afghan proverb

Case apple’s Global supply Chain

How long does it take to get an iPhone?1 In September 2012, Apple, the largest consumer electronics company in the world and the larg- est company in the United States in market capitalization, formally announced the iPhone 5, the sixth generation of the iPhone and suc- cessor to the popular iPhone 4S. The hype over the new phone was so high that preorders swamped Apple’s ability to get enough phones from its factory in Zhengzhou, a city in the north-central region of China. Mandy Xiao was living in Provo, Utah, at the time and wanted to get the phone by Christmas of 2012, so she ordered the phone directly from Apple.com on December 5. The factory in Zhengzhou is actually owned by Taiwan-based Hon Hai Precision Industry Co. Ltd., also known as the Foxconn Technology Group. Given the Christ- mas rush and the fact that Zhengzhou was a little over 6,500 miles away, Mandy wasn’t sure how long it would take to get her phone. But Apple’s supply chain was fast. Mandy was able to track her phone’s journey by UPS online from Zhengzhou to Incheon International Airport in Korea to Anchorage, Alaska, to her door in Provo, Utah—only two days after it was ordered. If you are going to compete today, you need to get the product to the consumer as soon as possible, and Apple excels at this, even when it’s 6,500 miles away from the consumer.

Apple’s Origins

Apple’s initial supply chain was relatively simple. In 1976, Steve Jobs and Steve Wozniak (“Woz”) sold their first product, the Apple I com- puter, out of the Jobs’ family garage in Cupertino, California. Woz was the designer and Jobs ran the business in the up-and-coming micro- computer industry. Jobs and Woz had to design the product, develop the operating system that made it work, manufacture it, and market it. Large auto companies like Ford and GM had the same issues, but they invested significant resources into building massive manu- facturing facilities to supply the market. Unlike the auto companies, the new Apple Computer company was not a major manufacturer of products, but primarily an assembler of components supplied by other companies. However, Apple was extremely successful with this new venture, although the cost of the computer was quite high (since the company was in its infancy), volumes were not very high, and competition was not very strong.

What really changed the game was the entry of IBM into the market. IBM knew that to beat Apple, it needed to drive down costs as low as possible. Initially, IBM was a large vertically integrated company that produced most of its parts and components itself within the United States. In the early 1980s, however, IBM realized that it needed to use external suppliers for key components in an effort to create a cheaper alternative to the Apple II computer, the successor to Jobs’ and Woz’s successful Apple I computer. Then IBM

outsourced its operating system to Microsoft and its microproces- sor to Intel, and the race was on. By taking a close look at the value chain, IBM was able to modularize the industry so that Microsoft, for example, could sell its operating system to any company that wanted to use it, and Intel could develop semiconductors for a wide range of products for many different companies. This allowed them to achieve even greater economies of scale.

Apple’s AdAptAtiOn

Apple adapted in many different ways, as did the entire consumer electronics industry. Apple’s strength was in the design of new prod- ucts that consumers wanted. However, it realized that it had to go far beyond just computers. Rather than just stick with personal com- puters, it branched off into a variety of mobile communication and media devices, portable music players, software, and cloud storage. Its products include the Apple Watch, iPhone, iPad, Mac, iPod, and the Apple TV, and it designs and manufactures its own products. Apple always comes up with cool stuff, and it is being pushed by new en- trants in the market like Samsung. But it is still known for new ideas and new products—the strength of Steve Jobs and the organization he created before he died.

The big challenge is how to manufacture this wide range of prod- ucts. Apple has assembly operations in Freemont, California; Cork, Ireland; and Singapore using components supplied by other compa- nies. In 2012, it even announced that it was “reshoring” (also called onshoring) or bringing the manufacturing of some of its Macs back to the United States by investing $100 million in new facilities to assemble the computers. Even though Apple no longer manufactures its own components, it buys them from suppliers, what is also called supply chaining. Apple’s decision to reshore some of its production is partly due to lower energy costs, rising wages in countries like China, a weaker U.S. dollar (at the time), quality control issues, and proxim- ity to the large U.S. market. However, this is not a major shift in the way Apple manufactures all of its products.

the rise Of COntrACt MAnufACturing

Most of the components Apple uses come from multiple sources, but some are from single or limited sources, which can create sup- ply problems. This is especially true when Apple uses some custom components that are not widely used in the industry but are used only for its products. Apple’s search for reliable suppliers coincided with the emergence of Hon Hai Precision Industry Company, Ltd., widely known as Foxconn Technology Group. Foxconn was founded in Taiwan in 1976 by Terry Gou, about the same time Apple was founded. Gou

Chapter 18 Global Operations and Supply-Chain Management 495

began his company with a loan of $7,500 from his mother with a goal of increasing the affordability of electronics products by combining his expertise for mechanical and electrical parts with a low-cost solution. He started supplying parts to Atari and then traveled to the United States to develop relationships with U.S. companies. One of the com- panies that he won orders from was IBM. Gou arrived at just the right time. IBM’s supply chain moved from being vertical to horizontal and from sourcing only domestically to sourcing internationally.

When Apple assembles products at its factory in Singapore, it is offshoring, meaning that it is moving a factory offshore from the United States to assemble products. The factory still belongs to Apple, but it may get parts and components from a variety of sup- pliers, mostly from Asia. Apple’s relationship with Foxconn is differ- ent. As wages began to rise in Taiwan, many companies moved to the Philippines and Malaysia, but Foxconn invested in China, initially in Shenzhen but later in other cities where labor was plentiful and cheap. As it picked up more orders from abroad, it rose from a small company in Taiwan to the largest contract electronics manufacturer in the world, employing over 1 million people in China.

Although Foxconn supplies components to a variety of companies from all over the world, it is clear that Apple is its number one cus- tomer. In fact, when concerns arose in the first few months of 2013 over Apple’s first quarter results, shares of Hon Hai fell by 14 percent, with similar results for shares of other Apple suppliers. However, when the first quarter results were released and Apple appeared to be doing just fine, the shares recovered their losses and posted gains. Such is the relationship between Apple and its suppliers.

When Tim Cook, the current CEO of Apple and successor to Steve Jobs, was brought into the company in 1997, he was asked by Jobs to clean up the manufacturing process. Manufacturing problems and excess inventory were a drag on corporate profits, cash flow, and therefore on funds available for investment in new products. As Cook worked to strengthen manufacturing, he developed strong sup- plier relations with companies throughout Asia, including Foxconn. The difference with Foxconn is that Apple was able to outsource the assembly of entire products, such as the iPhone 5 mentioned above, instead of just sourcing components that Apple could assemble at its own facilities. Rather than manufacture the product through offshor- ing in Ireland or Singapore, Apple was able to outsource the entire production process to Foxconn as a contract manufacturer. Apple designed the product with very tight specifications and worked with Foxconn and their suppliers to roll out new products, but Foxconn was responsible for the manufacture and delivery of the product to Apple. Now nearly all of Apple’s hardware products are manufac- tured by outsourcing partners located primarily in Asia. A significant amount of the manufacturing is currently performed by a small number of contract manufacturers, like Foxconn, in single locations. Some of these partners are sole-sourced suppliers of components and manufacturers of many of Apple’s products.

Although Foxconn became a very trusted contract manufacturer, Apple still has to work hard to make sure the quality of the product and components are exactly what it is looking for. It’s one thing to con- trol quality at your own assembly facilities, and it’s quite another thing to make sure Foxconn’s quality is high enough. Apple’s strong rela- tionship with Foxconn and other suppliers is the envy of the industry. However, contract manufacturing is not without its problems. News of Foxconn’s problems with its employees at its facilities in China created PR problems for Apple. Workers were accusing Foxconn of forcing them to work long hours in poor conditions, and some employ- ees even committed suicide by jumping from Foxconn buildings. As a result, Mr. Cook visited factories in China and insisted that Foxconn and other suppliers comply with Chinese labor laws and even higher international standards of worker safety. Apple became the first tech- nology company to join the Fair Labor Association, and Apple began publishing the results of its audits on worker conditions in 2007. In 2012, Apple listed the names of 156 companies that supplied it with parts and other services used in manufacturing its products.

the lAst pArt Of the supply ChAin

In addition to designing and manufacturing good products, Apple needs to worry about marketing, the last part of the supply chain. When Mandy decided to buy her iPhone, she had lots of options. Apple sells its products worldwide through its retail stores, online stores (Mandy’s choice), a direct sales force, and third-party cellular network carri- ers, wholesalers, retailers, and value-added retailers. The photo at the beginning of the chapter is an Apple retail store opened in Shanghai in 2011, only the second Apple store opened in China. As of 2016, there were 36 Apple stores in China, compared with only 8 in 2013. It sells its digital content through a variety of sources, including the iTunes Store. The key is to get the products from the point of manufacture to the final consumer, and 67 percent of Apple’s revenues were from outside of the United States in 2016, compared with 40 percent in 2006. ■

Questions

18-1. Although Apple’s inbound logistics began with Apple con-

trolling the assembly of its computers, it shifted to having

suppliers acquire raw materials with contract manufactur-

ers handling most of the production and assembly of final

products. Why did they do this, and what are the major

challenges Apple faces?

18-2. Foxconn, a major contract manufacturer for Apple, is by

far the largest ODM/EMS (original design manufacturer/

Electronics Manufacturing Services) company in the world,

dwarfing U.S.-based Flextronics, which is the major manufac-

turer and assembler of Samsung phones. In 2013, Foxconn

was contemplating opening operations in the United States.

In what way could this be a challenge for Apple, Inc.?

496 part 6 Managing International Operations

glObAl supply-ChAin MAnAgeMent Most companies agree that effective supply-chain management is one of their most impor- tant tools in reducing costs and boosting revenue.2 Our opening case on Apple illustrates dimensions of these supply-chain networks that link suppliers with manufacturers and customers. In the chapter, we will discuss the international dimensions of the global sup- ply chain, focusing on the upstream processes of the purchasing function and supplier networks; operations strategy; the role of information technology in global supply-chain management; and quality management as it affects operations. The downstream process is covered primarily in Chapter 17.

WhAt is supply-ChAin MAnAgeMent? As illustrated in Figure 18.1, the supply chain is the network that links together the differ- ent aspects of the value chain, from sourcing and procurement to conversion through opera- tions to the final consumer.3

Supply-chain management refers to activities in the value chain that occur outside the company, whereas operations management (also known as logistics management) refers to internal activities. Suppliers can be part of the company’s organizational structure, such as in a vertically integrated company, or they can be independent of it. For example, Foxconn, a contract manufacturer for Apple, has its own network of suppliers used in the manufacturing of Apple products in its factories in China. Suppliers can be located in the country where the manufacturing or assembly takes place, or they can be located else- where and ship materials to the final assembly facility or to an intermediate storage point. Manufacturing process output can be shipped directly to the customers or to a warehouse network and sold directly to the end consumer or to a distributor, wholesaler, or retailer, then on to the final consumer. As is the case in the supplier network, the output can be sold domestically or internationally.

Most MNEs have excelled in their ability to manage their supply-chain networks. One of the best examples is Spanish Retailer Zara which is discussed in Chapter 12. Companies

Supply chain—the coordina- tion of materials, information, and funds from the initial raw-material supplier to the ultimate customer.

Logistics (also called materials management)—that part of the supply-chain process that plans, implements, and con- trols the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers’ requirements.

Logistics & Quality Management

In te

gr at

in g

In no

va tin

g a nd

Im pa

ct in

g Im

pr ov

in g

Customer Relationship Management

Operations Management

Supply Management

Upstream Processes

Designing and Implementing

the Core

Downstream Processes

Global SC Strategy

Figure 18.1 An integrated global Supply Chain and Operations Strategy Source: S. Thomas Foster, Scott Sampson, Cindy Wallin, and Scott Webb, Managing Supply Chain and Operations: An Integrative Approach (Pearson Education, Inc., 2016): 2.

Chapter 18 Global Operations and Supply-Chain Management 497

we study in this chapter are considered part of a global network that links together designers, suppliers, subcontractors, manufacturers, and customers. The supply-chain net- work is quite broad, and its coordination takes place through interactions between firms in the network.4

glObAl supply-ChAin And OperAtiOns MAnAgeMent strAtegies Recall that Apple initially set up manufacturing facilities in China because of location-specific advantages (notably cheap labor and associated costs), choosing to enter the country through an agreement with Foxconn, its future contract manufacturer. This allowed Apple to focus on its firm-specific assets (innovation, product development, and marketing) and thus move away from vertical integration to become more effective by giving up more of the elements of the value chain to Foxconn.

Apple is not the only company to outsource manufacturing to others. Examples abound. Nike subcontracts its manufacturing, remaining basically a design and marketing firm. Rather than owning facilities in China to manufacture Barbie dolls, Mattel instead outsources the manufacturing to a Hong Kong–based company that invests in China.5 As we note in Chapter 19, H&M purchases all of its fashion merchandise from external suppliers in Europe and Asia, rather than vertically integrating and establishing its own facilities.

OperAtiOns MAnAgeMent strAtegy One piece in the supply-chain strategy for both manufacturing and services is operations: the conversion of inputs into outputs. The success of a global operations strategy depends on four key factors: compatibility, configuration, coordination, and control.6

Compatibility Compatibility in this context is the degree of consistency between the for- eign investment decision and the company’s competitive strategy. Some companies such as Walmart adopt a low-cost strategy. Others, like Apple, have adopted a differentiation strat- egy where they design products that are relatively unique. Some factors that companies must consider as they align their overall strategy with operations are

• Efficiency/cost—reduction of operational costs • Dependability—degree of trust in a company’s products, its delivery, and its price

promises • Quality—performance reliability, good service, speed of delivery, and dependable prod-

uct maintenance • Innovation—ability to develop new products and ideas • Flexibility—ability of the production process to make a variety of products and adjust the vol-

ume of output.7 For example, Wall’s makes ice cream in China, including the Magnum Bar and the Cornetto, which are global brands for Unilever, Wall’s parent company. However, Wall’s found that it can produce some of its global brands during the winter when demand is down and ship them to South Africa and Australia during their summer, enabling the use of excess production facilities and reducing costs in markets outside China.8

Manufacturing Configuration In the global supply chain, suppliers transform raw materials into parts which make up the inputs that go into the conversion of parts into final products in the operations management phase. The discussion below focuses on the manufacturing configuration of a company like Ford Motor Company that manufactures

ConCept CheCk

On page 310 in Chapter 12, we explain value as the underlying principle of strategy, defining it as “the measure of a firm’s capability to sell what it makes for more than the costs incurred to make it.”

Compatibility—the degree of consistency between FDI decisions and a company’s competitive strategy.

ConCept CheCk

In discussing the process of “The Quest to Create Value” on pages 310 and 311 in Chapter 12, we explain that a firm that aspires to a position of cost leadership strives to be the low-cost pro- ducer in an industry for a given level of quality. This strategy, we observe, means that the firm adopts one of two tactics, both of which must be compatible with the structure of its value chain: (1) earning a profit higher than industry rivals by selling products at average industry prices or (2) capturing market share by sell- ing products at prices below the industry average.

ConCept CheCk

Recall from page 321 in Chapter 12 our extended discussion of “Global Integra- tion Versus Local Responsive- ness” as an issue in configuring and coordinating a firm’s value chain. We then proceed to explain how efforts to resolve this issue may contribute to the formulation of a global strategy or a multi- domestic strategy for international operations. Here we analyze ways in which this same issue can put pressure on specific strategic decisions about the configuration of manufacturing facilities.

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automobiles worldwide. MNEs must consider three basic configurations in establishing a global manufacturing strategy:

• Centralized Manufacturing—There are several options with a centralized strategy. MNEs may centralize their manufacturing in one plant, usually their home market, which ser- vices the entire world. A second option is they may have several plants in one country that service the domestic and international markets. A third is that they have factories that focus on a particular product which is sold worldwide. Ford doesn’t have just one factory that produces all models, but it has different factories that produce different mod- els. For example, Ford will manufacture the Ford Focus in a factory in Mexico, while the U.S. plant that was manufacturing the Focus will manufacture two other models.9

• Regional Manufacturing—Many companies use Asia as a regional hub for manufacturing. Hong Kong–based apparel maker, Tal Group, is one of Asia’s largest suppliers of pants for Banana Republic and J. Crew, among other companies. It used to manufacture pants in China, but rising labor costs forced them to open factories in Malaysia and Vietnam. It still employs 4,000 workers in China to make shirts, so it has several manufacturing facilities in the region.10 In this case, Tal Group’s regional manufacturing strategy allows it to service clients outside of the region. BMW, Volkswagen AG, and Toyota Corporation have factories in the United States and Mexico to service clients in the North American region.11 Most of the major auto manufacturers have set up manufacturing facilities in Mexico to service North America as well as other markets.12

• Multi-Domestic Manufacturing—As MNEs expand markets internationally, they may be forced to manufacture products in individual markets where they can be closer to con- sumers and meet individual needs. This is consistent with a multi-domestic strategy as discussed in Chapter 12.13 This is the approach that Philips, the Dutch electronics com- pany, used after World War II. Because there were barriers to entry in European countries, Philips had to manufacture on a country-by-country basis. As trade barriers dropped, they were able to rationalize their production in a regional manufacturing approach, but as the markets in the different countries grew, they found it made sense to have local manufacturing, even though there was a duplication of efforts.

Offshoring, Nearshoring, and Onshoring Once a company decides to manufacture outside its home market, it is engaging in offshore manufacturing, as was the case when Apple set up manufacturing facilities in Singapore and Cork, Ireland. The main driver was cheap wages. As wages have continued to rise in China, companies moved to countries with even lower wages like Vietnam and Indonesia. Now, Africa is becoming popular as a low- wage destination.14

However, some companies have modified their offshore strategy by nearshoring (e.g., GM moved some of its manufacturing operations to Mexico to be closer to the U.S. market). Lower wages in Mexico compared with U.S. wages, coupled with NAFTA and the ability to have a closely aligned supply chain make it far more attractive to be located in Mexico than other markets that may have even cheaper wages but are farther from the U.S. market. Some MNEs have improved the efficiency of their operations so much that they have even moved back to their home countries, known as reshoring or onshoring.

Coordination and Control Coordination and control fit well together. Coordination is the linking or integrating of activities into a unified system.15 The activities include everything along the global supply chain, from purchasing to warehousing to shipment. It is hard to coordinate supplier relations and logistics activities if those issues are not considered when the manufacturing configuration is set up.

Once the company determines the manufacturing configuration it will use, it must adopt a control system to ensure that company strategies are carried out. Control can be the mea- suring of performance so a firm can respond appropriately to changing conditions. Another aspect of a control structure is the organizational structure, discussed in more detail in Chapter 16.

Manufacturing configuration:

• Centralized manufacturing in one country

• Manufacturing facilities in specific regions to service those regions

• Multi-domestic facilities in each country

Offshore manufacturing—any investment that takes place in a country other than the home country.

Nearshoring implies moving the supply chain closer to the home market, such as Mexico for U.S. firms or Prague for German firms.

Reshoring or onshoring means bringing back production to the home country from offshore locations.

Coordination is linking or integrating activities into a unified system.

ConCept CheCk

We discuss control on page 447 in Chapter 16 from the perspec- tive of organization structure, coordination and control sys- tems, and organizational culture. In explaining coordination and control systems, we explain that, regardless of its structure, the MNE must develop coordina- tion and control mechanisms to prevent duplication of efforts, to coordinate resource allocation, and to ensure that company- wide operations benefit from ideas generated anywhere in the organization.

Control systems, such as organizational structure and performance measurement systems, ensure that managers implement company strategies.

Chapter 18 Global Operations and Supply-Chain Management 499

glObAl sOurCing Global sourcing is the first step in the process of materials management, which includes obtaining a supply of inputs used in the production process, inventory management, and transportation between suppliers, manufacturers, and customers. Global sourcing and pro- duction strategies can be better understood by taking a look at Figure 18.2 which illustrates the basic operating-environment choices (home country or any foreign country) by stage in the production process.

Although global sourcing is often linked with high-tech and complex processes such as automobile manufacturing, global sourcing affects even the low-cost products we use and consume every day. Take U.S.-based Sara Lee’s whole-grain white bread. To make this bread, Sara Lee acquires ingredients from a variety of suppliers, nearly a third of which are located in foreign countries. Its guar gum, used to keep the bread moist, is a powder that comes from the guar plant seedpods grown in India. Calcium propionate, a powdery mold inhibitor that is manufactured in several countries, is sourced in the Netherlands. Honey, used as a natural sweetener, is purchased from suppliers in the United States, China, Vietnam, Brazil, Uruguay, India, Canada, Mexico, and Argentina. Sara Lee sources from several different countries besides the United States because the U.S. supply can often run short. Flour enrichments to replenish the vitamins lost in the milling process come from China. Due to industry consoli- dation, suppliers of flour enrichments are limited. Beta-carotene, an artificial coloring used to provide color to the bread and crust, is sourced from Switzerland, though it is available in many countries. Vitamin D3 is sourced from China, while wheat gluten comes from several countries, including France, Poland, Russia, the Netherlands, and Australia.16

With its ingredient sources spread all over the globe, Sara Lee must manage its supply chain carefully to ensure timeliness, safety, and quality. So it has centralized its global ingre- dients purchasing by consolidating its previously scattered procurement operations into a single division known as the “nerve center” located at company headquarters. Purchasing specialists monitor weather patterns, commodity trends, and energy prices. They also com- municate and work closely with Sara Lee’s diverse base of suppliers—in some cases, even investing money in suppliers’ operations to ensure that they are complying with U.S. food safety standards.17

On the sourcing side, a company can manufacture parts internally or purchase parts from external (unrelated) manufacturers. It can also assemble its own products internally or sub- contract to external firms; the manufacture of parts and final assembly may take place in its home country, the country in which it is trying to sell the product, or a third country.18

Sourcing—the process of a firm having inputs supplied to it from outside suppliers (both domestic and foreign) for the production process.

Companies can manufacture parts internally or purchase them from external manufacturers.

Manufacture and assembly of

components and final products

Sourcing of raw materials, parts, and components

Sale of products Stage of production and sales

Location of sourcing, production, and sales

Home country

Both

Abroad

Home country

Both

Abroad

Home country

Both

Abroad

Figure 18.2 When a company wants to source raw materials, parts, or components as a function of its global strategy, it’s faced with some key decisions. it may, for example, decide to source components at home, assemble them abroad, and then export the final product to the home market, to foreign markets, or to both.

500 part 6 Managing International Operations

The term sourcing is used in a variety of ways. Outsourcing, for instance, refers to a situation in which one company externalizes a process or function to another company. This most often occurs with the IT function but is also being used in other areas, such as research, service centers, and even accounting and tax functions. In addition to offshore manufac- turing, another type of offshoring occurs when a company moves part of its business pro- cesses outside its home country but internalizes the function rather than outsourcing it to another firm. An example would be setting up its own R&D facilities in another country or, say, a U.S.-based public accounting firm setting up a branch of its tax practice in India. Outsourcing can be domestic or offshore. Sometimes the entire operations can be shipped offshore using talent hired in that location.

Another way to look at outsourcing is supply chaining “which is a method of col- laborating horizontally among suppliers, retailers, and customers to create value.”19 Zara, Walmart, and IKEA are three good examples of companies whose strategy is to engage in supply chaining with key suppliers from around the world to provide products for their customers. Supply chaining is slightly different from traditional outsourcing, which focuses more on a business process, but far more extensive and complicated since it relates more directly to the final product sold to customers. Apple’s use of Foxconn as a contract manufacturer for products such as the iPhone is technically supply chaining, although it is similar to outsourcing since the entire manufacturing process is being handled by Foxconn. In Figure 18.1, a contract manufacturer like Foxconn not only assumes the upstream processes, but it also takes on some of the operations management functions since it also does the assembly.

Sourcing in the home country enables companies to avoid numerous problems such as language differences, long distances, lengthy supply lines, exchange-rate fluctuations, wars and insurrections, strikes, politics, tariffs, and complex transportation channels. However, for many companies, domestic sources may be unavailable or more expensive than foreign sources. In Japan, foreign procurement is critical because nearly all of the raw materials used in the manufacturing process such as uranium, bauxite, nickel, crude oil, iron ore, copper, and coking coal are imported. Japanese trading companies came into being expressly to acquire the raw materials needed to fuel Japan’s manufacturing.

Supply chaining is a method of collaborating horizontally— among suppliers, retailers, and customers—to create value.

Contract manufacturers refer to companies such as Foxconn (the manufacturer of products for Apple).

Using domestic sources for raw materials and components allows a company to avoid problems with language dif- ferences, distance, currency, politics, and tariffs, as well as other problems.

Outsourcing occurs when a company transfers a portion of its work to outside suppliers, increasingly from countries with skilled, low- cost workers. This photo is an example of a software development team some- where in Asia collaborating on a project. Source: ProStockStudio/Shutterstock

▶

Chapter 18 Global Operations and Supply-Chain Management 501

Why glObAl sOurCing? Companies pursue global sourcing strategies for a number of reasons:

• To reduce costs through cheaper labor, laxer work rules, and lower land and facilities costs • To improve quality • To increase exposure to worldwide technology • To improve the delivery-of-supplies process • To strengthen the reliability of supply by supplementing domestic suppliers with

foreign ones • To gain access to materials that are only available abroad, possibly because of technical

specifications or product capabilities • To establish a presence in a foreign market • To satisfy offset requirements • To react to competitors’ offshore sourcing practices20

These reasons are similar to the benefits to FDI discussed in Chapter 15. Whether the suppliers are company-owned or independent firms, MNEs can take advantage of the loca- tion-specific advantages in foreign countries.

In 2015, Abu Dhabi–owned Globalfoundries purchased from IBM a business that manufactured advanced microchips used in U.S. spy satellites, missiles, and combat jets. Globalfoundries has operations in Germany and Singapore in addition to IBM’s former facil- ities in New York. One goal of the Pentagon was to globalize its supply chain in response to market trends and to reduce its costs. However, it still wanted the manufacture of the micro- chips to take place in New York until it can expand its supplier base. This is a good example of global sourcing in a unique business where cybersecurity is a real issue.21

In some ways, however, global sourcing is more expensive than domestic sourcing. For example, transportation and communications cost more. Given the longer length of supply lines, it often takes more time to get components from abroad, and lead times are less cer- tain. This problem increases inventory carrying costs and makes it more difficult to get parts to the production site in time. If imported components come in with errors and need to be reworked, the cost per unit will rise, and some components may have to be shipped back to the supplier.

MAjOr sOurCing COnfigurAtiOns Vertical integration Vertical integration occurs when a company owns the entire sup- plier network, or at least a significant part of it as was the case with Apple before it began to outsource to suppliers and use contract manufacturers. The company may have to pur- chase raw materials from outside suppliers, but it produces the most expensive parts itself. Integrating vertically can reduce transaction costs by internalizing the different levels in the value chain.22

industrial Clusters Utilizing industrial clusters is an alternative way to reduce trans- portation and transaction costs. Under clustering, buyers and suppliers locate close to each other to facilitate doing business. For example, the growth in auto manufacturers in Mexico has drawn suppliers to Mexico so they can be closer to their clients. Silicon Valley is a cluster of software firms that are taking advantage of research out of Stanford University and other high-tech firms in the IT supply chain.

Keiretsus Japanese keiretsus are groups of independent companies that work together to manage the flow of goods and services along the entire value chain.23 Toyota’s highly coordinated supplier network is among the most successful and well known of the Japanese

Major outsourcing configurations include

• vertical integration, • outsourcing through

industrial clusters, • other outsourcing.

502 part 6 Managing International Operations

keiretsus and a good example of industrial clustering. It borders on vertical integration because parts suppliers tend to set up shop close to Toyota’s assembly operations, and Toyota usually has an ownership interest in them. The trusted relationships among companies in the keiretsu allow the companies to work closely together from the design phase onward, often sharing proprietary technology but also allowing each other the first right of refusal when new technology is developed. Changes in its global markets and price pressures resulting from the high cost of steel and the strong yen forced Toyota to start looking beyond its closely knit supplier base in Japan by pressuring its keiretsu suppliers to benchmark against China’s cheaper suppliers. If the suppliers can’t achieve low enough pricing, Toyota will be forced to court suppliers outside Japan.24

the MAke-Or-buy deCisiOn When it comes to production activities, MNE managers struggle with a make-or-buy decision: Which should be performed internally and which could be subcontracted to inde- pendent companies? In the case of subcontracting, a company must also decide whether the activities should be carried out in the home market or abroad. This often involves developing a strategy that might be a combination of outsourcing, offshoring, and/or sup- ply chaining.

In deciding whether to make or buy, MNEs can focus on those parts of production that are critical to the product and that they are particularly good at making. They can outsource parts when suppliers have a distinct comparative advantage, such as greater scale, lower cost structure, or stronger performance incentives. They can also use outsourcing as an implied threat to underperforming employees: Improve, or we move the business elsewhere.25 The MNE must determine the design and manufacturing capabilities of potential suppliers com- pared to its own capabilities. If the supplier has a clear advantage, management needs to decide what it would cost to catch up to the best suppliers and whether it would make sense to do so.

ConCept CheCk

As we explain on page 407 in Chapter 15, the resource-based view of the firm holds that every company has a unique combi- nation of competencies. Here we suggest that make-or-buy decisions may depend on the extent to which a firm embraces this view, which may prompt it to concentrate internally on those activities that best fit its competencies while depend- ing on other firms to supply products, services, or support activities for which it has lesser competency.

Make or buy—outsource or supply parts from internal production.

If MNEs outsource parts instead of sourcing them from internal production, they need to determine the degree of involvement with suppliers.

Yes A firm should outsource inno- vative processes if it can maintain

focus and position itself effectively in the roiling high-tech and electronics industries. More and more companies are coming to realize the advantages of doing so. Suppliers are taking on such responsibilities as designing and manufac- turing prototypes, converting them into workable products, upgrading mature products, conducting quality tests, put- ting together user manuals, and selecting parts vendors. In 2011, 94 percent of the laptops in the world were de- signed by a small number of Taiwan-based original design manufacturers (ODMs), although they were often produced in China. The biggest companies are Quanta, Compai, Wistron, and Foxconn. The companies they supply include HP, Lenovo, Apple, Dell, and Acer. Even Boeing collabo- rated with an Indian company to develop software for its 787 Dreamliner jet.

Companies willing to outsource some R&D and technological designs can experience enormous cost sav- ings. Although innovation is key to remaining competitive, more and more firms find that their internal R&D teams

aren’t producing results that justify the large investments in them. Thus, in the face of demanding customers and relent- less competition that pressures margins, managers must find a way to reduce costs or increase R&D productivity.

Outsourcing is a viable solution. Companies can save millions by simply buying designs rather than developing them in-house. For instance, using a predesigned platform for cell phones can reduce the costs of developing them from scratch—which takes approximately $10 million and 150 engineers—by 70 percent. Furthermore, demands by retailers and customers as well as uncertain future market trends require developing a costly range of product models. Third-party developers are better equipped to handle such costs, spreading them over many buyers and possessing the expertise to develop a variety of models from a single basic design.

Outsourcing also helps get products to market faster, which is crucial where products become commodities in a matter of months. Hewlett-Packard claims that by working with partners and suppliers on designs, it now gets a new concept to the market in 60 percent less time. Critics worry

Should Firms Outsource Innovation?

Point Point

Chapter 18 Global Operations and Supply-Chain Management 503

that by outsourcing technology, companies are outsourcing their fonts of competitive advantage; still, outsourcing certain design and development processes allows firms to focus more on their true core competencies. Few, if any, companies plan on completely eliminating their own R&D forces, and most insist they will continue with the more proprietary R&D work.

No one company can manage everything in-house. Even the chief technology officer of Nokia—a company that once

prided itself on developing almost everything on its own— has stated, “Nobody can master it all.” In fact, a recent survey of MNEs found that almost three-quarters of respon- dents believed they could boost innovation dramatically by collaborating with outsiders, even competitors.26 The companies that will survive in the future are those able to efficiently and effectively control a network of partners and suppliers around the world.

no When it comes to outsourc- ing R&D, design, and develop-

ment work, how does a firm know where to draw the line? How does it determine what is core intellectual property and what is commodity technology? The truth is, outsourc- ing turns the former into the latter, which becomes avail- able to most anyone. Look at Toshiba. By working with South Korean chipmakers to develop its DRAM memory chips, it allowed the technology behind these components to become commoditized and is now struggling to stay ahead.27

Competitive advantage often depends on trade secrets that set a firm apart from its rivals. Outsourcing innovation enhances the risk that it will pass on these proprietary tech- nologies to suppliers and partners, thereby fostering new competitors. Because suppliers rarely cooperate solely with one customer, the R&D they do for one can easily be trans- ferred to another. Such was the case for Japanese company Sharp, which worked closely with suppliers to develop a “sixth-generation” plant for making larger flat panels for tele- visions. Unfortunately, its suppliers also work closely with Sharp’s rivals, many of them Taiwanese companies, and not long after the completion of the plant, these competi- tors were constructing their own “Gen-6” facilities. Sharp tried to protect itself by secretly rewriting software on some equipment and fixing machinery in-house rather than having suppliers do it. However, in 2012, Foxconn of Taiwan bought 10 percent of Sharp and one of its factories in Japan that manufactures LCD displays.28 In 2016, Foxconn completed the takeover of Sharp by investing $3.5 billion in the com- pany which produces screens for Apple products. Foxconn was hoping that the investment will solidify its relationship with Apple even more.29

Suppliers and partners might also take the informa- tion and technology that have been shared with them and become competitors themselves. After Motorola hired Taiwanese company BenQ Corp. to design and manufac- ture its mobile phones, BenQ began selling the phones

under its own brand name in the highly com- petitive Chinese market, causing Motorola to

terminate the contract. In addition to giving rise to new competitors, outsourc-

ing innovation may cause firms to lose their competitive edge and the desire to invest in innovation. Although some assert that outsourcing certain development and design work allows companies to focus more on new innovative technologies, it more often prompts companies to decrease internal R&D investments and become lazy in their pursuit of future breakthroughs, relying too much on suppliers to do their work. Jim Andrew, senior vice president of Boston Consulting Group, warns, “If the innovation starts residing in the suppliers, you could incrementalize yourself to the point where there isn’t much left.”

High-tech and electronics firms that outsource their innovation processes risk losing the essence of their actual business, becoming mere marketing fronts for others. It also sends a bad message to investors, who might have difficulty finding intrinsic value in a company that owns little true intel- lectual property and whose profits from successful products are most likely being paid out in licensing fees to the compa- nies that actually developed them.

Much has been made of manufacturing outsourcing in the past few decades, but outsourcing innovation poses a potentially greater threat to high-tech firms that see it as a shortcut to cost savings. Looking to immediate savings is shortsighted, and firms that do so will ultimately damage their competitive positions and lose viability as true industry players.30

Question

1. Now that Apple purchases its iPhones and iPads from Foxconn, should it let Foxconn develop the new technology that goes in Apple’s products so that they can focus more on marketing? Why or why not?

Counterpoint

Should Firms Outsource Innovation? Counterpoint

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supplier relAtiOns Supplier relationships are very important but sometimes complicated, especially for MNEs trying to manage them around the world. IKEA’s global supply chain involves companies that employ over 600,000 people in more than 50 countries. Their suppliers’ suppliers or sub- suppliers employ millions of other people. IKEA has established IWAY, a supplier Code of Conduct that focuses on a variety of issues, including energy and water sustainability, child labor, forced and bonded labor, and health and safety issues.31 Apple’s supplier responsibility report focuses on empowering workers, labor and human rights, health and safety, the envi- ronment, and accountability. The foundation of the supplier code of conduct is to ensure that workers have the right to safe and ethical working conditions. Apple uses not only its own auditors but third-party auditors as well. In 2015, it conducted 640 audits across its supply chain, over 20 percent of which were first-time audits.32 The 2012 report discusses supplier accountability, including their audit program, and it also discloses its 17 final assembly facili- ties, including who the supplier is and what they assemble, and its top 200 suppliers which represent 97 percent of its procurement expenditures worldwide.

COnfliCt MinerAls A real challenge for U.S.-based MNEs is compliance with a provision in the Dodd–Frank Act that requires companies to disclose the use of certain minerals mined in war-torn or conflict areas, primarily in Africa. The minerals in question are titanium, tungsten, tin, and gold mined from ore and extracted from Congo or nine surrounding countries. The objec- tive of the provision is to stamp out militias in these countries that are funded by the sale of the minerals.33 Companies like Apple, Microsoft, and Intel have long supply lines, and they are under scrutiny to determine if their suppliers are using conflict minerals. The com- panies have to show that they are using their best judgment to do country-of-origin tests with their suppliers, but most are stopping short of stating that they are conflict free. In its 2015 Supplier Responsibility report, Apple goes to great lengths to show what it is doing to respond to Dodd–Frank. It provides a list of all of the “names, countries, and Conflict-Free Smelter Program participation status of the smelters and refiners in our supply chain.”34 Like most large MNEs, they use independent auditors to help determine if their suppliers are doing their best to avoid using conflict minerals, but it is impossible to verify that every product is conflict free.

the purChAsing funCtiOn The purchasing agent is the link between a company’s outsourcing decision and its supplier relationships. Just as companies go through stages of globalization, so does the purchas- ing agent’s scope of responsibilities. Typically, purchasing goes through four phases before becoming “global”:

1. Domestic purchasing only 2. Foreign buying based on need 3. Foreign buying as part of procurement strategy 4. Integration of global procurement strategy35

Phase 4 occurs when the company realizes the benefits that result from the integration and coordination of purchasing on a global basis and is most applicable to the MNE.

When purchasing becomes global, MNEs often face the centralize/decentralize dilemma. Should they allow each subsidiary to make every purchasing decision, or should they cen- tralize all or some of them? The primary benefits of decentralization include increased control over purchases, better responsiveness to facility needs, and more effective use of local suppliers. The primary benefits of centralization are increased leverage with suppliers,

Conflict minerals are certain minerals that come from warring areas that generate revenues to fund conflicts.

Global progression in the purchasing function:

• Domestic purchasing only • Foreign buying based on

need • Foreign buying as part of a

procurement strategy • Integration of global

procurement strategy

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better prices, eliminating administrative duplication, allowing purchasers to develop special- ized knowledge in purchasing techniques, reducing the number of orders processed, and enabling purchasing to build solid supplier relationships.36

infOrMAtiOn teChnOlOgy And glObAl supply-ChAin MAnAgeMent A comprehensive supply-chain strategy is most effective with a strong commitment to infor- mation technology (IT), which aids in quick and efficient production, proficient inventory management, effective supplier communication, and customer satisfaction. In The World is Flat, Flattener #3 is workflow software.37 Basically encompassing the standard protocols such as HTTP that allow computers to work with each other and business processes such as SAP, workflow software is critical for the supply-chain management process.

eleCtrOniC dAtA interChAnge (edi) The key to making a global information system work is getting the relevant information in a timely manner. Apple, for example, has established a B2B (business to business) gateway that all of its suppliers are required to use, which basically allows suppliers to share elec- tronic data with Apple. Many companies use electronic data interchange (EDI) to link sup- pliers, manufacturers, customers, and intermediaries, especially in the food-manufacturing and car-making industries, in which suppliers replenish in high volumes.

In a global context, EDI has been used to link exporters with customs to facilitate the quick processing of customs forms, thus speeding up cross-border deliveries. Walmart is known for its revolutionary use of EDI to connect its global suppliers to its inventory order- ing system.38

enterprise resOurCe plAnning/MAteriAl

requireMents plAnning The next wave of technology affecting the global supply chain was the implementation of IT packages known as enterprise resource planning (ERP). Companies such as Oracle, Baan, PeopleSoft, and German software giant SAP introduced software to integrate everything in the back office (the part of the business dealing with internal matters, as opposed to the front office, which deals with the customer). ERP is essential for bringing together the infor- mation inside the firm with information from different geographic areas, but its inability to tie in to the customer and take advantage of e-commerce has been a problem.

An extension of ERP is material requirements planning (MRP), a computerized informa- tion system that addresses complex inventory situations and calculates the demand for parts from the production schedules of the companies that use them. DENSO, the Japanese auto parts supplier for Toyota, uses MRP extensively to calculate the demand for parts from the production schedules of the non-Toyota companies it supplies.

rAdiO frequenCy id (rfid) A newer wave has recently swept the technology scene in the form of radio frequency ID (RFID), a system that labels a product with an electronic tag that stores and transmits information on the product’s origin, destination, and quantity. When electronic readers scan the tags by means of radio waves, the data can be rewritten or captured and sent to a computer-network database, which collects, organizes, stores, and moves the data—often in conjunction with an ERP system.

A key to making the global supply chain work is a good information system.

EDI (electronic data inter- change)—the electronic link- age of suppliers, customers, and third-party intermediaries to expedite documents and financial flows.

ERP (enterprise resource planning)—software that can link information flows from different parts of a business and from different geographic areas.

Material requirements planning (MRP)—computerized informa- tion system that addresses complex inventory situations and calculates the demand for parts from the production schedules of the companies that use the parts.

Radio frequency ID (RFID)—a system that labels prod- ucts with an electronic tag, which stores and transmits information regarding the product’s origin, destination, and quantity.

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Such real-time information allows manufacturers, suppliers, and distributors to keep track of products and components throughout their manufacturing processes and trans- portation networks, resulting in greater efficiency and more visibility along the supply chain. The use of RFID in the Las Vegas airport to track luggage has resulted in more accu- rate sorting, better tracking, and fewer lost bags.39 In 2003, Walmart mandated that its top suppliers use RFID tags at the pallet level, predicting it could save billions of dollars for the entire retail industry through supply-chain efficiencies.40 In 2010, it announced it would experiment with placing removable “smart tags” on individual garments such as jeans and underwear that would allow workers to use handheld scanners to identify exact inventory on the shelves or in the backroom. There are concerns over privacy, but RFID tags placed on removable labels or packaging is not as invasive as imbedding them in the clothing, which could then be tracked anywhere.41 Apple even has an RFID app which can be pur- chased on iTunes and downloaded to an iPhone or iPad to display the location status of taggable items.

e-COMMerCe The next technological wave linking together the parts of the global supply chain is E-commerce. Since Walmart moved its EDI-based infrastructure from traditional but expen- sive value-added networks (VANs) to the Internet, it has been good news for thousands of worldwide vendors. All of their transactions with Walmart are now web-based—a substan- tial cost savings for the MNE and its vendors.42

extranets and intranets Companies with web-based systems usually establish an extranet for suppliers—a linkage to its information system via the Internet—so they can organize production and delivery of parts. Plugged into a company’s customer database, the suppliers can keep track of changes in demand; plugged into the ordering process, they can track the progress of their orders from factory to doorstep.

The real attraction of the Internet in global supply-chain management is that it not only helps automate and speed up internal processes in a company through an intranet, but also spreads efficiency gains to the business systems of its customers and suppliers.43 A recent development in technology is private technology exchange (PTX), an online collaboration model that brings manufacturers, distributors, value-added resellers, and customers together through the Internet to execute trading transactions and share information about demand, production, availability, and more.

“the digital divide” The challenge in global supply-chain management is that al- though some networks can be managed through the Internet, others—particularly in emerging markets—cannot because of the lack of technology or low Internet speeds. The use of the Internet varies by location and by industry. However, access to the Internet has grown in recent years. In December 2004, it was estimated that 12.7 percent of the global population was using the Internet; by December 2015, that had climbed to 46.4 percent.44 Access to the Internet through cell phones has made a big difference in the general popu- lation, and the use of social media, such as Facebook, with over 1.5 billion users worldwide by April 2016, has provided another avenue for people to connect and shop online through the Internet.

The preceding discussion shows that IT can help companies manage their global sup- ply chains but it must be carefully integrated into their overall strategy. Because IT is highly technical as well as a support to a company’s lines of business, it is often difficult to align it with company strategy. This is especially true in the international arena, where personnel in different countries may be accustomed to their own IT systems and may have difficulty adopting a global IT format that will allow them to achieve some economies of scale as well as fully integrate it in the overall strategy.

ConCept CheCk

In discussing “Changing Times, Changing Organizations” on page 431 in Chapter 16, we observe that the Internet, which accelerates the spread of ideas throughout an organization, has created a new concept for organization structure. In other words, as a supremely efficient and effective means of organiz- ing global knowledge, resourc- es, and people, the Internet has inspired many people to imagine new ways of effectively organizing a company’s resourc- es (especially its people).

E-commerce—the use of the Internet to join together suppliers with companies and companies with customers.

Private technology exchange (PTX)—an online collaboration model that brings manufacturers, distributors, value-added resellers, and customers together to execute trading transactions.

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quAlity An important aspect of all levels of the global supply chain is quality management, for ser- vice firms as well as manufacturers. Quality can be defined here as meeting or exceeding customer expectations. More specifically, it is conformance to specifications, value, fitness for use, support (provided by the company), and psychological impressions (image).45 Quality involves careful design of a product or service and ensuring that an organization’s systems can consistently produce the design.46 For example, no one wants to buy computer software that has a lot of bugs, but the need to get software to market quickly may mean speeding it there as soon as possible and correcting errors later. In the airline industry, service is critical. Some airlines, such as Singapore Air, have developed a worldwide reputa- tion for excellence in service—a distinct competitive advantage, especially when trying to attract the business traveler.

Quality failures can have serious ramifications for a company. Japan-based Takata Corporation manufactures motor vehicle seat belts, air bags, steering wheels, interior trims, and child restraint systems to major auto manufacturers worldwide. Although Honda is its largest customer, 14 Japanese, U.S., and European carmakers use its products. However, a major defect in Takata’s air bags has resulted in 10 deaths and over 100 injuries in the United States alone. Even though far more lives have been saved by the deployment of air bags dur- ing crashes, the deaths and injuries that resulted from defective air bags have resulted in the largest and most complex safety recall in U.S. history, in addition to similar recalls world- wide.47 The problem is that the faulty air bag’s inflator can explode in a crash under certain conditions, shooting metal shards from the airbag that can be sprayed throughout the vehicle. It is estimated that over 85 million vehicles will have to be recalled. This has affected Takata’s stock price and the company posted a $121 million loss in FY 2016. In addition, it has been trying to find a cash infusion to help pay for the recall. The quality issues have also strained relations with companies that use the air bags since the defective air bags are a blemish on their reputation.48 The challenge is to figure out the source of the problem, when Takata first realized there was a problem, and when it notified Honda and other manufacturers.

ZerO defeCts Quality also refers to zero defects, an idea perfected by Japanese manufacturers who refuse to tolerate flaws of any kind, although the Takata example illustrates that nobody is perfect. Before this strong emphasis on getting rid of defects, many companies operated according to the premise of acceptable quality level (AQL), which held that a few faulty products would be dealt with through repair facilities and service warranties. This type of manufactur- ing/operating environment required buffer inventories, rework stations, and expediting, with the goal of pushing through products as fast as possible and then dealing with the mistakes later. However, world-class companies prefer zero defects and they realize that taking quality seriously is the only way to beat the competition.49 In the Takata case, imagine how difficult it would be to recall over 85 million vehicles.

In the late 1970s, when Japanese companies began to seriously outpace those in the United States in achieving high-quality products and processes, a new emphasis was placed on actively managing the operations that affect quality. One contributor to this focus on quality management, and one of the people who trained the Japanese in quality, was W. Edwards Deming. To espouse the idea that the responsibility for quality resides within the policies and practices of managers, Deming developed several suggestions on how compa- nies could improve. His focus on quality was designed to reduce the variance in the manu- facturing process through statistical control, design, and training and through the policies and practices of managers. He felt that higher quality would lead to lower costs and better acceptance by the consumer. His process for continuous improvement was to plan a process to correct problems, do or implement the plan, check to see how the improvements were pro- gressing, and act to make sure the changes were permanent.

Quality—meeting or exceeding the expectations of a customer.

Zero defects—the refusal to tolerate defects of any kind.

Deming’s 14 Points encompass the idea that the responsibility for quality resides within the policies and practices of managers.

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The emphasis on quality management has continued to provide a major source of com- petitive advantage and play a major role for companies across the globe. However, just as different countries possess different cultures, product preferences, and business practices, various regions of the world have approached the concept of quality management in various ways. The Japanese have long focused on lean production processes that eliminate waste and boost visibility, whereas the American approach has historically been more statistically based, and the Europeans have opted to concentrate more on quality standards.50 These varying attitudes toward quality create a high level of complexity for MNEs with global operations.

leAn MAnufACturing And tOtAl quAlity

MAnAgeMent (tqM) One reason why companies might hesitate when considering whether to source parts from foreign suppliers is because of lean manufacturing, the process of reducing waste in all areas of the supply chain.51 This concept was popularized by Toyota, and has been imitated world- wide. Because it relies on the efficiencies gained by reducing waste and defects, lean manu- facturing is also closely tied to quality management.

Total quality management (TQM) is a process that stresses three principles: cus- tomer satisfaction, continuous improvement, and employee involvement.52 The goal is to eliminate all defects. TQM often focuses on benchmarking world-class standards, product and service design, process design, and purchasing.53 The center of the entire process, however, is customer satisfaction, the achievement of which may raise production costs. In TQM, quality means the product is so good that the customer wouldn’t think of buying from anyone else.

TQM is a process of continuous improvement at every organizational level. It implies that the company is doing everything it can to achieve quality at every stage of the process. TQM does not use any specific production philosophy or require the use of other techniques, such as a just-in-time system for inventory delivery. Although benchmarking—determining the best processes used by the best companies—is an important part of TQM, it is not intended to be a goal. In essence, TQM means that a company will try to be better than the best.

Executives who have adopted the zero-defects philosophy of TQM claim that long-run production costs decline as defects decline. The continuous improvement process is also known as kaizen, which means identifying problems and enlisting employees at all levels to help eliminate those problems. The key is to make continuous improvement a part of every employee’s daily work.

An important element of lean manufacturing is just-in-time (JIT) inventory manage- ment, which focuses on “reducing inefficiency and unproductive time in the production pro- cess to improve continuously the process and the quality of the product or service.”54 The JIT system gets raw materials, parts, and components to the buyer “just in time” for use, sparing companies the cost of storing large inventories.

That is what Dell hoped to accomplish in its Irish plant by having parts delivered just as they were to enter the production process and then go out the door to consumers as soon as the computers were built. However, the use of JIT means that parts must have few defects and must arrive on time. That is why companies need to develop solid supplier relationships to ensure good quality and delivery times if JIT is to work—and why industrial clustering is a popular way of linking more closely with suppliers.

risks in foreign sourcing Foreign sourcing can create big risks for companies that use lean manufacturing and JIT because interruptions in the supply line can cause havoc. MNEs are becoming expert at meeting the requirements of JIT—ships that take two weeks to cross the Pacific docking within an hour of scheduled arrival, factories that are able to more easily fill small orders, and so on. However, because of distances alone, the supply chain is open to more problems and delays.55

ConCept CheCk

Compare the concept of employee involvement as it’s characterized here with the idea of coordination by mutual ad- justment, which we discuss on page 450 in Chapter 16. Both approaches to coordination sig- nal a willingness to coordinate value activities through a range of informal mechanisms, includ- ing means by which employees are encouraged to engage one another in decisions about mat- ters of mutual importance.

Lean manufacturing—a productive system whose focus is on optimizing processes through the philosophy of continual improvement.

Total quality management (TQM)—a process that stresses customer satisfaction, employee involvement, and continuous improvement of quality. Its goal is to eliminate all defects.

Just-in-time (JIT) approach to inventory management—a system that sources raw mate- rials and parts just as they are needed in the manufacturing process.

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Many MNEs that have set up manufacturing and assembly facilities overseas to service local markets have practically forced their domestic parts suppliers to move overseas as well to allow them to continue with JIT manufacturing. That is why so many Japanese parts sup- pliers have moved to the United States and Mexico to be near their major customers.

A company’s inventory management strategy determines the frequency of needed shipments. The less frequent the delivery, the more likely the need to store inventory some- where. Because JIT requires delivery just as the inventory is to be used, some concession must be made for inventory arriving from foreign suppliers. Since DENSO, one of Toyota’s major suppliers, is very close to Toyota’s assembly plants in Japan, JIT allows the DENSO components to arrive a matter of a few minutes but no more than a few hours from when they are used.56

the kanban system One system pioneered by Toyota to facilitate its JIT strategies is the kanban system, named after the Japanese word for “card” or “visible record.” Kanban cards are used to control the flow of production through a factory. In the system used by Toyota, components are shipped to a plant just before they need to go into production, where they are kept in a bin with an attached card identifying the quantity of items in the bin. When the assembly process begins, a production-order card signifies that a bin needs to be moved to the assembly line. When the bin is emptied, it is moved to a storage area and replaced with a full bin. The kanban card is then removed from the empty bin and is used to order a replace- ment from the supplier.

six sigMA Six Sigma is an effective statistical approach to quality management developed by Motorola and popularized by General Electric. As a highly focused system of quality control that scru- tinizes a company’s entire production system, it aims to eliminate defects, slash product cycle times, and cut costs across the board. The system uses data and rigorous statistical analysis to identify “defects” in a process or product, reduce variability, and achieve as close to zero defects as possible.57

Since being introduced by Motorola in the 1980s, Six Sigma has been adopted by many MNEs, including GE, GlaxoSmithKline, and Lockheed Martin. Although some have accused the program of diverting attention away from customers and squashing innovation, most of the 100 largest companies in the United States have embraced it.58 Its main goal is defect reduction, and fewer defects should cause an improvement in yields, which should improve customer satisfaction and then lead to enhanced income. Given that Six Sigma is a metric designed to measure defects, some argue that it is most effective when used in conjunction with the Baldrige Criteria for Excellence or the European Quality Award.59

quAlity stAndArds There are three different levels of quality standards: general, industry-specific, and company- specific. The first is a general standard, such as the Deming Award, which is presented to firms that demonstrate excellence in quality, or the Malcolm Baldrige National Quality Award, which is presented annually to companies that demonstrate quality strategies and achievements. However, even more important than awards is certification of quality.

general-level standards The International Organization for Standardization (ISO) in Geneva was formed in 1947 to facilitate the international coordination and unification of industrial standards. From the beginning, it has partnered with the IEC (International Electrotechnical Commission), which is the originator of global technical standards. It also collaborates with the International Telecommunications Union and the World Trade Organization. As an NGO, the ISO represents a network of standard setters in 161 countries and has established over 21,000 international quality standards.60

It is hard to combine foreign sourcing and JIT production without having safety stocks of inventory on hand, which defeats the concept of JIT.

A kanban system facilitates JIT by using cards to control the flow of production through a factory.

Six Sigma—a quality control system aimed at eliminating defects, slashing product cycle times, and cutting costs across the board.

Levels of quality standards:

• General level—ISO 9000, Malcolm Baldrige National Quality Award

• Industry-specific level • Company level

ISO 9000—a global set of quality standards intended to promote quality at every level of an organization.

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ISO 9000 and ISO 14000 Even with more than 21,000 standards in the ISO, new ones are being published every year. The two main families of standards are ISO 9000, which describes the fundamentals of quality management systems, and ISO 14000, which addresses what the company does to improve its environmental performance. However, many different areas have ISO standards.

ISO 9000 is a set of universal standards for a quality assurance system that is accepted around the world. Applying uniformly to companies in any industry and of any size, it is intended to promote the idea of quality at every organizational level. Initially it was designed to harmonize technical norms within the EU. Now it is an important part of busi- ness operations throughout Europe. Under the ISO 9000 family of standards, companies must document how workers perform every function affecting quality and install mecha- nisms to ensure that they follow through on the documented routine. The documentation is generic and applicable to any organization that makes products or provides services. A major advantage of ISO 9000 is the documentation process, which not only requires work- ers to examine what they do to improve quality but also ensures continuity as workers change positions.

ISO certification entails a complex analysis of management systems and procedures, not just quality-control standards. Rather than judging the quality of a particular product, ISO evaluates the management of the manufacturing or service process according to the stan- dards it has created in 20 domains, from purchasing to design to training. The operational principles of its management-system standards are: plan, do, check, and act (correct and improve plans), which is based on Deming’s PDCA continuous improvement cycle. A com- pany that wants to be ISO certified must fill out a report and submit to certification by a team of independent auditors.61 The process can be expensive and time-consuming, as each site of a company must be separately certified. The ISO 14000 family of standards is designed to help companies establish high-quality environmental standards in terms of air, water, and soil; ensure that environmental standards are followed; and develop products and services that are environmentally friendly.

U.S. companies that operate in Europe seek ISO certification to maintain access to its market. When DuPont lost a major European contract to an ISO-certified European com- pany, it decided to become certified. By doing so, not only was it able to position itself better in Europe, it also benefited from the experience of going through the certification process and focusing on quality in and of itself. Some European companies are so committed to ISO that they will not do business with a certified company if its suppliers are not also ISO certi- fied. They want to be sure that quality flows back to every level of the supply chain.

industry-specific standards In addition to the general standards described earlier, there are industry-specific standards for quality, especially for suppliers to follow. Since ISO stan- dards are relatively generic, some industries, such as the auto industry, have developed more specific ones to fit the industry. One such example is QS9000, which was initially required for any supplier of Ford and General Motors. However, it was eventually replaced by ISO/ TS 16949:2009, which was more applicable to the auto industry. It is supposed to be used in conjunction with ISO 9001, and it defines the quality management system requirements for the design, development, production, installation, and service of automotive-related products.62

Company-specific standards Individual companies also set their own standards for suppliers to meet if they are going to continue to supply them. Most large MNEs with large supply chains have set and published supply-chain standards, often in the context of a sus- tainability report. Apple’s approach was noted above in the context of working with global suppliers. In the service sector, global public accounting firms, such as KPMG and PWC, have set high audit practices that it expects its affiliates around the world to use. This is always complicated since public accounting firms are an association of individual national partnerships operating under one name. However, the audit of a multinational client must be performed to high standards.

ISO 14000—a quality standard concerned with environmental management.

Non-European companies operating in Europe need to become ISO certified in order to maintain access to that market.

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Two competing ideas have been emphasized in this chapter: First, globalization has pushed companies to establish operations abroad or to outsource to foreign suppliers to reduce costs and be closer to markets; second, the longer the supply line, the greater the risk. Since September 11, 2001, the risks of longer supply lines have increased dramatically. At any time, global political events could completely disrupt a well-organized supply chain and put a company at risk. This was demonstrated more recently in 2011 with the earthquake and tsunami in Japan.

Because some of Sara Lee’s suppliers have con- solidated, there are fewer options for purchasing key ingredients for Sara Lee products. What if no supplier could deliver because of political events or safety/quality concerns? Ford Motor Company’s announcement that the economic slowdown was forcing it to cut its suppliers by 50 percent created a ripple effect throughout the auto industry, since suppliers tend to supply many different companies.

As a supply chain stretches and uncertainty grows, companies have to become much better at scenario building so that viable contingencies are

available. Maybe this means they will pursue more multi-domestic strategies to insulate their foreign operations from other countries and allow them to be more responsive to local consumers. However, as MNEs in the developed countries respond to competitive pressures to reduce costs, they will be forced to continue sourcing abroad, either in com- pany-owned facilities or from third parties—at least until nobody can source abroad.

That’s probably a little extreme, but the important thing is to continue to look at the “what-ifs.” What if there is no secure air or ocean transportation avail- able to move goods? What if the goods can move, but there are delays? What if terrorists begin to use the global supply chain of legitimate compa- nies to contaminate products or move hazardous materials? Clearly, the future appears much more complicated than current or past conditions, so let the manager beware. Escalating costs in China, the manufacturing floor of the world, are causing many firms to look to other countries for cheaper sources of supply as well as closer to home for their sourc- ing decisions. ■

Looking to the Future Uncertainty and the Global Supply Chain

Case Nokero: Lighting the World63

Manuel G. Serapio, Associate Professor and IB Pro- gram Director, Business School and Faculty Director of the University of Colorado Denver CIBER prepared this case.

In June 2016, Steve Katsaros, founder and CEO of Nokero, was contemplating how to build on his company’s accomplishments. Nokero, a marketer of solar light bulbs, has emerged as a successful born-global social enterprise. Since its establishment in 2010, Nokero had sold more than 1.4 million solar light bulbs to over 120 countries. The company has generated significant media attention. CNN,

The New York Times (online), The Washington Post, Fast Company, Popular Mechanics, Popular Science, The Den- ver Post, and Engadget, to name just a few, have featured Nokero’s story of doing well by doing good as a provider of environmentally friendly solar lighting to the world’s poor. Katsaros himself has been recognized for his humanitarian work. In April 2013, he was awarded the U.S. Patent Office’s Patent for Humanity Award.

While Katsaros was very pleased with his company’s overall performance to date, he was concerned with three fundamental questions. First, how should the company

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Steve Katsaros, founder and CEO of Nokero, shows a group of children how his innovative solar light works. Source: Courtesy of Steve Katsaros/ Nokero

▶

grow? Specifically, what market segments should the company focus on for profitable growth? Several oppor- tunities had propelled Nokero’s sales since its establish- ment. The company has sold tens of thousands of solar bulbs in small and sample order sales through the com- pany’s website from thousands of customers in North America and abroad. Additionally, Nokero has entered into distributorship or dealer agreements in several coun- tries. Finally, governments, international agencies, and nongovernmental organizations have partnered with or approached Nokero on collaborative social programs relating to environmental sustainability, renewable energy, poverty alleviation, and disaster and relief projects. Kat- saros wanted to make sure that Nokero explores the best pathways for growth in both the social enterprise sector and commercial channels.

Second, where should the company grow? Currently, Nokero has pursued an opportunistic sales approach. The company’s major customers are in diverse and dispersed locations in Kenya, Ghana, South Africa, Fiji, Mexico, India, Indonesia, Nigeria, Haiti, and other markets. Although practi- cal business sense may dictate that international new ven- tures like Nokero focus on a few markets at a time, Katsaros was hesitant to pursue this approach since it contradicted the company’s social mission of reaching out to as many people as possible that could benefit from Nokero’s solar light bulbs.

Third, how should Nokero manage its supply chain to support the company’s growth? Katsaros understood that growth brings a number of challenges that require Nokero

to address critical global supply-chain issues effectively. How can the company serve different markets and customer segments that are dispersed in many countries? How can Nokero bring down sourcing, manufacturing, and distribution costs to make the product more affordable to its customers? What should the company do to address the “last mile issue” of reaching customers in the most remote locations?

The Nokero Story

Identifying the Opportunity Nokero (short for “No Kerosene”) was established by Steve Katsaros in order to develop safe and environmentally friendly solar products that eliminated the need for harmful and polluting fuels used for light and heat around the world and that are affordable to the customers who need them. Katsaros saw a significant opportunity in developing a solar light product to replace kerosene and diesel lanterns. Kat- saros described the opportunity as follows:

In many parts of the world, nonelectrified dwellings and workplaces are illuminated by kerosene or diesel lamps, candles or wood. There are electric options but most are expensive, or fragile, or don’t have replaceable, rechargeable batteries.

More than 1.3 billion people live without electricity. Of these, 704 million people are in South Asia, 550 million in sub- Saharan Africa, and 225 million in Southeast Asia. Many of these people live in remote areas and rely on kerosene

Chapter 18 Global Operations and Supply-Chain Management 513

and diesel-fueled lanterns for their lighting. By substituting solar light bulbs for kerosene lanterns, these people are able to recoup their purchase price within a period of 12 days to 2 months, depending on market forces. Moreover, the replacement of kerosene lanterns with solar light bulbs gen- erates significant environmental and health benefits. Every solar light that replaces a kerosene lantern saves three- quarters of a ton of CO2 emissions over the five-year lifetime of the product. According to the World Bank, daily exposure to emissions from kerosene lanterns is like smoking two packs of cigarettes per day.

Inventing the Solution: The N100, N200, and N233 Katsaros invented the first Nokero light bulb (the Nokero N100) on January 24, 2010, drawing a sketch of the idea on a notepad. Four days later, he filed a U.S. patent on the N100 that was eventually granted in February 2011. Production on the light bulb commenced in June 2010 and the newest model, the N233, was introduced in November 2016.

The Nokero solar light bulb is a small, lightweight, por- table light, shaped like a light bulb for easy identification. The bulb hangs in the sun to charge and can be hung or laid on its side at night. A “pivot” feature allows users to swivel the solar panel toward the sun to maximize charge capability. The bulb can be swiveled at night to direct light

where needed. The LED lights are enclosed in the shatter resistant bulb, do not get hot, and produce an even light. (See the photo on the bottom page.)

The N233’s brightness is 25 lumens on high illumination and 10 lumens on low illumination. The duration of light is 6–15 hours on one day’s charge. While the brightness is not the same as traditional LED lighting, the N233’s brightness is five times brighter than that of a kerosene lantern. The N233 is shatter- and rain-proof and built to last for five years.

Nokero sells the N233 in large quantity orders (e.g., over 1,000 light bulbs) for about $8.00 (FOB China). Sample sales are priced between $15 and $20 (depending on shipping costs). In response to strong market feedback for a low- price starter version of the Nokero solar bulbs, Katsaros has released a more basic version that sells for about half the price of the N233.

Building a Born-Global Company A few weeks after developing the N100, Katsaros worked on Nokero’s business model, package design, pricing, and manufacturing and distribution processes. In April 2010, he formed Nokero International Ltd., the operating company of Nokero.

The speed with which Nokero developed and manu- factured the N100 and formed the business entity could be attributed to Katsaros’ experience as an inventor and

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entrepreneur. He had previously licensed inventions to sports companies (e.g., Dynastar Skis, K2, and HaberVi- sion) and built RevoPower, a motorized wheel for bicycles that gets 200 miles per gallon at 20 miles per hour. A BS Mechanical Engineering graduate from Purdue University, a Bard Center for Entrepreneurship (now the Jake Jabs Center for Entrepreneurship) certificate graduate recipi- ent at the University of Colorado Denver, and a Collegiate Inventors Competition awardee, Katsaros is a patent agent registered with the U.S. Patent and Trademark Office which has issued him several patents for his previous inventions.

From the start, Nokero was a “born-global com- pany” with customers in different parts of the world, and co-owners and supplier partners in Hong Kong and China. Katsaros partnered with three Hong Kong–based entrepreneurs to form Nokero International Ltd. in Hong Kong. These partners, associates of Katsaros in previous businesses, provided start-up capital that represented a minority equity interest in Nokero and helped Katsaros find a strong and reliable factory supplier in China. Nokero also leveraged the HK partners’ connections with the factory supplier to secure a trade financing line from the supplier. The HK partners manage Nokero’s operations, includ- ing overseeing the supplier factory in China; filling large orders directly from the factory; maintaining an outsourced fulfillment center in Shenzhen, China, to supply small and sample sales from all over the world; and managing the company’s supply chain.

Nokero’s Chinese supplier is an established factory that has significant experience and scale in consumer electronics. In solar-powered consumer electronic prod- ucts alone, the supplier produces more than 30 million pieces of solar products every year. The supplier’s clients include Costco, Walmart, Home Depot, Lowe’s, and other major retail customers in the United States and Europe. Nokero maintains its headquarters in Denver, Colorado, where the company oversees sales and marketing, busi- ness development, web-based sales, and overall adminis- tration of the business.

Creating Groundswell Support Widespread and favorable coverage by traditional and social media outlets has been instrumental in getting the Nokero story out to as many people as possible. A key moment came with a six-minute daytime television seg- ment featuring Katsaros and Nokero with Ali Velshi on the CNN show “The Big Eye.” Not only did the coverage reach a global audience, it helped legitimize Nokero to those who were interested in solar lighting in general and Nokero’s products in particular.

Nokero has benefited from dozens of stories by tradi- tional print media and TV networks and hundreds of sto- ries from new and social media, including sources from

abroad such as O Globo (Brazil), Sydney Times (Australia), Air France, and Sudwestrundfunk (Germany). In a story entitled “A Solar Light Bulb May Light the Way,” The New York Times noted that “Where Nokero’s bulb appears to break ground is in its design; it is small enough to carry, self-contained, highly durable and features a replaceable battery.” In another article, “The Power of Light,” The Den- ver Post lauded the environmental, health, and safety ben- efits of Nokero’s products and the social entrepreneurial aspects of the company’s business model. These major stories resulted in a boost in traffic to Nokero’s website and new orders for samples, as well as inquiries from prospec- tive distributors.

Social media, particularly blogs, have been a power- ful way for the company to create community groundswell support. In July 2010, an influential London businessman offered support to the company, an offer that led to an endorsement of Nokero’s products by popular soccer star Didier Drogba. Social media have also been instrumental in creating awareness and mobilizing community participa- tion in social initiatives championed by Nokero and other partners. For example, Nokero has partnered with Project C.U.R.E. on a buy-give program. Under this program, cus- tomers who buy a solar light bulb from Nokero can give a second light bulb to Project C.U.R.E. that the latter will dis- tribute to people in need throughout the world.

Similarly, filmmaker Kurt Mann’s organization, American Green, brought light bulbs to Haiti to help victims who have been devastated by the country’s earthquake. Nokero and American Green have jointly set up a program, “The Gift of Light,” for people to donate light bulbs to Haiti. Mann also filmed a short video during one of his recent visits to Haiti to document how Nokero’s products have helped the people of Haiti and the world’s poor by providing ready access to light. Nokero and third parties have used this video widely to help tell the company’s story. Nokero has also been quick to respond to natural calamities, such as Typhoon Haiyan in the Philippines or Hurricane Sandy in the U.S. East Coast, by donating solar bulbs to victims, as well as instituting a program that led to the donation of these solar bulbs.

Growing the Business

Opportunities in Working with Governments and International Organizations Several governments, international nongovernmental orga- nizations, and international agencies have approached Katsaros and Nokero on a number of potential large-scale partnerships and projects. The governments of Mexico and Congo are pursuing the idea of buying Nokero’s products for distribution to people in their respective countries who are earning less than $2 per day (i.e., bottom of the pyramid consumers) and do not have access to electricity. Through a partner in the Philippines, Nokero is exploring how best

Chapter 18 Global Operations and Supply-Chain Management 515

to provide its solar light bulbs to school children from poor families who still rely on kerosene lanterns.

Nokero has also initiated discussions with international agencies, such as the United Nations, USAID, and various international foundations. While governments and interna- tional organization sales represent attractive opportunities for Nokero, they have posed three major challenges. First, the sales cycle in these organizations tends to be long and requires specialized skills and major business development resources. To address this challenge, Nokero has brought on board a consultant who is knowledgeable and has net- worked with these kinds of entities.

Second, the company would have to significantly scale production to fill larger orders from these governments. The governments that Nokero has been dealing with have talked about buying not thousands but millions of light bulbs. In addition, these governments are also likely to pressure Nokero to lower its price. Third, selling to these govern- ments portends production and supply-chain challenges. Katsaros is also anticipating that governments that place large orders from Nokero would require the company to pro- duce or assemble its products locally.

Opportunities in the Social Enterprise Sector As previously mentioned, Nokero has been engaged in part- nership programs with various social enterprises, such as Proj- ect C.U.R.E. (Commission on Urgent Relief and Equipment), Elephant Energy, Earthspark International, Shelterbox, Child Fund, and Power the World. As a case in point, Nokero and Project C.U.R.E. began the Lights for Life Campaign in 2010 whereby Nokero solar bulbs were added to the C.U.R.E. Kits for Kids (i.e., shoebox-sized kits of everyday health-care sup- plies, including bandages, antibiotic ointments, and insect repellent) and provided to parents who might not otherwise have access to an everyday medicine cabinet.

In contrast to working with governments and interna- tional organizations, partnerships with social enterprises entail a different set of challenges for Nokero. The programs championed by these partners are quite diverse, the cus- tomers that they serve are widely dispersed, and their order amounts tend to be smaller, although purchases are made more frequently. All of these considerations require different order and fulfillment mechanisms in Nokero’s supply chain. While these processes may be more demanding, Katsaros is committed to working with micro-business and the social enterprise sector, since serving the people that these enter- prises reach out to is at the core of Nokero’s mission.

Opportunities in Commercial Channels Nokero has driven sales through the commercial channel in two ways: through direct, web-based sales and through licensed distributors. Customers order directly through

Nokero’s website (Nokero.com) and pay using a credit card or an account through PayPal. Once an order is placed and payment is verified, the order is added to a sales spread- sheet and is exported nightly to Nokero’s fulfillment center, which handles the order deliveries. Nokero fills order using Hong Kong Post or Singapore Post. The customer can then log on to Nokero’s website to track the shipment of their package and order history by entering the e-mail address that they used to place the order.

Since 2011, Nokero has been successful in selling tens of thousands of dollars of light bulbs to more than 120 coun- tries through its website. Accordingly, one major opportu- nity that Katsaros sees in this channel is sales conversion (i.e., converting people who have placed sample orders to sign up as distributors). Nokero would like to put in place a strategy or process for such sales conversion other than a form on its website which invites people to apply to become distributors.

The company’s largest customers are distributors, asso- ciations, and individuals that have ordered thousands of light bulbs, including Anzocare (South African Alternative Energy Association) and major individual distributors from India, Kenya, Zambia, Ghana, and Fiji. Additional distributors are in place in Afghanistan, Australia, Nigeria, Central America, Cote D’ Ivoire, Mali, Burkina Faso, and Vietnam. Large com- mercial orders are filled directly from Nokero’s factory in China via the port of Shenzhen, China. Nokero’s outsourced fulfillment partner in Shenzhen, China, serves smaller orders.

Addressing Supply-Chain Issues As previously mentioned, Katsaros understands that the success of Nokero’s business hinges on its ability to address critical supply-chain issues. Katsaros and his Hong Kong partners must ensure that the company is ready to fill both large and concentrated orders from government and inter- national organizations, as well as sample and small order sales from hundreds of customers that are geographically dispersed. At this point, Nokero needs to evaluate whether it should bring on board a second or third supplier that will sup- port its major supplier partner in China. Moreover, it needs to evaluate the locations of the company’s fulfillment centers.

In addition, Katsaros needs to address some operational issues related to supply-chain management. These include

1. Payments and Pricing of Shipping Charges. Currently, customers who order through the website pay by credit card or PayPal. However, PayPal is not accepted in all countries, particularly in some mar- kets that represent attractive markets for Nokero in Asia and Africa. In addition, determining the correct amount to charge for shipping has been a challenge since Nokero’s fulfillment center does not provide a live feed with updated international pricing of ship- ping charges, and in general it is extremely difficult to

516 part 6 Managing International Operations

reliably estimate the cost of shipping small orders to all the regions of the world.

2. Order Tracking. Tracking information usually stops once the package has left China (i.e., the Chinese factory location or fulfillment center in Shenzhen) making the tracking information limited and less useful.

3. Timely Delivery. Orders are filled and shipped in a timely manner from Nokero’s factory and fulfillment center. However, the delivery process relies heavily on the time- liness and reliability of the postal system in the receiving country. In some instances, it has taken months for a sample or small order to be delivered to the customer.

4. Last Mile Issue. Often Nokero’s customers are in remote locations that cannot be accessed by regular postal delivery. Even social enterprises and government orga- nizations that partner with Nokero find it challenging to reach users in remote locations. The significance of the last mile issue is not just about getting the products to the needful users but educating them about product attributes and usage. As Katsaros noted, “this cannot be done through a website or a product manual, it is better if someone local can communicate with and dem- onstrate the products to users.” To this end, Nokero is testing a model in Kenya where it has partnered with a Procter and Gamble distributor who has a strong reach and connections with customers in remote locations. Nokero has also hired a local employee to help with the

communication and distribution of these products to Kenyan customers, as well as to work with its distribu- tor. If successful, Nokero hopes to replicate this model in other markets.

Katsaros knows that the growth strategy that Nokero chooses to pursue will have important implications for the company’s supply-chain strategy, processes, and prob- able results. In turn, generating greater efficiencies in distribution and the supply chain will be critical to Noke- ro’s ability to lower its price and make its products more affordable to its customers. Katsaros wants to ensure that Nokero effectively addresses the key strategic and tacti- cal issues related to the management of the company’s supply chain, which will in turn help the company in antici- pating and capitalizing on further and faster growth in the coming years.

Questions

18-3. What manufacturing strategy should Nokero pursue? Should

it continue to supply all of its light bulb orders from a single

factory location in China?

18-4. In terms of distribution networks, should Nokero maintain

fulfillment warehouses in Africa, Asia, and Latin America?

How should Nokero address the last mile issue of accessing

people in the most remote locations?

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

18-5 How should Nokero build its distribution footprint in international markets? What regions should it emphasize?

18-6 A number of potential distributors have asked Nokero for exclusive rights in key geographic markets. Should Nokero grant exclusive country distribution rights? What performance standards or metrics should Nokero put in place for distributors?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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Objectives

After studying this chapter, you should be able to

19-1 explain the crossroads of accounting and finance

19-2 identify the major factors affecting the devel- opment of accounting objectives, standards, and practices

19-3 Describe international accounting standards and the process of global convergence

19-4 Demonstrate how companies account for foreign-currency transactions

19-5 Determine how companies can translate foreign-currency financial statements

19-6 List some of the key international finance functions

19-7 show how companies protect against foreign-exchange risk

chapter 19 international accounting and Finance issues

Traders at GPS Capital Inc., a leading foreign-exchange brokerage firm, scan current exchange rate trends.

▶

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

Even between parents and children, money matters make strangers.

—Japanese proverb

Case GPs Capital Markets: In the Market for an effective Hedging strategy?

On April 10, 2000, U.S.-based firms Wells Fargo & Company and First Security Corporation announced that they had signed a merger agreement involving their banks in San Francisco and Salt Lake City, respectively.1 Both banks, located in the West, were clearly position- ing themselves to compete with each other, especially in the Utah market, which is composed of individuals, small businesses, middle- market businesses, farmers, ranchers, and a few large corporate customers. Wells Fargo was operating in 22 states, First Security in 7. Given the overlapping markets and client demographics, it was clear that services were to be consolidated over the next several months.

First Security Bank had three key personnel in the interna- tional banking area: Ryan Gibbons, VP and manager of the Foreign Exchange Department; Jason Langston, who had recently been pro- moted to VP and foreign-exchange trader; and Ali Manbeian, who had become VP and trade products manager in the International Banking Division. All three had significant experience in international banking, and First Security had a trading room where they could provide for- eign-exchange services and trade-related collections and payments for clients. With the merger, however, many of the more interest- ing businesses shifted to San Francisco, and the three could see the writing on the wall.

The STarT-up of GpS

In 2002, with the help of some key investors, Manbeian, Langston, and Gibbons formed GPS Capital Markets Inc. Realizing there was a niche market in foreign exchange that was no longer being served in the Intermountain West, they struck out on their own with a business model they believed could be successful.

Bringing investors on board, particularly their large clients and brokers, was essential to their success because they needed the necessary credit backing and reputation to enter the wholesale market. Jason Langston noted that “90 percent of the transactions [we’ve] done in the past wouldn’t have happened without these cred- ible investors.” However, GPS has been able to move beyond the help of its initial investors due to a strong working capital position.

TarGeT MarkeT and ClienT STraTeGy

To compete effectively in the market, GPS initially decided to target small and medium-sized companies (SMEs) and focus on serving those that had significant foreign-exchange needs, but not their own foreign-exchange team. With this in mind, they started out by provid- ing the regular services that commercial banks offer, believing that their expertise and low overhead would help them outbid the larger banks for their business. At first, they offered traditional inbound and outbound payments—areas in which they excelled at First Security

Bank. Such payments are the basic needs of firms that are going to receive or are required to pay invoices in a different currency.

GPS, however, was finding it difficult to obtain clients. The first choice for most companies when it comes to foreign exchange is to use their commercial bank with which they already have a good relationship and which provides traditional banking services, includ- ing inbound and outbound payments. GPS financial advisers have overcome this obstacle with their competitors by visiting potential clients personally and building an open and transparent relation- ship. Travel to New York, Los Angeles, and other cities outside the Rocky Mountain region makes this more expensive, of course, but it has paid off because the advisers have developed relationships and obtained new clients. Some competitive advantages GPS has over the commercial banks are lower transaction costs, 100 percent transparency, and customizing solutions to satisfy customer needs.

Commercial banks have so many different departments and ser- vices that the foreign-exchange transactions tend to be more expen- sive in order to meet the overhead. Also, the banks look at foreign exchange as a potential area for earning a lot of money, so they price aggressively to build their profits. GPS is smaller and more special- ized in the foreign-exchange market, so it can keep its costs low and pass on lower prices to companies.

Until the Internet brought more transparency to foreign-exchange markets, companies often didn’t know how much banks or brokers were making on foreign-exchange transactions. GPS has adopted complete transparency with its clients, disclosing to them how much it will make on the deal.

While big banks tend to want to sell standardized services—one size fits all—GPS tries to focus on satisfying the individual foreign- exchange needs of clients. Managers sit down with clients to discuss needs and strategies and come up with innovative solutions resulting in more satisfactory foreign-exchange transactions. These strategies have helped GPS grow significantly since its inception.

Thomson Reuters and Bloomberg play an important role in the business of GPS, with their powerful analytical tools, market infor- mation, real-time pricing, and a trading platform. In addition, the ser- vices are essential for trying to price more complex foreign-exchange products such as options. Despite the high cost of subscribing to these services, GPS decided to use both.

fuTure ChallenGeS

Although GPS has never lost a client to another competitor, the fu- ture holds a number of challenges. The first is services. If GPS had stuck with its initial goal of providing traditional foreign-exchange services, it would have opened itself up to significant competition

Chapter 19 International Accounting and Finance Issues 519

with the banks and other market entrants, such as boutique firms that can focus only on the payments side in the SME market. So the key was to find ways to move clientele upstream with other value- added services, while the problem was to decide what areas to enter and where to find the expertise.

A second risk is its target market. Given the merger and acquisi- tion activity in the United States, could GPS continue to maintain its client base, or would its clients get bought out by larger firms, just as Wells Fargo snapped up First Security? If that were to happen, GPS would have to figure out how to sell its expertise to larger clients who had no experience or track record with them.

A third risk is the potential of new regulations. The regulatory environment of the foreign-exchange trade is intense and changes frequently, both in the United States and abroad. The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in the United States on July 21, 2010, with potentially signifi- cant ramifications to GPS’s business in the foreign-currency deriva- tives market. Among other things, the Dodd–Frank Act established a Financial Stability Oversight Council with the power to regulate non- bank financial companies in areas such as improved transparency and accountability for trading in derivatives. Although Dodd–Frank affects who can engage in the business, a key issue is the onerous reporting requirements.

The Global finanCial CriSiS: ChallenGeS and opporTuniTieS

When the global economic crisis hit in 2008, it became obvious that counterparty risk was a real issue: the risk that the other party to an agreement—in this case, a money center bank entering into a foreign-exchange agreement—might default. Many of GPS’s clients or potential clients became nervous as one major money center bank after another ran into problems in late 2008. Because GPS was on sound financial footing, many companies flocked to it to handle their foreign-exchange transactions, which caused a large spike in activ- ity. In addition, GPS’s lower rates were more attractive. As the global economy began to contract, investors realized how important it was to squeeze out any savings they could, which played right into the hands of GPS.

However, as soon as the U.S. Fed decided to bail out the banks and reduce the counterparty risk, many of GPS’s new clients realized they needed to go back to the banks, given how tight credit was. GPS was, however, able to retain some of them.

expanded ServiCeS: a key To fuTure GrowTh

As Langston, Gibbons, and Manbeian looked at their business, they realized that the key to their future was to develop a broader base of services to their clients. So they decided to focus on their strength—corporate foreign exchange—and provide expanded

services in global business risk management. The general idea of trading currencies to satisfy their initial core business of import and export transactions was simple. Some transactions went beyond ex- ports and imports and involved derivatives to protect against future risks. With their connection to Bloomberg and Reuters, they had the capabilities necessary to enter into any transaction the client needed.

Then, as they began to work with SME companies with opera- tions around the world, they realized that many of these companies were spending a lot of money making trades. Analyzing the cash flows in different currencies, it was easy to see that as their clients’ markets and the currencies in which they operated increased, they had to enter into more and more foreign-exchange transactions.

One client, a large technology firm, was expanding internation- ally so rapidly that the growth was straining the capabilities of its finances to keep up. With hundreds of currency pairs and financial statements being generated in many different currencies and using several different functional currencies, the client was having a dif- ficult time keeping on top of the complexities. GPS realized it could save its client a lot of money by netting its transactions. Instead of having each entity around the world settle its transactions with every other entity, GPS helped the firm set up a system that could reduce the number of times it had to exchange currency. By doing that, it reduced the costs of each transaction—an important source of rev- enue to the client’s bank.

fxpert

GPS developed proprietary software called FXpert to help its clients monitor foreign-exchange flows and determine how to save money on transactions. After identifying the timing and nature of the cash flows through a specialized audit, a GPS financial adviser proposes an effective hedging solution that GPS can provide. The solution might be as simple as reducing the number of foreign-currency transactions or as complex as hedging some of the exposures using forwards, options, or futures contracts.

The global risk-management business also offers foreign accounts receivable reviews, worldwide business consultation on finance methods, dispute resolution in solving payment disputes, international loan packaging, and letters of credit. As it has devel- oped these services, GPS has had to expand its expertise base to include an understanding of complex accounting rules on derivatives, complex financial hedging strategies, and software development.

addiTional STraTeGiC MoveS

Given the risky foreign-exchange environment, GPS has shifted some of its efforts to work as an agent or broker with clients’ banks instead of being the direct counterparty in foreign-exchange transactions. This allows it to do what it does best: use its proprietary software to find business solutions for clients to reduce foreign-exchange risks and lower the costs of trading foreign exchange. With its knowledge

520 part 6 Managing International Operations

of the markets, GPS is able to negotiate with clients’ banks to get the best possible exchange rate on a transaction and earn a little in the process.

In addition to technical expertise, GPS has developed a solid marketing strategy, continuing to focus on SMEs while expanding its client base by setting up business centers in Los Angeles, Phoenix, Dallas, Boston, and London. Entering London has opened up signifi- cant opportunities for GPS in the UK and the rest of Europe. Not only can it pick up new customers in Europe, it can also represent U.S. clients in Europe more effectively.

As GPS continues to expand, it must constantly refine its mes- sage. From a sales point of view, its managers need to make sure they understand what CFOs and treasurers need to know about the firm and what it has to offer. And they need to figure that out for the

different regulatory environments in which GPS operates. In London they face competition that only offers traditional payments clear- ance, but it is nevertheless difficult even to get an audience with CFOs to explain how they can help in ways that go way beyond payments clearances to involve risk management in global capital markets.

Questions

19-1. What is the unique market niche for GPS, and what does it

have to offer compared to larger banks and other financial

institutions?

19-2. What do you think are the major obstacles to success for

GPS in Europe?

The CroSSroadS of aCCounTinG and finanCe As noted in Chapter 11, the Chief Financial Officer (CFO) of a company is responsible for overseeing the financial activities of a company.2 Working under the CFO, the controller has responsibility for accounting-related activities, providing management with relevant and reliable information, and preparing information for the external users of financial information.

The accounting and finance functions are closely related, with each relying on the other to fulfill its responsibilities. The CFO relies on the controller, or chief accountant, to provide the right information for making decisions, while the internal audit staff ensures that corporate policies and procedures are followed. The internal auditors, the controller, and the CFO work closely with the external auditor to try to safeguard the assets of the business.

The actual and potential flow of assets across national boundaries complicates the finance and accounting functions. So MNEs must learn to cope with differing inflation rates, exchange-rate changes, currency controls, expropriation risks, customs duties, tax rates and methods of determining taxable income, levels of sophistication of local accounting person- nel, and local as well as home-country reporting requirements.

whaT doeS The ConTroller ConTrol? The role of the company controller is critical to providing useful and timely information to management and external stakeholders. Today’s controller is engaged in a variety of activities outside the typical accounting and reporting functions that support the firm’s general strat- egy such as evaluating potential acquisitions abroad, disposing of a subsidiary or a division, managing cash flow, hedging currency and interest-rate risks, tax planning, internal audit- ing, and helping to plan corporate strategy. As noted in Chapter 16, foreign managers and subsidiaries are usually evaluated at headquarters on the basis of data generated in the com- pany’s reporting system as set up and coordinated by the controller’s office. The controller generates reports for internal consideration, local government needs, creditors, employees, suppliers, stockholders, and prospective investors while handling the effect of many different currencies and inflation rates on the statements and becoming familiar with different coun- tries’ accounting systems.

ConCepT CheCk

We discuss foreign cur- rency exchange rates and the ways in which they affect the operations of an MNE in Chapter 8. Here we explain the responsibilities of the CFO in overseeing a company’s closely related financial and accounting functions. As we’ll see, financial management deals with the ef- fects of exchange rates on such financial-statement items as receivables and payables.

The controller is essential in providing information to finan- cial decision-makers.

The controller of an interna- tional company must be con- cerned about a range of issues dealing with corporate strategy broader than just accounting issues.

Chapter 19 International Accounting and Finance Issues 521

differenCeS in finanCial STaTeMenTS inTernaTionally One problem an MNE faces is the varying accounting standards and practices around the world. Financial statements among countries differ in form (or format) and content (or substance). In terms of form, the balance sheets for U.S. companies are in the balance format:

Assets = Liabilities + Shareholders’ equity

The balance sheet varies in the order of liquidity of the accounts presented. Some companies start with the least liquid assets (those that are harder to convert into cash quickly) and go to those that are most liquid (such as cash), whereas other companies start with the most liquid and progress to the least liquid assets (such as property, plants, and equipment). The former practice is very common among European companies such as Swedish retailer H&M; the lat- ter is used by U.S.-based firms. In a slight twist, Parmalat from Italy uses the following format:

Noncurrent assets + Current assets = Shareholders’ equity + Noncurrent liabilities + Current liabilities

The balance sheet for British retailer Marks and Spencer uses the following format, which is very common among British firms:

Noncurrent assets + Current assets - Current liabilities - Noncurrent liabilities = Total equity

differenCeS in The ConTenT of finanCial inforMaTion The types of financial information required in different countries can differ, while com- panies also have to consider who their audience is: Are they providing financial informa- tion only for the local market, or also for users from the broader global capital markets? Companies that list on stock exchanges usually provide an income statement, a balance sheet (also known as a statement of financial position), a statement of shareholders’ equity, a cash-flow statement, and detailed footnotes in their annual report. The depth of disclo- sure of information, especially in footnotes, is a major issue in terms of content. Providers of financial information for the broader investing community need to consider the following three factors:

1. Language 2. Currency 3. Underlying GAAP on which the statements are based

language differences If companies are going to provide their annual reports in a lan- guage different from their home language, which language do they use? English tends to be the first choice of companies choosing to raise capital on multiple stock exchanges. For example, Sweden’s H&M provides its annual reports in Swedish and English. German com- pany Daimler provides information in English and German. In addition to language, com- panies have to deal with differences in terms. For example, U.S. companies use inventory to refer to what British firms call stocks. However, U.S. firms use stocks for their equity capital, whereas British firms use shares.

Currency differences Companies around the world prepare their financial statements in different currencies—Daimler’s are in euros, H&M’s in Swedish kronor, Coca-Cola in U.S. dollars, and so on. In its 2015 annual report, Adidas provided its financial infor- mation in euros, disclosed information on the firm’s currency-translation policies, and gave average exchange rates for the U.S. dollar, the British pound, the Japanese yen, the Russian ruble, and the Chinese yuan to allow investors to make convenient translations from euros.3

Both the form and the content of financial statements are dif- ferent in different countries.

Major reporting issues:

• Language • Currency • Underlying GAAP on which

the financial statements are based

Major sources of influence are capital markets, the cultural and regulatory environments, global standards settings, and other users.

522 part 6 Managing International Operations

underlying Gaap A major hurdle in raising capital in different countries is dealing with widely varying accounting and disclosure requirements. Although this problem is decreasing as more stock exchanges and countries allow the use of International Financial Reporting Standards (IFRS), some countries care more about those differences than others. Most countries also may apply one set of accounting standards for consoli- dated groups while using another set for the individual companies in the group. In this situation, the individual companies must use local accounting standards that are usually tied to legal requirements and are the basis for tax accounting. Consolidated financial statements, which are used for capital markets and not for tax purposes, are prepared by a different set of standards, such as IFRS. U.S. companies do not have the same situation. They disclose only consolidated financial statements, not individual company financial statements. There are some differences for tax accounting, but those differences are rec- onciled in the financial statements rather than as separate statements for each company in a group.

faCTorS affeCTinG aCCounTinG objeCTiveS, STandardS, and praCTiCeS Figure 19.1 identifies some of the factors affecting the development of accounting standards and practices both domestically and internationally. Although all the factors shown are sig- nificant, their importance varies by country. Capital markets refer to equity and debt mar- kets. As noted in Chapter 11, lenders are considered to be bond holders, banks, and private equity funds. Equity market investors are influential in the United States and the United Kingdom, but creditors, primarily banks, have traditionally had more influence in Germany and Switzerland.

As we will discuss in more detail below, cultural issues cut across all countries and strongly influence the development of accounting. The regulatory environment, including legal and tax systems, is very influential, especially in countries with weak stock markets. However, the regulatory environment is also influential on stock markets. Certain interna- tional factors also have weight, such as former colonial influence, foreign investment, and the influence of regional economic agreements, such as the EU.

ConCepT CheCk

In discussing “Legal Issues Fac- ing International Companies” on p. 84 in Chapter 3, we survey the various ways in which local legal standards can affect the way foreign firms function on a day-to-day basis. Naturally, these standards include ac- counting standards, and here we emphasize that attitudes toward, and more importantly regulations concerning, ac- counting practices vary widely from country to country.

Political and Economic

Environments

Other Users CulturalEnvironment

Global Standard Setters

Regulatory Environment

Capital Markets

Figure 19.1 Sources of influence on Accounting Standards and Practices Every aspect of the accounting process is influenced by a variety of internal and external factors, and they’re all potentially important. The degree of importance will vary by country.

Chapter 19 International Accounting and Finance Issues 523

CulTural differenCeS in aCCounTinG The differences in measurement and disclosure practices among countries are of special interest to international investors. Measurement means how companies value assets, includ- ing inventory and fixed assets, whereas disclosure refers to how and what information com- panies provide and the level of detail and transparency.

Culture refers to learned norms based on the values, attitudes, and beliefs of a group of people. Much of the work on culture and accounting is initially based on Hofstede’s research on the structural elements of culture, particularly those that most strongly affect behavior in the work situations of organizations and institutions.4 Hofstede’s work was extended into the accounting area by Gray, which resulted in country classifications according to disclosure and measurement principles—specifically, secrecy/transparency and optimism/ conservatism.5

The Secrecy–Transparency/optimism–Conservatism Matrix Figure 19.2 depicts the accounting practices of various groupings of countries within a matrix of the cultural values of secrecy–transparency and optimism–conservatism. With respect to accounting, secrecy and transparency indicate the degree to which companies disclose information to the public. In the past, countries such as Germany, Switzerland, and Japan tended to have less disclo- sure (illustrating the cultural value of secrecy) than did more transparent U.S. and British companies (Anglo-Saxon in Figure 19.2) due to their reliance on stock markets. The classifi- cation of countries in Figure 19.2 represents a point in time, but countries are always chang- ing due to the increased importance of and demands by capital markets and the influence of IFRS. However, the importance of understanding where countries came from illustrates the complexity of moving everyone to one set of global accounting standards.

Optimism and conservatism (in an accounting sense, not political) are the degrees of caution companies exhibit in valuing assets and recognizing income. The more

Culture influences measure- ment and disclosure practices:

• Measurement—how to value assets

• Disclosure—the presentation of information and discussion of results

ConCepT CheCk

Chapter 2 is devoted to il- lustrating the many ways in which local culture shapes the environment in which interna- tional business is conducted from country to country. Here we point out that culture also affects differences in ap- proaches to accounting systems and policies. In Chapter 2, we cite Geert Hofstede among the researchers who’ve studied national differences in manage- rial attitudes and preferences, and here we use applications of Hofstede’s findings to studies of work-situation behavior as a means of shedding light on the effect of cultural differences on accounting standards and practices.

Greater caution in assessment

Secrecy

Transparency

Optimism Conservatism

Anglo-American

Nordic

Asian colonial

African

Germanic Near Eastern

Japan Less developed

Asian More developed Latin

Less developed Latin

Le ss

d is

cl os

ur e

to th

e pu

bl ic

Figure 19.2 A Disclosure/Assessment Matrix for National Accounting Systems The vertical axis reflects practices according to transparency–secrecy (the extent to which companies in a country disclose information to the public). The horizontal axis reflects practices accounting to optimism–conservatism (the degree of caution taken by companies when it comes to valuing assets and recognizing income). Note that, not surprisingly, transparency and optimism tend to go hand in hand, as do secrecy and conservatism.

Source: Based on Lee H. Radebaugh, Sidney J. Gray, and Ervin L. Black, International Accounting and Multinational Enterprises, 6th ed. (New York: John Wiley & Sons, 2002): 51.

524 part 6 Managing International Operations

conservative countries tend to understate assets and income, whereas optimistic coun- tries tend to be more liberal in their recognition of income. Historically, banks have been a primary source of funding for companies in countries with weak capital markets and a strong influence on tax accounting, so those companies tend to be very conservative both when recording profits that keep them from paying taxes and when declaring divi- dends to pile up cash reserves to service their bank debts. However, as German MNCs in particular outgrew the ability of banks to provide the majority of their funding needs, they were forced to adopt accounting standards and reporting practices more in line with global capital markets, becoming less secret and more transparent. In contrast, U.S. and British companies are more optimistic and want to show earning power to impress and attract investors.

inTernaTional STandardS and Global ConverGenCe

MuTual reCoGniTion verSuS reConCiliaTion Before the rise in importance of global capital markets and the move to a common set of accounting standards, it was common for many countries to apply the principle of mutual recognition, whereby a regulator, such as the German Stock Exchange, would accept financial statements provided in U.S. GAAP of a U.S. company wanting to list securities in Germany. Prior to the requirement in 2005 that EU companies provide financial statements prepared according to IFRS, some German companies such as Daimler and Deutsche Bank prepared their consolidated financial statements according to U.S. GAAP, as permitted at the time by German law. This made it easier for them to list on the New York Stock Exchange. However, they dropped this practice and moved to IFRS in 2007.

The United States uses two approaches: adoption of U.S. standards or the use of IFRS as established by the International Accounting Standards Board. If a foreign com- pany prefers to list according to their home-country GAAP instead of U.S. GAAP or IFRS, they must provide a statement of reconciliation. In this case, the company usu- ally lists American Depositary Receipts (ADRs) on a U.S. exchange and then reconciles its home-country GAAP with U.S. GAAP in a special statement called Form 20-F on net income and shareholders’ equity. This is the approach Daimler used before it adopted U.S. GAAP for its consolidated financial statements. Since 2007, however, the SEC permits foreign issuers to list without a reconciliation statement as long as their financial state- ments are prepared in accordance with full IFRS. In response, the EU announced in 2008 that it would allow U.S. firms to continue to list on EU stock markets using U.S. GAAP, given the progress of convergence and the fact that U.S. GAAP and IFRS are essentially equivalent.6

Despite the many differences in accounting standards and practices around the world, a number of forces are leading to convergence:

• A movement to provide information compatible with the needs of investors • The global integration of capital markets, which means easier and faster access to in-

vestment opportunities around the world and, therefore, the need for more comparable financial data

• The need of MNEs to raise capital outside their home-country capital markets while gen- erating as few different financial statements as possible

• Regional political and economic harmonization, such as the efforts of the EU, which af- fect accounting as well as trade and investment issues

• Pressure from MNEs for more uniform standards to allow greater ease and reduced costs in general reporting in each country

Secrecy and transparency refer to the degree to which corporations disclose informa- tion to the public. Optimism and conservatism refer to the degree of caution companies display in valuing assets and recognizing income.

British and U.S. companies are optimistic when recognizing income, whereas Japanese and continental European compa- nies are more conservative.

Major approaches to dealing with accounting and reporting differences:

• Mutual recognition • Reconciliation to local GAAP • Issue financial statements

according to IFRS

Major forces leading to establishing global accounting standards:

• Investor orientation • Global integration of capital

markets • MNEs’ need for foreign

capital • Regional political and

economic harmonization • MNEs’ desire to reduce

accounting and reporting costs

• Convergence efforts of standards-setting bodies

Chapter 19 International Accounting and Finance Issues 525

The firST STepS in eSTabliShinG ifrS Established in 1973, the International Accounting Standards Committee (IASC), the fore- runner of the IASB, began working toward harmonizing standards by issuing a set of International Accounting Standards (IAS) that they hoped anyone in the world could use. Its original standards had a strong capital-markets focus so that they could be used worldwide to facilitate the free flow of capital. With such a goal, the IASC tended to lean more toward the traditions of the United States and the United Kingdom rather than the legal- and tax- based systems of Germany and France, where funding was more the domain of banks than broadly based capital markets. The early standards were often very superficial, with too many options to capture the support of everyone.

The turning point in the significance of IAS came in 1995, when the International Organization of Securities Commissions (IOSCO) announced publicly it would endorse IAS if the IASC developed a set of core standards acceptable to it. IOSCO is significant because it comprises the regulators of most of the world’s stock markets, including the SEC in the United States. In May 2000, the IASC completed a core set of standards acceptable to IOSCO, and securities market regulators began the process of convincing their standard setters to adopt these standards, called International Financial Reporting Standards (IFRS).

The inTernaTional aCCounTinG STandardS board In March 2001, the IASC was reorganized into the International Accounting Standards Committee Foundation (now called the IFRS Foundation) and the International Accounting Standards Board (IASB). The IFRS Foundation is the parent entity of the IASB, which assumed the major standard-setting functions of the old IASC.7 The IASB is composed of 14 members who are standard setters, preparers, auditors, users, and academics with broad geographic representation from the Asia/Oceania region, Europe, North America, Africa, and South America. Two members are “at large” instead of from a specific geographic area.8

international financial reporting Standards (ifrS) When the IASB was organized, all of the old standards from the IASC were adopted, and the Board began to go through each one to upgrade them. Then the Board began to issue the new International Financial Reporting Standards; thus, when we use the term IFRS, we refer to the new standards as well as the old IAS.

The objectives of the IFRS Foundation and the IASB include developing “a single set of high- quality, understandable, enforceable, and globally accepted international financial reporting stan- dards (IFRSs) through its standard-setting body, the IASB, and [promoting] the use and rigorous application of those standards.”9 As of 2016, 120 countries require the use of IFRS for reporting by public companies, while most others permit their use in some cases. Of course, there is a dif- ference between permitting and requiring, and that is a major issue. In 2016, the IASB published a detailed study of countries to determine the level of acceptance and usage of IFRS.10

The relationship between the faSb and the iaSb The U.S. Financial Accounting Standards Board (FASB) and IASB have been working closely to achieve a convergence of accounting standards. In 2002, they issued the Norwalk Agreement, pledging their best ef- forts to remove individual differences between U.S. GAAP and IFRS and undertake joint projects to develop future standards.11 Convergence implies a goal and a path to achieving it. The goal is to eliminate differences in accounting standards between FASB and the IASB. The convergence process (or path) takes several forms. Initially, the two Boards identified standards that could easily be converged. Once these standards were converged, they de- cided to jointly develop new standards where existing standards were too far apart. Finally, they identified entirely new standards which would be jointly developed.12

However, standard-setting in the United States depends on the cooperation of the Securities and Exchange Commission (SEC), whose mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”13 Although the SEC does

The International Organiza- tion of Securities Commis- sions accepted a core set of accounting standards issued by the IASB in which securities regulators can be confident.

The IASB is harmonizing accounting standards through issuing International Financial Reporting Standards (IFRS).

FASB and IASB are trying to converge their standards through removing differ- ences in existing standards and engaging in joint projects to develop new standards.

526 part 6 Managing International Operations

not set accounting standards, it empowers the FASB to do so because companies—both foreign and domestic—that want to raise capital in the United States must follow the SEC guidelines. Also, the SEC determines which accounting standards can be used by issuers on the U.S. stock exchanges as noted above. Convergence is complicated because it is both technical in terms of the quality of the standards as well as political.

The european response to Convergence The main body of financial reporting re- quirements for limited liability companies in the EU consists of two directives issued by the European Council. Thus, it is important to understand that IFRS and interpretations must be approved by the European Parliament and the European Council and adopted as an official regulation by the European Commission to have legal standing in the EU.14 This illustrates the importance of the political process in IFRS adoption. Prior to the development of the IASB, the EU was working to harmonize reporting practices to better coordinate financial markets. To enhance that process, it supported the efforts of the IASB and, in the spring of 2002, directed its member countries to adopt IFRS by 2005. In the case of the EU, this meant that 7,000 publicly listed companies started using IFRS for their consolidated financial statements in 2005.15 The two main reasons for the EU to push IFRS were to allow it to influence IASB standards and to avoid funding and developing a competing standard-setting body.16 By working with the IASB, the EU would avoid relying on standards developed in the United States for capital mar- ket reporting. In one political decision, the EU suddenly made IFRS the most important set of accounting standards outside of standards issued by FASB in the United States.

The EU has adopted most of the standards as written, but has “carved out” or suspended the standard on financial instruments due largely to political pressure from French banks. Thus the EU has its own version of IFRS. As a result, European companies such as H&M, as described in the ending case, must state in their annual report that they apply IFRS “as adopted by the EU.” That means that in the future, upon the EU’s recommendation, its member companies can “opt out” or “carve out” certain standards, ending up with their own version of IFRS. Initial reactions of various parties to European firms’ 2005 adoption of IFRS have been interesting. In fact, various interpretations and applications exist. Some firms use wide judgment in applying IFRS, while others use an adapted form with changes or alterna- tive interpretations based on individual country accounting treatments.

The EU required adoption of IFRS in 2002, effective in 2005.

Full application of IFRS in various countries and under various regulatory regimes is difficult to judge. The EU does not require companies to adhere to all IFRS, only those approved by the EU.

Yes A major issue for investors around the world is obtaining reli- able, comparable financial-statement informa-

tion for company evaluation and comparison. Creditors and other users also need this information for making well- informed decisions on a global basis. As the composition of the business world has shifted from domestic economies to a global economy, the need for a single set of financial re- porting standards has never been greater. IFRS are required for listed entities in many countries, such as all countries in the European Union, Canada, Australia, and New Zealand.

U.S. GAAP and IFRS are the two most recognized sets of standards today, and they are steadily becoming nearly identical to each other. The combined efforts of the IASB and the FASB in their convergence project have brought the two closer than ever before. The SEC currently allows foreign firms that list on U.S. exchanges to use IFRS for financial reporting and should allow U.S. firms as well. Not only would

this make the United States more a part of the global econ- omy, its companies could also raise more capital because investors in countries that use it would be more familiar and able to keep up with the single international set of standards.

U.S. investors would also benefit. They would become more familiar with the international standards and would feel more apt to invest in international companies. As the gap between IFRS and U.S. GAAP shrinks, the quality of the financial information presented under IFRS will not be lower than it has been under GAAP.

Many U.S. firms with international operations use IFRS abroad, so allowing IFRS to be used for U.S. reporting would reduce the costs of accounting for and reporting information to users. In addition, U.S. companies that acquire foreign companies that use IFRS would find it easier to use IFRS for all operations rather than have to convert the results of their acquired companies from IFRS to U.S. GAAP for reporting purposes.

Should U.S. Companies Be Allowed to Use IFRS?

Point

Chapter 19 International Accounting and Finance Issues 527

no It is unrealistic to assume that IFRS would be appropriate

for the unique U.S. economic environment. As the largest economy in the world, with the largest and most sophis- ticated capital market, the United States should have the most stringent and transparent financial reporting standards in the world. Many companies around the globe continue to prepare their financial information in accordance with U.S. GAAP because it has historically been the world’s most reliable set of standards, designed to present information that is both relevant and trustworthy. IFRS are far less com- prehensive than GAAP, and the standards, though oriented to capital markets, cannot take into account specific issues important to U.S. capital markets.

Allowing U.S. companies to use IFRS would impose tre- mendous costs on the nation’s economy. Publicly traded firms would need trained employees proficient in IFRS application. U.S. accounting firms would be responsible for training their existing auditors in IFRS, hiring new employ- ees and training them, or hiring existing IFRS experts. This training and/or hiring would impose tremendous burdens in both time and money on these firms, which would still be held responsible for meeting all the rigorous standards

of the Public Company Accounting Oversight Board (PCAOB) and the Sarbanes–Oxley Act

of 2002. Many contracts in the United States are based on U.S. GAAP, and it would be necessary to change nearly all of them to allow for the use of IFRS.

The differences between IFRS and U.S. GAAP, though growing more insignificant, still exist. The standards are not directly comparable, which could mean trouble for inves- tors who may have difficulty seeing the differences. In addi- tion, more than one set of IFRS seems to exist: (1) IFRS as issued by the IASB, (2) IFRS as adopted by the EU, and (3) IFRS as applied/adopted on an individual-country basis. How will investors ascertain which set is being used by various companies, and how will this information be com- parable?

Just as politics enters into the adoption of IFRS in the EU, politics is important for U.S. GAAP. Since the SEC is a U.S. government entity whose five commissioners are appointed by the president,17 it is impossible to believe that U.S. GAAP would be turned over to IFRS and the control of the IASB. Sovereignty, even over accounting, is not something the U.S. government would give up to an international organiza- tion over which it has some influence but not control.

Counterpoint

Should U.S. Companies Be Allowed to Use IFRS?

TranSaCTionS in foreiGn CurrenCieS When a company operates outside the domestic market, it must concern itself with the proper recording and subsequent accounting of assets, liabilities, revenues, and expenses that are measured or denominated in foreign currencies. These transactions can result from the pur- chase and sale of goods and services as well as the borrowing and lending of foreign currency.

reCordinG TranSaCTionS Any time an importer has to pay for equipment or merchandise in a foreign currency, it must trade its own currency for that of the exporter to make the payment. Assume that Sundance Ski Lodge, a U.S. company, imports skis from a French supplier for €5,000 and agrees to pay in euros when the exchange rate is $1.4500/euro. Sundance records the following in its books:

Purchases 7,250

Accounts payable 7,250

€ 5,000 @ 1.4500

If Sundance pays immediately, there’s no problem. But what happens if the exporter extends 30 days’ credit to Sundance? If the rate changed to, say, $1.5000/euro by the time the payment was due, Sundance would record a final settlement as:

Accounts payable 7,250

Foreign-exchange loss 250

Cash 7,500

528 part 6 Managing International Operations

The merchandise stays at the original value of $7,250, but there is a difference between the dollar value of the account payable to the exporter ($7,250) and the actual number of dollars the importer must come up with to purchase the euros to pay the exporter ($7,500). The dif- ference between the two accounts ($250) is the loss on foreign exchange and is recognized in the income statement.

The company that denominates the sale or purchase in the foreign currency (in this case, the importer) must recognize the gains and losses arising from foreign-currency transac- tions at the end of each accounting period. In the example here, assume that the end of the quarter has arrived and Sundance has still not paid the French exporter. The skis continue to be valued at $7,250, but the payable has to be updated to the new exchange rate of $1.5000/ euro. The journal entry would be:

Foreign-exchange loss 250

Accounts payable 250

The payable would now be worth $7,500. If settlement were made in the month fol- lowing the end of the quarter and the exchange rate remained the same, the final entry would be:

Accounts payable 7,500

Cash 7,500

If the U.S. company were an exporter and anticipated receiving foreign currency, the corre- sponding entries (using the same information as in the example here) would be:

Accounts receivable 7,250

Sales 7,250

Cash 7,500

Foreign-exchange gain 250

Accounts receivable 7,250

In this case, a gain results because the company received more cash than if it had collected its money immediately.

CorreCT proCedureS for u.S. CoMpanieS According to U.S. GAAP, U.S. companies must record the initial transaction at the spot exchange rate in effect on the transaction date and record receivables and payables on sub- sequent balance-sheet dates at the spot exchange rate on those dates. Any foreign-exchange gains and losses are recognized in the income statement in that period.18 This is basically the same procedure required by the IASB as well as in IAS 21.19

TranSlaTinG foreiGn-CurrenCy finanCial STaTeMenTS Even though U.S.-based MNEs receive reports originally developed in a variety of different currencies, they eventually must end up with one set of financial statements in U.S. dol- lars to help management and investors understand their worldwide activities in a common currency. The process of restating foreign-currency financial statements into U.S. dollars is called translation. The combination of all of these translated financial statements into one is consolidation. The same concept exists for other countries, such as a British-based MNE that has to come up with a set of financial statements in British pounds. For the sake of illus- tration, we use a U.S.-based MNE.

Foreign-currency receivables and payables give rise to gains and losses whenever the exchange rate changes. Trans- action gains and losses must be included in the income statement in the accounting period in which they arise.

The FASB requires that U.S. companies report foreign- currency transactions at the original spot exchange rate and that subsequent gains and losses on foreign-currency receivables or payables be put on the income statement. The same procedure must be fol- lowed according to IFRS.

Translation—the process of restating foreign-currency financial statements.

Chapter 19 International Accounting and Finance Issues 529

Translation in the United States is a two-step process:

1. Recast foreign-currency financial statements into statements consistent with U.S. GAAP. 2. Translate all foreign-currency amounts into U.S. dollars. FASB Statement No. 52 describes

how companies must translate their foreign-currency financial statements into dollars. All U.S. companies, as well as foreign firms that list on a U.S. exchange, must use Statement No. 52.

TranSlaTion MeThodS Statement No. 52 and IAS 21, the relevant translation standards issued by the FASB and the IASB, respectively, are basically the same in how they require MNEs to translate their foreign-currency financial statements into the currency of the parent’s country. For sim- plicity’s sake, we continue to use the example of a U.S.-based MNE that must translate its foreign-currency financial statements into U.S. dollars.

Two Methods: Current-rate and Temporal Both standards allow companies to use either of two methods in the translation process: the current-rate method (called the closing rate method under IFRS) or the temporal method. The one the company chooses depends on the functional currency of the foreign operation, which is the currency of the primary economic environment in which that entity operates. Whichever method a company uses, it has to determine the proper exchange rate to translate the foreign-currency balances into U.S. dollars.

For example, one of Coca-Cola’s largest operations outside the United States is in Japan. Its primary economic environment is Japan, and its functional currency is the Japanese yen. FASB identifies several factors that can help management determine the functional currency: cash flows, sales prices, sales market data, expenses, financing, and transactions with other entities within the corporate group. If the cash flows and expenses are primarily in the for- eign operation’s currency, that is the functional currency; if they are in the parent’s currency, that is the functional currency.

If the functional currency (the Japanese yen in the case of Coca-Cola) is that of the local operating environment (Japan), the company must use the current-rate method, which pro- vides that it translates all assets and liabilities at the current exchange rate, which is the spot exchange rate on the balance-sheet date. All income-statement items are translated at the average exchange rate, and owners’ equity is translated at the rates in effect when the com- pany issued capital stock and accumulated retained earnings.

If the functional currency is the parent’s currency, the MNE must use the temporal method, which provides that only monetary assets (cash, marketable securities, and receiv- ables) and liabilities are translated at the current exchange rate. The company translates inventory, property, plants, and equipment at the historical exchange rates (the transaction rate in IASB terminology), which are the rates in effect when the assets were acquired. In general, the company translates most income-statement accounts at the average exchange rate, but it translates cost of goods sold and depreciation expense, as well as owners’ equity, at the appropriate historical exchange rates.

Because companies can choose the translation method that’s most appropriate for a particular foreign subsidiary, they don’t have to pick just the temporal or the current-rate method. Coca-Cola faces this problem because it sells its products in over 200 countries and uses 71 different functional currencies.20

Figure 19.3 summarizes the selection of translation method, depending on the choice of functional currency. As in the preceding explanation, if the functional currency is the currency of the country where the foreign subsidiary is located, the current-rate method applies. If it is the reporting currency of the parent company, the temporal method applies.

Consolidation—the process of combining the translated finan- cial statements of a parent and its subsidiaries into one set of financial statements.

The functional currency is the currency of the primary eco- nomic environment in which the entity operates.

The current-rate method ap- plies when the local currency is the functional currency.

The temporal method applies when the parent’s report- ing currency is the functional currency.

530 part 6 Managing International Operations

The Translation Process Tables 19.1 and 19.2 show a balance sheet and income statement developed under both approaches to compare the differences in translation methods. The beginning balance in retained earnings for both methods is assumed to be $40,000. The fol- lowing exchange rates are used to perform the translation process in Tables 19.1 and 19.2:

• $1.5000—Historical exchange rate when fixed assets were acquired and capital stock issued

• $1.6980—Current exchange rate on December 31, 2014 • $1.5617—Average exchange rate during 2015 • $1.5606—Exchange rate during which the ending inventory was acquired • $1.5600—Historical exchange rate for cost of goods sold

Because the foreign currency was rising in value (strengthening) between the time the capital stock was issued ($1.5000) and the end of the year ($1.6980), the balance sheet reflects a positive accumulated translation adjustment under the current-rate method. This is consistent with the idea that net assets were gaining value in a strong currency.

Functional currency

Local currency

Reporting currency of parent

Current-rate method

Temporal method

Figure 19.3 Selecting a Translation Method When an MNE receives reports from subsidiaries or branches located in different countries, the accounting department is faced with financial figures stated in different currencies. Accountants must translate these foreign-currency figures into amounts stated in the currency of the parent’s home country. The functional currency, which may be either the currency of the economic environment in which the subsidiary or branch operates or the parent firm’s currency, will determine the translation method that the company will use.

Table 19.1 Translating foreign Currency: The balance Sheet

*Retained earnings is the U.S. dollar equivalent of all income earned in prior years retained in the business rather than distributed to shareholders plus this year’s income. There is no single exchange rate used to translate retained earnings into dollars.

Temporal Method Current-Rate Method Foreign Currency Rate Dollars Rate Dollars

Cash 20,000 1.6980 33,960 1.6980 33,960 Accounts receivable 40,000 1.6980 67,920 1.6980 67,920 Inventories 40,000 1.5606 62,424 1.6980 67,920 Fixed assets 100,000 1.5000 150,000 1.6980 169,800 Accumulated depreciation (20,000) 1.5000 (30,000) 1.6980 (33,960) Total Assets 180,000 284,304 305,960 Accounts payable 30,000 1.6980 50,940 1.6980 50,940 Long-term debt 44,000 1.6980 74,712 1.6980 74,712 Capital stock 60,000 1.5000 90,000 1.5000 90,000 Retained earnings 46,000 * 68,652 * 77,481 Accumulated translation adjustment

12,507

Total Liabilities and Owners’ Equity

180,000 284,304 305,640

Chapter 19 International Accounting and Finance Issues 531

Note that under the temporal method, the ending retained earnings balance of $68,652 in Table 19.1 is found by subtracting the translated values of accounts payable, long-term debt, and capital stock from total assets. In Table 19.2, net income is found by subtracting the beginning retained earnings balance ($40,000) from the ending retained earnings balance ($68,652). When translating the income-statement accounts in Table 19.2, however, it is necessary to plug in the translation loss of $9,633 to get the net-income figure of $28,652. In the case of the current-rate method, net income is found in Table 19.2 by subtracting translated expenses from revenues. There is no translation gain or loss on the income statement, as will be explained below. On the balance sheet in Table 19.1, the retained earnings balance of $77,841 is found by adding net income ($37,481) to the beginning retained earnings balance ($40,000). However, total assets must equal total liabilities and owners’ equity, so the accumulated transla- tion adjustment of $12,507 must be plugged in to get the right total balance.

Disclosing Foreign-Exchange Gains and Losses A major difference between the two translation methods is in the recognition of foreign-exchange gains and losses. Under the current-rate method, the gain or loss is called an accumulated translation adjust- ment and is taken to comprehensive income rather than net income, so it appears as a separate line item in owners’ equity. This is important because the accumulated transla- tion adjustment does not affect earnings per share, a key figure that financial analysts monitor. From a cultural perspective, this points out how important net income is to U.S.-based companies, which rely on the stock market as a major source of funding. Under the temporal method, the gain or loss is taken directly to net income and thus affects earnings per share.

inTernaTional finanCial iSSueS In Chapter 11, we examined the finance function from the standpoint of global capital markets. In this section, we will discuss some of the important treasury functions, includ- ing capital budgeting, cash flows and global cash management, and foreign-exchange risk management.

CapiTal budGeTinG in a Global ConTexT Capital budgeting is the technique that helps the MNE determine which projects and coun- tries will receive its capital investment funds. The parent company must compare the net present value or internal rate of return of a potential foreign project with that of its other projects around the world to determine the best place to invest resources.

With the current-rate method, the translation gain or loss is recognized in comprehensive income rather than net income, and therefore it goes to own- ers’ equity. With the temporal method, the translation gain or loss is recognized on the income statement.

Capital budgeting—the pro- cess whereby MNEs determine which projects and countries will receive capital investment funds.

Table 19.2 Translating foreign Currency: The income Statement

Temporal Method Current-Rate Method Foreign Currency Rate Dollars Rate Dollars

Sales 230,000 1.5617 359,191 1.5617 359,191 Expenses: Cost of goods sold (110,000) 1.5600 (171,600) 1.5617 (171,787) Depreciation (10,000) 1.5000 (15,000) 1.5617 (15,617) Other (80,000) 1.5617 (124,936) 1.5617 (124,936) Taxes (6,000) 1.5617 (9,370) 1.5617 (9,370) Translation gain (loss) (9,633) Net Income 24,000 28,652 37,481

532 part 6 Managing International Operations

Methods of Capital budgeting

Payback Period One approach to capital budgeting is to determine the payback period of a project, or the number of years required to recover the initial investment made. This is typically done by estimating the annual after-tax free cash flow from the investment, deter- mining the present value of the future cash flow for each year, and then determining how many years it will take to recoup the initial investment.

Net Present Value A second approach is to determine the net present value (NPV) of a project, which is defined as follows:

NPV = a n

t= 1

FCFt (1 + k)t

- IO

where FCFt = the annual free cash flow in time period t k = the appropriate discount rate; that is, the required rate of return or cost of capital

IO = the initial cash outlay n = the project's expected life

The required rate of return is the rate the company must get from the project to justify the cost of raising the initial investment or at least maintaining the value of its common stock. If the NPV is positive, the project is also considered positive. If the NPV is negative, the com- pany should not enter into the project.

Internal Rate of Return A third approach is to compute the internal rate of return (IRR) of the project—the rate that equates the present value of future cash flows with the pres- ent value of the initial investment—and compare it with the required rate of return. If it is greater than the required rate of return, the investment is considered positive. However, the company then needs to compare the IRR with that of competing projects in other countries.

Several things are common about each of the methods. First, the firm needs to determine the free cash flows, which involves estimating those flows as well as bringing into the equa- tion different tax rates from different countries. Second, in the case of both NPV and IRR, the company needs to determine what the required rate of return is.

Complications in Capital budgeting Several aspects of capital budgeting are unique to foreign-project assessment:

• Parent cash flows (those from the project back to the parent in the parent’s currency) must be distinguished from project cash flows (those in local currency from the sale of goods and services). Will the decision be based on one, the other, or both?

• Remittance of funds to the parent, such as dividends, interest on loans, and payment of intracompany receivables and payables, is affected by differing tax systems, legal and political constraints on the movement of funds, local business norms, and differences in how financial markets and institutions function. In addition, tax systems affect free cash flows on the project, irrespective of the remittance issue.

• Differing rates of inflation must be anticipated by both the parent and the subsidiary because of their importance in causing changes in competitive position and cash flows over time.

• The parent must consider the possibility of unanticipated exchange-rate changes because of their direct effects on the value of cash flows and their indirect effects on the foreign subsidiary’s competitive position.

• The parent company must evaluate political risk in a target market because political events can drastically reduce the value or availability of expected cash flows.

Capital budgeting techniques:

• Payback period • Net present value of a

project • Internal rate of return

MNEs need to determine free cash flows based on cash- flow estimates and tax rates in different countries and an appropriate required rate of return adjusted for risk.

Chapter 19 International Accounting and Finance Issues 533

• The terminal value (the value of the project at the end of the budgeting period) is difficult to estimate because potential purchasers from host, home, or third countries—or from the private or public sector—may have widely divergent perspectives on the project’s value. The terminal value is critical in determining the total cash flows from the project. The total cash outlay is partially offset by the terminal value—the amount of cash the parent company can get from the subsidiary or project if it eventually sells.21

Because of all the forces listed here, it’s very difficult to estimate future cash flows. There are two ways to deal with the variations in future cash flows. One is to set out several differ- ent scenarios and then determine the payback period, net present value, or internal rate of return of the project. The other less appropriate approach is to adjust the hurdle rate, which is the minimum required rate of return the project must achieve for it to receive capital. The adjustment is usually made by increasing the hurdle rate above its minimal level. This is easier than estimating cash flows, but it is also the easy way out.

Once the budget is complete, the MNE must examine both the return in local currency and the return to the parent in dollars from cash flows. Examining the return in local cur- rency will give management a chance to compare the project with other investment alterna- tives in the country. However, cash flows to the parent are important, since dividends are paid to shareholders from those flows. If the MNE cannot generate a sufficient return to the parent in the parent’s currency, it will eventually fall behind in its ability to pay shareholders and pay off corporate debt. Finally, the decision must be made in the strategic context of the investment, not just the financial context.

inTernal SourCeS of fundS Although the term funds usually means “cash,” it is used in a much broader sense in business and generally refers to working capital—that is, current assets minus current liabilities.22 From a general perspective, funds come from the normal operations of a business (selling merchandise or services) as well as from financing activities, such as borrowing money, issuing bonds, or issuing shares. They are used to purchase fixed assets, pay employees, buy materials and supplies, and invest in marketable securities or long-term investments.

Cash flows and the Mne Cash flows in an MNE are significantly more complex than for a company that operates in a strictly domestic environment. An MNE that wants to expand operations or needs additional capital can look not only to the domestic and international debt and equity markets but also to sources within itself. The complexity of its internal sources is magnified because of the number of its subsidiaries and the diverse environments in which they operate.

Figure 19.4 shows a parent company that has two foreign subsidiaries. All three may be increasing funds through normal operations that may be used on a company-wide basis, perhaps through loans. The parent can lend funds directly to one subsidiary or guarantee an outside loan to the other. Equity capital from the parent is another source of funds for the subsidiary.

Funds can also go from subsidiary to parent. A subsidiary could declare a dividend to the parent as a return on capital, or lend cash directly to it. If the subsidiary declared a dividend, the parent could lend the funds back. The dividend would not be tax deductible to the sub- sidiary, but it would be included as income to the parent, so the parent would have to pay tax on the dividend. If the subsidiary lent money to the parent, the interest paid by the parent would be tax deductible for the parent and taxable income for the subsidiary.

Merchandise, people, and financial flows can travel between subsidiaries, giving rise to receivables and payables. Companies can move money between and among related entities by paying quickly, or they can accumulate funds by deferring payment. They can also adjust the size of the payment by arbitrarily raising or lowering the price of intercompany transac- tions in comparison with the market price.

Determine different cash flow scenarios or adjust the hurdle rate (the minimum required rate of return for a project).

Funds are working capital, or current assets minus current liabilities.

Sources of internal funds:

• Loans • Investments through equity

capital • Intercompany receivables

and payables • Dividends

534 part 6 Managing International Operations

Global CaSh ManaGeMenT Managing cash effectively is a chief concern of the CFO, who must answer the following three questions:

1. What are the local and corporate system needs for cash? 2. How can the cash be withdrawn from subsidiaries and centralized? 3. Once the cash has been centralized, what should be done with it?

The cash manager, who reports to the treasurer, must collect and pay cash in the com- pany’s normal operational cycle and then deal with financial institutions. Before remitting any cash into the MNE’s control center—whether at regional or headquarters level—the cash manager must first assess local cash needs through cash budgets and forecasts. Because the forecast projects the excess cash that will be available, the cash manager will know how much can be invested for short-term profits.

French Subsidiary

Brazilian Subsidiary

Parent Company

Dividends, royalties, and fees

Loans Invests more equity capital

Guarantees loans

Loans

Extensions of accounts payable

Figure 19.4 How the MNe Handles its Funds (i): internal Funds Funds consist of working capital that comes from normal business operations and that may be used to purchase assets and materials, to pay employees, and to make investments. If the company is an MNE, funds may come from either parent or subsidiary operations, or both, and can be used by the parent to support either its own operations or those of its subsidiaries.

Brussels, Belgium is the home of the Grand Palace and is a major cash man- agement center for MNEs operating in Europe. It’s low tax rates coupled with its prime location, political and economic stability, access to international banking and communications, and a well- defined legal system make it ideal. Source: S-F/Shutterstock

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Chapter 19 International Accounting and Finance Issues 535

Once local cash needs are met, the cash manager must decide whether to allow the local manager to invest any excess cash or have it remitted to a central cash pool. If the cash is centralized, the manager must find a way to make the transfer. A cash dividend is the easi- est way to distribute cash, but government restrictions may interfere. For example, foreign exchange controls may prevent the company from remitting as large a dividend as it would like. Cash can also be remitted through royalties, management fees, and repayment of prin- cipal and interest on loans.

Multilateral netting An important cash-management strategy is netting cash flows internationally. For example, an MNE with operations in four European countries could have several different intercompany cash transfers resulting from loans, the sale of goods, licensing agreements, and so forth. In the illustration in Figure 19.5, for example, there are no fewer than seven different transfers among four subsidiaries. Among its special services, GPS Capital Markets Inc., helps clients determine their foreign-currency cash flows and assists them in developing strategies to net cash flows by minimizing the number of their foreign- currency transactions.

Table 19.3 identifies the total receivables, payables, and net position for each subsidiary. Rather than have each subsidiary settle its accounts independently with subsidiaries in other countries, many MNEs are establishing cash-management centers in one city (such as Brussels) to coordinate cash flows among subsidiaries from several countries.

Cash budgets and forecasts are essential in assessing a company’s cash needs. Dividends are a good source of intercompany transfers, but governments often restrict their free movement.

Multilateral netting—the process of coordinating cash inflows and outflows among the subsidiaries so that only net cash is transferred, reduc- ing transaction costs.

Netting requires sophisticated software and good bank- ing relationships in different countries.

French Subsidiary

Italian Subsidiary

$150,000

$50,000

$200,000

$200,000$200,000

$100,000 U.K. Subsidiary

German Subsidiary

Figure 19.5 How the MNe Handles its Funds (ii): Multilateral Cash Flows As the various subsidiaries of the MNE go about their business, cash can be transferred among them for a variety of reasons (e.g., in the form of loans or as proceeds from the sale of goods). Cash, of course, can flow in any direction, and if the MNE doesn’t maintain some kind of cash-management center, each subsidiary must settle its accounts (receivables, payable, etc.) independently.

Table 19.3 how the Mne handles its funds (iii): net positions

Assume that these data are from the same MNE as the one introduced in Figure 19.5. Because the com- pany has no cash-management center, net positions—the difference between total receivables and total payables—must be determined on a subsidiary-by-subsidiary basis.

subsidiary Total Receivables Total Payables Net Position French 250,000 350,000 (100,000) German 250,000 100,000 150,000 Italian 150,000 300,000 (150,000) U.K. 300,000 200,000 100,000

536 part 6 Managing International Operations

Figure 19.6 illustrates how each subsidiary in a net payable position transfers funds to the central clearing account. The account manager then transfers funds to the accounts of the net receiver subsidiaries. In this example, only four transfers need to take place. The clearing account manager receives transaction information and computes the net position of each subsidiary at least monthly, then orchestrates the settlement process. The transfers take place in the payor’s currency, and the foreign-exchange conversion takes place centrally. For netting to work, the company needs to match its cash needs with software that can track and transfer funds and with banking relationships that allow money to be moved among corporate entities.

foreiGn-exChanGe riSk ManaGeMenT As illustrated earlier, global cash-management strategy focuses on the flow of money for specific operating objectives. Another important objective of an MNE’s financial strategy is to protect against the foreign-exchange risks of investing abroad. The strategies an MNE adopts to do this may mean the internal movement of funds as well as the use of one or more of the foreign-exchange instruments, such as options and forward contracts.

TypeS of expoSure If all exchange rates were fixed in relation to one another, there would be no foreign- exchange risk. However, rates are not fixed, and currency values change frequently. A change in the exchange rate can result in three different exposures for a company: translation, trans- action, and economic or operational.

Translation exposure Foreign-currency financial statements are translated into the re- porting currency of the parent company (assumed to be USD for U.S. companies) so they can be combined with financial statements of other companies in the corporate group to form the consolidated financial statements. Translation exposure occurs because exposed accounts—those translated at the current exchange rate—either gain or lose value in dollars when the exchange rate changes.

Consider the example of a U.S. company with a subsidiary in Mexico. The subsidiary keeps its books in pesos, but it has to translate the financial statements into dollars so the

ConCepT CheCk

In Chapter 9, we explain why it’s important for MNEs to an- ticipate exchange-rate changes and make decisions about business activities that may be sensitive to those changes— decisions, for instance, about the sourcing of raw materials and components or the location of manufacturing and assembly facilities. We take up the same theme on p. 342 in Chapter 13, where we cite exchange-rate movement as just one factor that can affect wages in a particular country—and thus any advantage in labor-cost dif- ferences that a company might hope to gain from locating operations in that country.

Three types of foreign- exchange exposure:

• Translation • Transaction • Economic or operational

Translation exposure arises because the dollar value of the exposed asset or liability changes as the exchange rate changes.

$150,000

$150,000$100,000

$100,000

German Subsidiary

U.K. Subsidiary

Italian Subsidiary

French Subsidiary

Clearing Account

Figure 19.6 How the MNe Handles its Funds (iV): Multilateral Netting Dissatisfied with the process represented in Figure 19.5, our MNE has now established a cash-management center—a clearing account—into which each subsidiary transfers its net cash. Naturally, the MNE may in turn distribute the total to support subsidiary operations.

Chapter 19 International Accounting and Finance Issues 537

parent can combine the results of the Mexican subsidiary with its operations from around the world. Assume the subsidiary has 900,000 pesos in the bank. So what is the effect of a change in the exchange rate on the dollar equivalent of the cash? If the exchange rate before the change was 18.5 pesos per dollar ($48,649) and the rate changes to 20 pesos per dollar (a weakening of the peso against the dollar), the cash would only be worth $45,000. The sub- sidiary still has pesos in the bank account, but the dollar equivalent of the peso has fallen, resulting in a loss. The gain or loss does not represent an actual cash flow effect because the pesos are only translated, not converted, into dollars. In addition, reported earnings can either rise or fall against the dollar because of the translation effect, which can affect earn- ings per share and stock prices.

Transaction exposure Denominating a transaction in a foreign currency gives rise to transaction exposure because the company has accounts receivable or payable in foreign currency that must be settled eventually. Consider the example of a U.S. exporter delivering merchandise to a British importer for $500,000 when the exchange rate is $1.9000 per pound (equivalent to £263,158). If the exporter were to receive payment in dollars, there would be no immediate effect to the exporter if the dollar/pound exchange rate changed. If payment were to be received in pounds, however, the exporter might incur a foreign-exchange gain or loss. If the exchange rate when the exporter receives the pounds from the importer falls to $1.8800, the exporter would only receive $494,737, which would be a loss of $5,263. In this case, be- cause the pound is falling in value, the exporter would receive fewer dollars from the sale after the change in the exchange rate. This would be an actual cash flow loss to the exporter.

economic (or operating) exposure Economic exposure, also known as operating exposure, is the potential for change in expected cash flows that arises from the pricing of products, the sourcing and cost of inputs, and the location of investments. Pricing strate- gies have both immediate and long-term effects on cash flows. In the example above, if the exporter decides to receive payment in dollars, the foreign-exchange risk would pass to the importer. However, the importer would have to come up with more pounds at the new ex- change rate (£265,957) than at the original exchange rate. Now, the importer can either sell the product at the original price and not earn as much profit, or it can raise the price and hope that consumers will be willing to pay it. The exporter, however, also has two choices. It can continue to sell the merchandise at the same price, or it can lower it. If it lowers the price, it will incur a lower profit margin. If it continues to sell at the same price, the importer will have to pay more for the merchandise, then decide what to do.

Another economic-exposure decision involves how to make investment decisions. In 2011, Volkswagen AG decided to open a factory in the United States to take advantage of the strong euro versus the dollar. Because of the strength of the euro, it had not been cost- competitive in the United States, and it realized that by opening a factory in Tennessee, it could take advantage of the strong euro as well as lower labor costs. Thus they were generat- ing revenues in a weak currency and costs in a strong currency, severely affecting earnings. One of the economic solutions was to expand manufacturing operations in the United States to balance revenues and expenses in the same currency.23

expoSure-ManaGeMenT STraTeGy To adequately protect assets against the risks from translation, transaction, and economic exposure to exchange-rate fluctuations, management must do the following:

• Define and measure exposure • Organize and implement a reporting system that monitors exposure and exchange-rate

movements • Adopt a policy assigning responsibility for minimizing—or hedging—exposure • Formulate strategies for hedging exposure

Transaction exposure arises when a transaction is denomi- nated in a foreign currency and where the settlement gives rises to a cash flow gain or loss.

Economic, or operating, expo- sure arises from the effects of exchange-rate changes on

• future cash flows, • the sourcing of parts and

components, • the location of investments, • the competitive position of

the company in different markets.

To protect assets from exchange-rate risk, manage- ment needs to

• define and measure exposure,

• establish a reporting system, • adopt an overall policy on

exposure management, • formulate hedging

strategies.

538 part 6 Managing International Operations

define and Measure exposure To develop a viable hedging strategy, an MNE must fore- cast the degree of exposure in each major currency in which it operates. Because the types differ, the actual exposure by currency must be tracked separately. For example, the firm should keep track of the translation exposure in Brazilian reals separately from the transac- tion exposure because it will result in an actual cash flow, whereas the translation exposure may not. Thus, the company generates one report for each type of exposure. It may also adopt different hedging strategies for the different types. Recall that GPS Capital Markets developed proprietary software, called FXpert, which not only conducts specialized audits of clients’ foreign-exchange cash flows but proposes effective hedging strategies for improving them. Solutions may include such well-known hedging strategies as forwards, options, and futures contracts.

A key aspect of measuring exposure is forecasting exchange rates. A company should estimate and use ranges within which it expects a currency to vary over the forecasting period by developing in-house capabilities to monitor exchange rates or using economists who also try to obtain a consensus of exchange-rate movements from the banks they deal with. Their concern is to forecast the direction, magnitude, and timing of an exchange-rate change.

organize and implement a reporting System Once the company has decided how to define and measure exposure and estimate future exchange rates, it must create a reporting system that will assist in protecting it against risk. To achieve this goal, substantial participa- tion from foreign operations must be combined with effective central control.

formulate hedging Strategies Once a company has identified its level of exposure and determined which exposure is critical, it can hedge its position by adopting operational and/ or financial strategies, each with cost-benefit as well as operational implications. The safest position is a balanced one in which exposed assets equal exposed liabilities.

Operational Hedging Strategies The use of debt to balance exposure is an interest- ing strategy. Many companies “borrow locally,” especially in weak-currency countries, because that helps them avoid foreign-exchange risk from borrowing in a foreign cur- rency and balances their exposed position in assets and earnings. One problem with this strategy is that, because interest rates in weak-currency countries tend to be high, there must be a trade-off between the cost of borrowing and the potential loss from exchange- rate variations.

Protecting against loss from transaction exposure becomes complex. In dealing with for- eign customers, it is always safest for the company to denominate the transaction in its own currency to avoid any foreign-exchange exposure. The risk shifts to the foreign customer that has to come up with the company’s currency. Or the company could denominate purchases in a weaker currency and sales in a stronger one. If forced to make purchases in a strong currency and sales in a weak one, it could resort to contractual measures such as forward contracts or options, or it could try to balance its inflows and outflows through astute sales and purchasing strategies.

Leads and Lags Other operational strategies protect cash flows among related entities, such as a parent and subsidiaries. A lead strategy means either collecting foreign-currency receivables before they are due when the foreign currency is expected to weaken, or paying foreign-currency payables before they are due when it is expected to strengthen. With a lag strategy, a company either delays collection of foreign-currency receivables if that currency is expected to strengthen, or delays payables when it is expected to weaken. In other words, a company usually leads into and lags out of a hard currency and leads out of and lags into a weak one.

Sometimes an operational strategy means shifting assets overseas to take advantage of currency changes. As mentioned earlier, when the euro strengthened against the U.S. dollar, VW shifted some of its manufacturing to the United States.

All three types of exposure must be monitored and measured separately.

Exchange-rate movements are forecasted using in-house or external experts.

The reporting system should use both central control and input from foreign operations.

Hedging strategies can be operational or financial.

Operational strategies include

• using local debt to balance local assets,

• taking advantage of leads and lags for intercompany payments.

A lead strategy means collecting or paying early. A lag strategy means collecting or paying late.

Chapter 19 International Accounting and Finance Issues 539

Using Derivatives to Hedge Foreign-Exchange Risk In addition to the operational strategies just mentioned, a company may hedge exposure through derivative financial con- tracts such as forward contracts and options, with the most common hedge being a forward contract.

Consider a U.S. exporter selling goods to a British manufacturer for £1 million when the exchange rate is $1.9000 per £. If the exporter could collect the money right away and con- vert it into dollars, it would receive $1.9 million. However, if the exporter were not expected to receive payment for 90 days, it would be exposed to an exchange-rate change. One way to protect against this is to enter into a forward contract with a bank to deliver pounds and receive dollars at the forward rate of, say, $1.8500. In 90 days, the exporter would con- vert the pounds into dollars at $1.8500 and receive $1,850,000, which is less than it would have received at the initial spot rate. But if the pound had deteriorated even more in value, the exporter would still receive the $1.85 million. Also, the forward contract eliminates uncertainty.

A foreign-currency option is more flexible than a forward contract because it gives its purchaser the right, though not the obligation, to buy or sell a certain amount of foreign currency at a set exchange rate within a specified amount of time. In the same situation described above, the exporter would enter into an option contract with a trader to convert pounds into dollars at a certain exchange rate. For the cost of protection, the exporter pays a premium to the trader, which is like insurance. When the exporter receives the cash from the importer, it can decide whether to exercise the option. If the option gives it more money than the spot rate, the exporter will exercise the option. If not, it won’t.

Forward contracts can estab- lish a fixed exchange rate for future transactions.

Currency options can ensure access to foreign currency at a fixed exchange rate for a specific period of time.

the accuracy of the financial records of a firm. A major concern with IFRS is the enforceability of the standards by an independent accounting profession. Simply generating a set of accounting rules is not enough if the auditing profession in each country is not good enough to verify the accuracy of the financial information. This can be seen in recent cases brought by the SEC against Chinese firms that are listing on the NYSE. U.S.-based audit firms use local Chinese auditors to perform audits of Chinese companies that list on the NYSE as well as on the Chinese subsidiar- ies of U.S. MNEs. The local Chinese audit firms would not provide documents to the SEC because Chinese law prohibited them from doing so. The SEC levied fines against the Big 4 PWC, Deloitte, KPMG, and E&Y and threatened to suspend the Chinese audit firms from auditing U.S. traded Chinese companies.26

The major vote in favor of U.S. GAAP is that half the world’s stock market capitalization is located in the United States, and companies that want access to U.S. capital must play by U.S. rules. Americans have always felt that their standards were the best in the world and that it would be unfair for U.S. companies competing for cash in the U.S. market to allow foreign companies to list using IFRS. However,

The future of accounting is complicated. It is clear that more jurisdictions use IFRS than U.S. GAAP for exter- nal financial reporting. However, the United States is no closer to allowing IFRS to be used for U.S. compa- nies listing on U.S. stock exchanges. A major reason is that GAAP is far more comprehensive than IFRS, both in depth and breadth. Also, it responds more to the background, needs, and regulatory requirements of U.S. capital markets than do IFRS. The SEC is try- ing to figure out how to make it easier for U.S. MNEs to report financial information, improve disclosure, simplify financial reporting, and move toward a single global accounting standard.24 This sounds almost impossible. However, one possibility would be to “drop the reconciliation requirement, letting compa- nies supplement their U.S. financial reports with ones filed with U.S. regulators using international stan- dards.” As noted by the director of global accounting for Ford Motor Company, “we are concerned that pro- viding both international accounting standards and U.S. GAAP financial data could be complicated.”25 Complicated, yes; impossible, no.

An important aspect of financial reporting in the United States is an independent auditing profession that examines internal control processes and ensures

Looking to the Future Will IFRS Become the Global Accounting Standard?

540 part 6 Managing International Operations

the decision by the SEC to allow foreign firms to list in the United States if they use full IFRS is a major game changer. As European stock markets continue to grow in importance, more European companies are choosing to list in Europe where they can use IFRS instead of in the United States where there are more regulatory requirements.

An additional complication to combining or con- verging IFRS and U.S. GAAP is the Sarbanes–Oxley Act of 2002. Requiring companies to establish solid internal controls over financial reporting, this leg- islation limits the types of services that may be performed by primary auditors in addition to the financial-statement audit, and requires the manag- ers of publicly traded companies to assess internal controls and make a statement on this assessment, which must be examined and opined on by external auditors. Foreign issuers are required to abide by some of the key provisions of Sarbanes–Oxley, but

they are given some concessions which decrease the burden on listed companies.27 In addition, for- eign issuers don’t have to provide quarterly reports and they can file their annual reports as a 20-F.

The convergence project between the FASB and IASB may solve some of these problems in the long run. To its credit, the IASB has expanded coverage of key topics and has narrowed the alternatives available to companies. It has sold itself as based on principles rather than rules, although it is more accurate to say that the standards are simpler and less comprehensive. FASB and IASB are narrowing the differences in existing standards and develop- ing new ones together. Now they jointly write new standards so that even the wording is the same. In addition, public accounting firms and publicly traded companies have several years of experience in adopting the requirements of Sarbanes–Oxley, so who knows what the future will bring?

Swedish-based H&M places trendy stores in trendy loca- tions. This store in Liverpool, England, is one of H&M’s 4000 stores in 61 countries. Source: Julius Kielaitis/Alamy Stock Photo

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Case

Hennes & Mauritz AB (also known as H&M), the Swedish MNE that is a fashion trendsetter, has a stated goal “to give customers unbeatable value by offering fashion and quality at the best price.” It doesn’t own any factories, but rather outsources production to independent suppliers, primarily in Asia and Europe. H&M also rents space from international and local landlords rather than owning its own stores.28

H&M is a major firm in the apparel retail market where fashion trends are critical and where goods move quickly. In this industry, the key buyers are consumers, the key suppli- ers are clothing manufacturers and wholesalers, designers are king, and a fast, well-organized supply chain is essen- tial. Depending on the individual firm strategy, the apparel retail market doesn’t have to be capital intensive, but the largest players in the industry are very international, both in retail footprint and suppliers. The biggest companies in the industry are U.S.-based The Gap; H&M; and Spain-based Industria de Diseno Textil, S.A. (Inditex), better known by its flagship brand, Zara. All three companies have different store brands: Gap, Banana Republic, Old Navy, and Athleta for The Gap; H&M, COS (collection of style), Monki, Week- day, and Cheap Monday for H&M; and Zara, Bershka, Pull and bear, Massimo Dutti, Stradivarius, Oysho, Zara Home and Uterque for Inditex.

Global Spread and Strategy Both of H&M’s competitors are very international. H&M operates about 4,000 stores in 61 markets, whereas The Gap operates 3,300 company stores and over 400 franchise stores worldwide, and Inditex operates in a network of over 7,000 stores in 85 countries. Zara has the largest geographic spread within Inditex with stores in 73 countries.

Hennes & Mauritz AB started as a single women’s wear store in Sweden in 1947. Today, H&M’s business is much broader and currently includes the sales of clothing, acces- sories, footwear, cosmetics, and home textiles. Although H&M is known as one of Sweden’s premier MNEs, in 2015 it generated 17.6 percent of its sales in Germany, 12 percent in the United States, and 7.6 percent in the United Kingdom.

H&M and Zara have very different strategies. Zara deliv- ers new products to its stores twice a week. Because of its highly organized supply chain, Zara only takes 10–15 days to go from design to the stores. Although it sources its apparel from around the world, it has adopted just-in- time manufacturing from the auto industry and established 14 highly automated Spanish factories where robots cut and dye fabrics creating the unfinished “gray goods” which are the foundation for their final products. It then takes the gray

H&M: The Challenges of Global expansion and the Move to adopt International Financial Reporting standards

goods and outsources them to a network of small shops in Portugal and Spain to do the finish work. Store managers are constantly sending updated information on consumer demand so that they can move to the next hot fashion. The rule at Zara is that if you see it in the store and you like it, you’d better buy it because as soon as it is gone, you’ll never see it again. Veteran Zara consumers keep track of when new shipments come in so they can buy the latest stuff. H&M is trendy, but it outsources production to a net- work of over 800 suppliers, 60 percent of which are in Asia. It offers a main collection twice a year in the spring and the fall with several sub-collections that allow it to bring in new trendy items. Longer lead time items are produced in Asia, whereas short lead time items are manufactured in Europe.

Currently the second-largest apparel retailer behind Indi- tex, H&M has met its target growth rate of 10–15 percent per year, with no plans of slowing its expansion—growing from 2,800 to 4,000 stores in the past three years. Despite its global presence, H&M is listed in the Stockholm Stock Exchange and Nasdaq Stockholm. H&M adopted the EU’s version of IFRS and presents its financial statements in both English and Swedish. The financial statements are reported in Swedish kronor, which also serve as its functional cur- rency. Because the retail industry is less capital inten- sive, most companies have no need to list in any foreign stock exchanges. Inditex lists only on the stock exchanges throughout its home country, Spain, including Madrid, Bar- celona, Bilbao, and Valencia. Consistent with domestic list- ings, The Gap, which was founded in the United States in 1969, is listed solely on the NYSE.

The ability to list solely in the country in which a com- pany is domiciled can simplify the financial reporting pro- cess by avoiding the need to present financial statements that adhere to the accounting rules of multiple countries. Ericsson, another popular Swedish MNE, required much more capital and was therefore listed on both the Stockholm exchange in Sweden as well as the NASDAQ in the United States as American Depositary Receipts. As a result, Erics- son has had to accommodate multiple accounting bodies and become more transparent in its reports because of its desire to raise capital on foreign exchanges.

The Gap, H&M, and Inditex come from different account- ing and regulatory environments. In its 2015 annual report, H&M states that its consolidated accounts have been pre- pared in accordance with IFRS issued by the IASB and the interpretations provided by the IFRS Interpretations Commit- tee. In addition, the IFRS that is used for its parent company reports are only those approved by the EU. Besides IFRS, H&M provides disclosures in accordance with the Swed-

542 part 6 Managing International Operations

ish Financial Reporting Board’s recommendation RFR 1. Both the parent company and consolidated balance sheets use the following format: fixed assets + current assets = equity + long term liabilities + current liabilities.

Given that Sweden is a member of the European Union, H&M was required to adopt IFRS as of 2005, which was a change from its past practices. Prior to that, H&M was using recommendations issued by the Swedish accounting standards setters which were largely based in International Accounting Standards, so the consolidated reports of H&M were already pretty much adjusted to IAS. In preparation for the switch from Swedish GAAP to IFRS, H&M began a tran- sition process in 2003 and 2004 that was intensified in 2005. In its 2005 annual report, H&M reported that the greatest impact of the change was because of financial instruments and hedge accounting. H&M decided at that time to apply IAS 32 and IAS 39 on financial instruments. Prior to the adoption of these standards, H&M was holding derivatives for cash flow hedging, and gains and losses on derivatives were recognized when the hedged transaction took place. However, under IAS 39, all derivatives had to be recognized at fair value, so H&M commented that reported profit was probably going to be more volatile than it was when gains and losses on hedges were deferred and recognized out- side the balance sheet. That is exactly the volatility that the European, especially French, banks wanted to avoid, result- ing in the EU carving out the treatment of derivatives.

Before the Changeover to IFRS Prior to the move to IFRS in 2006, H&M reported its financial results in compliance with Swedish GAAP—a bit of a mix- ture between Anglo-American accounting, which is driven by the capital markets, and Germanic accounting, which is driven by bank financing and taxation. Swedish reporting tends to be a little more transparent than German account- ing but less transparent than Anglo-American accounting.

Issues of Transparency One reason why Swedish accounting has been less transpar- ent is its orientation to creditors, government, and tax authori- ties. In addition, because the Swedish Stock Exchange has become a focal point for listings by Nordic companies, the influential Swedish accounting profession has pushed for con- solidated accounts to represent the needs of shareholders, whereas the parent-company accounts have reflected Swed- ish legal requirements. Swedish accounting tends to be very conservative due to the importance of taxes to fund extensive social welfare programs and the tendency of the Swedish gov- ernment to use tax policies to influence investment in areas deemed important to the government and its social objectives.

Sweden and the EU Since Sweden entered the EU, its accounting has evolved to incorporate EU accounting directives and philosophies. The Swedish government established an Accounting Standards Board (BFN) in 1976 to recommend accounting principles that fit within the framework of the Company Law. The Swedish Financial Accounting Council (RR) was estab- lished in 1991 to take over the role of the accounting profes- sion in making recommendations on accounting practices, especially with respect to how to prepare an annual report according to the Annual Accounts Act. Now the standards are set by the Swedish Financial Reporting Board.

The Swedish Stock Exchange has supported the efforts of the profession, even though their recommendations are voluntary and subject to the Company Law. However, the decision by the EU to require firms to use IFRS for consoli- dated financial statements takes precedence over everything.

Conversion Costs H&M didn’t provide much information about the cost of con- verting to IFRS in 2005, but Ericsson did. Ericsson provided more information because it was listing on NASDAQ as well the Swedish Stock Exchange, so it had to provide Form 20F reconciliation between Swedish and U.S. GAAP. Because of its higher level of disclosure, Ericsson estimated that the conversion to IFRS in 2005 would result in a difference of about 1.5 billion Swedish kronor for 2004 net income and a difference of 5.7 billion kronor for equity as of January 1, 2005. Net income under Swedish GAAP would have been 17,539 million kronor under IFRS, compared with 19,024 mil- lion under Swedish GAAP. In addition, the recognition of cash on the balance sheet appears to be quite different under IFRS than it is under Swedish GAAP, with cash under IFRS being SEK46.1 billion less than cash under Swedish GAAP. From Ericsson’s Form 20-F report, one can also see that cash at the end of 2004 was the same under U.S. GAAP and IFRS.

Costs of implementing IFRS are difficult to gauge. Many countries implemented national regulations that attempted alignment with IFRS (e.g., Sweden). Thus costs of imple- mentation may have been spread out over several years because companies knew that full IFRS implementation was drawing near. Ericsson’s management notes the follow- ing in the 2004 annual report:

Because Swedish GAAP, in recent years, has been adapted to IFRS to a high degree and as the rules for first time adopters allows certain exemptions from full retrospective restatements, the transition from Swedish GAAP to IFRS is expected to have a relatively limited effect on our financial statements. Furthermore, we believe the conversion to IFRS will align our reporting more closely with US GAAP.

Chapter 19 International Accounting and Finance Issues 543

Questions

19-3. If an investor wants to compare the financial results of The

Gap, Inditex, and H&M, what difference does it make that

their financial statements are prepared according to differ-

ent GAAP? Would you expect there to be a big difference

between U.S. GAAP as used by The Gap and IFRS as used

by H&M and Inditex?

19-4. What type of IFRS did H&M decide to disclose in its financial

statements in 2005? In 2015?

MyManagementLab Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:

19-5 What are the major sources of influence on H&M’s accounting standards and practices?

19-6 H&M says in its accounting policies that it uses IFRS as issued by the IASB for its con- solidated accounts and, since its parent company is a company within the EU, only IFRS as approved by the EU are used in its financial statements. What difference does it make whether or not the financial statements are prepared according to full IFRS or IFRS as approved by the EU? Why does the EU insist on having a veto power over IFRS?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

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Objectives

After studying this chapter, you should be able to

20-1 Profile international human resource management

20-2 Distinguish the perspective of the expatriate

20-3 Differentiate the staffing frameworks used by MNes

20-4 Describe expatriate selection

20-5 Appraise expatriate preparation

20-6 summarize expatriate compensation

20-7 Profile expatriate repatriation

20-8 Describe expatriate failure

chAPter 20 international human resource Management

MyManagementLab® Improve Your Performance! When you see this icon , visit www.mymanagementlab.com for activities that are applied, personalized, and offer immediate feedback.

A person does not seek luck; luck seeks the person.

—Turkish proverb

Case Globalizing Your Career

Companies have been moving people around for centuries, capturing the benefits of putting the right person into the right job at the right place at the right time at the right pay for the right stretch. Contemporary market trends, strategic imperatives, and executive performance standards intensify this task. Today, career success requires, at the least, expanding your global awareness and, ideally, your experiential knowledge of the ways that the world works.

Globalization, by spurring trade, capital, and investment flows, expands the scope of the hundreds of thousands of existing sub- sidiaries that operate in the 214 markets that compose the global business environment. Each unit, established and emerging, requires executives who command the competencies to navigate economic complexities, cultural ambiguities, and political challenges, all the while maximizing the MNE’s global efficiency and optimizing its local responsiveness. GE’s Jeffrey Immelt explains, “A good global com- pany does three things: It’s a global sales company—meaning it’s number one with customers all over the world, whether in Chicago or Paris or Tokyo. It’s a global products company, with technologies, fac- tories, and products made for the world, not just for a single region. And, most important, it’s a global people company—a company that keeps getting better by capturing global markets and brains.”1

By no means must one immediately pack up, say good-bye, and head abroad. For those who do, fear not, as an international assign- ment has many benefits (see Figure 20.1). Moreover, the word is out: A Gallup World Poll reports that 1.1 billion people, or one-quarter of the earth’s adults, want to move temporarily to another country to find a higher paying job. Another 630 million aim to move abroad per- manently.2 Still, even if your career plans anchor you to your home market, globalizing markets encourage globalizing your mindset.

From Afghanistan to Zimbabwe, effective leadership increas- ingly calls for a global mindset. “You have to have an intuitive sense of how the world works and how people behave,” says Paul Lau- dicina, vice president of A. T. Kearney.3 Observed Daniel Meiland of Egon Zehender International, an executive search firm, “The world is getting smaller, and markets are getting bigger. In my more than 25 years in the executive search profession, we’ve always talked about the global executive, but the need to find managers who can be effective in many different settings is growing ever more urgent. In addition to looking for intelligence, specific skills, and technical insights, MNEs are also looking for executives who are comfortable on the world stage.”4

The expaTriaTe

MNEs often send managers to live and work in another country to run their foreign operations. Some, such as W. L. Gore and J&J, send only a few. Others, like Royal Dutch Shell and Wipro Technologies,

send many. Unfortunately, few standards stipulate why, when, and where MNEs should use expatriates (a person who works outside their native country). Moreover, ambiguity complicates selecting the right expatriates, developing the right predeparture programs, de- signing the right compensation packages, setting the right stretch of time for the assignments, and determining the right way to rein- tegrate them into the home company when they complete their tour of duty.

The consequences of success and failure press MNEs to man- age their human resources proactively. Honeywell, like many, begins developing potential expatriates years before they might head abroad. It assesses candidates’ cross-cultural skills and prescribes training paths that anticipate likely points of culture shock. “We give them a horizon, a perspective, and, gradually, we tell them they are poten- tially on an international path,” says Honeywell’s VP of HR. “We want them to develop a cross-cultural intellect, what we call strategic accountability.”5 Honeywell might advise employees to network with experienced expatriates or improve their personal and professional resourcefulness. Nestlé leaves less to chance in developing its expa- triate pipeline. High performers typically rotate through two stays at corporate headquarters in Vevey, Switzerland; the first early on in an individual’s career and the other when one reaches middle manage- ment. The pace of globalization, particularly for MNEs in emerging economies like India, China, and the Philippines, accelerates prepa- ration. Indeed, some managers identify expatriate candidates upon hire. Sanjay Joshi, chief executive of global programs at India’s Wipro Technologies, notes, “A big part of our recruiting is telling people that they will get a chance to work abroad.” This approach, he believes, improves the quality of new hires while fortifying the company’s expatriate pipeline.6

New places, New Faces, New ways

Figure 20.1 lists the benefits of working abroad. Enduring constants spotlight improving job prospects, engaging new challenges, boost- ing the quality of life, and increasing earning potential. Accomplished expatriates testify to the merits of the quest, describing how the experience changed their perception of business and their sense of self. Many note that working abroad pushed them, sometimes gently, sometimes harshly, to interpret situations differently. Galina Naumenko, of PwC Russia, says an international assignment “spurs global networking among employees, gives them an understanding of different cultures, and gets them thinking about alternative ways of approaching problems and solving them.” Adds Michael Cannon- Brookes, head of strategy for IBM’s Growth Markets, “You get very different thinking if you sit in Shanghai or São Paulo or Dubai than if you sit in New York.”7

Chapter 20 International Human Resource Management 547

Working internationally compels employees to develop broader management repertoires. Consider Joan Pattle, a Microsoft manager who worked at headquarters in Seattle before accepting a post as product leader in Great Britain. Her U.K. job came with wider respon- sibilities, as she explains: “At home, my job was very strictly defined. I basically had to know everything about managing a database. But when I got to London, I was also in charge of direct market- ing and press relations. I was exposed to a much broader set of experiences.”9 Similarly, Laura Anderson, a spokesperson for Intel, explains that an assignment in Hong Kong improved her sense of the company’s business. In fact, several Asian media relations encoun- ters opened her eyes. “For me,” she says, “it was a tremendous growth experience.”10

New problems, New challeNges

Notwithstanding the allure of adventure and rewards, the expatriate lifestyle is not for everyone. Difficulty adapting, no matter how strong the intent, explains nearly half of failed foreign assignments. Living and working abroad is tough. Cultural clashes, language difficul- ties, murky business practices, and social hazards rule out anything beyond a short-term visit for many. Other problems arise when a company asks an executive to transfer to a second- or third-tier city in a less preferred location. Moving from paradise to the wastelands, besides a tough sell, makes for a challenging experience.

The gap between life at home versus “over there” often fans professional, family, and personal problems. Expatriates routinely struggle with foreign cultures. Difficulty understanding and respect- ing differences, no matter how mundane, spiritual, or philosophical, causes expensive failures. To top it off, IB travel “is perhaps the most dangerous form of travel. Tourists wouldn’t consider flying

into a Colombian war zone for a week, yet folks from oil, computer, pharmaceutical, agricultural, and telecom MNEs do it regularly.”11 Once there, merely frequenting high-profile hotels and restaurants is hazardous.

comiNg home

Floating around the world are transpatirates, basically “expat lifers.” Moving from assignment to assignment, whether with the same company or another, they plan never to return “home.” Most, how- ever, eventually do—they pack their bags, bid farewell to colleagues, board the plane, and return to a hero’s welcome. A snap, right? Not so. In many cases, one gets everything but the big bash.

Repatriation —returning to one’s country of origin—can prove disappointing, but need not. Tales of success confirm that career planning makes a big difference. Following a four-year assignment in Tokyo, Bryan Krueger returned to a promotion to president of Bax- ter Fenwal North America. When he left for Tokyo, his company had not guaranteed him a promotion upon his return. While he was away, however, he kept up to date with the goings-on at headquarters and visited the home office every few months to maintain his network. As he explains, “I was definitely proactive. Anyone who is not, does himself a disservice. I made a conscious effort to stay in touch, and it paid off.”12

Still, not all executives share victory tales. A survey of repatri- ated executives who successfully completed their international assignments found that more than a third held temporary posts three months after returning home. Nearly 80 percent saw their new job as a demotion. More than 60 percent felt they had too few opportunities to leverage their international expertise. Some executives tolerate these outcomes. Others don’t and move on.13

Personal development–life experience, broaden horizons

Better quality of life

Career development

Financial wealth

Making new friends/networking

The weather

Tax eciency

Less crime

Cost-of-living

Better environment for my children

Healthcare–quality and access

Finding love or a life partner

Escaping political intrusion in home country

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure 20.1 Top Benefits of the expatriate experience Executives identify many benefits of their international assignments. Here we see leading personal and professional motivations.8

548 part 6 Managing International Operations

risk aNd reTurN

The choice to work abroad has a high upside, but a steep downside. On balance, the allure of an international assignment usually tips the scale. While overseas, an expatriate is well-paid, has big responsi- bilities, and commands high status. The adventure of living abroad makes an international career irresistible to some, effectively creat- ing so-called “global nomads” who travel from one country to the next. For example, after stints in Singapore and London, a Morgan Stanley expat in India said, “I still don’t want to go back to the United States. It’s a big world—lots of things to see.”14

Still, the risks of a career detour loom large. Some MNEs tout a foreign assignment as a meaningful experience that prepares managers for broader responsibilities—indeed, career devel- opment drives nearly a quarter of expat assignments.15 As the reasoning goes, it improves skills and expertise, fosters cultural awareness, increases confidence in overcoming challenges, and enhances creativity through exposure to different ways of doing things. A neutral or negative career outcome, however, is not out of the question. As Tom Schiro of Deloitte & Touche observes, “Some MNEs just send somebody overseas and forget about them for two years.”16 Then, after returning, the company may be slow to reward a manager’s successful experience with an expanded leadership role.

emergiNg sTaNdards

The expanding scale and scope of globalization triggers short sup- plies of talented executives. MNEs report difficulty finding skilled candidates, investing more time interviewing and hiring, and wor- rying about rivals poaching their high performers. Despite the global economic slowdown, shortages worsen. Manpower, a multinational human resource consulting firm, found that 34 percent of employ- ers worldwide struggle to fill expatriate slots. According to the global consultancy McKinsey & Company, (1) only 43 percent of employers in leading markets such as Brazil, Germany, India, Mexico, Saudi Ara- bia, Turkey, and the United States can find enough skilled workers, (2) the world will be short 40 million college-educated workers in 2020, and (3) “there will be far too few workers with the advanced

skills needed to drive a high productivity economy.”17 Shortages will amplify the value of a global mindset.

By changing the game, globalization also changes performance standards. Increasingly, MNEs regard international experience as the cornerstone of a high-impact career. Nearly 40 percent of FTSE 100 companies have a foreign national as CEO, and about 70 percent have had a foreign assignment. Among the Fortune 100, the figures clock in at 10 percent and 33 percent, respectively.18 At Procter & Gamble, nearly all of the company’s top global executives have had a foreign assignment, and a good share were born outside the United States. Global awareness and experience are “ingredient[s] you must have if you aspire to be a global player in the long term,” says P&G’s HR director.19 P&G expects its leaders to be both innovative and worldly; they cannot rise to the top without running operations in a foreign market.20 Its German rival, Henkel, insists on the same, requiring executives to live in at least two different countries prior to promo- tion.21 Boyden, an executive search firm, notes that nearly 3 of every 4 clients request international experience when seeking C-suite executives or board members; of those, roughly half now expect candidates’ career records to show overseas experience.22 Bluntly put, multinational experience is as essential as multifunctional and multiproduct experiences. Consequently, MNEs post high-potential executives overseas, giving them the opportunity to step up to the challenge, test their skills, and fine-tune their global mindset.

In summary, aspiring executives increasingly look abroad to move ahead. While perhaps overly hyped, personal ambition, environmental trends, market conditions, and workplace standards create situations where “the people with the top jobs in large corporations, even in the United States, will be those who have lived in several cultures and who can converse in at least two languages. Most CEOs will have had true global exposure, and their MNEs will be all the stronger for it.”23

Questions

20-1. Identify three compelling reasons to pursue an expatriate

assignment.

20-2. Explain why you would seek or, alternatively, avoid an

expatriate assignment.

iNTerNaTioNal humaN resource maNagemeNT Successful MNEs have clever strategies, effective organizations, efficient supply chains, sharp financial systems, and the like. Ultimately, though, success is a function of the people who start and sustain operations. The expanding global business web calls for executives who can manage interconnected operations across a diversity of markets. While directing global oper- ations from the sanctuary of a home office, one can fall prey to misinterpreting international differences, with some executives seeing them as insurmountable while others view them

Chapter 20 International Human Resource Management 549

as trivial. Managing design, manufacturing, marketing, and supply jobs worldwide calls for executives with experience in several functions in several regions—for example, overseeing a product from its design phase in Silicon Valley to production in Taiwan and then distributing it across Africa. These tasks, in isolation and totality, require talented executives.

Putting the right person in the right job in the right place at the right time for the right compensation for the right stretch takes us to the front lines of IB. From launching new ventures, rebuilding failing units, developing local expertise, filling skills gaps, setting technology platforms, or diffusing the organizational culture, the star of the show is an executive. Indeed, any successful or, for that matter, struggling strategy has an executive at its core. Quite simply, the focal point of IB is an executive facing challenges that often lead to transformational opportunities. The contest between challenge and opportunity, the focus of this chapter, is the spirit of a career in IB.24

International Human Resource Management (IHRM) shepherds an MNE’s most valued assets—its people. IHRM organizes people within the MNE, developing policies and systems that improve individual productivity and collective performance. Opening and operating a business, whether a small-scale micronational or a vast multinational, requires finding people to implement the strategy, motivating them to perform well, upgrading their skills so they can move on to bigger challenges and, ultimately, retaining them.25 IHRM directs these functions, minding the matters of staffing, training, performance evaluation, compensation, and retention given the requirements of the firm’s strategy.

This chapter elaborates these issues, building on themes introduced in Chapter 12 and applied since to business functions and operating activities. We evaluate IHRM from the perspective that the successful MNE staffs its operations with skilled executives that are mission-led and principle-driven to leverage the company’s core competencies while reconciling competing calls for global integration and local responsiveness. This perspec- tive emphasizes that IHRM activities perform best when managers link them to the MNE’s strategy (see Figure 20.2).

Unconditionally, IHRM is more difficult for the MNE than for its uni-national counter- part. Besides dealing with situations in the home market, IHRM adjusts policies and systems

coNcepT check

Recall our discussion in Chapter 1 (page 6) of “The Forces Driving Globalization and IB,” in which we identify several factors that create connections among people worldwide. The convergence of cultures, politics, and markets diminish the physical and psychic distances between countries. Here we suggest that this trend has begun to make the prospect of moving from one country to another a more attractive career plan.

IHRM refers to activities that staff the MNE’s worldwide operations.

IHRM is more difficult for the MNE than its domestic counterpart due to

• environmental differences, • strategic contingencies, • organizational challenges.

COMPETITIVE ENVIRONMENT

PHYSICAL AND SOCIAL FACTORS

OBJECTIVES

MEANS

Functions Overlying

Alternatives

OPERATIONS

STRATEGY

Modes Marketing Exporting and importing Global manufacturing Supply chain management Accounting and taxation Finance Human Resources

• • • • • • •

OPERATING ENVIRONMENT

Figure 20.2 Factors influencing iHrM in iB Successful MNEs consistently show that managing human resources, like managing finance, marketing, and supply chains, follows the requirements of the company’s strategy. The key task centers on putting the right person in the right job in the right place at the right time for the right compensation for the right stretch—with the standard of “right” set by the MNE’s strategy.

550 part 6 Managing International Operations

for differing political, cultural, legal, and economic circumstances. Preferred leadership styles and management practices, for example, often vary from country to country. Differences fan difficulties between people in different units—say, headquarters and local subsidiar- ies.26 Neglected, they can turn great managers at home into ineffective ones overseas. Consequently, MNEs continually evaluate how to staff international operations and fine- tune the mix of recruiting, training, compensation, transfer, and repatriation programs.27 Inevitably, some ask why executives put up with these aggravations. The short answer is that the megatrend of globalization demands doing so. The long answer is that in the face of globalization, successfully navigating these challenges creates value and fortifies competi- tiveness. Both answers highlight IHRM’s mandate: Devise systems to develop and sustain a cadre of managers that lead the MNE to attain its vision.28

The sTraTegic role oF ihrm Anecdotes suggest and research confirms a powerful relationship between IHRM policies, executive expertise, and strategic performance.29 GE’s CEO, for example, sees global success as “truly about people, not about where the buildings are. You’ve got to develop people so they are prepared for leadership jobs and then promote them. That’s the most effective way to become more global.”30 Ongoing study of MNEs in Asia, Europe, and the United States confirm that MNEs with superior human capital practices sustain high productivity, value creation, and competitive advantage.31 On average, they consistently create greater value than those with run-of-the-mill IHRM practices.

Improving understanding of the link between human resources and company perfor- mance is correspondingly testing the thesis that superior performance creates the resources that then enable MNEs to develop superior IHRM practices. Analysis indicates the reverse: Superior IHRM is a key determinant of firm performance. Furthermore, the interaction between an MNE’s strategy and its IHRM practices accounts for more variation in perfor- mance than does IHRM in isolation.32 These relationships suggest IHRM is not a glorified euphemism for personnel management, concerned with administering routine employee processes and setting short-term employment policies. Rather, IHRM is a performance driver, identifying, developing, staffing, compensating, and retaining the executives that command the requisite skills and outlooks to direct the MNE.

a case in point: ge’s evolution Looking at the role of IHRM in the context of GE’s international evolution elaborates these ideas. Beginning in the 1980s, GE focused on globalizing its markets by selling existing products abroad (i.e., the international strategy and its quest to leverage core competencies). In the late 1980s, GE began globalizing its supply chains to acquire higher-quality, lower-priced resources (i.e., the global strategy and its quest to maximize efficiency). In the mid-1990s, GE began globalizing its intellect by seeking, learning, and transferring ideas throughout its operations (i.e., the transna- tional strategy and quest to optimize knowledge transfer, local responsiveness, and global integration simultaneously). Each strategy imposed unique demands for configuring resources, capabilities, and competencies. Correspondingly, each strategy required IHRM find, prepare, staff, compensate, and retain executives that had the requisite skills and outlooks. Failing to do so, irrespective of the brilliance of its strategy, would weaken GE’s performance. Getting it right, by staffing slots with the executives with the “right stuff,” powered superior performance.

Each stop along its strategic evolution saw GE reset its IHRM policies and systems to develop the requisite human capital. The key to its international strategy was staffing people who used GE’s competencies to build competitive operations in foreign markets. Local units lacked the knowledge and skills to acquire resources, build capabilities, and develop competencies; hence, GE sent expats from the home office to fill gaps. The key to its global strategy was developing executives who optimized location economics in direct- ing global supply chains. Growing linkages between local operations required coordinating the expanding web of global relationships; short supplies of the requisite executive talent in

coNcepT check

A recurring theme of the text is the usefulness of adopting a strategic perspective. No mat- ter if the topic involves political, legal, economic, or cultural dimensions of the marketplace, the quest for superior perfor- mance compels the MNE to link these trends, challenges, and consequences to its strategy.

IHRM policies that support the MNE’s strategy generate high productivity and competitive advantage.

MNEs use expatriates for various reasons, including

• filling a skills gap in the local market,

• transferring competencies, • integrating decision-making

perspectives, • coordinating strategic

activities, • developing executive

leaders

Chapter 20 International Human Resource Management 551

many subsidiaries spurred GE to fill gaps with experienced expats. Lastly, implementing its transnational strategy required posting expats that developed, transferred, and engaged ideas throughout global operations, irrespective of the business, function, or market source. This goal required posting different people to different operations in different countries to develop the requisite global outlook and leadership skills; hence, GE posted its best manag- ers, no matter their nationality, to expat slots.

ihrm’s missioN An MNE’s strategic evolution shapes how it engages IB. Each stage in GE’s evolution, for instance, required IHRM align its policies and systems with the corresponding require- ments of its strategy. CEO Jeffrey Immelt explains, “When I first joined General Electric [in 1982], globalization meant training the Americans to be global thinkers. So, Americans got the expat assignments. We still have many Americans living around the world, and that’s good, but we shifted our emphasis in the late 1990s to getting overseas assignments for non-Americans. Now you see non-Americans doing new jobs, big jobs, and important jobs at every level and in every country.”33 Today, GE has a cadre of international managers with the expertise to acquire resources, build capabilities, and develop competencies that support superior performance.

GE’s success, like that of many other MNEs profiled throughout this chapter, highlights IHRM’s mission: find, staff, compensate, and retain executives with the qualifications needed to support and sustain the MNE’s strategy. Done well, IHRM supports higher productivity, stronger competitiveness, and improving profitability. Done poorly, people problems under- mine firm performance and diminish careers.

The perspecTive oF The expaTriaTe One can evaluate IHRM from many perspectives, anchoring on the issue of job specification, recruitment, personnel planning, wages and salaries, benefits and incentives, labor relations, per- formance evaluation, etc. This chapter applies an executive perspective, centering on expatriate management. In the MNE, the tip of the operational spear is the executive running international operations. Virtually any successful or, for that matter, struggling strategy has executives at its core. Ultimately, it’s the responsibility of executives to launch new ventures, rebuild failing units, develop local expertise, fill skills gaps, transfer core competencies, set technology platforms, and diffuse the organizational culture. Moreover, an executive perspective speaks to your likely inter- est in working internationally. Students often ask professors about the why, how, when, where, and what of careers in IB. This chapter sheds light on these questions.34

who’s who? This chapter looks at two broad types of executives: locals and expatriates. A local is hired by the MNE in his or her home country to staff the local operations; no special provisions apply to his or her work contract. A German national working in the Berlin office of a German MNE, for example, fits this profile. An expatriate (or “expat”) is an executive sent to work temporarily in a country that is not his or her legal residence. There are various types of expatriates. A home-country national, also known as a parent-country national, is a citizen of the country where the firm is headquartered (i.e., a Brazilian national sent to the Argentinean subsidiary of her Brazilian MNE). A third-country national is neither a citizen of the home nor the host country (i.e., a Malaysian national running the Russian subsidiary of his Australian company). If the Malaysian executive is transferred to the MNE’s Australian headquarters, he is then an inpatriate. Finally, a transpatriate refers to expat lifers who work an ongoing series of international assignments, plan never to return to headquarters, and in extreme cases, profess neither a corporate nor national “home.”

An executive perspective directs attention to the managerial activities that run international business operations.

Classifying a foreign assign- ment, in terms of the execu- tive’s relative nationality, uses a range of terms, including

• expatriate, • home-country national, • parent-country national, • third-country national, • inpatriate, • transpatriate, • flexpatriate, • reverse-expat.

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expands expat searches to consider older employees, whose children have grown and whose spouses see an international assignment positively, and younger employees, who are single, more mobile, and eager to experience life abroad.43 In 2014, for example, 46 percent of expats fell between 35 and 54 years old; 28 percent and 25 percent, respectively, were 18 to 34 and 55-plus.44

MNEs trade performance track records for long-term potential when posting younger managers to international assignments. For example, PricewaterhouseCoopers (PwC) offers its Early PwC International Challenge program (EPIC) to fast-track international assign- ments for its younger employees.45 EPIC identifies high performers interested in work- ing abroad. Candidates jump-start the process by completing an online assessment and consulting PwC’s career pages. Then, if selected, the high performer departs for his chosen destination, completing a two-year assignment. Candidates, besides expediting career pro- gression, improve executive skills and global orientation.46 PwC benefits by fortifying the leadership pipeline.

Increasingly, university programs respond to and accelerate these trends. Schools world- wide internationalize their curricula, expand study-abroad options, offer joint degrees with foreign institutions, and recruit international students. Similarly, some students take the big plunge, heading abroad for college. Hong Kong University of Science and Technology’s Business School, for example, had 16 nationalities in 2001, and almost all of them hailed from Asia. Now, it has more than 60 nationalities with many coming from outside Asia. The number of foreign students attending U.S. universities grew from 110,000 in 2001 to 524,000 in 2012, to nearly a million in 2016.47 Similar change is afoot elsewhere, with Americans increasingly heading to overseas MBA programs. Explained one attending ESADE in Barcelona, “If you look at the world today, at the state of business, you see that bridges are being built and borders broken down. I desired to focus on global business to expand both my knowledge and my network.”48 Self-starting expatriates, heading abroad to pursue cultural, personal, and career experiences, refine interpretations.

expanding scope of women The gender dimension of expatriate selection evolves. In absolute terms, females compose roughly 20 percent of expatriates.49 Relative growth has been far more dramatic. Since 2001, MNEs in the Asia–Pacific region have seen a sixteen-fold increase in women on international assignments, MNEs in North America have seen nearly a fourfold rise, and Europe has doubled its count. Surveys indicate that more than half of MNEs expect the number of female expatriates to increase, about a third believe the number will hold steady, and a handful see it declining. Reasoned an observer, “Going on expatriate placements can be an important step on the career ladder, and women are increasingly inter- ested in taking these assignments.”50

growing scope of Third-country Nationals MNEs establish operations abroad in increasingly dissimilar markets—say, from the United States to Canada to England to India to Singapore to China to Vietnam. The changing workflow of globalization elevates the role of third-country nationals, who often have the outlook, resourcefulness, and versatility to run operations in diverse locales.51 Longer term, the supply of skilled third-country nations will expand, especially in emerging economies. China has committed $250 billion to its uni- versity infrastructure, on top of already doubling its number of universities over the previous decade. It plans to produce 195 million college graduates by 2020.52

Short-term assignments boost the logistical appeal of third-country nationals—an exec- utive living in Dubai, for instance, may spend Monday through Friday working in Mumbai, then return home for the weekend. Then, as the need arises for help in the MNE’s Doha office, he easily changes his commute. “Fly In–Fly Out” mobility lets an MNE adroitly adapt its strategy, confident it has well-positioned executives to implement it. Data document the growing use of third-country nationals.53 A generation ago, most expatriates were selected from the executive pool in the MNE’s home country. In 2015, about 60 percent of interna- tional assignees relocated to or from the headquarters country; others relocated to or from a non-headquarters country.54

Short-term expatri- ate assignments, such as commuter and flexpatriates, are more common today than a decade ago.

Changing markets, growing cost consciousness, and evolving strategies are resetting notions of who is an expatriate—now, we see growing interest in the young, the old, and the restless.

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Chapter 12 (page 332) reported that search for superior competitive advantage pushes many to build a globally integrated enterprise that can implement increasingly sophisti- cated strategies. Consequently, they adjust their idea of an expatriate, fine-tuning the traditional notion of someone posted abroad for a lengthy tour as well as experimenting with novel formats that tinker with duration and design.

TreNds iN expaTriaTe assigNmeNTs Demand for expatriates escalates worldwide.35 Consider that in 1990, there were approxi- mately 3,000 MNC’s worldwide. By 2010, there were 80,000 MNC’s with 800,000 affiliates. Now, there are more than 100,000 MNC’s running 900,000 affiliates.36 Likewise, there are more than 25,000 MNEs headquartered in the emerging world; few existed a decade ago.37 The emergence of fast-growing economies worldwide has led MNEs, both in established markets, like the United States and Germany, as well as emerging markets, such as China and India, to open subsidiaries in new, different locations. MNEs of all types struggle to staff subsidiaries. No matter where, no matter doing what, each unit of each MNE requires execu- tive talent.

Shortages of talented executives, in light of flexible logistics and shifting markets, change the characteristics of the international assignment. The historical standard had been an executive posted to a host country for a three- to five-year assignment, with the plan of ultimately returning home. The notion of “a few years” increasingly gives way to a few months, a few weeks, or even a few days. So-called commuter assignments post an expa- triate for a short span. In extreme cases, it comprises the workweek, with the expat return- ing home for the weekend—say, shuttling between Paris and Madrid. Notes an HR director, “Commuter assignments were nonexistent until ten years ago, but now they are much more common.”38 Doing so, as the photo below spotlights, put expats around the world in motion, moving here to there as they travel everywhere. Short-term assignments, besides far more economical than long-term tours, quickly transfer resources to local subsidiaries.39 Moreover, face-time with coworkers, no matter how brief, promotes social relations that support innovation.40 Increasingly, commuter assignments give rise to so-called flexpatri- ates, executives who run the commuter cycle for a longer span as they work “frequent flyer assignments.”41

The young, old, and restless Besides duration, who goes abroad changes. Traditionally, expatriates were mid- and upper-level executives sent overseas to develop leadership potential and prepare for greater responsibilities. Effectively, international assignments were career stepping-stones for the MNE’s best and brightest. This mindset still prevails in many MNEs. Xerox, for instance, rotates its rising stars through two- to four-year assign- ments; successfully passing this test makes one a C-level contender.42 Increasingly, IHRM

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Short-term expatri- ate assignments, such as commuter and flexpatriates, are more common today than a decade ago.

Changing markets, growing cost consciousness, and evolving strategies are resetting notions of who is an expatriate—now, we see growing interest in the young, the old, and the restless.

coNcepT check

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Chapter 16, that high performance requires the right organization, a task that, in turn, requires the right sorts of executives to run the show. Research emphasizes the ethnocen- tric, polycentric, and geocentric staffing frameworks.

The eThNoceNTric Framework Ethnocentrism occurs when one group places itself at the top of a supposed hierarchy of relevant groups. Hence, the ethnocentric framework signifies the belief that the management principles and business practices used by headquarters are superior to those used in other countries. The proven success of the company’s way of doing things, goes this reasoning, means there is little call to adapt people and processes to foreign markets.62 Thus, the MNE fills executive positions in foreign units with home-country nationals (i.e., a Japanese MNE fills international slots with Japanese executives).

advantages Home-office executives commonly explain there is no shortage of executive talent in a particular host country, just a shortage of people with the right mix of operational expertise, industry experience, and fluency with the company’s preferred way of doing busi- ness. Thus, staffing overseas slots with parent-country executives has strategic, skills, and socialization advantages.

Strategic Advantages A firm earns success in its home market by uniquely bundling resources and capabilities to create proprietary core competencies. Success leads a firm to see its way of doing business as the superior means of creating value. Likewise, it sees international success as dependent on doing the same things, the same way, elsewhere. Headquarters concludes that executives who have performed successfully at home will do the same overseas. Thus, they adopt an ethnocentric staffing framework.

The growing importance of protecting ownership advantages spurs an MNE to safeguard its core competency. With it, the firm prospers; without it, the firm struggles. Headquarters prefers entrusting control of the company’s “crown jewels” to those who will best pro- tect them: namely, trustworthy colleagues from the home country. Earlier discussion of intellectual property explained that legal safeguards deter, but do not prevent, theft. The ethnocentric framework fortifies defenses by posting dependable home-country executives to vigilantly protect corporate assets.

Skills and Socialization Advantages Regulating the transfer of its core competencies is vital when they are difficult to articulate, specify, or standardize. For example, think of the challenge of codifying Apple’s product-design and media expertise, Walmart’s information- management and product-distribution systems, Ritz-Carlton’s standards of service, or Honda’s mastery of engine technology.63 An ethnocentric framework offsets this problem by posting a home-country manager with technical knowledge and direct experience to local slots. Consider India’s Wipro Technology, which has nearly 170,000 employees servicing over 900 of the Fortune 1000 corporations with a presence in 175 countries. It uses more than 10,000 expats, most of whom are Indian, reasoning that they are best-prepared to spread the “Wipro Way.” Explained Sanjay Joshi, chief executive of global programs, “We sprinkle Indians in new markets to help seed and set up the culture and intensity.”64 The HSBC Group long epitomized this outlook. For generations, most top executives came from a tight-knit cadre of elite expatriates who, in circulating among foreign operations, proactively dispersed the “DNA of the organization.”65

limitations MNEs have compelling rationales when asked why they rely on home-country nationals to run foreign operations. Yet, as the adage goes, vices are virtues taken to extreme. The same applies to the ethnocentric framework. Difficulties arise on several counts.

Workplace Tensions Ethnocentric staffing policies demotivate local workers. Consistently posting parent-country nationals sends the message to subsidiary personnel that all the

Three perspectives anchor an MNE’s staffing policy:

• Ethnocentrism • Polycentricism • Geocentricism

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Discussion of “Company and Management Orientations” in Chapter 2 (page 47) introduced the idea of polycentrism, eth- nocentrism, and geocentrism to describe how MNEs and their managers approach foreign cultures. Here, we reintroduce these terms, highlighting the ways these “attitudes or ori- entations” influence an MNE’s staffing framework.

Ethnocentrism is the conviction that one’s preferred policies and procedures are the supe- rior way to manage anyone, anywhere.

The ethnocentric framework fills key management positions with home-country nationals.

reverse expatriates The rising importance of emerging markets refines our evolv- ing ideas of expatriates. Historically, MNEs recruited executives in richer countries and assigned them to units in developing countries. Now, talented executives from emerging economies—so-called reverse-expats—are sent straight to richer countries to speed their development. They spend anywhere from a few weeks to a year in an operational unit before eventually returning home—where they often replace a traditionally defined, and usually higher-paid, expatriate.55 Some tweak this option further. Goldman Sachs’ Growth Markets Opportunity Program recruits high-potential Asians and Latin Americans that have earned an MBA from Western universities. It posts them to its New York or London offices for up to a year before expatriating them to emerging financial centers such as Singapore, São Paulo, and Hong Kong.56

The ecoNomics oF expaTriaTes Expats, if anything, are expensive. Besides salary, relocation, taxation, housing, cost-of-living and education allowances means that an expat package runs two to three times an expat’s annual pay.57 Escalating expenses spur IHRM to contain costs; 75 percent of a worldwide sample report programs to reduce international assignment expenses.58 In recourse, MNEs design short-term and commuter assignments in lieu of traditional, multiyear assignments. Rather than moving to foreign markets, executives travel far more often to far more places that lie farther from their home base. Presently, short-term posts (3 to 12 months) repre- sent more than half of expat assignments.59 Likewise, cost concerns accelerate deploying third-country nationals in place of parent-country executives. The latter often demand richer compensation packages and impose higher relocation costs.

Cost pressures encourage localization, whereby an expatriate retains the for- eign assignment but accepts the status of a local hire and, correspondingly, a lower host-location salary. Some MNEs go with “expat-lite” slots that offer fewer benefits. In both cases, compensation is cut. IBM’s “Project Match” added an interesting twist, offer- ing terminated employees in the United States the option to move to a local unit in say, India, China, Brazil, Nigeria, Russia, provided the candidate has been a “satisfactory per- former” and was “willing to work on local terms and conditions.”60 That is, one has the option to move abroad and preserve their job, but compensation will be set by the local pay scale. Granted, a few perks may be added to the package. Inevitably, though, total compensation falls.

The eNduriNg coNsTaNT Evolving trends in the global marketplace drive evolving ideas on staffing international operations. Still, there is an enduring constant: Running the hundreds of thousands of sub- sidiaries throughout the world requires a mix of talented, enterprising locals, parent-country execs, and third-country expatriates. So keen is demand that MNEs report ongoing short- ages of expatriate talent for international assignments and, consequently, expand the pool to include the young, old, and restless.61 Throughout it all, IHRM aims to staff the right person in the right job in the right place at the right time for the right compensation for the right stretch. Success drives strategy and sustainability. Failure erodes careers and diminishes performance.

sTaFFiNg Frameworks iN The mNe IHRM professionals apply staffing frameworks (a conceptual structure that helps solve complex issues) to organize expatriate policies and systems. A staffing framework iden- tifies the optimal mix of local workers from the host nation, expatriates sent from the home country, and third-country nationals. It organizes selection, training, compensation, and repatriation guidelines in terms of the demands of the MNE’s strategy. Recall from

Reverse expats spend a predetermined amount of time at the company’s home country operations before running emerging market operations.

Economic pressures and cost concerns spur companies to emphasize frequent business travel in lieu of a longer-term international assignment.

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Workplace Tensions Ethnocentric staffing policies demotivate local workers. Consistently posting parent-country nationals sends the message to subsidiary personnel that all the

Three perspectives anchor an MNE’s staffing policy:

• Ethnocentrism • Polycentricism • Geocentricism

coNcepT check

Ethnocentrism is the conviction that one’s preferred policies and procedures are the supe- rior way to manage anyone, anywhere.

The ethnocentric framework fills key management positions with home-country nationals.

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smart, capable people live within a 25-mile radius of the home-office headquarters. Unless an expatriate transfers unique skills, local employees may resent someone they see as no more, perhaps less, qualified than themselves. Unchecked, resentment can lower productiv- ity and increase turnover as locals sense a glass ceiling capping their careers. For instance, the preference among highly skilled Chinese professionals’ to work in a domestic, rather than a foreign, company, increased significantly in just a few years; anecdotal evidence high- lights the sense of greater upward mobility in local companies.66

Legal-Political Tensions An ethnocentric staffing policy can prove legally difficult and politically impractical. Employment law in countries worldwide regulates, sometimes lightly, sometimes strictly, the use of expatriates in place of locals. Host governments, alert to the importance of developing their workforce, prefer that subsidiaries hire locals. MNEs’ plea that the special status of their operations prevents their doing so is often rejected. Governments then impose immigration laws or workplace regulations that prod MNEs to hire locals.

Misreads and Misfits Tensions Force-fitting foreign operations to mimic the standards of the home office risks pounding square pegs into circular slots. Certainly, an MNE can make its foreign operations mirror the outward appearance of its home-country headquarters. Assigning home-office executives to foreign operations, however, does not automatically create a successful “mini-me” subsidiary. Consequently, an ethnocentric framework can prove detrimental, posting executives who misread markets and methods. In 2001, for exam- ple, Toyota aspired to sell one million cars a year in China within a decade. By 2012, data indicated serious shortfalls. Analysts reported Toyota had sorely misread the Chinese market, notably offering cars priced too high with too little daqi (Chinese consumers’ perception of road presence). Toyota’s solution to its ongoing China problem, a reflection of its traditional ethnocentric staffing policy, complicated problems. Explained a senior Toyota executive, “Our way of beefing up operations in China is to bring in more people from Japan. We should be localizing our business here, promoting Chinese managers, and listening more attentively to Chinese consumers. But we don’t.”67

The polyceNTric sTaFFiNg Framework Polycentrism is the principle of organizing around different, but equivalently important political, social, or economic centers. Hence, the polycentric staffing framework acknowl- edges the business practices of foreign centers as philosophically and practically equivalent to those at home. Because business in the home country differs from that in foreign markets, and given intrinsic cross-national equivalency, IHRM adapts policies and systems to the host business environment. Thus, local executives from local units (e.g., home nationals staff headquarters, Russians run Russian subsidiaries, Mexicans run Mexican subsidiaries, and so on). In rare cases where home-office executives are posted to foreign subsidiaries, the work- ing assumption is that their effectiveness requires immersing themselves in the ways of the local business environment.

advantages Staffing foreign operations with locals has strategic, economic, and political advantages.

Strategic Advantages Proponents of polycentrism reason that local managers are stronger performers given their keener understanding of local customers, markets, and institutions. Interviews of 300 senior executives at global companies, for instance, found that more than 60 percent believed locals better understood the local operating environ- ment and customers’ needs than did they.68 As Microsoft’s former COO explains, “You want people who know the local situation, its value system, the way work gets done, the way people use technology in that particular country, and who the key competitors are. . . . If you

The polycentric staffing framework looks to host-country nationals to manage local subsidiaries.

The ethnocentric staffing framework is vulnerable to problems arising from workplace, legal-political, and misreads and misfits tensions.

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send someone in fresh from a different region or country, they don’t know those things.”69 Added Bill Gates, Microsoft’s chairman, “It sends the wrong message to have a foreigner come over to run things.”70

J&J’s experiences spotlight related aspects. As a rule, locals run J&J’s local subsidiaries. Each unit has substantial autonomy, commanding the freedom to act as it believes best given its read of the local market. Each unit performs as a small business, entrepreneurial in character and aware that success depends on its superior sense anticipating local customers’ needs and delivering meaningful solutions. J&J’s CEO explained that relying on locals to staff local operations “is a tremendous magnet for talent because it gives people room to grow and room to explore new ideas, thus developing their own skills and careers.”71 Likewise, fixing its Chinese market problems pushed Toyota to rethink its IHRM policy, deemphasiz- ing its traditional ethnocentric approach in favor of greater localization. Explained a Toyota spokesperson, “We’re promoting more local Chinese employees to management ranks and will continue to do so.”72

Economic Advantages A compelling motivation of the polycentric approach is its impli- cations to expatriate economics. Hiring local managers eliminates the expense of posting expatriates to local slots. It is difficult to pinpoint the total cost of an expat assignment due to the range of relevant variables, running from financial incentives, housing, relocation, taxa- tion, to cost-of-living and education allowances. A general rule is that the total annual cost is two to three times the expat’s annual compensation.73 Indirect administrative expenses boost this sum. For example, an expat slot generates more paperwork than an equivalent domestic slot. Setting policies and systems to administer the complicated circumstances of expatriate assignments requires, on average, twice as many HR professionals than needed for a non-expatriate slot.74 Qualifying expat pay by the comparative expense of a local hire means an expat costs the employer much more than a local. Some see these stark economics encouraging staffing local operations with home-country nationals.

Political Advantages Understandably, host governments prefer polycentric approaches. They see local managers as better citizens and stakeholders than expatriates, far more likely to champion national interests over global objectives. Activist officials often require the MNE hire locals, such as licensing requirements that prohibit expatriate accountants and lawyers or visa regulations that put a hard cap on the number of foreigners who can staff a local subsidiary. The polycentric framework neutralizes these impediments.

limitations A polycentric approach, by effectively decentralizing authority to local subsid- iaries, fans organizational tensions on several counts.

Autonomy Tensions Installing local executives in decision-making roles gives them opportunities to develop their skills and build thriving operations. Success supports grow- ing resource independence from the parent that can turn the local subsidiary into a quasi-autonomous unit. Unchecked, an MNE risks devolving into a federation of loosely connected, largely autonomous national operations that pay little mind to headquarters. For instance, when J&J launched Tylenol in 1960 in the United States, the product was avail- able to worldwide units shortly thereafter. However, the quasi-independent Japanese unit, despite duress from headquarters, did not begin selling it until 2000.75

Accountability and Allegiance Tensions Dilemmas over allegiance emerge when host- country managers are loyal to local colleagues instead of their home-country bosses. In theory, local managers balance the competing demands of making sense of events from a local and the home-office view. In practice, however, national concerns often take prece- dence given the immediacy of local pressures.76 Left to their own devices, local managers may respond to local circumstances in ways that then complicate integrating their activities with global operations.77

Using host-country managers boosts local motivation and morale. Still, likely costs include gaps with global operations due to prob- lems of accountability and allegiance.

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Motivation and Mobility Tensions There are few expatriate slots in the polycentric framework; again, the presumption is host-country nationals manage local subsidiar- ies, parent-country nationals run corporate headquarters, and a select few move between countries. Locals have scant opportunities to work outside their home country, effectively imposing a glass ceiling on their professional mobility. Consequently, local managers may see little incentive to study multinational business practices or identify ways to improve cross-national integration. The resulting single-country focus can isolate national subsidiar- ies as well as push enterprising executives, ambitious to work abroad, to quit.

The geoceNTric sTaFFiNg Framework Geocentrism is a world-oriented set of attitudes and values that regards humanity as a single entity sharing universal outlooks and orientations. The geocentric staffing framework sees the blunt split of home-, host-, and third-country managers as needless divisions. Rather, it reasons the best way, wherever discovered, works everywhere, whenever applied. IHRM develops talented executives, regardless of their home nations or eventual host market, with the knowledge, skills, and abilities needed to get the job done. Reasoned GE’s CEO, “It’s more important to find the best people, wherever they may be, and develop them so that they can lead big businesses, wherever those may be.”78

advantages The geocentric framework develops executives whose global mindset enables them to easily and effectively navigate cultures and countries.79

Strategic Advantages Geocentricity, and its advocacy of a global mindset, develops expats that command key competencies. They understand and interpret what is going on in a global situation, they decipher verbal and nonverbal messages and signals from people of differ- ent outlooks, and their flexibility helps them deal appropriately with different situations. They effectively implement global and, especially, transnational strategies, finding ways to exploit learning opportunities, transfer knowledge, and promote collaboration. As the CEO of Schering-Plough explains, “Good ideas can come from anywhere. . . the more places you are, the more ideas you will get. And the more ideas you get, the more places you can sell them and the more competitive you will be. Managing in many places requires a willingness to accept good ideas no matter where they come from—which means having a global attitude.”80

Performance data confirm these effects. MNEs with diverse top teams are financial high performers, particularly those implementing ambitious global strategies with strong cross-cultural dimensions.81 Promoting broader attitudes and values in the executive ranks promotes outlooks that bridge differences and champion collaboration. Too, developing a multinational management cadre reduces cultural myopia, improves team representative- ness, and enhances market responsiveness.82

limitations A geocentric framework is tough to develop and costly to maintain. Professional and logistic tension complicate its effectiveness.

Professional Tensions Difficulty plagues expat development given the need for executives to retain a sense of identity in the face of increasing diversity. Working with groups marked by cultural diversity takes on a different vibe than with groups composed of people of simi- lar ethnicities and nationalities.83 Often, the mix of different perspectives generates creative breakthroughs. However, making sense of the various outlooks that potentially bear on a decision can prove overwhelming. Akin to the Tower of Babel, geocentrism can erode com- mon cause as the clarity of the task is lost in a hodgepodge of dissimilar outlooks.84

Logistics Tensions The geocentric framework imposes costly logistics. Exposing execu- tives to different ideas in diverse places, given the quest to improve their global mindset, is expensive. Compensation and relocation costs escalate when transferring high-priced executives from country to country. Often the high pay and prestige enjoyed by those in

The geocentric framework posts the most qualified executives, regardless of na- tionality, to expatriate slots.

The geocentric staffing frame- work is vulnerable to problems arising from professional and logistic tensions.

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the geocentric vanguard triggers resentment among the rank-and-file. The geocentric framework’s preference for multiyear assignments runs counter to growing pressure to reduce expat expense via short-term posts and flexpatriate slots. Operationally, immigra- tion laws and visa caps can hinder efficiently maneuvering executives among subsidiaries. In recourse, some advocate “think global, hire local” as a solution.85

which sTaFFiNg Framework wheN? Table 20.1 summarizes the merits and drawbacks of the ethnocentric, polycentric, and geo- centric frameworks. This typology applies a contingency perspective that optimizes staff- ing policies in terms of the requirements of the MNE’s strategy. That is, expatriates drive an MNE’s strategy: they launch new ventures, build management expertise, fill local skills gaps, transfer technology, and diffuse organization culture. Different strategies, whether international, localization, global, or transnational, impose different requirements. For exam- ple, nearly all MNEs prepare for global expansion by assessing the executive requirements of their strategic vision and mission. They then assess their pool of potential expatriates, identi- fying requisite outlooks and skills, and filling gaps.86

coNcepT check

Table 20.1 demonstrates a prin- ciple that we develop through- out this book: Although most of us are prone to determine the “one best way” of doing things, it’s seldom a promising approach in IB. Likewise, this outlook applies to formulating a staffing strategy for interna- tional operations.

Table 20.1 Frameworks to staff international operations: principles and practices

The assumptions, advantages, drawbacks, and strategic fit of the leading staffing frameworks run the gamut. IHRM, keen to the requirements of the MNE’s strategy, applies the most appropriate staffing framework. As they do, they mind various opportunities and trade-offs.

Framework assumptions advantages Drawbacks strategic Fit ethnocentric • The leadership ideals,

management values, and workplace practices of one’s company are superior to those elsewhere.

• Headquarters makes key decisions and foreign subsidiaries implement them.

• Leverages and protects core competencies.

• Promotes executives’ international outlook.

• Fills local skills gaps.

• Transfers principles and practices of the company’s culture.

• Fans dissent and demotivation among locals.

• Discourages cultural empathy.

• Managers may misread local innovations.

• Alienates locals who prefer national orientation.

International Strategy, given its quest to leverage and safe- guard the company’s core competencies in foreign markets.

Polycentric • Headquarters develops a vision and mission that local units adapt.

• Responds to differences between home and host countries.

• Superior competitiveness requires understanding local customers, markets, and institutions in the host market.

• Respects the unique merits of the local environment.

• Local hires demand less compensation.

• Local managers holding top jobs attract, motivate, and retain local employees.

• Reduces the odds of expat failure.

• Appeases host governments that prefer locals who champion local goals.

• Complicates coordinating and controlling value activities.

• Isolates country operations.

• Reduces the incentive among locals to engage a global perspective.

• Creates agency dilemmas for quasi-autonomous country operations.

• Promotes a single-nation focus among local staff.

Localization Strategy, given its quest to maximize the local responsiveness of foreign operations by adapting people, products, and processes to local standards.

Geocentric • All nations are equal and possess inalienable characteristics that are neither superior nor inferior.

• Headquarters and subsidiaries collaborate to identify, transfer, and diffuse best practices.

• Ideas and innovations are found anywhere and everywhere—provided one is open to insights.

• Adroitly deal with different people with different outlooks in different countries.

• Efficiently configures operations and expat staffs.

• Leverages strategic scale and operational scope.

• Promotes learning dynamics that develop, transfer, and leverage local ideas worldwide.

• Tough to develop, costly to run, hard to maintain.

• Contrary to many countries’ market development plans that champion local causes.

• Difficult to find and fund qualified expatriates with a global mindset.

• High status of global expats demotivates supporting players.

Global and Trans- national Strategies, given the quest to optimize worldwide integration and local responsiveness.

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expaTriaTe selecTioN Developing high-performance expatriates requires identifying candidates who are inter- ested in an international assignment, preparing them for the adventure, devising ways to motivate them, posting them to the appropriate job, and leveraging their improved skills when they are ready for their next position. IHRM steadily systematizes programs to per- form these functions, starting with selection, and moving on sequentially through prepara- tion, compensation, and repatriation. Screening executives to find those with the highest potential and greatest inclination for a foreign assignment anchors expatriate selection (see Figure 20.3).

Operationally, the challenge of expatriate selection is not finding candidates who are ready and willing to head abroad, but identifying those who are also able. IHRM lacks precise metrics that reliably predict the performance of a potential expatriate.87 Some rely on hunch, sending someone who seems reasonably qualified. Failure though, is expensive. Avoiding this outcome, along with resolving escalating need to identify executives ready, willing, and able to go international, spurs IHRM to improve selection processes. Today, IHRM applies operational, cultural, and personality measures, commensurate with the prevailing staff- ing framework, to identify candidates. These screens, applied through objective evaluations and in-depth personal interviews, assess candidates on several dimensions. Anecdotes and analysis emphasize the following:88

TechNical compeTeNce An enduring selection criteria is an executive’s technical expertise, as indicated by past job performance, and his understanding of how to transfer it to the foreign unit.89 Implementing a software system, orchestrating a marketing campaign, or launching ventures, for instance, often exceeds a subsidiary’s competencies. Assigning a high-performance expatriate transfers the necessary expertise. Consequently, filling a technical or managerial skills gap in a foreign subsidiary determines nearly half of the executives sent abroad.90 The sorts of sophisticated expertise typically needed means candidates have several years of high-performance line experience. Relatedly, IHRM routinely screens candidates by consulting coworkers, thereby reinforcing the importance of operational expertise. Finally, outstanding technical compe- tence is often seen as signifying the self-confidence needed to succeed abroad.91

selF-orieNTaTioN An expatriate assignment is marked by ambiguity, uncertainty, and risk. Thrust into challeng- ing situations, an expat’s effectiveness depends upon developing new knowledge, skills, and abilities. Facing ambiguities, one must organize interpretation and fortify decision-making.

coNcepT check

In Chapters 2, 3, and 4, we ana- lyze the environments—cultural, political, legal, and economic— that frame international busi- ness operations. The variability in each context prevents setting absolute standards for running international operations. Here, we observe the implications of that variability to selecting expatriates. General guidelines more often than not take the place of absolute standards.

Candidate Is a High-Potential Employee

Candidate Has Specific (Rare) Skill

Candidate Has Previous International Assignment Experience

Candidate Has Cultural Adaptability Skills

Other

Candidate Expressed Willingness to Go on International Assignment

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure 20.3 Criteria for identifying a Candidate for an expatriate Assignment92

Technical competency and operational expertise are key determinant of those executives that are posted to an expatriate slot.

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Challenged by physical, emotional, and social stress, one must reconcile choices and conse- quences. Hence, personal qualities, such as motivation, self-reliance, and conscientiousness help one start and move onward.93 For instance, HSBC’s selection process uses tests, inter- views, and exercises to gauge a candidate’s capacity for self-orientation. Still, HSBC evalu- ates intangible indicators, such as ambition and resilience. Explained its CEO, “We don’t look so much at what or where people have studied, but rather at their drive, initiative, cultural sensitivity, and readiness to see the world as their oyster. Whether they’ve studied classics, economics, history, or languages is irrelevant. What matters are the skills and qualities nec- essary to be good, well-rounded executives in a highly international institution operating in a diverse set of communities.”94

oThers-orieNTaTioN International travelers note that new situations in new settings challenge their values and outlooks. Understanding how colleagues, customers, and competitors in the local market see events, rather than criticizing dissimilar perspectives, supports strong performance. Interpreting events in ways that reject stereotypes, preconceptions, and unrealistic expecta- tions enables an expat to adapt messages to listeners’ outlooks. Effective communication, an element of others-orientation, helps one go far in IB.95 Likewise, others-orientation promotes cultural empathy, namely the ability to develop sincere, honest friendships with foreign nationals and the willingness to use, no matter how rudimentary, the host-country language. Others-orientation enhances one’s interactions with people and, importantly, an understanding of why some went well while others did not. The records of successful expats indicate that they did not recoil from cultural differences, criticizing locals for their personal choices. Rather, they developed the necessary tools of communication, empathy, and diplomacy.96

resourceFulNess The precise job descriptions found in the job bank of the home office inevitably give way to far broader responsibilities in foreign subsidiaries. Complicating matters is the fact that the expat usually lacks the battery of resources she commanded at the home office. The call to do many jobs simultaneously requires finding ways to interpret how locals engage the workplace, make decisions, tolerate uncertainty, use power, and build consensus. In addi- tion, expats will confront different trade rules, investment regulations, and business prac- tices. Resourcefulness enables one to make sense of odd situations and develop insightful solutions.

Fast-growing markets, for instance, have attracted many MNEs and, by extension, expa- triates. More than a few hail from a rule of law environment (where rules governing business are straightforward directives, as in Germany), and move into a rule of man setting (where rules are seen more as flexible guidelines, as in China). One expat noted that in the West, “everything is transparent. If you want to obtain a license to do something, you don’t need to spend money bribing an official or hiring a go-between: You just download the form from the Internet and apply.”97 Moving from the transparency of Germany to the opacity of China can prove daunting for those accustomed to following the straight and narrow. Resourcefulness, whether adapting to cultures, laws, or simply getting around town, shapes an expatriate’s performance.

global miNdseT Figure 20.4 highlights the eclectic set of competencies, talents, and outlooks that shape an expat’s success. Collectively, this data highlights the importance of a global mindset. Increasingly a precondition as well as an outcome of expatriate success, a global mind- set reflects awareness of differences across countries coupled with a capacity to divine

Resourcefulness refers to a person’s potential for

• self-maintenance situational flexibility,

• interpreting the immediate environment,

• developing productive workplace relationships.

Executives in foreign subsidiaries usually assume a greater range of leadership roles than counterparts running similar-size home- country operations.

Orientation, both self and others, help expats

• manage ambiguity, uncertainty and risk,

• resolve physical, emotional and social stress,

• support effective communication,

• enhances interpersonal interactions.

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overlapping principles. On this note, McKinsey & Co. concluded that whereas technical com- petence is a given, high-performance expatriates also have a particular mindset. Specifically, “When you look behind the success stories of leading globalizers, you find MNEs that have learned how to think differently from the herd. They seek out different information, process it in a different way, come to different conclusions, and make different decisions. Where oth- ers see threats and complexity, they see opportunity. Where others see a barren landscape, they see a cornucopia of choices.”99 Developing solutions requires switching from custom- ary, even preferred methods, to alternative approaches. Making the switch depends on the expat’s capacity to make sense of situations, adjusting her mindset given cues and circum- stances, engaging the players and the processes, and insightfully responding.

expaTriaTe preparaTioN aNd developmeNT Ideally, IHRIM begins preparing an executive for an international assignment long before she is slated to go. Too, IHRIM does not stop once she begins her new job; support systems carry on to optimize her performance. Often, circumstances prevent deliberative preparation. A foreign operation may be experiencing a technical meltdown, managerial impasse, or hostile takeover that requires headquarters immediately dispatch support. But, in a perfect world, IHRM has the flexibility to prepare and develop an executive for an international assignment.

Conventionally, IHRM focused on fitting an expat’s technical know-how with the position’s requirements. Functional expertise was seen as necessary and sufficient for high performance. Greater concern for the expat’s business qualifications led IHRM to tailor preparation programs toward improving technical skills and administrative competencies. The matters of cultural awareness or resourcefulness were largely left up to the individual. Presumably, the manager interested in an international career would, through personal choices, travel abroad, monitor world events, and socialize with people of different ethnicities, cultures, and nationalities.100

A global mindset helps successful expatriates see not a barren landscape, but a cornucopia of choices upon entering foreign markets.

coNcepT check

Improving understanding of the intricacies of international business operations, as we have seen in the previous chap- ters, along with increasingly sophisticated HRM programs has steadily reduced the rate of expatriate failure. Evidence confirms the importance of commanding a broad band of knowledge about institu- tions, markets, companies, and consumers.

Global mindset Cultural intelligence/sensitivity

Adaptability to change Strategic thinking Leadership skills

Flexibility Business acumen

Interpersonal skills Decision-making ability

Analytical thinking Emotional intelligence

Language skills Prior global experience Geographic knowledge

Technical skills Risk tolerance

Other Extroverted Personality

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Figure 20.4 Key Competencies of expatriates Surveys of the preferred competencies of expatriates consistently emphasize facets of executive outlook and international orientation. Effectively, technical skills open the door to an international assignment, but leadership skills and global mindset move one through it.98

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Performance records indicate that when eventually sent abroad, these sorts of managers often outperformed their less worldly counterparts.101 The variability in performance among expatri- ates, by highlighting gaps in training and development, led MNEs to expand preparation and development beyond technical capabilities.

Today, rare is the foreign assignment that fails because IHRM misjudged a candidate’s technical qualification. Improving understanding of working abroad finds that an execu- tive’s poor performance often follows from poor preparation for the lows of the international assignment. Unquestionably, as we saw in Figure 20.1, working abroad is often a stimulating experience. Still, expatriates run into difficulties that suppress, if not ruin, their workplace performance. Figure 20.5 identifies recurring stress points. Highlights, naturally, require little preparation. Stress points, however, do. Reestablishing a social life, overcoming loneli- ness, and reconciling with missing friends and family top the list. The challenge of building productive relationships with new, different colleagues, to say nothing of interacting with host nationals in a new cultural milieu, fans anxieties. These concerns show that improving cultural sensitivities and interpersonal skills improves the odds of successful adjustment and, by extension, a successful assignment.103 IHRM translate this imperative into a two-stage program: preparation prior to departure, and then, once in-country, ongoing development.

pre-deparTure preparaTioN programs Host-country familiarization and cross-cultural orientation anchor most preparation programs.104A universal method is education about the way things work in the host country. Topics include politics, laws, economics, workplace practices, business etiquette, logistics options, and social situations. Instruction typically takes the form of roundtables, seminars, videos, web activities, and readings. Collectively, these materials provide general area stud- ies, market analysis, operational overviews, and workplace profiles. Often, due to the expat’s imminent departure, they compose the bulk of preparation.

Ideally, preparation includes cross-cultural training and rudimentary language lessons. Both help expatriates better navigate life in the host country. Cultural orientation highlights how dif- fering ideas, attitudes, and beliefs influence workplace and social relations. These outlooks do

Expatriate preparation pro- grams aim to transfer specific information about the host country as well as improve the executive’s cultural sensitivity.

Reestablishing a social life

Feeling lonely and missing friends and family

Career prospects

Relocation process

Language barriers

Healthcare–quality and access

Adapting to culture

Standard of living

Dealing with bureaucracy/corruption

Managing finances

Safety and crime

Raising my children

The weather

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Figure 20.5 Leading Concerns of expatriates Ahead of Moving to Their Foreign Assignment A foreign assignment is rich with opportunity yet, at the same time, fraught with challenges. Prior to heading abroad, executives worry about many issues. Anticipating and adjusting for the sorts of problems shown here improves the odds of a successful experience.102

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not come naturally to all. Hence, preparing expats often requires helping them recognize gaps in their global mindset. Realization helps immunize them to culture shock—a soon-after-arrival dissatisfaction with the host society that can deteriorate into homesickness, irritability, arrogance, and disdain. Michelle Brown, for example, departed London for a job in Hong Kong, eagerly anticipating immersing herself in the new culture. The day-to-day practicalities of her new life, however, proved daunting. “I suppose I was quite naive, but Hong Kong was a complete culture shock,” she says. “The humidity was insane, the smells made me ill, there was just so much to take in and not all of it pleasant.”105 Improving cross-cultural sensitivity boosts people’s receptiveness to and tolerance of foreign environments.106 Expats appreciate cross-cultural preparation; ongo- ing surveys consistently report that more than 80 percent see it as a good to great value.107

iN-couNTry developmeNT programs Once in-country, expatriates initially flow well in the workplace—colleagues and coworkers offer help, provide advice, and cut slack for the new guy. Gradually, ambiguous workplace situations emerge. In-country development efforts, often through mentorship programs, virtual meetings, and executive coaching, support the expatriate. Increasingly, MNEs use CD-based or web-based development programs, given that the expatriate can tap resources anywhere, anytime during an assignment.108 Their economical convenience provides in- country reinforcement tools that can span the assignment.

In terms of lifestyle, developing new routines in a different place can prove demanding. Expatriates, for instance, report big challenges arranging finances, health care, accommoda- tions, and utilities in a host of locales, such as India, China, Brazil, Qatar, Russia, and Saudi Arabia. Notably easier, but still not the same as home, are South Africa, Canada, Thailand, and Australia.109 Familiarizing expatriates and their families with host-country routines develops an understanding of the realities of daily life. The sooner they establish productive patterns of schooling, socializing, and shopping (to some, the “3Ss” of successful adjust- ment), the higher the odds of withstanding culture shock.

Family maTTers Executives decline expatriate assignments for a variety of reasons, including compensation, security, and quality-of-life concerns. All pale in comparison to the influence of family and partner/spouse/children concerns—executives cite those reasons nearly 70 percent of the time they decline an expat offer.110 Furthermore, a persistent cause of poor performance is the struggles an expatriate’s spouse and children experience adapting to their new home. The foreign assignment is stressful for the expatriate, but the transfer can overwhelm the family. Challenges follow from education concerns, lifestyle adjustments, and family mem- bers’ lingering regret about moving abroad. Expats warn of a recurring dynamic. Abrupt sep- aration from friends, family, and career isolates the spouse and children. Many then look for companionship and reassurance from the expatriate whose job demands leave scant time to provide support. Sometimes slowly, sometimes quickly, but almost always, family harmony suffers as stress escalates. Unchecked, the expat’s work performance declines because, “If the family starts to unravel, the employee will at some time start to unravel too.”111

IHRM tries workarounds, such as posting executives on short-term or commuter assign- ments, thereby avoiding uprooting families. Others advocate sending younger or older folks. Younger candidates are more likely single; motivated by adventure, career, and money; and less risk-averse. Alternatively, older candidates have grown children and more-agreeable partners.112 An emerging trend is including families in predeparture preparation, particularly destination familiarization and cultural orientation programs. Similarly, proliferating dual career track family structures lead companies to extend support to spouses. Popular programs include language training, intercultural preparation, work permit advice, job finding fees, and career planning assistance. Some offer allowances for spousal support, club memberships, job possibilities, volunteer options, and support networks.

Culture shock is the anxiety and disorientation experienced when one moves into an unfamiliar culture.

Key to successfully transitioning to a foreign assignment, beyond workplace adjustments, is mas- tering the new ways of school- ing, socializing, and shopping.

Increasingly, expatriate prepa- ration and support activities include the spouse and family members.

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Yes The prevalence of English worldwide signals that learning a

foreign language, while arguably worthwhile, is ultimately unnecessary. Inexorably, English ably performs as the lingua franca of the business world, providing a universal means for people who speak mutually unintelligible languages to communicate effectively. Presently, about a quarter of the world’s population speaks some English, including the nearly 450 million who speak it as their mother tongue and the billions for whom it is a second language. Both counts steadily grow.113 Too, when you get down to hard dollars, English rules. It accounts for a far larger share of world output than that represented by the proportion of native speakers. Though the first language of only 7 percent of the world’s population, English speakers generate more than 40 percent of world output.

The Preferred Choice Situations in the European Union (EU), where more than half the population claims to be reasonably conversant in English, highlight common trends. Among Europeans born circa 1950, English, French, and German are equally common. But 15- to 24-year-olds are five times more likely to speak English as a foreign language than either German or French. Add native speakers to those who have learned it, and some 60 percent of young Europeans speak English “well or very well.”114 Many envision improving their competency; more than 70 percent in a survey of 16,000 people living in the EU agreed, “Everybody should speak English.”

We see similar trends elsewhere. India has the second- largest fluent English-speaking population, after the United States; it will have the world’s largest number of fluent English speakers within a decade. Hindi films, advertising billboards, and higher education are in English. Most well- paying jobs in India require some English competency.115 In China, state employees younger than 40 must master a min- imum of 1,000 English phrases.116 The prevalence of English throughout the Arab world fans worry about the decline of Arabic. American universities reflect these general trends as well. Although they are aggressively internationalizing their curricula, fewer require foreign language training—currently 37 percent versus 53 percent in 2001. The share of university students enrolled in foreign language classes has dropped by half since 1960.117

The Default Choice Although English is not an official language in many countries, it is commonly taught as the second language. In the EU, 76 percent of schoolchildren study English, followed by French (32 percent), German (18 percent), and Spanish (8 percent). More than 90 percent

study English in Malta, Austria, Spain, Italy, Cyprus, Poland, Croatia, and France.118 More than a quarter billion students in China study English; some begin as young as two, but all by kindergarten. More than a fifth of Japanese five- year-olds study English conversation. Argentina requires students from the fourth grade through high school to study English two hours per week. Chile mandates public schools begin teaching English in the fifth grade. English is the language of choice in the classrooms of many African countries. Countries worldwide aim to become bilingual in English in the next decade or two in the belief that “it’s the language for international teaching. English allows students to be able to come from anyplace in the world and for our students to go everywhere.”119 In sum, with 2 billion people speaking or studying it today, we are on the verge of widespread diffusion of English language competency.120

The Online Choice Expanding English use gains from its predominance on the Internet. Ever so easily, one can conduct business worldwide using the English interface of one’s preferred browser.121 More than 80 percent of home pages on the web are in English. Heavyweight publications around the world, like Der Spiegel and China Daily, offer English-language websites. The growing sophistication of translation software makes foreign language competency a moot point for those who prefer using their local language on the Internet. Offline, workable, nearly flawless simultaneous-translation devices are now close-at-hand.122

Then again, the online choice may reset our notion of language. Rather than the phonetics or morphology of English, German, or Mandarin, people will master the semantics and syntax of Python, Java, or Ruby. The latter, forms of high-level programming languages, arguably bet- ter prepare people for a future in which the Internet is the foundation for nearly everything. Facebook, for instance, serves more than 1.5 billion customers in more than 150 nations through a website interface that is automatically translated into more than 100 languages.123 Speaking a programming language that fits the digital pieces together, rather than conversing with foreigners in their native tongue, may prove to be the path to meaningful linguistic compe- tency. As the director of government affairs of the Comput- ing Research Association notes, “To be successful in the modern world, regardless of your occupation, requires a fluency in computers.”124

The Only Choice MNEs respond in kind. The Economist reports that just under half of employers rate foreign language competency as important; it ranked well behind

English: Destined to Be the Global Language?

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technical skills, leadership ability, and career development in assessing an expat candidate.125 Airbus, SAP, Lenovo, Honda, Daimler-Chrysler, Renault, Lufthansa, Rakuten, Aventis, Samsung, and Microsoft, to name a few, mandate English as the corporate language.126 Growing interest in programming languages, long considered arcane as well as uncool, may reset standards. Finally, some say

language proficiency is an easy but ultimately misleading proxy of a global mindset. As one CEO explains, “I’ve met many people who speak three or four languages, yet still have a very narrow view of the world. At the same time, I’ve come across people who speak only English but have a real passion and curiosity about the world and who are very effective in different cultures.”127

no Learning another tongue is an indisputably enriching experi-

ence that has life-changing and mind-altering benefits. Studying another society, through the prism of its language, clarifies one’s understanding of the world as well as a sense of self. Ultimately, international cooperation and collabora- tion requires people with foreign language proficiencies.

New Ways of Thinking Learning a foreign language changes the way you think, teaching you that there are several ways to express a concept, interpret an abstraction, and make sense of a situation.128 Thinking differently, besides improving exchanges with stakeholders, sharpens business skills and expands global mindsets. Employees’ foreign-language competency adds professional and personal value.129 Managers that learn a foreign language discover new ways to make innovative contributions. Even if far from fluent, the willingness to communicate in the language of the locals builds productive rapport with colleagues. Others add that countries have different cultural and business expectations that one can only decipher through the local language.

Research suggests that learning a foreign language makes you smarter.130 Bilingualism fortifies the brain’s so-called executive function—basically, the command system that we use to plan, solve problems and puzzles, and manage cog- nitively demanding tasks. Bilinguals demonstrate sharper sensitivity to environmental circumstances and show greater efficiency solving problems. They sustain focus in the face of distractions, easily switch attention from one matter to another, and excel at organizing information.131

Cultural Imperatives Language helps people build, understand, and express emotions, values, and intentions. A vibrant national language, besides defining and sustaining culture, fortifies nationalism. Rising linguicide—the killing of a language—spurs cultures and countries to protect their legacies. First, the death rate is accelerating: on average, every 14 days a language passes on. By 2100, more than half of the 7,000 languages presently used will likely

disappear.132 Second, linguicide commonly follows from a community of speakers of the

native language becoming bilingual in another language, then gradually shifting allegiance to the latter language until they cease using the former.

Linguicide compels cultures to defend their language. Canada’s Official Languages Act promotes and protects the equal status of French and English. France relies on its L’Académie française, its official authority on usage, vocab- ulary, and grammar, to prevent the Anglicization of French. Proliferating Arabizi—switching back and forth from Arabic to English—sparks concern throughout the Middle East. Saudi Arabia prohibits the use of English to answer telephone calls in hotels, private companies, and government offices.133 Likewise, China’s General Administration of Press and Publi- cation sees the invasion of English words and abbreviations in Chinese texts “abusing the language” and “severely dam- ages the standard and purity of the Chinese language and disrupts the harmonious and healthy language and cultural environment, causing negative social impacts.”134 China bans mixing foreign language phrases, such as English words or abbreviations like GDP (gross domestic product), CPI (consumer price index), or WTO (World Trade Organization), in Chinese publications.135 Lastly, deanglicization is a mat- ter of national pride for some; India, for example, regarded Bombay as the corrupted English version of Mumbai and an unwanted legacy of British colonial rule. Hence, we now have Mumbai—and, for that matter, Kolkata, Bengaluru, and Chennai rather than Calcutta, Bangalore, and Madras.

New Networks Executives averse to learning a foreign language, besides signifying cross-cultural difficulties, exclude themselves from influential business networks, complicate relations with local officials, and slow socializing with workmates.136 Working abroad is challenging; linguistic limitations worsen matters.137 Microsoft’s Joan Pattle noted that her inability to speak Turkish made for a lonely stint in Istanbul, explaining, “You can’t really mix with the locals. . . use local transportation because you can’t read any of the signs.”138 Symbolically, the effort to speak the

Counterpoint

English: Destined to Be the Global Language?

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expaTriaTe compeNsaTioN All things being equal, compensation can determine the likelihood and success of an expa- triate assignment. Pay too little, and people decline to go; if they do go, resentment often proves demotivating and hastens an early return. Pay them too much, and costs escalate, returns fall short, and inequities fan dissension. Too, more often than not, the higher the pay, the longer an expatriate assignment tends to last. Some managers, content to prolong a munificent lifestyle, are less than eager to return home.141 Hence, compensation plays a decisive role in attracting, motivating, and retaining expatriates.

Setting effective compensation systems that fairly reward executives here, there, and everywhere requires IHRM deal with a range of issues regarding differing pay levels, ben- efits, tax programs, and prerequisites. Should the MNE, for instance, pay executives in dif- ferent countries according to the prevailing standards in each locale? Or should it set pay for each position on a global basis? What sorts of allowance should it offer? What might be the qualification standards? How should it resolve the impact of different tax policies on compensation? Further complicating these compensation choices is accommodating the different types of expatriates such as, long-term, short-term, commuter, flexpatriates, third- country nationals, that move among assignments worldwide.

IHRM faces relentless pressure to economize the expense of an expatriate assignment. MNEs in the United States can easily spend great amounts on an expatriate during a three- year assignment. Practically, posting a $200,000-a-year American executive from Atlanta to São Paulo overnight triples her cost to her employer. Move her to high-cost locales like Hong Kong, Singapore, Luanda, or Zurich, and she becomes a million-dollar executive. Improving the return on investment on the expat calls for negotiating reasonable salaries. Several con- ditions shape the standards of reasonable.

• IHRM’s mission is “keeping the expatiate whole,” setting compensation so that working abroad does not impose additional costs that diminish one’s standard of living.

• IHRM devises packages that convince an executive and family to go abroad, reflect the responsibility of the foreign assignment, and ensure that their after-tax income will not fall because of the foreign assignment.

• IHRM sets plans that preserve pay equity among peers, promote parity among expatri- ates, and ensure compensation competes with packages offered by rivals.

“Keeping employees whole” spurs IHRM to offset features of the international assignment that negatively affect an expatriate’s standard of living.

Ceteris paribus, compensation can make or break an expatri- ate’s motivation.

local language, no matter how poorly, sends a subtle but essential message: We are equal.139 Moreover, as anyone who has struggled to learn a foreign language can attest, unexpected benefits include a good dose of humility.

New Requirements Eventually, foreign language com- petency will be a competitive necessity. The expanding international links and intercultural connections in a globalizing world make linguistic skills crucial for getting many jobs and accelerating careers. Differentiating one’s competencies, such as through linguistic skills, creates opportunities. The notion that the spread of English competency worldwide means those who already speak it need not worry is dubious. Marketplace trends will punish, not privilege, English-only speakers. They steadily lose the advantages that once came with being among the small number of native Anglophones who spoke the language of business. Bilinguals or multilinguals increasingly offer

the same as English monoglots, but also add innovative cognitive outlooks and broader international perspectives. Officials have begun institutionalizing incentives to support this movement. For instance, the EU’s official language policy is “mother tongue plus two,” whereby citizens are encouraged to learn two additional languages.140

Which One? Ultimately, one wonders, which foreign language should I study? One has many choices that are shaped by popularity, prevalence, and difficulty. Market trends clarify options for business players. Entrepreneurs may look around their hometown and go for fast-spreading languages such as Spanish, Mandarin, or Arabic. Those looking abroad quickly recognize that expatriate slot positions are migrating from the West to emerging economies. As MNEs struggle to place expatriates in these high-growth markets, proficiency in languages like Mandarin or Hindi will open opportunities.

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• IHRM delivers compensation packages that reconcile parent- and host-country financial, legal, and customary practices.

• IHRM devises efficiently administered compensation systems and policies.

These tasks are formidable and inexorably expand in line with the scale and scope of the MNEs international operations. IHRM, through trial and error as well as astute analytics, develops systems and methods that regularly meet the challenge.

Types oF compeNsaTioN plaNs MNEs generally manage expatriate compensation with variations of the balance sheet approach.142 This approach organizes compensation plans so that an expatriate has the same living standard in the foreign post that he had at home, no matter where the assignment puts him.143 In the spirit of “keeping one whole,” its fundamental principle is equalization: an expa- triate should neither overly prosper nor unduly suffer from working abroad.144 The following methods implement variations of the balance sheet approach.

home-based method This method bases expatriate compensation on the salary of a comparable job in the expat’s hometown, thereby preserving equity with home-country col- leagues as well as simplifying their eventual return. Salary is often set in the same manner as that for a domestic position, such as by a job evaluation or a competency-based plan, market surveys, merit, and incentives. It’s the most prevalent compensation plan. Approximately 80 percent of MNEs apply it to short- and long-term assignments, especially for experienced mid- to senior-level expatriates.145

headquarters-based method This method sets the expatriate’s salary in the terms of a comparable job in the city where the MNE has its headquarters. For example, if a Boston-headquartered MNE posts expats to its offices in London, Santiago, and Jakarta, it would give each executive a salary structured in terms of the going wage in Boston. This plan recognizes the disruption of a foreign assignment and helps expatriates live as they had in their home country. This plan eases moving an expatriate from a low to a high cost post.

host-based method Sometimes called destination pricing, going rate, or localization, this method bases expatriate compensation on the prevailing pay scales in the foreign locale. IHRM starts by setting the expatriate’s salary in terms of a local executive with similar responsibilities. The expat then negotiates additional compensation in the form of cost-of- living allowances, home-country benefits, taxation relief, and so on. The host-based method compensates expatriates, relative to the home- and headquarters-based methods, the least. Although not beneficial to the employee, it reduces tension between an expatriate and typi- cally lower-paid, host-country colleagues. Moreover, lower compensation expense improves the MNE’s return on its investment. PwC uses the host-based method for expats involved in its EPIC program. It offsets lower pay with immigration aid, relocation planning, language study, and intercultural training.

global market method Variability in the types, conditions, and duration of expatriate assignments, from traditional to commuter to flexpatriate, require IHRM tweak com- pensation methods. The global market approach views an international assignment as a continuous but an irregular activity. It recognizes that an expatriate, in the context of a commuter or flex assignment, irregularly works for different durations in the same or, sometimes, different countries. Implementing this approach requires designing flexible systems and sophisticated performance tracking that, in spite of logistical complications, keeps the expat whole.

The most common approach to determining expatriate com- pensation is the balance sheet approach.

Ideally, compensation neither overly rewards nor unduly punishes a person for accept- ing a foreign assignment.

Variations of the balance sheet approach to expatriate compen-

sation include • home-based method • headquarters-based method • host-based method • global market method

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compoNeNTs oF expaTriaTe compeNsaTioN The home-, headquarters-, and host-, and global market methods apply different goals and guidelines to set total compensation.146 Commonly, expatriates negotiate their base salary, foreign-service premium, various allowances, fringe benefits, tax differentials, and benefits (see Table 20.2). Each dimension can significantly influence the total compensation.

The changing economics of expatriate assignments moderates compensation schemes. In particular, the mandate to contain costs pushes IHRM to review the link between aspects of selecting and classifying expatriates with compensation standards. Key points include:

assignment Type The growing use of commuters and flexpatriates alters the compensa- tion calculus. Short-term assignments typically do not trigger a change in pay or benefits, but add a per diem to regular pay.147

supply dynamics Growing numbers are willing to work most anywhere nowadays, motivated by career ambitions and personal quests. Some executives want to work abroad in order to turbocharge their career. Others see experiencing situations that expand their mindset, not financial gain, as the benefit of a foreign assignment.148 In both cases, execu- tives accept working abroad for lower pay. Consequently, many international assignments have “gone from being special and unique, with piles of money thrown at them, to being an everyday part of the company.”149 Foreign service premiums, likewise, have been phased out by many.150

Expatriate compensation packages typically incorpo- rate many types of payments, allowances, provisions, and reimbursements.

Allowances give HRM the flexibility to tailor compensa- tion plans to deal with special situations.

Table 20.2 components of expatriate compensation

Sending an executive on an international assignment imposes expensive logistics and considerable stress. MNEs adjust the total compensation package with the following sorts of allowances.

Dimension specification

Base Salary An expat’s base salary normally falls in the same range as that for a comparable job in the home country. It is paid either in the home-country currency or in the local currency.

Cost-of-Living Ensures that expats don’t suffer a decline in their standard of living due to the steep expense of a particular city (London or Lagos) or nation (Switzerland). Fair compensation reflects the cost of living in the assigned foreign city, accounting for its cost of goods and services, including housing, transportation, food, clothing, household goods, and entertainment.151

Foreign Service Premium This cash incentive, a.k.a mobility premium, compensates an individual for the inconvenience of moving to a new country, living away from family and friends, dealing with the day-to-day challenges of the new culture, language, and work- place practices, and the reality that he will ultimately have to disrupt this life upon return. Long-term assignments often qualify for a mobility premium; short-term assignments rarely do.

Fringe Benefits Various benefits supplement the expatriate’s base salary, including health insurance, life coverage, education reimbursement, childcare and assistance reimbursement, and spouse support.152

Hardship An expatriate assigned to a difficult environment or dangerous location typically negotiates a hardship allowance—a.k.a. combat pay. This allowance offsets the costs of security systems, ransom insurance, crisis response safeguards, or threat management programs.153

Housing Allowance that enables the expatriate to replicate his accustomed standard of housing.154

Tax Differentials Varying tax policies require that MNEs adjust compensation so that expatri- ates’ after-tax income does not suffer from the taxes incurred during the foreign assignment. Tax equalization often proves a costly component of expatriate compensation.

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redefining markets Cost-reduction techniques redefine the compensation parameters of an international assignment. Many MNEs with operations in Europe now treat the con- tinent as if it were one country. Others cut hardship allowances for locales that are far more hospitable than they once were, such as Prague, Shanghai, and Rio de Janeiro. Increasing globalization steadily reduces the number of hardship destinations.

compeNsaTioN complicaTioNs Setting compensation in evolving organizations that use several types of expatriates expands the parameters of analysis. IHRM, for instance, regularly resolves complications of the fol- lowing sort.

changing standards The evolving dynamics of globalization require IHRM fine-tune compensation methods. The home-based method, for example, was designed to compensate employees and families transferred from Western-headquartered MNEs to slots throughout the world. Effectively, it based its cost of living indices and support allowances for moves from high-cost countries, such as England or the United States, to countries like Malaysia or Kenya.

Difficulties emerge when the path reverses—say, transferring an executive from inexpen- sive Manila to costly San Francisco. For example, Chinese expatriates tend not to enjoy lavish pay and benefits. China Unicom’s managing director in Europe received his modest Chinese salary plus a small cost-of-living allowance during his foreign assignment. Combined, they totaled 30 percent of the local entry-level salary for his firm.155 Hence, MNEs applying the balance sheet approach, particularly the home-based method, struggle to maintain pay equity and benefit consistency given the changing locales and demography of their expatri- ate populations.

consistency concerns Systematizing pay and benefit programs while removing incon- sistencies makes for fair and equitable compensation plans. Steadily, salaries for similar jobs vary less substantially among countries. Still, legal, cultural, and regulatory differences require tailoring performance-based pay by country and region. Differences especially challenge MNEs applying a geocentric staffing framework. Managing expatriates of mul- tiple nationalities transferred from high to low or low to high cost markets quickly creates anomalies and exceptions. IHRM must determine if all managers who perform the same job, but in different locations, receive the same compensation.

Besides reducing the company’s return on its investment, extreme pay disparities among managers doing similar jobs saps coworkers’ motivation. An MNE with an ethnocentric or polycentric staffing policy, alternatively, has its own complications. It may have few expa- triates today, but expanding internationalization complicates administering compensa- tion packages on a case-by-case basis. Hence, even if few in number, effective IHRM calls for developing standards and systems. Then, throughout it all, IHRM must reconcile the dilemma of paying the expat just enough to persuade her to work abroad, but without sacri- ficing the standard of keeping her financially whole.156

expaTriaTe repaTriaTioN IHRM drives a cycle of events: selection, preparation, compensation, and repatriation. The latter task is the process of reintegrating an expatriate into the home company upon completion of her foreign assignment, intact, and in good spirits. Success at each stage in the sequence, not just early on, supports a self-sustaining cycle. Returning employees share their knowledge, experiences, and enthusiasm with colleagues. High-performing coworkers, real- izing the rewards of an international assignment, look abroad.

Repatriation works for many. Returning expatriates report that their international experi- ence boosted career trajectories, led to faster promotions, improved performance ratings, and increased compensation. Others report repatriation falls short. Promotions never arrive, career

IHRM tailors allowances to help an expatriate offset the difficulties of

• different standards of living, • replicating preferred

housing, • supporting a trailing spouse, • extraordinary safety or

security hardships.

MNEs struggle to equalize pay for the same type of job that is done by different people in different countries.

coNcepT check

The expanding scale and scope of globalization, driven by increasing physical and cyber- netic connectivity, increasingly blur the idea of expatriates. Where once foreigners seemed foreign, today they seem almost commonplace. Consequently, there is less need to pay people premiums to go to places that are increasingly alike.

Repatriation returns an expatriate to his or her home country.

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progression stalls, opportunities fade, and networks weaken.157 A survey of expatriates who had successfully completed their overseas assignments found that a third held temporary assignments three months after returning home. Of these, 80 percent saw their new jobs as demotions and some 60 percent saw few opportunities to leverage their international exper- tise. Frustrated, former high flyers left for other companies—the 15-year average switch runs around 20 percent.158 But, spun differently, 80 percent of returning expats remain with their employer.159

repaTriaTioN challeNges IHRM, focused on boosting success rates, identifies recurring stress points.160 Consistently, job placement dominates an expatriate’s concerns, followed by changes in personal finances and readjusting to life at home.

career progression Pressed to pinpoint where repatriation breakdowns begin, expats target the difficulty of returning to the right job. “People who have spent two years working in different ways across varied markets and cultures are not always happy to return to the same desk and the same prospects,” concludes one report. Others add that “in this vacuum of direction, many have a career ‘wobble,’ and then leave via a recruitment market in which their experience is seen as increasingly valuable.”161 More than half of returning expatriates report that their employer had been vague about career progression. Others noted return- ing home to less challenging jobs and finding former peers have been promoted above them. Colleagues occasionally question whether they’ve maintained cutting-edge market knowledge and technical skills during their exotic “vacation.” They may struggle to rejoin the office network. Resentment often builds as executives reason that they have worked hard to progress professionally, taken one for the team, and deserve praise and promotion.

A recurring repatriation difficulty is “out of sight overseas” deteriorates into “out of mind back home.” This fear leads some fast-tracking executives to decline an international assign- ment. Going abroad effectively means leaving the power center for the periphery. Explains one executive, “MNEs station people abroad and then forget about them. If anything, advancement is even more difficult for the expat when he returns to headquarters, hav- ing missed out on opportunities to network with top management.”162 This situation plays havoc in business cultures, especially those anchored in collectivism, where face time with influential executives shapes promotions.

changes in personal Finances Returning home significantly alters the expat’s finances. Many enjoy rich benefits during an international assignment, living in exclusive neighbor- hoods, sending children to prestigious schools, employing domestic help, socializing with elites, and still saving a good amount. Returning home to a reasonable compensation plan with far fewer privileges can prove demoralizing.

personal readjustment Return challenges repatriates to readjust to home life.163 Problems emerge as they, and their families, experience reverse culture shock. Upon return- ing to the United States, one said, “I loved the culture so much in Peru. My feelings don’t fit my own beliefs anymore. This is my home, but it doesn’t make sense.”164 Depending on the length of the international assignment, repatriates may need to relearn what they once took for granted about hometown life. Meantime, children may struggle to fit into school, while spouses may feel isolated or out of touch with the career or friends they left behind.

improviNg repaTriaTioN IHRM notes the importance of effective repatriation. Most have formal repatriation policies, organize workshops, and link return strategies to career management.165 Some find ways to create opportunities for the expatriate to utilize her international experience, providing

Returning home from a foreign assignment can be professionally rewarding. It is also marked by difficulties.

Repatriation tends to trigger work, financial, and social adjustment difficulties.

The principal cause of repatriation frustrations is finding the right job for the returning executive.

Reverse culture shock occurs when one experiences anxiety when returning to one’s own culture.

coNcepT check

Chapters 3 and 4 note political, legal, and economic factors that contribute to the changing profile of high-growth markets. Chapter 17 discusses new wrinkles in global manufactur- ing strategies and strategies in supply-chain management that respond to this changing profile. These trends lead some MNEs to preempt repatriation problems by changing their expatriate-staffing policies to recruit more locals to run local operations.

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recognition after the assignment, supporting the family’s transition, and providing greater choices of new assignments. Still, repatriation demands jam many employers into difficult situations. An expat’s office cannot sit vacant while she is abroad. Mergers, acquisitions, divestures, and restructurings change a company’s plans and, by extension, those it had for the expatriate. Likewise, permitting repatriated employees to bump their “replacements” on return solves one problem, but creates another.

IHRM studies and solves repatriation complications precisely because the greater the difficulties that repatriates confront, the greater the difficulty in convincing others to accept international assignments. Some MNEs pledge that repatriates will return to jobs at least as good as those they originally left. Others integrate foreign assignments into career plan- ning, developing mentoring programs to safeguard the expat’s career. PwC’s EPIC program installs safety nets, promising participants “unrivaled support mechanisms” to safeguard their careers.166 Personal career management is as vital to being selected for a foreign assignment as it is to returning home triumphantly. IHRM advises expats to manage the cycle, encouraging them to regularly revisit the home office, either in person or online, to sustain networks. Passivity is hazardous. Navigating repatriation requires a keen sense of its positive and negative aspects—before departure, while abroad, and particularly before transitioning home.167

expaTriaTe Failure The best-laid plans, as we all know, often go awry. Similarly, MNEs fall prey when they select their best and brightest executives, invest in their development, send them abroad, com- pensate them well, and watch them fail. Sometimes expatriate failure is the result of poor assignment planning, putting the wrong person in the wrong job at the wrong time with the wrong expectations. Other times it comes as a surprise, as personal circumstances disrupt what many saw as a sure thing. In either case, plans get twisted. Expatriate failure, nar- rowly defined, is a manager’s premature return home due to poor operational performance. Broadly defined, it is the breakdown of IHRM’s expatriate management systems.

In the 1980s, performance problems brought nearly a third of American expatriates assigned to advanced countries home early; the failure rate was twice that for those posted to less-hospitable countries. Today, approximately 5 percent of expats fail to complete their assignment.168 Leading causes include quitting to work elsewhere, family concerns, spouse/ partner dissatisfaction, inadequate job performance, organizational restructuring, and inter- nal transfer. Difficulty adjusting to the host culture and quality of life, once commonplace concerns, are increasingly anomalies given the expanding connectivity of globalization.

The cosTs oF Failure The continuing decline in expatriate failure testifies to the improving sophistication of IHRM’s talent to select, prep, and post the right individual to the right job. The decline is cause for celebration, but it does not signify mission accomplished. The financial and personal costs of failure, no matter how infrequent, are significant. Moreover, some worry about a possible rise in failure rates. Expansion into emerging economies puts expats into markets that test their resourcefulness to deal with fundamentally different environments. Already, we see escalating difficulties. China and India, today’s leading hotbeds of expat slots, top the list of locations with the highest failure rates.169 The average cost of failure runs as high as three times the expat’s annual domestic salary plus the cost of reloca- tion.170 Total financial costs are often eye-opening when one accounts for the time and money spent on selection, preparation, logistics, lost productivity, and damage control. An incalculable cost is the personal implications of professional failure to the formerly high-performing executive’s self-confidence and leadership potential. Finally, there is the consequence of the hardship on the spouse and family.171

The improving sophistication of expatriate selection processes has reduced the rate of expa- triate failure.

Expatriate failure is operationally costly, professionally detrimental, and personally stressful.

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The wildcard Some folks, despite best-intentions, do not adjust well to working abroad. In theory, an ideal expatriate’s technical qualification, self-confidence, resourcefulness, and global mind- set make her effective anywhere and everywhere.172 For some, this ideal rings hollow given struggles overcoming the operational and lifestyle challenges of the assignment. Sadly, awareness of differences, as one might hear from an executive about to depart Boston for Bangkok, does not confirm the capacity to adapt to the odd, strange, and different.173 Displacement can lead to nostalgia, culture shock, and depression. Notwithstanding the glamour and rewards, the expatriate lifestyle moves some far beyond their comfort zone. Then, no matter the degree of preparation, a sought-after adventure devolves into a nerve- wracking exile.174

A leading cause of expatri- ate failure is the difficulty the partner/spouse and family experience in adapting to the foreign assignment.

boosting employment overseas by 2.4 million. Asked about the shift, GE’s chief executive replied, “Today we go to Brazil, we go to China, we go to India, because that’s where the customers are.”177 Correspondingly, MNEs reorganize their executives, moving those that had worked in the West to busi- ness centers in the East. Cisco combined all of its emerging-markets activities into a single unit, “Cisco East” in Bengaluru, and transferred a high- ranking executive with the auspicious title of Chief Globalization Officer. Moreover, the pace of change accelerates—executives at 17 MNEs reported that “just 2 percent of their top 200 employees were located in Asian emerging markets that would, in the years ahead, account for more than one-third of total sales.”178

Changing Career strategies

The allure of emerging markets extends beyond com- panies. Graduates face slow-growing business and saturated executive markets in mature Western econ- omies. Many see better chances getting promoted, to say nothing about starting a career, in Panama City, Shanghai, Lagos, or Mumbai than in New York, Tokyo, Paris, or London. “A lot of my friends are go- ing to Asia and Latin America to do their internships,” said a student at a prominent U.S. business school. “It may be outside their comfort zone, but they see getting some experience there as helpful, since that’s where many of the jobs will be.”179 Then again, let’s not forget about the magnetic draw of working abroad to young people; a survey of 4,200 graduates in

A generation ago, expatriates, by and large, flocked to the premier business centers of the flourishing markets of Europe, North America, and Japan.175 Looking down the road signals big changes in the geography of expatriate assignments. Western MNEs are reorienting their strategies toward countries that once were off the beaten path. The rising importance of emerging economies, particularly in fast-growing Africa, Asia, and South America, leads them to open and expand operations there. Meanwhile, back in their home markets, Western MNEs downscale opera- tions and reduce headcounts. At Unilever, for exam- ple, emerging markets generate more than 60 percent of sales. In the United States, companies such as GE, Microsoft, IBM, Walmart, and Citibank reset opera- tions, relocating activities to emerging markets.

Changing corporate configurations drive all sorts of change. Consider the matter of hotel rooms in Africa. Its long-dormant but now fast-growing markets attract an increasing number of expats of all sorts, including commuters, flexpatriates, and long-termers. Consequently, hotel chains are fast- tracking new facilities across Africa. Marriott, a U.S. hotel group, plans 50 hotels in Africa by 2020, a 600 percent increase. Accor, a French counterpart, plans another 5,000 rooms in 30 hotels spanning the con- tinent. Other global hotel brands are scouting sites in African capitals.176

As multinationals reset battle lines, they rede- ploy their troops. In the 1990s, for example, U.S. companies added 4.4 million workers in the United States versus 2.7 million abroad. In contrast, dur- ing the 2000s they cut their workforces in the United States by nearly 3 million, while concurrently

Looking to the Future I’m Going Where? The Changing Locations of International Assignments

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44 countries found that 80 percent wanted to work internationally.180

Rather than patiently waiting for opportunities, students jump-start the process and head straight to the markets they see powering the future. While compelling for graduates with cultural links to for- eign locales as well as those with relevant language fluency, the siren call of opportunity also attracts those with limited cultural experience and linguistic skills.181 Growing economies, lower costs of living, higher after-tax compensation, and the chance to bypass years spent in dues-paying entry-level jobs prove irresistible.

Full speed ahead

As sales, growth, labor, and executive opportunity migrate from the West to emerging economies, we anticipate a radical reset of the geography of expatri- ate assignments and activities. Data already confirms the trend is underway: China, Brazil, the United Arab Emirates, Hong Kong, India, and Singapore are lead- ing destinations for expats.182 Not far behind are Thailand, Malaysia, Kenya, and Nigeria. Finally, keep in mind that the flow is not one way. Emerging market MNEs increasingly post expatriates to run operations in Western markets.183 ■

Case

In May 2016, Mark Hopkins, managing director of Tel- Comm-Tek (TCT) India, a subsidiary of a U.S. MNE, announced his retirement. During his tenure, Hopkins had overseen the rising growth, market share, and profitabil- ity of the Indian operation. Upon his announcement, TCT began searching for his replacement.

TCT manufactures office equipment, such as photocopi- ers, laser printers, and document shredders, in 13 countries that are then sold worldwide. Most recently, it reported sales in 83 countries. TCT entered India in 2005, initially relying on local agents to sell and service its imported prod- ucts. Increasing sales led TCT to open a marketing subsid- iary in New Delhi in 2010. TCT’s sales have steadily risen, in tandem with the booming Indian IT industry. Forecasts saw sales accelerating, fueled by demand from local companies, such as Infosys, Tata, and Wipro. TCT USA projected India’s becoming the center point of its expanding Asian opera- tions. In 2015, TCT made plans to add a local manufacturing facility to its Indian operations.

India: An Emerging Juggernaut

Fast Growth Some see India developing into the world’s next big indus- trial power. This view leads many MNEs to expand their

Tel-Comm-Tek: selecting the Managing Director of its Indian subsidiary184

Indian operations. For example, IBM, a longtime customer of TCT, has steadily boosted its Indian headcounts from a handful in 1998 to approximately 150,000 today. TCT expects India’s growth will push its total sales past those of the United States by 2024.

Improving Infrastructure The expanding Indian transportation network spurred expanding TCT India’s strategy. Improving highways, rail- ways, and ports boost logistic efficiencies. Management sees TCT India becoming a vital link in its global supply chain and, longer term, the hub of its Asian network.

Political Economy From 1947 through 1990, India had a centrally planned economy. Government control, rather than free-market ide- als, led to the notorious “License Raj,” a situation marked by extensive regulations that were administered by an opaque bureaucracy. In 1991, a balance-of-payments crisis forced India’s hand. The government began liberalizing the economy, scrapping burdensome regulations and boost- ing investment, trade, and operating freedom. Its transition, an ongoing process, stabilized the economy and improves India’s market attractiveness. Confident of continuing lib- eralization, TCT decided to invest in a manufacturing unit.

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Labor Laws Notwithstanding steady deregulation, India’s restrictive labor laws pose problems. They prohibit companies, for example, from letting manufacturing workers clock more than 54 hours of overtime in any three-month period—even if workers are willing. India’s Industrial Disputes Act requires a company employing 100 or more workers get the state’s authorization before firing anyone, no matter how dire the situation.185 Permission typically hinges on extensive nego- tiations and settlements. Consequently, “companies think twice, 10 times, before they hire new people,” said the CEO of India’s Hero Group.186

Industry Regulation Various laws, largely designed to protect the millions of small enterprises operating in scattered villages, restrict MNEs from competing in many Indian industries. High tariffs pose other challenges. Instituted long ago to promote domestic production, they still apply to many imports. Minimizing tariff exposure spurs TCT to make products locally.

Legal Legacies Although a functioning democracy, corruption mars India’s business environment. Transparency International 2015, for instance, ranked it 85 of 175 countries in terms of the mis- use of public power for private benefit.187 Its legal system, though endorsing the rule of law, struggles with the prob- lems posed by its vast bureaucracy—a legacy of its centrally planned economy and the infamous License Raj. Regula- tory transparency has improved, but has far to go. High-tech MNEs have struggled to protect intellectual property rights.

Damn the Torpedoes, Full Speed Ahead In early 2017, TCT began building a factory in Bengaluru, the center of India’s Silicon Valley. The plant will make entry- level to high-end laser printers, with the first production run set for March 2018. Local shortages of quality components require initially sourcing inputs from TCT’s U.S. facilities. Several of these inputs face high tariffs. Ultimately, TCT India plans to make these parts locally.

TCT India initially planned to hire 75 to 90 workers to run its assembly line. It anticipates no problems recruit- ing skilled labor given demographic and educational circumstances. For example, when the South Korean con- glomerate LG looked to staff 458 assembly-line jobs at its just-opened Indian factory, it required applicants to have at least 15 years of education—a condition that translates into having both high school and technical college certi- fication. Too, preferring a young workforce, LG sought workers with some, but not much, previous experience. Ultimately, some 55,000 people qualified for interviews. Likewise, millions regularly apply for slots at prominent Indian IT MNEs.188

TCT enlisted a Japanese engineering firm to supervise construction of its Bengaluru plant. Upon completion, Gary Kent will temporarily move from TCT’s USA laser printer fac- tory in the role of production supervisor. He will jointly report to TCT’s U.S. headquarters as well as TCT India’s managing director in New Delhi (the position made vacant by Hop- kins’s retirement). Once the plant is certified, Mr. Kent will return to the United States and his replacement will report directly to the managing director of TCT India.

Selecting the Managing Director TCT applies a geocentric staffing framework, mixing home-, host-, and third-country nationals to staff international oper- ations. It fills executive vacancies by promoting the best- qualified candidate from within; a key criteria is openness to developing a global mindset. It also rotates managers among its foreign and U.S. locations, believing that inter- national experience is a key facet of leadership. Generally, ambitious executives must successfully complete an expa- triate assignment before contending for a C-level position.

The Candidates TCT USA charged its Asian Regional Office to select the Managing Director for TCT India. The Director commis- sioned a committee, consisting of manufacturing, marketing, logistics, and administrative representatives, to rank order the following candidates:

• Atasi Das: Born in the United States, Das joined TCT nine years ago after earning her MBA from a university in New England. At 38, she has successfully moved between staff and line positions and assumed broader responsibilities in strategic planning. For two years, she was the assistant director of a midsized prod- uct group. Her performance regularly earns excellent rat- ings. Currently, she directs supply-chain logistics from TCT’s home office. Upon joining TCT, she stated her goal was to work internation- ally, pointing to her undergraduate major in international management. She has reiterated her interest in inter- national responsibilities and her interest in continuing with TCT, but was not averse to looking elsewhere. She speaks Hindi and is unmarried. Her parents, who now live in the United States, are first-generation immigrants from India. She has relatives in India’s northern states, Kashmir and Punjab.

Atasi Das Source: Shutterstock

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(ages 2 and 7), and speaks English and Hindi as well. His wife, also a native of India, neither works outside the home nor speaks English.

• Brett Harrison: Harrison, 44, has spent 15 years with TCT running both line activi- ties and supervising staff. His superiors consider him a seasoned executive poised to move into upper-level management. For the past three years, he has worked in the Singapore-based Asian Regional Office and regularly tours TCT’s Asian operations. He and his wife, along with their two teenage children, have traveled to

India a few times and are familiar with its geography, politics, customs, and outlooks. The Harrisons know other expats in the Bengaluru region. Mrs. Harrison works as the marketing director for the Singapore sub- sidiary of a Japanese pharmaceutical company. It pres- ently does not have an operating unit in India.

Brett Harrison Source: EDHAR/Shutterstock

Jalan Bukit Seng Source: Ajay Bhaskar/Shutterstock

• Jalan Bukit Seng: Seng, 52, is the managing director of TCT’s assembly operation in Malaysia. A citizen of Singa- pore, he has spent his career in Singapore or Malaysia. He regularly commutes to vari- ous TCT factories, helping to upgrade assembly systems and supervising equipment refits. He earned an under- graduate and MBA degrees from the National University of Singapore and speaks

Singapore’s four official languages—Malay, English, Mandarin, and Tamil. His performance reviews are con- sistently positive, with a periodic ranking of excellent. Seng is unmarried but has family members in Singapore and Malaysia.

Ravi Desai Source: ansar80/Shutterstock

• Ravi Desai: Currently an assistant managing direc- tor in TCT India, Desai over- sees local market activity. A citizen of India, he has spent 11 years with TCT, primar- ily working in India, but also working, short-term, in the Japanese and Australian units as a flexpatriate. Now 37, he holds an MBA from the prestigious Indian Insti- tute of Management. He is married, has two children

• Saumitra Chakraborty: At 36, Chakraborty is an executive assistant to the departing managing direc- tor in India. He has held that position since joining TCT India upon graduating from Oxford University. He con- sistently earns a job perfor- mance rating of excellent in customer relationship man- agement. He has increased TCT India’s sales, largely

Saumitra Chakraborty Source: Ashwin/Shutterstock

owing to his connections with prominent Indian families and government officials, along with his skillfulness in the ways of the Indian business environment. Besides speaking India’s main languages of English and Hindi, Chakraborty is the only candidate who speaks Kannada (the local language of Bengaluru). Presently, he lacks line experience.

Tom Wallace Source: Andresr/Shutterstock

• Tom Wallace: A 30-year TCT veteran, Wallace has broad technical skills and sales experience. He has worked with Gary Kent on supply-chain projects in the United States. Although he has never worked abroad, he has periodically toured TCT’s foreign operations. He recently expressed interest in an expatriate slot. His superiors typi- cally rate his performance as excellent. Wallace is set

to retire in seven years. He and his wife speak only English. They have three adult children who live with their own families in the United States. Presently, Wal- lace manages a U.S. unit that is a little larger than the present size of TCT India. The merger of his unit with another TCT division will eliminate his current position in nine months.

Questions

20-3. Identify the key advantage of each of the six candidates.

Identify their key limitation. Rank-order the candidates, from

the most to least qualified, for the position of Managing Di-

rector of TCT India.

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20-4. What operational and personal challenges might the

person you recommend encounter if named managing

director?

20-5. What steps would you recommend your preferred candidate

take to manage those challenges?

20-6. What are the pros and cons of posting a foreign national

versus an Indian-born candidate to the position of Managing

Director?

MyManagementLab Go to mymanagementlab for Auto-graded writing questions as well as the following Assisted-graded writing questions:

20-7 How should the compensation package differ if TCT U.S. opted for a short-term versus long-term expatriate assignment?

20-8 What benefits might result by appointing two different individuals to the position of co-managing director of TCT India – effectively, one person would supervise sales and customer relations while the other would supervise manufacturing. Each slot would command equal positional authority and each person would be charged to co-manage with his or her counterpart. What benefits issues might result from this arrangement? What problems, if any, might occur?

Endnotes Scan for Endnotes or go to www.pearsonhighered.com/daniels

http://globalization.kof.ethz.ch/

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Glossary

Absolute advantage: A free trade theory hold- ing that different countries produce differ- ent things more efficiently than others.

Acceptable quality level (AQL): A concept of quality control whereby managers are willing to accept a certain level of produc- tion defects, which are dealt with through repair facilities and service centers.

Acquired advantage: An explanation of a country’s competitive advantage based on either product or process technology.

Acquired group memberships: An individual affiliation not determined by birth, such as religion, political membership, and profession.

Active income: Income of a CFC that is derived from the active conduct of a trade or business, as specified by the U.S. Inter- nal Revenue Code.

Ad valorem duty or tariff: A tax placed on the value of goods shipped internationally.

Advance import deposit: A form of foreign- exchange convertibility control where the government tightens control of import licenses and requires importers to make a deposit with the central bank.

American Depositary Receipt (ADR): A nego- tiable certificate issued by a U.S. bank in the United States to represent the underly- ing shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country.

American terms: The practice of using the direct quote for exchange rates.

Andean Community (CAN): A South Ameri- can form of economic integration involving Bolivia, Colombia, Ecuador, and Peru.

.Arbitrage: The process of buying and selling foreign currency at a profit that results from price discrepancies between or among markets.

Arm’s-length price: A price between two companies that do not have an ownership interest in each other.

Ascribed group membership: An individual affiliation determined by birth, such as gender, family, age, ethnicity, and race.

Asia Pacific Economic Cooperation (APEC): A cooperation formed by 21 countries that border the Pacific Rim in Asia and the Americas to promote multilateral economic cooperation in trade and investment in the Pacific Rim.

Association of South East Asian Nations (ASEAN): A free trade area involving the

Asian countries of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

Ascribed group memberships: An individual affiliation determined by birth, such as gender, family, age, ethnicity, and race.

Balance of payments: Statement that sum- marizes all economic transactions between a country and the rest of the world during a given period of time.

Balance sheet approach: Compensation plan that sets expatriate salaries to equalize purchasing power across countries.

Bank for International Settlements (BIS): A bank in Basel, Switzerland, that facilitates transactions among central banks; it is effectively the central banks’ central bank.

Base currency: The currency whose value is implicitly 1 when a quote is made between two currencies; for example, if the Brazilian real is trading at 3.8 reals (reais) per dollar, the dollar is the base currency and the real is the quoted currency.

Bargaining school theory: A premise that the terms of a foreign investor’s operations depend on how much the investor and host country need each other.

Base of the Pyramid: The billions of people living on less than a few dollars per day yet who some see as the next market frontier of the global economy.

Bicultural: A description of someone who has internalized two different national cultures.

Bid (buy) rate: The amount a trader is willing to pay for foreign exchange.

Bilateral integration: A form of integration between two countries in which they agree to cooperate more closely, usually in the form of tariff reductions, but often in other areas as well.

Black market: The foreign-exchange market that lies outside the official market.

Born-global companies: Companies that start out with a global focus, usually because of their founders’ international experience and knowledge of foreign markets through advances in communications.

Boundaries: In terms of political environ- ments, an official or perceived point of separation that defines the boundary of a nation. In terms of organization structure, horizontal constraints that follow from having specific employees only do specific

jobs in specific units as well as the vertical constraints that separate employees into specific levels of a precisely stipulated command-and-control hierarchy.

Boundarylessness: State whereby companies build organizations that eliminate the verti- cal, horizontal, and external boundaries that impede information flows and hinder developing relationships.

Bretton Woods Agreement: An agree- ment among IMF countries to promote exchange-rate stability and to facilitate the international flow of currencies.

BRICs: An acronym referring to the nations of Brazil, Russia, India, and China that reflect their vanguard status as emerging economies.

Bureaucratic control: System whereby an organization uses centralized authority to install rules and procedures to govern activities.

Capability: A distinct type of resource that improves the productivity of related resources owned by the firm.

Capitalism: An economic system character- ized by private ownership, pricing, pro- duction, and distribution of goods.

Caribbean Community (CARICOM): A cus- toms union in the Caribbean region.

Carry trade: Borrow a currency at a low inter- est rate and invest it in a currency with a higher interest rate.

Centralization: The degree to which high-level managers, usually above the country level, make strategic decisions and delegate them to lower levels for implementation.

Civil law system: A legal system based on a detailed set of laws that are organized into a code; countries with a civil law system, also called a codified legal system, include Germany, France, and Japan.

Civil law: A body of rules that delineate private rights and remedies, and govern disputes between individuals in such areas as contracts, property, and family.

Chicago Mercantile Exchange (CME) Group: The CME Group is the world’s leading and most diverse derivatives marketplace, dealing in future and options products for a wide variety of asset classes, including foreign exchange.

Clan control: System whereby an MNE relies on shared values among employees to ide- alize and enforce preferred behaviors.

579

580 Glossary

Cluster effect: Follows from the congregation of buyers and sellers of a particular good or service in a certain locale; they, in turn, induce other buyers and sellers to relocate there.

Code of conduct: A set of principles guiding the actions of MNEs in their contacts with societies.

Collaborative arrangements: Companies’ working together, such as in joint ventures, licensing agreements, management con- tracts, minority ownership, and long-term contractual arrangements.

Collectivism: Perspective that the needs of the group take precedence over the needs of the individual; encourages dependence on the organization.

Command economy: An economic system in which the political authorities make major decisions regarding the production and distribution of goods and services.

Commercial law: The area of law that governs the broad areas of business, commerce, and consumer transactions.

Common law system: A legal system based on tradition, precedent, and custom and usage, in which the courts interpret the law based on those conventions; found in the United Kingdom and former British colonies.

Common market: A form of regional economic integration in which countries abolish internal tariffs, use a common external tariff, and abolish restrictions on factor mobility.

Communism: A form of totalitarianism ini- tially theorized by Karl Marx in which the political and economic systems are virtu- ally inseparable.

Commuter assignment: One where the expa- triate travels between his home and host country at frequent intervals.

Comparable access argument: Also known as a fairness argument, it holds that industries are entitled to the same access to foreign markets as foreign industries have to theirs.

Comparative advantage: A free trade argu- ment that global efficiency gains may result from trade if a country specializes in what it can produce most efficiently, even though other countries’ may have an absolute advantage.

Compound duty: A tariff based on both a valuation and the number of units traded.

Concentrated configuration: The design of a value chain whereby a particular activity is performed in one geographic location and serves the world from it.

Concentration strategy: A company first moves to only one or a few foreign coun- tries, not going elsewhere until it develops a very strong involvement and competitive position.

Configuration: To set up, arrange, and dis- perse value activities to the ideal locations around the world so that the company can start and sustain operations.

Confirmed letter of credit: A letter of credit to which a bank in the exporter’s country adds its guarantee of payment.

Consolidation: An accounting process in which financial statements of related entities, such as a parent and its subsidiar- ies, are combined to yield a unified set of financial statements; in the process, transactions among the related enterprises are eliminated so that the statements reflect transactions with outside parties.

Contract manufacturer: A company that is responsible for manufacturing and delivering a product on behalf of another company with which it is contracted.

Constitutional law: Law that is created and changed by the people.

Consortium: An organization owned by more than two firms.

Consumer ethnocentrism: Preference for local to global, such as seeking out local alterna- tives when buying products and services.

Control systems: Process by which managers compare performance to plans, identify differences, and, where found, assess the basis for the gap and implement corrective action; ensure that activities are completed in ways that support the company’s strategy.

Controlled foreign corporation (CFC): A foreign corporation of which more than 50 percent of the voting stock is owned by U.S. shareholders (taxable entities that own at least 10 percent of the voting stock of the corporation).

Convergence: Efforts by the FASB and IASC to move toward a common global set of accounting standards.

Coopetition: Refers to situations in which competing firms collaborate on some por- tions of their operations.

Coordination by mutual adjustment: System whereby managers interact extensively with counterparts in setting common goals.

Coordination by plan: System that relies on general goals and detailed objectives to coordinate activities.

Coordination by standardization: System whereby rules and procedures apply to

units worldwide, thereby enforcing con- sistency in the performance of activities in geographically dispersed units.

Coordination systems: Systems that syn- chronize the work responsibilities of the value chain so that the company uses its resources efficiently and makes decisions effectively.

Core competency: A special outlook, skill, capability, or technology that runs through the firm’s operations, weaving together disparate value activities into an integrated value chain; Managers bundle resources and capabilities to create a core compe- tency.

Core values: Values so strong that they are not negotiable.

Cosmopolitanism: Openness to the world, thus high acceptance of foreign products.

Cost leadership: Strategy whereby a firm sells its products at the average industry price to earn a profit higher than that of rivals or below the average industry prices to capture market share.

Cost-plus strategy: Pricing at a desired margin over cost.

Countertrade (or offsets): A requirement that an exporter create value in the importing country, such as by transferring technol- ogy or receiving payment in the importing country’s merchandise. An umbrella term for several sorts of trade, such as barter or offset, in which the seller accepts goods or services, rather than currency or credit, as payment.

Country-similarity theory: A trade theory that organizations place earlier and stronger emphasis on those countries most similar to their own.

Country of origin: Where products or services are created, which affects trade in that con- sumers may prefer to buy goods produced in one country rather than another usually because of quality perceptions or because of nationalism.

Criminal law: Body of laws dealing with crimes against the public and members of the public.

Cross-licensing: An arrangement whereby companies exchange technology or other intangible property rather than compete with each other on every product in every market.

Cross rate: An exchange rate between two currencies used in the spot market and computed from the exchange rate of each currency in relation to a third currency, usually the U.S. dollar.

Glossary 581

Cultural collision: A situation whereby contact among divergent cultures creates problems.

Cultural distance: A measurement based on cultural factors that indicates the relative similarity of countries culturally.

Cultural imperialism: The imposition of cer- tain elements from an alien culture.

Culture: The shared values, attitudes, and beliefs of a group of individuals.

Culture shock: The frustration resulting from having to absorb a vast array of new cul- tural cues and expectations.

Currency swap: The exchange of principal and interest payments between two currencies.

Current-rate method: A method of translating foreign-currency financial statements that is used when the functional currency is that of the local operating environment.

Customary law system: A legal system anchored in the wisdom of daily experi- ence or great spiritual or philosophical traditions.

Customs broker: The profession that involves helping importers and exporters clear ship- ments through a nation’s customs agencies.

Deal-focus (DF) culture: A culture in which people are primarily task oriented rather than relationship oriented.

Decentralization: The degree to which lower-level managers, usually at or below the country level, make and implement strategic decisions.

Deflation: A decrease in the general price level of goods and services; often caused by a reduction in the supply of money or credit.

Democracy Index: An index compiled by the Economist Intelligence Unit that assesses the state of democracy in many states based on 60 indicators.

Democracy: A political system that relies on citizens’ participation in the decision- making process.

Deontological approach: An approach which asserts that moral reasoning occurs inde- pendent of consequences.

Dependencia theory: A theory holding that emerging economies have practically no power in their dealings with MNEs.

Derivative: A foreign-exchange instrument such as an option or futures contract that derives its value from the underlying currency.

Developed economy: An economy marked by a comparatively higher standard of living, advanced technological infrastructure, and broader range of productive activities rela- tive to developing economies.

Developing country: A developing country is typically marked by low industrialization and low standard of living relative to other countries; also referred to as a less devel- oped country or underdeveloped country.

Diamond of national competitive advantage: A theory showing four features as impor- tant for countries’ competitive superiority: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure, and rivalry.

Differentiation: A business strategy in which a company tries to gain a competitive advantage by providing a unique product or service, or providing a unique brand of customer service.

Digitization: The conversion of paper and other media in existing collections to digital form.

Direct exports: Products sold to an indepen- dent party outside of the exporter’s home country.

Direct quote: A quote expressed in terms of the number of units of the domestic currency given for one unit of a foreign currency.

Dispersed configuration: The design of a value chain whereby a particular activity is performed in many geographic locations and serves the world market from any to all of its units.

Distribution: The course—physical path or legal title—that goods take between pro- duction and consumption.

Diversification strategy: In the context of IB location, it describes a company’s rapid movement into many foreign markets, gradually increasing its commitment within each one.

Divesting: This is also called harvesting. It is the process of reducing commitments in some countries because they have poorer performance prospects than do others.

Divisional structures: An organization that contains separate divisions based around individual product lines or based on the geographic areas of the markets served.

Draft (or commercial bill of exchange): An instrument of payment in international business that instructs the importer to forward payment to the exporter.

Dumping: Exporting below cost or below the home-country price.

Duty: A tax levied on a good shipped interna- tionally (also known as a tariff).

Dynamic effect: The overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale.

E-commerce: The use of the Internet to join together suppliers with companies and companies with customers.

Economic exposure (operating exposure): The potential for change in expected cash flows that arises from the pricing of products, the sourcing and cost of inputs, and the loca- tion of investments.

Economic Freedom Index: The systematic measurement of economic freedom in countries throughout the world; sponsored by the Heritage Foundation and the Wall Street Journal.

Economic freedom: The absence of govern- ment coercion or constraint on the produc- tion, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty.

Economic integration: Political and economic agreements among nations in which preference is given to member countries, especially as they relate to the reduction of trade barriers.

Economic system: The system concerned with the allocation of scarce resources.

Economies of scale: The lowering of cost per unit as output increases because of allocation of fixed costs over more units produced.

Economy in transition: Economy applying structural transformations that aim to institute market-based principles and practices.

Effective tariff: An argument that the manufactured portion of products from developing countries pay higher tariffs in developed countries than the stated tariff because the raw material component would have come in duty free.

Electronic data interchange (EDI): The elec- tronic movement of money and information via computers and telecommunications equipment.

Embargo: A specific type of quota that prohib- its all trade.

Emerging economies: Countries with devel- oping economies, often experiencing rapid growth and offering lucrative investment opportunities, but also characterized by political instability and high risk.

Emerging economy: An economy that is experiencing rapid growth, expanding industrialization, and improving standard of living.

Enterprise resource planning (ERP): Software that can link information flows from differ- ent parts of a business and from different geographic areas.

Equity alliance: A collaborative arrangement in which at least one of the companies

582 Glossary

takes an ownership position (almost always minority) in the other(s).

Escalation of commitment: The more time and money companies invest in examining an alternative, the more likely they are to accept it, regardless of its merits.

Essential-industry argument: A rationale for protectionism contending that nations should apply trade restrictions to protect crucial domestic industries so that they are not dependent on foreign supplies during hostile political periods.

Ethnocentrism: A conviction that one’s own practices are superior to those in other countries.

Ethnocentric framework: A staffing approach in which all key management positions, whether in the home country or abroad, are filled by home-country nationals.

Euro: The common currency of the European Union, although not all members have adopted the euro.

Eurobond: A bond sold in a country other than the one in whose currency it is denominated.

Eurocredit: A loan, line of credit, or other form of medium- or long-term credit on the Eurocurrency market that has a maturity of more than one year.

Eurocurrency: Any currency that is banked outside of its country of origin.

Eurocurrency market: An international whole- sale market that deals in Eurocurrencies.

Eurodollars: U.S. dollars banked outside of the United States.

Euroequity market: The market for shares sold outside the boundaries of the issuing company’s home country.

European Central Bank (ECB): Established July 1, 1998, the ECB is responsible for set- ting the monetary policy and for managing the exchange-rate system for all of Europe since January 1, 1999.

European Monetary System (EMS): A cooperative foreign-exchange agreement involving many members of the EU and designed to promote exchange-rate stability within the EU.

European Monetary Union (EMU): An agree- ment by participating European Union member countries that consists of three stages coordinating economic policy and culminating with the adoption of the euro.

European terms: The practice of using the indirect quote for exchange rates.

European Union (EU): A form of regional economic integration among countries in Europe that involves a free trade area, a customs union, and the free mobility

of factors of production that is working toward political and economic union. It is governed by the European Commision, the European Council, the European Parlia- ment, and the Court of Justice.

Exchange rate: The price of one currency in terms of another currency.

Expatriate: An expatriate, often reduced to “expat,” is a person temporarily or perma- nently working in a country other than that of his or her country of origin.

Expatriate failure: Narrowly defined, it is the manager’s premature return home due to poor performance. Broadly defined, it is the failure of the MNE’s selection poli- cies to identify individuals who succeed abroad.

Expatriate selection: The process of screening executives to find those with the great- est inclination and highest potential for a foreign assignment.

Experience effect: The more experience a firm has in producing a particular good or service, the lower are its costs.

Export intermediaries: Individuals or compa- nies that assume responsibility for different combinations of finding overseas buyers, sourcing and shipping products, and get- ting paid on the behalf of a manufacturer. The export intermediary may be a commis- sioned agent, an export management com- pany (EMC), an export trading company (ETC), an export agent, or a re-marketer.

Export plan: Specification of the key issues that shape the success of exporting.

Export tariffs: Taxes collected on exports by the exporting country.

Exporting: The sale of goods or services pro- duced by a company based in one country to customers that reside in a different country.

Export-led development: A country’s promo- tion of industries with export potential so as to increase economic growth.

Extranet: The use of the Internet to link a com- pany with outsiders.

Extraterritoriality: The extension by a gov- ernment of the application of its laws to foreign operations of companies.

Factor mobility theory: A theory focusing on why production factors move internation- ally, the effects of those movements on transforming factor endowments, and their impact on world trade.

Factor proportions theory: A theory main- taining that differences in countries’ proportional endowments of labor, land, and capital explain differences in these endowments’ costs and, thus, the export

of products using abundant and cheaper inputs.

Favorable balance of trade: A country is exporting more than it imports.

FDI: An acronym for foreign direct invest- ment.

Financial Accounting Standards Board (FASB): The private-sector organization that sets financial accounting standards in the United States.

First-mover advantage: Being first into a country enables a firm to more easily gain the best partners, best locations, and best suppliers.

Fisher Effect: The theory about the relation- ship between inflation and interest rates; for example, if the nominal interest rate in one country is lower than that in another, the first country’s inflation should be lower so that the real interest rates will be equal.

Five-forces model: A framework used to assess industry structure and business strategy in estimating the potential for profitability.

Flexpatriates: An employee who conducts an international assignment through frequent international business travel from his home market rather than relocating to the host market.

Foreign bond: A bond sold outside of the borrower’s country but denominated in the currency of the country of issue.

Foreign Corrupt Practices Act (FCPA): A law that criminalizes certain types of pay- ments by U.S. companies, such as bribes to foreign government officials.

Foreign direct investment: This is sometimes referred to simply as direct investment. It is an operation in which an investor holds a controlling interest in a foreign company.

Foreign exchange: Checks and other instru- ments for making payments in another country’s currency.

Foreign exchange control: A requirement that an individual or company must apply to government authorities for permission to buy foreign currency above some deter- mined threshold amount.

Foreign-exchange market: The market where foreign exchange is traded; usually banks, nonbank financial institutions, and exchanges, such as the CME.

Forward discount: The amount by which the forward rate in a foreign currency is less than the spot rate, that is, the foreign cur- rency is expected to weaken in the future.

Forward premium: The amount by which the forward rate in a foreign currency is greater than the spot rate, that is, the foreign currency is expected to strengthen in the future.

Glossary 583

Franchising: A contract in which a company assists another on a continuous basis and allows use of its trademark.

Freight forwarder: A company that facilitates the movement of goods from one country to another.

Functional currency: The currency of the primary economic environment in which an entity operates; useful in helping a firm determine how to translate its foreign cur- rency financial statements into the current of the parent company.

Functional structure: An organization that is structured according to functional areas of business.

Fundamental forecasting: A forecasting tool that uses trends in economic variables to predict future exchange rates.

Future orientation: A willingness to delay grati- fication in order to reap more in the future.

Futures contract: An agreement between two parties to buy or sell a particular currency at a particular price on a particular future date, as specified in a standardized contract to all participants in that currency futures exchange.

FX swap: A simultaneous spot and forward transaction in foreign exchange.

Gap analysis: A tool used by a company to estimate potential sales for a given type of product and compare how emphasis on different marketing mix elements accounts for shortcomings in reaching the potential.

General Agreement on Tariffs and Trade (GATT): A global arrangement aimed at reducing barriers to trade, both tariff and nontariff; at the signing of the Uruguay round, the GATT was designated to become the World Trade Organization (WTO).

Generally Accepted Accounting Principles (GAAP): The accounting standards accepted by the accounting profession in each country as required for the preparation of financial statements for external users.

Generic: A situation whereby a branded product enters the public domain so that competitors can use the name for their products.

Geocentrism: A process of integrating home- and host-country practices as well as introducing some entirely new ones.

Geocentric staffing framework: Staffing per- spective that seeks the best people for key jobs throughout the organization, regard- less of nationality.

Gini coefficient: A measure of the extent to which the distribution of income deviates from a perfectly equal distribution.

Global integration: The unification of distinct national economic systems into one global market.

Global strategy: A strategy that increases prof- itability by achieving cost reductions from experience curves and location economies.

Globality: The state of affairs where one competes with everyone, from everywhere, for everything.

Globalization: The widening and deepening of interdependent relationships among people from different nations. The term sometimes refers to the elimination of bar- riers to international movements of goods, services, capital, technology, and people that influence the integration of world economies.

Glorecalization: A portmanteau of Globalization-Regionalization-Localization; champions consistent global values and customized local tactics within a regional context.

Go-no-go decisions: Examining one oppor- tunity at a time and pursuing it if it meets some threshold criteria.

Gray market: It is also called product diver- sion and refers to the selling and handling of goods through unofficial distributors.

Great by choice: The principle that manag- ers’ choices are the basis of building and sustaining a high-performance enterprise in unpredictable, tumultuous, and fast- moving times.

Green economics: Transdisciplinary field that studies the interdependence and coevo- lution of human economies and natural ecosystems.

Gross national income (GNI): Formerly referred to as Gross national product.

Gross national product (GNP): The total of incomes earned by residents of a country, regardless of where the productive assets are located.

Gulf Cooperation Council: A group of Mid- dle-Eastern, oil-rich Arab countries that includes Bahrain, Saudi Arabia, Kuwait, Oman, Qatar, and the UAE.

Happynomics: Evaluating a country’s perfor- mance and potential by directly consider- ing peoples’ life satisfaction.

Hard currency: A currency that is freely traded without many restrictions and for which there is usually strong external demand; often called a freely convertible currency.

Harvesting: This is also called divesting. It is the process of reducing commitments in some countries because they have poorer performance prospects than do others.

Hedge fund: An investment fund available to a limited number of investors that is man- aged more aggressively than mutual funds.

Hierarchy-of-needs theory: A motivation theory that people try to fulfill lower-level needs before moving on to higher-level ones.

High-context cultures: Where most people tend to understand and regard indirect information as pertinent.

Home-country nationals: Expatriate employ- ees who are citizens of the country in which the company is headquartered.

Idealism: A preference to establish overall principles before trying to resolve small issues.

Import or export license: A country’s require- ment that importers or exporters secure governmental permission before transact- ing trade. The license often controls access to foreign exchange at a government- specified exchange rate.

Import substitution: The restriction of imports to boost local production of products that would otherwise be imported.

Import tariffs: Taxes on traded goods imposed by the country in which international ship- ments enter.

Importing: The purchase of products by a company based in one country from sellers that reside in another.

Income distribution: The distribution of national income among groups of individ- uals, households, social classes, or factors of production.

Incremental internationalization: The view that as a company gains experience, resources, and confidence, it progressively exports to increasingly distant and dissimi- lar countries.

Indirect exports: Exports that are not handled directly by the manufacturer or producer but through an export agent, freight for- warder, or 3PL.

Indirect quote: An exchange rate given in terms of the number of units of the foreign currency for one unit of the domestic cur- rency.

Individualism: A construct comparing people’s preference to fulfill leisure time, build friendships, and improve skills inde- pendently and outside the organization as opposed to collectively and within the organization.

Industrial policy: This is also known as a strategic trade policy. It is one in which a government identifies target industries to develop to be internationally competitive.

584 Glossary

Industrialization argument: A trade protec- tion argument that, although a country may develop an inefficient and non- globally competitive industrial sector, it will achieve economic growth by pro- tecting the industrial sector so that the unemployed and underemployed people can work in industry.

Industry organization (IO) paradigm: Field of economics that studies the strategic behavior of firms, the structure of markets, and their interactions.

Industry structure: The makeup of an indus- try: its number of sellers and their size distribution, the nature of the product, and the extent of barriers to entry.

Infant-industry argument: It holds that a government should shield an emerging industry from foreign competition by guar- anteeing it a large share of the domestic market until it can compete on its own.

Inflation: A general and progressive increase in prices.

Inpatriate: An expatriate transferred from a foreign operation to the MNE’s headquar- ters country.

Institutions: Systems of established and prevalent social rules that structure social interactions, such as language, money, law, systems of weights and measures, table manners and organizations.

Integrated cost leadership/differentiation strategy: Simultaneously pursue provid- ing unique but comparatively inexpensive goods or services by combining elements of the cost leadership and differentiation strategy.

Integration-responsiveness (IR) grid: Schema that helps managers measure the global and local pressures that influence the con- figuration and coordination of value chains.

Intellectual property (IP): Property in the form of patents, trademarks, service marks, trade names, trade secrets, and copyrights.

Intellectual property right (IPR): Ownership rights to intangible assets, such as patents, trademarks, copyrights, and know-how.

Interbank transactions: Foreign-exchange transactions that take place between com- mercial banks.

Internalization: Control through self-handling of foreign operations, primarily because such control is less expensive than to con- tract with an external organization.

Interest arbitrage: Investing in debt instru- ments in different countries to take advantage of interest differentials. The investment is “covered” if the investor con- verts money into foreign exchange at the

spot rate, invests it in the foreign market at a higher interest rate, and enters into a forward contract so that it can convert principle and interest back into the home currency and earn more than if that money had been invested in the home currency.

International Accounting Standards Board (IASB): The international private-sector organization based in London that sets financial accounting standards for world- wide use.

International Financial Reporting Standards (IFRS): A set of accounting standards issued by the International Accounting Standards Board (IASB) and adopted by many countries, especially those in the European Union.

International Fisher Effect (IFE): The theory that the relationship between interest rates and exchange rates implies that the currency of the country with the lower interest rate will strengthen in the future.

International human resource management (IHRM): The staffing function of the orga- nization; includes the activities of human resources planning, recruitment, selection, performance appraisal, compensation, retention, and labor relations.

International Monetary Fund (IMF): A multi- governmental association organized in 1945 to promote exchange-rate stability and to facilitate the international flow of currencies.

International Organization of Securities Commissions (IOSCO): An international organization of securities regulators that supports the efforts of the IASB to establish comprehensive accounting standards.

International strategy: The effort of managers to create value by transferring core com- petencies from the home market to foreign markets in which local competitors lack those competencies.

Intranet: The use of the Internet to link together the different divisions and func- tions inside a company.

Jamaica Agreement: A 1976 agreement among countries that permitted greater flexibility of exchange rates, basically formalizing the break from fixed exchange rates.

Joint venture: An operation in which two or more companies share ownership. (There are also non-equity joint ventures.)

Kyoto Protocol: An international agreement among countries to reduce the emission of

greenhouse gases which was replaced by the Paris Agreement in 2015/2016.

Lag strategy: An operational strategy that involves either delaying collection of foreign-currency receivables if the currency is expected to strengthen or delaying payment of foreign-currency payables if the currency is expected to weaken; the opposite of a lead strategy.

Laissez-faire: The concept of minimal govern- ment intervention in a society’s economic activity.

Lead strategy: An operational strategy that involves either collecting foreign-currency receivables before they are due when the currency is expected to weaken or paying foreign-currency payables before they are due when the currency is expected to strengthen; the opposite of a lag strategy.

Learning effect: The more times a task has been performed, the less time is required on each subsequent iteration, thereby improving productivity.

Legal system: The rules that regulate behavior, the processes that enforce the laws of a country, and the procedures used to resolve grievances.

Letter of credit (L/C): A precise document by which the importer’s bank extends credit to the importer and agrees to pay the exporter.

Leverage: The amount of debt used to finance a firm’s assets.

Liability of foreignness: Foreign companies’ lower survival rate in comparison to local companies for many years after they begin operations.

License for trade: See import or export license.

Licensing agreements: Contracts whereby firms allow others to use some assets, such as trademarks, patents, copyrights, or expertise.

Local content: A term used in trade agreements which refers to the percentage of a product which is produced in the member countries to the agreement. Preferential tariff provi- sions often depend on the amount of local or regional content included in a product.

Location advantages: Cost advantages arising from performing a value activity in the optimal location.

Local responsiveness: The process of disag- gregating a standardized whole into differ- entiated parts to improve responsiveness to local market circumstances.

Localization strategy: An approach that emphasizes responsiveness to the unique

Glossary 585

conditions prevailing in different national markets.

Localization: Process whereby an expatri- ate retains a foreign assignment provided she accepts the status, and corresponding compensation, of a local hire.

Location economies: Cost advantages arising from performing a value activity in the optimal location.

Logistics (or materials) management: That part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption, to meet customers’ requirements; some- times called materials management.

London Interbank Offered Rate (LIBOR): The interest rate for large interbank loans of Eurocurrencies. It is the benchmark interest rate for many different types of loans, including home mortgages.

Low-context cultures: Where people generally regard as relevant only firsthand informa- tion that bears directly on the subject at hand.

Management contracts: Arrangements in which a company provides personnel to perform management functions for another organization.

Market capitalization: A common measure of the size of a stock market, which is computed by multiplying the total number of shares of stock listed on the exchange by the market price per share.

Market control: System whereby an MNE uses external market mechanisms to establish internal performance benchmarks and standards.

Market economy: An economic system in which resources are allocated and controlled by consumers who “vote” by buying goods; emphasizes minimal government involvement.

Masculinity–femininity index: A construct measuring attitudes toward achievement and the roles expected of genders.

Materialism: The importance of acquiring possessions as a means of self-satisfaction and happiness, as well as for the appear- ance of success.

Matrix structure: A structure in which foreign units report (by product, function, or area) to more than one group, each of which shares responsibility over the foreign unit.

Mercosur: A major regional group in South America that includes Argentina, Brazil, Paraguay, Uruguay, and Venezuela that is hampered by internal political issues.

Mercantilism: A trade theory holding that a country’s wealth is measured by its holdings of “treasure,” which usually means its gold.

Merchandise exports and imports: Tangible products—goods—that are respectively sent out of and brought into a country.

Mission: Statement that defines the business, its objectives, and its approach to achieve them.

Mixed economy: An economic system char- acterized by some mixture of market and command economies; balances public and private ownership of factors of production.

Mixed legal system: A legal system that emerges when two or more legal systems function in a country.

Mixed structure: A structure that integrates various aspects of classical structures.

MNC: An acronym for multinational corpora- tion or multinational company and a synonym for multinational enterprise.

MNE: An acronym for multinational enterprise. Monochronic: A term to describe cultures

in which most people normally prefer to work sequentially, such as finishing trans- actions with one customer before dealing with another.

Most-favored-nation (MFN) clause: A GATT (and now a WTO) requirement that a trade concession that is given to one country must be given to all other countries. Also known as “trade without discrimination.”

Multicultural: Description of someone who has internalized more than two national cultures.

Multinational corporation or company (MNC): A synonym for a multinational enterprise (MNE).

Multinational enterprise (MNE): Usually signifies any company with foreign direct investments.

Multiple exchange-rate system: A means of foreign-exchange control whereby the government sets different exchange rates for different kinds of transactions.

Mutual recognition: The principle that a foreign registrant that wants to list and have its securities traded on a foreign stock exchange need only provide information prepared according to the GAAP of the registrant’s country.

NASDAQ: The second-largest stock market in the United States that trades in equities, commodities, options, and futures. In the Nordic countries, it owns and operates the exchanges in Denmark, Finland, Iceland, Sweden, and has an exchange for commod- ities derivatives in Norway. It is known in the region as NASDAQ OMX.

Natural advantage: A reason for a competitive advantage in production that comes from countries’ climatic conditions, access to certain natural resources, or availability of certain labor forces.

Nearshoring: This applies to bringing back or setting up production or services in a country close to the home country, often in a country that shares a common border.

Neoclassical structure: Applies different devices to resolve the shortcomings, such as confor- mity, rigidity, bureaucracy, and authoritari- anism, often found in the classical formats of functional and divisional structures.

Neomercantilism: The running of a favorable balance of trade to achieve some social or political objective.

Net present value (NPV): The sum of the pres- ent values of the annual cash flows minus the initial investment.

Netting: The transfer of funds from subsidiar- ies in a net payable position to a central clearing account and from there to the accounts of the net receiver subsidiaries.

Network structure: Neoclassical structure whereby a small core organization out- sources value activities to linked firms whose core competencies support greater innovation.

Non-tradable goods: Products and services that are seldom practical to export because of high transportation costs.

Normativism: A theory stating that universal standards of behavior (based on people’s own values) exist that all cultures should follow, making nonintervention unethical.

North American Free Trade Agreement (NAFTA): A free trade agreement involv- ing the United States, Canada, and Mexico that went into effect on January 1, 1994.

NYSE:ICE: Also known as Intercontinental Exchange Inc., ICE owns and operates 23 regulated exchanges in the United States, Canada, and Europe, including the New York Stock Exchange and various deriva- tives exchanges. NYSE is the largest stock market in the world.

Offsets: See countertrade. Offer (sell): The amount for which a

foreign-exchange trader is willing to sell a currency.

Offshore financial centers (OFCs): Cities or countries that provide large amounts of funds in currencies other than their own and are used as locations in which to raise and accumulate cash.

Offshore financing: The provision of financial services by banks and other agents to nonresidents.

586 Glossary

Offshoring: The dependence on production in a foreign country, usually by shifting from a domestic source.

Offshore manufacturing: Any investment that takes place in a country other than the home country.

Oligopolistic reaction: In IB, it is a situation in which managers may purposely crowd a market to prevent competitors from gain- ing advantages there that they can use to improve their positions elsewhere.

Onshoring: Relocating operations from a foreign to a domestic location.

Operations: The conversion of inputs into outputs.

Operations management: Activities in the value chain that occur within the company.

Optimum-tariff theory: The imposition of an import tariff that leads a foreign producer to lower its export price.

Option: A foreign-exchange instrument that gives the purchaser the right, but not the obligation, to buy or sell a certain amount of foreign currency at a set exchange rate within a specified amount of time.

Organizational culture: The shared mean- ing and beliefs that shape how employees interpret information, make decisions, and implement actions.

Organization of Petroleum Exporting Countries (OPEC): A producers’ alliance among 13 petroleum-exporting countries that attempt to agree on oil production and pricing policies.

Organization structure: The formal arrange- ment of roles, responsibilities, and relation- ships within an organization.

Organization: The specification of the framework for work, development of the systems that coordinate and control what work is done, and the cultivation of a common workplace culture among employees.

Outright forward transaction: A forward contract that is not connected to a spot transaction.

Outsourcing: Where one company contracts with another company to perform certain functions, including manufacturing and back-office operations. May be done in the company’s home country or in another country (nearshoring oroffshoring).

Pacific Alliance: A regional economic group in Latin America composed of Mexico, Colombia, Peru, and Chile. It is more favor- able to trade and investment than other regional groups in South America.

Par value: The benchmark value of a currency, originally quoted in terms of gold or the

U.S. dollar and now quoted in terms of Special Drawing Rights.

Parent-country nationals: An expatriate sent from her or his home country to live and work in another.

Payback period: The number of years required to recover the initial investment made.

Peg: To fix a currency’s exchange rate to some benchmark, such as another currency.

Penetration strategy: Introducing a product at a low price to induce a maximum number of consumers to try it.

Peripheral values: Those values that are less dominant and more pliable than core values.

Planning: A comprehensive process that determines how the firm can best achieve its goals. An industry is composed of those companies engaged in a particular type of enterprise.

Political freedom index: An annual index created by The Freedom House to assess the degree of political freedom in various nations.

Political freedom: The right to participate freely in the political process.

Political ideology: The body of complex ideas, theories, and aims that constitute a socio- political program.

Political risk: Potential changes in political conditions that may cause a company’s operating positions to deteriorate.

Political spectrum: A conceptual structure that specifies and organizes various types of political ideologies.

Political system: The system designed to integrate a society into a viable, function- ing unit.

Polycentric staffing framework: A staffing policy whereby a company relies on host country nationals to manage operations in their own country, while parent-country nationals staff corporate headquarters.

Polychronic: A term to describe cultures where most people are more comfortable when working simultaneously on a variety of tasks (multitasking).

Poverty: Multidimensional condition in which a person or community lacks the essentials for a minimum standard of well-being and life.

Power distance: A measurement of employee preferences of interaction between superi- ors and subordinates.

Pragmatic: Describes cultures in which people focus more on details than on abstract principles.

Primary activities: The line activities that com- pose the value chain. Specifically, inbound logistics, operations, outbound logistics, marketing, and service.

Private technology exchange (PTX): An online collaboration model that brings manufac- turers, distributors, value-added resellers, and customers together to execute trading transactions and to share information about demand, production, availability, and more.

Product diversion: It is also called the gray market and refers to the selling and han- dling of goods through unofficial distribu- tors.

Product life cycle (PLC) theory of trade: The theory states that the production location of certain manufactured products shifts as they go through their life cycle, particularly from developed to developing countries.

Protectionism: The collective, governmental actions to influence international trade.

Pull: A type of promotion that relies on mass media.

Purchasing power parity (PPP): A theory that explains exchange-rate changes as being based on differences in price levels in dif- ferent countries. Also, the number of units of a country’s currency to buy the same products or services in the domestic market that US$1 would buy in the United States.

Push: A type of promotion that uses direct selling techniques.

Quality: Meeting or exceeding the expecta- tions of a customer.

Quota: A quantity limit of a product’s import or export in a given time frame, typically per year.

Reconciliation: The process required in U.S. capital markets where a company from a foreign country reconciles its home country GAAP with U.S. GAAP.

Regional integration: A form of integration in which a group of countries located in the same geographic proximity decide to cooperate.

Relationship-focus (RF) culture: A culture that puts dealings with friends ahead of business dealings.

Relativism: A theory stating that ethical truths depend on the groups holding them, mak- ing intervention by outsiders unethical. The belief that behavior has meaning and can be judged only in its specific cultural context.

Repatriation: An expatriate’s return to his or her home country.

Reshoring: Firms’ bringing operations back to their home countries from abroad and is sometimes called rightshoring.

Glossary 587

Resource-based view: Each company has a unique combination of resources, capabili- ties, and competencies.

Resources: Inputs, owned or controlled by the MNE, that support its production process.

Reverse culture shock: The trauma of adjust- ing to one’s own country after having become partial to aspects of life abroad that are not options back home.

Reverse-expat: A local manager who directs a Western-based company’s emerging-market business and is rotated through some of the company’s established operations outside of that market before returning home.

Rightsourcing: Also known as reshoring is the process of shifting production from abroad to the home country.

Royalties: Payments for the use of some assets, such as trademarks, patents, copyrights, or expertise.

Rule of law: The principle that every member of a society must follow the same laws.

Rule of man: Notion that the word and whim of the ruler, no matter how arbitrary, are law.

Scanning: A process in which managers examine many countries broadly—using information that is readily available, inex- pensive, and fairly comparable—to narrow detailed analysis and travel to only the most promising ones.

Serendipity: Refers to the trigger of so-called accidental exporters who, responding to happenstance or odd circumstances, enter overseas markets by chance.

Service exports and imports: Non-merchandise international earnings. They are also referred to as invisibles.

Shadow economy: Illicit economic activ- ity, such as counterfeiting or unlicensed services, that exists alongside a country’s official economy; also called the under- ground, informal, or parallel economy.

Sight draft: A commercial bill of exchange that requires payment to be made as soon as it is presented to the party obligated to pay.

Silent language: The exchange of messages through a host of nonspoken and nonwritten cues.

Six Sigma: A highly focused system of qual- ity control that uses data and rigorous statistical analysis to identify “defects” in a process or product, reduce variability, and achieve as close to zero defects as possible.

Skimming strategy: Charging a high price for a new product by aiming first at consumers willing to pay that much, then progres- sively lowering the price to sell to other consumers.

Small and medium-sized enterprise (SME): Companies whose headcount or sale turnover falls below certain thresholds; in the United States, companies that employ fewer than 500 employees. Commonly expressed as “SME.”

Smithsonian Agreement: A 1971 agreement among countries that resulted in the devaluation of the U.S. dollar, revaluation of other world currencies, a widening of exchange-rate flexibility, and a commit- ment on the part of all participating coun- tries to reduce trade restrictions; super- seded by the Jamaica Agreement of 1976.

Socialism: A system based on public own- ership of the means of production and distribution of wealth.

Soft (or weak) currency: A currency that is usually not fully convertible. Often these currencies are unstable and not very liquid.

Sourcing: The strategy that a company pur- sues in purchasing materials, components, and final products; sourcing can be from domestic and foreign locations and from inside and outside the company.

Sovereignty: A country’s freedom to “act locally” and without externally imposed restrictions.

Sovereign wealth fund (SWF): A pool of money from a country’s reserve which is set aside for investment purposes; usually related to natural resources such as oil.

Specific duty: A tariff assessed on a per-unit basis.

Special drawing right (SDR): A unit of account issued to countries by the Inter- national Monetary Fund to expand their official reserves bases.

Speculation: The buying or selling of foreign currency with the prospect of great risk and high return.

Spillover effect: A marketing program in one country that results in product awareness elsewhere, particularly in an adjacent country.

Spot rate: An exchange rate quoted for imme- diate delivery of foreign currency, usually within two business days.

Spot transactions: Foreign exchange transac- tions involving the exchange of currency the second day after the date on which the two foreign-exchange traders agree to the transaction.

Spread: In the forward market, the difference between the spot rate and the forward rate; in the spot market, the difference between the bid (buy) and offer (sell) rates quoted by a foreign-exchange trader.

Staffing framework: A systems view that artic- ulates the internal structures and mecha- nisms of human resource management.

Stakeholders: The collection of groups, including stockholders, employees, customers, and society at large, that a com- pany must satisfy to be successful.

State capitalism: An economic system whereby the state decides how, when, and where assets will be valued and resources allocated.

Static effect: The shifting of resources from inefficient to efficient companies as trade barriers fall.

Strategic alliance: Refers simply to companies’ working together, such as in joint ventures and licensing agreements. However, the term sometimes refers to an agreement that is of critical importance to a partner or one that does not involve joint ownership.

Strategic trade policy: Also known as an industrial policy. It is one in which a government identifies target industries to develop to be internationally competitive.

Strategy: An integrated and coordinated set of commitments of actions that reflects the company’s present situation, identifies the direction it should go, and determines how it will get there.

Subpart F (or passive) income: Income of a CFC that comes from sources other than those connected with the active conduct of a trade or business, such as holding company income.

Supply chain: The coordination of materials, information, and funds from the initial raw material supplier to the ultimate customer.

Supply-chaining: Collaborating horizontally among suppliers, relailers, and customers to create value.

Support activities: The general infrastructure of the firm that anchors the day-to-day execution of the primary activities of the value chain.

Sustainability: The ability to meet the needs of the present without compromising the ability of future generations to meet their own needs, while taking into account what is best for the people and the environment.

Syndication: Cooperation by a lead bank and several other banks to make a large loan to a public or private organization.

Tariff: A tax levied on a good shipped internationally.

Technical forecasting: A forecasting tool that uses past trends in exchange rates them- selves to spot future trends in rates.

Teleological approach: An approach based on the idea that decisions are made based on the consequences of the action.

Temporal method: A method of translating foreign-currency financial statements used

588 Glossary

when the functional currency is that of the parent company.

Terms currency: In a foreign exchange quote, the base currency is 1 and the terms cur- rency gives you the number of units of that currency per one unit of the base currency. If a foreign exchange trader quotes USD/ JPY, the dollar is the base currency and the yen is the terms currency. The quote will give you the number of Japanese yen per U.S. dollar. The quote is also shown as USDJPY=X.

Terms of trade: The quantity of imports that a given quantity of a country’s exports can buy.

Theocratic law: A situation whereby a nation’s legal system is based on whatever religious text the ruling religion abides by.

Theory of country size: Countries with larger land masses usually depend less on trade than smaller ones.

Third Wave of Democratization: Expression to capture the collective set of nations that moved from nondemocratic to democratic political systems during the 1970s through the 1990s.

Third-country national: An expatriate who is neither a citizen of the country in which he or she is working nor a citizen of the coun- try where the company is headquartered.

Third-party logistics (3PL): Agents that develop state-of-the-art technology to help compa- nies understand trade practices, identify opportunities, manage risks, and shepherd exports and imports from buyers to sellers.

Time draft: A commercial bill of exchange call- ing for payment to be made at some time after delivery.

TNC: An acronym for transnational company, a term used by the United Nations to refer to a multinational enterprise.

Total quality management (TQM): The process that a company uses to achieve quality, where the goal is elimination of all defects.

Totalitarian system: A political system char- acterized by the absence of widespread participation in decision making and sup- pression of political and civil freedoms.

Trade deficit: A country is importing more than it is exporting.

Trade surplus: A country is exporting more than it is importing.

TQM: See Total quality management. Trans-Pacific Partnership: A potential regional

economic trade group involving the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

Transaction exposure: Foreign-exchange risk arising because a company has outstanding accounts receivable or accounts payable that are denominated in a foreign currency.

Transit tariffs: Taxes charged by countries through which international shipments move.

Translation: The restatement of financial state- ments from one currency to another.

Translation exposure: An exposure that occurs because exposed accounts—those translated at the balance-sheet or current exchange rate—either gain or lose value when the exchange rate changes.

Transnational company: A term used by the United Nations to refer to a multinational enterprise.

Transnational strategy: Configuring a value chain to exploit location economies as well as coordinate activities to leverage core competencies while simultaneously responding to local pressures.

Transpatriate: An expatriate “lifer” who tends to work in several countries over time and who has no true corporate “home.”

Turnkey operations: Construction projects performed under contract and transferred to owners when they’re operational.

Uncertainty avoidance: A country trait whereby most people feel uncomfortable with ambiguity.

Unemployment rate: The percentage of the workforce that is unemployed at any given date.

Unfavorable balance of trade: A country is importing more than it is exporting.

United Nations Conference on Trade and Development (UNCTAD): A UN body that has been especially active in dealing with the relationships between developing and industrialized countries with respect to trade.

Unity-of-command principle: An unbroken chain of command and communication should flow from the CEO to the entry- level worker.

Utilitarianism: A consequences-based approach to moral reasoning that judges an action to be right if it does the most good to the most people.

Value chain: The collective activities that occur as a product moves from raw materials through production to final distribution; the disaggregation of value creation.

Value: A measure of a firm’s capability to sell what it makes for more than the costs incurred to make it; the ultimate purpose of strategy.

VER: See voluntary export restraint. Vertical differentiation: The specification of

the degrees of centralization and decentral- ization of decision-making in an organiza- tion.

Vertical integration: The control of the dif- ferent stages as a product moves from raw materials through production to final distribution.

Virtual organization: A form of company that acquires strategic capabilities by creat- ing a temporary network of independent companies, suppliers, customers, and even rivals.

Vision: The idealization of what an MNE firm wants to be. It expresses, in broad terms, its ultimate goal.

Voluntary export restraint (VER): A quota variation whereby a country voluntarily reduces its companies’ exports to another country.

World Trade Organization (WTO): The 125-member successor to GATT that is charged with reducing tariff and nontariff barriers to trade in goods, services, and investment among member nations.

Zero defects: The elimination of defects, which results in the reduction of manufac- turing costs and an increase in consumer satisfaction.

Company and Trademarks Index

A.T. Kearney, 546 ABB, 58 Abbot Laboratories, 90 ABN AMRO, 253 Accenture, 448 Accor, 573 Acer, 332, 502 Adidas, 2n1, 466, 518n3 Aditya Birla Group, 574n183 Aer Lingus, 421n96, 423 AeroRepublic, 415 Agatec, 198 Ahold, 373 AIG, 277, 480n89 AirAsia Japan, 414, 417 Airberlin, 423 Airbus, 19, 168–169, 196, 196n33, 415, 435, 566 Air Canada, 449 Air France, 168, 514 Alfred Dunhil, 298 Alibaba Group, 287, 287n24, 374, 395, 431 Allergan, 280–281 Alstom, 131 Amazon, 216, 297, 307, 311, 374, 383, 395 American Airlines (AA), 421n96, 422, 423,

424, 425 American Green, 511n63, 514 ANA, 414, 417 Analytical Graphics, 370, 374, 390 Anglo American PLC, 149–151 Anheuser-Busch, 476 Anzocare, 515 Apollo, 422 Apple, 5, 194, 216, 286n21, 309, 311n47, 312, 323, 326, 334,

352, 380, 380n78, 442, 456, 494–498, 494n1, 500, 502–506, 503n29, 503n32, 503n34, 510, 555

ArcelorMittal, 311, 457 Areva, 306, 378 ARM, 332 Arrow, 479 AstraZeneca, 281, 414 AT&T, 246 Audi, 144–145 Avaya, 572n166 Aventis, 443, 566 Avon, 479

Baan, 505 Baidu, 431 Balanced Scorecard, 449 BAML, 246 Banana Republic, 498 Bank of Montreal, 253 Barceló Hotels, 399 Barclays, 238, 246 Barings PLC, 250 Baron Philippe de Rothschild Winery, 408 Barrick, 414 Baxter Fenwal North America, 547 Bayer CropScience, 414 Bechtel, 365, 413, 414 Belcorp, 432 BenQ Corp., 503 Bershka, 302n6, 302n8 Best Buy, 58 BHP Billiton, 151 Blockbuster, 346n39 Bloomberg, 238, 243, 246, 519 BMP Recycling, 375 BMW, 145, 420, 498 Bodegas, 232, 234 Body Shop International, The, 145 Boehringer Mannheim, 416 Boeing, 19, 168–169, 196, 196n33, 247, 362, 367, 415, 435, 502 Bombardier, 435 Borderfree, 371, 395–396 BorderJump, 395 Boston Consulting Group, 503 Boyden, 548 BP, 216, 230, 415, 416n70 Bridgestone Tires, 348 British Airport Authority

(BAA), 413 British Airways (BA), 417n82, 422–425 British Telecom, 443 Buick, 467 Bulgari SpA, 298 Burberry, 477 Burger King, 280, 336–337, 336n1, 409, 468

Cadbury, 342, 474 Cadillac, 467 Calvin Klein, 462

589

Page references with “f ” refer to figures, page references with “m” refer to maps, and page references with “n” refer to endnotes cited by number.

590 Company and Trademarks Index

Carnival Cruise Lines, 21–23, 21n51 Carpesian Capital Group, 337 Carrefour, 85, 233, 329n103, 348, 357–360, 357n68, 373 Car Shoe, 298 Cartier, 192n13, 298 Caterpillar, 58, 329, 362 Cathay Pacific, 423 Cemex, 311, 432 Certified Worldwide, 388 Chanel, 466 Chendraui, 232, 233 Chevrolet, 467 Chevron Texaco, 150 Chie Mie Optoelectronics, 325 China Daily, 565 China Mobile, 325 China National Petroleum, 49 China State Construction Engineering, 414 China Unicom, 570 Chineseall.com, 383 Chiquita Brands, 343 Chloè, 298 Christian Dior, 298 Chrysler, 76, 201 Church’s Group, 298 Cigna, 569n151 Cisco, 334, 435, 442–444, 452, 573 CITGO, 465 Citi, 238, 245–246 Citibank, 330, 480n89, 573 CITIC Industrial Bank, 253 Citicorps, 246 Citigroup, 253, 311 Claimpower, 12–13 Clearspirem 443n56 Coca-Cola, 19, 150, 177, 194, 311, 343–344, 393,

405, 466, 466n11, 471, 471n31, 476, 478, 479n83, 521, 529, 529n20

Coeur d’Alene Mines, 73n101 Coffee & More, 368, 390 Cognizant, 378, 444 Colgate, 474 Colgate-Palmolive, 150 Comerci, 232–234 Compai, 502 Compañía Chilena

de Fósforos, 465 Constellation Brands, 408 Copa, 415 Costco, 233, 452, 514 Credit Suisse, 238, 449 Cryos International, 412 Cubanacán, 399

Daimler, 521 Daimler-Chrysler, 566 Dana, 355 Danone, 478 Daraprim, 203 Dell, 440, 444, 502, 508 Deloitte, 288n36–37 Deloitte & Touche, 539, 548 Delta Air Lines, 196 DENSO, 505, 509 Dentsu, 325–326 Denver Post, The, 511, 514 Der Spiegel, 565 Deutsche Bank, 238, 246, 253, 443 DHL, 395 Diageo, 468 Disney, 15, 46, 407, 456 Domes International, 369 Dow Chemical, 440 Dune Group, The, 395 DuPont, 428, 428n1, 437n40, 445, 449 Duracell, 468

East India Company, 410 eBay, 395 EBS, 238, 246 Economist, The, 270, 565–566 E.G. Hills, 181 Egon Zehender International, 546 El Al, 34 El Corte Inglés, 463 Eli Lilly, 473 Engadget, 511 Eni, 415 Enron, 291n38 Ericsson, 541 Ernst & Young, 539 Ethereum, 251 Euromoney, 246 European Central Bank, 255 Evergreen Solar, 110n63 Everstone Capital, 337 Evertek Computer, 371, 371n40–42 Exportadora de Sal in Mexico, 415 Exxon-Mobil, 58, 230, 435

Faber-Castell, 405 Facebook, 148, 323, 333n129, 431, 565, 565n123 Fast Company, 511 FedEx, 37, 384, 388, 395 Ferrari, 466 Ferrero Rocher, 484 Fiat, 19, 343, 403

Company and Trademarks Index 591

Fidelity, 12–13 Financial Times, 243 Finnair, 423 First Security Corporation, 518, 518n1 Flagship Ventures, 414 Flintstones, 401 Foley & Corinna, 91 Ford Motor Company, 49, 150, 389, 403, 497–498, 510 ForEveryBody, 380 Fortis, 330 Fortune, 132 Foxconn, 311, 320, 442, 494–495, 497, 500, 502–503,

503n29 Frito-Lay, 485 Fuji Photo, 417

Galeries Lafayette, 473 Galileo, 422 Gap Inc., 145, 303, 323, 541 Garmine Marine, 389 Gazprom, 286, 286n20 GCL-Poly Energy (China), 110n63 GE, 66, 84, 130–133, 130n1, 137, 142–143, 318, 338n2, 362,

405n14, 430n15, 441, 448–449, 453–455, 457, 509, 546, 550–551, 558, 573

General Motors, 19, 201, 311, 430n16, 437n40, 445, 467, 510 Gigante, 233 Gillette, 88n151, 468 GlaxoSmithKline, 151, 281, 293, 343, 509 Glencore International plc, 299 Globalfoundries, 501 GM, 498 Godiva, 484, 484n94 Goldman Sachs, 238, 246, 365, 554 Google, 58, 216, 294, 297, 306–307, 309, 314n59, 326–328,

328n98, 412, 412n54, 434–435, 445, 454–455,, 454n101, 552n40

Goonj, 101 Gore & Associates, 428–429,

428n2, 428n8, 429n9–10, 429n13, 431–432, 437, 437n30, 441, 441n46, 451–452, 454–455, 454n102, 455n106, 455n111, 546

GPS Capital Markets Inc., 518–520, 535, 538 Grainger, 479 Grameen Bank (GB), 486–487 Grameen Danone Foods, 486–490, 486n102 Grand Metropolitan, 337 Groupe Danone, 487 Grupo Empresarial Antioqueño, 432, 443 Grupo Vegaflor, 181 Gucci, 298, 303

Haier, 311 Halliburton, 316

Hard Rock Café, 401 Harrods, 395 Harvey Nichols, 26 Henkel, 466, 548 Hermés, 88n151, 466 Hershey’s, 43, 484 Hewlett Packard, 473, 502 Hisense, 220, 233 H&M, 145, 302–303, 497, 521, 541–543 Hochtief, 413 Hoja Verde, 181 Holcim, 344, 344n27 Home Depot, 58, 468, 474, 514 Honda, 457, 507, 555, 566 Honeywell, 546 Hon Hai, 367, 494–495 HSBC, 238, 245–246, 253–254, 328, 555, 561 Huawei, 87 Hugo Boss, 88n151 Humana Milchunion, 416 Hungry Jack, 409 Hyatt, 399 Hydraulx Visual Effects, 365–366

Iberia, 423, 424, 425 IBM, 90, 329, 332, 406, 416, 431, 431n19, 440n39, 444, 448, 452,

452n97, 494, 501, 546, 554, 573–574 ICAP PLC, 254 Igen, 416 IKEA, 26, 32, 61, 85, 147, 329, 443, 476, 500, 503n31, 504 Inditex, 145, 302n6–12, 541 Industria de Diseno Textil, 541 Infiniti, 409–410, 410n48 Infosys, 325, 378, 432, 444, 455–457, 574 ING, 250, 253 Intel, 362, 447n77, 547, 594 International Checkout, 395 Internal Revenue Service, 86n141 I.P.I. SpA, 298 ITT, 445

Japan Airlines (JAL), 417n82, 421n96, 422–423 Jarden Zinc Products, 369n28 JBS S.A, 406 JCPenney, 463 J. Crew, 498 Jin Jiang, 399, 400 Johnson & Johnson (J&J), 328, 329n104, 431, 433, 452, 454–456,

458–460, 458n128, 458n130–134, 566n71, 557 JP Morgan Chase, 238, 246, 250, 456

Kajima, 365 Kellogg’s, 468

592 Company and Trademarks Index

Kempinski, 399, 400 KFC, 413 Kleenex, 477 Kodak, 194 Korean Air, 15 Korea Telecom, 449 KPMG, 510, 539 Kyocera, 442

La Motte, 477 LAN Airlines, 423, 247 Lands’ End, 395 Lee Hung Fat Garment Factory, 475 Lehman Brothers, 276–277, 480n89 Lenovo, 406, 473, 502, 566 Leo Burnett Worldwide, 474 Leopard’s Leap, 477 Levant, 410 Lexus, 311, 312 LG Group, 477 LG Philips, 325 Li & Fung, 432 Limited Brands, 352 Lindt, 484 Liverpool Football Club, 16, 18 Liz Claiborne, 90 Lloyd’s of London, 378 L’Occitane, 405n17 Lockheed Martin, 348, 509 Logitech, 371 L’Oreal, 28 Louis Vuitton, 88n151, 437n31 Lowe’s, 514 Lufthansa, 422, 566 Luxottica, 298 LVMH, 298, 307, 329, 437n31, 457

Macy’s, 462n1, 463 Malaysia Airlines, 423 Manpower, 548 Marcel Bich, 476 Marks & Spencer, 52, 145 Marriott, 344, 399, 573 Mars, 484 Marshalls, 463 Marvel, 198 Más, 234 Maserati SpA, 298 Massimo Dutti, 302n6, 302n8 Matsushita, 452 Mattel, 457, 457n119, 497 McCall’s magazine, 48 McDonald’s, 15, 26, 34, 61, 61n20, 117, 328, 332–333, 332n117–

119, 336–337, 413, 456, 468 McKinsey & Company, 365, 445–446, 548, 562

Meliá Hotels International, 398–402, 406, 412–413 Mercedes-Benz, 145, 409–410, 410n48, 414 Merrill Lynch, 416, 480n89 Microsoft, 42–43, 88n151, 89, 91, 91n167, 216, 306, 435, 448, 452,

476, 494, 504, 547, 556–557, 566, 573 Migros, 484 Mitsubishi, 414–415, 446 Mitsui, 432 Mobile Telecommunications Company, 473 Moët Hennessy, 437n31 Mohawk Global Logistics, 388 Mondavi, 408n38 Monitor Group, 28 Morgan Stanley, 98n22, 548 Mossack Fonseca, 296 Motorola, 61, 503, 509 mPedigree, 90

Nanfu, 468 NatWest Bank, 246 Naver, 431 NEC, 414 Neiman Marcus, 395 Nestlè, 306–307, 315, 321–322, 326, 328, 342, 414, 432, 437–438,

437n33, 451, 478, 484, 484n95, 546 New Balance, 466 The New York Times, 202, 296, 511, 514 Nike, 2n1, 8, 88n151, 142, 334, 437n34, 438, 440, 442, 451, 466,

469, 469n28, 497 Nikon, 88n151 Nissan, 50–51, 414 Nitropress, 203 Nokero, 511–516, 511n63 Nokia, 147, 409, 445, 503 Nortel Networks, 449 North Face, 88n151 Novartis, 281 NuSkin Enterprises, 284

Oakley, 88n151 O Globo, 514 Olayan Financing Company, 28–29 oneworld, 421–425 Opus One Winery, 408 Oracle, 452, 505 Organizacion Soriana, 232 Oticon, 432 Owens-Illinois, 343–344 Oysho, 302n6, 302n8

Pan American Silver, 73n101 Panasonic, 438 Paris Saint-Germain (PSG), 4 Parmalat, 296 PayPal, 431

Company and Trademarks Index 593

PdVSA, 258, 465 Pearson, 306 Pegatron, 442 People’s Bank of China (PBOC), 253, 254 PeopleSoft, 505 PepsiCo, 389, 393n125, 474, 478 Perry Ellis, 462 Petrobras, 140–141 Petronas, 20 Pfizer, 90, 203, 280–281, 280n1, 473 Philips Electronics, 319–320, 444, 498 Philips-Van Heusen (PVH), 462–463 Pierre Cardin, 416 Pitney Bowes, 371, 371n39 Pizza Hut, 413 Polycom, 435 PolyGram, 332 Popular Mechanics, 511 Popular Science, 511 Porsche, 144–145 PPR, 298 Prada, 88n151, 192n13, 298–300, 303 Pricesmart, 348 PricewaterhouseCooper (PwC), 61, 144, 510, 539, 546, 553, 572 Procter & Gamble, 14–15, 332, 389, 452, 457, 466, 468, 474,

546n3, 548 Progress Energy, 20 PUIG Beauty & Fashion Group, 298

Qantas, 423 Qatar airlines, 423 Qualcomm, 334, 442 Quanta, 502 Quick, 337

Radisson, 399 Rakuten, 566 Ralph Lauren, 13, 462 Ranbaxy Laboratories, 311 Rank, 417 Rawling’s, 14 RBC Capital Markets, 258 RBS, 238 Red Bull, 466, 474 Red Hat, 431, 449, 450n88, 452 Reebok, 334 Remedia, 416 Renault, 50, 51, 403, 566 Reuters, 243, 443, 519. See also Thomson Reuters Richemont, 298 Rio Tinto, 435 Ritz-Carlton, 311, 555 Robert Mondavi, 408 Rolls-Royce, 140 Rosen Tantau, 181

Royal Bank of Scotland, 253, 330, 480n89 Royal Crown, 19 Royal Dutch Shell, 546 Royal Jordanian, 423 RSR, 376

SABMiller, 468 Sacyr Vallehermosa, 15, 413 Safari.com, 101 Saks Fifth Avenue, 28, 47 Sam’s Club, 232, 233 Samsung, 12, 12n27, 115, 325, 367, 378, 412n54, 477, 566 SAP, 332, 444, 452, 456, 505, 566 Sara Lee, 476, 499, 511 Saudi Arabian Airlines, 26 Scania, 443 Schering-Plough, 558 Schott North America, 383–384 Scrap Computers, 375 Sears, 463, 437n40 Seco/Warwick, 382 Seiko, 403 Seiyu, 408 7-Eleven, 453n97 Shanghai Construction Group, 414 Sharp Corp., 220, 233, 503 Shiseido, 332 Siemens, 145, 449, 480n89 Skanska AB, 365 S-Market, 52 Société Générale, 480n89 Sol-Meliá. See Meliá Hotels International Sony, 88n151, 115, 275–278, 311n46, 365, 441n48 Soriana, 233 SoundCloud, 9 Southwest Airlines, 311 Spectra Colors, 383 SpinCent, 362–364, 367–368, 373n49, 374, 383 Squigle, 372, 373 Srijan, 445 SriLankan Airlines, 423 S7 Airlines, 423 Standard Oil, 437n40 Starbucks, 297, 232, 238, 409, 447n81, 448 STMicroelectronics, 332 Stradivarius, 302n6, 302n8 StrawberryFrog, 443n56 Suburbias, 232 SumAll, 445 Sundance Ski Lodge, 527–528 Superamas, 232, 234 Suzuki, 198 Swissair, 422 Swiss Bank Corporation, 246 Sydney Times, 514

594 Company and Trademarks Index

Takata Corporations, 507 Tal Group, 498 TAM, 423 Tambrands, 474 Target, 312 Tata, 307, 332, 574 Tata Communications, 288–289 Tata Global Beverages, 328 Tata Motors, 365 Tel-Comm-Tek (TCT) Tesco, 52–55, 85, 348, 329n103 Tesla, 329 Thai Union Frozen, 311 Thomson Reuters, 238, 246, 254 3G Capital Partners LP, 280 3M, 90, 450 Tim Hortons, 280 T.J. Maxx, 463 TNK, 416 TNT, 384 Tommy Hilfiger, 462–463, 462n1, 465n3 Toshiba, 416, 503 Total Quality Management, 449, 451 Towers Perrin, 569n151 Toxics-Link Delhi, 377 Toyota, 19, 134–135, 208–209, 208n1, 218, 220, 275n35, 306–307,

307n32, 315, 326, 348, 403, 420, 432, 452, 454–456, 456n112, 458, 458n127, 498, 502, 502n24, 505, 509, 557, 566n67, 566n72

Tredegar Industries, 15 Tristyle International, 475 Trunci, 395 TRYP, 398, 400, 401 Tsushin Kogyo Corporation, 275 Turing Pharmaceuticals, 203 Twitter, 148

UBS, 238, 246, 365, 480n89 UFJ, 416 UGG, 88n151, 90 Unilever, 343, 468, 573 Unipart, 457 United Airlines, 44 United Fruit Company (UFC), 410 United Technologies, 316n63 Universal Genève 403

UPS, 311, 384, 388–389, 395 US Airways, 425

Vale, 306, 435 Valeant Pharmaceuticals, 203 Vellus Products, 372, 372n47 Venda, 395 Vinci, 413 Virgin Atlantic, 306 Virgin Group, 443 Virgin Mobile, 311 Vistaprint, 16 Vodafone, 58, 306–307, 325 Volkswagen, 144–145, 220, 348, 403, 498, 537–538 VTB Capital, 337 The Wall Street Journal, 20, 243

Walmart, 19, 84n135, 85, 209, 232–234, 232n39, 309, 311, 348, 373, 374n54, 389, 408, 408n39, 432, 444, 455n106, 469, 500, 505–506, 505n38, 505n41–42, 514, 555, 573

The Washington Post, 511 Wells Fargo & Company, 518, 518n1 Western Union, 236–237 Whirlpool, 468, 469 Wipro, 444, 449, 455, 546, 555, 574 Wistron, 502 W.L. Gore. See Gore & Associates Woolco, 232 Wyndham, 399–400

Xerox, 417, 477, 552

Yandex, 431 YouTube, 148 Yue Yuen Industrial, 442, 466 Yum! Brands, 337, 413 Yves Saint Laurent, 298

Zady, 371, 374 Zappo’s, 445 Zara, 302–304, 302n1, 302n6, 302n8, 303n13, 303n15–16,

304n19–24, 307, 309, 312, 316n64, 323, 329, 331, 433, 496, 500, 541

Zeiss, 88n151 Zijin Mining Group, 414 ZTE, 87

Name Index

Abe, Shinzo, 278 Adamy, Janet, 413n59 Agarwal, James, 466n13 Agarwal, Manoj K., 466n12 Agins, Teri, 462n1 Agle, Bradley R., 132n4 Ahles, Andrea, 421n95 Ahlstrom, David, 419n87, 557n76 Ahmed, Azam, 352n53 Ahuja, Manju, 443n55 Akolaa, Andrews Adugudaa, 476n57 al Jundi, Nora, 26n1 Alade, Wale, 481n87 Alagaraja, Meera, 563n104 Albanese, Chiara, 252n25 Alderman, Liz, 348n47 Alejandro, Moreno, 46n81 Alessandri, Todd M., 338n5 Alex Pentland, 558n83 Alexander, Marcus, 331n109 Alfaro, Laura, 86n142 Ali, A. M., 139n21 Aljindi, Omar, 26n1 Al-Khatteeb, Luay, 95n10 Allam, Abeer, 26n1 Allen, David G., 453n99 Allen, Robert, 390n119 Allwood, Carl, 552n40 Alt,Elisa, 306n29 Altayli, Birsen, 403n4 Alvarez, Lizette, 412n55 Ana, Miranda, 336n1 Anand, Bharat, 420n88 Anand, Jaideep, 405n23 Ancona, Deborah, 307n31 Andersen, Torben Juul, 313n51 Anderson, Jamie, 473n37 Anderson, Laura, 547 Anderson, S. Eric, 305n28 Anderson, Sam, 17n43 Andersson, Ulf, 550n31 Anita M., McGahan, 308n36 Antonsson, Erik K., 446n72 Apil, Ali Riza, 404n10 Apostopoulos, Yorghos, 174n47 Appel, Rebecca, 553n47 Applebaum, Binyamin, 2n1

Apuzzo, Matt, 2n1 Arbour, Louise, 83n128 Archibugi, Daniele, 432n21 Areddy, James T., 417n75 Arendt, Hannah, 64n32 Ariño, Africa, 419n84 Ariss, Sonny, 443n53 Arman, Mayala, 258n1 Armario, Julia, 370n31 Armario, Enrique, 370n31 Armstrong, Richard, 389n115 Arora, Ashish, 458n129, 458n130 Arthur, W. Brian, 319n72 Asgary, Nader, 49n89 Ashill, Nicholas, 367n14 Ashish, Arora, 405n18 Åslund, Anders, 102n36 Asmussen, Christian G., 404n12 Assimakopoulos, Dimitris, 559n86 Asturias, Miguel Angel, 410n51 Atkinson, Anthony B., 98n25 Attia, Samaa, 477n67 Austen, Ian, 48n88, 469n29 Autor, David H., 13n34 Avery, Gayle C., 306n29 Aviel, David, 357n67 Aw, B., 368n19 Awuah, Gabriel Baffour, 407n31 Axtell, Roger E., 45f Ayal, Igal, 354n57 Azarian, Mohammad, 80n113

Bader, Benjamin, 352n55 Baer, Justin, 252n25 Bagozzi, Richard P., 476n56 Bailey, Ronald, 68n56 Bakacsi et al., 41n60 Baker, S., 566n136 Baker, W., 442n47 Balabanis, George, 476n64 Balassa, Bela, 211n5 Balasubramanian, Sridhar, 481n88, 482n89 Ball, Deborah, 474n44 Ball, Linda, 421n95 Bals, Lydia, 13n33 Bandler, James, 48n86 Banerjee, Sanjay, 417n80

595

Page references with “f ” refer to figures, page references with “m” refer to maps, and page references with “n” refer to endnotes cited by number.

596 Name INdex

Banerjee, Sudipto, 94n1, 383n89 Bani, Eirmalasare, 357n68 Barbaro, Michael, 462n1 Barboza, David, 73n93 Bardhan, Pranab, 94n1 Barkema, Harry G., 417n77 Barnes, Brooks, 441n43 Barney, J. B., 453n99 Barr, Colin, 285n13 Barrett, Devlin, 142n30, 232n39 Barrionuevo, Alexei, 499n17 Barstow, David, 84n135 Barta, Patrick, 223n26 Barta, T., 453n99, 558n83 Barta, Patrick, 194n23 Barta, Thomas, 558n81 Barthelemy, Claire, 144n36 Bartlett, Christopher A., 148n45, 168n26, 453n98, 430n17,

440n37, 450n85 Basañez, Miguel, 31n10, 34n24, 36n35, 37n40, 41n56 Batra, Avinder, 336n1 Batson, Andrew, 5n4 Battisti, Martina, 381n81 Bauerschmidt, Alan, 370n32, 370n35, 372n44, 382n85 Baulch, Helen, 375n60, 377n68 Bayly, Megen, 478n77 Beach, William W., 104n42 Beaman, Karen, 445n66, 562n98 Beamish, Paul W., 148n45, 343n20, 420n88, 445n109 Bean, Frank D., 176n55 Beatson, Amanda T., 313n51 Beattie, Alan, 275n35 Beechler, Schon, 550n29 Behfar, Kristin, 30n5 Belenzon, Sharon, 458n129, 458n130 Belford, Aubrey, 73n95 Bell, John H. J., 417n77 Bendick, Marc Jr., 32n14 Benet-Martinez, V., 49n96 Bennet, Paul, 486n102 Bennett, Julie, 409n44 Bensaou, Ben B., 417n76 Berg, Nicola, 352n55 Bergman, Harriet, 47n84 Bergsteiner, Harald, 306n29 Berk, Jonathan, 281n2 Bernard, Andrew, 369n24, 378n75–77 Bernard, Bruce, 421n95 Bernhagen, Patrick, 68n57 Berry, Heather, 14n38 Berton, Elena, 357n68 Bertelli, Patrizio, 298 Bertsch, Andy, 36n34 Bettina, Merlin, 374n56

Bhagwati, Jagdish N., 12n25, 20n50, 405n18 Bhardwaj, Vertica, 302n1 Bhattacharjee, Yudhijit, 566n130 Bhattacharya, Arindam, 332n113, 332n114, 435n27 Bianchi, Alessandra, 392n122 Bierly, Paul E., 421n93 Bigness, J., 452n94 Bills, Steve, 251n23 Bird, Allan, 560n88 Birkinshaw, Julian, 141n26, 437n29 Birnbaum, Jeffrey H., 184n1 Bish, Joseph J., 225n28 Black, Ervin L., 523f Black, Fisher, 345n28 Black, J. S., 550n31 Black, Thomas, 275n35 Blackstone, Brian, 268n19 Blafour,Frederik, 236n1 Blanc, Luis, 303 Blazevic, Vera, 473n35 Bleacher, Liz, 571n164, 571n165 Blevins, Jason, 511n63 Blitz, Roger, 2n1 Blomkvist, Katarina, 345n34 Blossfeld, H. P., 7n7 Boatright, John R., 139n19, 139n20 Bochner, Stephen, 49n91 Boddewyn, Jean J., 355n62 Bolino, Mark, 553n47, 562n100, 564n106, 571n160 Bolt, J., 94n1 Bolton, Ruth N., 466n13 Bond, Michael Harris, 41n58, 41n61, 523n4 Bonilla-Carríon, Roger Enrique, 164n10 Bonnin, A., 302n1 Boone, Jon, 34n22 Boonstra, Jaap J., 41n61 Booth, William, 89n156 Borland, Rosilyne Mae, 164n10 Boroditsky, Lera, 566n128 Bosco, Frank A., 453n99 Bouncken, Ricarda B., 42n67 Bourguignon, François, 98n25 Bowdidge, John S., 250n21 Bowen, Sally, 49n94 Boyd, Tom, 511n63 Boyd,Jens, 318n69 Boyle,Matthew, 232n39 Bradfield, Owen M., 473n38 Bradshaw, Della, 457n124 Bradsher, Keith, 252n25, 261n6, 302n3, 311n45, 341n13, 432n23,

468n24, 575n186, 553n52 Brady, Anne-Marie, 66n39 Brahm, Richard, 173n40 Brain, Cecelia, 20n46

Name INdex 597

Brambley, Will, 96n16 Brandt, Josephine Cecilie,

458n129 Brannen, Mary Yoko, 46n83, 47n84, 49n96, 50n97, 50n98, 52,

52n104, 406n30 Brannigan, Martha, 21n51 Brashear,Thomas G., 475n49 Brasher, Keith, 66n45 Bremmer, Ian, 111n65, 111n67 Brett, Jeanne, 30n5 Brewer, Paul, 32n14 Brews, Peter J., 313n51 Brice, Jessica, 192n13 Bridgewater, Susan, 374n55 Brodie, Mollyann, 203n59 Brooks, Geraldine, 48n85 Brouthers, Keith, 550n28 Brown, Alan S., 12n29 Brown, David E., 31n8 Brown, Drusilla K., 166n18 Brown, Michelle, 31n13, 564 Browning, E. S., 208n1 Browning, Lynnley, 504n33 Bruton, Garry, 557n76 Bryan, Lowell, 446n69 Bryant, Adam, 432n22, 454n101 Bryant, Christa Case, 102n39 Bryla, Pawel, 30n6 Buchholz, S., 7n7 Buckley, Peter J., 209n2, 343n22, 347n42, 550n31 Buhovac, Adriana Rejc, 306n29 Bui, Quoctrung, 187n2 Bull, Christopher, 13n36,

176n56 Burgess, Kate, 406n27 Burke, Donald R., 443n53 Burkett, Laurie, 298n56 Burkitt, Laurie, 468n20 Burton, Fred, 413n56 Burton, Gary D., 419n87 Bush, Jason, 286n20 Bushardt, Christian, 302n1 Bustillo, Miguel, 232n39, 506n41 Buzzell, Robert Dow, 330n107 Byrne, Patrick, 304n21

Calantone, Roger J., 416n69 Calero, Mauricio, 179n63 Caligiuri, Paula, 549n24, 560n88, 560n89, 561n96, 563n101,

571n157, 571n158, 571n163 Callaway, Sue, 5n3 Callen, Tim, 269n22 Cameron, Doug, 418n82, 501n21 Cantwell, John, 346n37

Capar, Nejat, 318n68 Capelli, Peter, 50n99 Caprar, Dan V., 30n6 Cardinal, Laura B., 313n51 Carey, John, 143n32 Carey, Susan, 10n15 Carley, Kathleen, 443n55 Carruthers, R., 304n23 Carter, Ralph G., 201n57 Carter, S., 382n86 Carvajal, Doreen, 565n119 Cary, Loren, 446n71 Casey, Nicholas, 341n13 Cashin, Paul, 224n27 Casselman, Ben, 31n11 Casson, M., 405n13 Castillo, Michelle, 376n66 Castro, Maolis, 258n1 Cavusgil, S., 368n16 Cellich, Claude, 472n34 Cento, Arianne, 336n1 Cerdin, J., 571n157, 571n158 Cervellati, Matteo, 73n89 Cervantes, 398 Chaffin, Joshua, 217n17 Chakrabarti, Rajesh, 406n30 Chakraborty, Saumitra, 576 Chakraborty, Subhajit, 550n31 Chaloupecky,Kurt E., 250n21 Chan, Chi-fai, 555n62 Chan, Christine M., 338n4, 348n46, 355n58, 355n61 Chan, Eunice S., 557n76 Chan, Kelvin, 298n56, 485n100 Chandrashekhar, G., 197n39 Chang, Anita, 199n51 Chansarkar, Bal, 477n67 Chao, Chi-Chur, 197n40 Chao, Loretta, 232n39, 473n36 Chao, Mike Chen-Ho, 477n67 Chari, Anusha, 86n142 Charles, Gemma, 336n1 Charles,Gemma, 474n43 Chase, Richard B., 507n46 Chatterji, Aaron, 16n40 Chavez, Hugo, 258–259, 258n1 Chea, Terrence, 416n68 Chen, Homin, 497n4 Chen, Qimei, 465n7 Chen, Yu-Ping, 553n47, 562n100, 564n106, 571n160 Chen,Tain-Jy, 497n4 Cheng, Andria, 352n52, 438n34 Cheosakul, Adith, 41n61 Chetty, Sylvie, 355n59 Cheung, Mee-Shew, 318n68

598 Name INdex

Child, John, 406n28 Chinta, Ravi, 318n68 Chintakananda, Asda, 338n5 Choi, Yong-Seok, 166n14 Chon, Gina, 49n93 Chooi, Clara, 36n32 Christy, Bryan, 194n26, 194n27 Chu, Kathy, 405n17, 498n10, 498n14 Chua, C., 571n157, 571n158 Cienski,Jan, 343n18 Cimilluca, Dana, 280n1 Clagg, Jeremy, 209n2 Clark, Don P., 168n23 Clark, Don, 43n70 Clark, Kim B., 497n7, 507n49 Clarke, Ronald V., 194n26 Claxton, Gary, 203n59 Cleeland, Nancy, 236n1 Clegg, Jeremy, 343n22, 347n42 Clerwal, Christer, 320n76 Cleveland, Mark, 485n101 Clifford, Stephanie, 2n1, 88n149, 469n29 Coase, Ronald H., 405n13 Cochrane,Lauren, 302n1 Cohen, Roger, 72n82 Cohen, Roger, 120n108 Colchester, Max, 285n10 Cole, C., 566n137 Cole-Laramore, Aimee, 443n53 Collard, Sharon, 96n16 Collier, Joe Guy, 208n1 Collier, Paul, 81n123 Collins, Jim, 302n5, 304n22, 308n38, 334n132, 454n103, 454n104 Collins, Lauren, 412n55 Colvin, Geoffrey, 314n56, 445n68 Comer, Lucette B., 44n77 Confucius, 60n16 Connor, John M., 408n35 Contractor, F., 398n1, 410n49 Cook, Sasikarn Chatvijit, 302n1 Cook, Tim, 495 Coote, Leonard V., 453n99 Copeland, Michael V., 333n123 Cowen, Tyler, 49n89 Cramer, Gail L., 195n30 Crawford, Elizabeth, 484n93 Creswell, Julie, 345n32 Crick, D., 368n20 Crilly, Donal, 318n68 Crispin, Shawn W., 95n11 Cross, Adam R., 413n56 Cross, Rob, 559n86 Cross, Sam Y., 237n2, 237n3, 240n10, 241n12, 273n30 Crossman, Alf, 444n57

Crystal, David, 34n22 Cui, Anna, Shaojie, 416n69 Cui, Carolyn, 258n1 Cumberland, Denise M., 563n104 Cummings, L. L., 558n84 Cutler, Edward, 372, 373 Cuypers, Ilya R. P., 417n76

Dada, M., 347n41 Daekwan, Kim, 2n1 Daft,Richard, 435n28 Dailey, Melissa, 303n15 Dalton, Mathew, 217n16 Dalton, Matthew, 477n70 D’Amato, Iolanda, 405n17 Dan, Lovallo, 314n59 Dan, West, 393n125 Daneshkhu, Scheherazade, 357n68, 486n102 Daniel, Kahneman, 314n59 Daniels, John D., 343n23, 486, 572n168 D’Antona, John, Jr., 238n6 Darbi, William Phanuel Kofi, 306n29 Darling, John R., 483n90 Darrell, Rigby, 503n26 Das, T. K., 419n85 Das, Atasi, 575 Datta, Shoumen Palit Austin, 96n16 Daum, Anika, 13n33 Davies, Sylvie, 475n51 D’Aveni, R., 501n22 Davis, Bob, 20n47 Davis, Donald R.. 166n15 Davis, Julie Hirschfeld, 280n1 Davis, Lance, 193n17 Davis, Nick, 297n54 Dawson, Chester, 208n1, 502n24 de Castilla, Fernán González, 232n39 de Jong, Abe, 283n6 de Jong, Martijn G., 476n63 de la Baume, Maïa, 48n88 de la Merced, Michael J., 287n24, 280n1, 285n10 De Marzo, Peter, 281n2 De Run, Ernest Cyril, 474n43 Desai, Ravi, 576 De Soto, Hernando, 82n124, 102n36 Dean, Jason, 90n158–159 Dedrick, Jason, 494n1 DeGeorge, Richard T., 137n9–11, 138n16 Delios, Andrew, 405n23, 445n109 Dellestrand, Henrik, 550n31 Demain, Beth, 208n1 Demirbag, Mehmet, 14n39 DeMorro, Christopher, 11n19 Denbour, C., 341n12

Name INdex 599

Deng, Ping, 406n27 Deshpandé, Rohit, 453n99 Devinney, Timothy M., 404n12 Dewan, Shaila, 37n37 Dewan, Neha, 462n1 Dewhurst, Martin, 94n4, 101n33, 323n87, 431n18, 446n70,

455n108, 556n68, 573n178 Di Gregorio, Dante, 232n39 Di Santo, Victoria, 549n24 Diallo, Yacouba, 146n40, 146n41 Diamantopoulos, Adamantios, 476n64 Dickerson, Marla, 236n1 Dickinson, Barry J., 410n47 Dickmann, M., 573n173 Diderich, Joelle, 462n1 Díez-de-Castro, Emilio Pablo, 306n29 Dimofte, Claudiu V., 476n56 Dittrich, Koen, 409n46 Dobbs, Richard, 94n1, 102m, 102n35 Dodes, Rachel, 462n1 Doherty, Dermot, 484n94 Doherty, N., 573n173 Dollar, David, 168n27 Dolles, Harald, 2n1 Dolven, Ben, 250n21 Domsch, Michel, 449n82 Donaldson, Thomas, 132n4 Donthu, Naveen, 475n49 Dorfman, Peter W., 31n10, 36n26 Douglas, Jason, 252n25 Doukas, Jon A., 347n40 Dow, Douglas, 168n25 Doz, Yves, 332n115, 332n116, 325n95, 442n48 Drabaugh, Kevin, 280n1 Driebusch, Corrie, 287n28 Drogba, Didier, 514 Drogendijk, Rian, 345n34 Drucker, Peter, 98n21 Duanmu, J., 177n60, 344n26 Dubner, Stephen J., 96n15 DuBois, Frank, 497n7 Dufey, Gunter, 272n27 Dumitrescu, Luigi, 331n109 Dunning, John H., 133n5, 366n11 DuRant, Hassan, 320n78 Dussauge, Pierre, 409n45 Dutta, Madhumita, 377 Duysters, Geert, 409n46 Dvorak, Phred, 408n34 Dyer, Geoff, 406n25

Eaglesham, Jean, 539n26 Easterlin, Richard, 11n20 Eberts, Randall W., 187n3

Eccles, R., 442n47 Eden, Lorraine, 11n17, 201n57 Edmondson, Gail, 208n1 Egan, Mary Lou, 32n14 Eickman, Megan, 302n1 Einhorn, Bruce, 503n30 Eisingerich, Andreas B., 476n55 Eiteman, David K., 533n21 Elhagrasey, Galal, 415f Ellis, Paul D., 345n34 Ellison, Sarah, 474n44 Elmer-DeWitt, Philip, 494n1 Emmerentze, Ellen, 194n21 Enderwick,P eter, 338n6 Endresen, Iver, 475n52 Engardio, Pete, 503n30 Engerman, Stanley, 193n17 Enrich, David, 285n10 Ensinger, Dustin, 94n8 Epstein, Marc J., 306n29 Erasmus, Daniel, 449n83 Erdbrink, Thomas, 194n24 Erdem, Tulin, 475n54 Erikson, T., 333n126, 371n38 Ertug, Gokhun, 417n76 Escarré, Gabriel, 398 Esterl, Mike, 2n1, 280n1 Estevadeordal, Antoni, 166n14 Etienne, Alex, 146n40, 146n41 Ettorre, Barbara, 546n5 Evans, Ben, 184n1 Evans, Peter, 466n10 Ewing, Jack, 144n37, 405n20 Ezema, Benedict, 190n8

Fackler, Martin, 456n112, 456n114, 458n127 Fadeyi, Olatunji, 435n28 Fairbairn, Ursula, 453n99 Fairgrieve, Duncan, 87n145 Fairlamb, David, 236n1 Fang, Liang, 405n16 Farley, John U., 453n99 Fattah, Hassan, 73n91 Faulkner, David, 406n28 Fawcett, Stanley E., 497n6, 498n15 Fawcett, Stanley E., 505n36 Feenstra, Robert C., 12n28 Fenn, Donna, 457n118 Fernandez, Joe, 462n1 Field, Alan M., 226n31 Fijikawa, Megumi, 507n48 Filippov, Sergery, 406n24 Filipppetti, Andrea, 432n21 Fine, Ben, 96n15

600 Name INdex

Fingar, Courtney, 387n111 Fingleton, Eamonn, 72n84 Fink, Ronald, 293n40 Finkel, Michael, 478n80 Fischer, Stanley, 102n36 Fisher, Anne, 130n1 Fisk, Margaret Cronin, 458n128 Fitzgerald, Drew, 462n1 Fitzgerald, Michael, 486n102 Fitzpatrick, Jonathan, 336n1 Fitzpatrick, William M., 443n53 Flamholtz, Eric, 453n99 Fleenor, John W., 563n104 Fletcher, Owen, 90n158–159 Flint, Robert, 275n35 Flood, Chris, 471n31 Florescu, Elizabeth, 120n106, 122n120 Florida, Richard, 71n76, 432n21 Flowers, Edward B., 347n43 Flyer, Fredrick, 347n44 Flynn, J. Laurie, 374n58, 377n70 Fogel, Robert, 20 Folpe, Jane M., 302n12 Fontaine, Craig W., 433n24 Ford, Martin, 320n78 Forelle, Charles, 283n7 Forero, Juan, 258n1 Forsans, Nicolas, 209n2 Fortunato, Piergiuseppe, 73n89 Fosfuri, Andrea, 405n18 Foss, Nicolai J., 445n64 Foster, Robert J., 30n3 Francis, Theo, 274n32 Frangos, Alex, 223n26, 275n34 Frayter, Karina, 554n60 Freeman, Elizabeth B., 314n52 Freeman, R. Edward, 132n4 Freeman, Susan, 355n59 French, Patrick, 65n35 Frey, Carl Benedikt, 12n32, 127n139 Fridman, Mikhail, 416n70 Friedman, Thomas, 83n129, 94n1, 332n110, 500n19, 505n37 Froud, G., 494n1 Frynas, Jedrzej George, 348n46 Fu, Ping Ping, 41n61 Fujikawi, Megumi, 275n35 Fukuyama, Francis, 37n41, 68n58 Fuller, Thomas, 36n31 Furnham, Adrian, 49n91

Gadiesh, Orit, 468n23 Galbraith, John Kenneth, 420n91, 421 Galvão, Jorge Manuel Mendes, 37n41 Gama, Ana Paula Matias, 37n41

Ganges B., 494n1 Garcia, Dominie, 50n97 García, M. A., 398n1 Garcia, Roberto P., 49n95 Garrette, Bernard, 409n45 Gates, Bill, 557 Gaul, Christine, 413n57 Gauthier-Villars, David, 38n46 Gavlen, Morten, 475n52 Gebeloff, Robert, 37n37 Gehring, Fred, 462n1 Gelfand, Michele, 32n16 Gelles, David, 280n1 Gemunden, Hans, 370n31 Geneen, Harold, 445 Gentry, J., 561n95 Gesteland, Richard, 30n7 Ghemawat, Pankaj, 132n2, 209n4, 211n6, 303n15, 323n90,

323n90, 333n127 Ghoshal, Sumantra, 141n26, 440n37, 445n109, 450n85,

453n98 Ghosn, Carlos, 51 Gibbons, Ryan, 518–519 Gibbs, Toby, 329n105, 444n58, 451n90 Gibson, Christina, 30n5 Giddy, Ian H., 272n27 Gilbertson, Brian, 151 Gill, Tyler, 179n63 Gillespie, Kate, 382n85, 477n65, 477n66 Gilley, M., 563n103 Glader, Paul, 338n2 Gladstone, Rick, 478n75 Glenn, Jerome, 120n106, 122n120 Glovinsky, Paige L., 302n1 Gobry, Pascal-Emmanuel, 380n80 Godart, Benoit, 90n163 Goerzen, Anthony, 420n88 Gold, Riva, 287n28, 288n29 Goldberg, David, 565n117 Goldsmith, Charles, 474n40 Goldsmith, Edward, 120n106 Goldstein, Andrea E., 173n41 Golovko, Elena, 369n26 Gomes, G., 561n93 Gomes, Leonard, 159n4 Gong, Yaping, 30n5 Gonzalez, Carmen G., 197n39 Gonzalez, David, 340n7 Gonzalez, Jorge A., 550n31 Goodwin, Leonie, 473n38 Gopalakrishnan, Shanthi, 421n93 Gopinath, C., 472n33 Gopolan, Nisha, 298n56 Gore, Bill, 428–429

Name INdex 601

Gordon H., Hanson, 94n1 Gordon, Theodore, 120n106, 122n120 Gough, Neil, 507n48 Gould, C., 568n142 Gould, Stephen, 477n67 Gowen, Annie, 191n10 Graham, Matthew, 2n1 Grant, Adam, 40n53 Grant, Jeremy, 199n50 Grant, Robert M., 314n52 Gratchev, Mikhail V., 346n36 Gray, H. Peter, 168n23 Gray, Sidney J., 523f, 523n5 Greaney, Theresa M., 173n42 Green, S., 546n1, 548n23, 550n30, 551n33, 558n78, 558n80 Greenberg, D., 443n54 Greenberg, Paul, 184n1 Greene, Jay, 43n73 Greenfield, Daniel, 478n79 Greenley, Gordon E., 313n51 Greenway, D., 368n17 Gregersen, H. B., 550n31 Grégoire, Denis A., 345n34 Gregory, Alan, 406n27 Grein, Andreas, 477n67 Grescoe, Taras, 184n1 Griffith, David A., 416n69 Griffiths, John, 403n5 Griffiths, John, 457n122 Grillo, Ioan, 236n1 Gross, Jenny, 227n32 Grote, Karl-Heinrich, 446n72 Grow, Brian, 509n58 Guerrera, Francesco, 406n25 Guillén, Mauro F., 318n68 Guiso, Luigi, 38n43 Gulde, Ann-Marie, 265n15 Gullstrand, J., 368n17 Gulsoy, Tanses, 477n67 Gulyani, Sumila, 101n32 Guncavdi, Oner, 166n15 Guney, Y., 177n60 Gunter, Bernhard G., 12n24 Gupta, Vipin, 31n10, 36n26 Gupta-Mukherjee, Swasti, 406n30 Guthrie, Amy, 474n42

Habib, M., 133n6, 140n25 Hacki, Remo, 333n128 Haerpfer, Christian, 68n57 Hajro, Aida, 30n5 Håkanson, Lars, 168n25 Hakim, Danny, 144n35, 144n36, 144n37, 478n78 Hall, Edward T., 43n76

Hall, Peter, 357n65 Halper, Stefan, 111n67 Hamel, Gary, 392n124 Hamel, Liz, 203n59 Hammond, Allen L., 485n98 Hammond, Ed, 466n14, 474n39 Han, Joseph P. F., 282n4, 283n5 Hancock, Julie I., 453n99 Hanges, Paul J., 31n10, 36n26 Hanrath, Alexander, 232n39 Hansen, Gary S., 453n99 Hansen, James M., 195n30 Hansen, Suzy, 303n15 Hanson, Gordon H., 12n28, 164n11 Hanson, Terry, 184n1 Harding, James, 20n47 Harford, Jarrad, 281n2 Harney, Alexandra, 329n106, 406n25 Harrigan, James, 166n17 Harris, Gardiner, 7n8, 85n136 Harris, Jonathan, 94n4, 101n33, 323n87, 431n18, 446n70,

455n108, 556n68, 573n178 Harris, Suzy, 565n113 Harrison, Brett, 576 Harrison, D., 563n103 Hart, Michael, 188n4 Hart, S. L., 102n38 Hartley, Jon, 280n1 Hartmann, L., 552n41 Harvey, David, 184n1 Harzing, Anne-Wil, 31n13, 405n22 Hassan, F., 546n1, 548n23, 550n30, 551n33, 558n78, 558n80 Hatz, Wolfgang, 145 Hausmann, R., 167n22 Hawkins, Beth, 458n128 Hayashi, Yuka, 275n35 Hayes, Robert H., 497n7, 507n49 Haynes, Michelle, 355n62 Head, Keith, 176n53, 347n43 Hebron, Lui, 323n91 Heckscher, Eli J., 166n13 Helleiner, Gerald K., 190n9 Heller, Richard, 302n1 Helliker, Kevin, 478n81 Helliwell, John, 120n112 Helliwell, R. Layard, 120n112 Hemerling, James, 332n113, 332n114, 435n27 Hemli,Sven, 552n40 Heneman, R., 443n54 Hennart, Jean-François, 401n3, 404n12 Herd, Ann, 563n104 Hernandez, Exequiel, 348n45, 417n80 Herring, Andrew Avery, 164n10 Hertz, Noreena, 121n114

602 Name INdex

Hess, Kathleen, 562n100 Hewlin, Patricia Faison, 29n2 Heywood, Suzanne, 94n4, 101n33, 323n87, 329n105, 431n18,

444n5, 446n70, 451n90, 455n108, 556n68, 573n178 Higashide, Hiro, 41n61 Hill, C. W., 405n18 Hill, Kenneth Hailey, 164n10 Hindo, Brian, 509n58 Hinshaw, Drew, 468n22 Hippler, Thomas, 560n88 Ho, P. Sai-wing, 189n5 Ho, Prudence, 298n56 Hoag, Christina, 43n74 Hodgetts, Richard, 440n38 Hodgson, Geoffrey M., 17n42 Hofacker, D., 7n7 Hoffman, Liz, 203n59, 280n1 Hofstede, Geert, 31n10, 32n15, 39n48, 40n52, 40n54, 41n55,

435n28, 523n4 Hofstede, Gert Jan, 435n28, 523n4 Hogan, Suellen J., 453n99 Holbert, Neil, 555n62 Holden, Nigel, 32n19 Holmes, Kim, 106m Holodny, Elena, 126n132 Holt, Douglas B., 331n109 Holt, Philip J., 444n57 Hommes, Martin, 338n3 Hong, Y.Y., 49n96 Hookway, James, 476n58 Hoole, Richard W., 498n13 Hopey, Don, 478n72 Hopkins, Jim, 333n123 Hopkins, Mark, 574 Horyn, Cathy, 462n1 House, Karen Elliott, 26n1 House, Robert J., 31n10, 36n26 Howe, Robert F., 408n38 Howell, Jon P., 41n61 Howells, Geraint, 87n145 Hrebiniak, Lawrence G., 458n129 Hristozova, Elena, 449n82 Hsieh, Linda H.Y., 419n83 Hsieh, Tsun-yan, 453n99, 555n63, 559n85, 562n99 Hu, Jintao, 72 Hu, Yiyang, 189n6 Huang, Jason L., 563n104 Hubbard, Ben, 26n1 Hulland, John S., 404n10 Hult, G. Tomas, 408n37 Hunt, John W., 439n36 Hunt, Michelle R., 313n51 Huntington, Samuel P., 68n52, 73n92 Hutchings, Kate, 355n59

Hutzschenreuter, Thomas, 338n3 Hwang, L. P., 405n18 Hyun, Y., 561n95

Ibison, David, 416n71 Iksil, Bruno, 250 Im, Subin, 313n51 Imaka, Isaac, 265n16 Immelt, J., 551n33, 546n1, 548n23, 550n30, 558n78, 558n80 Immelt, Jeffrey, 130, 454 Inglehart, Ronald, 31n10, 34n24, 36n35, 37n40, 41n56, 68n57 Inman, Daniel, 275n35 Inman, M., 566n129 Insch, Gary, 572n168 Iosebashvili, Ira, 252n25 Irwin, Douglas A., 198n47 Isaacson, Walter, 323n88 Isobe, Takehiko, 338n4, 348n46, 355n58, 355n61 Ito, Kiyohiko, 171n30 Ivanov, Dmitry, 444n62

Jack, Andrew, 478n74, 478n76, 479n85 Jacob, Rahul, 407n32 Jacobs, F. Robert, 507n46 Jacques, Martin, 72n84 Jain, Subhash C., 330n107 Jain, Sudeep, 273n31 James, Harold, 20n47 Jamison, Brad, 305n28 Jan-Benedict, E., 476n63 Janofsky, Adam, 468n19 Jargon, Julie, 280n1, 336n1 Jarvis, Steve, 26n1 Jasimuddin, Sajjad M., 405n19 Jaumotte, Florence, 98n25 Javidan, Mansour, 31n10, 36n26 Javier, Blas, 393n125 Jaworski, Renata A., 561n96, 563n101, 572n170 Jayaraman, Narayanan, 406n30 Jen, Lichung, 154, 154n1 Jenkins, Wyn, 308n39 Jensen, B., 369n24 Jensen, Bradford, 378n75–77 Jensen, Karina R., 465n6 Jensen, Michael C., 132n4 Jesino, Jorge Correia, 41n60 Jiang, Yuwei, 318n68 Jimenez, Alfredo, 30n6 Jiménez, Fernando R., 473n35 Jin, Zhongqi, 477n67 Jing, Fenwick Feng, 306n29 Jingjing, Jiang, 374n54 Jobs, Steve, 494–495 Joerres, Jeffrey, 554n55

Name INdex 603

Johal, S., 494n1 Johanson, Jan, 370n32 Johansson, Johny K., 476n56 Johnson, Avery, 479n84 Johnson, Eric M., 405n14 Johnson, Jean L., 465n7 Johnson, Johanna, 560n88, 560n89 Johnson, Keith, 191n11 Johnsson, Julie, 421n95 Johnston, David Cay, 291n38 Johnston, Russell, 501n23 Jolly-Desodt, A. M., 302n1 Jones, Harold B., Jr., 38n42 Jones, John F., 486n102 Jones, Sandra, 547n12 Jones, Sophia, 333n121 Jones-Evans, D., 382n86 Jordan, Miriam, 220n20, 236n1, 476n61 Joseph, M., 565n115, 574n184 Joshi, Sanjay, 545 Jouanjean, Marie-Agnés, 199n52 Joyce, Claudia, 446n69 Joyner, Nelson T., 387n111 Judge, William, 550n26 Jun, S., 561n95 Jung, Moosup, 12n27 Junglas, Iris, 506n40

Kabir, Rezaul, 283n6 Kaczmarek, S., 558n84 Kaeschel, Joachim, 444n62 Kafouros, Mario I., 343n22 Kafouros, Mario I., 347n42 Kahle, Lynn R., 469n26 Kahn, Alfred, 421n95 Kahn, Gabriel, 508n55 Kahn, J., 557n69, 557n70 Kahn, Jeremy, 2n1 Kahn, Zaheer, 405n21 Kahneman, Daniel, 314n57, 315n61 Kaimal, Anu, 484n91 Kale, Prashant, 419n85, 420n89 Kaletsky, Anatole, 109n57 Kalleberg, Arne, 12n23 Kan, Ozgur B., 347n40 Kanbur, Ravi, 98n25 Kandemir, Destan, 408n37 Kannan-Narasimhan, Rangapriya, 453n99 Kano, Liena, 20n46 Kanter, James, 36n29 Kanter, Rosabeth Moss, 357n68 Kapferer, Jean-Noël, 476n62 Karatnycky, Adrian, 67n49 Karmin, Craig, 12n26

Karnitschnig, Matthew, 48n86 Karpinski, Richard, 505n38, 506n42 Kashyap, Vishal, 475n49 Katsaros, Steve, 511–513, 511n63 Katsikeas, Constantine S., 366n10, 465n4, 467n17 Kaufman, Leslie, 374n59, 378n73 Kaufmann, D., 82m Kaufmann, Daniel, 60n17 Kaynak, Erdener, 404n10 Kazaz, B., 347n41 Kedia, Ben L., 405n21, 550n28, 558n79 Kekic, Laza, 69n63 Kemp, Murray, 163n9 Kendall, Jerry, 80n113 Kennedy, Jeff, 41n61 Kennedy, Robert, 478n73 Kern, Mary C., 30n5 Kerr, John, 382n86, 384n95 Kerrick, Sharon A., 563n104 Kesselheim, Aaron S., 203n59 Kessler, Eric H., 421n93 Khan, Matthew, 375n64 Khanna, Paraq, 19n44 Khanna, Tarun, 420n88 Khatri, N., 550n32 Khavul, Susanna, 481n86 Khurana, Anil, 342n14 Kienstra, Jeffrey D., 196n33 Kiger, Patrick, 445n65 Kilman, Scott, 408n34 Kim, Anthony, 105f Kim, Daekwan, 465n7 Kim, Heeyon, 348n45 Kim, Jiyeon, 302n1 Kim, Minjeong, 302n1 Kim, Quenna Sook, 508n55 Kim, W. C., 390n118, 405n18 King, Colbert I., 26n1 King, Stephen, 96n17 Kirkpatrick, Colin, 343n20 Klaff, Leslie, 457n119, 552n38, 572n166 Klein, Andrew, 453n99 Klein, Jill Gabrielle, 404n8 Kleiner, M. 558n83, 453n99 Kleiner, Markus, 558n81 Kline, John M., 138n15 Knecht, G. Bruce, 342n16 Kneller, R., 368n17 Knepper, Paul, 362–363 Knickerbocker, Frederick, 347n43 Knight, Gary A., 405n13 Knight, Rebecca, 456n115 Kofele-Kale, Ndiva, 411n52 Kogut, B., 405n13

604 Name INdex

Kohlberg, Lawrence, 136n8 Kolk, Ans, 146n39 Kollinger, I., 552n41 Komisar, Lucy, 296n52 Komor, Marcin, 473n35 Koopman, Paul, 41n61 Korine, Harry, 331n109 Korn, Melissa, 456n116 Koseki, Mari, 208n1 Kossek, Ellen Ernst, 563n104 Köster, Katherin, 31n13 Kostov, Nick, 357n68 Kostova, Tatiana, 445n109 Kotabe, Masaaki, 499n18 Kotulla, Thomas, 464n2, 468n25 Kouremetis, Dena, 200n54 Kraay, A., 60n17, 82m, 82n126 Kraemer, Kenneth L., 494n1 Kraimer, Maria, 553n47, 561n96, 562n100, 563n101, 564n106,

571n160, 572n170 Krainer, John, 345n28 Krajewski, Lee J., 507n45, 508n52, 508n53 508n54 Kramer, Andrew, 176n54, 333n118, 333n119, 357n68 Krampf, Robert, 413n58 Krebsbach, Karen, 236n1 Krey, Nina, 302n1 Kripalani, Manjeet, 43n73 Krishna, Pravin, 166n14 Krissoff, Barry, 184n1 Kristal, Tali, 13n34 Kristen, Hopewell, 94n1 Kronholtz, June, 176n57 Krotov, Vlad, 506n40 Krueger, Anne O., 94n1 Krueger, Bryan, 547 Krugman, Paul, 71n68, 163n7, 166n16, 166n17, 173n38 Kshirsagar, Alka, 179n63 Ku, Nancy, 367n14 Kubota, Yoko, 275n35 Kuchler, Fred, 184n1 Kucukcifi, Suat, 166n15 Kumar Sanjiv, 419n85 Kumar, Vinod, 288n33 Kumarev, Anatola, 258n1 Kundu, S., 398n1 Kupe, Simon, 2n1 Kupp, Martin, 473n37 Kurmanaev, Analtoly, 258n1 Kwoh, Leslie, 548n22, 552n42

Labelle, Huguette, 141n27 Labes, Sebastian-Andrei, 408n41 Lacassagne, Marie-François, 41n61 Lahart, Justin, 392n123 Lahiri, Nandini, 346n37

Lall, Subir, 98n25 Lam, Willy, 59n9, 66n44 Lamar, Mia, 252n25 Lamont, James, 149n46 Landes, David S., 38n44 Lane, Peter J., 404n11 Langston, Jason, 518–519, 518n1 Lapoule, Paul, 477n67 Laroche, Michel, 485n101 Larsen, Ralph, 458 Larson, Mark, 547n10 Larson, S., 564n107, 564n108 Lashinsky, Adam, 445n68 Laszlo, Tihani, 404n12 Latar, Noam Lemelshtrich, 320n76 Latta, G., 568n143 Laufer, Daniel, 477n65, 477n66 Lauricella, Tom, 252n25 Lauring, J., 564n112 Lavoie, Johanne, 453n99, 559n85, 555n63,

562n99 Law, Fiona, 286n17 Lawler, John J., 37n39 Lawrence A., Beer, 44n78 Lawrence, Paul R., 501n23 Lawson, Robert, 106n47 Layard, Richard, 120n112 Lazarova, M., 571n163 Lazzarini, Sergio G., 408n36 Leamer, Edward E., 347n44 Leaver, A., 494n1 Lee, Fiona, 49n96 Lee, Keun, 12n27 Lee, Kyu, 120n112 Lee, Kyu-Hye, 302n1 Lee, Ruby P., 465n7 Lee, Seung-Hyun, 408n40 Lee, Yvonne, 298n56 Lee,Hyun-Jung, 41n65 Lee-Kelley, Liz, 444n57 Leeson, Nicholas, 250, 250n20, 250n21 Lemieux, Andrew M., 194n26 Lenartowicz, Tomasz, 31n9, 482n89, 481n88 Lenway, Stefanie, 11n17 Leon, Amos Vivancos, 198n45 Lenin, Vladimir, 110 León-Darder, F., 398n1 Leonel, J., 561n93 Leong, Richard, 285n12 Leonidou, L., 381n81 Leung, Peter, 311n45 Levine, Jonathan B., 510n61 Levitt, Larry, 203n59 Levitt, Steven D., 96n15 Levitt, Theodore, 323n86, 330n107

Name INdex 605

Levitz, Jennifer, 456n116 Lew, Yong Kyu, 405n21 Lewis, Diane E., 564n111 Lewis, Geoff, 86n137 Li, Lee, 387n109 Li, Zhichuan Frank, 458n129 Liang, Hong, 224n27 Lien, Mego, 478n77 Liesch, Peter W., 405n13 Lighton, Julian, 333n128 Ligos, Melinda, 547n9, 548n16, 566n138 Limon, Yonca, 469n26 Lincoln, Abraham, 64 Linden, Greg, 494n1 Linder, Stefan B., 167n20 Lindsay, Vai, 367n14 Lings, Ian N., 313n51 Lipnack, J., 443n53 Lipton, Eric, 196n32, 296n51 Littrell, Lisa, 562n100 Liu, Li, 405n19 Liviu-George, Ion Ignat, 173n33 Lloréns-Montes, Francisco Javier, 306n29 Lo, J. L. W., 302n1 Lockwood, Lisa, 462n1 Lodge, James E., 444n57 Lohr, Steve, 12n22 Looney, Dennis, 565n117 Lopez, Gabriela, 232n39 Lopez, Marcos, 304 Lotz, Sherry, 413n58 Lovallo, Dan, 314n57, 315n61 Lowe, Janet C., 318n70 Lowrey, Annie, 217n16 Lubin, Joann S., 217n16 Lucas, Louise, 468n21 Luce, Edward, 147n42 Luckey, John R., 199n49 Luhnow, David, 232n39 Luk, D., 563n103 Luo, Yadong, 34n21, 411n53 Lusin, Natalia, 565n117 Lyles, Marjorie A., 404n11 Lynch, Richard, 477n67

Maalouf, Amin, 46n82 Mabert, Vincent, 405n15 MacDonald, Philip, 387n110 Mackintosh, James, 51n102 MacLucas, Neil, 268n19 Maddison, Angus, 94n1 Madhok, Anoop, 450n84 Madsen, T. Koed, 333n125, 371n37 Maduro, Nicolás, 258–259 Magee, Stephen, 405n18

Magnusson, Peter, 30n6 Maheshwar, Atul, 375 Maitland, Alison, 455n107 Makino, Shige, 338n4, 346n38, 348n46, 355n58, 355n61 Maleske, Melissa, 410n50 Malhotra, Naresh, 466n13 Maling, Nick, 208n1 Manbeian, Ali, 518n1 Manceau, Delphine, 474n41 Mangaliso, Mzamo P., 49n92 Manjoo, Farhad, 216n12 Mann, James, 72n84 Mann, Joseph A., Jr., 398n1 Mann, Kurt, 514 Manolis, Chris, 470n30 Manyika, James, 94n1, 102m, 102n35 Manz, C. C., 450n86 Manz, K. P., 450n86 Marcella, Rita, 475n51 Marcus, Alfred, 137n12 Marer, Paul, 405n15 Mariam, Mertule, 174n43 Markille, Paul, 12n31 Markillie, Paul, 178n61 Markoff, John, 127n137, 320n75, 320n79 Markowitz, Harry, 20 Marks, M., 546n1, 548n23, 550n30, 551n33, 558n78, 558n80 Marsh, Peter, 403n6, 321n83 Martens, Pim, 7n7 Martin, Andrew, 78n107 Martin, Ben, 552n40 Martin, Justin, 392n122 Martin, Peter, 406n28 Martin, Philippe, 347n44 Marx, Karl, 110 Masefield, John, 21 Maseland, Robbert, 17n42 Masidover, Nadya, 357n68 Maslow, Abraham, 39n49 Masson, Paul, 265n14 Massot, M. M., 398n1 Mastruzzi, Massimo, 60n17, 82n126, 82m Mata, Jose, 355n62 Mathewson, G., 501n22 Matt, Susan J., 573n172 Matthews, Christopher M., 142n30 Mauborgne, Renee, 390n118 Mauri Alfredo J., 342n17 Max, Sarah, 43n75 Mayer, Thierry, 347n43 Mayerhofer, H., 552n41 Maylie,Devon, 468n22 Maznevski, Martha L., 560n88 McCallum, Kevin, 477n71 McCartney, Scott, 506n39

606 Name INdex

McClusky, Robert, 509n59 McCrae, Robert R., 32n15 McDaniel, Karen R., 453n99 McDermott, C. John, 224n27 McDonald, John, 430n16 McDougall, Patricia

Phillips, 8n10 McFadden, David, 21n51 McGahan, Anita M., 318n69 McGeever, Jamie, 275n35 McGrath, Michael E., 498n13 McGraw, Dan, 8n9 McGregor, Richard, 58n2, 81n120 McGroarty, Patrick, 268n20 McGuire, Patrick, 284n9 McGuire, Steven M., 173n41 McKay, Betsy, 466n11 McKinnon, John D., 280n1 McMahon, Dinny, 252n25 McMillan, John, 502n25 McMillan, Robert, 251n24 McNish, Jacquie, 203n59 McNulty, Lucy, 250n22 Mehran, Farhad, 146n40 Mehran, Farhad, 146n41 Mehrjoo, Marzieh, 302n1 Meiland, D., 545, 546n1, 548n23, 550n30, 551n33, 558n78,

558n80 Meister, Jeanne C., 457n120 Mellah, Kamel, 348n46 Mellahi,Kamel, 14n39 Mellander, Charlotta, 432n21 Mendenhall, Mark E., 560n88 Mengqiao, Liu, 563n104 Meran, J., 368n16 Merton, Robert C., 345n28 Mesquita, Luiz F., 408n36 Metters, Richard, 40n51 Meyers, William H., 416n72 Michael, David, 298n56 Michaels, Daniel, 168n24, 414n65 Michailova, Snejina, 32n19 Michelitsch-Riedl, G., 552n41 Miguel, Basañez, 46n81 Miles, Edward W., 471n32 Miles, Marc A., 104n42 Miller, C. Chet, 313n51 Miller, Claire Cain, 552n40 Miller, John W., 192n12, 197n34 Miller, Stewart R., 346n35 Miller, Terry, 105f, 106m Millman, Joel, 340n7, 348n47 Mills, T., 573n173 Milner, Mark, 208n1 Milonakis, Dimitris, 96n15

Minder, Ralph, 199n50 Minkov, Michael, 435n28, 523n4 Mintzberg, Henry, 314n52 Mireles, Ricardo Castillo, 232n39 Mischel, Walter, 41n59 Mishan, E., 122n118, 122n119 Mitchell, Matthew Coy, 34n25 Mitchell, Ronald K., 132n4 Mitchell, Will, 409n45 Moaligou, Ronan, 473n37 Moen, O., 333n126, 371n38 Moens, Alexander, 198n45 Moffett, Matt, 465n8 Moffett, Michael H., 533n21 Moffett, Sebastian, 275n35 Mogollon, Francisco Suarez, 232n39 Mohamed, Amal, 407n31 Mohn, Tanya, 567n139 Moini, A., 368n16 Møller, Ørstrøm, 20n50 Monahan, Andrew, 275n35 Monczka, Robert M., 501n20 Monczka, Robert M., 504n35 Mondavi, Robert, 408 Monteiro, P., 561n93 Montgomerie, Tim, 227n32 Moon, Jon Jungbien, 486 Moore, Stephen, 193n15 Morais, Richard C., 232n39 Moran, P., 141n26 Moran, Theodore H., 176n59 Moreno, Alejandro, 31n10, 34n24, 36n35, 37n40, 41n56 Morgan, Mark, 549n24 Morris, Ian, 81n118, 94n1 Morrison, A. J., 550n31 Morschett, Dirk, 435n28 Mosakowski, Elaine, 346n35 Moskowitz,H., 347n41 Moss, Chris, 563n103 Moss, David A., 273n29 Motsi, Terence, 477n67 Mozur, Paul, 503n29 Muethal, Miriam, 41n58 Mughan, Terence, 32n19, 43n72, 52, 52n104 Mukherjee, Debmalya, 405n21 Mukherji, A., 558n79 Mukherji, Biman, 252n25 Mullens, Drake, 481n86 Muller, Matthias, 145 Mulligan, Mark, 2n1 Munoz, Sara Schaefer, 258n1 Murjani, Johan, 462 Murphy, John, 275n35 Murphy, Marina, 190n9 Murray, Alan, 130n1

Name INdex 607

Murray, Sarah, 486n102 Murukutla, Nandita, 478n77 Musante, Michael D., 475n49 Mutsaka, Farai, 268n20 Myers, A., 566n129 Myrdal, Gunnar, 189n5

Nachum, Lilach, 346n37 Nackman, Mark J., 200n55 Naím, Moisés, 352n54 Nair, Smitha R., 14n39 Nakamichi, Takashi, 275n35 Nakamoto, Michiyo, 357n68, 485n97 Napier, Nancy, 550n29 Nash, John, 20 Naughton, Julie, 462n1 Nayak, Debiprasasd, 273n31 Neely, Christopher J., 272n27 Neely, Tsedal, 566n126 Negishi, Mayumi, 275n35 Nelson, Brian A., 258n1 Nelson, Dean, 486n102 Nelson,Mark M., 208n1 Neuman, William, 258n1 Neumann, Tilo, 453n99, 558n81, 558n83 Neuwirth, Rostram J., 195n28 Newman, Barry, 548n14 Nguyen, Thuy Thu, 283n6 Ni,Na, 318n68 Nicholas, James Bailey, 343n19 Nieburg, Oliver, 484n92 Nielsen, B. B., 558n81, 558n82, 558n84 Nielsen, S., 558n81, 558n82, 558n84 Nisbett, Richard E., 42n68 Nishii, Lisa Hisae, 32n16 Nixon, Richard, 261 Nixon, Ron, 198n47 Nobles, B., 450n86 Nohria, N., 442n47 Nohria, Nitin, 445n109 Noorderhaven, Niels G., 417n76 Nordtvedt, Richard, 550n28 Norman, Laurence, 227n32 Norton, Mira, 203n59 Nueno, Jose Luis, 303n15 Nwankwo, Sonny, 173n34, 173n36 Nykodym, Nick, 443n53

Obal, Michael W., 302n1 O’Boyle, Thomas F., 208n1 Obal, Michael W., 302n1 Obstfeld, David, 307n33 Occleston, Jessica, 478n77 Oddou, Gary R., 560n88 O’Gorman, C., 382n86

Olaseni, Mobolaji, 481n87 O’Leary, Christopher J., 187n3 Oliff, Michael D., 497n7 Oliver, Ralph, 345n33 Omura, Glen S., 499n18 O’Murchu Cynthia, 343n18 O’Neill, Colin, 197n36 Ong, Aihwa, 51n100 Ono, Yumiko, 275n35, 408n39 Oppenheimer, Andres, 223n22 Ordish Rebecca, 336n1 O’Reilly, C. A., III, 558n84 Orlick, Tom, 252n25 Orth, Ulrich R., 469n26 Osborn, Andrew, 61n22 Osborne, Michael A., 12n32, 127n139 Osland, Joyce S., 5n2, 560n88 Oster, Shai, 252n25 Ottaviano, Gianmarco I. P., 167n19, 347n44 Ou, Jia-Ruey, 408n42 Ovans, Andrea, 305n27 Oviatt, Benjamin M., 8n10 Øystein, Moen, 475n52

Pack, Howard, 173n38 Packenham, Robert A., 411n52 Pacter, Paul, 525n10 Page, Larry, 445 Paine, Thomas, 81n121 Pajunen, Kalle, 405n16 Pakko, Michael, 270n24 Paley, Michael, 562n100 Palley, Thomas I., 163n8 Palmer, T., 572n167, 572n168 Pande, Shamni, 505n38 Panella, C., 566n129 Panggabean, Hana, 550n31 Papadimitriou, Thanos, 405n17 Papadopoulos, Nicolas, 485n101 Papageorgiou, Chris, 98n25 Park, H., 139n21 Park, Hoon, 343n21, 549n25 Park, Seah, 477n69 Park, Seung Ho, 417n77 Park,Ji Eun, 477n67 Parker, Caroline, 473n38 Parkhe, Arvind, 346n35, 419n85, 421n95 Parmar, Neil, 51n101 Pasa, Selda, 41n61 Pasek, Zbigniew J., 302n1 Passariello, Christina, 486n102 Passariello, Cristina, 416n72 Patillo, Catherine, 265n14 Pattie, Joan, 567 Pattle, John, 547

608 Name INdex

Paul M. Vaaler, 175n52 Pearce, John A., 314n52 Pearl, Daniel, 45n80 Pearson, Samantha, 345n33 Peçanha, Sergio, 175n48 Pedersen, Torben, 404n12 Peel, Michael, 342n15 Peel, Quentin, 51n103 Peltokorpi, Vesa, 34n21 Peng, George Z., 343n20 Peng, Mike W., 417n81 Peng, Tai-Kuang, 41n61 Pepper, Suzanne, 70n65 Perez, Liliana M., 550n28 Pérez-Nordtvedt, Liliana, 405n21 Perl, Rebecca, 478n77 Perlmutter, Howard, 419n85 Perry, Joellen, 10n16, 11n21 Perry, Martin, 381n81 Persad, Govind, 203n59 Peterson, Mark F., 406n30 Peterson, Mark, 481n86 Petro, Greg, 541n28 Pfanner, Eric, 294n42, 297n55 Phatak,Arvind V., 342n17 Philip G., Gayle, 336n1 Pichler, F., 39n50 Picker, Leslie, 280n1 Picker, Leslie, 280n1 Pico, Alejandro, 44n77 Pierce, Charles A., 453n99 Pieterse, Jan Nederveen, 323n91 Pieth, Mark, 141n27 Pigman, Geoffrey Allen, 348n46 Pilat, Dirk, 167n21 Pillania,Rajesh K., 435n28 Piramal, Gita, 141n26, 453n98 Piszczek, Matthew M., 563n104 Pitethly, Robert, 406n28 Pittelko, Brian M., 187n3 Pla-Barber, J., 398n1 Pleven, Liam, 193n16 Plumridge, Hester, 21n51 Plushnick-Masti, Ramit, 416n73 Politi, James, 217n17 Polizzotto, Beth, 511n63 Pollack, Andrew, 203n59 Polland, Patricia, 270n24 Pollitz, Karen, 203n59 Pollock, Andrew C., 272n28 Popper, Nathaniel, 251n24 Porras, Jerry I., 302n5 Porter, Eduardo, 132n3, 170n29, 308n36, 315n61, 318n69 Portugal, Pedro, 355n62 Postolachi, Andre Teofil, 173n33

Potsch, Hans-Dieter, 145 Potts, David, 52 Power, Stephen, 208n1, 537n23 Prada, Miuccia, 298–300 Prahalad, C. K., 102n38, 325n95, 332n110, 485n98, 486n102 Prahalad, S. L. Hart, 332n110 Pras, Bernard, 474n41 Prasso, Sheridan, 486n102 Praxmarer, Sandra, 473n35 Prebisch, Raul, 189n5 Preston-Ortiz, Dina, 419n85 Prestowitz, Clyde V., 94n1, 95n13, 332n110 Prieto, Leonel, 41n61 Pucik, Vladimir, 171n30 Puddington, Arch, 69n60–62 Pudelko, Markus, 30n4, 30n5 Puga, Diego, 167n19 Pulfer, Rachel, 130n1 Putin, Vladimir, 61, 72

Quelch, John A., 331n109

Raab, M., 7n7 Rabenasolo, B., 302n1 Radebaugh, Lee H., 523f Ramage, James, 275n35 Ramakrishnan, Mano, 550n31 Ramamurti, Ravi, 135n7, 411n53 Ramirez, Julio A., 336n1 Rampell, Catherine, 494n1, 552n40 Ramsey, J., 561n93 Ramsey, Mike, 345n29, 537n23, 561n93 Randlesome, C., 566n129 Ranf, Diana Elena, 417n74 Ransom, Mary, 394n128 Rao, V. S. Rama, 393n125 Rapoport, Michael, 539n26 Rappaort, Liz, 296n53 Rascouet, Angelina, 258n1 Rasheed, Abdul A., 481n86 Rauwald, Christoph, 208n1 Raval, Dinker, 455n105 Ravenscraft, D., 501n22 Raver, Jana L., 32n16 Reade, Carol, 41n65 Reddy, Sudeep, 217n16 Reed, Stanley, 275n35 Reeg, Caitlan, 466n10 Reilly, Kevin T., 209n2 Reilly, Patrick M., 48n86 Reinstaller, Andreas, 13n36 Reinstaller, Andreas, 176n56 Remes, Jaana, 102m, 102n35 Reney, Marie-Claude, 418n82 Rentrope, Shantyana, 174n47

Name INdex 609

Reuer, Jeffrey J., 338n5, 419n84, 420n88 Rhodes, Mark, 413n56 Rice, Mark, 197n40 Richard, Schmalensee, 318n69 Ricardo, 156n6 Richards, Darlington, 173n34, 173n36 Riedel, Sharon, 562n100 Ries, John, 176n53, 347n43 Rigby, Darrell, 445n67, 496n2 Riley, Bryan, 198n45, 198n47 Rios, L., 458n129, 458n130 Ritala, Paavo, 407n33 Ritzman, Larry P. 507n45, 508n52, 508n53, 508n54 Roath, Anthony S., 497n6, 498n15 Roberson, Roy, 184n1 Roberts, James A., 470n30 Roberts, Jo, 475n53 Roberts, M., 368n19 Robinson, Richard B., 314n52 Robyn, Dorothy, 421n95 Rock, Michael E., 447n77 Rockoff, Jonathan D., 280n1 Rodrigues, Suzana B., 419n83 Rodriguez, Rosa Salter, 236n1 Rodríguez-Clare, Andrés, 173n37 Rodrik, D., 167n22 Rodrik, Dani, 189n7 Rogers, Christina, 498n9, 498n11, 498n12, 498n14 Rogoff, Kenneth, 94n1 Rohwedder, Cecile, 346n39 Ronald, Inglehart, 46n81 Ronen, D., 20n49 Roosevelt, Franklin D., 486, 488 Rosati, Andrew, 258n1 Rose, Rebecca, 466n16 Rosenthal, Elisabeth, 375n62, 376n67 Rosenzweig, Phil, 314n57, 314n60 Roth, Kendall, 31n9, 330n107 Rothaermel, Frank, 306n29 Rothmann, S., 561n96, 563n101 Rothschild, Baron Philippe de, 408 Roxas, Hernan, 367n14 Roxburgh, Charles, 102m, 102n35 Rubanik, Yuri, 419n87 Rubera, Gale, 476n55 Rubin, Richard, 280n1 Rudd, John M., 313n51 Ruderman, Marian, 563n104 Rudolf, John Collins, 511n63 Rugman, Alan M., 20n46, 209n3, 323n90 Rugman, Alan, 333n127 Ruigrok, W., 558n84 Ruiz, David, 370n31 Ruland, M., 7n7 Rumelt, Richard, 308n36, 318n69

Runyan, Rodney C., 302n1 Russell, Alec, 149n46 Rutigliano, Tony, 391n121 Rutkin, Aviva, 320n76 Ryan, Alan, 62n25 Ryans, John K., Jr., 413n58 Ryscavage, Paul, 98n25

Saalfield, Peter, 553n47 Sabar, Ariel, 34n23 Sable, Jonathan, 507n48 Sabri, Ouidade, 474n41 Sachs, Jeffrey, 102n36, 102n37, 120n112, 173n35 Saggi, Kamal, 173n38 Sahay, Arvind, 474n44 Saiad, I. H., 139n21 Salas, Eduardo, 562n100 Salk, Jane, 404n11 Salmen, Lawrence F., 101n32 Salorio, Eugene, 202n58 Saltmarsh, Matthew, 357n68 Salzman, Avi, 458n128 Samek, R. A. P., 453n99, 559n85 Samek, Robert, 555n63, 562n99 Samiee, Saeed, 330n107, 366n9, 467n17, 476n64 Sampson, Hannah, 21n51 Sampson, Rachelle C., 420n90 Samuelson, Paul A., 12n22 Sanchez, Alberto Rubio, 44n77 Sang-Hun, Choe, 32n18 Santos, Jose, 332n115 Sapienza, Paola, 38n43 Sapsford, Jathon, 208n1 Sarala, Riikka, 30n6 Sarala, Rikka M., 417n78 Sarno, Lucio, 272n27 Saud, Ibn (King), 26 Saul, John Ralson, 20n47 Saunders, Carol, 44n78 Saxena, Sanchita B., 192n14 Saywell, Trish, 508n55 Schaer, Fabian, 102n35 Schechner, Samm, 48n88 Schindler, Robert M., 476n60 Schmid, Stefan, 464n2, 468n25 Schmidt, C., 556n66 Schmidt, Lisa, 190n9 Schmitz, Hubert, 172n32 Schneider, Susan, 560n91 Schaer, Fabian, 102m Schiro, Tom, 548 Schoeff, Mark, Jr., 546n3, 546n4, 548n19 Schoenberger, Karl, 375n63 Schoenfeld, Amy, 499n16 Schofield, Adrian, 418n82

610 Name INdex

Scholes, Myron S., 345n28 Scholte, Jan Aart, 331n108 Scholte, Jan Aart, 331n109 Schonberger, B., 7n7 Schoofs, Mark, 149n46 Schott, Peter, 378n75–77 Schramm-Klein, Hanna, 435n28 Schuiling, Isabelle, 476n62 Schultz, Don E., 341n8 Schulze, Günther G., 6n5 Schumann, Jan H., 473n35 Schwartz, Nelson D., 187n2 Schwartz, S., 31n10 Schwartz,H., 453n99 Schweer, Margaret, 559n86 Schweikart, James A., 343n23 Sciaudone, Christiana, 192n13 Scott, Mark, 9n11, 236n1, 294n43 Scrimshaw, Nevin S., 486n102 Sechler, Bob, 179n63 Segal, David, 345n32 Segalla, Michael, 36n27 Seidenberg, Steven, 409n43 Seligson, H., 574n181 Sell, Susie, 193n18 Selmer, J., 564n112 Selmer, J., 572n167 Semaan, Rania, 477n67 Sen, Amartya, 36n28, 71n68, 102n36, 119n104 Seng, Jalan Bukit, 576 Sengupta, Somini, 20n48, 37n36 Seo, Min Jeong, 302n1 Serapio, Manuel G., 511, 511n63 Sermiento-Saher, Sebastian, 223n23 Servais, P., 333n125, 371n37 Seth, Anju, 419n85 Sethi, S. Prakash, 138n17 Shaffer, Margaret, 553n47, 562n100, 563n103, 564n106, 571n160 Shah, Neil, 275n35 Shainesh, G., 473n35 Shan, Jordan, 158n3 Shane, Scott, 71n72 Shankar S., 559n85, 453n99 Shannon, Randall M., 473n35 Sharfstein, Joshua M., 203n59 Sharkey, Joe, 547n11, 569n153 Sharma, P., 477n67 Sharma, Subash, 476n64 Shaver, J. Myles, 347n44 Sheinbaum, Stanley K., 411n52 Shenkar, Oded, 34n21, 59n11, 311n45, 405n21, 408n40, 417n77,

417n81 Shenon, Philip, 194n22 Sherer, Paul M., 173n39 Sherman, Lauren, 497n5

Shimamoto, Kenichi, 343n20 Shimoni, Baruch, 47n84 Shimp, Terrence A., 476n64 Shin, Jongtae, 14n38 Shipper, F., 450n86 Shirouzu, N., 452n94 Shorto, Russell, 114n73 Shrader, Rodney C., 8n10, 407n31 Shumsky, Tatyana, 539n24, 539n25 Siders, Mark, 483n90 Silvera, David H., 477n65, 477n66 Simmons, Lee, 476n60 Simonian, Haig, 344n27 Simonian, Haig, 484n95 Singer, Hans, 189n5 Singer, Marc, 333n128 Singh, Harber, 50n99, 419n85, 420n89 Singh, Jitendra, 50n99 Sirkin, Harold, 332n113, 332n114, 435n27 Sissell, Kara, 130n1 Sites, Dave, 184n1 Sitze, A., 565n121 Slangen, Arjen H., 401n3 Slater, Joanna, 275n35 Slavin, Barbara, 26n1 Sloan, Alfred P., 430n16 Sloane, Julie, 392n122 Smit, Sven, 102m, 102n35 Smith, Adam, 110, 112, 122n69, 159n6 Smith, Alasdair M., 173n38 Smith, Anne, 418n82 Smith, Benson, 391n121 Smith, Geri, 236n1 Smith, Joyce van der Laan, 417n74 Smith, Ray A., 462n1 Smith, Vernon, 20 Snow, Charles C., 435n28 Socha, Miles, 462n1 Söderman, Sten, 2n1 Sokolov, Boris, 444n62 Solinger, Dorothy, 189n6 Solomon, Deborah, 13n35 Song, Jaeyong, 14n38 Song, Lisa Z., 313n51 Song, Michael, 313n51 Song, Sangcheol, 408n40 Song, Sangyoung, 346n37 Sönmez, Sevil, 174n47 Sonne, Paul, 468n22 Sonsino, Yvonne, 552n39 Sorbeim, R., 333n126, 371n38 Spagat, Elliot, 21n51 Spector, Mike, 507n48 Spencer, Mimosa, 357n68 Spiro, Kasper, 456n115

Name INdex 611

Sridharan, R., 505n38 Srinivas, Ekkirala S., 41n61 Stack, John F., 323n91 Stahl, G., 571n157, 571n158 Stahl, Günter K., 560n88 Stalk, George, 298n56 Stamps, J., 443n53 Stancati, Margarita, 466n9 Staw, B. M., 558n84 Stearman, Kathy, 59n10 Steenkamp, M., 476n63 Stefan, Schmid, 465n5 Stein, Gertrude, 179 Stein, Mark, 372n46, 373n50 Stein, Peter, 252n25, 286n18, 275n35 Stern, Robert M., 166n18 Stevens, Michael, 560n88 Stewart, James B., 250n22 Stieghorst, Tom, 21n51 Stiglitz, Joseph, 98n25, 119n103, 197n34, 501n22 Stirton, Brent, 194n27 Stockman, David, 126n133 Stoll, John D., 498n14 Stonehill, Arthur I., 533n21 Storper, Michael, 347n44 Stothard, Michael, 336n1 Stringfellow, Anne, 473n35 Strom, Stephanie, 199n48, 485n99 Stubbington, Tommy, 271n25 Subramanian, Bala, 455n105 Sugden, Roger, 20n50 Sullivan, Dennis Michael, 458n129 Sullivan Daniel, 59n10, 311n45, 370n32, 370n35, 372n44,

382n85 Sun, Fiona, 158n3 Sun, Yun, 197n41 Sundaram, Anant, 286n19 Sunde, Uwe, 73n89 Sutcliffe, Kathleen M., 307n33 Sutton, Stephanie, 89n155, 89n154 Svensson, Göran, 331n109 Swait, Joffre, 475n54 Swann, Christopher, 198n47 Sylvester, Michael, 58n1

Tabuchi, Hiroko, 275n35, 414n64, 417n79, 441n43, 507n48 Tabuchi, Takatoshi, 167n19 Tahvanainen, M., 560n90 Tait, Nikki, 355n60 Takebe, Miyako, 275n35 Talley, Ian, 252n25 Talmon, Jacob, 72n85 Talukdar, Debabrata, 101n32 Taniguchi, M., 571n157, 571n158 Tao, Xiangnan, 158n3

Taras, Vas, 30n6 Tata, Jasmine, 41n61 Tate, Wendy, 13n33 Taylor, Alan M., 166n14 Taylor, Earl L., 331n109 Taylor, Sully, 550n29 Teece, David J., 405n13 Teng, Bing-Sheng, 419n85 Tenzer, Helene, 30n4 Terazono, Emiko, 191n11 Terlep, Sharon, 345n29 Teweldemedhin, M.Y., 48n85 Theodosiou, Marios, 465n4, 467n17 Theriault, John, 203n59 Thirwell, A. P., 163n7 Thisse, Jacques-François, 167n19 Thomas, Amy M., 5n3 Thomas, Anna, 374n55 Thomas, David C., 50n97 Thomas, Douglas E., 232n39 Thomas, Katie, 203n59 Thomas, Kotulla, 465n5 Thomas, Landom, Jr., 9n13 Thomas, Robert, 559n86 Thompson, Derek, 303n13, Thompson, Steve, 355n62 Tibballa, Sue, 26n1 Tietze, Susanne, 32n19 Timmons, Heather, 236n1, 319n73 Tiplady, Rachel, 302n1 Titman, Sheridan, 282n4, 283n5 Tjitra, Hora Widjaja, 550n31 Todaro, Michael, 113n72 Tofani, Roberto, 73n87 Tomlinson, John, 48n87 Tong, Tony W., 338n5 Toyne, Brian, 497n7 Tracy, Tennille, 191n11 Tran, Diane, 174n47 Tran, Khanh T. L., 346n39 Trehern, Steve, 457n126 Trent, Robert J., 501n20, 504n35 Triandis, Harry C., 32n17, 39n47 Trivedi, Anjani, 275n35 Trivei, Anjani, 252n25 Troianovski, Anton, 194n21 Trompenaars, Fons, 36n30, 44n79 Tröster, Christian, 30n6 Tsang, Eric W.K., 346n38 Tudor, Alison, 298n56 Tung, Rosalie, 466n13, 560n91 Turk, Thomas A., 409n45 Twain, Mark, 462 Twentyman, Jessica, 564n105 Twite, Garry, 282n4, 283n5

612 Name INdex

Ucbasaran, Deniz, 370n35 ul Haq, Mahbubm, 119n104 Ungson, Gerardo R., 417n77 Urbina, Ian, 302n3, 432n23 Ursprung, Heinrich W., 6n5 Useem, Michael, 50n99 Uz, Irem, 32n16

Vaara, Eero, 34n21, 417n78 Vaggi, Gianni, 158n2 Vahlne, Jan-Erik, 370n32 Vaishampayan, Saumya, 287n27 Valentini, Giovanni, 369n26 Valenzuela, Ana, 475n54 van Agtmael, Antoine, 332n110 Van Assche, A., 494n1 van den Berg, Peter T., 306n29 Van der Bank, M., 561n96, 563n101 van der Bij, Hans, 313n51 van der Hoeven, Rolph, 12n24 van Hoorn, André, 17n42 van Knippenberg, Daan, 30n6 Van Slyke, Craig, 44n78 van Tulder, Rob, 146n39 van Zanden, J. L., 94n1 Varner, I., 572n167, 572n168 Vayas, Kejal, 258n1 Vegas, L. M., 398n1 Velshi, Ali, 514 Venables, Anthony J., 166n16, 167n22 Venaik, Sunil, 32n14 Verbeke, Alain, 20n46, 209n3, 323n90,

333n127 Verbergt, Matthias, 217n13 Vermeulen, Freek, 417n77 Vernon, Raymond, 168n27 Veseth, Michael, 323n91 Vestring, Till, 468n23 Vickery, Shawnee K., 509n56 Victorio, Antong, 367n14 Vidal, David J., 132n13 Vidal, John, 377n72 Vijayenthiran, Viknesh, 410n48 Villalonga, Belen, 308n39 Villar, C., 398n1 Vinerean, Simona, 331n109 Vishampayan, Saumya, 287n26 Vishwanath, V., 453n99, 559n85 Viswanatha, Aruna, 142n30 a, 232n39 Vlasic, Bill, 220n21 Vogel, Douglas, 44n78 Von Bertrab, Alejandra Xanic, 84n135 Vyas, Kejal, 258n1 Vyas,Kejal, 341n10

Wade, Nicholas, 41n62 Wagenheim, Florian V., 473n35 Wahl, Grant, 2n1 Wailes, Eric J., 195n30 Waldmeir, Patti, 31n12 Walker, Elaine, 336n1 Walker, Marcus, 20n45 Wall, Robert, 414n65 Wallace, C., 39n50 Wallace, Irving, 138n14 Wallace, Timothy, 175n48 Wallace, Tom, 576 Walle, Alf H., 49n89 Wallechinsky, David, 138n14 Walmsley, Julian, 242m Walt, Vivienne, 303n17 Walters, Peter, 366n9 Walton, Sam, 232 Wang, Chu-Ching, 435n28 Wang, Shirley, 41n62 Ward, Andrew, 474n44 Warner, Andrew, 102n36 Warner-Soderholm, Gillian, 36n34 Wayne, Sandy J., 561n96, 563n101, 572n170 Weber, J. A., 483n90 Wei, Lingling, 239n9, 252n25 Weick, Karl E., 307n33 Weiner, Eric, 120n109 Weinstein, David E., 166n15 Weisberg, Jacob, 194n25 Weisman, Jonathan, 196n32 Weisman, Steven, 59n13 Weiss, Leigh, 329n105, 444n58, 451n90 Welch, D., 560n90 Welch, Jack, 441, 441n44, 453, 457 Welch, Jack, 430n15, 453n98 Welch, Suzy, 430n15, 453n98 Weld, William C., 557n71 Weldon, William, 458 Welzel, Christian, 68n57 Werdigier, Julia, 329n103 Wernau, Julie, 261n8 Wernerfelt, B., 308n36, 318n69 Wernerfelt, Birger, 453n99 Wertheim, Jon, 2n1 Wertheim, L. Jon, 2n1 Wessel, David, 20n45, 454n100, 552n40 West, Dan, 393n127 Westhead, Paul, 370n35 Wheelwright, Steven C., 497n7, 507n49 Whitehouse, Mark, 121n114 Whitley, Edward, 250n21 Whitney, Glen, 250n21 Whittall, Christopher, 285n16, 286n21, 288n29

Name INdex 613

Whorf, Benjamin Lee, 41n63 Wiechman, Denis, 80n113 Wiersma, Uco J., 306n29 Wiesen, Jeremy, 172n31 Wiggins, Jenny, 471n31 Wilderom, Celeste P. M., 306n29 Wilkie, Mary E., 272n28 William son, O., 501n22 Williams, David W., 345n34 Williams, K. Y., 558n84 Williams, K., 494n1 Williamson, Peter, 332n115 Wilson, Duff, 76n104 Wilson, James R., 20n50, 51n103 Wilson, Keeley, 332n116 Wilson, Todd Allen, 203n59 Wilson,Keeley, 442n48 Windrum, Paul, 13n36 Windrum, Paul, 176n56 Wines, Michael, 110n61, 476n59 Wingfield, Nick, 494n1 Winkler, Viviane A., 42n67 Winterkorn, Martin, 145 Wirz, Matthieu, 261n8 Woetzel, Jonathan, 94n1 Wollaston, Graham, 375 Wong, Edward, 73n93 Wood, Donna J., 132n4 Wood, Van R., 483n90 Woodley, James, 410n49 Wooldridge, Adrian, 323n89, 421n94, 554n61 Worm, V., 560n90 Wortham, Jenna, 565n124 Wozniak, Steve, 494 Wright, Mike, 355n62, 370n35 Wright, Robert, 343n25, 345n33 Wu, Cindy, 37n39 Wucherpfennig, Julian, 71n69

Xi, Xiang, 37n39 Xu, D., 368n19

Yang, Jing, 404n8 Yang, Zhilin, 473n35 Ybarra, Candace E., 409n45 Yeganeh, Hamid, 38n45 Yester, Brenda, 21n51 Yoshikawa, Katsuhiko, 41n65 You, Jia, 320n78 Young, Michael N., 419n87 Yu, Eden S. H., 197n40 Yuk, Pan Kwan, 21n51 Yuki, Gary, 41n61 Yun, L., 368n18 Yunus, Mohammad, 486, 486n102, 488 Yurchisin, Jennifer, 302n1

Zaheer, Akbar, 41n57, 417n80, 419n86 Zaheer, Srilata, 346n35, 419n86 Zahra, Shaker, 415f Zalamea, Luis, 415n67 Zander, U., 405n13 Zaun, Todd, 208n1 Zeng, Min, 287n26 Zeng, Yuping, 408n40 Zentes, Joachim, 435n28 Zestos, George K., 158n3 Zhao, Shuming, 31n13 Zhou, Nan, 318n68 Zhou, Wenting, 43n71 Zidane, Zinédine (Zizou), 489 Zif, Jehiel, 354n57 Zijun, Luo, 336n1 Zimbalist, Andrew, 2n1 Zimmerman, Ann, 408n39 Zingales, Luigi, 38n43 Zollo, Maurizio, 420n88 Zou, S., 368n16 Zuckerman, Gregory, 250n22 Zulfikar, Yavuz Fahir, 38n42 Zumbrun, Josh, 118n100, 348n47 Zurawicki, L., 133n6, 140n25 Zywietz, Daniel, 7n7

614 Subject Index

Subject Index

Absolute advantage theory, 156, 159 Abu Dhabi Investment Authority, 287 Acceptable quality level (AQL), 507 Accounting (international accounting)

effects from cultural differences, 523–524 factors affecting objectives, standards, and practices,

522–524, 522f See also Finance and accounting; Generally Accepted

Accounting Principles (GAAP) Acquired advantage

defined, 159–160 and specialization, effects on trade, 167

Acquired group memberships, 36 Acquisition

alliance vs., 425 as FDI, 405–406 greenfield vs., FDI, 405–406

Active income, 291 Adaptation

Apple and, 494 See also Organizational structure, changing and adapting;

Product adaptation Ad valorem duty, 195 Advance import deposit, 269 Advantages for exporting, 366–367 Advertising. See Promotion Advertising standardization, pros and cons, 473–474 Affiliation needs, 39 Africa

regional integration in, 225–226, 225m sub-Saharan, 173

African common currency, pros and cons, 265 After-sales service, distribution and, 481 Age-based groups, 37 Agglomeration by nationality, 347–348 Agreements

bilateral, 211, 217, 231 commodity, 229–231 licensing, 15–16 See also Contracts; Trade

agreements Agricultural subsidies, 197 Aid and loans, 197 AIDS. See HIV/AIDS Airline alliance case study, 421–425 Alliances. See Collaborative arrangement

American Depositary Receipt (ADR), 289 American terms, 243 Americas, regional economic integration in,

221–223 Andean Community (CAN), 223 Antiglobalization, 20 Antiretroviral therapy (ART), provided by employer,

149–151 Antitrust immunity in airline alliance, 423 Antitrust investigations, EU, 216 Apparel industry case study, 298–300, 302–304 Apple supply chain case study, 494–495 Appropriability theory, 405 Aquaculture, rise of, 184 Arab Spring, 73 Arbitrage, 249 Arbitrageurs, importers as, 380 Area division, worldwide, 437–438, 438f Arm’s-length price, 292 Ascribed group memberships, 36 ASEAN free trade area, 223–224 Asia

deciding to export to, 362–363 economic growth case study, 94–95 regional economic integration in, 223–224 Tesco PLC in, 52–55

Asia Pacific Economic Cooperation (APEC), 224 Asian Infrastructure Investment Bank, 94 Assets

firm-specific, 497 intangible, putting price on, 412 location-specific, gaining through

collaboration, 408 protecting through collaboration, 408–409

Asset use, 15 Associates, employees as, 428–429 Association of African Central Bank Governors

of the African Union (AU), 265 Association of Southeast Asian Nations (ASEAN),

223–224, 224m Association of Tennis Professionals (ATP), 2 Authoritarian regime, 69 Authoritarianism

allure of, 71–72 defined, 65

Auto market, Toyota in Europe, 208–209

614

Page references with “f ” refer to figures, page references with “m” refer to maps, and page references with “n” refer to endnotes cited by number.

Subject Index 615

Back translations, 43 Balance format, 521 Balance of payments (BOP)

as economic analysis component,123 effects, 134–135

Balance sheet, translating foreign currency, 530t Balance sheet approach, and compensation

plans, 568 Balance of trade, 158 Balance-of-trade adjustments, 190 Bangladesh

child labor in, 146 Grameen Danone Foods case study, 486–490

Bank for International Settlements (BIS), 238 Bank of England, 255 Bargaining school theory, 411 Barter, 393 Base currency, 243 Basel Convention on the Transboundary Movement of Haz-

ardous Wastes and their Disposal, 378 Base of the Pyramid, 102 Base salary, expat’s, 569 Basis of law, mapping, 82–83 Basis of rule, 81 Behavioral factors, and IB, 18 Behavioral practices affecting business, 35–42 Beijing Consensus, 72–73 Benefits of countertrade, 394 Biases in forecasting, 272 Bicultural, 30 “Big Mac Index,” 270–271, 270t “Big Ten Constructions,” 155 Bilateral agreements, 211

EU, 217 WTO vs., 231

Bilateral integration, 209 Bilingualism, and English as global language, 565–567 Bitcoin, 251, 251n24 Black market, 258–259, 268 Body language, cultural differences in, 44–45, 45f Bolivar fuerte (VEF), 258–259 Bonds, international, 285–286 Booking centers, 295 Borderfree case study, 395–396 Born-global companies, 8–9

defined, 371 Nokero, 513–514

Borrowing, and regulatory risk, 283

Bottom of the Pyramid (BoP), lessons for tapping, 488 Boundaries, 440–441 Boundarylessness, 441 Brain drain, 175 Brand acquisition, and promotion, 476

Brand image, 18 Branding

global vs. local strategies, 476–477 Grameen Danone Foods case study, 489 and promotion, Tommy Hilfiger, 462–463

Brazil corruption in, 140–141 and decline in commodity prices, 95 environmental record of, 194 net import effect of Toyota in, 134–135

Brazil, Russia, India, and China (BRICs) Burger King in, 337 as gauge for emerging economies, 100–101

Bretton Woods Agreement, 260 Brexit, 227, 228 Bribery

corruption and, 139–142 extent by country, 140f

British Public Accounts Committee, 297 Bureaucratic control, 451 Burger King

case study, 336–337 regional emphasis, 336f

Business ease of doing, by country, 88t political and legal environment affecting, 88–89 See also International business (IB); Multinational

enterprises (MNEs) Business dividend, and growth, 121 Buyback, 393 “Buy local” legislation, 199

Canada, importing drugs from, 203–205 Capabilities

defined, 309 specification and profile, 310t Zara case study, 303

Capital, and factor mobility, 174 Capital asset pricing model (CAPM), 308n39 Capital budgeting, 531–533

complications, 532–533 methods, 532

Capitalism, 111 Capital markets, growth of, and governments’ drive

to capture more tax revenues, 297 Capital structure, 282–283

factors affecting choice of, 282–283 leveraging debt financing, 282

Carbon footprint, 11 See also Environment

Career, global, 546–548 See also Expatriates

Career progression, repatriation and, 571, 573–574 Caribbean Community (CARICOM), 221–222

616 Subject Index

Carnival Cruise Lines case study, 21–23, 22m Carrefour

case study, 357–360 stores by region, 358m

Cash flows, 533–534 aspects of imports and exports, 247–248 multilateral, 535f

Cash management, 534–536 Casinos, 22 Catastrophe. See Disaster; Financial crisis Catastrophic political risk, 76 Catfish case study, 184–186, 185m CCP. See Chinese Communist Party (CCP) Central America and Caribbean, economic

integration, 221m Central bank

reserve assets, 267 role of, 267

Centralization defined, 433 in manufacturing, 498 principles and practices, 434t

Centralized states, China, 58–59 Chartists, 272 Chavismo, 258 Chief financial officer (CFO), role of, 281–282 Child labor, 146 China

and business implications of totalitarian state, 66 case study, 58–60 cultural shifts in, 31 debt, 95 economic growth and authoritarianism, 71 expansion into, 398–399 and foundation of legality, 80 infrastructure, 58n3 liberalization of currency, 252–255 luxury brands in, 298–300 market potential, 58n3 Microsoft’s predicament in, 89–90 pearl farming in, 311n45 resources, 58n3 and rule of law, 83 settling civil disputes in, 58n9 and state capitalism, 111 strategic positioning, 58n3 See also Beijing Consensus

China Investment Corporation, 287 Chinese Communist Party (CCP), 58–59, 73 Chinese currency, RMB, 274–275 Choice-of-law clause, 87 Civil and commercial laws, 78 Civil law, 79–80 Civil stability, and growth, 121

Clan control, 452 Clash of civilizations, 73 Classical structures, 435 Clean technologies, GE’s commitment to, 130 Client strategy, target market and, 518 Climate change, Paris Agreement on, 143–144 Clothing, in Saudi Arabia, 26 CME Group, 246–247 Code of Conduct, 136 Codes of ethics, corporate, 147–148 Collaborative arrangement

and complexity of control, 415f defined, 16 growth in project size and

complexity, 420–421 international motives for, 408–409 and international objectives, 407f reasons for, 406–409

Collaborative arrangement, forms and choice of, 409–415

considerations in, 409–410 equity alliance, 415 franchising, 412–413 joint ventures, 414–415 licensing, 411–412 management contracts, 413 turnkey operations, 413–414

Collaborative arrangement, reasons for failure, 415–417 comparative contributions and appropriations,

416–417 culture clashes, 417 divergent objectives, 416 questions of control, 416 relative importance, 416

Collaborative arrangement, reasons for success, 417–420

continual evaluation, 419–420 contracts and trust, 419 country/company strength matrix, 418f finding and evaluating potential partners,

418–419 fitting modes to country differences, 417–418 learning and adjusting, 420 and proprietary information, 419

Collectivism, 40, 62–63 Colombia

as competitor to Ecuador’s rose market, 179–180 Burger King in, 337

Colors, cultural differences in, 44 Command economy, 112–113 Commercial bill of exchange, 247 Commercial channels, opportunities for Nokero, 515 Commodities

prices and emerging economies, 95

Subject Index 617

sales, 464–465 and world economy, 229

Commodity agreements, 229–231 consumers and producers, 229–230 OPEC, 130–131

Common currency African, pros and cons, 265 See also Dollarization; Euro

Common law, 79 Common market, 212 Communications

and globalization, 7–8 problems across different cultures, 42–45 See also Cultural differences; Language

Commuter assignments, 552 Comparable access argument, 190–191 Comparative advantage

by analogy, 161 defined, 161 production possibilities, 161–162, 161f as theory, 156, 159, 161–162

Comparative country information, sources and shortcomings, 350–352

Comparative market growth, 356–357 Compatibility, and operations management, 497 Compensation, and collaborative arrangement, 410 Compensation, expatriates’, 567–570

complications, 570 components of, 569–570, 569t types of plans, 568

Competencies, specializing through collaboration, 407 Competition

avoiding or countering through collaboration, 407–408 and BoP product, 488 dumping, 184 environment of, 18–19 and globalization, 8–9 heading off or avoiding, 348 from imports, tactics for dealing with, 201 increased, and regional integration, 213 innovation, and economic freedom, 125 preparing for changes in environment, 202

Competitive forces, and Western Union, 236–237 Competitive product strategy, 18–19 Complementary effect on trade, 176–177 Compound duty, 195 Concentrated configuration, 316 Concentration strategy, 354 Configuration, 315–318

defined, 315 risks of, 318

Confirmed letter of credit, 248 Conflict materials, 504 Connectography, 19

Consolidation, 528 Consortium, 414 Constitutional law, 78 Consumer ethnocentrism, 486 Consumer preferences, 323 Consumer pressures, and globalization, 8 Consumers and producers, and commodity agreements,

229–230 Contract manufacturing

defined, 500 rise of, 494–495

Contracts futures, 239 long-term arrangements, 16 making and enforcing, 86 management, 15, 413 scaling, in turnkey operations, 413 See also Agreements; Management contracts

Control and coordination, 498 Control mechanisms, 452–453 Control systems, 451–453

bureaucratic, 451 clan, 452 control mechanisms, 452–453 deciding on, 453 defined, 451 market, 451

Controlled foreign corporation (CFC), 291 Controller, 520 Controls, Venezuela case study, 258–259 Conventional fixed-peg arrangement, 263 Convergence

European response, 526 and global standards, 524–526

Convertibility, 268–269 Coopetition, 410 Coordination and control, 498 Coordination systems, 447–451

defined, 447 by mutual adjustment, 450–451 by plan, 448–449 by standardization, 448–449

Core competencies defined, 309 Zara study, 303–304

Core values, 29 Corporate code of ethics, 147–148 Corporate taxes, two approaches to, 290 Corporate universities, rise of, 456–458 Corruption

in Brazil, 140–141 and bribery, 139–142 consequences of, 140–141 methods to combat, 141–142

618 Subject Index

Cosmopolitanism, 486 Cost leadership strategy, 310–311 Cost strategy. See Differentiation strategy Cost-of-living, expat’s, 569 Cost-plus pricing, 470f Cost-plus strategy, 470 Costs

converting to IFRS, 542 of countertrade, 393 distribution, hidden, 481–482 of expatriate failure, 572 as factor in airline alliance, 422–423 of import/export private agents, 389 internal distribution, 480 operating, in HIV/AIDS epidemic, 150 and operations management, 497 overseas production, 403 product alterations, 468–469 and product line extent and mix, 469 putting price on intangible assets, 412 in resource acquisition, 341–343 spreading and reducing through collaboration, 407 transport, and theories of specialization, 163 transportation, 403

Counter-purchase, 393 Counterfeit. See Piracy Countertrade, 393–394

common forms of, 393t defined, 200

Country of origin defined, 87 images of, 476–477

Country segment, 466 Country similarity theory, 156, 167–168 Country size theory, 156, 164 Court of Justice, 216 Creeping expropriation, 76 Creolization, 32 Crew members, finding, 23 Criminal law, 78 Cross rate, 241 Cross-cultural project, Tesco PLC, 53–55, 53m Cross-licensing, 412 Cross-national cooperation, expansion of, 9–10 Cruise industry, operating, 22–23 Cryptocurrency, 251 Cuba, expansion into, 398 Cultural attitudes, hidden, 46 Cultural change, 32–35

learning abroad, 50 opinion leadership in, 49 resistance to too much, 48 sharing in reward, 49 sources of, 32 strategies for instituting, 47–50

timing of, 50 using biculturals as mediators, 49–50

Cultural collision, 30 Cultural conditions, effect on growth, progress, and

prosperity, 103 Cultural differences

in accounting, 523–524 company and management orientations, 47–48 concept of Li, 59–60 degree of, 45–46 effect on information and task processing, 41–42 effect on success and reward, 38–39 guidelines for adjusting, 45–50 host society acceptance, 45 influence on risk-taking behavior, 40–41 performance and achievement across, 39 and product adaptation, 468 problems in communicating, 42–45 and relationship preferences, 40 and silent language, 43–45 Tesco PLC case study, 52–55 and work motivation, 37–40

Cultural diffusion, 32 Cultural distance, 46 Cultural diversity, 30 Cultural homogeneity, 11 Cultural imperialism, 48–49

defined, 32 pros and cons, 48–49

Cultural looseness, 32 Cultural similarity, effects on trade, 168 Cultural tightness, 32 Cultures

age-based groups in, 37 building awareness of, 31 clashing, in collaborative arrangements, 417 defined, 29 ethnic and racial groups, 36 factors affecting IB operations, 29f family-based groups in, 37 as foundations of ethical behavior, 137–138 gender-based groups in, 36–37 and group affiliations, 36 hybrid, 50–51 idealist vs. pragmatic, 42 importance and trickiness, 29–32 influences on formation and change, 32–35 and issues in social stratification, 35–37 and language, 32–34 low- and high-context, 41 monochronic vs. polychronic, 42 people factor in, 30 preserving, through trade intervention, 195 religion as stabilizer for, 34–35 Saudi Arabia case study, 26–29

Subject Index 619

shortcoming in assessments, 31–32 See also National culture; Organizational culture

Culture shock, 46, 564 Currencies

base and term, 243 changes in relative strength of, 274–275 converting, 236 differences, and content of financial information, 521 fluctuations in value, 470 speculating on, pros and cons, 249–250 hard and soft, 269 offshore, 284 See also Dollarization; Euro

Currencies, foreign, transactions in, 527–528 procedures for U.S. companies, 528 recording, 527–528 translating financial statements, 528–531

Currency basket, yuan and, 252–253 Currency board, and hard peg, 263 Currency market, characteristics, 284 Currency swaps, 239 Current-rate method, 529 Customary law, 80 Customer management, importing and exporting, 381–382 Customer orientation, 465–466 Customers, as stakeholders, 132 Customs brokers, 389 Customs union, 212 Customs valuation, 197–198 Cybercorp, future, 333–334

Data, internally generated, 352 De jure system, 262 Deal-focus (DF) culture, 30 Debt, and capital structure, 283 Debt markets, global, 284–289

and global equity markets, 286–287 and international bonds, 285–286 eurocurrencies and eurocurrency market, 284–285 stock markets, 287–289

Decentralization defined, 433 J&J, 458–459 principles and practices, 434t

Decline stage, and PLC theory, 169 Deflation, as economic analysis component,123 Delays, administrative, 200 Delisting, trend toward, 288 Delivery, timely, 516 Demand, insufficient, and theories of specialization, 163 Demand conditions, as diamond facet, 170 Demand fluctuations, in Ecuador’s rose market, 180–181 Deming’s 14 Points, 507, 509, 510 Democracy, 64–65

business implications in, 64–65

defined, 64 different interpretations of, 72 and EIU, 69–70 prominent types, 65t qualifying by democracy, 70–71 setbacks in, 71

Democracy index, 70m Democratization, and clash of civilizations, 73 Demographics

influences of, 17 qualifying democracy by, 70–71 variables in, 340–341

Deontological approach, 137 Dependencia theory, 411 Derivatives

defined, 238 to hedge foreign-exchange

risk, 539 Design, Zara case study, 303 Detailed analysis, vs. scanning, 339–340 Developed economies, 97–98 Developing economies, 98–100 Diamond of national competitive advantage theory, 157,

170–172, 170f Differentiation strategy, 18, 311–312 Digital divide, 319, 506 Digitization, 319 Direct exporting, 373 Direct investment, 16 Direct price influences

nontariff barriers, 196–198 tariffs, 195–196

Direct quote, 243 Disaster

impact on yen, 277 natural, 345 See also Risk

Disclosure/assessment matrix, 523f Disease, as risk, 345 Dispersed configuration, 316 Dispute settlement, WTO’s role in, 210–211 Distance

effects on trade, 168 physical. See Personal space, cultural differences in

Distribution challenges and opportunities, 481–482 and competitive gaps, 484 defined, 479 Grameen Danone Foods case study, 489–490 Tommy Hilfiger, 463

Distribution, practices and complications, 479–482 internalizing, 480 standardizing, 479

Distribution partnership, 480–481 Distributive political risk, 75–76

620 Subject Index

Diversification exporting and, 369 importing and, 379 and trade interventions, 189–190

Diversification strategy, 354 Diversity, cultural, 30. See also Cultural differences Divesting, 355 Divisional structure, 436–439 Division of gains, and theories of specialization, 163 Documentation, import and export, 384–385 Dollarization

and hard peg, 263 in Latin America, 259

Domestic capacity, insufficient, 403 Domestic law, and IB, 18 Double taxation and tax credit, 293 Draft, 247 Dubai, and Western Union case study, 237 Due diligence, 78n108 Dumping

defined, 191–192 preventing, 191–192 as unfair competition, 184

Duty, 195 Dynamic effects

defined, 212 NAFTA, 219

Dynamics and statics, and theories of specialization, 163

E-commerce case study, 394–396 defined, 506 IT and, 506

E-waste exporting, pros and cons, 374–376 patterns of trade, 375m

Ecomagination Initiative case study, 130–132 Economic analysis

elements of, 123–125 gap. See Gap analysis happynomics, 120 improving, 116–117 integrating, 123–125 key components, 123t monetary measures, 114–116 purchasing power parity, 116–117, 117t, 118m stability, 120–121 sustainability, 119

Economic center of gravity, mapping, 102f Economic development

different degrees of, 101–103 moderators of, 103t performance, and potential, assessing,

114–121

Economic efficiency, and theories of specialization, 162–163

Economic environments average freedom scored by type, 109 case study of the West, 126–127 complexity of, 96 developed economies, 97–98 dynamism of, 96 and economic freedom, 107 for expatriates, 554 factors affecting IB operations, 97f interdependence of, 96 international analysis, 95–97 who’s who globally, 97–103

Economic exposure, 537 Economic factors, and product adaptation, 468 Economic forces, and IB, 18 Economic freedom, 103–109

classification and characteristics, 108t defined, 104 and Economic Freedom Index, 104, 104t global distribution of, 106m innovation, and competitiveness, 125 prevalence of, 106–107 promise vs. prevalence, 107–109 scores by type of economic environment, 109t and standard of living, 105f and type of economic environment, 107 value of, 105–106

Economic growth and authoritarianism, 71 rate of, 116

Economic integration in Africa, 225–226, 225m in Americas, 221–223 in Asia, 223–224 forms of, 209 regional, and economies of scale, 213

Economic issues, in cruise industry, 23 Economic problems, and authoritarianism, 71 Economic reform, Taiwan, 155–156 Economic relationships, international, and trade intervention,

190–192 Economic systems

command economy 112–113 market economy, 111–112 mixed economy, 113–114 types of, 111–114, 112f

Economic variables, 340–341 Economies

China, 58–60 developed, 97–98 developing, 98–100 emerging, 94–95, 100–101

Subject Index 621

largest, by GDP, 115t largest, GDP adjusted for purchasing power

parity, 117t size of, and national trade, 164–165 small, overdependence

on globalization, 10–11 in transition, 100–101

Economies of scale and regional integration, 213 defined, 318

Economist Intelligence Unit (EIU), 69–71 Ecuador

case study, 179–182 dollarization in, 259

eCycling Leadership Initiative, 376 Education, and BoP product, 488 Effective tariff, 196 Efficiency, and operations management, 497 El Salvador, dollarization of, 259 Electronic data interchange (EDI), 505 Embargo, 199. See also Trade sanctions, pros and cons Emerging Africa Fund, 287 Emerging economies, 100–101, 100m

acronyms, 101t case study, 94–95

Employees abroad. See Expatriates hiring and firing, 86 as stakeholders, 132 unethical, MNEs’ responsibility for, 144–145 See also Labor; Workers

Employment, limits on, 188 Employment effects, growth and, 135–136 Employment, full, as economic objective,

187–188 Endaka, 275–276 Endowments, and trade patterns, 177 English language

cultural imperialism and, 48 as global language, pros and cons, 565–567 popularity of, 33–34 problems with translation, 43 US vs. UK, 44t

Enterprise resource planning (ERP) defined, 505 and material requirements planning, 505

Entry strategies, 401 Environment

benefits to, and growth, 121 commitment to, GE Ecomagination,

130–132 damage to, 122 ethics and, 142–144 Nokero case study, 511–516

VW’s “defeat” software, 144–145 Environment

carbon footprint, 11 ethics, 142–145 GE’s commitment to, 130 and greenhouse gas (GHG), 142–143 protection regulations, 467

Environmental stress, 11 Equilibrium exchange rate, 266f Equity alliances, 415 Equity markets, global, 286–287 Equity securities, 286 Eritrea, managing change in, 48 Escalation of commitment, 340 Essential-industry argument, 192–193 Essentiality, and restrictions on services, 200 Esteem needs, 39 Ethical behavior

basis of, 136–137 corporate codes of, 147–148 cultural foundations of, 137–138 dilemmas in global economy, 148 environmental, 142–145 and labor conditions, 144–147, 495 legal foundations, 138–139 reasons for companies to care, 137

Ethical Training Initiative (ETI), 145–146 Ethnic groups, 36 Ethnocentric framework, 555–556, 559t Ethnocentric management, 47 Euro, 216

and foreign-exchange market, 241 as freely floating arrangement, 263–264

Eurobonds, 286 Eurocredit, 284 Eurocurrency, 284 Eurocurrency market

eurocurrencies and, 284–285 characteristics, 284 defined, 284 interest rates in, 285

Eurodollar, 284 Euroequity market

defined, 288 rise of, 288–289

Europe, Toyota’s drive into, 208–209 European Central Bank (ECB), 264 European Commission, 216 European Council, 216 European Monetary System (EMS), 263–264 European Monetary Union (EMU), 263–264 European Parliament, 216 European Structural Funds, 343 European terms, 243

622 Subject Index

European Union (EU), 214–218 anticorruption efforts, 141 antitrust investigations, 216 bilateral agreements, 217 and Brexit, 227, 228 corporate strategy to do business with, 218 and economic integration, 215m euro, 216 expansion, 217 key governing bodies, 216 migration, 217 milestones, 214t organizational structure of, 215–216 predecessors, 215 product-liability directive, 87 Schengen Area, 216–217 T-TIP, 217

Evaluation, Grameen Danone Foods case study, 490

Excel, quest to, and growth, 121 Exchange rates

and capital structure, 283 defined, 238 floating, 261–262, 266 forecasting movements, 272–273

Exchange rates, determining, 266–272 and black markets, 268 in fixed rate or managed floating rate, 267–268 foreign-exchange convertibility and controls, 268–269 fundamental factors to monitor, 272–273 and interest rates, 271 nonintervention, 266 and PPP, 269 various factors, 272

Exchange-rate arrangements, 262–264 choices of, 262t euro, 263–264 floating, 263 hard peg, 263 soft peg, 263

Exchange-rate changes business implications, 273–274 and marketing decisions, 273 and production decisions, 274 and risk, 344

Exclusive license, 411 Ex-Im Bank, 362n4 Expansion

Carrefour’s international move, 358–359 and collaborative arrangement, 410 and financial reporting standards, H&M study,

541–543 See also Growth

Expatriate failure, 572–573 Expatriate selection, 560–562

criteria for identifying, 560f defined, 560 global mindset, 561 others-orientation, 561 resourcefulness, 561 self-orientation, 560–561 TCT’s managing director case study, 574–577 technical competence, 560

Expatriates, 546–548 age of, 552–553 assignment trends, 552–554 changing locations for, 573–574 defined, 551 economics of, 554 key competencies of, 562f leading concerns of, 563f perspective of, 551–554 reverse, 554 top benefits of experience, 546f trends in assignments, 552–554

Expatriates, compensation, 567–570 complications, 570 components, 569–570, 569t types, 567–570

Expatriates, preparation and development, 562–564 family matters, 564 in-country programs, 564 pre-departure programs, 563–564

Expatriates, repatriation, 547, 570–572 challenges, 571 improving, 571–572

Export, deciding on, 362 Export capabilities

and diamond of national competitive advantage theory, 170–172

dynamics of, 168–172 and product life cycle (PLC) theory, 168–170

Export documents, types of, 384t

Exporters, 366–368 Export expansion, Taiwan, 154–155 Exporting

advantages, 366–367 barriers to, relative influence of, 381t defined, 365 of e-waste, pros and cons, 374–376 motivation and methods, 368–369 principles and practices, 365–368 See also Importing and exporting

Exporting, start-up and expansion, 370–374 approaches to, 372–374 born global, 371 incremental internalization, 370 influence of time and space, 371–372 and serendipity, 372

Subject Index 623

Export-led development, 190 Export license, 199 Export management company (EMC), 387 Export plan, 390–391, 390t Export price escalation, 470 Export restrictions, 191 Exports

as IB mode, 15 OPEC, 230 passive, 465

Export tariffs, 195 Export trading company (ETC), 387 Exposure

define and measure, 538 types of, 536–537

Exposure-management strategy, 537–539 External connections costs, 342 External environments, 16–18 Extranets, 506

Factor conditions, as diamond facet, 170 Factor mobility

effects of, 175 reasons production moves, 174–175 relationship with trade, 176–177 theory and major effects of, 172, 174–175

Factor mobility theory, 156–158, 174 Factor proportion theory, 156, 166–167 Fair Labor Association, 495 Fair trade agreements (FTAs), impact of, 213f Family-based groups, 37 Fascism, 65 Fashion-tech, Zara case study, 304 Fatalism, 41 Favorable balance of trade, 158 FDI. See Foreign direct investment (FDI) FIFA, bribery scandal, 142 Finance and accounting, 520–522

differences in content of financial information, 521–522

financial statements, 521 role of controller, 520

Finance function, 281–282 Finances, personal, expat’s, 571 Financial Accounting Standards Board (FASB),

525–526 Financial crisis

challenges and opportunities, 519 effect on debt and borrowing, 283 euro and, 264 IMF role in, 261

Financial decisions, and exchange-rate changes, 274 Financial issues, 531–536

capital budgeting in global context, 531–533 cash management, 534–536

internal sources of funds, 533–534 Financial reporting standards. See International

Financial Reporting Standards (IFRS) Financial risks. See Risk Financial statements

differences in, 521 foreign-currency, translating, 528–531

Firm strategy, as diamond facet, 171 First-mover advantage, 348 Fiscal dividend, and growth, 121 Fisher Effect, 271 Fish farms, and US-Vietnam catfish dispute,

184–186 Flags of convenience, 21 Flawed democracy, 69 Flexibility

and operations management, 497 Zara case study, 304

Flexpatriates, 552 Floating arrangement, 263, 266 Flower markets. See Rose market, Ecuadoran Focus strategy, 19 Food and Drug Administration (FDA), and drugs from

Canada, 203 Forecasting, exchange-rate movements, 272–273 Foreign bonds, 286 Foreign branch, 290 Foreign control of key industries, pros and cons,

410–411 Foreign Corrupt Practices Act (FCPA), 141–142 Foreign direct investment (FDI)

acquisition vs. greenfield, 405–406 in China, 58–59 defined, 16 as economic analysis component,123 effect of individual, 134 reasons for making, 404–406 in Taiwan, 156

Foreign exchange cash flow aspects of imports and exports, 247–248 convertibility and controls, 268–269 currency distribution, 240t defined, 237 financial flows, 248–249 gains and losses, disclosing, 531 how companies use, 247–249

Foreign exchange control, 200 Foreign-exchange markets, 237–238

aspects of, 238–243 direction of, 251 frequently traded currency pairs, 241 futures, 245 geographical distribution, 241f global OTC instruments, 239 how to trade, 238

624 Subject Index

Foreign-exchange markets (Continued) major, 243–245 options, 244–245 and overlapping time zones, 242f size, composition, and location of, 239–241 trades and time zones, 241–243 using US dollar on, 239–241

Foreign-exchange risk, 344–345 Foreign-exchange risk management, 536–539

exposure-management strategy, 537–539 types of exposure, 536–537

Foreign-exchange trading process, 245–247, 246f Foreign expansions, alternative operating modes, 402f Foreign expansions, reasons for

altering products for foreign sales, 403 import restrictions, 403–404 insufficient domestic capacity, 403 production costs, 403 transportation costs, 403

Foreign-market segments, 465 Foreign service premium, 569 Foreign-source income, taxation of, 289–294 Foreign subsidiary, 290–291 Fortune, 500, 389 Fortune, 1000, 555 Fortune at the Bottom of the Pyramid (BoP), The, 486 Forward discount, 244 Forward market, 244 Forward premium, 244 France, Burger King in, 337 Franchising, 15, 412–413 Free country, 67 Freedom House, 67 Freedom

economic, 103–109 gains and declines by country, 74f See also Political freedom

Free markets, vs. state capitalism, 110–111 Free trade agreement (FTA), 212 Free trade theories, 156, 159 Free trade theory, interventionist theory and, 158–164 Freight forwarders, 387–388 Fringe benefits, expat’s, 569 Full democracy, 69 Full employment

as economic objective, 187–188 and theories of specialization, 162

Functional currency, 529 Functional structure, 435–436, 436f Fundamental forecasting, 272 Funds, internal sources, 533–534 Funds, how MNEs handle

internal, 534f multilateral, 535f multilateral netting, 536f

net positions, 535t Future orientation, 41 Futures, 245 Futures contract, 239 FX swap, 239

GAAP. See Generally Accepted Accounting Principles (GAAP)

Gains distribution, 481–482 division of, and theories of specialization, 163 and losses, foreign-exchange, disclosing, 531

Gap analysis, 482–484, 483f defined, 482 distribution and competitive gaps, 484 product-line gaps, 484 usage gap, 483–484

Garment manufacturers, offshoring, 136 GATT, as WTO predecessor, 210 GE Ecomagination Initiative case study, 130–132 Gender roles

and gender-based groups, 36–37 and masculinity-femininity index, 39 in Saudi Arabia, 28 women as expatriates, 553

General Agreement on Tariffs and Trade. See GATT Generally Accepted Accounting Principles (GAAP)

and content of financial information, 522 differences in, 289–290

Generic, 477 Genuine Progress Indicators (GPI), 119 Geocentric management, 47 Geocentric staffing framework, 558–559, 559t Geographic diversification

through collaboration, 409 concentration vs., 354–355

Geography influences of, 17 and regional integration, 211–212

Global bond, 286 Global Competitiveness Index (GCI), 124 Global economy, ethical dilemmas in, 148 Global Innovation Index (GII), 124 Global integration

defined, 209, 321 and WTO, 210–211

Global integration and local responsiveness consumer preferences between, 323 differences, 321–325 and institutional agents, 324 motivations of, 322t mapping interactions, 324–325 and potential for standardization, 322–323

Global market method of compensation, 568 Global matrix structure, 439–440, 439f

Subject Index 625

Global operations. See International operations Global Reporting Initiative (GRI), 148 Global segment, 466 Global strategy. See International strategy; Strategy Global supply chain. See Supply chain Global trade, future of, 202 Global warming, and Paris Agreement on Climate Change,

143–144 Globality, 435 Globalization

argument for growth and cooperation, 11 criticisms of, 10–12 defined, 5 expanded economies and, 102 factors in, 7–10 future scenarios on, 19–20 inevitability of, 19–20 and local objectives and policies, 10 relation to international business, 5 slowing down, 20 small economies’ overdependence, 10–11

Globally integrated enterprise, future, 332 Glorecalizized MNE, future, 333 Go-no-go decisions, 356 Goods and services, institutional factors affecting flow of, 186f Gore Way. See W.L. Gore & Associates case study Governmental constraints

in import/export, 383–384 overcoming through collaboration, 408–409 See also Laws; Regulations

Governmental incentives and disincentives, 343 Government Pension Fund

(Norway), 287 Government regulation, companies’ marketing to

developing countries, pros and cons, 477–479 Governments

drive to get more tax revenues from MNEs, 297 economic rationales and outcomes of trade interventions,

187–192, 187t limited, and average freedom scores, 109 limited, and Economic Freedom Index, 104 and NGOs, working with, 514–515 noneconomic rationales and outcomes of trade interven-

tions, 192–193, 195 and trade influences, how companies deal, 201–202

GPS Capital Markets Inc. case study, 518–520 Grameen Danone Foods

case study, 486–490 joint venture, 489m

Gray market, 471 Greenfield investment

as FDI, 406 vs. acquisition, FDI, 405–406

“Green Frog,” global travels of, 131m Greenhouse gas (GHG), 142–143

carbon footprint, 11 GE’s commitment to reducing, 130 See also Environment

Greenland, 399 Grids, to analyze opportunity and risk, 348–349, 349t Gross Domestic Product (GDP)

adjusted for purchasing parity, 118m defined, 115 largest economies by, 115t world, world trade as percent, 364f

Gross National Income (GNI), 115 Gross National Product (GNP), 115–116 Gross National Wellness Index (GNWI), 120 Group affiliations, 36 Growth

advantages and disadvantages, 121–123 and employment effects, 135–136 expanded services as, 519 in India, 574 LDC, 487–488 Nokero, 511–512 in project size and complexity, 420–421 regional vs. global, 20 See also Expansion

Growth stage, and PLC theory, 169 Gulf Cooperation Council (GCC) Fund, 287

H&M case study, 541–543 Happynomics, 120 Happy Planet Index (HPI), 121 Hard currencies, 269 Hard peg, 263 Hardship pay, for expat, 569 Harvesting, 355–356 Headquarters-based method of compensation, 568 Health and safety, in catfish dispute, 184–185 Health insurance, and cost of drugs, 204. See also HIV/AIDS,

employer-provided treatment in South Africa Hedging strategies, 538–539 Hierarchical structure, pros and cons, 445–447 Hierarchy-of-needs theory, 39 High-context cultures, 41 Hiring and firing, 86. See also Expatriate selection;

International Human Resource Management (IHRM); Staffing frameworks

HIV/AIDS, employer-provided treatment in South Africa, 149–151

Holding company income from, and CFC, 291 tax-haven subsidiary as, 292f

Home-based method of compensation, 568 Home-country national, 551 Homeshoring, 321 Homogeneity, cultural, 11 Hong Kong, as hybrid regime, 70

626 Subject Index

Horizontal alliance, 409–410 Horizontal links, securing through collaboration, 408 Host-based method of compensation, 568 Host society acceptance, 45 Housing, for expat, 569 Human Development Index (HDI), 119 Hybrid cultures, 50–51 Hybrid regime, 69 Hypermarkets, Carrefour, 357–358

ICE Libor rate, 285 Idealism, 42 Images, country-of-origin, 476–477 Immigration

factor mobility and, 174–175 restrictions on services and, 201 as threat to NAFTA, 220 as threat to Schengen, 217 Western Union’s business and, 236 See also Expatriates

Importers, 380 characteristics of, 378 tactics for dealing with competition, 201

Importing defined, 378 drivers, 379 motivations and methods, 379–380 principles and practices, 378

Importing and exporting factors influencing operations, 365f foreign expansion vs., reasons for, 402–403 introduction to, 364–365

Importing and exporting, problems and pitfalls, 380–385 government regulation, 383–384 international business

expertise, 382 marketing challenges, 382 trade documentation, 384–385

Importing and exporting, resources and assistance, 385–389 private agents, 387–389 public agencies, 386–387

Import license, 199 Import restrictions

affecting exporters’ prices, 191–192 as bargaining tool, 191 to compel foreign country to change behavior, 193 negative effects of, 187–188 as reason for foreign expansion, 403–404

Import substitution defined, 190 in Taiwan, first period, 154 in Taiwan, second period, 155

Import tariffs, 195–196 Imports

catfish case study, 184–186

and customs valuation, 197–198 as IB mode, 15 widening of prescription drugs from Canada, 203–205

Income active vs. passive, 291 future demographics and market segmentation, 485 See also Compensation

Income distribution as economic analysis component,123 inequality in, 11–12, 99 and level, and product adaptation, 468

Income statement, translating foreign currency, 531t Incremental internalization, exporting, 370 India

child labor in, 146 TCT in, 574–577

Indirect exporting, 373 Indirect quote, 243 Individualism, 40, 62 Individuality, impact of growth on, 122 Industrial base, developing, 189–190 Industrial clusters, 501 Industrialization argument, 189 Industrial organization, 307–308 Industrial policy, 172 Industrial Revolution, 94

4th, promise and peril of, 126–127 stages of, 127t

Industries “infant,” protection of, 188 involving in governmental trade influences, 201–202 related and supported, as diamond facet, 171

“Infant” industries, protecting, 188 Infant-industry argument, 188 Inflation, as economic analysis component,123 Information, and task processing, 41–42 Information technology (IT)

and changing organizations, 430–431 as control mechanism, 452–453 and supply-chain management, 505–506 See also Technology

Infrastructure costs, 342 improving in India, 574 and product adaptation, 468

Innovation economic freedom, and competitiveness, 125 Nokero case study, 511–516 and operations management, 497 outsourcing, pros and cons, 502–503

Inpatriate, 551 Input optimization, importing and, 379 Input optimizers, importers as, 380 Institutional agents, effect of, 324 Institutions, 17

Subject Index 627

Insufficient demand, and theories of specialization, 163 Insurance companies, and political risk, 78 Integrated cost leadership/differentiation, 312 Integrated system approach, 290 Integration. See Economic integration; Global integration;

Regional integration; Vertical integration Integration-Responsiveness (IR) Grid, 324–325, 325f Intellectual property (IP), 87–88

and Chinese piracy, 59 defined, 87 and licensing, 411–412 piracy case study, 89–91

Intellectual property right (IPR), 87–88 Interbank transactions, 243 Interest arbitrage, 249 Interest rates

exchange rates and, 271 in eurocurrency market, 285

Internal rate of return, 532 Internalization

advantages, 367 defined, 405

Internalization theory, 405n13 International Accounting Standards Board (IASB), 525–526 International Anti-Counterfeiting Coalition (IACC), 89 International assignments. See Expatriates International bonds, 285–286 International business (IB)

behavioral factors and, 18 company resources and experience, 19 competitive environment, 18–19 competitors in each market, 19 economic forces and, 18 factors in operations, 4f hiring and firing, 86 and institutional factors, 17–18 leading to cultural imperialism, 48–49 operating within political and legal environments, 60–61, 61f and physical factors, 17 types of organizations, 16 why companies engage in, 14–15 See also Global integration; Multinational enterprises

(MNEs) International business and globalization

driving forces, 6–10 reasons to study, 5–6

International Cocoa Organization, 229 International Coffee Organization (ICO), 229 International Copper Study Group, 229 International corporate-level strategies, 326–331

global strategy, 329–330 localization, 328–329 MNE strategy, 326–328 transnational, 330–331

International divisional structure, 436f

International economic analysis, 95–97 International Financial Reporting Standards (IFRS), 525

as future standard, 539–540 H&M case study, 541–543 U.S. companies’ use of, pros and cons, 526–527

International Fisher Effect (IFE), 271 International Human Resource Management (IHRM),

549–551 defined, 549 factors influencing IB, 549f GE’s evolution, 550–551 mission, 551 strategic role, 550–551 workers abroad. See Expatriates

Internationalization, usual pattern of, 354f International Labor Organization (ILO), 146 International law, and IB, 18 International marketing. See Marketing International Monetary Fund (IMF), 260–262

current form, 260–261 evolution to floating exchange rates, 261–262 origins and objectives, 260 quota system, 260–261 role in global financial crisis, 261 SDRs, 260–261

International operating modes factors affecting, 402f foreign expansions, 402f hotel, 400 introduction, 401–402 reasons for, 402–404

International operations and economic connections, 157f W.L. Gore & Associates case study, 428–429

International Organization of Securities Commissions (IOSCO), 525

International Organization for Standardization (ISO), 509–510

International strategy, 329–330 International strategy

characteristics, 327t defined, 326 freedom to pursue, 405 marketing as means of, 464f

International Trade Administration (ITA), 386 International trade zones, and single world market, 242m International waters, doing business in, 21 Internet

and e-commerce, 394–396 and problems in promotion, 475 as design standard, 431 See also Technology

Intervention, in exchange rates, 267–268 Interventionist and free trade theories, 158–164 Intranets, 506

628 Subject Index

Inventory stock-outs, 482–483 Investment inflows, and import restrictions, 189 Investments, 16 Invisibles, 15 Iraq War, and clash of civilizations, 73 Islam

and theocratic law, 80 in Saudi Arabia, 26–27

ISO 9000 and ISO 14000, 510 Ivory, restrictions on imports, 194

Jamaica Agreement, 262 Japan, occupation of Taiwan, 154 Job market, international, sports case study and, 2 Johnson & Johnson case study, 458–460 Joint ventures (JVs), 16, 414–415

defined, 16 transatlantic airlines, 424

Jurisdiction, 87–88 Just-in-time (JIT), 508–509

Kaizen, 508 Kanban system, 509 Keiretsus, 442–443, 501–502 Knowledge, as component of HDI, 119 Kuwait Investment Corporation, 287

Labeling requirements, 467 standards and, 199

Labor costs of, 341–342 specialization of, 379 See also Employees; Expatriates; Workers

Labor conditions ethical dilemmas of,

144–147, 495 Foxconn, 495

Labor laws in India, 575 Lag strategy, 538 Laissez-faire, 112. See also Individualism Language

and cultural imperialism, 48–49 and culture, 32–34 distribution of major, 33m English as global language, pros and cons, 565–567 evolvement of, 34 in global branding, 476

Languages, different and content of financial information, 521 interpreting spoken and written, 42–43 translation in advertising, 474

Latin America dollarization in, 259 economic integration in, 222m

Laws and IB, 18 as justification for ethical behavior, 138–139 domestic and international, affecting IB, 18 and product adaptation, 467–468 types in modern legal systems, 78 See also Government regulation; Legal environment; Regula-

tion; Trade intervention Lead strategy, 538 Lean manufacturing, and TQM, 508–509 Leasing, as FDI, 406 Legal environment, 78–84

in China, 59 factors affecting IB, 61f and foundation of legality, 80–81 implications to managers, 84 issues affecting IB, 84–88 mapping basis of law, 81–82 operating within, 60–61 and politics, impact on business, 88–89 and rule of law, 82–84 strategic concerns, 86 types of systems, 79–80

Legal jurisdiction, 87 Legal policies. See Laws Legal systems, 79m

defined, 78 types of, 79–80

Legality in advertising, 474 foundation of, 80–81

Letters of credit (LC), 247–248 Leverage, 282 Liability of foreignness, 346 Liability regulation and product safety, 87 Licenses

and exchange rate, 269 import or export, 199

Licensing, 411–412 Licensing agreements, 15–16 Life expectancy, and growth, 122 Link alliance, 409 Local, 551 Localization

defined, 554 strategy of, 328–329

Local responsiveness defined, 321 vs. global integration, 321–325

Local unavailability, importing and, 379 Location advantages, 316, 319–321, 367 Locations

allocating resources among, 353–356 comparing country information, 350–352 decision process, 339f

Subject Index 629

diversification of, 346–347 expanding lexicon of, 321t importance of, 338 as name origin, 477 noncomparative decisions, 356 prime, conditions that may cause change, 356–357

Location-specific advantages, 497 Location-specific assets, gaining through collaboration, 408 Logistics, Zara case study, 303 Logistics management. See Operations management Logistics platforms, and international trade, 392 London Interbank Offered Rate (Libor), 285 London Stock Exchange, 287–289 Longevity, as component of HDI, 119 Long-term contractual arrangements, 16 Low-context cultures, 41 Loyalty, building abroad, 488

Major League Baseball (MLB) case study, 2 Make-or-buy decision, 502 Management, challenges to, in import/export, 382–383 Management contracts, 15, 413 Managerial standards, evolving with the times, 431–432 Manufacturing configuration, and operations management,

497–498 Manufacturing

contract, 494–495, 500 make-or-buy decision, 502 Zara case study, 303

Market capitalization of global domestic markets, 288m Market control, 451 Market diversity, and pricing obstacles, 469–470 Market economy, 111–112 Market failure, as reason for FDI, 404 Market growth, comparative, 356–357 Marketing

challenges in importing and exporting, 382 decisions in, and exchange-rate changes, 273 managing mix with gap analysis, 482–484 See also Promotion

Marketing mix, mixing, 466 Marketing orientations, 464–466 Marketing strategies

orientations, 463–466 segmentation, and targeting, 466–467

Markets national, future of, 485–486 redefining, for expat, 570 mass vs. niche, 476 target, and client strategy, 518 traditional, maturation of, 487

Market segmentation, future evolution, 485–486 Market structure, Ecuadoran roses, 180 Masculinity-femininity index, 39 Mass markets, vs. niche markets, 476

Master franchise, 413 Materialism

as consumer personality trait, 486 and motivation, 37–38

Material requirements planning (MRP), 505 Materials, conflict, 504 Matrices, for analyzing opportunity and risk,

349–350, 350f Matrix structure, global, 439–440, 439f Maturity stage, and PLC theory, 169 Meliá Hotels International

case study, 398–401 regional breakdown, 399m

Mercantilism, 156, 158 Merchandise exports and imports, 15 Mercosur, 222 Merger

alliance vs., 425 and tax inversions, 280–281

Messaging, in advertising, 474 Metanational, future of, 332–333 Mexico

and Western Union case study, 237 as consumer market, 221. See also North American Free

Trade Agreement (NAFTA) Walmart in, 232–234

Micro-multinational, future, 332 Migration

and factor mobility, 174–175 and Western Union’s business, 236 as threat to Schengen, 217

Minimum wage, 98 Minority ownership, 16 Misery index, as economic analysis

component,123 Mission, 305 Mission statements, leading MNEs, 306t Mixed economies, 113–114 Mixed legal system, 80 Mixed structure, 440 Mixed venture, 415 Multinational enterprises (MNEs)

defined, 16 of future, case study, 332–334 and ethical labor conditions, 147 and foreign exchange, 237 dealing with ethical dilemmas, 148 economic impact of, 133–136 in China, 58–60 in democracies, 64 in totalitarian states, 66 offerings of, 133f political ideology and, 72–73 responsibility for unethical employees, 144–145 See also International business (IB)

630 Subject Index

Multinational enterprises (MNEs), legal issues facing, 84–88

operational concerns, 85–86 strategic concerns, 86

Mobility, and theories of specialization, 163–164 Modernization

in emerging economies, 100 in Saudi Arabia, 26

Modes of operations, 15–16 Monetary measures, 114–116 Money-transfer market case study, 236–237 Monochronic, 42 Monopolies, foreign, prevention of, 191 Moral development, levels of, 136–137. See also Ethics Most-favored-nation (MFN) clause, 210 Mozambique, and IMF, 261 Multicultural, 30 Multi-domestic manufacturing, 498 Multilateral cash flows, 535f Multilateral development banks (MDBs), 77 Multilateral netting, 535–536 Multinational corporation or company (MNC), 16 Multiparty democracy, 65 Multiple exchange-rate system, 269 Mutual recognition

defined, 524 vs. reconciliation, 524

NAFTA. See North American Free Trade Agreement (NAFTA) NASCAR, sports case study, 2 NASDAQ OMX, 246, 247 Nation, as cultural mediator, 30 National culture

as point of reference, 29–30 preserving, 195 scenarios on future evolvement, 50–51

National Football League (NFL), case study, 2 National Retail Federation, 304 National sovereignty, globalization as threat to,10–11 National sports, 3m National trade

determining trading partners, 167–168 extent of, 164–165 theories to explain patterns, 164–168 types of products, 166–167

Natural advantage, 159 Natural disasters

by country, 346m risk of, 345

Natural resources, and trade patterns, 178 Nearshoring

defined, 321 manufacturing operations, 498

Neoclassical structures, 440–445 Neomercantilism, 156, 158

Net capital flow, calculating, 135 Net import effect, calculating, 134–135 Net National Product (NNP), 119 Net positions, 535t Net present value, 532 Netting, 535 Network structure, 442–443, 442f New York Stock Exchange (NYSE), 287–289 Niches,

vs. mass markets, 467 and production orientation, 465

Nokero case study, 511–516 Non-exporter, 366 Nongovernmental organizations (NGOs), 228 Non-tradable goods, 164 Normativism

defined, 138 vs. relativism, 137–138

North American Free Trade Agreement (NAFTA), 218–221

defined, 218 impact of, 220 Mexico as consumer market, 221 purpose of, 218–219 rationalization of production, 220 rules of origin and regional content, 219 strategy for doing business with, 220 and Walmart in Mexico, 233

Not free country, 67 Not-for-profit services, restrictions on, 200 NYSE:ICE, 246, 247

Offsets defined, 200 as form of countertrade, 393

Offshore currency, 284 Offshore financial centers (OFCs), 294–296

characteristics of, 295 elimination of, pros and cons, 296–297 operational vs. booking centers, 295

Offshore financing defined, 294 and offshore financial centers, 294–296

Offshoring, 98, 321 garment manufacturers, 136 manufacturing operations, 498 point/counterpoint, 12–13 See also Outsourcing

Oil as catalyst for modernization in Saudi Arabia, 26 producers of, OPEC, 230–231 and Venezuela’s economy, 258

Oligopolistic reaction, 347 Olympics, 2, 3, 15, 17 oneworld Alliance case study, 421–425

Subject Index 631

Online platforms, and international trade, 391–392 Onshoring

defined, 321 manufacturing operations, 498

Open markets and average freedom scores, 109 and Economic Freedom

Index, 104 Operating costs, in HIV/AIDS epidemic, 150 Operating exposure, 537 Operational centers, 295 Operational hedging strategies, 538 Operations

defined, 497 modifying, for franchises, 413 See also International operating modes

Operations management, 496 Operations management strategy

and compatibility, 497 coordination and control, 498 and manufacturing configuration, 497–498

Operations strategy, integrated with supply chain, 496f, 497–498

Opinion leadership, and cultural change, 49 Opportunities, resource acquisition, 341–343 Opportunities and risk variables, 340–350

analyzing and relating, 348–350 resource allocation, 341–343 risk factors and considerations, 343–348 sales expansion, 340–341

Optimum-tariff theory, 192 Options, 239, 244–245 Order tracking, 516 Ordoliberalism, 114n75 Organization, 432 Organization of the Petroleum Exporting Countries (OPEC),

230–231 Organizational culture, 453–456

defined, 453 developing, 455–456 importance of, 453–454 Johnson & Johnson case study, 459–460 power of common cause, 454–455

Organizational structure changing and adapting, 430–432 defined, 433 EU, 215–216 expanding cope of IB, 431 factors affecting operations, 430f hierarchical, pros and cons, 445–447, 446f Internet as design standard, 431 introduction, 430 and managerial standards, 431–432 and response to trends, 432 social contract and, 432

Organizational structures, classical, 433–440 divisional structure, 436–439 functional structure, 435–436 global matrix structure, 439–440 horizontal differentiation, 435 mixed structure, 440 vertical differentiation, 433–435

Organizational structures, neoclassical, 440–445 boundarylessness, 441 challenge of boundaries, 440–441 in action, 444 network structure, 442–443 pitfalls of, 444–445 virtual organization, 443–444

Orientations, marketing, 463–466 Outright forward transactions, 239 Outsourcing

defined, 500 innovation in, pros and cons, 502–503 See also Offshoring

Overseas Private Investment Corporation (OPIC), 77 Ownership advantages, 366–367

Pacific Alliance, 222–223 Panama Papers, 296 Parent-country national, 551 Paris Agreement, 143–144 Parliamentary democracy, 65 Partly free country, 67 Partnerships

distribution, 480–481 Carrefour’s, 359–360 potential, finding and evaluating,

418–419 See also Collaborative arrangement; Joint ventures

Par value, 260 Passive exports, 465 Passive income, 291 Payback period, 532 Peace dividend, and growth, 121 Penetration strategy, 470 People, and factor mobility, 174–175 Perception of cues, 41 Peripheral values, 29 Personal space, cultural differences in, 44 Pfizer vs. U.S. government case study, 280–281 Pharmaceuticals

costs of, ART, 151 counterfeit, 90 from Canada, case study, 203–205

Physiological needs, 39 Piracy, 88

case study, 89–91 intellectual property in China, 59 Microsoft products, 89–90

632 Subject Index

Point/counterpoint feature African common currency, 265 companies operating in violent areas, 352–353 cultural imperialism, 48–49 eliminating OFCs and aggressive taxation,

296–297 English as global language, 565–567 exporting e-waste, 374–376 foreign control of key industries, 410–411 government regulation of marketing in developing coun-

tries, 477–479 growth as positive and productive, 121–123 hierarchical structure, 445–447 offshoring, 12–13 outsourcing innovation, 502–503 proactive political risk management, 76–78 regional integration, 226–227 responsibility for unethical employees, 144–145 speculating on currency, 249–250 strategic planning, 313–314 strategic trade policies, 172–173 trade sanctions, 193–194 U.S. companies’ use of IFRS, 526–527

Policies code of conduct, 147 See also Legal policies; Political policies; Regulations

Political economy, Indian, 574 Political environments, 62–66

and collectivism, 62–63 China’s centralized state, 58–59 democratic, 64–65 factors affecting IB, 61f and individualism, 62 and law, impact on business, 88–89 operating within, 60–61 and political ideology, 63–64 totalitarianism, 65–66

Political freedom defined, 64 prevalence of, 68 state of, 67–72, 67m struggles of, 68–71

Political ideology defined, 63–64 and MNEs’ actions, 72–73

Political/legal conditions, effect on growth, progress, and prosperity, 103

Political policies, and IB, 17 Political relationships and economic agreements, effects

on trade, 168 Political risk, 60m, 74–76, 343–344

classifying, 74–75, 75f defined, 74 proactive management of, pros and cons, 76–78

Political spectrum, 63, 63f

Political system defined, 62 types and characteristics, 69t See also Democracy

Politics in China, and yuan, 252 and government, as factors in globalization, 9 and OPEC, 230

Polycentric management, 47 Polycentric staffing framework, 556–558, 559t Polychronic, 42 Population size, 116 Portfolio investment, 16 Poverty

in developing economies, 99–100 as economic analysis component,123 reduction, and growth, 121

Power distance, 40 Prada case study, 298–300 Pragmatic, 42 Premature industrialization, 189 Prescription Drug Marketing Act, 203, 204 Prestige, cultural indications of, 44–45 Price controls, and OPEC, 230 Price influences

nontariff barriers, 196–198 tariffs, 195–196

Prices and BoP product, 488 pharmaceuticals from Canada vs. US, 203–204 high, downside to, 230–231 transfer, 292–293 See also Costs

Pricing Grameen Danone Foods case study, 488 Tommy Hilfiger, 462

Pricing complexities, 469–472 export price escalation, 470 fixed vs. variable, 471–472 fluctuations in currency value, 470–471 government intervention, 469 market diversity, 469–470

Primary activities, 315 Private technology exchange (PTX), 506 Proactive political risk management, point/counterpoint

feature, 76–78 Problem-solving, multinational, 9–10 Procedural political risk, 75 Process technology

acquired advantage and, 160 and factor proportions theory, 166–167

Product adaptation, reasons for, 467–468 Product compatibility, and BoP product, 488 Product differentiation, effects on trade, 167–168 Product diversion, 471

Subject Index 633

Product division, worldwide, 437 Product introduction stage, and PLC theory, 168–169 Production

decisions about, and exchange-rate changes, 274 increase through specialization, 160–161

Production networks, and theories of specialization, 163 Productivity, of exporting, 369 Productivity/leisure tradeoff, 38 Product life cycle (PLC) theory, 157, 168–170

defined, 168 verification and limitations of, 169–170

Product line extent and mix, 469 gaps in, 484

Product name, 477 Product orientation, 464–465 Product policies, Grameen Danone Foods case study, 488 Product regulation

to protect US catfish industry, 184–185 as strategic concern, 87

Products altering for foreign sales, 403 country adaptation vs. global standardization, 467–469 institutional factors affecting flow of, 186f manufactured, growth through import restrictions, 190 Tommy Hilfiger case study, 462

Product safety and liability regulation, 87 Product strategy, competitive, 18–19 Product technology

as acquired advantage, 159–160 and factor proportions

theory, 167 Product types, in national trade, 166–167 Profitability, of exporting, 368–369 Promotion

and BoP product, 488 differences among countries, 472–475 push-pull mix, 472–473 Grameen Danone Foods case study, 489 to potential distributors, 480–481 Zara case study, 303

Promotion, problems in, 473–475 Internet, 475 legalities, 474 message needs, 474 translation, 474

Promotion and branding, Tommy Hilfiger, 462–463 Property. See Intellectual property; Resources Property rights, 82–83 Protectionism, 186 Protestant work ethic theory, 37–38 Public debt, as economic analysis component,123 Pull promotion, 472 Purchasing function, 504–505 Purchasing power parity (PPP), 116–117

exchange rate and, 269–271 GDP per capita adjusted for, 118m

Push promotion, 472 Push-pull promotion, 472–473

Qatar Investment Authority, 4 Quality, 507–510

defined, 507 lean manufacturing and total quality management (TQM),

508–509 and operations management, 497 Six Sigma, 509 standards, 509–510 and zero defects, 507–508

Quality controls, exchange rate, 269 Quota

defined, 260–261 Japanese cars into Europe, 208 as quality control, 198–199

Racial groups, 36 Radio frequency ID (RFID), 505–506 Rate of return, internal, 532 Reciprocal advantages, of cross-national cooperation, 9 Reciprocal requirements in trade, 200 Reconciliation, 524 Regional economic integration, 211–213

bilateral agreements, 211 effects of, 212–213 and geography, 211–212 pros and cons, 226–227 static and dynamic effects, 212–213

Regional integration defined, 209 vs. WTO, 231

Regional manufacturing, 498 Regional trading groups, 213–228

comparative statistics, 214t European Union (EU), 214–218 North American Free Trade Agreement (NAFTA), 218–221 UN and other NGOs, 227–228

Regional trading groups, economic integration Africa, 225–226 Americas, 221–223 Asia, 223–224

Regional Value Content requirements, 219 Regular exporter, 366 Regulations

airline industry, 422 as challenge in import/export, 383–384 Indian, 575 product safety and liability, 87 See also Governmental constraints; Laws; Product

regulations; Trade intervention

634 Subject Index

Regulatory efficiency and average freedom scores, 109 and Economic Freedom Index, 104

Regulatory framework by nation, 85t

Regulatory risk, effect on borrowing, 283 Reinvestment, 355 Relationship-focus (RF) culture, 30 Relativism

defined, 138 vs. normativism, 137–138

Religion as cultural stabilizer, 34–35 distribution of major, 35m in Saudi Arabia, 26

Renminbi. See Yuan Reporting system, organizing and implementing, 538 Reports, as control mechanism, 452 Representative democracy, 65 Research and data

external sources of information, 351–352 inaccuracy, 350–351 noncomparability, 351

Research and development costs, recouping for pharmaceuticals, 204

Reserve assets, central bank, 267 Reshoring, 321

defined, 13 manufacturing operations, 498

Resource acquisition as opportunity, 341–343 through IB, 14

Resource-based view, 407 Resources

capabilities, and competencies, role in strategy, 307–308 defined, 309 marshaling, for turnkey operations, 414 specification and profile, 309t Zara case study, 303

Resources, allocating among locations, 353–356 alternative gradual commitments, 353–354 geographic diversification vs. concentration,

354–355 noncomparative locations, 356 reinvestment and harvesting, 355–356

Retail sites, Zara case study, 303 Retail types, Carrefour, 358 Revenue, tariffs as source of, 195–196 Reverse culture shock, 46 Reverse-expats, 554 Reward, expectation of, 38–39 Rightshoring, 13 Risk, 343–348

competitive, 345–348 counterparty, 519

factors to consider, 343 financial, with import and export, 381 financial, importing and exporting, 381 foreign-exchange, 344–345 in foreign sourcing, 508–509 minimizing through collaboration, 409 natural disaster, 345 political, 74–76, 343–344 pros and cons of operating in violent areas, 352–353 to working abroad, 548

Risk analysis, factors to consider, 343 Risk management, foreign-exchange, 536–539 Risk reduction, through IB, 14–15 Risk-taking behavior, 40–41 Risk variables

analyzing and relating to opportunity, 348–350 opportunity and, 340–350

Rivalry, as diamond facet, 171 Robots, rise of, 319–320 Rose market, Ecuadoran, 179–182 Royalties, 15 Rule, regulatory framework by nation, 85t Rule of law, 81–83

and average freedom scores, 109 and Economic Freedom Index, 104 defined, 81 worldwide practice, 82m

Rule of man, 81–83 Rules of origin, NAFTA, 219 Russia

and decline in commodity prices, 95 operating in legal and political environment, 61

Rwanda, and economic freedom, 109

Safety in cruise industry, 22–23 and pharmaceuticals from Canada, 204 product, and liability regulation, 87

Sales building abroad, 488 expanding, through IB, 14 and product line extent and mix, 469

Sales income, and CFC, 291 Sales orientation, 465 Sales volume, and distribution, 480 SAMA Foreign Holdings, 287 Sanctions. See Trade sanctions Sarbanes-Oxley Act (SOX), 142, 540 Saudi Arabia

and Arabian Peninsula, 27m case study, 26–29 and decline in commodity prices, 95

Scale, contracting to, 413 Scanning

comparing countries through, 338–340

Subject Index 635

defined, 339 vs. detailed analysis, 339–340

Schengen Area, 216–217 Secrecy-Transparency/Optimism-Conservatism Matrix,

523–524 Secularism, 65 Security needs, 39 Segmentation, 466–467 Self-actualization needs, 39 Sentiment analysis, 77 Separate equity approach, 290 Serendipity, 372 Service exports and imports, 15 Service income, and CFC, 291 Service performance, 15 Services

restrictions on, 200–201 and theories of specialization, 163

Shadow economy, 118 Shanghai Maritime Court, 43 Shareholders, as stakeholders, 132 Shipping, payments and pricing, 515–516 Ships, shopping for, 22 Shopping, as adventure, 304 Shortages, in Venezuela case study, 258 Sight draft, 247 Silent language, 43–45 Singapore International Monetary Exchange, 250 Six Sigma, 509 Skimming strategy, 470 Small and medium-sized enterprises (SMEs)

defined, 367 SpinCent, 362–364

Smithsonian Agreement, 262 Social business, 486–487 Social contract, and organizational structure, 432 Social democracy, 65 Social enterprise sector, opportunities for Nokero, 515 Socialism, and mixed economies, 114 Social marketing orientation, 466 Social media, and dealing with ethical dilemmas, 148 Social stratification, issues in, 35–37 Society, as stakeholder, 132 Soft currencies, 269 Soft peg, 263 Software, piracy, 91 Software platforms, and international trade, 391–392 Solar light bulb case study, Nokero, 511–516 Sony falling yen case study, 275–278 Sourcing, 499–502

conflict minerals, 504 defined, 499 foreign, risks in, 508–509 globally, reasons for, 501 major configurations, 501–502

make-or-buy decision, 502 purchasing function, 504–505 raw materials, 499f supplier relations, 504

South Africa Anglo American PLC in, 149–151 and decline in commodity prices, 95

South Korea, and monetary measures, 115 Sovereignty, 10 Sovereign wealth funds (SWFs), 287 Spain, growth of Meliá Hotels in, 398 Special drawing rights (SDRs), 260–261 Specialization

and acquired advantage, effects on trade, 167 increasing production through, 160–161 theories of, 162–164 trade patterns and, 178

Specialization of labor, and importing, 379 Specific duty, 195 Speculation

on currency, pros and cons, 249–250 and financial flows, 248

Spillover effect, 346 Sporadic exporter, 366 Sports case study, 2–4 Spot market, 243 Spot rate, 239 Spot transactions, 239 Stability

economic development, performance, and potential, 120–121

sustainability and, 119 Stability and Growth Pact, 263–264 Staffing frameworks, 554–559

defined, 554 ethnocentric, 555–556, 559t geocentric, 558–559, 559t polycentric, 556–558, 559t principles and practices, 559t

Staffing network, deciding on, 559 Stakeholder participation in change, 48, 49 Stakeholders

defined, 132 and GRI, 148 involving in governmental trade influences, 201–202 pressures from, in HIV/AIDS epidemic, 150–151 role within trade regulations, 187

Stakeholder trade-offs, 132–133 Standardization

coordination by, 447 in distribution, 479 potential for, 322–323

Standard of living as component of HDI, 119 economic freedom and, 105f

636 Subject Index

Standard & Poor’s 500 Index, 314 Standards

company-specific, 510 establishing IFRS, 525 global convergence and, 524–526 industry-specific, 510 International Accounting Standards Board, 525–526 and labels, 199 restrictions on services and, 200–201 quality, 509–510 See also Generally Accepted Accounting Principles (GAAP)

Stare decisis doctrine, 79–80 Start-up

exporting, 371–374 See also Greenfield Investment

State Administration of Foreign Exchange (SAFE), 253, 254 State capitalism, 110–111 Static effects

defined, 212 NAFTA, 219

Statics and dynamics, and theories of specialization, 163 Stock markets, global

political and economic forces and trends, 287–288 size of, 287–289

Strategic alliance, 16. See also Collaborative arrangement Strategic marketing orientation, 466 Strategic orientation, Grameen Danone Foods case study, 488 Strategic planning, 307, 313–314 Strategic trade policy, 172 Strategies

corporate-level, 326–331 cost leadership, 310–311 defined, 305 differentiation, 311–312 diversification vs. concentration, 354–355 entry, 401 exposure-management, 537–539 global, 329–330 global, freedom to pursue, 405 hedging, 538–539 IHRM, 550–551 integrated cost leadership/differentiation, 312 international, 326–328 localization, 328–329 making sense of decisions, 307–308 marketing. See Marketing strategies in MNE, 305–307 operations, integrated with supply chain, 496f, 497–498 pricing, 470 role in IB, 305f structure follows, 433–434 transnational, 330–331

Strategy-structure-systems model, 440n40 Stress, personal, 12 Structure, as diamond facet, 171

Subpart F income, 291 Subsidiaries

determining income of, 292 foreign, 290–291 licensing to, 412 tax-haven, as holding company, 292f visiting, as control mechanism, 452

Subsidies, 196–197 Substitution, in trade and factor mobility, 176 Success, expectation of, 38–39 Supplier relations, 472, 504 Supply chain

addressing issues, 515–516 Apple case study, 494–495 defined, 496 integrated with operations strategy, 496f, 497–498 sources of worker-related pressures, 146f uncertainty in future, 511

Supply chaining, 500 Supply-chain management

in global supply chain, 496–497 defined, 496

Supply-chain management, and IT, 505–506 e-commerce, 506 electronic data interchange (EDI), 505 enterprise resource planning/material requirements

planning, 505 radio frequency ID, 505–506

Supply dynamics, and compensation, 569 Support activities, 315 Sustainability

defined, 119, 142–143 and growth, 122–123 and stability, 119

Sweden, and H&M case study, 541–543 Switch or swap trading, 393 Syndication, 284 Syrian refugee crisis, EU and, 217 Systemic political risk, 75

Taiwan as economic success, 173 international trade evolution case study, 154–156 major export markets of, 155m

Taoism, 343b25 Targeting markets, 466–467 Target market and client strategy, 518 Tariffs

defined, 195 as direct price influences, 195–196 optimum-tariff theory, 192

Taxation aggressive, pros and cons of eliminating,

296–297 corporate, two approaches, 290

Subject Index 637

double, and tax credit, 293 transfer prices and, 292–293

Taxation of foreign-source income, 289–294 dodging taxes, 294 double taxation and tax credit, 293 international practices, 289–290 taxing branches and subsidiaries, 290–292 transfer prices, 292–293

Tax credit, double taxation and, 293 Tax differentials, for expat, 569 Taxes

different types, 289 dodging, 294

Tax havens, OFCs as, 295–296 Taxing branches and subsidiaries, 290–292 Tax inversions case study, 280 Tax rates, differences in, 290 Tax revenues, governments’

drive to capture more from MNEs, 297 Tax treaties, and elimination of double taxation, 293 Technical forecasting, 272 Technology

democratization and, 68 e-commerce, 394–395 foreign-exchange trades and, 251 and globalization, 7–8 influence on exporting, 374 and organizational structure, 434–435 process, and factor proportions theory, 166–167 product, and factor proportions theory,167 transforming international trade, 391–392 at Zara stores, 304 See also Information technology (IT); Internet

Technology transfers, and collaborative arrangements, 419 Tel-Comm-Tek (TCT) case study, 574–577 Teleological approach, 137 Temporal method, 529 Terms currency, 243 Terms of trade, 190 Tesco PLC case study, 52–55 Theocracy, 65 Theocratic law, 80 Third-country national

defined, 551 growing scope, 553

Third-party logistics (3PLs), 388–389 Third Wave of Democratization, 68, 80 3-D printing, 319–320 Time draft, 247 Time zones, overlapping, 242–243, 242f Tokyo Stock Exchange, 287, 289 Tommy Hilfiger case study, 462–463 Totalitarianism, 65–66

business implications, 66 prominent types, 65t

Totalitarian system, 65 Total quality management (TQM), 508 Tourism, and transportation, 15 Toyota’s European drive case study, 208–209 Toyota Way, the, 307n32, 456n112, 458n127 Trade

between developed and developing economies, 177 ease of, 385t and factor mobility, 176–177 global, future of, 202 as internalization, 369 liberalization across borders, 8 national, 164–168 See also Importing and exporting

Trade agreements bilateral, 211 FTAs, impact of, 213f limiting Japanese cars in Europe, 208 See also North American Free Trade Agreement (NAFT)

Trade creation, 212 Trade deficit, 158 Trade diversion

NAFTA as, 219 static effects and, 212

Trade influences, governmental, how companies deal, 201–202

Trade intervention, 469 economic rationales and outcome uncertainties, 187–192, 187t and extending spheres of influence, 195 governmental, reasons for, 187t major instruments of control, 195–201 noneconomic rationales and outcomes, 192–193, 195 nontariff quantity controls, 198–201 nontariff quantity controls, quotas, 198–199 preserving national culture through, 195 See also Export restrictions; Import restrictions; Laws; Legal

environment; Regulations Trademark squatters, 409 Trade patterns, future scenarios, 177–178 Trade protectionism, conflicting outcomes of, 186–187 Trade-Related Aspects of Intellectual Property Rights (TRIPS),

90, 91 Trade restrictions on importing, 403–404 Trade sanctions, pros and cons, 193–194 Trade surplus, 158 Trade theories

major, areas of address, 157t reasons for reliance on, 156–158

Trading partners factors determining, 167–168 See also Regional trading groups

Traditions, in Saudi Arabia, 27–28 Transaction exposure, 537 Transatlantic Trade and Investment Partnership (T-TIP), 217 Transfer prices, 292–293

638 Subject Index

Transformation, using diamond of national advantage for, 171–172

Transit tariffs, 195 Translation

importance of accuracy, 43 translation in advertising, 474 See also Languages, different

Translation exposure, 536–537 Translation methods

foreign-currency financial statements, 529–531 process, 530 selecting, 530f

Transnational company (TNC), 16 Transnational strategy, 330–331 Trans-Pacific Partnership (TPP), 224 Transpacific route, American and Japan airlines, 424m Transparency, and Swedish accounting, 542 Transpatriate, 551 Transportation

costs, and theories of specialization, 163 and globalization, 7–8 shipping, payments and pricing, 515–516 and tourism, 15

Travel agent of cargo. See Freight forwarders Trust, 41 Turnkey operations,

as collaborative arrangement, 413–414 defined, 15

Uncertainty avoidance, 40–41 Unemployment

as economic analysis component,123 fighting, 187–188

Unfavorable balance of trade, 158 United Kingdom (UK)

and Brexit, 227, 228 Tesco PLC in, 52–55

United Nations, 227–228 United Nations Conference on Trade and Development

(UNCTAD), 228 United States

anticorruption efforts, 141–142 central bank, 267 import regulation of pharmaceuticals, 203 minimum wage, 98 national vs. state economies, 165m

United States Commercial Services, Export Assistance Center, 362–363

United States Treasury, and tax inversions case study, 280–281

United States-Vietnamese catfish dispute case study, 184–186

Unity-of-command principle, 439–440 Universal Declaration of Human Rights, 67

Urbanization, and trade patterns, 177 Usage gap, 483–484 Utilitarianism, 137

Value defined, 310 core and peripheral, 29

Value, quest to create, 310–311 cost leadership strategy, 310–311 differentiation strategy, 311–312 integrated cost leadership/differentiation, 312

Value activities, locating, 317t Value-added tax (VAT), 289 Value chain, 314–318

configuring, 315–318 and economies of scale, 318 specifying, 316f visualizing, 315f

Value systems, and change strategies, 48 Venezuelan currency case study, 258–259 Vertical alliance, 409 Vertical differentiation, 433–435 Vertical integration, 501 Vertical links, securing through collaboration, 408 Vietnam, fishing dispute with US, 184–186 Virtual organizations, 443–444 Visible exports and imports, 15 Vision, 305 Vision statements, leading MNEs, 306t Volkswagen “defeat” software, 144–145 Voluntary export restraint (VER), 199

Walmart case study, 232–234 Washington Consensus, 72, 73 Water use reduction, GE’s commitment to, 130, 131 Weather, and cruise business, 23 Website, going global with e-commerce, 394–396 Western markets, economic environments of,

126–127 Western Union case study, 236–237 Where-to-Be Born Index (WTBBI), 125 W. L. Gore & Associates case study, 428–429 Women

as expatriates, 553 in Saudi Arabia, 26, 28 See also Gender roles

Workers surplus, 189 See also Employees; Labor

Workforce, Saudi women in, 28–29 Working abroad. See Expatriates Work motivation, cultural differences in, 37–40 Workplace tensions, in ethnocentric framework,

555–556

Subject Index 639

World Bank assessing legal issues for business, 85 study on laws hindering women’s work, 37

World Competitiveness Index (WCI), 124 World Cup, 2, 3 World Intellectual Property Organization (WIPO), 87, 90 World market, single, and international trade zones, 242m World Trade Organization (WTO)

defined, 210 and global integration, 209–211 and most favored nation, 210

purpose of, 210–211 role in settling disputes, 210–211 vs. bilateral and regional integration efforts, 231

World trade as percent of world GDP, 364f

Yen case study, 275–278 Your Better Life Index (YBLI), 120 Yuan case study, 252–255

Zara case study, 302–304 Zero defects, 507–508

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EndnotEs

1 Sources include the following: “Bigger than Blatter,” The Economist (June 6, 2015): 12; Andrew Zimbalist, Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup,” (Washington: Brookings Institution Press, 2015); Binyamin Applebaum, “Globalization Under Attack,” New York Times (April 2, 2015): A3; Stephanie Clifford and Matt Apuzzo, “U.S. Vows to Rid Global Soccer of Corruption,” New York Times (May 28, 2015): A1+; CIES Football Observatory, “Monthly Report: Foreign Players in Teams,” (February 9, 2016): n.p.; “The Swedish Model,” The Economist (October 27, 2012): 56; Kim Daekwan, “The Global Impacts of World Event Sponsorships on Firm Market Performance: A Hierarchical Linear Modeling Approach,” Proceedings of the 54th Annual Meeting of the Academy of International Business (Washington: June 30 – July 3, 2012); Mike Esterl, “Olympics Sponsors Go for the Young,” Wall Street Journal (July 3, 2012): B8; Harald Dolles and Sten Söderman, eds., Sport as a Business: International Professional and Commercial Aspects (Houndsmills, UK: Palgrave Macmillan, 2011); Mark Mulligan, “Football, Funding and MBAs,” Financial Times (December 13, 2010): 11; Roger Blitz, “Sports Organisers Play High Stakes Games,” Financial Times (September 29, 2010): 7; Jeremy Kahn, “N.B.A. in India, In Search of Fans and Players,” New York Times (December 28, 2010): B13; Simon Kuper, “Lost in Translation,” Financial Times (February 2–3, 2008): p. life & arts 2; Matthew Graham, “Nike Overtakes Adidas in Football Field,” Financial Times (August 19, 2004): 19; L. Jon Wertheim, “The Whole World Is Watching,” Sports Illustrated (June 14, 2004): 73–86; Jon Wertheim, “Hot Prospects in Cold Places,” Sports Illustrated (June 21, 2004): 63–66; Grant Wahl, “Football vs. Fútbol,” Sports Illustrated (July 5, 2004): 69–72; Grant Wahl, “On Safari for 7-Footers,” Sports Illustrated (June 28, 2004): 70–73.

2 For a good discussion of the versatility of the term globalization, see Joyce S. Osland, “Broadening the Debate: The Pros and Cons of Globalization,” Journal of Management Inquiry 10:2 (June 2003): 137–54.

3 Amy M. Thomas, “Brussels: The Chocolate Trail,” New York Times (December 25, 2011): tr7 shows that the typical bonbon includes cacao from five different countries. Less than 75 percent of Ford’s content orig- inates in the United States; see Sue Callaway, “Cars Made in America? Chrysler, Ford No Longer Qualify,” Fortune (June 29, 2015): n.p.

4 Andrew Batson, “Not Really ‘Made in China,’” Wall Street Journal (December 16, 2010): B1–B2.

5 Günther G. Schulze and Heinrich W. Ursprung, “Globalisation of the Economy and the Nation State,” The World Economy 22:3 (May 1999): 295–352.

6 “Africa’s Economy: Bulging in the Middle,” The Economist (October 20, 2012): 43.

7 For example, see OECD, Measuring Globalisation: OECD Economic Globalisation Indicators (Paris: OECD, 2005); Pim Martens and Daniel Zywietz, “Rethinking Globalization: A Modified Globalization Index,” Journal of International Development 18:3 (2006): 331–50; “The Globalization Index,” Foreign Policy (November–December 2007): 68–76; M. Raab, M. Ruland, B. Schonberger, H. P. Blossfeld, D. Hofacker, S. Buchholz, et al., “GlobalIndex: A Sociological Approach to Globalization Measurement,” International Sociology 23:4 (2008): 596–631; “KOF Globalization Index, 2011,” http://globalization.kof. ethz.ch/ (accessed November 5, 2012).

8 Gardiner Harris, “Tiny Bean, Crucial to Halliburton, Lifts India Farmers from Mud,” New York Times (July 17, 2012): A1+.

9 Dan McGraw, “The Foreign Invasion of the American Game,” The Village Voice (May 28–June 3, 2003) (accessed June 4, 2007).

10 See Rodney C. Shrader, Benjamin M. Oviatt, and Patricia Phillips McDougall, “How New Ventures Exploit Trade-Offs among International Risk Factors: Lessons for the Accelerated Internationalization of the 21st Century,” Academy of Management Journal 43:6 (2000): 1227–47.

11 Mark Scott, “Companies Born in Europe, but Based on the Planet,” New York Times (June 12, 2012): B7.

12 “Charlemagne: Coming off the Rails,” The Economist (October 20, 2012): 51.

13 Landom Thomas, Jr., “Seeking Firewall Between Fed and World,” New York Times (December 8, 2015): B1+ referring to criticism by Hélène Rey.

14 For the cooperation on piracy, see “Malacca Buccaneers,” The Economist (June 27, 2015): 34.

15 Susan Carey, “Calculating Costs in the Clouds,” Wall Street Journal (March 6, 2007): B1+.

16 His views are discussed in Joellen Perry, “Nobel Laureates Say Globalization’s Winners Should Aid Poor,” Wall Street Journal (August 25, 2008): 2.

17 Lorraine Eden and Stefanie Lenway, “Introduction to the Symposium Multinationals: The Janus Face of Globalization,” Journal of International Business Studies 32:3 (2001): 383–400.

18 For a discussion on the impact of international travel, see “Travelling Light,” The Economist (August 29, 2015): 50.

19 Christopher DeMorro, “One Container Ship Pollutes As Much As 50 Million Cars,” (June 3, 2009), http://gas2.org/2009/06/03/one- container-ship-pollutes-as-much-as-50-million-cars/ (accessed September 14, 2012).

20 On the question of absolute versus relative income gains, see Richard Easterlin, “Happiness, Growth, and Public Policy,” Economic Inquiry 51:1 (January 2013): 1–15.

21 His views are discussed in Joellen Perry, “Nobel Laureates Say Globalization’s Winners Should Aid Poor,” Wall Street Journal (August 25, 2008): 2.

22 Steve Lohr, “An Elder Challenges Outsourcing’s Orthodoxy,” New York Times (September 9, 2004): C1+; Paul A. Samuelson, “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization,” Journal of Economic Perspectives 18:3 (Summer 2004): 135–47.

23 An examination of this subject may be found in Arne Kalleberg, “Precarious Work, Insecure Workers: Employment Relations in Transition,” American Sociological Review 74:1 (2009): 1–22.

24 Bernhard G. Gunter and Rolph van der Hoeven, “The Social Dimension of Globalization: A Review of the Literature,” International Labour Review 143:1/2 (2004): 7–43.

25 Jagdish Bhagwati, “Anti-Globalization: Why?” Journal of Policy Modeling 26:4 (2004): 439–64.

26 Craig Karmin, “Offshoring Can Generate Jobs in the U.S.,” Wall Street Journal (March 16, 2004): B1.

27 Keun Lee and Moosup Jung, “Overseas Factories, Domestic Employment, and Technological Hollowing Out: A Case Study of Samsung’s Mobile Phone Business,” Review of World Economics 151:3 (August 2015): 461–75.

28 Robert C. Feenstra and Gordon H. Hanson, “The Impact of Outsourcing and High-Technology Capital on Wages: Estimates for the United States, 1979–1990,” Quarterly Journal of Economics 114:3 (1999): 907–40.

29 Alan S. Brown, “A Shift in Engineering Offshore,” Mechanical Engineering 131:3 (2009): 24–29.

30 “An Internet of Airborne Things,” The Economist (December 1, 2012): Monitor 3.

31 Paul Markille, “Cars on Autopilot,” The Economist (The World in 2013 special issue): 152.

32 Carl Benedikt Frey and Michael A. Osborne, The Future of Employment: How Susceptible Are Jobs to Computerization (Oxford, UK: Oxford University Programme on the Impacts of Future Technology, 2013).

http://gas2.org/2009/06/03/one-container-ship-pollutes-as-much-as-50-million-cars/

http://globalization.kof.ethz.ch/

2 Endnotes

33 Lydia Bals, Anika Daum, and Wendy Tate, “From Offshoring to Rightshoring: Focus on the Backshoring Phenomenon,” AIB Insights 15:4 (2015): 3–8.

34 David H. Autor, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation,” The Journal of Economic Perspectives, 29:3 (Summer 2015): 3–30; and Tali Kristal, “Good Times, Bad Times: Postwar Labor’s Share of National Income in Capitalist Democracies,” American Sociological Review 75.5 (Oct 2010): 729–63.

35 Deborah Solomon, “Federal Aid Does Little for Free Trade’s Losers,” Wall Street Journal (March 1, 2007): A1+.

36 Paul Windrum, Andreas Reinstaller, and Christopher Bull, “The Outsourcing Productivity Paradox: Total Outsourcing, Organisational Innovation, and Long Run Productivity Growth,” Journal of Evolutionary Economics 19:2 (2009): 197–232; and Ryan Avent, “The Third Great Wave,” The Economist (October 4, 2014): Special Report, The World Economy: 6.

37 Small Business Export Association, “Eight Myths about U.S. Business Exporting,” (June 1, 2015) http://smallbsiness.com/selling/small- business-exporting-facts/ (accessed March 24, 2016); and “Rep. Sam Graves Holds a Hearing on U.S. Trade Strategy and Small Business Exporters,” Political Transcript Wire [Lanham] 17 (May 2012): n.p.

38 Heather Berry, “Leaders, Laggards, and the Pursuit of Foreign Knowledge,” Strategic Management Journal 27 (2006): 151–68; and Jaeyong Song and Jongtae Shin, “The Paradox of Technological Capabilities: A Knowledge Sourcing from Host Countries of Overseas R&D Operations,” Journal of International Business Studies 39:2 (2008): 291–303.

39 Smitha R. Nair, Mehmet Demirbag, and Kamel Mellahi, “Reverse Knowledge Transfer from Overseas Acquisitions: A Survey of Indian MNEs,” Management International Review 55 (2015): 277–301.

40 Aaron Chatterji, “”Why Washington Has It Wrong,” Wall Street Journal (November 12, 2012): R1+.

41 “Ships Take to Arctic Ocean as Sea Ice Melts,” www.msnbc.com/ id/39394645/ns/world_news-worldenvironment (accessed September 28, 2010).

42 Geoffrey M. Hodgson, “What Are Institutions?” Journal of Economic Issues XL: 1 (March 2006): 2; for a discussion on the measurement of institutional differences, see André van Hoorn and Robbert Maseland, “How Institutions Matter for International Business: Institutional Distance Effects vs Institutional Profile Effects,” Journal of International Business Studies 47:3 (2016): 374–81.

43 Sam Anderson, “Home and Away,” New York Times Magazine (August 23, 2015): 26–9.

44 Paraq Khanna, Connectography: Mapping the Future of Global Civilization (New York: Random House: 2016).

45 David Wessel and Marcus Walker, “Good News for the Globe,” Wall Street Journal (September 3, 2004): A7+.

46 Alan M. Rugman and Cecelia Brain, “Multinational Enterprises Are Regional, Not Global,” Multinational Business Review 11:1 (2004): 3; and Alain Verbeke and Liena Kano, “An Internalization Theory Rationale for MNE Regional Strategy,” Multinational Business Review 20:2 (2012): 135–52.

47 John Ralston Saul, “The Collapse of Globalism,” Harpers (March 2004): 33–43; James Harding, “Globalisation’s Children Strike Back,” Financial Times (September 11, 2001): 4; Bob Davis, “Wealth of Nations,” Wall Street Journal (March 29, 2004): A1; Harold James, The End of Globalisation: Lessons from the Great Depression (Cambridge, MA: Harvard University Press, 2001).

48 The figures are from the United Nations and appeared in Somini Sengupta, “Global Poverty Drops Sharply, But Gains are Uneven,” New York Times (July 7, 2015): A4.

49 D. Ronen, “The Effect of Oil Price on Containership Speed and Fleet Size,” The Journal of the Operational Research Society 62:1 (January 2011): 211–16.

50 On the schism between those who thrive in a globalized environ- ment and those who don’t, see Jagdish Bhagwati, “Anti-Globalization: Why?” Journal of Policy Modeling 26:4 (2004): 439–64; Roger Sugden and James R. Wilson, “Economic Globalisation: Dialectics, Conceptualisation and Choice,” Contributions to Political Economy 24:1 (2005): 13–32; J. Ørstrøm Møller, “Wanted: A New Strategy for Globalization,” The Futurist (January–February 2004): 20–22.

51 Sources include the following: We’d like to acknowledge the invaluable assistance of Brenda Yester, vice president of Carnival Cruise Lines. Other sources include Hannah Sampson, “From Ships to Finance, Carnival’s Woes Grow,” Miami Herald (March 16, 2013): A1+; David McFadden, “World’s Biggest Cruise Ships Drop Anchor in Caribbean, but Ship-to-Shore Feud Brews Over Cash,” Associated Press (October 10, 2012): n.p.; Hannah Sampson, “Cruise Industry,” Miami Herald (December 21, 2012): 10B+; Hester Plumridge, “Cruise Tragedy Takes Its Toll on Carnival,” Wall Street Journal (January 17, 2012): C10; “Update: Japanese ECAs Credit Carnival’s Cruise Ships,” Trade Finance (Feb 2012): n.p.; Elliot Spagat, “Passengers Disembark ‘Nightmare’ Cruise Amid Cheers,” www .msnbc.msn.com/id/40126918/ns/travel-cruise_travel?GT1=43001 (accessed November 11, 2010); “Cruise Market Watch,” www.cruise- marketwatch.com/market-share/ (accessesd December 16, 2012); “Cruise Ship Industry Statistics,” www.statisticbrain.com/cruise- ship-industry-statistics/ (accessed December 16, 2012); “Holland America Line Adds Three New Segments To 2012 Grand Asia And Australia Voyage,” Marketing Weekly News (July 14, 2012): 52; Pan Kwan Yuk, “Carnival Outlook Down on Discounts,” Financial Times (March 25, 2009): 16; Tom Stieghorst, McClatchy-Tribune Business News (March 21, 2008): n.p.; “Carnival Cruise Lines; Carnival Experiencing Dramatic Increase on On-Line Shore Excursion Sales,” Entertainment & Travel (March 26, 2008): 168; “The Wave Rolls On: Carnival Cruise Lines Reports Record Booking Week,” PR Newswire (March 3, 2009): n.p.; Martha Brannigan, “Cruise Lines Aim for Wider Appeal,” Knight Ridder Tribune Business News (March 14, 2007): 1; Cruise Lines International Association, “Cruise Industry Overview,” Marketing Edition 2006, www.cruising.org/press/overview%20 2006.cfm (accessed May 9, 2007); Donald Urquhart, “Greed and Corruption Rooted in Flag of Convenience System,” The Business Times Singapore (March 9, 2001): n.p.; Daniel Grant, “Onboard Art,” American Artist (March 2003): 18.

http://smallbsiness.com/selling/small-business-exporting-facts/

http://www.msnbc.com/id/39394645/ns/world_news-worldenvironment

http://www.cruise-marketwatch.com/market-share/

http://www.statisticbrain.com/cruise-ship-industry-statistics/

http://www.cruising.org/press/overview%202006.cfm

http://www.msnbc.com/id/39394645/ns/world_news-worldenvironment

http://www.msnbc.msn.com/id/40126918/ns/travel-cruise_travel?GT1=43001

http://www.cruising.org/press/overview%202006.cfm

EndnotEs

1 We are particularly appreciative of personal insights given us by the following people in Saudi Arabia: Nora al Jundi, lecturer at Effat University; Omar Aljindi, consultant at Saudi Diyar Consultants; and Talah Tamimi, former executive at Saudi Investment General Authority. Additional sources include the following: “Saudi Arabia: Advisors Urge King to Let Women Drive,” New York Times (November 8, 2014): A7; “Saudi Arabia: One (Very) Small Step for a Woman,” The Economist (December 19, 2015): 62; “Saudi Arabia: A Small Step for Women,” New York Times (December 3, 2015): A8; “Fashion in Saudi Arabia,” The Economist (June 13, 2015): 47; Ben Hubbard, “Young Saudis Find Freedom on Smartphones,” New York Times (May 24, 2015): International 6+; Sue Tibballa, “Saudi Women Make History,” New Statesman 141:5118 (August 13, 2012): 17; “Saudi Arabia: The Western Compound,” americanbedu. com/2011/03/07/saudi-arabia-the-western-compound/(accessed March 15, 2011); Abeer Allam, “Saudi Women Bridle at Business Rules,” Financial Times (May 22, 2009): 4; Karen Elliott House, “Pressure Points,” Wall Street Journal (April 10, 2007): A1+; Steve Jarvis, “Western-Style Research in the Middle East,” Marketing News (April 29, 2002): International section, 37; Barbara Slavin, “U.S. Firms’ Saudi Offices Face Manpower Issues,” USA Today (May 13, 2002): 5A; Colbert I. King, “When in Saudi Arabia…Do as Americans Do,” Washington Post (February 2, 2002): A25.

2 Patricia Faison Hewlin, “Authenticity on One’s Own Terms,” Chapter 6 in Positive Organizing in a Global Society, eds. Laura Morgan Roberts, Lynn Perry Wooten, and Martin N. Davidson (New York: Routledge, 2016): 53–8.

3 Robert J. Foster, “Making National Cultures in the National Acumen,” Annual Review of Anthropology 20 (1991): 235–60, discusses the con- cept and ingredients of a national culture.

4 Helene Tenzer and Markus Pudelko, “Language Differences as Impediments to Shared Mental Model Formation in Multinational Teams,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012).

5 Jeanne Brett, Kristin Behfar, and Mary C. Kern, “Managing Multicultural Teams,” Harvard Business Review 84 (November 2006): 84–91; Yaping Gong, “The Impact of Subsidiary Top Management Team National Diversity on Subsidiary Performance: Knowledge and Legitimacy Perspectives,” Management International Review 46:6 (2006): 771–98; and Aida Hajro, Markus Pudelko, and Christina Gibson, “Multinational Teams: Cultural Differences, Interactions, Organizational Context, and Performance,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012).

6 Vas Taras, Pawel Bryla, Dan V. Caprar, Alfredo Jimenez, Peter Magnusson, and Riikka Sarala, “A Comparative Analysis of the Effects of Different Forms of Team Diversity on Global Virtual Team Performance,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012) and Christian Tröster and Daan van Knippenberg, “Leader Openness, Nationality Dissimilarity, and Voice in Multinational Management Teams,” Journal of International Business Studies 43:6 (2012): 591–613.

7 Richard Gesteland, Cross-Cultural Business Behavior (Copenhagen: Copenhagen Business School Press, 2012).

8 David E. Brown, “Human Universals, Human Nature and Human Culture,” Daedalus 133:4 (Fall 2004): 47–54.

9 Tomasz Lenartowicz and Kendall Roth, “The Selection of Key Informants in IB Cross-Cultural Studies,” Management International Review 44:1 (2004): 23–51.

10 Four of the most significant are Geert Hofstede, Cultures and Organizations: Software of the Mind (New York: McGraw-Hill, 1997),

which explores attitudes in 50 countries, primarily those concern- ing workplace relationships; Ronald Inglehart, Miguel Basañez, and Alejandro Moreno, Human Values and Beliefs: A Cross-Cultural Sourcebook (Ann Arbor: University of Michigan Press, 1998) ana- lyzes political, religious, sexual, and economic norms in 43 countries; Robert J. House, Paul J. Hanges, Mansour Javidan, Peter W. Dorfman, and Vipin Gupta, eds., Culture, Leadership, and Organizations (Thousand Oaks, CA: Sage, 2004) examines leadership prefer- ences in 59 countries; and S. Schwartz, “A Theory of Cultural Value Orientations: Explication and Applications,” Comparative Sociology 5:2–3:(2006): 137–82.

11 Ben Casselman, “Risk-Averse Culture Infects U.S. Workers, Entrpreneurs,” Wall Street Journal (June 3, 2013): A1+ shows how a variety of entrepreneurial indicators changed with the economy.

12 Patti Waldmeir, “Property Bubble Erodes China’s Traditional Preference for Sons,” Financial Times (November 2, 2010): 1.

13 Anne-Wil Harzing, Michelle Brown, Katherin Köster, and Shuming Zhao, “Response Style Differences in Cross-National Research,” Management International Review 52:3 (2012): 341–63.

14 Mary Lou Egan and Marc Bendick, Jr., “Combining Multicultural Management and Diversity into One Course on Cultural Competence,” Academy of Management Learning & Education 7:3 (2008): 387–93; and Paul Brewer and Sunil Venaik, “National Culture versus Individual Culture: The Importance of the Ecological Fallacy,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012).

15 Geert Hofstede and Robert R. McCrae, “Personality and Culture Revisited: Linking Traits and Dimensions of Culture,” Cross-Cultural Research 38:1 (February 2004): 52–88.

16 Irem Uz, “The Index of Cultural Tightness and Looseness Among 68 Countries,” Journal of Cross-Cultural Psychology 46:3 (April 2015): 319–35; Michele Gelfand, Lisa Hisae Nishii, and Jana L. Raver, “On the Nature and Importance of Cultural Tightness-Looseness,” Cornell University CAHRS Working Paper Series 1-1 (2007).

17 Harry C. Triandis, “Dimensions of Cultural Variation as Parameters of Organizational Theories,” International Studies of Management and Organization 12:4 (Winter 1982–1983): 143–44.

18 Choe Sang-Hun, “In Changing South Korea, Who Counts as ‘Korean’?” New York Times (December 7, 2012): A10.

19 Terence Mughan, “Language and Languages: Moving from the Periphery to the Core,” in The Routledge Companion to Cross-Cultural Management, eds. Nigel Holden, Snejina Michailova, and Susanne Tietze (New York: Routledge, 2015): 79–84.

20 “English Speaking Countries: Statistical Profile,” http://www. nationmaster.com/country-info/groups/English-speaking (accessed February 6, 2016).

21 Yadong Luo and Oded Shenkar, “The Multinational Corporation as a Multilingual Community: Language and Organization in a Global Context,” Journal of International Business Studies 37 (2006): 321–39; and Vesa Peltokorpi and Eero Vaara, “Language Policies and Practices in Wholly Owned Foreign Subsidiaries: A Recontextualization Perspective,” Journal of International Business Studies 43 (2012): 808–33.

22 David Crystal, English as a Global Language (Cambridge: Cambridge University Press, 1997): 1–23; Jon Boone, “Native English Speakers Face Being Crowded Out of Market,” Financial Times (February 15, 2006): 8; “The Golden Age of the Western Corporation May Be Coming to an End,” The Economist (September 19, 2015): n.p. illus- trates the faster growth of companies within emerging markets along with their proportional increase among Fortune 500 companies.

23 Ariel Sabar, “Last Words,” Smithsonian (February 2013): 31-34. 24 Inglehart et al., Human Values and Beliefs, 21.

http://www.nationmaster.com/country-info/groups/English-speaking

2 Endnotes

25 Matthew Coy Mitchell, “Corporate Legitimacy across Cultural Contexts: Mapping the Cultural Schemata of Religio-Institutional Actors,” (Columbia, SC: unpublished PhD dissertation, Moore School of Business Administration, 2010).

26 “When Culture Masks Communication: Japanese Corporate Practice,” Financial Times (October 23, 2000): 10; Robert House et al., “Understanding Cultures and Implicit Leadership Theories across the Globe: An Introduction to Project GLOBE,” Journal of World Business 37 (2002): 3–10.

27 Michael Segalla, “National Cultures, International Business,” Financial Times (March 6, 1998): mastering global business section, 8–10.

28 Amartya Sen, Development as Freedom, (Oxford: Oxford University Press, 1999): 192.

29 James Kanter, “Renewed Push in Europe to Seat Women on Boards,” New York Times (November 14, 2012): B3.

30 Fons Trompenaars, Riding the Waves of Culture (Burr Ridge, IL: Richard D. Irwin, 1994): 100–16.

31 “Putting the Malaise into Malaysia,” Asia Times Readers Forum, forum .atimes.com/topic.asp?topic_ID=9002& whichpage=10 (accessed May 27, 2007); Thomas Fuller, “Malaysia Vote May Rule on Racial Divide,” New York Times (April 4, 2013): A10.

32 Clara Chooi, “Poor English Skills, Race Quotas in Way of Malaysian Prosperity, says ST,” The Malaysian Insider (December 11, 2011): n.p. A downside of Malaysia’s racial quota system has been an emigra- tion of many of the best qualified Chinese-Malaysians. See “Race in Malaysia: Playing with Fire,” The Economist (September 26, 2015): 38.

33 “Black Women of Brazil,” (November 20, 2011) www. blackwomenofbrazil.com/2011/11 /(accessed November 23, 2012); “Affirming a Divide,” The Economist (January 28, 2012).

34 Information on a number of gender-related indices can be found in UN Human Development Report (2011). Gender Inequality Index, pp. 139–42. Available at hdr.undp.org/en/statistics/gii/(accessed November 19, 2012). For a discussion of the relationship between gender gaps and a number of cultural values, see Andy Bertsch and Gillian Warner-Soderholm, “Updating Cross Cultural Management: Exploring the Relationships between Cultural Values and Gender Inequality Practices,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012).

35 Inglehart et al., Human Values and Beliefs, question V128. 36 Somini Sengupta, “Report Finds Most Nations Hinder Women,”

New York Times (September 10, 2015): A8. 37 Shaila Dewan and Robert Gebeloff, “More Men Enter Fields

Dominated by Women.” New York Times (May 21, 2012): A1+; Josh Mitchell, “Women Notch Progress,” Wall Street Journal (December 5, 2012): A3 citing Census Bureau data that showed women composed about 10 percent of U.S. doctors in 1970, but 32 percent in 2010.

38 “Which European Country Has the Lowest Drinking Age?” (January 6, 2015), http://brilliantmaps.com/drinking-age-europe/ (accessed February 6, 2016).

39 “The Employers Forum on Age,” Legal: Europe, at www.efa.org .uk/legal/europe.asp (accessed May 27, 2007); Cindy Wu, John J. Lawler, and Xiang Xi, “Overt Employment Discrimination in MNC Affiliates: Home-Country Cultural and Institutional Effects,” Journal of International Business Studies 39:5 (2008): 772–94.

40 Inglehart et al., Human Values and Beliefs, question V129. 41 Francis Fukuyama, Trust: The Social Virtues and the Creation of

Prosperity (New York: Free Press, 1995); Ana Paula Matias Gama and Jorge Manuel Mendes Galvão, “Performance, Valuation and Capital Structure: Survey of Family Firms,” Corporate Governance 12:2 (2012): 199–214; “Spanish Business: Supersize Me,” The Economist (February 21, 2015): 65.

42 For a good overview of the literature on the Protestant ethic, see Harold B. Jones Jr., “The Protestant Ethic: Weber’s Model and the Empirical Literature,” Human Relations 50:7 (1997): 757–86. For

evidence that other religions have equal or higher work ethics, see Yavuz Fahir Zulfikar, “Do Muslims Believe More in Protestant Work Ethic than Christians? Comparison of People with Different Religious Background Living in the US,” Journal of Business Ethics 105:4 (Feb 2012): 489–502.

43 Luigi Guiso, Paola Sapienza, and Luigi Zingales, “People’s Opium? Religion and Economic Attitudes,” Journal of Monetary Economics 50:1 (2003): 225–38.

44 See, for example, David S. Landes, The Wealth and Poverty of Nations (New York: Norton, 1998).

45 Hamid Yeganeh, “An Investigation into the Cultural and Religious Determination of National Competitiveness,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012).

46 David Gauthier-Villars, “France Wrests Title of Sleeping Giant,” Wall Street Journal (May 5, 2009): A8.

47 Triandis, “Dimensions of Cultural Variation as Parameters of Organizational Theories,” 159–60.

48 Hofstede, Cultures and Organizations. 49 Abraham Maslow, Motivation and Personality (New York: Harper &

Row, 1954). 50 F. Pichler and C. Wallace, “What Are the Reasons for Differences in

Job Satisfaction across Europe?” European Sociological Review 25:5 (2009): 535–49.

51 Richard Metters, “A Case Study of National Culture and Offshoring Services,” International Journal of Operations & Production Management 28:8 (2008): 727–47.

52 Hofstede, Cultures and Organizations 49–78; House et al., Culture, Leadership, and Organizations.

53 Adam Grant, “Friends at Work? Not So Much,” New York Times (September 6, 2015): Sunday Review 1+.

54 Hofstede, Cultures and Organizations. 55 Hofstede, Cultures and Organizations. 56 Inglehart et al., Human Values and Beliefs, question V94. 57 Srilata Zaheer and Akbar Zaheer, “Trust across Borders,” Journal of

International Business Studies 37:1 (2006): 21–29. 58 Miriam Muethal and Michael Harris Bond, “National Context and

Individual Employees’ Trust of the Out-Group: The Role of Societal Trust,” Journal of International Business Studies 44:4 (2013): 312–33.

59 Walter Mischel, The Marshmallow Test: Mastering Self-Control (New York: Little, Brown & Company, 2014).

60 Examples in this section come from the GLOBE (Global Leadership and Organizational Behavior Effectiveness) project. See Bakacsi et al., “The Germanic Europe Cluster: Where Employees Have a Voice,” Journal of World Business 37 (2002): 55–68; Jorge Correia Jesino, “Latin Europe Cluster: From South to North,” Journal of World Business 37 (2002): 81–89.

61 Ping Ping Fu, Jeff Kennedy, Jasmine Tata, Gary Yuki, Michael Harris Bond, Tai-Kuang Peng, Ekkirala S. Srinivas, Jon P. Howell, Leonel Prieto, Paul Koopman, Jaap J. Boonstra, Selda Pasa, Marie-François Lacassagne, Hiro Higashide, and Adith Cheosakul, “The Impact of Societal Cultural Values and Individual Social Beliefs on the Perceived Effectiveness of Managerial Influence Strategies: A Meso Approach,” Journal of International Business Studies 35:4 (2004): 284–304.

62 Shirley Wang, “The Science Behind Why We Love Ice Cream,” Wall Street Journal (November 9, 2010): D1+; and Nicholas Wade, “Human Culture, an Evolutionary Force,” New York Times (March 2, 2010): D1+.

63 Benjamin Lee Whorf, Language, Thought and Reality (New York: Wiley, 1956): 13 claimed there are more than 6,000 words. “How Many Words Are There for ‘Camel’ in Arabic?” Arabglot (November 11, 2011), http://www.arabglot.com/2011/02/how-many-words-are- there-for-camel-in.html (accessed November 23, 2012) found many fewer, but nevertheless, many more than one would find in any other language.

http://www.blackwomenofbrazil.com/2011/11

http://brilliantmaps.com/drinking-age-europe/

http://www.efa.org.uk/legal/europe.asp

http://www.arabglot.com/2011/02/how-many-words-are-there-for-camel-in.html

http://www.efa.org.uk/legal/europe.asp

Endnotes 3

64 “Legal Language,” The Economist (November 10, 2012): 66. 65 Hyun-Jung Lee, Katsuhiko Yoshikawa, and Carol Reade, “Culture Under

Strain? Leadership Challenges of Japanese Managers in the UK and China,” paper presented at the 54th Annual Meeting of the Academy of International Business (Washington, DC: June 30–July 3, 2012).

66 “Getting from A to B,” The Economist (September 20, 2014): 58. 67 Viviane A. Winkler and Ricarda B. Bouncken, “How Does Cultural

Diversity in Global Innovation Teams Affect the Innovation Process?” Engineering Management Journal 23:4 (December 2011): 24–35.

68 Richard E. Nisbett et al., “Culture and Systems of Thought: Holistic versus Analytic Cognition,” Psychological Review 108:2 (April 2001): 291–310.

69 “Babel or Babble?: Machine Translation,” The Economist (Online) (Jun 11, 2012).

70 Don Clark, “Hey, #@*% Amigo, Can You Translate the Word ‘Gaffe’?” Wall Street Journal (July 8, 1996): B6.

71 Wenting Zhou, “Translation Errors Cause Disputes over Contract Terms,” McClatchy - Tribune Business News [Washington] (March 23, 2012) accessed November 24, 2012.

72 Terry Mughan, “Culture and Management Crossing the Linguistic Rubicon,” Language and Intercultural Training 13:1 (Spring 1993).

73 Manjeet Kripalani and Jay Greene, “Culture Clash,” Business Week (February 14, 2005): 9.

74 Christina Hoag, “Slogan Could Offend Spanish Speakers,” Miami Herald (March 8, 2005): C1+.

75 Sarah Max, “Selling Marketers a Spanish Accent that Doesn’t Sound Faked,” New York Times (March 26, 2015): B5.

76 Much of the discussion on silent language is based on Edward T. Hall, “The Silent Language in Overseas Business,” Harvard Business Review (May–June 1960). Hall identified five variables—time, space, things, friendships, and agreements—and was the first to use the term silent language.

77 Alberto Rubio Sanchez, Alejandro Pico, Lucette B. Comer, Purdue University, “Salespeople’s Communication Competence: A Study of the Mexican Market,” Journal of Business & Economic Studies 16:1 (Spring 2010): 1–18.

78 For an excellent explanation of four ways to view time, see Carol Saunders, Craig Van Slyke, and Douglas Vogel, “My Time or Yours? Managing Time Visions in Global Virtual Teams,” Academy of Management Executive 18:1 (2004): 19–31. See also Lawrence A. Beer, “The Gas Pedal and the Brake: Toward a Global Balance of Diverging Cultural Determinants in Managerial Mindsets,” Thunderbird International Business Review 45:3 (May–June 2003): 255–70.

79 Trompenaars, Riding the Waves of Culture, 130–31. 80 Daniel Pearl, “Tour Saudi Arabia: Enjoy Sand, Surf, His-and-Her

Pools,” Wall Street Journal (January 22, 1998): A1. 81 Inglehart, Human Values and Beliefs, 16. 82 Amin Maalouf, In the Name of Identity (New York: Penguin Group,

2000): 26, asserts that people pinpoint the aspect of their identity that is most under threat.

83 Mary Yoko Brannen, “When Mickey Loses Face: Recontextualization, Semantic Fit, and the Semiotics of Foreignness,” Academy of Management Review 29:4 (2004): 593–616.

84 Mary Yoko Brannen and Jane Salk, “Partnering across Borders: Negotiating Organizational Culture in a German-Japanese Joint Venture,” Human Relations 53:4 (June 2000): 451–87; Baruch Shimoni and Harriet Bergman, “Managing in a Changing World: From Multiculturalism to Hybridization—The Production of Hybrid Management Culture in Israel, Thailand, and Mexico,” Academy of Management Perspectives (August 2006): 76–89.

85 Geraldine Brooks, “Eritrea’s Leaders Angle for Sea Change in Nation’s Diet to Prove Fish Isn’t Foul,” Wall Street Journal (June 2, 1994): A10; M. Y. Teweldemedhin, “The Fish Industry in Eritrea: From Comparative to Competitive Advantage,” African Journal of

Agricultural Research 3:5 (May 2008): 327–33; “Taboo Food and Drink,” Wikipedia, en.wikipedia.org/wiki/Taboo_food_and_drink (accessed November 26, 2012).

86 Patrick M. Reilly, “Pitfalls of Exporting Magazine Formulas,” Wall Street Journal (July 24, 1995): B1; James Bandler and Matthew Karnitschnig, “Lost in Translation,” Wall Street Journal (August 19, 2004): A1+.

87 John Tomlinson, Globalization and Culture (Chicago: University of Chicago Press, 1999).

88 Sam Schechner, “C’est What?: French TV in English,” Wall Street Journal (November 21, 2012): B8; Ian Austen, “Crackdown in Quebec: ‘Le Gap’ Won’t Do,” New York Times (November 23, 2012): B1+; Maïa de la Baume, “Bid in France to Add Course in English Raises Fear for Language,” New York Times (May 24, 2013): A10.

89 Nader Asgary and Alf H. Walle, “The Cultural Impact of Globalisation: Economic Activity and Social Change,” Cross Cultural Management 9:3 (2000): 58–76; Tyler Cowen, Creative Destruction: How Globalization Is Changing the World’s Cultures (Princeton, NJ: Princeton University Press, 2002): 128–52.

90 “Schumpeter: The Global Mexican,” The Economist (October 27, 2012): 70.

91 Adrian Furnham and Stephen Bochner, Culture Shock (London: Methuen, 1986): 234.

92 Mzamo P. Mangaliso, “Building Competitive Advantage from Ubuntu: Management Lessons from South Africa,” Academy of Management Executive 15:3 (August 2001): 23–34.

93 Gina Chon, “China Faces Unexpected Problem Drilling for Oil in Iraq—Farmers,” Wall Street Journal (May 22, 2009): A6.

94 Sally Bowen, “People Power Keeps Peru’s Investors in Check,” Financial Times (February 6, 1998): 6.

95 Roberto P. Garcia, “Learning and Competitiveness in Mexico’s Automotive Industry: The Relationship between Traditional and World-Class Plants in Multination Firm Subsidiaries,” unpublished PhD dissertation (Ann Arbor, MI: University of Michigan, 1996).

96 Mary Yoko Brannen and Fiona Lee, “How Can the Organizational Literature Inform Psychology Research on Biculturalism?” in The Handbook of Multicultural Identity: Basic and Applied Psychological Perspectives, eds. V. Benet-Martinez and Y.Y. Hong (New York: Oxford University Press: 2014): 417–38.

97 Mary Yoko Brannen and David C. Thomas, “Bicultural Individuals in Organizations: Implications and Opportunity,” International Journal of Cross Cultural Management 10:1 (2010): 5–16; and David C. Thomas, Mary Yoko Brannen, and Dominie Garcia, “Bicultural Individuals and Intercultural Effectiveness,” European Journal of Cross- Cultural Competence and Management l:4 (2010): 315–33.

98 Mary Yoko Brannen, “Building Cross-Cultural Leadership Competence: An Interview with Carlos Ghosn,” Academy of Management Learning & Education (Special Issue on Cross-Cultural Management) 12:3 (2013): 494–502.

99 Peter Capelli, Harber Singh, Jitendra Singh, and Michael Useem, “The Indian Way, Lessons for the U.S.,” The Academy of Management Perspectives 24:2 (May 2010): 6–24.

100 Aihwa Ong, Flexible Citizenship: The Cultural Logics of Transnationality (Durham, NC: Duke University Press, 1999).

101 Neil Parmar, “Legalities: A Global Love Affair,” WSJ.Money (Summer 2013): 12–13.

102 James Mackintosh, “A Superstar Leader in an Industry of Icons,” Financial Times (December 16, 2004): 10.

103 James Wilson and Quentin Peel, “Multicultural Attempts ‘Failed,’ Claims Merkel,” Financial Times (October 18, 2010): 3.

104 Mary Yoko Brannen is Professor of International Business/Jarislowsky CAPI East Asia (Japan) Chair at the Gustavson School of Business, University of Victoria, British Columbia, Canada, and Terrence Mughan is Professor of International Business at Royal Roads University, Victoria, Canada.

EndnotEs

1 Sources include the following: Michael Sylvester, “Flaming Hoops,” Corporate Counsel: Market Report China (2004): 171; “A Survey of Business in China: A Disorderly Heaven,” The Economist (March 20, 2004): 12; “Bulls in a China Shop,” The Economist (March 20, 2004): 10; “China Slams US Piracy Complaint,” BBC News (April 10, 2007); The Economist, Country Briefings: China, retrieved January 20, 2013, from www.economist.com/countries/China/; U.S. Department of State, Background Note: China, retrieved January 13, 2013, from www. state.gov/r/pa/ei/bgn/18902.htm; Central Intelligence Agency, World Factbook, www.cia.gov/library/publications/the-world-factbook/ geos/ch.html (January 12, 2013). The pace of change in China’s busi- ness environment makes any discussion of it hazardous. Regard this case as a set of educated generalizations about the kinds of problems encountered by would-be foreign investors in China from the 1990s to date.

2 Richard McGregor, The Party: The Secret World of China’s Communist Rulers (Harper Collins, 2010): 1.

3 Market Potential With 1.34 billion citizens, China resets conventional analytics. Consider that the Walt Disney Corporation has opened a theme park and resort in Shanghai where 330 million people—more than the population of the United States—live within a three-hour drive or train ride. China’s market scope steadily expands. Its eco- nomic growth has reduced the number of poor by more than a half-billion since 1981. Hundreds of millions more, though poor, see a brighter future. In 2010, 91 percent of Chinese citizens saw their economic situation as “good,” compared to 52 percent in 2002. Most domestic markets are in early high-growth stages. Many MNEs that came for low-cost workers stay for increasingly well-off shoppers.

Market Performance Rapid economic development catapulted China from an also-ran in 1980 to the world’s second-largest economy in 2012; analysts see it becoming the world’s largest sometime between 2016 and 2036. Growing income spurs consumer spending. During the U.S. and British industrialization in the nineteenth century, real incomes per capita doubled in 50 years. China’s did the same in nine years. Said a China expert, “Never before in history has so much wealth been created in such a short time.”

Infrastructure In a multiyear program, China is investing trillions of renminbi on housing, offices, highways, airports, seaports, waterways, dams, power grids, high-speed trains, and communication networks. Despite tremendous progress, it has far to go. For example, it lags in the number of airports with paved runways: 452, compared to 713 in Brazil and 5,194 in the United States. Moreover, 44 Chinese cities populated by more than a million people still have no mass-transit system other than buses.

Resources China’s well-educated population creates an immense pool of productive labor. Wage rates for unskilled labor are less those in many other countries—perhaps 5 percent of comparable costs in the United States, Japan, and Europe and a third of those in Mexico and Turkey. Besides efficient factory workers, China boasts a large and growing number of productive, lower-cost brainworkers. In 2013, it added another $250 billion to its university infrastructure, and after doubling its number of universities over the previous decade, it plans to produce 195 million college graduates by 2020. China’s current five-year economic plan directs millions to study alternative energy, energy efficiency, environmental protection, biotechnology, advanced information technologies, and high-end equipment manufacturing.

Strategic Positioning China represents the biggest growth opportunity in the history of capitalism. The country is experiencing roughly ten times the economic acceleration, on more than 100 times the scale, resulting in an economic transformation that carries over 1,300 times the force of change than seen during the Industrial Revolution. MNEs are responding in kind: Ford plans to double its production capacity

in China to 1.2 million vehicles by 2015, its most rapid expansion anywhere in 50 years; GE relocated its 115-year-old X-ray division from Wisconsin to Beijing; Yum! now looks to China for half its global sales and 40 percent of its operating profits. Bluntly put, “You are not a global player unless you are in China.”

4 “Foreign Investment in China: Even Harder Than It Looks,” The Economist, (September 16, 2010): 64.

5 “Chinese Negotiation: The Long Kiss Goodnight,” retrieved May 14, 2009, from www.chinesenegotiation.com/page/2/.

6 “A Survey Of Business in China: A Disorderly Heaven,” The Economist, retrieved March 24, 2011, from www.economist.com/ node/2495184.

7 Officially, China has 34 provincial-level administrative units: 23 prov- inces, 4 municipalities (Beijing, Tianjin, Shanghai, Chongqing), 5 au- tonomous regions (Guangxi, Inner Mongolia, Tibet, Ningxia, Xinjiang) and 2 special administrative regions (Hong Kong, Macau).

8 “A Survey Of Business In China: A Disorderly Heaven,” The Economist, retrieved March 24, 2011, from www.economist.com/ node/2495184.

9 The goal is not judicial independence. Rather, the Chinese chief justice advocates out-of-court mediation as a favored means of settling civil disputes in ways that enhance social harmony. Criminal defendants, for example, have limited access to legal counsel, few rights to call their own witnesses, or even opportunities to contest testimony. Willy Lam, “Beijing Tightens Control over Courts,” Asia Times, retrieved August 4, 2011, from atimes.com/atimes/China/MF25Ad02.html.

10 Personal Conversation, Daniel Sullivan and Kathy Stearman, Beijing (March 4, 2011).

11 Oded Shenkar, The Chinese Century, (Upper Saddle River, NJ: Pearson Prentice Hall, 2006).

12 IPR Seizure Statistics, 2011, U.S. Customs and Border Protection- Trade, retrieved January 18, 2013, from www.cbp.gov/xp/cgov/trade/ priority_trade/ipr/ipr_communications/seizure/; “A Mind-Blowing Number of Counterfeit Goods Come from China” Business Insider, http://www.businessinsider.com/most-counterfeit-goods-are- from-china-2013-6 (accessed January 3, 2016); “An Unbelievable Amount of Counterfeit Goods Come from China,” Economy In Crisis, (April 15, 2016) http://economyincrisis.org/content/ an-unbelievable-amount-of-counterfeit-goods-come-from-china.

13 Steven Weisman, “Before Visit to China, a Rebuke,” New York Times (December 12, 2006): A-1.

14 “The World’s Greatest Fakes,” 60 Minutes, quote by Dan Chow, retrieved June 15, 2006, from www.cbsnews.com/ stories/2004/01/26/60minutes/main595875.shtml.

15 “The Sincerest Form of Flattery,” The Economist (April 4, 2007): 67. 16 “Xi Touts Communist Party as Defender of Confucius’s Virtues,”

New York Times, http://sinosphere.blogs.nytimes.com/2014/02/13/ xi-touts-communist-party-as-defender-of-confuciuss-virtues/?_r=1 (accessed November 4, 2015). Notably, Confucius held that “Good government consists in the ruler being a ruler, the minister being a minister, the father being a father, and the son being a son”; so set, the state would lead the people with virtue and thus create a sense of shame that prevents corrupt conduct. In particular, Confucius held that “If the people be led by laws, and uniformity among them be sought by punishments, they will try to escape punishment and have no sense of shame. If they are led by virtue, and uniformity sought among them through the practice of ritual propriety, they will possess a sense of shame and come to you of their own accord.” Similarly, Confucius’s idea of gong, which can best be understood as ‘impartial- ity’, calls for the government to care for people without favoritism or discrimination.

http://www.economist.com/countries/China/

http://www.state.gov/r/pa/ei/bgn/18902.htm

http://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

http://www.chinesenegotiation.com/page/2/

http://www.economist.com/node/2495184

http://www.economist.com/

http://www.cbp.gov/xp/cgov/trade/priority_trade/ipr/ipr_communications/seizure/

http://www.businessinsider.com/most-counterfeit-goods-are-from-china-2013-6

http://economyincrisis.org/content/an-unbelievable-amount-of-counterfeit-goods-come-from-china

http://www.cbsnews.com/stories/2004/01/26/60minutes/main595875.shtml

http://sinosphere.blogs.nytimes.com/2014/02/13/xi-touts-communist-party-as-defender-of-confuciuss-virtues/?_r=1

http://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

http://www.economist.com/node/2495184

http://www.cbp.gov/xp/cgov/trade/priority_trade/ipr/ipr_communications/seizure/

http://www.cbsnews.com/stories/2004/01/26/60minutes/main595875.shtml

http://sinosphere.blogs.nytimes.com/2014/02/13/xi-touts-communist-party-as-defender-of-confuciuss-virtues/?_r=1

http://economyincrisis.org/content/an-unbelievable-amount-of-counterfeit-goods-come-from-china

2 Endnotes

17 Political stability safeguards investment while uncertainty penalizes it. Daniel Kaufmann, Art Kraay, and Massimo Mastruzzi, “Governance Matters IV: Governance Indicators for 1996–2004,” World Bank Policy Research Working Paper Series No. 3630 (May 2005).

18 Furthermore, the World Bank identifies 214 discrete economic envi- ronments in the world today—188 countries and 26 economies with populations of more than 30,000. The former include countries that most are quite familiar with, such as Austria, Chile, China, Germany, Indonesia, Vietnam, and so on. The set of “26” include some that you have likely heard of, such as Andorra or Bermuda, but also others that you have not, such as the Isle of Man, Macao, San Marino, or Vanuatu. Each, as we see in Map 3.1, poses political risks. In some cases, risk is reasonable. In other cases, it is extreme.

19 “Business in Russia: Dancing with the Bear,” The Economist (February 1, 2007): 23.

20 “BP in Russia: Dancing with Mr. Putin,” The Economist, retrieved February 14, 2011, from http://www.economist.com/node/17967066; “Russia Closes Four McDonald’s Branches in Moscow,” Wall Street Journal, http://www.wsj.com/articles/russia-closes-four-mcdonalds- in-moscow-mcd-1408568948 (accessed November 4, 2015).

21 “Business in Russia: Dancing with the Bear,” The Economist. 22 “Putin Signs Law to Shut Down ‘Undesirable’ Foreign Organizations

in Russia,” http://www.huffingtonpost.com/2015/05/24/putin-unde- sirable-organizations-law_n_7430800.html (accessed November 4, 2015);

“Planet Plutocrat,” The Economist, http://www.economist.com/ news/international/21599041-countries-where-politically-connect- ed-businessmen-are-most-likely-prosper-planet (accessed November 4, 2015); “Corruption Perceptions Index—2014,” http://www.transpar- ency.org/cpi2014 (accessed November 4, 2015); “Crocodile Tears,” The Economist, (April 28, 2007): 44; Andrew Osborn, “Russia’s Rule of Lawlessness,” WSJ.com, retrieved January 20, 2011, from online.wsj. com/article/SB123758426519199313.html; Corruption Perceptions Index 2012, retrieved from www.transparency.org/cpi2012/results, January 15, 2013;

“Russia’s Weakened Democratic Embrace,” Pew Global Attitudes Project, retrieved January 14, 2013, from (www.pewglobal. org/2006/01/05/russias-weakened-democratic-embrace/); “Russia’s Future: The Cracks Appear,” The Economist, (December 10, 2011): 13. Others, however, see Russia trapped in lawlessness and legal nihilism.

23 Once a company leaves its home country, it operates in markets with different political and legal systems. Some countries are similar; Australian companies would not find many surprises in New Zealand, for instance. In other cases, the differences are profound; an ill-pre- pared U.S. company would encounter shocks in Russia. Navigating among countries requires that MNEs study how political and legal circumstances overlap and differ. Determining where, when, and how to adjust business practices without undermining the basis for suc- cess is an enduring challenge. Indeed, as we saw in the opening case for Chapter 3, no matter where an MNE goes, the prevailing politics and laws affect its options and operations. China’s political and legal environments, for example, require MNEs to rethink the best ways to acquire resources, make investments, adapt operating modes, and manage risk.

Consider that a domestic company operates in a single national environment in which institutional policies are reasonably predict- able. Operating internationally exposes its managers to diverse and conflicting pressures from wide-ranging groups in different nations. Variations increase the challenge of interpreting different philoso- phies, laws, and attitudes on political freedom, property rights, and legal responsibility. Consequently, effective managers begin with the realization that when it comes to politics and laws, countries’ differ- ent ideas result in different political and legal environments. They position themselves to compete by understanding these differences, rather than ignoring or, worse, resisting them.

24 “Fragile States Index,”Wikipedia, the Free Encyclopedia, https://en.wikipedia.org/w/index. php?title=Fragile_States_Index&oldid=707180980.

25 Alan Ryan, On Politics: A History of Political Thought from Herodotus to the Present (London: Allen Lane, 2012.)

26 Statement from the Declaration of Independence of the United States of America.

27 Recent events dramatize this circumstance. The global financial crisis of the last decade revealed that some individuals and firms had maxi- mized their interests at the expense of societal welfare. Long-running support of deregulation, privatization, and trade liberalization, advo- cated to maximize individual freedom of choice, ultimately proved destructive. Opportunistic behavior destabilized the marketplace and jeopardized system sustainability. In response, governments reset regulations to reduce market inefficiencies (such as deficient consumer knowledge or excessive producer power) that had given some individuals undue privilege. Ongoing market problems in such countries as Spain, Japan, Ireland, Greece, Portugal, and the United States push governments to restrain the individualism of free markets in order to protect the collective welfare.

28 In Germany, before the adoption of liberal western economic ideas, its economic policy, so named “Gemeinnutz geht vor Eigennutz,” held that that “the welfare of the nation takes precedence over the selfishness of the individuals” (www.stephenhicks.org/tag/ gemeinnutz-geht-vor-eigennutz/).

29 “Iran: Police Use New Tactics to Confiscate Satellite Dishes,” BBC News, http://www.bbc.com/news/blogs-news-from-else- where-27920659 (accessed December 16, 2015).

30 Many countries have political parties that list smaller memberships than do the main parties. Consequently, most nations are pluralistic in which different political groups champion competing ideologies. Pluralism rests upon ideas drawn from the sociology of small groups. Translated to the level of a society, these ideas interpret the relation- ships and interactions between and within groups as they champion and contest political ideologies. Pluralism also arises when two or more groups in a country differ in terms of language (Belgium), class structure (United Kingdom), ethnic background (South Africa), tribal legacy (Afghanistan), or religion (India). A pluralistic system requires that officials negotiate policies. The bargaining process between com- peting groups dictates that politics follow multiple, shifting lines. Multi- criteria compromise, not single-minded consensus, is the order of the day. The resulting ambiguity complicates decision-making for MNEs. Pluralism requires that managers assess the interplay among groups. Often, companies try to influence policy formulation. In the United States, for example, some companies fund political action committees that support preferred candidates or influence the legislative process. Fundamentally, pluralism holds that there are multiple opinions about an issue, each of which contains part of the truth, but none that contain the entire truth. Progress depends on negotiation and compromise.

31 In the United States, the liberal principles of the Democratic Party and the conservative doctrine of the Republican Party define their respective political ideologies (i.e., the former favors collectivist measures such as progressive taxation and strict environmental stan- dards whereas the latter champions individualistic measures such as consumer choice and minimal regulation). Japan has a similar situa- tion: its Democratic Party advocates social liberalism while its Liberal Democratic Party advocates conservatism.

32 Hannah Arendt, “Totalitarianism,” Part Three of The Origins of Totalitarianism (New York: Houghton Mifflin Harcourt, 1968), 164.

33 Practically, the ideology of democracy anchors a political system that grants voters the power to alter the laws and structures of govern- ment, to make decisions (either directly or through representatives), and to participate directly in elections.

34 More specifically, a democracy accepts the legitimacy of (1) free- dom of opinion, expression, press, religion, association, and access

http://www.economist.com/node/17967066

http://www.wsj.com/articles/russia-closes-four-mcdonalds-in-moscow-mcd-1408568948

http://www.huffingtonpost.com/2015/05/24/putin-unde-sirable-organizations-law_n_7430800.html

http://www.economist.com/news/international/21599041-countries-where-politically-connected-businessmen-are-most-likely-prosper-planet

http://www.transparency.org/cpi2014

http://www.transparency.org/cpi2012/results

http://www.pewglobal.org/2006/01/05/russias-weakened-democratic-embrace/

https://en.wikipedia.org/w/index.php?title=Fragile_States_Index&oldid=707180980

http://www.stephenhicks.org/tag/gemeinnutz-geht-vor-eigennutz/

http://www.bbc.com/news/blogs-news-from-else-where-27920659

https://en.wikipedia.org/w/index.php?title=Fragile_States_Index&oldid=707180980

http://www.economist.com/news/international/21599041-countries-where-politically-connected-businessmen-are-most-likely-prosper-planet

Endnotes 3

to information; (2) free, fair, and regular elections; (3) majority rule coupled with protection of individual and minority rights; and (4) subordination of government to the rule of law.

35 Patrick French, India: A Portrait, (London: Allen Lane, 2011). 36 The philosophy of Apple’s founder Steve Jobs fit this outlook as well;

he rejected the notion that individuals were rational, believing “con- sumers don’t know what they want.”

37 Between 1978 and 2015, for instance, China’s One Child Policy pro- hibited a family from having more than a single child; a couple that had a second child could be fined the equivalent of $1,300—a steep penalty in rural areas where most annual incomes are a fraction of that sum. The one-child law changed to a two-child policy effective January 1, 2016, following its passage by the standing committee of the National People’s Congress on December 27, 2015.

38 “China’s Future: Rising Power, Anxious State,” The Economist, (June 25, 2011): 3; for example, bookstores in China stock works approved by the CCP.

39 Anne-Marie Brady, Marketing Dictatorship: Propaganda and Thought Work in Contemporary China (Lanham, MD: Rowman & Littlefield, 2007).

40 “Freedom in the World 2013: Middle East Gains Provoke Intensified Repression,” Freedom House, retrieved January 20, 2013, from www. freedomhouse.org/article/freedom-world-2013-middle-east-gains- provoke-intensified-repression.

41 “Freedom in the World 2013: Middle East Gains Provoke Intensified Repression,” Freedom House.

42 “China’s Future: Rising Power, Anxious State,” The Economist, Special Report: China (June 25, 2011): 3.

43 “The Long Arm of the State,” The Economist, Special Report: China (June 25, 2011): 14.

44 Willy Lam, “China’s State Giants too Big to Play with,” Asia Times Online, retrieved May 26, 2011, from www.atimes.com/atimes/China_ Business/MA22Cb01.html.

45 Keith Brasher, “Solar Panel Maker Moves Work to China,” NYTimes.com, retrieved February 11, 2011, from www.ny- times.com/2011/01/15/business/energy-environment/15solar. html?pagewanted=2&hpw.

46 “Chinese Politics and the WTO: No Change,” The Economist, (December 10, 2011): 46.

47 “China Squeezes Foreigners for Share of Global Riches,” WSJ. com, retrieved December 29, 2010, from online.wsj.com/ar- ticle/SB10001424052970203731004576045684068308042. html?mod=rss_whats_news_us_business.

48 “Corporate Espionage: Who Needs Cyber-Spying?,” The Economist, (February 21, 2013): 44.

49 Adrian Karatnycky, Freedom in the World 2001–2002: The Democracy Gap (New York: Freedom House, 2002), retrieved February 11, 2011, from www.freedom house.org.

50 Extracted from Mission Statement, Freedom House, retrieved June 28, 2009, from www.freedomhouse.org/template.cfm?page=2. For example, classical liberal philosophy holds that freedom is the ab- sence of coercion of one person by others; jurisprudence holds that one has the right to determine one’s own actions autonomously; environmentalism advocates constraints on the use of ecosystems in any definition of freedom. Others take a more abstract approach, discussing notions of positive versus negative freedom (the right to fulfill one’s own potential vs. freedom from restraints).

51 Specifically, on December 10, 1948, the General Assembly of the United Nations adopted the Universal Declaration of Human Rights and has since called on all member countries to publicize the text and “to cause it to be disseminated, displayed, read, and expounded prin- cipally in schools and other educational institutions, without distinc- tion based on the political status of countries or territories,” For the full text of the Declaration, go to www.un.org/Overview/rights.html.

52 Samuel P. Huntington, The Third Wave: Democratization in the Late Twentieth Century, (Norman: University of Oklahoma Press, 1991).

53 “Sledge Hama,” The Economist, (July 9, 2011): 45. 54 On a micro scale, we see similar effects linking protests in Chinese

factories. Specifically, labor unrest has become more commonplace in China, as factories operating in highly competitive markets press their workers to improve productivity. “Angry Workers Push Back in Revolt over 2-minute Toilet Breaks,” CTV News, retrieved January 22, 2013, from www.ctvnews.ca/business/angry-workers-push-back-in- revolt-over-2-minute-toilet-breaks-1.1124139.

55 The Economist Intelligence Unit’s Index of Democracy 2008, retrieved June 24, 2009, from graphics.eiu.com/PDF/Democracy percent 20Index percent 202008.pdf.

56 Ronald Bailey, “Does Disease Cause Autocracy?” Reason Magazine (June 1, 2011).

57 Christian Haerpfer, Patrick Bernhagen, Ronald Inglehart, and Christian Welzel, eds., Democratization (Oxford: Oxford University Press, 2009); “Two Billion More Bourgeois,” The Economist (February 14, 2009): 18.

58 Francis Fukuyama, The End of History and the Last Man (New York: Free Press, 1992).

59 “Most Muslims Want Democracy, Personal Freedoms, and Islam in Political Life,” Pew Global Attitudes Project, retrieved January 15, 2013, from www.pewglobal.org/2012/07/10/most-muslims-want-de- mocracy-personal-freedoms-and-islam-in-political-life/; Tang Ming, “Chinese Want Democratic Reform First, Official Poll Shows,” Epoch Times,” retrieved January 15, 2013, from www.theepochtimes.com/ n2/china-news/chinese-want-democratic-reform-first-official-poll- shows-316896.html.

60 Arch Puddington, “Freedom in the World 2011: The Authoritarian Challenge to Democracy,” Freedom House, freedomhouse.org: Freedom in the World 2011 Survey Release,” retrieved April 21, 2011, from www.freedomhouse.org/template.cfm?page=594.

61 “Freedom in the World 2011,” 48–9. 62 Arch Puddington, “Freedom in the World 2012,” Freedom House, re-

trieved January 15, 2013, from http://www.freedomhouse.org/report/ freedom-world/freedom-world-2012.

63 “Democracy Index 2010: Democracy in Retreat,” Economist Intelligence Unit, retrieved February 7, 2011, from www.eiu.com/pub- lic/topical_report.aspx?campaignid=demo2010; Laza Kekic, “A Pause in Democracy’s March,” The Economist, The World in 2007 (Annual Review, 2007): 59–60. Technically, the EIU evaluated 165 independent states and two territories.

64 Adapted from “Democracy Index 2014,” Economist Intelligence Unit, http://www.eiu.com/public/topical_report. aspx?campaignid=Democracy0115 (accessed February 15, 2016).

65 “Planet Plutocrat,” The Economist, http://www.economist.com/ news/international/21599041-countries-where-politically-connect- ed-businessmen-are-most-likely-prosper-planet (accessed October 21, 2015). The sense of a rigged system of political freedom without democratic accountability radicalizes its politics. Similarly, just over half the 70 seats in Hong Kong’s Legislative Council are determined by popular vote; the remainder is decided by groups of industry and professional associations. Add it all up and you have what some see as “the most convoluted election system on the planet.” “Streets Not Seats,”; The Economist, (September 15, 2012): 42 (view of Suzanne Pepper, a fellow at the Chinese University of Hong Kong); “Banyan: Post-Merger Integration,” The Economist,” October 13, 2012; also “Monsoon of their Discontent,” The Economist, (July 9, 2011): 40; “Why Hong Kong’s ‘Occupy Central’ Movement Has Beijing Very, Very Scared,” The Nation, http://www.thenation.com/article/why- hong-kongs-occupy-central-movement-has-beijing-very-very- scared/ (accessed October 21, 2015).

66 “World” population refers to the total population of the 167 countries covered by the index. Since this excludes only microstates, this is

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http://www.freedomhouse.org/report/freedom-world/freedom-world-2012

4 Endnotes

nearly equal to the entire actual estimated world population in 2010. Economist Intelligence Unit.

67 “Freedom House: Democratic Ideals under Threat around Globe,” http:// www.voanews.com/content/rights-group-worldwide-democratic-free- doms-at-historic-low/2616397.html (accessed October 26, 2015).

68 In 1991, citizens in the former Soviet bloc countries celebrated the move from a single-party state to a multiparty political system. By 2009, support had fallen drastically, especially in poorer coun- tries such as Ukraine, Hungary, and Lithuania (“Public Opinion in Eastern Europe: The Glow Fades,” The Economist, retrieved January 31, 2011, from www.economist.com/research/articlesBySubject/ displaystory.cfm?subjectid=7933596&story_id=14792427.) By 2012, belief in democracy continued deteriorating in the wake of the global financial crisis as most countries in the region saw declining democracy scores (Paul Krugman, “Central European Shadows,” New York Times, retrieved January 16, 2013, from krugman.blogs.nytimes. com/2011/12/11/central-european-shadows/). Established democra- cies struggle as well. In the United States, the terrorist attacks have reset the standards of personal freedom, resulting in restrictions that raised questions about the moral authority of democratic ideals. Europe, meanwhile, struggles to preserve political freedom in the face of harsh austerity policies and the replacement of sovereign demo- cratic processes with financial dictates from leaders of the EU and the European Central Bank (Amartya Sen, “The Crisis of European Democracy,” New York Times, (May 22, 2012): A-8.) Persistent eco- nomic struggles challenge the belief, strongly held since the fall of the Berlin Wall, that “freedom works.”

Authoritarian trends have become even more entrenched in the Middle East and much of the former Soviet Union. Democratization in sub-Saharan Africa is grinding to a halt, and in some cases is being reversed. A political malaise in east-central Europe has led to disap- pointment and questioning of the strength of the region’s democratic transition. Media freedoms are being eroded across Latin America and populist forces with dubious democratic credentials have come to the fore in a few countries in the region. In the developed West, a precipitous decline in political participation, weaknesses in the functioning of government, and security-related curbs on civil liber- ties are having a corrosive effect on some long-established democ- racies (“Democracy Index 2010: Democracy in Retreat,” Economist Intelligence Unit, retrieved February 7, 2011, from www.eiu.com/ public/topical_report.aspx?campaignid=demo2010).

69 Julian Wucherpfennig, “Modernization and Democracy: Theories and Evidence Revisited,” Living Reviews in Democracy (2009): 1.

70 “On The People’s Democratic Dictatorship,” Selected Works of Mao Tse-tung, retrieved January 15, 2013, from www.marxists.org/ reference/archive/mao/selected-works/volume-4/mswv4_65.htm; Pushkar, “India Waits for Democracy with Benefits,” Asia Times Online, retrieved January 16, 2013, from www.atimes.com/atimes/ South_Asia/NK03Df01.html.

71 “Countries at the Crossroads,” freedomhouse.org, retrieved April 18, 2011, from www.freedomhouse.org/template. cfm?page=139&edition=9.

72 Scott Shane, “America’s Journeys with Strongmen,” NYTimes.com, (February 5, 2011) retrieved February 7, 2011, from www.nytimes. com/2011/02/06/weekinreview/06shane.html?_r=1&ref=us.

73 “Democracy Index 2011,” Economist Intelligence Unit,” retrieved January 20, 2013, from www.eiu.com/public/topical_report.aspx? campaignid=DemocracyIndex2011.

74 “Confidence in Institutions,” Gallup.com, http://www.gallup.com/ poll/1597/Confidence-Institutions.aspx (accessed November 1, 2015); “Public Faith in Congress Falls Again, Hits Historic Low,” http:// www.gallup.com/poll/171710/public-faith-congress-falls-again-hits- historic-low.aspx (accessed January 4, 2016).

75 ILO, “World of Work Report 2010: From One Crisis to the Next?,” retrieved February 7, 2011, from www.ilo.org/global/publications/ books/WCMS_145259/lang–en/index.htm.

76 Richard Florida, “The Conservative States of America,” The Atlantic, retrieved March 30, 2011, from www.theatlantic.com/politics/ archive/2011/03/the-conservative-states-of-america/71827/.

77 “The Global Crisis and the Poor,” The Economist (March 14, 2009): 62–4. 78 “Democracy? Hu Needs It,” The Economist (June 28, 2007): 44; “A

Warning for Reformers,” The Economist (November 17, 2007): 67. 79 “Xi Touts Communist Party as Defender of Confucius’s Virtues,” New

York Times, http://sinosphere.blogs.nytimes.com/2014/02/13/xi-touts- communist-party-as-defender-of-confuciuss-virtues/?_r=1 (accessed November 4, 2015).

80 “‘I am a True Democrat:’ G-8 Interview with Vladimir Putin,” Spiegel Online, retrieved June 4, 2007, from www.spiegel.de/international/ world/0,1518,486345,00.html.

81 “Brazil’s President Lula Says G7 Nations No Longer Speak for the World,” The Telegraph (March 16, 2009): A-1.

82 Roger Cohen, November 11, 2006. “China vs. U.S.: Democracy Confronts Harmony. Stay Tuned,” New York Times, retrieved February 7, 2011, from select.nytimes.com/iht/2006/11/22/world/IHT- 22globalist.html.

83 “Freedom in the World-2011,” 48–9. Ironically, promoting and pro- tecting the Washington Consensus requires a powerful military with global capabilities. The combined defense-related spending of more than $1.1 trillion in the United States exceeds that of all other coun- tries combined. See “Military Budget of the United States,” Wikipedia, retrieved January 15, 2013, from en.wikipedia.org/wiki/Military_bud- get_of_the_United_States; “Military Spending: Defence Costs,” The Economist, retrieved June 8, 2011, from www.economist.com/blogs/ dailychart/2011/06/military-spending.

84 James Mann, The China Fantasy: Why Capitalism Will Not Bring Democracy to China, (London: Penguin 2007); Eamonn Fingleton, In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony (New York: Thomas Dunne Books, 2008); Martin Jacques, When China Rules the World: The End of the Western World and the Birth of a New Global Order (London: Penguin Press, 2009); Stefan Halper, The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century (New York: Basic Books, 2010).

85 “Banyan: On the Defensive,” The Economist (April 7, 2011): 49; Jacob Talmon, The Origins of Totalitarian Democracy (London: Secker & Warburg, 1952); “China: Democratic Dictatorship,” Time, retrieved May 16, 2011, from www.time.com/time/magazine/ar- ticle/0,9171,800834,00.html.

86 “Where Do You Live?” The Economist, Special Report: China (June 25, 2011): 12.

87 “China Builds Middle East Ties through Business,” Al Jazeera America, http://america.aljazeera.com/articles/2016/2/20/china- middle-east-business-politics.html (accessed February 21, 2016); Roberto Tofani, “Business before Rights in Southeast Asia,” Asia Times Online, retrieved January 16, 2013, from www.atimes.com/atimes/ Southeast_Asia/NF01Ae02.html.

88 “China’s Modern Authoritarianism,” WSJ.com, retrieved February 10, 2011, from online.wsj.com/article/SB124319304482150525.html.

89 Matteo Cervellati, Piergiuseppe Fortunato, and Uwe Sunde, “Democratization and Civil Liberties: The Role of Violence dur- ing the Transition,” IZA DP No. 5555 (March 2011); “Extinguishing the Flames of the Arab Spring,” Al Jazeera English, http:// www.aljazeera.com/news/2015/12/extinguishing-flames-arab- spring-151216073803176.html (accessed December 17, 2015).

90 Oil-based revenue entrenches an autocracy by removing the need to levy taxes and thereby reducing state accountability.

91 Hassan Fattah, “Democracy in the Arab World, a U.S. Goal, Falters,” New York Times (April 10, 2006): C-1.

92 Samuel Huntington, The Clash of Civilizations and the Remaking of World Order (New York: Simon & Schuster, 1996); Huntington, Who Are We? The Challenges to America’s National Identity (New York: Simon & Schuster, 2004).

http://www.voanews.com/content/rights-group-worldwide-democratic-freedoms-at-historic-low/2616397.html

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Endnotes 5

93 “US Tells Egypt to Unblock Facebook, Twitter,” retrieved January 31, 2011, from www.todayonline.com/World/EDC110128-0000197/ US-tells-Egypt-to-unblock-Facebook,-Twitter; Edward Wong and David Barboza, “Wary of Egypt Unrest, China Censors Web,” NYTimes.com, retrieved January 31, 2011, from www.nytimes. com/2011/02/01/world/asia/01beijing.html?_r=1&hp. For example, Iranian leaders in 2009 and Egyptian authorities in 2011 struggled to quash antigovernment protests by blocking social networking sites that had been used to organize protests. Meanwhile, in the initial days of the Egyptian rebellion, wary Chinese officials instructed Sina.com and Netease.com — two of the country’s biggest online portals — to block keyword searches of the word “Egypt”; Weibo, the Chinese equivalent of Twitter, did the same.

94 Category, Satisfaction with Country’s Direction, Specific Query, “How satisfied are you with the country’s direction?” Pew Global Attitudes Project, retrieved April 21, 2011, from pewglobal.org/database/? indicator=3&survey=12&response=Satisfied&mode=chart. Similarly, the Pew Foundation has a very straightforward but interesting ques- tion, namely whether children are better off/worse off. More precisely the foundation asks residents of the country “When children today grow up, will they be better off financially than their parents?” In 2015, 88 percent of Chinese respondents agreed whereas 32 percent of respondents the United States agreed. See http://www.pewglobal. org/database/indicator/74/.

95 Aubrey Belford, “Indonesia’s Political Landscape Offers Path for Egypt,” New York Times, (February 16, 2011), www.nytimes. com/2011/02/17/world/asia/17iht-indo17.html?partner=rss&emc=rss. Similarly, the Pew Foundation has a very straightforward but inter- esting question, namely whether children are better off/worse off. More precisely the foundation asks residents of the country “When children today grow up, will they be better off financially than their parents?” In 2015, 88 percent of Chinese respondents agreed whereas 32 percent of respondents the United States agreed. See http://www. pewglobal.org/database/indicator/74/.

96 For instance, the end of the second wave saw more than 20 coun- tries revert from totalitarianism, symbolized by the ensuing ideo- logical war between Washington and Moscow. “Freedom in the World-2015,” 48–49.

97 The political risks of IB have telltale characteristics. Here, we see that they vary in terms of the intensity of their impact on company opera- tions, belong to various classes, typically follow from the imposition of certain sorts of regulations, and have distinctive outcomes.

98 Image is reported on Page 4 in this report. 99 If democracy continues faltering, the likely rise in corruption, weak-

ened property rights, unpredictably enforced laws, and freedom constraints will increase systemic political risk in many countries; “Venezuelan Bluster? Hugo Chávez Threatens to Seize Banks and a Steel-Maker,” The Economist Intelligence Unit (May 8, 2007): 57.

100 For example, Nigeria’s notoriously challenging business environ- ment is rife with procedural risks. “The entire state machinery exists to siphon off cash,” said one observer. “Many functions of govern- ment have been adapted for personal gain. . . . A universe of red tape engulfs the economy. . . . In some Nigerian states, governors must personally sign off on every property sale; many demand a fee”; “Nigeria’s Prospects: A Man and a Morass” The Economist (May 28, 2011): 24.

101 Foreign MNEs, like Coeur d’Alene Mines and Pan American Silver, besides watching their share price plummet on the news, were given two weeks to prepare for state takeover of their Bolivian mines; “Will Silver Surge Following the Nationalization of Bolivia’s Silver Mines by Embattled President Evo Morales?,” retrieved April 15, 2011, from www.zerohedge.com.

102 Specific methods include increasing tax rates, blocking repatriat- ing profits or dividends, or boosting the minimum share of local ownership.

103 “Japan and China: Rattling the Supply Chains,” The Economist, (October 20, 201): 60.

104 Duff Wilson, “Cigarette Giants in Global Fight on Tighter Rules,” NYTimes.com, retrieved February 1, 2011, from www.nytimes. com/2010/11/14/business/global/14smoke.html?_r=1.

105 “The 2010 Failed States Index,” Foreign Policy, retrieved February 8, 2011, from www.foreignpolicy.com/failedstates.

106 “Science: Getting in the Mood,” The Economist: The World in 2012, (November 17, 2012): 152.

107 Andrew Martin, “Turning Point for Suits over Chinese Drywall,” New York Times, (October 12, 2012): A-7.

108 For example, consider the legal concept of due diligence, which re- quires that the statements in a firm’s security-registration forms be true and omit no material facts. Companies rely on due diligence to manage the risk of cross-border acquisitions; it enacts a legally bind- ing process during which a potential buyer, say an Indian software designer, evaluates the assets and liabilities of a potential acquisi- tion in say, Germany. Hence, due diligence is often the difference between success and failure—provided the local legal codes permit the full examination of operations and management and the veri- fication of material facts. In the European Union, data protection rules can interfere with assessing important elements of a potential acquisition, such as managers’ physical or mental health, patterns of trade union membership, and criminal histories. Hence, prudent companies considering cross-border acquisitions pinpoint issues, the country or countries involved, and the citizenship and identity of people involved from the pre-due-diligence phase to the close of the deal. These decisions inevitably reference aspects of constitutional law, (i.e., what philosophies anchor ownership rights?), criminal law, (i.e., what are the procedures and penalties for malfeasance?), and civil/commercial law, (i.e., do regulations promote disclosure and verification of information?). Similar situations arise with respect to discovery and with other aspects of the legal process. With respect to discovery, for example, language, culture, volume, and local law influence the right to demand documents relative to the case from the other party; “Translating and the Law: Legal Language,” The Economist, (November 10, 2012): 66.

109 “Russia: The Long Life of Homo Sovieticus,” The Economist” (December 10, 2011): 27–30.

110 “Russian Politics: Fear and Loathing,” The Economist, (September 22, 2012): 60.

111 See Juriglobe World Legal Systems, www.juriglobe.ca/eng/. 112 Stare Decisis: Latin, “to stand by that which is decided.” 113 Denis Wiechman, Jerry Kendall, and Mohammad Azarian, “Islamic

Law: Myths and Realities,” retrieved June 22, 2009, from muslim- canada.org/Islam_myths.htm.

114 Andorra and the Guernsey and Jersey Islands, both of which belong to the United Kingdom, apply customary law only. The codification of civil law developed out of legal customs that evolved in particular com- munities and, over time, were collected and recorded by local jurists.

115 In a sense, legal pluralism results when two or more legal systems apply cumulatively or interactively.

116 “A Disorderly Heaven,” The Economist (March 20, 2004): 75. 117 “Russian Politics: Fear and Loathing,” The Economist. 118 Ian Morris, Why the West Rules . . . For Now (New York: Farrar, Strauss

and Giroux, 2010). 119 “Revolution in the Arab World: The Twilight of the Dictators,” The

Economist, (August 4, 2012): 73. 120 Richard McGregor, The Party: The Secret World of China’s Communist

Rulers (Harper Collins, 2010), Quote, He Weifang, p. 22. 121 Similarly, Thomas Paine wrote “in America, the law is king” in

contrast to the view that the king was the law, Common Sense, retrieved March 26, 2011, from www.ushistory.org/paine/ commonsense/singlehtml.htm.

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6 Endnotes

122 “Rule of Law Index,” World Justice Project,” retrieved February 8, 2011, from worldjusticeproject.org/rule-of-law-index.

123 Paul Collier, Wars, Guns, and Votes: Democracy in Dangerous Places (New York: HarperCollins, 2009). More pointedly, the rule of law is vital to a functioning democracy, given that, as John Locke warned some three centuries ago, “Wherever law ends, tyr- anny begins.”

124 Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000).

125 See profile of the World Justice Project, reported in “The Paper Chase,” The Economist, (June 25, 2011): 40.

126 http://info.worldbank.org/governance/wgi/index.aspx#reports; A. Kraay and M. Mastruzzi “The Worldwide Governance Indicators: Methodology and Analytical Issues,” 2010, retrieved April 15, 2013, from info.worldbank.org/governance/wgi/pdf/WGI.pdf.

127 Alternatively, Thomas Jefferson reasoned, “Information is the cur- rency of democracy.” If so, then the satellite dish-covered exteriors we see worldwide play a crucial role.

128 Louise Arbour, “The Rule of Law,” New York Times (September 26, 2012): A-8; “Economics and the Rule of Law: Order in the Jungle,” The Economist (March 13, 2008): 43–8.

129 Tom Friedman, “Our One-Party Democracy,” New York Times, (September 8, 2009): A-8.

130 Now, the more plausible scenario is one in which emerging econo- mies may migrate from one basis of rule to another—that is, from rule of man to “rule by law” and its implicit notion that even the ruler is subject to the law.

131 “Business in Russia: Dancing with the Bear,” 18. 132 “Belarus,” Freedom House, retrieved January 16, 2013, from www.

freedomhouse.org/country/belarus; “Kazakhstan,” Freedom House, retrieved January 16, 2013, from www.freedomhouse.org/country/ kazakhstan.

133 “Big US Firms Shift Hiring Abroad,” Wall Street Journal (April 19, 2011): B1.

134 “The World’s New Growth Frontier: Midsize Cities in Emerging Markets,” McKinsey & Company, www.mckinsey.com/insights/ economic_studies/the_worlds_new_growth_frontier_midsize_cit- ies_in_emerging_markets (accessed October 20, 2015).

135 Walmart has run into a firestorm of controversy over its bribery practices in Mexico. In defense, Walmart held that the convoluted, often contradictory Mexican legal code pushed it to protect its com- petitiveness with well-placed bribes. David Barstow and Alejandra Xanic Von Bertrab, “The Bribery Aisle: How Wal-Mart Got Its Way in Mexico,” NYTimes.com, retrieved April 15, 2013, from www. nytimes.com/2012/12/18/business/walmart-bribes-teotihuacan. html?pagewanted=all&_r=0.

136 Gardiner Harris, “India Backs Foreign Investment in Retailing,” NYTimes.com, retrieved January 17, 2013, from www.nytimes. com/2012/09/15/business/global/india-backs-foreign-investment-in- retail-sector.html.

137 Geoff Lewis, “Who in the World is Entrepreneurial?” Fortune: Small Business (June 1, 2007): 24.

138 A contract is a binding legal agreement that formalizes promises be- tween parties, the breach of which triggers legal action.

139 “Reform in Mexico: Labour Pains,” The Economist, (November 3, 2012): 37.

140 “Economics Focus: The Himalayas of Hiring,” The Economist (August 7, 2010): 76.

141 In the United States, the Internal Revenue Service requires reporting the sale of assets, payments to subcontractors, and termination of retirement plans.

142 Laura Alfaro and Anusha Chari, India Transformed? Insights from the Firm Level 1988–2005, National Bureau of Economic Research Working Paper 15448, 2009.

143 “Lawmakers to U.S. Companies: Don’t Buy Huawei, ZTE,” CNET News, retrieved January 17, 2013, from news.cnet.com/8301-1035_3-57527782-94/ lawmakers-to-u.s-companies-dont-buy-huawei-zte/.

144 “Brazil’s Trade Policy: Seeking Protection,” The Economist, (January 14, 2012): 35. Likewise, it requires foreign energy firms to spend 1 per- cent of gross revenue on local R&D.

145 Duncan Fairgrieve and Geraint Howells, “Is Product Liability Still a Global Problem?” Managerial Law 49:1/2 (2007): 6–9.

146 “Lego: Bricks and Flicks,” The Economist (May 7, 2011): 70. 147 Others advise a different stance. The evolving world economy, es-

pecially the market moves powered by emerging economies, alters transnational institutional structures and legal outlooks. Popular per- spectives in developing countries advocate less-stringent protection, arguing that IP rights are better interpreted as predatory, monopoly privileges that impose costs by • stifling the creativity, innovation, and emulation that support tech-

nological and cultural advance, • inhibiting local development and lowering global welfare by con-

straining the use of existing knowledge, • creating intellectual monopolies that protect business interests,

bestow monopoly profits, and lessen the efficiency gains of free trade, • inflating the prices that poor nations pay for products and pro-

cesses that are available only from wealthy nations, • stipulating licensing fees and regulatory burdens that increase the

cost of idea creation and slow the diffusion of innovations. In sum, goes this reasoning, property rights are a state-created privi- lege that impoverish the majority in order to concentrate wealth and power among the privileged. For example, in practical terms, critics in poor countries charge their rich counterparts with promoting strong IP protection to camouflage their intent to dismantle their generic drug industries. This debate will twist and turn for many years. In the meantime, hard economics is likely the key determinant of a country’s protection of IPRs. Poor people have little money to spend on necessities, let alone for expensive branded goods sold by foreign companies. In Kenya, where the average annual income is about $1,800, it should not come as a surprise that many Kenyans “think you have to cheat to survive.” One means of survival is buying pirated copies of products that improve productivity (i.e., software), fight illness (medicines), or provide relief (consumer products).

148 Intellectual Property Rights seen here grants the registered owner the legal authority to prevent others from making, using, or selling the registered intellectual property without permission. Common forms include the following: 1. Copyright, whereby the creator of an original work of authorship,

such as literature, music, technical drawings, artistic works, adver- tisements, and computer software, had exclusive rights to repro- duce, publish, perform, communicate, and adapt it.

2. Geographical indication that authorizes protection of a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.

3. Industrial design, a right granted for an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem.

4. Plant varieties authorizing the breeder of a new variety of plant exclusive control over the propagating material (including seed, cuttings, divisions, tissue culture) and harvested material (cut flow- ers, fruit, foliage) of a new variety for a number of years.

5. Trademark that provides protection of a sign, design, or expression that distinguishes products or services of a particular trader from the similar products or services of others.

149 Stephanie Clifford, “Recession? Knockoffs Go Down-Market,” NYTimes.com, retrieved February 14, 2011, from www.nytimes. com/2010/08/01/business/economy/01knockoff.html.

http://info.worldbank.org/governance/wgi/index.aspx#reports

http://www.freedomhouse.org/country/belarus

http://www.freedomhouse.org/country/kazakhstan

http://www.mckinsey.com/insights/economic_studies/the_worlds_new_growth_frontier_midsize_cities_in_emerging_markets

http://www.nytimes.com/2012/12/18/business/walmart-bribes-teotihuacan.html?pagewanted=all&_r=0

http://www.nytimes.com/2012/09/15/business/global/india-backs-foreign-investment-inretail-sector.html

http://www.nytimes.com/2010/08/01/business/economy/01knockoff.html

http://www.freedomhouse.org/country/kazakhstan

http://www.mckinsey.com/insights/economic_studies/the_worlds_new_growth_frontier_midsize_cities_in_emerging_markets

http://www.nytimes.com/2012/09/15/business/global/india-backs-foreign-investment-inretail-sector.html

http://www.nytimes.com/2010/08/01/business/economy/01knockoff.html

Endnotes 7

150 “Doing Business – Measuring Business Regulations,” World Bank Group, retrieved January 15, 2013, from www.doingbusiness.org.

151 “I stride toward ground zero of counterfeiting—the notorious Silk Market of Beijing. As do more than 10 million people a year, I enter a 35,000-square-meter, seven-level piracy temple, packed with nearly 2,000 small stalls staffed by thousands of hard-charging, take-no- prisoner vendors offering cheap knockoffs of the leading branded products in the world. Navigating a surreal bazaar, I scan stalls boldly displaying bogus Louis Vuitton luggage, Prada purses, Hugo Boss shirts, and Hermes scarves; depending on how well you negotiate, each can be had for an absurd fraction of the price of the genuine version. Moving on, stall after stall offers infamous “copywatches,” Nike gear, Sony Jump Drives, Wii Remotes, Gillette razors, UGG footwear, Oakley sunglasses, Zeiss binoculars, Nikon lenses, North Face jackets—one after another, in a seemingly endless procession of premier brand names. Despite spot-on cosmetic resemblance, virtu- ally all is counterfeit. Moving around, I come to digital zones, finding copies of software, music, games, and movies. Rack upon rack dis- plays products from some of the best and the brightest minds of the world, now selling for ludicrously low prices—Microsoft Windows for about a buck, Microsoft Office for $0.75, Call of Duty or Wii Guitar Hero for a buck, Photoshop for two bucks, AutoCAD for five dollars. Each stall is packed with an ever-changing collage of customers— Germans, Indians, Canadians, Brazilians, British, Americans, and on and on—each getting past the initial shock, and many buying mul- tiple titles.” Daniel Sullivan’s ramble through the Silk Market, Beijing, March 2012.

152 Items commonly counterfeited include books, printer cartridges, music CDs, brake pads, DVDs, aircraft parts, cigarettes, wristwatches, razor blades, batteries, medicine, motorcycles, handbags, jewelry, automobiles, shampoo, pens, toys, wine, shoes, clothing, lug- gage, foods, beer, perfume, cleaning supplies, pharmaceuticals, and health-care supplies.

153 “Inside the Knockoff-Tennis-Shoe Factory,” NYTimes.com, retrieved February 14, 2011, from www.nytimes.com/2010/08/22/ magazine/22fake-t.html?_r=2&adxnnl=1&emc=eta1& adxnnlx=1282932069-1merRjlswb8WDMPz0lEG1w; “Homepage,” International Anti-Counterfeiting Coalition, retrieved February 14, 2011, from www.iacc.org; International data reported in “Intellectual Property: Can You Keep a Secret?,” The Economist, (March 16, 2013): 67. Specifically, a survey by ASIS International, a security-industry body, estimated the annual value of stolen corporate intellectual property at $300 billion in America. Another put it at over $1 trillion worldwide.

154 Stephanie Sutton, “EFCG: Counterfeit Medicines More Profitable than Heroin,” retrieved February 16, 2011, from pharmtech.

findpharma.com/pharmtech/Ingredients/EFCG-Counterfeit- Medicines-More-Profitable-than-He/ArticleStandard/Article/ detail/635540.

155 Ibid. 156 William Booth, “Drug Cartels Muscle into Piracy Business,” The

Washington Post (June 1, 2011): A-1. 157 “Pirated Microsoft Software Funded Mexican Drug Cartel,” retrieved

February 16, 2011, from www.digitaltrends.com/computing/ pirated-microsoft-software-funded-mexican-drug-cartel/.

158 Owen Fletcher and Jason Dean, “Ballmer Decries Huge China Sales Holes,” Wall Street Journal, (May 27, 2011): A-1.

159 Ibid, Quote by Jonathan Erece, a trade enforcement coordinator for United States Protection.

160 “Fake Pharmaceuticals: Bad Medicine,” The Economist, (October 13, 2012): 74.

161 “Fake Drugs: Poison Pills,” The Economist, retrieved February 14, 2011, from www.economist.com/node/16943895?story_id=16943895.

162 Ibid. 163 Benoit Godart, “IP Crime: The New Face of Organized Crime,” Journal

of Intellectual Property Law & Practice, retrieved February 14, 2011, from iplp.oxfordjournals.org/content/5/5/378.full.

164 “SPECIAL 301 Report, Office of the United States Trade Representative,” retrieved February 24, 2013, from www.ustr. gov/about-us/press-office/press-releases/archives/2007/april/ special-301-report.

165 “Fake Pharmaceuticals: Bad Medicine,” The Economist, (October 13, 2012): 74; “Deadly Fake Viagra: Online Pharmacies Suspected of Selling Counterfeit Drugs,” CNN.com, http://www.cnn. com/2015/08/31/health/counterfeit-medications/ (accessed December 17, 2015).

166 “Software Piracy Takes Toll on Global Scale,” Hack in the Box: Keeping Knowledge Free, retrieved April 23, 2011, from www.hackinthe- box.net/modules.php?op=modload&name=News&file=article& sid=2951.

167 “Microsoft Says Software Piracy Continues to Grow,” TG Daily, retrieved February 14, 2011, from www.tgdaily.com/hardware- brief/13603-microsoft-says-software-piracy-continues-to-grow.

168 View of Mr. Orhii reported in “Fake Pharmaceuticals: Bad Medicine,” The Economist (October 13, 2012): 74.

169 “Microsoft Says Software Piracy Continues to Grow,” TG Daily. 170 “Business in China and the West: A Tale of Two Expats,” The

Economist (December 29, 2010): 73. 171 “Business Software Alliance - Global Software Piracy Study,” re-

trieved February 16, 2013, from portal.bsa.org/globalpiracy2011/ index.html.

http://www.doingbusiness.org

http://www.nytimes.com/2010/08/22/magazine/22fake-t.html?_r=2&adxnnl=1&emc=eta1&adxnnlx=1282932069-1merRjlswb8WDMPz0lEG1w

http://www.iacc.org

http://www.digitaltrends.com/computing/pirated-microsoft-software-funded-mexican-drug-cartel/

http://www.economist.com/node/16943895?story_id=16943895

http://www.ustr.gov/about-us/press-office/press-releases/archives/2007/april/special-301-report

http://www.cnn.com/2015/08/31/health/counterfeit-medications/

http://www.hackinthe-box.net/modules.php?op=modload&name=News&file=article&sid=2951

http://www.tgdaily.com/hardware-brief/13603-microsoft-says-software-piracy-continues-to-grow

http://www.digitaltrends.com/computing/pirated-microsoft-software-funded-mexican-drug-cartel/

http://www.ustr.gov/about-us/press-office/press-releases/archives/2007/april/special-301-report

http://www.cnn.com/2015/08/31/health/counterfeit-medications/

http://www.nytimes.com/2010/08/22/magazine/22fake-t.html?_r=2&adxnnl=1&emc=eta1&adxnnlx=1282932069-1merRjlswb8WDMPz0lEG1w

EndnotEs

1 Sources include the following: Bolt, J. and J. L. van Zanden (2014). The Maddison Project: collaborative research on historical national accounts. The Economic History Review, 67 (3): 627–651.Thomas Friedman, The World Is Flat: A Brief History of the Twenty-first Century,” (Farrar, Straus and Giroux, 2005); Clyde V. Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East (New York: Basic Books, 2006); Clyde Prestowitz, “Three Billion New Capitalists,” video transcript, News Hour (August 15, 2005), www.pbs.org/newshour/bb/economy/july-dec05/prestowitz_8-15. html; Kenneth Rogoff, “Betting with the House’s Money,” Project Syndicate, retrieved May 7, 2007, from www.project-syndicate. org/commentary/rogoff27; Anne O. Krueger, “Stability, Growth, and Prosperity: The Global Economy and the IMF,” retrieved June 7, 2006, from www.imf.org/external/np/speeches/2006/060706. htm; Angus Maddison, The World Economy, 1–2030 AD (London: Oxford University Press, 2007); The World Economy: Volume 1: A Millennial Perspective (Paris: Development Centre, 2001); Volume 2: Historical Statistics (Paris: Development Centre, 2003); “BRICs, Emerging Markets and the World Economy: Not Just Straw Men,” The Economist (June 18, 2009): 45; “Government v. Market in America: The Visible Hand,” The Economist (May 28, 2009): 25–8, retrieved August 12, 2009, from www.economist.com/displaystory. cfm?story_id=13743310; “The Next Billions: Unleashing Business Potential in Untapped Markets,” World Economic Forum (January 2009): 44; “A Special Report on Innovation in Emerging Markets: The World Turned Upside Down,” The Economist, retrieved April 21, 2011, from www.economist.com/node/15879369; “China Claims #9 Rank in United States Patents!” retrieved April 23, 2011, from www.defence. pk/forums/china-defence/55892-china-claims-9-rank-united-states- patents.html; Ian Morris, Why the West Rules … For Now (New York: Farrar, Straus and Giroux, 2010); Hanson, Gordon H. The rise of middle kingdoms: Emerging economies in global trade. No. w17961. National Bureau of Economic Research, 2012; Hopewell, Kristen. “Different paths to power: The rise of Brazil, India and China at the World Trade Organization.” Review of International Political Economy 22, no. 2 (2015): 311-338; Bardhan, Pranab. Awakening giants, feet of clay: Assessing the economic rise of China and India. Princeton University Press, 2012; Banerjee, Sudipto. “Emerging Nations: Perspectives on Past Success and Future Challenges*.” Emerging Economy Studies 1, no. 2 (2015): 163-170; “The Rise of the African Consumer | McKinsey & Company.” Accessed May 18, 2016. http:// www.mckinsey.com/industries/retail/our-insights/the-rise-of-the- african-consumer. Dobbs, Richard, James Manyika, and Jonathan Woetzel. “The Four Global Forces Breaking All the Trends | McKinsey & Company.” Accessed May 18, 2016. http://www.mckinsey.com/ business-functions/strategy-and-corporate-finance/our-insights/ the-four-global-forces-breaking-all-the-trends.

2 “Emerging Markets: Redrawing the World Map,” FT.com, http:// www.ft.com/cms/s/2/4a915716-39dc-11e5-8613-07d16aad2152.html (accessed December 15, 2015).

3 “Global Economic Outlook,” The Conference Board, retrieved April 11, 2011, from www.conference-board.org/data/globalout look.cfm. They moved to 50.4 percent in 2010. “Global Development Horizons 2011—Multipolarity: The New Global Economy,” The World Bank (accessed May 19, 2011).

4 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly, December 31, 2012, from www.mckinseyquarterly.com/ The_global_companys_challenge_2979.

5 So, for example, in May 2011, Chinese Central Bank governor Zhou Xiaochuan noted that “The new IMF leadership needs to reflect changes in the world economic order and be more representative of emerging market economies.”

6 We are currently experiencing roughly 10 times the economic accel- eration of the Industrial Revolution, on more than 100 times the scale, resulting in an economic transformation that carries over 1,300 times the force of change.

7 Ibid, Note 1. 8 Dustin Ensinger, “China Takes the Crown, Economy in Crisis,”

retrieved April 13, 2011, from www.economyincrisis.org/content/ china-takes-crown.

9 “People’s Republic of China: Spillover Report,” International Monetary Fund, retrieved January, 26, 2013, from www.imf.org/exter- nal/pubs/ft/scr/2011/cr11193.pdf.

10 “China’s Economic Growth in 2015 Is Slowest in 25 Years,” WSJ. com, http://www.wsj.com/articles/china-economic-growth-slows- to-6-9-on-year-in-2015-1453169398 (accessed April 18, 2016); Luay Al-Khatteeb, “Saudi Arabia’s Economic Time Bomb,” The Brookings Institution (December 30, 2015), http://www.brookings.edu/research/ opinions/2015/12/30-saudi-arabia-economic-time-bomb-alkhatteeb; “Brazil’s Political Crisis, Explained in 500 Words” Vox.com, http://www. vox.com/2016/4/13/11416578/brazil-petrobras-rousseff-impeachment (accessed April 18, 2016); “South African Economy Is on the Brink of Junk Status,” LA Times, http://www.latimes.com/world/africa/la-fg- south-africa-precipice-20160330-story.html (accessed April 18, 2016).

11 Shawn W. Crispin, “The Trouble with Thailand’s Economy,” The Diplomat, http://thediplomat.com/2015/08/the-trouble-with- thailands-economy/ (accessed April 18, 2016); “Backs to the Wall,” The Economist, October 3, 2015, http://www.economist.com/news/ middle-east-and-africa/21669966-drought-and-weak-rand-may- do-more-decade-sanctions-spur?zid=295&ah=0bca374e65f2354d 553956ea65f756e0; Patrick Gillespie, “Five Reasons Why Venezuela May Be the World’s Worst Economy,” CNNMoney, February 20, 2015, http://money.cnn.com/2015/02/20/news/economy/venezuela-econ- omy-inflation/index.html.

12 Its helpful to think about what you’ve learned through your stud- ies about how the transition from the Agrarian to the Industrial Revolution changed the way people lived their lives.

13 Clyde Prestowitz, “Three Billion New Capitalists,” video transcript, News Hour (August 15, 2005), retrieved July 18, 2007, from www.pbs. org/newshour/bb/economy/july-dec05/prestowitz_815.html.

14 “How Does the World Bank Classify Countries?” World Bank Data Help Desk, https://datahelpdesk.worldbank.org/knowledgebase/ articles/378834-how-does-the-world-bank-classify-countries (accessed May 18, 2016).

15 See, for example, Steven D. Levitt, and Stephen J. Dubner, Freakonomics, (New York: HarperCollins, 2009); Ben Fine, and Dimitris Milonakis, From Economics Imperialism to Freakonomics: The Shifting Boundaries Between Economics and Other Social Sciences, (Routledge, 2009); www.econlib.org/library/Enc/BehavioralEconomics.html.

16 Shoumen Palit Austin Datta, “Dynamic Socio-Economic Disequilibrium Catalyzed by the Internet of Things,” Journal of Innovation Management 3:3 (2015): 4–9; “How To Overcome The ‘Analysis Paralysis’ Of Decision-Making,” Forbes, http://www.forbes. com/sites/jeffboss/2015/03/20/how-to-overcome-the-analysis-paraly- sis-of-decision-making (accessed December 14, 2015); Will Brambley and Sharon Collard, “Saving Us From Ourselves: How Can We Make The UK More Financially Resilient?,” The Open University, July 13, 2015. The task of sorting through these sorts of situations, aiming to develop a mosaic profile that represents an economy’s features and model its interactions, presents a tough challenge to managers.

17 Stephen King, Losing Control: The Emerging Threats to Western Prosperity, (New Haven, CT: Yale University Press, 2010).

18 Consider, for example, the consequences of a reduction in inter- est rates; a cut spurs more borrowing that fans greater demand that

http://www.pbs.org/newshour/bb/economy/july-dec05/prestowitz_8-15

http://www.project-syndicate.org/commentary/rogoff27

http://www.imf.org/external/np/speeches/2006/060706.htm

http://www.economist.com/displaystory.cfm?story_id=13743310

http://www.defence.pk/forums/china-defence/55892-china-claims-9-rank-united-statespatents.html

http://www.mckinsey.com/industries/retail/our-insights/the-rise-of-the-african-consumer

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-four-global-forces-breaking-all-the-trends

http://www.ft.com/cms/s/2/4a915716-39dc-11e5-8613-07d16aad2152.html

http://www.conference-board.org/data/globaloutlook.cfm

http://www.mckinseyquarterly.com/The_global_companys_challenge_2979

http://www.economyincrisis.org/content/china-takes-crown

http://www.imf.org/external/pubs/ft/scr/2011/cr11193.pdf

http://www.wsj.com/articles/china-economic-growth-slows-to-6-9-on-year-in-2015-1453169398

http://www.brookings.edu/research/opinions/2015/12/30-saudi-arabia-economic-time-bomb-alkhatteeb

http://www.ox.com/2016/4/13/11416578/brazil-petrobras-rousseff-impeachment

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http://thediplomat.com/2015/08/the-trouble-with-thailands-economy/

http://www.economist.com/news/middle-east-and-africa/21669966-drought-and-weak-rand-maydo-more-decade-sanctions-spur?zid=295&ah=0bca374e65f2354d553956ea65f756e0

http://money.cnn.com/2015/02/20/news/economy/venezuela-economy-inflation/index.html

http://www.pbs.org/newshour/bb/economy/july-dec05/prestowitz_815.html

https://datahelpdesk.worldbank.org/knowledgebase/articles/378834-how-does-the-world-bank-classify-countries

http://www.econlib.org/library/Enc/BehavioralEconomics.html

http://www.forbes.com/sites/jeffboss/2015/03/20/how-to-overcome-the-analysis-paralysis-of-decision-making

http://www.project-syndicate.org/commentary/rogoff27

http://www.imf.org/external/np/speeches/2006/060706.htm

http://www.economist.com/displaystory.cfm?story_id=13743310

http://www.defence.pk/forums/china-defence/55892-china-claims-9-rank-united-statespatents.html

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-four-global-forces-breaking-all-the-trends

http://www.mckinseyquarterly.com/The_global_companys_challenge_2979

http://www.economyincrisis.org/content/china-takes-crown

http://www.brookings.edu/research/opinions/2015/12/30-saudi-arabia-economic-time-bomb-alkhatteeb

http://www.ox.com/2016/4/13/11416578/brazil-petrobras-rousseff-impeachment

http://www.economist.com/news/middle-east-and-africa/21669966-drought-and-weak-rand-maydo-more-decade-sanctions-spur?zid=295&ah=0bca374e65f2354d553956ea65f756e0

http://www.pbs.org/newshour/bb/economy/july-dec05/prestowitz_815.html

https://datahelpdesk.worldbank.org/knowledgebase/articles/378834-how-does-the-world-bank-classify-countries

http://www.forbes.com/sites/jeffboss/2015/03/20/how-to-overcome-the-analysis-paralysis-of-decision-making

2 Endnotes

boosts inflation that erodes purchasing power that creates wage pressure that reduces profits that lowers savings and so on.

19 See “Country Classification: Data Sources, Country Classifications and Aggregation Methodology,” http://www.un.org/en/development/ desa/policy/wesp/wesp_current/2012country_class.pdf; “How Does the World Bank Classify Countries?” World Bank Data Help Desk, https://datahelpdesk.worldbank.org/knowledgebase/articles/378834- how-does-the-world-bank-classify-countries (accessed December 13, 2015). The composition of each class reflects basic economic conditions. In some situations, countries have characteristics that could place them in more than one category (e.g., urban centers in many developing economies). For example, Shanghai or Shenzhen in China exhibit quality-of-life standards comparable to those found in developed economies like New York or Atlanta in the United States. Elsewhere in China, though, one finds rural centers, such as Guiyang or Lanzhou, whose income and wealth levels reflect those of poorer developing economies. The prevalence of the latter types in China, therefore, prompt classifying it as an economy in transition. So, notwithstanding overlap along the edges, the classes of developed, developing, and economies in transition are mutually exclusive.

20 “The World Factbook,” Central Intelligence Agency, https:// www.cia.gov/library/publications/resources/the-world-factbook/ rankorder/2001rank.html (accessed March 21, 2016); “How Much Has Global Economic Power Really Shifted? ” TripleCrisis, http://tri- plecrisis.com/how-much-has-global-economic-power-really-shifted/ (accessed April 3, 2016).

21 Peter Drucker, “Managing Oneself,” Harvard Business Review (1999). 22 The 2014 version of the OECD Employment Outlook report cited by

Morgan Stanley defines low-paying jobs as those for which earn- ings are below two-thirds of a country’s median income. In 2013, the median annual income in the US was $35,080, according to the Bureau of Labor Statistics’ Occupational Employment Statistics pro- gram. Under the OECD’s definition, then, a low-paying job would earn less than about $23,390.

23 See Figure 1.16, “Weekly Working Hours Needed at Minimum Wage to Move above the Relative Poverty Line, 2013,” OECD Employment Outlook, http://www.keepeek.com/Digital-Asset-Management/ oecd/employment/oecd-employment-outlook-2015_empl_outlook- 2015-en#page532015; “Minimum Wages After The Crisis: Making Them Pay,” OECD, http://www.oecd.org/social/Focus-on-Minimum- Wages-after-the-crisis-2015.pdf.

24 “In These 21 Countries, a 40-Hour Work Week Still Keeps Families in Poverty,” Bloomberg, http://www.bloomberg.com/news/arti- cles/2015-05-06/in-these-21-countries-a-40-hour-work-week-still- keeps-families-in-poverty#media-3 (accessed April 3, 2016).

25 Florence Jaumotte, Subir Lall, and Chris Papageorgiou, “Rising Income Inequality: Technology, or Trade and Financial Globalization,” IMF Economic Review 61:2 (2013): 271–309; Anthony B. Atkinson and François Bourguignon, eds. Handbook of Income Distribution SET vols. 2A-2B, (Elsevier, 2014); Paul Ryscavage, Income Inequality in America: An Analysis of Trends, (Routledge, 2015); Ravi Kanbur and Joseph Stiglitz, “Wealth and Income Distribution: New Theories Needed for a New Era,” Vox, (August 18, 2015).

26 Less commonly, some refer to developing economies as “least devel- oped countries” or “Third World Countries”; the latter was in vogue during the Cold War Era when democratic countries, aligned with the United States, composed the “First World” and communist coun- tries, aligned with the then USSR, represented the “Second World.” Whatever the terminology whether developing, underdeveloped, or least developed, this refers to economic performance and does not extend to cultural, historical, or social legacies.

Varying definitions of the term First World and the uncertainty of the term in today’s world leads to different indicators of First World status. In 1945, the UN used the terms first, second, third, and fourth worlds to define the relative wealth of nations. They were defined

in terms of Gross National Product (GNP), measured in U.S. dol- lars, along with other sociopolitical factors. The first world included the large industrialized, democratic (free elections, etc.) nations. The second world included modern, wealthy, industrialized nations, but they were all under communist control. Most of the rest of the world was deemed part of the third world, while the fourth world was con- sidered to be those nations whose people were living on less than US$100 annually.

27 “The World Factbook,” Central Intelligence Agency, https:// www.cia.gov/library/publications/resources/the-world-factbook/ rankorder/2001rank.html (accessed March 21, 2016); “2013 World Population Data Sheet,” http://www.prb.org/publications/ datasheets/2013/2013-world-population-data-sheet.aspx (accessed March 21, 2016).

28 “GNI per Capita, Atlas Method (current US$),” The World Bank, http://data.worldbank.org/indicator/NY.GNP.PCAP.CD (accessed December 7, 2015). See also http://data.worldbank.org/country.

29 “China Now Has More Billionaires than U.S.,” CNNMoney, (October 15, 2015), http://money.cnn.com/2015/10/15/investing/china-us- billionaires/ (accessed December 14, 2015).

30 “Poverty Overview,” http://www.worldbank.org/en/topic/poverty/ overview (accessed March 21, 2016); “2013 World Population Data Sheet,” http://www.prb.org/publications/datasheets/2013/2013- world-population-data-sheet.aspx (accessed March 21, 2016).

31 Emerging-market status determined by “MSCI Index Country Membership,” https://www.msci.com/emerging-markets and https:// www.msci.com/market-classification (accessed December 13, 2015). Others determined by UN classification.

32 At the turn of the century, analysts forecast great gains for developing and emerging economies. Notably, the U.S. Department of Commerce estimates that more than three quarters percent of the expected growth in world trade between 2005 and 2025 will come from the more than 130 developing countries; a small core of these countries, notably, China, India, Singapore, Malaysia, Indonesia, and South Korea, will account for more than half of that growth. See Debabrata Talukdar, Sumila Gulyani, and Lawrence F. Salmen. “Customer Orientation in the Context of Development Projects: Insights from the World Bank,” Journal of Public Policy & Marketing 24:1 (2005): 100–11.

33 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly, retrieved December 31, 2012, from www.mckinseyquarterly.com/ The_global_companys_challenge_2979.

34 “The World’s Shifting Centre of Gravity,” The Economist, June 28, 2012, http://www.economist.com/blogs/graphicdetail/2012/06/daily- chart-19; “McKinsey: The World’s Economic Center Of Gravity From AD 1 To AD 2010,” Business Insider, http://www.businessinsider. com/mckinsey-worlds-economic-center-of-gravity-2012-6 (accessed December 30, 2015).

35 Authors: Richard Dobbs, Jaana Remes, James Manyika, Charles Roxburgh, Sven Smit, and Fabian Schaer.

36 Amartya Sen, Development as Freedom, (Oxford Paperbacks, 2001); Jeffrey D. Sachs, Andrew Warner, Anders Åslund, and Stanley Fischer, “Economic Reform and the Process of Global Integration,” Brookings Papers on Economic Activity 1995:1 (1995): 1–118; Hernando De Soto, The Other Path: The Invisible Revolution in the Third World, (New York: Harper & Row, 1989); Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000).

37 Quote, Jeffery Sachs, “Commanding Heights : Jeffrey Sachs” PBS, http://www.pbs.org/wgbh/commandingheights/shared/minitext/ int_jeffreysachs.html (accessed March 22, 2016).

38 “The Next Billions: Unleashing Business Potential in Untapped Markets,” World Economic Forum (January 2009): 44; C. K. Prahalad and S. L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy+Business (2002) 26: 54–67; “Defining the Base of the

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Endnotes 3

Pyramid | Introduction: Creating a Fortune with the Base of the Pyramid,” FT Press, http://www.ftpress.com/articles/article. aspx?p=1648904&seqNum=4 (accessed December 14, 2015).

39 Christa Case Bryant, “Surging BRIC Middle Classes Are Eclipsing Global Poverty,” CSMonitor.com, retrieved May 25, 2011, from www.csmonitor.com/World/2011/0517/ Surging-BRIC-middle-classes-are-eclipsing-global-poverty.

40 “The Mixed Blessing of Asia’s Growing Middle Class,” East Asia Forum, http://www.eastasiaforum.org/2015/03/23/the-mixed-bless- ing-of-asias-growing-middle-class/ (accessed December 13, 2015); “Prosperity in Asia: The Intergenerational Dimensions,” EABER, http://www.eaber.org/node/24815 (accessed December 13, 2015).

41 “Chart Focus: The World’s Economic Center of Gravity Shifts,” McKinsey Quarterly, retrieved February 25, 2013, from www.mckin- seyquarterly.com/newsletters/chartfocus/2013_02.html.

42 William W. Beach and Marc A. Miles, “Explaining the Factors of the Index of Economic Freedom,” 2005 Index of Economic Freedom, retrieved August 14, 2006, from www.heritage.org/research/features/index:33.

43 Managers’ freedom to do so, in turn, generates and reinforces dynamic growth through efficient resource allocation, higher produc- tivity, and innovation.

44 Quotation extracted from The Wealth of Nations. Reported in “Executive Summary,” Index of Economic Freedom, retrieved February 4, 2008, from www.heritage.org/research/features/index/ chapters/pdf/index2008_execsum.pdf.

45 Methodologically, a country’s overall score is derived by summing a set of equally weighted measures, from 0 to 100, and averaging these 10 economic freedoms.

46 “IMD World Competitiveness Centre,” http://www.imd.org/wcc/ (accessed December 8, 2015).

47 Robert Lawson “Measuring Economic Freedom,” Cato Institute, retrieved April 13, 2011, from www.cato.org/pub_display.php?pub_ id=6101; “Global Indicators Database,” Pew Research Center’s Global Attitudes Project, http://www.pewglobal.org/database/ (accessed November 19, 2015).

48 “Index of Economic Freedom: Promoting Economic Opportunity and Prosperity by Country,” http://www.heritage.org/index/ (accessed May 18, 2016);“Executive Highlights,” 2016 Index of Economic Freedom Book, http://www.heritage.org/index/book/executive-high- lights (accessed May 18, 2016).

49 Retrieved January 31, 2013, from http://www.heritage.org/index/ images/book/2013/region-web-map-WORLD-large.jpg.

50 The global average economic freedom score had hit a low in 2010 of 59.4 and surpassing the pre-crisis high of 60.2 set in 2007. See “20th Anniversary,” 2016 Index of Economic Freedom, http://www. heritage.org/index/book/20thannchapter (accessed November 19, 2015); “Country Rankings: World & Global Economy Rankings on Economic Freedom,” http://www.heritage.org/index/ranking (accessed November 19, 2015); The 2013 Index of Economic Freedom, retrieved January 24, 2013, from www.heritage.org/Index.

51 For example, in mid-2011, Bolivia dismantled its privatization model that governed the mining industry and expropriated all assets owned by private, largely foreign-owned mining companies. The fear was this action signaled rising resource nationalism worldwide.

52 Adapted from “Methodology,” 2015 Index of Economic Freedom Book, http://www.heritage.org/index/book/methodology (accessed December 8, 2015).

53 “Country Rankings: World & Global Economy Rankings on Economic Freedom,” http://www.heritage.org/index/ranking (accessed December 14, 2015).

54 “Index of Economic Freedom: Promoting Economic Opportunity and Prosperity by Country.” Accessed May 18, 2016. http://www.heritage. org/index/. “Executive Highlights | 2016 Index of Economic Freedom

Book.” Accessed May 18, 2016. http://www.heritage.org/index/book/ executive-highlights.

55 Country clusters determined in accordance with “Country Classification: Data Sources, Country Classifications and Aggregation Methodology,” http://www.un.org/en/development/desa/policy/ wesp/wesp_current/2012country_class.pdf; “How Does the World Bank Classify Countries?” World Bank Data Help Desk, https:// datahelpdesk.worldbank.org/knowledgebase/articles/378834-how- does-the-world-bank-classify-countries (accessed December 13, 2015); “Featured Index—ACWI,” MSCI, https://www.msci.com/acwi (accessed March 26, 2016); “Emerging Markets,” Wikipedia, the Free Encyclopedia, https://en.wikipedia.org/wiki/Emerging_markets#cite_ note-21 (accessed March 26, 2016).

56 Demographic calculations estimated on May 15, 2016. 57 Anatole Kaletsky, Capitalism 4.0: The Birth of a New Economy in the

Aftermath of Crisis (New York: Public Affairs, 2010). 58 “A Hilly Dilemma,” The Economist, http://www.economist.com/

news/middle-east-and-africa/21694551-should-paul-kagame-be- backed-providing-stability-and-prosperity-or-condemned?zid=304& ah=e5690753dc78ce91909083042ad12e30 (accessed March 25, 2016).

59 “Q&A with Ian Bremmer on State Capitalism,” Foreign Affairs, retrieved April 13 2011, from www.foreignaffairs.com/discussions/ interviews/qa-with-ian-bremmer-on-state-capitalism?page=show.

60 The state essentially prevents systemic distortions threatening the sta- bility of the system and promoting societal welfare—or, as Marx proph- esied, capitalism eventually is destroyed by its own contradictions.

61 Michael Wines, “Make No Mistake: In China, State-Run Firms Rule,” New York Times (August 31, 2010): B-4.

62 “China’s Future: Rising Power, Anxious State,” The Economist, Special Report: China (June 25, 2011): 14.

63 Bolstering its solar power industry, for example, led China to recruit Evergreen Solar, a technology-rich U.S. company, by providing finan- cial incentives and tax breaks. State capitalism promotes the growth of particular industrial sectors and companies in order to speed eco- nomic development. GCL-Poly Energy of China, for instance, relied on quick approvals, cheap government loans, and state support to build a global-scale company in 15 months. China’s ensuing disrup- tion of the solar power industry prompted many firms to shut down; some, such as Evergreen Solar of the U.S., relocated to China.

64 “Countries at the Crossroads,” retrieved April 18, 2011, from www. freedomhouse.org/template.cfm?page=139&edition=9.

65 Ian Bremmer, “State Capitalism and the Crisis,” McKinsey Quarterly, (July, 2009): 4. Likewise, Brazil reasoned that the state succeeded where the private sector failed during the crisis; said its current president, state capitalism “prevented the economy from being ship- wrecked.” “Brazil’s Presidential Campaign: Falling in Love Again with the State,” The Economist, (August 18, 2012): 57.

66 “Global Indicators Database: Country’s Economic Situation (2015),” Pew Research Center, http://www.pewglobal.org/database/indica- tor/5/survey/17/ (accessed November 19, 2015); “Global Indicators Database: Country’s Economic Situation (2007),” Pew Research Center, http://www.pewglobal.org/database/indicator/5/survey/8/ (accessed November 19, 2015).

67 Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (New York: Portfolio, 2010); Stefan Halper, The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century (New York: Basic Books, 2010).

68 Strictly speaking, none of them is a “pure” market economy because their governments intervene in the marketplace. Still, their historic advocacy of economic freedom endorses the philosophy of capitalism and the principle of laissez-faire.

69 Adam Smith: “An Inquiry into the Nature and Causes of the Wealth of Nations, Book IV, Chapter IX,” Library of Economics and Liberty,

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4 Endnotes

http://www.econlib.org/library/Smith/smWN19.html (accessed December 8, 2015).

70 Only then, as Marx reasoned, are the proletariat (the social class that does manual labor or work for wages) protected from exploitation by the bourgeois (the social class that owns the factors of production). “Karl Marx,” Stanford Encyclopedia of Philosophy, http://plato.stanford. edu/entries/marx/ (accessed December 8, 2015).

71 Companies in centrally planned economies exhibited a particular quirk. The absence of competition and bankruptcy in this sort of eco- nomic system meant that once an enterprise was up and running, it survived indefinitely, irrespective of performance.

72 Michael Todaro, Economic Development, 6th edition (Reading, MA: Addison Wesley, 1996): 705.

73 The aftermath of the global financial crisis highlighted these out- comes. Countries that had favored a strong state presence, higher taxes, heavier regulation, tougher job-protection laws, and generous social safety programs better navigated the economic upheaval than had their counterparts in market and command economies. As the economically free United States regrouped and wondered “What next?,” the socialism of Denmark supported its steady economic performance and citizens’ status as the happiest people in the world. “Denmark ‘Happiest Place on Earth,’” BBC News, July 28, 2006, retrieved April 18, 2011 from news.bbc.co.uk/2/hi/health/5224306. stm. See also “The French Model: Vive la Différence!” The Economist, (May 7, 2009): 37; Russell Shorto, “Going Dutch: How I Learned to Love the Welfare State,” New York Times, retrieved April 17, 2011, from www.nytimes.com/2009/05/03/magazine/03european-t.html. As the United Kingdom’s free market struggled, Sweden’s mixed economy persevered. For instance, the French government holds sig- nificant ownership stakes in several large companies, including Areva (15.88 percent stake), Renault (15 percent stake), Safran (30.2 percent stake), EDF (84.44 percent stake), and GDF Suez (36.36 percent stake).

74 Most worrisome to free market proponents is that, once a crisis passes, government control sometimes shrinks, but it never returns to its original size. Indeed, some argue that a mixed economy is essen- tially a move toward a socialist state.

75 As a point of interest, the German government follows the principles and precepts rooted in German intellectual history, especially in the idea of ordoliberalism. This is an offshoot of classical liberalism that sprouted during the Nazi period, when dissidents around Walter Eucken, an economist in Freiburg, dreamed of a better economic sys- tem. They reacted against the planned economies of Nazi Germany and the Soviet Union. But they also rejected both pure laissez-faire and Keynesian demand management.

76 Regarding the informal, the Economist reported that “When Alan Greenspan was chairman of the Federal Reserve, he monitored sev- eral unusual measures. One favorite, supposedly, was sales of men’s underwear, which are usually pretty constant, but drop in recessions when men replace them less often.” See “Fast Food for Thought,” The Economist (July 30, 2011): 12.

77 “GDP: One of the Great Inventions of the 20th Century,” Bureau of Economic Analysis, retrieved January 24, 2013, from www.bea.gov/ scb/account_articles/general/0100od/maintext.htm.

78 For instance, more than 700 U.S. MNEs operate in Ireland, directly employing more than 150,000 workers (roughly 8 percent of the Irish workforce). Periodically, these MNEs repatriate profits to their U.S. home office. These financial outflows, along with those made by other foreign MNEs operating in Ireland, exceed the financial income flowing into Ireland. Consequently, GNI overestimates Ireland’s eco- nomic performance. See “700 US Companies Now Located in Ireland as Direct Investment Soars,” The Guardian, http://www.theguardian. com/world/2015/mar/05/ireland-attracts-soaring-level-of-us-invest- ment (accessed December 8, 2015).

79 Specifically, when large shares of the profits that arise from foreign investment do not remain in a nation, as in the case of Ireland, GNI outperforms GDP in estimating economic performance.

80 Historically, GNI was referred to as gross national product. The defi- nition and measurement of GNI and GNP are analogous, but institu- tions such as the World Bank and International Monetary Fund now use the term GNI.

81 Notwithstanding its virtues, GDP is not a comprehensive measure of economic performance. Recently, the United States has begun estimating gross output (GO), a broader measure that attempts to measure total sales or revenues at all stages of production. Whereas GDP is the “bottom line” (earnings) of an accounting statement, GO represents the “top line” (revenues or sales). Together, GDP and GO are complementary measures that help managers better assess eco- nomic performance in a country.

82 “GDP at Market Prices (current US$),” The World Bank, http:// data.worldbank.org/indicator/NY.GDP.MKTP.CD?order=wbapi_ data_value_2014%20wbapi_data_value%20wbapi_data_value- last&sort=desc (accessed March 27, 2016). For the record, the World Bank reports that GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in current U.S. dollars. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for differences in rates of inflation between the country, and through 2000, the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). From 2001, these coun- tries include the Euro area, Japan, the United Kingdom, and the United States.

83 Consequently, although world GNP and world GNI are equal, their slightly different calculation can result in a small discrepancy at the country level. Consequently, managers cross-check their analyses, not- ing the assumptions of the measure and characteristics of a particular country.

84 Technically, the calculation of GNP inevitably includes the estimate of GDP, along with adjustments made for income earned by residents from overseas investments, minus income earned within the domes- tic economy by overseas residents.

85 See “On the Difference Between GNP and GDP,” A (Budding) Sociologist’s Commonplace Book, http://asociologist.com/2012/04/30/ on-the-difference-between-gnp-and-gdp/ (accessed April 8, 2016).

86 For example, Latin America has seen income per capita drop five times since the 1980s. The current global credit crisis has triggered a sixth occurrence—population in the region is growing 1.3 percent a year but the economy “grew” 2.2 percent in 2009. As expected, con- sumer demand, public finances, financial reserves, and currency valu- ations tumbled. This calamity is not unique to Latin America; at least 60 developing markets suffered income drops in 2009, with especially hard times for Central and Eastern Europe and sub-Saharan Africa.

87 Effectively, this translates into a CAGR of .54 percent. See http://www.investinganswers.com/calculators/return/ compound-annual-growth-rate-cagr-calculator-1262.

88 Technically, we compute per capita GNI by taking the GNI of a country and converting it into a standard currency—say, the U.S. dollar at pre- vailing exchange rates—and then dividing this sum by population size.

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Endnotes 5

89 “U.S. and World Population Clocks,” POPClocks, retrieved January 30, 2013. Check www.census.gov/main/www/popclock.html for current statistic.

90 Technically, the World Bank estimates a higher per capita income level for Monaco. However, the 2011 report is an approximation and, moreover, there is no estimate for its purchasing power parity con- version. Hence, we use Norway given its complete data file for 2011.

91 “GNI per Capita, Atlas Method (current US$),” The World Bank, http://data.worldbank.org/indicator/NY.GNP.PCAP.CD (accessed March 27, 2016).

92 “Gasoline Prices around the World,” GlobalPetrolPrices.com, (March 21, 2016) http://www.globalpetrolprices.com/gasoline_prices/ (accessed March 27, 2016). Likewise, the combined price of a MacBook Air, 32 GB iPad 5, and a 16 GB iPhone 6 was $2,225 in Tokyo, $2,745 in New York, and $4,160 in Sao Paulo in 2014.

93 We calculate PPP between countries by estimating the value of a universal “basket” of goods (e.g., soap and bread) and services (e.g., telephone and electricity) that can be purchased with one unit of a country’s currency. For example, a loaf of bread that sells for 53.70 rupees in India should cost US$1.00 in the United States given an exchange rate between India and the United States of 53.70 INR to US$1. Exchange rates as of January 24, 2013.

94 World Bank, 2013 Survey (Atlas methodology for GNI per capita). Typically, the prices of many goods are considered and weighted according to their importance in the economy of the particular country.

95 “GDP, PPP (current International $),” The World Bank, http://data. worldbank.org/indicator/NY.GDP.MKTP.PP.CD?order=wbapi_data_ value_2014+wbapi_data_value+wbapi_data_value-last&sort=desc (accessed March 27, 2016). For the record, also see “GNI, PPP (current International $),” The World Bank, http://data.worldbank. org/indicator/NY.GNP.MKTP.PP.CD/countries/1W?display=graph (accessed December 8, 2015).

96 “Sex, Drugs and GDP: The Challenge of Measuring the Shadow Economy,” WSJ.com, http://www.wsj.com/articles/sex-drugs-and- gdp-the-challenge-of-measuring-the-shadow-economy-1402251721 (accessed December 31, 2015).

97 “The Countries with the Biggest ‘Shadow Economies,’” Bloomberg, http://www.bloomberg.com/ss/10/07/0729_worlds_biggest_shadow_ economy/index.htm, (accessed April 5, 2016).

98 “Shadow Economies All around the World: Model-Based Estimates,” VoxEU.org, retrieved May 25, 2015, from http://www.voxeu. org/article/shadow-economies-around-world-model-based- estimates; “Europe’s Shadow Economy: As Big As Germany,” Zero Hedge, retrieved May 13, 2013, from http://www.zerohedge.com/ news/2013-05-06/europes-shadow-economy-big-germany.

99 “Changing the Scales,” The Economist (August 23, 2014): 68–9; “How Nigeria’s Economy Grew by 89 percent Overnight,” The Economist (April 7, 2014): 56–7.

100 Josh Zumbrun, “Sex, Drugs and GDP: The Challenge of Measuring the Shadow Economy,” Wall Street Journal, (June 8, 2014): sec. US, http://www.wsj.com/articles/sex-drugs-and-gdp-the-challenge-of- measuring-the-shadow-economy-1402251721.

101 “Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond,” General Assembly Resolution 38/161, retrieved May 27, 2007, from www.un.org/documents/ga/res/38/a38r161htm.

102 “Sweden Retains Crown as World’s ‘Most Sustainable Country,’” http://www.businessgreen.com/bg/news/2414952/sweden-retains- crown-as-worlds-most-sustainable-country (accessed April 8, 2016); see http://www.robecosam.com/images/Country-Sustainability- Paper-en.pdf for detailed analysis.

103 Joseph Stiglitz, “Good Numbers Gone Bad: Why Relying on GDP as a Leading Economic Gauge Can Lead to Poor Decision-Making,” Fortune (September 25, 2006): 45–9.

104 Some maintain that the purpose of development is to enlarge people’s choices. In principle, these choices can be infinite and can change over time. People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, security against crime and physical violence, sat- isfying leisure hours, political and cultural freedoms, and sense of participation in community activities. The objective of development is to create an enabling environment for people to enjoy long, healthy, and creative lives. Statement by Dr. Mahbub ul Haq, co-conceiver, with Amartya Sen of HDI.

105 “|Human Development Reports,” http://hdr.undp.org/en/com- posite/HDI (accessed April 8, 2016); “List of Countries by Human Development Index,” Wikipedia, the Free Encyclopedia, 2016, https:// en.wikipedia.org/w/index.php?title=List_of_countries_by_Human_ Development_Index&oldid=713263781.

106 Jerome Glenn, Theodore Gordon, and Elizabeth Florescu, 2009 State of the Future, The Millennium Project, retrieved May 15, 2011, from www.millenniumproject.org/millennium/sof2009.html; “Humans using Earth’s Resources at Unsustainable Rate, Conservation Group Claims,” retrieved June 2, 2011, from www.naturalnews.com/020873. html; Edward Goldsmith, “The Stable Society – Can We Achieve It?” http://www.edwardgoldsmith.org/1105/the-stable-society-can-we- achieve-it/ (accessed December 31, 2015).

107 “World Happiness Report 2015,” World Happiness Report, http:// worldhappiness.report/ed/2015/ (accessed April 8 2016).

108 Roger Cohen, “The Happynomics of Life,” NYTimes.com, retrieved April 27, 2011, from nytimes.com/2011/03/13/opinion/13cohen. html?_r=1.

109 Eric Weiner, “The Happiest Places in the World,” Forbes (April 23, 2008): 55.

110 “World Happiness Report 2015,” World Happiness Report, http:// worldhappiness.report/ed/2015/ (accessed April 9, 2016); “Home – World Happiness Report,” http://worldhappiness.report/ (accessed April 9, 2016); “World Happiness Report,” Wikipedia, the Free Encyclopedia, https://en.wikipedia.org/w/index.php?title=World_ Happiness_Report&oldid=714149511; Charles Jones and Peter Klenow, Beyond GDP? Welfare across Countries and Time, NBER Working Papers 16352, National Bureau of Economic Research (2010).

111 Research reports a positive association between GDP and happiness; citizens in wealthier, developed countries report greater happiness and better life satisfaction than those in poorer, developing coun- tries—but, only to a point. After $75,000 or so, only people’s day-to- day emotional well-being, not their happiness, increases as income increases. This situation highlights the happiness paradox, whereby people in rich countries do not appear to be happier than people in poor countries.

112 “World Happiness Report 2015,” World Happiness Report, http:// worldhappiness.report/ed/2015/ (accessed April 9, 2016); “Home – World Happiness Report,” http://worldhappiness.report/ (accessed April 9, 2016); “World Happiness Report,” Wikipedia, the Free Encyclopedia, https://en.wikipedia.org/w/index.php?title=World_ Happiness_Report&oldid=714149511. Also see J. Helliwell, R. Layard, and J. Sachs, “World Happiness Report 2016, Update (Vol. I),” (New York: Sustainable Development Solutions Network, 2016); “GNH Survey 2010,” The Centre for Bhutan Studies; John Helliwell, Richard Layard, and Jeffrey Sachs, “World Happiness Report,” Columbia University Earth Institute (April 2, 2012); Kyu Lee, “Sustainable Development Solutions Network: World Happiness Report 2013,” unsdsn.org; “World Happiness Report 2016 Update,” UN Sustainable Development Solutions Network.

113 “OECD Launches Happiness Index,” AFP, retrieved May 26, 2011, from www.google.com/hostednews/afp/article/ALeqM5jj15a9Z CL9ETVD9UAn18y7MlrG_g?docId=CNG.b86506f095cbf61164e 88f98b0d5d21c.2a1. Originally, the OECD ranked countries, the

http://www.census.gov/main/www/popclock.html

http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

http://www.globalpetrolprices.com/gasoline_prices/

http://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?order=wbapi_data_value_2014+wbapi_data_value+wbapi_data_value-last&sort=desc

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http://www.bloomberg.com/ss/10/07/0729_worlds_biggest_shadow_economy/index.htm

http://www.voxeu.org/article/shadow-economies-around-world-model-basedestimates

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http://hdr.undp.org/en/composite/HDI

https://en.wikipedia.org/w/index.php?title=List_of_countries_by_Human_Development_Index&oldid=713263781

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http://www.edwardgoldsmith.org/1105/the-stable-society-can-we-achieve-it/

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http://worldhappiness.report/

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http://worldhappiness.report/

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http://www.google.com/hostednews/afp/article/ALeqM5jj15a9ZCL9ETVD9UAn18y7MlrG_g?docId=CNG.b86506f095cbf61164e88f98b0d5d21c.2a1

http://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?order=wbapi_data_value_2014+wbapi_data_value+wbapi_data_value-last&sort=desc

http://data.worldbank.org/indicator/NY.GNP.MKTP.PP.CD/countries/1W?display=graph

http://www.bloomberg.com/ss/10/07/0729_worlds_biggest_shadow_economy/index.htm

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6 Endnotes

top ten countries, in terms of the YBLI and beginning with the leader: Denmark, Canada, Norway, Australia, the Netherlands, Sweden, Switzerland, Finland, Israel, and Austria. Now, it refrains from doing so. “The Happiest Countries in the World,” 24/7 Wall St, retrieved June 4, 2011, from 247wallst.com/2011/06/01/ the-happiest-countries-in-the-world/2.

114 “Happy Planet Index,” http://www.happyplanetindex.org/ (accessed April 8, 2016); “About the HPI: Happy Planet Index,” http://www. happyplanetindex.org/about/ (accessed April 9, 2016). “The Broken- Window Fallacy,” Mises Institute, August 26, 2011, https://mises.org/ library/broken-window-fallacy; Mark Whitehouse, “GDP Can Be a Poor Measure of Success,” WSJ.com, retrieved January 17, 2011, from online.wsj.com/article/SB1000142405274870406450457607034325240 9876.html; “Noreena Hertz: Even War Is Good for Economic Growth,” Spiegel Online, retrieved January 28, 2013, from www.spiegel.de/ international/world/globalization-critic-noreena-hertz-even-war-is- good-for-economic-growth-a-685491.html.

115 “Happy Planet Index,” http://www.happyplanetindex.org/ (accessed April 8 2016).

116 “World Bank Indicators, 2013,” The World Bank, data.worldbank.org/ data-catalog/world-development-indicators.

117 “Government v. Market in America: The Visible Hand,” The Economist (May 28, 2009): 25–8.

118 E. Mishan, The Costs of Economic Growth (New York: Praeger, 1967). 119 Ibid. 120 Jerome Glenn, Theodore Gordon, and Elizabeth Florescu, 2009 State

of the Future, The Millennium Project, retrieved May 15, 2011, from www.millenniumproject.org/millennium/sof2009.html; “Humans Using Earth’s Resources at Unsustainable Rate, Conservation Group Claims,” retrieved June 2, 2011, from www.naturalnews.com/020873. html.

121 Process of Preparation of the Environmental Perspective to the Year 2000 and Beyond, General Assembly Resolution 38/161, retrieved May 27, 2007, from www.un.org/documents/ga/res/38/a38r161htm. Potential discussion question: “Put yourself in the following sce- nario: Tomorrow, while having lunch with your friends, the issue of economic growth pops up as a topic of discussion. Given your read of the information in the Point-Counterpoint, what three points of perspective would you use to communicate your understanding of economic growth?”

122 Technically, a score of zero implies perfect equality (everybody has the same income); a score of one implies perfect inequality (one per- son has all the income).

123 “Global Competitiveness Index,” World Economic Forum, retrieved January 25, 2013, from www.weforum.org/issues/ global-competitiveness.

124 “Global Competitiveness Report 2015–2016,” World Economic Forum, http://reports.weforum.org/global-competitiveness- report-2015-2016/competitiveness-rankings/ (accessed December 8, 2015).

125 “The Global Innovation Index 2012,” retrieved January 25, 2013, from www.globalinnovationindex.org/gii/.

126 To refine analysis, one can also consult the 2016 Global Manufacturing Competitiveness Index.

127 Again, U.S. performance had slipped in the aftermath of the great financial crisis. But, over the past few years, it has steadily regained its historic role as a global pacesetter. “Despite all its setbacks, the U.S. remains at the center of world competitiveness because of its unique economic power, the dynamism of its enterprises and its capacity for innovation.” “IMD Announces Its 2012 World Competitiveness Rankings,” IMD, retrieved January 25, 2013, from www.imd.org/news/ IMD-announces-its-2012-World-Competitiveness-Rankings.cfm.

128 “The Lottery of Life,” The Economist: The World in 2013, (November 21, 2012): 91.

129 Emerging-market status determined by “MSCI Index Country Membership,” https://www.msci.com/emerging-markets and https:// www.msci.com/market-classification (accessed December 13, 2015). Others determined by UN classification.

130 “GDP Growth (Annual %),” The World Bank, http://data.world- bank.org/indicator/NY.GDP.MKTP.KD.ZG?order=wbapi_data_ value_2014+wbapi_data_value+wbapi_data_value-last&sort=desc (accessed April 17, 2016).

131 Unfortunately, the productivity slowdown may be permanent. In a recent paper, John Fernald and Bing Wang of the San Francisco Fed documented how it began before the crisis—as big gains from infor- mation technology during the 1990s and early 2000s dried up—and warned that a “relatively slow pace” is the best guess for the future. See “Looking for a Rise,” The Economist, http://www.economist. com/news/united-states/21678231-wage-growth-last-accelerating- living-standards-will-continue-stagnate-looking (accessed February 1, 2016); On a related theme, technological and market forces have contributed to job polarization, with the middle-income bracket gradually deteriorating. Automation, for example, seems to have spurred an unexpectedly rapid decline in routine white- and blue- collar jobs. This has resulted in stagnating median incomes and rising income inequality, both of which constrain the private-consumption component of aggregate demand.

132 Elena Holodny, “The 5,000-Year History of Interest Rates Shows Just How Historically Low US Rates Are Right Now,” Business Insider, (September 18, 2105), http://www.businessinsider.com/chart- 5000-years-of-interest-rates-2015-9 (accessed February 1, 2016).

133 David Stockman, “Chart of the Day: Global Bond Yields Reach All- Time Low,” April 6, 2016, http://davidstockmanscontracorner.com/ chart-of-the-day-global-bond-yields-reach-all-time-low/; “Why Is Global Growth Stuck in a Rut?” World Economic Forum, http://www. weforum.org/agenda/2015/11/why-is-global-growth-stuck-in-a-rut/ (accessed February 1, 2016); “$5.5 Trillion in Government Bonds Now Have Negative Yields, Covering 23 Percent Of Global GDP,” Zero Hedge, http://www.zerohedge.com/news/2016-01-29/55-trillion- government-bonds-now-have-negative-yields-covering-23-global- gdp (accessed February 1, 2106); “Alarm Bells Ring over Negative Interest Rates,” FT.com, http://www.ft.com/cms/s/f8117512-1297- 11e6-839f-2922947098f0 (accessed May 6, 2016).

134 “What Is Helicopter Money?” World Economic Forum, https://www. weforum.org/agenda/2015/08/what-is-helicopter-money (accessed March 23, 2016).

135 “IMF Again Cuts Global Growth Forecast As It Warns Of ‘Secular Stagnation,’” Zero Hedge.com, http://www.zerohedge.com/ news/2016-04-12/imf-cuts-global-growth-forecast-again-warns- secular-stagnation-world-needs-more-stim (accessed April 17, 2016).

136 “5 Ways of Understanding the Fourth Industrial Revolution,” World Economic Forum, http://www.weforum.org/agenda/2015/11/5- ways-of-understanding-the-fourth-industrial-revolution/ (accessed February 1, 2016); “13 Signs the Fourth Industrial Revolution Is Almost Here,” World Economic Forum, http://www.weforum.org/ agenda/2015/09/13-signs-the-fourth-industrial-revolution-is-almost- here/?utm_content=buffer2ec29&utm_medium=social&utm_ source=twitter.com&utm_campaign=buffer (accessed February 1, 2016).

137 Quote by the founder of robot builder, Industrial Perception, reported in John Markoff, “New Wave of Deft Robots Is Changing Global Industry,” NYTimes.com, retrieved February 25, 2013, from http:// www.nytimes.com/2012/08/19/business/new-wave-of-adept-robots- is-changing-global-industry.html?pagewanted=all; “The Digitization of Manufacturing Will Transform the Way Goods are Made—And Change the Politics of Jobs Too,” The Economist, (April 21 2012): 56.

138 “Artificial Intelligence Meets the C-Suite,” McKinsey & Company, http://www.mckinsey.com/business-functions/

http://www.happyplanetindex.org/

http://www.happyplanetindex.org/about/

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http://www.un.org/documents/ga/res/38/a38r161htm

http://www.weforum.org/issues/global-competitiveness

http://reports.weforum.org/global-competitiveness-report-2015-2016/competitiveness-rankings/

http://www.globalinnovationindex.org/gii/

http://www.imd.org/news/IMD-announces-its-2012-World-Competitiveness-Rankings.cfm

https://www.msci.com/emerging-markets

https://www.msci.com/market-classification

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https://www.weforum.org/agenda/2015/08/what-is-helicopter-money

http://www.zerohedge.com/news/2016-04-12/imf-cuts-global-growth-forecast-again-warnssecular-stagnation-world-needs-more-stim

http://www.weforum.org/agenda/2015/11/5-ways-of-understanding-the-fourth-industrial-revolution/

http://www.weforum.org/agenda/2015/09/13-signs-the-fourth-industrial-revolution-is-almosthere/?utm_content=buffer2ec29&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

http://www.nytimes.com/2012/08/19/business/new-wave-of-adept-robots-is-changing-global-industry.html?pagewanted=all

http://www.mckinsey.com/business-functions/

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http://www.imd.org/news/IMD-announces-its-2012-World-Competitiveness-Rankings.cfm

http://www.economist.com/news/united-states/21678231-wage-growth-last-acceleratingliving-standards-will-continue-stagnate-looking

http://davidstockmanscontracorner.com/chart-of-the-day-global-bond-yields-reach-all-time-low/

http://www.weforum.org/agenda/2015/11/why-is-global-growth-stuck-in-a-rut/

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Endnotes 7

strategy-and-corporate-finance/our-insights/artificial-intelligence- meets-the-c-suite (accessed March 23, 2016).

139 “Jobs Study Reveals 100 Occupations Most and Least at Risk of Automation,” This Is Money, http://www.thisismoney.co.uk/money/ news/article-2642880/Table-700-jobs-reveals-professions-likely- replaced-robots.html (accessed February 2, 2016); “Nearly Half of US Jobs Could Be at Risk of Computerization, Oxford Martin School Study Shows,” Kurzweil Accelerating Intelligence, http://www. kurzweilai.net/oms-working-paper-on-the-future-of-employment- how-susceptible-are-jobs-to-computerisation (accessed February 2, 2016); Carl Benedikt Frey and Michael A. Osborne, “The Future of Employment: How Susceptible Are Jobs to Computerisation?” OMS Working Paper, Oxford Martin Programme on the Impacts of Future Technology, http://www.oxfordmartin.ox.ac.uk/downloads/academic/ The_Future_of_Employment.pdf (accessed February 2, 2016); “The State of Manufacturing in the United States,” International Trade Administration, accessed February 2, http://trade.gov/manufac- tureamerica/facts/tg_mana_003019.asp#P13_602 (accessed February 2, 2016).

140 On one hand, the clinical response would be to invest in building and developing skills linked to science, technology, and design so that we equip the world with people able to work. Augmenting, not replacing, technology, nor foolishly trying to deny technology, brought a solution to coexist with technology. The second strategy is to focus more on those qualities that make us uniquely human rather than machines—in particular traits such as empathy, inspi- ration, belonging, creativity, and sensitivity. In this way we can reinforce and highlight essential sources of the value created by and

within communities that is often completely overlooked in economic measurement—the act of caring for one another.

• The Digital/3rd Industrial Revolution is not creating tens of millions of low-skill jobs, and it never will. Even worse for the wishful-thinking crowd, the 3rd Digital Revolution is eating tech jobs along with the full spectrum of service-sector jobs.

• Those expecting to replace low-skill service jobs with armies of coders will be disappointed, because coding is itself being automated.

• The new jobs that are being created are few in number and highly demanding. Jobs are no longer strictly traditional boss– employee; the real growth is in peer-to-peer collaboration and what I term hybrid work performed by Mobile Creatives, workers with highly developed technical/creative/social skillsets who are comfortable working with rapidly changing technologies, who enjoy constant learning, and are highly adaptive.

• The work that is being created in the Digital/3rd Industrial Revolution is contingent and thus insecure. The only security that is attainable in fast-changing environments is the security offered by broad-based skillsets, great adaptability, a voracious appetite for new learning, and a keenly developed set of “soft skills”: communication, collaboration, self-management, etc.

• The problem is the number of these jobs is far smaller than the number of jobs that will be eaten by software, AI, and robotics. The number of workers who can transition productively to this far more demanding and insecure work environment is also much smaller than the workforce displaced by software/robotics.

http://www.thisismoney.co.uk/money/news/article-2642880/Table-700-jobs-reveals-professions-likelyreplaced-robots.html

http://www.kurzweilai.net/oms-working-paper-on-the-future-of-employmenthow-susceptible-are-jobs-to-computerisation

http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

http://trade.gov/manufactureamerica/facts/tg_mana_003019.asp#P13_602

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http://www.kurzweilai.net/oms-working-paper-on-the-future-of-employmenthow-susceptible-are-jobs-to-computerisation

http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

EndnotEs

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2 Pankaj Ghemawat, “Distance Still Matters: The Hard Reality of Global Expansion,” Harvard Business Review (September 2001): 137–47.

3 Eduardo Porter, “Corporate Action on Social Problems Has Its Limits,” New York Times (September 9, 2015): B1.

4 Bradley R. Agle, Thomas Donaldson, R. Edward Freeman, Michael C. Jensen, Ronald K. Mitchell, and Donna J. Wood, “Dialogue to- ward Superior Stakeholder Theory,” Business Ethics Quarterly 18:2 (2008): 153–90.

5 John H. Dunning, “The Eclectic Paradigm of International Produc- tion: A Restatement and Some Possible Extensions,” Journal of International Business Studies, 19:1 (1988): 1–32.

6 Mohsin Habib and Leon Zurawicki, “Corruption and Foreign Direct Investment,” Journal of International Business Studies 33 (Summer 2002): 291–308.

7 Ravi Ramamurti, “The Obsolescing ‘Bargaining Model’? MNE- Host Developing Country Relations Revisited,” Journal of Interna- tional Business Studies 32 (Spring 2001): 23.

8 Lawrence Kohlberg, “The Claim to Moral Adequacy of a Highest Stage of Moral Judgment,” Journal of Philosophy 70 (1973): 630–46.

9 Richard T. DeGeorge, Business Ethics, 7th edition (Upper Saddle River, NJ, 2010): 22–4.

10 DeGeorge, Business Ethics, 39, 44. 11 Ibid., p. 39. 12 Alfred Marcus, Business & Society: Ethics, Government, and the World

Economy (Homewood, IL: Irwin, 1996). 13 David J. Vidal, The Link between Corporate Citizenship and Financial

Performance (New York: Conference Board, 1999). 14 Trivia-Library.com, “Origins of Sayings—When in Rome, Do As

the Romans Do” (accessed March 30, 2011), reproduced with per- mission from the People’s Almanac series of books, 1975–1981 by David Wallechinsky & Irving Wallace.

15 See John M. Kline, Ethics for International Business: Decision Making in a Global Political Economy (London and New York: Routledge, 2005).

16 DeGeorge, Business Ethics, 33. 17 S. Prakash Sethi, “Standards for Corporate Conduct in the Inter-

national Arena: Challenges and Opportunities for Multinational Corporations,” Business and Society Review (Spring 2002): 20–39.

18 “The Ethics of Business,” in “A Survey of Corporate Social Respon- sibility,” The Economist (January 22, 2005): 20.

19 John R. Boatright, Ethics and the Conduct of Business (Upper Saddle River, NJ: Prentice Hall, 1993): 13–16.

20 Boatright, Ethics and the Conduct of Business, 16–18. 21 See A. M. Ali and I. H. Saiad, “Determinants of Economic Corrup-

tion,” Cato Journal 22:3 (2003): 449–66; H. Park, “Determinants of

Corruption: A Cross-National Analysis,” Multinational Business Review 11:2 (2003): 29–48.

22 Transparency International, “How Do You Define Corruption?,” http://www.transparency.org/what-is-corruption/ (accessed February 10, 2016).

23 Transparency International, “Bribe Payers Index Report,” http://www.transparency.org/bpi2011/results (accessed February 10, 2015).

24 http://www.theguardian.com/world/2015/sep/21/ex-treasurer- workers-party-sentenced-prison-petrobras-corruption-scandal and http://www.theguardian.com/business/2015/sep/27/rolls- royce-second-investigation-brazil-petrobas.

25 See The World Bank, World Development Report 2002: Building Institutions for Markets; M. Habib and L. Zurawicki, “Country- Level Investments and the Effect of Corruption—Some Empirical Evidence,” International Business Review 10:6 (2001): 687–700.

26 S. Ghoshal and P. Moran, “Towards a Good Theory of Manage- ment,” in J. Birkinshaw and G. Piramal, eds., Sumantra Ghoshal on Management: A Force for Good (Upper Saddle River, NJ: Financial Times/Prentice Hall, 2005): 1–27.

27 Mark Pieth and Huguette Labelle, “Bribery in International Busi- ness: Making Sure That Bribes Don’t Pay,” www.oecd.org/daf/ anti-bribery/makingsurethatbribesdontpay.htm (accessed June 20, 2013).

28 Progress Report 2015: Assessing Enforcement of the OECD Convention on Combating Bribery, Transparency International, http://www .transparency.org/whatwedo/publication/exporting_corrup- tion_progress_report_2015_assessing_enforcement_of_the_oecd (accessed February 10, 2016).

29 “EU Anti-Corruption Report: Report from the Commission to the Council and the European Parliament” (Brussels, European Com- mission, 3/2014 Com (2014) 38 Final).

30 Devlin Barrett, Christopher M. Matthews, and Aruna Viswanatha, “Charges Show U.S. Justice Department’s Long Reach,” Wall Street Journal (May 28, 2015): A11.

31 “Choking on It,” The Economist (December 5, 2015): 54. 32 John Carey, “Global Warming,” Businessweek (August 16, 2004):

60–69. 33 “Green Light,” The Economist (December 19, 2015): 89. 34 “Hope for the Trees,” The Economist (December 19, 2015): 90. 35 Danny Hakim, “VW Admits Cheating in U.S., but Says Its Prac-

tices Were Legal in Europe,” New York Times (January 22, 2016): B1. 36 Danny Hakim and Claire Barthelemy, “VW Fought Emissions Test

Changes in Europe,” New York Times (December 2, 2015): B1. 37 Danny Hakim and Jack Ewing, “Executive Had a Crucial Role as

VW Struggled with Emissions,” New York Times (December 22, 2015): B1.

38 Ethical Trading Initiative, www.ethicaltrade.org (accessed June 1, 2013).

39 Ans Kolk and Rob van Tulder, “Child Labor and Multinational Conduct: A Comparison of International Business and Stakeholder Codes,” Journal of Business Ethics 36:3 (March 2002): 291–301.

40 Yacouba Diallo, Alex Etienne, and Farhad Mehran, Global Child Labour Trends 2008–2012 (Geneva, Governance and Tripartism Department, International Labour Office, 2013, p. vii.

41 Ibid, p. 19. 42 Edward Luce, “Ikea’s Grown-Up Plan to Tackle Child Labour,”

Financial Times (September 15, 2004): 7. 43 UNICEF’s Corporate Partnerships: IKEA, www.unicef.org/

corporate_partners/index_25092.html, (accessed May 13, 2013).

44 www.globalreporting.org (accessed February 14, 2016).

http://www.ge.com

http://fortune.com/worlds-most-admired-companies/google-2/

http://www.transparency.org/what-is-corruption/

http://www.transparency.org/bpi2011/results

http://www.theguardian.com/world/2015/sep/21/ex-treasurer-workers-party-sentenced-prison-petrobras-corruption-scandal

http://www.theguardian.com/business/2015/sep/27/rolls-royce-second-investigation-brazil-petrobas

http://www.oecd.org/daf/anti-bribery/makingsurethatbribesdontpay.htm

http://www.transparency.org/whatwedo/publication/exporting_corruption_progress_report_2015_assessing_enforcement_of_the_oecd

http://www.ethicaltrade.org

http://www.unicef.org/corporate_partners/index_25092.html

http://www.globalreporting.org

http://www.oecd.org/daf/anti-bribery/makingsurethatbribesdontpay.htm

http://www.transparency.org/whatwedo/publication/exporting_corruption_progress_report_2015_assessing_enforcement_of_the_oecd

http://www.unicef.org/corporate_partners/index_25092.html

2 Endnotes

45 Christopher Bartlett and Paul Beamish, Transnational Management: Text, Cases, and Readings in Cross-Border Management, 7th Edition (New York, NY: 2014): Chapter 8.

46 Sources include the following: UNAIDS 2015, Country Report on South Africa, available for download at http://www.unaids.org/en/ regionscountries; Annual Report 2015, Anglo American; Alec Russell, “Answers to an AIDS Epidemic: New Initiatives to Help Infected Workers Mark a Big Shift in Attitude and Approach at Some of South Africa’s Largest Companies,” Financial Times (October 4, 2007): 14; Mark Schoofs, “New Challenges in Fighting AIDS—Enlisting Multinationals in Battle,” Wall Street Journal (November 30, 2001):

B1; “AIDS in the Workplace,” Business Africa (July 1, 2001): 1–2; “The Corporate Response,” Business Africa (September 1, 2001): 4; “Anglo American to Provide HIV/AIDS Help for Workers,” American Metal Market (August 7, 2002): 4; Bruce Einhorn and Catherine Arnst, “Why Business Should Make AIDS Its Business—Multinationals Are Taking Baby Steps to Control the Disease in Their Workforce,” Businessweek (August 9, 2004): 83; “Digging Deep,” The Economist (August 10, 2002): 55; James Lamont, “Anglo’s Initiative,” Financial Times (August 8, 2002): 10; “Anglo American to Give Mineworkers AIDS Drugs Free,” Wall Street Journal (August 7, 2002): A13.

http://www.unaids.org/en/regionscountries

EndnotEs

1 Lichung Jen is Professor of Marketing within the Department of International Business, National Taiwan University.

2 For a good survey of mercantilism and the mercantilist era, see Gianni Vaggi, A Concise History of Economic Thought: From Mercantilism to Monetarism (New York: Palgrave Macmillan, 2002).

3 For reviews of the literature, see Jordan Shan and Fiona Sun, “On the Export-Led Growth Hypothesis for the Little Dragons: An Empirical Reinvestigation,” Atlantic Economic Review 26:4 (1998): 353–71; George K. Zestos and Xiangnan Tao, “Trade and GDP Growth: Causal Relations in the United States and Canada,” Southern Economic Journal 68:4 (2002): 859–74.

4 For a good discussion of the history of free trade thought, see Leonard Gomes, The Economics and Ideology of Free Trade: A Historical Review (Cheltenham, UK: Edward Elgar, 2003).

5 6 For simplicity’s sake, both Smith and Ricardo originally assumed a

simple world composed of only two countries and two commodities. Our example makes the same assumption. Now, although this sim- plification is unrealistic, it does not diminish the usefulness of either theory. Economists have applied the same reasoning to demonstrate efficiency advantages in multiproduct and multicountry trade rela- tionships. Smith’s seminal treatise remains abundantly in print; for a reliable recent edition, see An Inquiry into the Nature and Causes of the Wealth of Nations (Washington, DC: Regnery Publishing, 1998). Like Smith’s Wealth of Nations, Ricardo’s seminal work on comparative advantage, originally published in London in 1817, is continuously reprinted; see, for example, On the Principles of Political Economy and Taxation (Amherst, NY: Prometheus Books, 1996).

7 For a good discussion of this paradoxical thinking, see Paul R. Krugman, “What Do Undergraduates Need to Know about Trade?” American Economic Review Papers and Proceedings (May 1993): 23–26. For a discussion of some developing countries’ views that monopo- listic conditions keep them from gaining a fair share of gains from international trade, see A. P. Thirwell, Growth and Development, 6th ed. (London: Macmillan, 1999).

8 Thomas I. Palley, “Institutionalism and New Trade Theory: Rethinking Comparative Advantage and Trade Theory,” Journal of Economic Issues 42:1 (2008): 195–208.

9 Murray Kemp, “Non-Competing Factor Groups and the Normative Propositions of Trade Theory,” International Review of Economics and Finance 17 (2008): 388–90.

10 Andrew Avery Herring, Roger Enrique Bonilla-Carríon, Rosilyne Mae Borland, and Kenneth Hailey Hill, “Differential Mortality Patterns Between Nicaraguan Immigrants and Native-Born Residents of Costa Rica,” Immigrant Minority Health 12 (2010): 33–42.

11 Gordon H. Hanson, “The Rise of Middle Kingdoms: Emerging Economies in Global Trade,” The Journal of Economic Perspectives 26:2 (Spring 2012): 41–64.

12 “Interiors: Why It’s Better to Have a Coastline,” The Economist (May 9, 2015): 31.

13 Eli J. Heckscher, Heckscher-Ohlin Trade Theory (Cambridge, MA: MIT Press, 1991).

14 For a discussion of ways in which the theory does not fit the reality of trade, see Antoni Estevadeordal and Alan M. Taylor, “A Century of Missing Trade?” The American Economic Review 92:1 (2002): 383–93. For a study supporting the theory, see Yong-Seok Choi and Pravin Krishna, “The Factor Content of Bilateral Trade: An Empirical Test,” The Journal of Political Economy 112:4 (2004): 887–915.

15 See, for example, Donald R. Davis and David E. Weinstein, “An Account of Global Factor Trade,” The American Economic Review 91:5 (2001): 1423–53; Oner Guncavdi and Suat Kucukcifi, “Foreign Trade and Factor Intensity in an Open Developing Country: An

Input-Output Analysis for Turkey,” Russian & East European Finance and Trade 37:1 (2001): 75–88.

16 See, for example, P. Krugman and A. J. Venables, “Globalization and the Inequality of Nations,” Quarterly Journal of Economics 110 (1995): 857–80.

17 See Paul Krugman, “Scale Economies, Product Differentiation, and the Patterns of Trade,” The American Economic Review 70 (1980): 950–59; James Harrigan, “Estimation of Cross-Country Differences in Industry Production Functions,” Journal of International Economics 47:2 (1999): 267–93.

18 Drusilla K. Brown and Robert M. Stern, “Measurement and Modeling of the Economic Effect of Trade and Investment Barriers in Services,” Title Review of International Economics 9:2 (2001): 262–86, discuss the role of economies of scale and trade barriers.

19 See Gianmarco I. P. Ottaviano and Diego Puga, “Agglomeration in the Global Economy: A Survey of the ‘New Economic Geography’,” The World Economy 21:6 (1998): 707–31; Gianmarco I. P. Ottaviano, Takatoshi Tabuchi, and Jacques-François Thisse, “Agglomeration and Trade Revisited,” International Economic Review 43:2 (2002): 409–35.

20 Stefan B. Linder, An Essay on Trade Transformation (New York: Wiley, 1961).

21 Dirk Pilat, “The Economic Impact of Technology,” The OECD Observer 213 (August–September 1998): 5–8.

22 Anthony J. Venables, “Shifts in Economic Geography and Their Causes,” Economic Review—Federal Reserve Bank of Kansas City 91:4 (2006): 61–85, referring to work by R. Hausmann and D. Rodrik, “Economic Development as Self Discovery” (2003), Harvard Kennedy School working paper.

23 Two discussions of intra-industry trade are: Don P. Clark, “Determinants of Intra-Industry Trade between the United States and Industrial Nations,” The International Trade Journal 12:3 (Fall 1998): 345–62; H. Peter Gray, “Free International Economic Policy in a World of Schumpeter Goods,” The International Trade Journal 12:3 (Fall 1998): 323–44.

24 Daniel Michaels, “Landing Rights,” Wall Street Journal (April 30, 2002): A1+.

25 Lars Håkanson and Douglas Dow, “Markets and Networks in International Trade: On the Role of Distances in Globalization,” Management International Review 52:6 (2012): 761–90.

26 Christopher A. Bartlett, “Global Wine Wars: New World Challenges Old,” Harvard Business School Case 9-303-056 (July 21, 2003).

27 See Raymond Vernon, “International Investment and International Trade in the Product Life Cycle,” Quarterly Journal of Economics 80 (May 1996): 190–207; David Dollar, “Technological Innovation, Capital Mobility, and the Product Cycle in North–South Trade,” American Economic Review 76:1 (1986): 177–90.

28 This is true according to various indicators. See, for example, International Bank for Reconstruction and Development, “Science and Technology,” The World Development Indicators (Washington, DC: International Bank for Reconstruction and Development, 2000): 300.

29 Michael E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review 68:4 (1990): 73–93.

30 Kiyohiko Ito and Vladimir Pucik, “R&D Spending, Domestic Competition, and Export Performance of Japanese Manufacturing Firms,” Strategic Management Journal 14 (1993): 61–75.

31 Jeremy Wiesen, “The U.S. Needs Its Own Industrial Policy,” Wall Street Journal (September 13, 2010): A19.

32 Hubert Schmitz, “Reducing Complexity in the Industrial Policy Debate,” Development Policy Review 25:4 (2007): 417–28.

33 Liviu-George, Ion Ignat, and Andre Teofil Postolachi, “Theoretical Controversies on Strategic Trade Policy,” Economy Transdisciplinarity Cognition 15:1 (2012): 300–07.

2 Endnotes

34 Sonny Nwankwo and Darlington Richards, “Institutional Paradigm and the Management of Transitions: A Sub-Saharan African Perspective,” International Journal of Social Economics 1:1/2 (2004): 111.

35 Jeffrey Sachs, “Institutions Matter, but Not Everything,” Finance and Development (June 2003): 38–41.

36 Nwankwo and Richards, “Institutional Paradigm and the Management of Transitions,” 111.

37 Andrés Rodríguez-Clare, “Clusters and Comparative Advantage: Implications for Industrial Policy,” Journal of Development Economics 82 (2007): 43–57.

38 Paul Krugman and Alasdair M. Smith, eds., Empirical Studies of Strategic Trade Policies (Chicago: University of Chicago Press, 1993); Howard Pack and Kamal Saggi, “Is There a Case for Industrial Policy?” The World Bank Research Observer 21:2 (2006): 267.

39 Paul M. Sherer, “Thailand Trips in Reach for New Exports,” Wall Street Journal (August 27, 1996): A8.

40 Richard Brahm, “National Targeting Policies, High-Technology Industries, and Excessive Competition,” Strategic Management Journal 16 (1995): 71–91.

41 Andrea E. Goldstein and Steven M. McGuire, “The Political Economy of Strategic Trade Policy and the Brazil-Canada Export Subsidies Saga,” The World Economy 27:4 (2004): 541.

42 Theresa M. Greaney, “Strategic Trade and Competition Policies to Assist Distressed Industries,” The Canadian Journal of Economics 32:3 (1999): 767.

43 Mertule Mariam, “The Young Continent,” The Economist,” (December 12, 2015): 23–25.

44 “Demographic Change Will Have Big Economic Impacts,” The Economist (September 26, 2016): 72.

45 Department of Economic and Social Affairs, Population Division, World Population Prospects: The 2008 Revision Highlights (New York: United Nations, 2009): xi.

46 “Migration: Foreign-Born Population,” OECD, https://data.oecd .org/migration/foreign-born-population.htm (accessed February 29, 2016).

47 Sevil Sönmez, Yorghos Apostopoulos, Diane Tran, and Shantyana Rentrope, “Human Rights and Health Disparities for Migrant Workers in the UAE,” Health and Human Rights 13:2 (2011).

48 Sergio Peçanha and Timothy Wallace, “Around the Globe, A Desperate Flight from Turmoil,” New York Times (June 21, 2015): 10.

49 “Statelessness: Nowhere to Call Home,” The Economist, (May 17, 2014): 58.

50 Trends in International Migration, retrieved March 18, 2005, from oecd.org/dataoecd/7/49/24994376.

51 “Remittances: Like Manna from Heaven,” The Economist” (September 5, 2015): 73–4.

52 Paul M. Vaaler, “Immigrant Remittances and the Venture Investment Environment of Developing Countries,” Journal of International Business Studies 42:9 (December 2011): 1121–49.

53 Keith Head and John Ries, “Exporting and FDI as Alternative Strategies,” Oxford Review of Economic Policy 20:3 (2004): 409–29.

54 Andrew E. Kramer, “Russian Farm, Chinese Farmer,” New York Times (September 11, 2012): B1+.

55 See Frank D. Bean et al., “Circular, Invisible, and Ambiguous Migrants: Components of Differences in Estimates of the Number of Unauthorized Mexican Migrants in the United States,” Demography 38:3 (2001): 411–22; United Nations Conference on Trade and Development, World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development (New York and Geneva: United Nations, 2000): 312.

56 Paul Windrum, Andreas Reinstaller, and Christopher Bull, “The Outsourcing Productivity Paradox: Total Outsourcing, Organisational Innovation, and Long Run Productivity Growth,” Journal of Evolutionary Economics 19:2 (2009): 197–229.

57 June Kronholtz, “Immigrant Labor or Machines?” Wall Street Journal (December 19, 2006): A4.

58 “March of the Lettuce Bot,” The Economist (December 1, 2012): monitor 5. 59 Theodore H. Moran, “Foreign Investment and Supply Chains

in Emerging Markets: Recurring Problems and Demonstrated Solutions,” Peterson Institute for International Economics, Working Paper WP 14–12 (December 2014): 1.

60 J. Duanmu and Y. Guney, “Heterogeneous Effect of Ethnic Networks on International Trade of Thailand: The Role of Family Ties and Ethnic Diversity,” International Business Review 22:1 (2013): 126–39.

61 Paul Markillie, “Manufacturing the Future,” The Economist (special issue, the world in 2013, no date): 128.

62 “3D Printing: Print Me a Pavilion,” The Economist (December 5, 2015): 13–14.

63 We wish to thank Mauricio Calero, former manager of two Ecuadoran rose farms, for granting us interviews and supplying additional data. We would also like to thank Tyler Gill who, while an undergraduate student at the University of Miami, worked diligently in gathering information on the world’s, and particularly Ecuador’s, export market in roses. Other information came from Alka Kshirsagar, “This V-Day, Rouble Trouble for Roses,” Businessline (February 13, 2015): n.p.; “Cut Flower Imports (FY 2014),” U.S. Customs and Border Protection, http://www.cbp.gov/newsroom/spotlights/2015-01-23-000000/ cut-flowers (accessed March 1, 2016); Bob Sechler, “Fresh-Cut Flowers, Shipped by Boat?” Wall Street Journal (May 11–12, 2013): 3; “Holiday Statistics on Buying Flowers,” http://www.aboutflowere .com/holiday-statistics.html (accessed March 1, 2016); Mick Conefry, “Roses with Altitude: Why Ecuador’s Roses Stand Out,” FT.com (April 10, 2015); “Our Rose Garden: The History of Roses,” University of Illinois Extension, retrieved December 8, 2010, from urbanext. illinois.edu/roses/history.cfm; “The World Cut Flower Industry: Trends and Prospects,” Sector Publications, retrieved September 12, 2010, from www.ilo.org/public/english/dialogue/sector/papers/ ctflower/139e1.htm; www.cia.gov/library/publications/the-world- factbook/geos/ec.html; “Trade Map—International Trade Statistics: List of Importing Markets for a Product Exported by Ecuador,” International Trade Center (ITC), retrieved February 4, 2011, from www.trademap.org/tradestat/Country_SelProductCountry_TS.aspx; “Hoja Verde: The Flower of Ecuador,” TransFair Canada, retrieved February 3, 2011, from transfair.ca/en/producers/profiles/hoja-verde.

https://data.oecd.org/migration/foreign-born-population.htm

http://www.cbp.gov/newsroom/spotlights/2015-01-23-000000/cut-flowers

http://www.aboutflowere.com/holiday-statistics.html

http://www.ilo.org/public/english/dialogue/sector/papers/ctflower/139e1.htm

http://www.cia.gov/library/publications/the-worldfactbook/geos/ec.html

http://www.trademap.org/tradestat/Country_SelProductCountry_TS.aspx

https://data.oecd.org/migration/foreign-born-population.htm

http://www.cbp.gov/newsroom/spotlights/2015-01-23-000000/cut-flowers

http://www.aboutflowere.com/holiday-statistics.html

http://www.ilo.org/public/english/dialogue/sector/papers/ctflower/139e1.htm

EndnotEs

1 Sources include the following: USDA, National Agricultural Statistics Service, “Catfish Production,” (February 5, 2016); Mississippi State University Extension Service, “Catfish Marketing,” n.d. https://extension.msstate.edu/agriculture/catfish/catfish- marketing (accessed April 29, 2016); Terry Hanson and Dave Sites, “2013 U.S. Catfish Database,” Fisheries and Allied Aquacultures Department Series No. 1 (April 2014); “Vietnam Catfish Exporters Forecast Gloomy Future As US Tightens Quality Control,” Thanhnien News [Ho Chi Minh City] (December 15, 2015):n.p.; “Vietnam’s Catfish Exports to the United States Still Safe This Year,” Vietnam NetBridge, (February 14, 2014): n.p.; Embassy of the Socialist Republic of Vietnam in the United States of America, “Vietnam Resumes Basa Catfish Exports to the US Market,” (April 6, 2016), http://vietnamembassy-usa.org/relations/Vietnam-resumes-basa- catfish (accessed April 29, 2016); Melissa Martin, “New Tariff Could Protect Alabama’s Catfish Industry,” Southeast Farm Press (March 25, 2013): n.p.; Roy Roberson, “Golden Opportunity for US Agriculture in Vietnam,” Western Farm Press (October 10, 2012): n.p.; Terry Hanson and Dave Sites, “U.S. Farm-Related Catfish Industry 2009 Review and 2010 Outlook,” Unpublished report, Department of Fisheries and Allied Aquacultures, Auburn University (March 2011); “Catfish Farmers Face Shifting Tides of Imports, Costs,” Southeast Farm Press (August 14, 2012): n.p.; Fred Kuchler, Barry Krissoff, and David Harvey, “Do Consumers Respond to Country-of-Origin Labelling?” Journal of Consumer Policy 33:4 (December 2010): 323–37; “Fishy Diplomacy with Hanoi,” Wall Street Journal (Online) (September 21, 2010), accessed November 30, 2010; Bartholomew Sullivan, “Stakes High in Catfish Fight,” McClatchy – Tribune Business News (October 31, 2010) accessed November 30, 2010; “Fishy Tales; Charlemagne,” The Economist 387: 8584 (June 14, 2008): 53; Paul Greenberg, “A Catfish by Any Other Name,” New York Times (October 12, 2008): 72; Ben Evans, “Catfish Plan Risks Trade War,” Miami Herald (July 2, 2009): 4C; Jeffrey H. Birnbaum, “House Floats Idea for Fish Inspections, But No One Is Biting,” Washington Post (March 11, 2008): A17; Taras Grescoe, “Catfish with a Side of Scombroid,” New York Times (July 15, 2007): WK13.

2 Nelson D. Schwartz and Quoctrung Bui, “Where Free Trade Hurts, Voters Seek Extremes,” New York Times (April 26, 2016): A1+.

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5 This argument is most associated with the writings of Raul Prebisch, Hans Singer, and Gunnar Myrdal in the 1950s and 1960s. For a recent discussion, see P. Sai-wing Ho, “Arguing for Policy Space to Promote Development: Prebisch, Myrdahl, and Singer,” Journal of Economic Issues 42:2 (June 2008): 509–16.

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8 Benedict Ezema, “Effectiveness of Policy Responses to Terms of Trade Shocks in Selected African Countries,” International Journal of Business and Management 7:8 (April 2012): 88–101.

9 Gerald K. Helleiner, “Markets, Politics, and Globalization: Can the Global Economy Be Civilized?” Global Governance (July–September 2001): 243; Marina Murphy, “EU Chemicals Need Flexibility: A Level Playing Field Should Be Established between the EU and U.S. Chemicals Industries,” Chemistry and Industry (July 1, 2002): 9; Lisa

Schmidt, “How U.S. Sees Trade Rows,” Calgary Herald [Canada] (June 25, 2002): A2.

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11 Emiko Terazono, “UN Warns Over Volatility in Food Prices,” Financial Times (October 11, 2011): 20; Tennille Tracy, “Lawmaker Gets a Say on Gas Exports,” Wall Street Journal (December 26, 2012): A4; Keith Johnson, “Geopolitical Benefit Raised in Debate on Exporting Gas,” Wall Street Journal (May 6, 2013): A4; “Crude-Oil Exports: Binning the Ban,” The Economist (March 28, 2015): 35–6.

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19 “The Amazon Rainforest: Cutting Down on Cutting Down,” The Economist (June 7, 2014): 83–4.

20 “Too Smart by Half,” The Economist (September 6, 2014): 29–30. 21 Anton Troianovski and Ellen Emmerentze, “Norway Fish Are Caught

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27 Bryan Christy and Brent Stirton, “Tracking Ivory,” National Geographic (September 2015): 32–59.

28 Rostram J. Neuwirth, “The ‘Culture and Trade Debate’ Continues: The UNESCO Convention in Light of the WTO Reports in China— Publications and Audiovisual Products: Between Amnesia or Déjà Vu?” Journal of World Trade 44:6 (December 2010): 1333–56.

29 “Canadian Content,” Wikipedia https://en.wikipedia.org/wiki/ Canadian_content (accessed May 1, 2016).

30 Gail L. Cramer, James M. Hansen, and Eric J. Wailes, “Impact of Rice Tariffication on Japan and the World Rice Market,” American Journal of Agricultural Economics 81 (1999): 1149.

31 “Futile Fortress,” Financial Times (August 26, 2003): 16. 32 Jonathan Weisman and Eric Lipton, “Air Skirmish in War Over Ex-Im

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34 John W. Miller, “WTO Warns Members Not to Undermine Trade,” Wall Street Journal (March 27, 2009): A8; Joseph Stiglitz, “The Global Crisis, Social Protection and Jobs,” International Labour Review

https://extension.msstate.edu/agriculture/catfish/catfish-marketing

http://vietnamembassy-usa.org/relations/Vietnam-resumes-basacatfish

https://en.wikipedia.org/wiki/Canadian_content

2 Endnotes

148:1/2 (June 2009): 1–13; “State Capitalism: Big Brother is Back,” The Economist (November 3, 2012): 63–4.

35 “Milking Taxpayers,” The Economist (February 14, 2015): 26, 28. 36 Colin O’Neill, “Will the Obama Administration Give Cotton Growers

a New $10 Billion Subsidy,” AgMag Blog (January 29, 2016) http:// www.ewg.org/agmag/2016/01, (accessed May 1, 2016).

37 “No More Grand Bargains,” The Economist (August 9, 2014): 10. 38 European Commission, EU Agriculture Spending Focused on Results

(September 2015). For some data on the United States, see “At the Trough,” The Economist (June 1, 2013): 32.

39 G. Chandrashekhar, “Should India Demand Farm Subsidy Cuts by Developed Nations?” Businessline (January 4, 2006): 1; Carmen G. Gonzalez, “The Global Food System, Human Rights, and the Environment,” GPSolo 29:6 (November-December 2012): 72–3.

40 Chi-Chur Chao and Eden S. H. Yu, “Import Quotas, Tied Aid, Capital Accumulation, and Welfare,” Canadian Journal of Economics 34 (2001): 661; Mark Rice, “Australia Must Join Other Countries in Untying Overseas Aid,” Australian Financial Review (April 4, 2002): 59.

41 Yun Sun, “China’s Aid to Africa: Monster or Messiah?” Brookings East Asia Commentary 75 (February 2014): n.p.

42 “An Opportunity to Support US Customs Valuations,” International Tax Review (June 2012): n.p.

43 “Philippines/Thailand: Philippines Urges Thailand to Fully Comply with WTO Customs Valuation Ruling,” Asia News Monitor [Bangkok] (May 19, 2012): n.p.

44 “National Import Specialist Addresses Outreach to the Public,” U.S. Customs Border Protection Today (October–November 2006), retrieved July 13, 2007, from www.customs.ustreas.gov/xp?CustomsToday/2006/ october_november/import_article; Customs Bulletin and Decision (June 27, 2007): 58.

45 Alexander Moens and Amos Vivancos Leon, “Mandatory Country of Origin Labeling: The Case for a Harmonized Canada–US Beef and Pork Regulatory Regime,” Fraser Forum 4 (July–August 2012): 14–17.

46 “Target Corp., Staples Inc., and OfficeMax, Inc., Among Pencil Importers in the Subject of a False Claims Act Case Brought by The Cullen Law Firm, PLLC,” PR Newswire [New York] (May 17, 2012): n.p.

47 Christopher Swann, “Shielding Sugar Industry ‘Costs Thousands of Jobs,’” Financial Times (February 15, 2006): 6; Bryan Riley, “U.S. Trade Policy Gouges American Sugar Consumers,” Backgrounder #2914 on Trade (June 5, 2014) http://www.heritage.org/research/reports/2014/06/ us-trade-policy-gouging (accessed May 1, 2016); Ron Nixon, “American Candy Makers, Pinched by Inflated Sugar Prices, Look Abroad,” New York Times (October 30, 2013): n.p.; Douglas A. Irwin, “The Return of the Protectionist Illusion,” Wall Street Journal (July 2, 2012): A11.

48 Stephanie Strom, “United States and Mexico Reach Tomato Deal, Averting a Trade War,” New York Times, February 3, 2013, http://www .nytimes.com/2013/02/04/business/united-states-and-mexico-reach- deal-on-tomato-imports.html (accessed April 21, 2014).

49 John R. Luckey, “Domestic Content Legislation: The Buy American Act and Complementary Little Buy American Provisions,” Congressional Research Service 7:5700 (April 25, 2012).

50 Jeremy Grant and Ralph Minder, “Comment & Analysis: Agribusiness,” Financial Times (February 1, 2006): 11.

51 Anita Chang, “Food Safety,” Miami Herald (July 15, 2007): 18A. 52 Marie-Agnés Jouanjean, “Standards, Reputation, and Trade: Evidence

from US Horticultural Import Refusals,” World Trade Review, suppl.

Symposium Issue: Standards and Non-Tariff Barriers in Trade 11:3 (July 2012): 438–61.

53 “Delays Reported in Customs-Clearance Procedures in China,” Jiji Press English News Service [Tokyo] (September 20, 2012): n.p.

54 Dena Kouremetis, “Bartering for Survival,” Forbes/Tech (October 22, 2012) http://www.forbes.com/sites/denakouremetis/2012/10/22/ bartering-for-survival-have-i-got-a-deal-for-you/ (accessed May 1, 2016).

55 Mark J. Nackman, “A Critical Examination of Offsets in International Defense Procurements: Policy Options for the United States,” Public Contract Law Journal 40:2 (Winter 2011): 511–29.

56 “Guns and Sugar,” The Economist (May 25, 2013): 63–5. 57 Ralph G. Carter and Lorraine Eden, “Who Makes U.S. Trade Policy?”

International Trade Journal 13:1 (1999): 53–100. 58 Eugene Salorio, “Trade Barriers and Corporate Strategies: Why Some

Firms Oppose Import Protection for Their Own Industry,” unpublished DBA dissertation, Harvard University, 1991.

59 Data for the case were taken from OECD (2015), Health at a Glance 2015: OECD Indicators, OECD Publishing, Paris, http://dx.doi. org/10.1787/health_glance-2015-en (accessed April 26, 2016); Jacquie McNish and Liz Hoffman, “Valeant’s CEO Was Key Force on Pricing,” Wall Street Journal (May 2, 2016): n.p.; Katie Thomas, “Under Fire Over Prices, Drug Makers Keep Raising Them,” New York Times (April 27, 2016): B1+; Andrew Pollack, “Drug Goes From $13.50 a Tablet to $750, Overnight,” (September 20, 2015) http://nyti.ms/1V3cJVc (accessed April 27, 2016); U.S. Food and Drug Administration, “Protecting and Promoting Your Health: Is It Legal for Me to Personally Import Drugs?” http:// www.fda.gov/AboutFDA/Transparency/Basics/ucm194904. htm (accessed April 27, 2016); “Painful Pills,” The Economist (September 26, 2015): 66, 68; Govind Persad, “The Medical Cost Pandemic: Why Limiting Access to Cost-Effective Treatments Hurts the Global Poor,” Chicago Journal of International Law 15:2 (Winter 2015): 559–611; John Theriault, “Protecting the U.S. Medicine Supply: Integrating Approaches to Promote Safety,” Journal of Commercial Biotechnology 19:4 (October 2013): 29–34; Todd Allen Wilson, “Grassley, McCain to HHS: Allow Case-by- Case Drug Imports From Canada,” InsideHealthPolicy.com 7:47 (November 25, 2015):n.p.; Joshua M. Sharfstein and Aaron S. Kesselheim, “The Safety of Prescription Drugs,” Journal of the American Medical Association (JAMA) 314:3 (July 21, 2015): 233–34; “HealthWarehuse.com Responds to Senator Klobucher & McCain On Reintroduction of Canadian Pharmacy Bill,” Business Wire (January 27, 2015): n.p.; “The Council on Foreign Relations Holds a Discussion on Generic Drug Regulation and Politics of Pharmaceutical Pricing,” Political Transcript Wire (February 19, 2016): n.p.; Liz Hamel, Mira Norton, Karen Pollitz, Larry Levitt, Gary Claxton, and Mollyann Brodie, “The Burden of Medical Debt: Results from the Kaiser Family Foundation/New York Times Medical Bills Survey,” (January 5, 2016) http://kff.org/health-costs/ report/the-burden-of-medical-debt-results-from-the-kaiser- family-foundationnew-york-times-medical-bills-survey/ (accessed April 26, 2016); “Save Money on Your Meds,” Consumer Reports 81:1 (January 2016): 13; “Pharmaceutical Companies and Drug Pricing,” Congressional Record – Senate (October 5, 2015): S7118-S7119.

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EndnotEs

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5 Bela Balassa, The Theory of Economic Integration (Homewood, IL: Richard D. Irwin, 1961): 40.

6 Op cit.,Ghemawat. 7 For more information on the EU, check out its website at europa.eu

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17 Joshua Chaffin and James Politi, “Fractures Appear on Trade Pact,” Financial Times (May 24, 2013), 2.

18 Office of the United States Trade Representative, “North American Free Trade Agreement,” www.ustr.gov/trade-agreements/free-trade- agreements/north-american-free-trade-agreement-nafta, (accessed May 27, 2013).

19 http://stat.wto.org/Home/WSDBHome.aspx?Language (accessed March 7, 2016).

20 Miriam Jordan, “Mexican Migration Reverses,” Wall Street Journal (November 20, 2015): A3.

21 Bill Vlasic, “Wariness as Detroit 3 Eye Mexico for Growth,” New York Times (July 23, 2015): B1.

22 Andres Oppenheimer, “While Pacific Alliance Thrives, Mercosur Withers,” The Miami Herald (May 27, 2013).

23 Sebastian Sermiento-Saher, “The Pacific Alliance: The Americas’ Bridge to Asia?” Pacific Money: Economics and Business (May 25, 2013), thediplomat.com/pacific-money/2013/05/25/the-pacific- alliance- the-americas-bridge-to-asia/ (accessed May 27, 2013).

24 The CIA World Factbook, (accessed March 12, 2016). 25 “AFTA Doha,” The Economist (September 6, 2008): 85. 26 Patrick Barta and Alex Frangos, “Southeast Asia Linking Up to

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28 Joseph J. Bish, “Population Growth in Africa: Grasping the Scale of the Challenge,” The Guardian (January 11, 2016), online edition accessed on March 12, 2016.

29 “Foreign Direct Investment in Africa,” KPMG (June 1, 2012), www .kpmg.com/africa/en/issuesandinsights/articles-publications/pages/ foreign-direct-investment-in-africa.aspx (accessed May 27, 2013).

30 “Trade Within Africa: Tear Down the Walls,” The Economist (February 27, 2016): 37.

31 Alan M. Field, “Showdown for CAFTA-DR,” Journal of Commerce (April 11, 2005)

32 “The Real Danger of Brexit,” The Economist (February 27, 2017): 8; “Next Stop: Brexit?”, The Economist (March 12, 2016): 53; “The Brexit Delusion,” The Economist (February 27, 2016): 16; Tim Montgomerie, “Brexit Strategy,” Wall Street Journal (February 20–21): C1; Jenny Gross and Laurence Norman, “Britain Forges EU Deal, Sets Up Showdown at Home,” Wall Street Journal (February 20–21): A1.

33 The United Nations, www.un.org/en/mainbodies/index.shtml (accessed March 12, 2016).

34 “About UNCTAD,” unctad.org. 35 United Nations Conference on Trade and Development, “The State of

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2 Endnotes

2002); “Walmart around the World,” The Economist (December 6, 2001), www.economist.com/displayStory.cfm?Story_ID=895888; David Luhnow, “Crossover Success: How NAFTA Helped Walmart Reshape the Mexican Market,” Wall Street Journal (August 31, 2001): A1; Alexander Hanrath, “Mexican Stores Wilt in the Face of US Group’s Onslaught,” Financial Times (August 14, 2002): 21; Richard C. Morais, “One Hot Tamale,” Forbes (December 27, 2004): 134–47; Mike Troy, “Walmart International,” DSN Retailing Today (December 13, 2004): 20–2; Ricardo Castillo Mireles, “Taking It to the Competition, Mexican Style,” Logistics Today (December 2004): 10; “International Data Sheet,” Walmart Stores, walmartstores.com (accessed June 15,

2011); Walmart 2010 Annual Report; Matthew Boyle, “Walmart v. the World,” CNNMoney (December 19, 2007); “CATALYST: Walmart’s Distribution Juggernaut,” Businessline (June 14, 2007): 1; Miguel Bustillo, “After Early Errors, Wal-Mart Thinks Locally to Act Globally,” Wall Street Journal (August 14, 2009): A1; Miguel Bustillo, “Sam’s Club Tests the Big-Box Bodega,” Wall Street Journal (August 10, 2009): B1; Comlay “Mexico’s Comerci Boosts Investment, Store Openings,” Reuters, (May 24, 2011), www.reuters.com/article/2011/05/24/ comerci-idUKN2426789820110524 (accessed May 27, 2011); Aruna Viswanatha and Devlin Barrett, “Wal-Mart Bribery Probe Tails Off,” Wall Street Journal (October 19, 2015): A1.

http://www.economist.com/displayStory.cfm?Story_ID=895888

http://www.reuters.com/article/2011/05/24/comerci-idUKN2426789820110524

EndnotEs

1 Sources include the following: World Bank, Migration and Remittances Factbook 2016 (The International Bank for Reconstruction and Development/World Bank: Washington, D.C., December 2015); Mark Scott, “Mobile Money Transfers Shake Up a Global Market,” New York Times (June 8, 2015): B7; “Migration and Development Brief 25: Migration and Remittances Recent Developments and Outlook,” (The World Bank, October 2015), worldbank.org (accessed March 25, 2016); “The GCC in 2020: The Gulf and its People,” Economist Intelligence Unit, 2009; “Remittances to Latin America and the Caribbean to Top $100 Billion a Year by 2010, IDB Fund Says,” press release, Inter-American Development Bank (March 18, 2007); Marla Dickerson, “Cash Going to Mexico Likely to Start at a Bank,” Los Angeles Times (February 14, 2007): 21; Miriam Jordan, “U.S. Banks Woo Migrants, Legal or Otherwise,” Wall Street Journal (Eastern Edition) (October 11, 2006): B1; Ioan Grillo, “Wired Cash,” Business Mexico 12:12/13:1 (2003): 44; ; Rosa Salter Rodriguez, “Money Transfers to Mexico Peak as Mother’s Day Nears,” Fort Wayne (IN) Journal Gazette (May 1, 2005): 1D; Karen Krebsbach, “Following the Money,” USBanker (September 2002): 62; Nancy Cleeland, “Firms Are Wired into Profits,” Los Angeles Times (November 7, 1997): 1; David Fairlamb, Geri Smith, and Frederik Blafour, “Can Western Union Keep On Delivering?” Businessweek (December 29, 2003): 57; Heather Timmons, “Western Union: Where the Money Is—In Small Bills,” Businessweek (November 26, 2001): 40.

2 Sam Y. Cross, All about the Foreign Exchange Market in the United States (New York: Federal Reserve Bank of New York, 1998): 9.

3 Cross, All about the Foreign Exchange Market, 9. 4 Bank for International Settlements, “Triennial Central Bank Survey:

Foreign Exchange Turnover in 2013: Preliminary Global Results (Basel: BIS, September 2013): 6.

5 Ibid. 6 John D’Antona Jr., “E-Trading in FX Outshines Voice,” Traders

Magazine, 27:377 (July 2015), Proquest, (accessed March 25, 2015). 7 Reuters financial glossary, glossary.reuters.com (accessed March 26,

2016). 8 Bank for International Settlements, “Triennial Central Bank

Survey,” 6. 9 Lingling Wei, “China Pushes Further to Widen Yuan Use,” Wall Street

Journal (June 16, 2015): C1. 10 Cross, All about the Foreign Exchange Market, 19. 11 Bank for International Settlements, “Triennial Central Bank Survey,

(2013), 6.” 12 Cross, All about the Foreign Exchange Market, 12. 13 Source: http://online.wsj.com/mdc/public/page/2_3021-forex.html

(accessed April 4, 2016). 14 Ibid. 15 See “Foreign Exchange Poll 2009: Methodology,” Euromoney (May

2009): 76. 16 “Citi Keeps Top Spot in FX Trading as European Banks Slump: Poll,”

Reuters (May 27, 2015) accessed April 4, 2016. 17 http://www.cmegroup.com/trading/fx/?utm_source=trading_

flyout&utm_medium=fx&utm_campaign=flyout (accessed April 4, 2016).

18 https://www.theice.com/products/Futures-Options/FX (accessed April 4, 2016).

19 A confirmed letter of credit adds the obligation of the exporter’s bank to pay the exporter.

20 More specifically, Leeson did not actually buy the contracts out- right, but rather paid a certain percentage of the value of the con- tract, known as the margin. When the stock market fell, the index futures contract became riskier, and the broker who sold the contract required Leeson to increase the amount of the margin.

21 “The Collapse of Barings: A Fallen Star,” The Economist (March 4, 1995): 19–21; Glen Whitney, “ING Puts Itself on the Map by Acquiring Barings,” Wall Street Journal (March 8, 1995): B4; John S. Bowdidge and Kurt E. Chaloupecky, “Nicholas Leeson and Barings Bank Have Vividly Taught Some Internal Control Issues,” American Business Review (January 1997): 71–7; “Trader in Barings Scandal Is Released from Prison,” Wall Street Journal (July 6, 1999): A12; Ben Dolven, “Bearing Up,” Far Eastern Economic Review (July 15, 1999): 47; “Nick Leeson and Barings Bank,” bbc.co.uk, www.bbc.co.uk/crime/ caseclosed/nickleeson.shtml (accessed May 19, 2005); Nick Leeson and Edward Whitley, Rogue Trader (London: Little, Brown, 1996): 272.

22 James B. Stewart, “Convictions Prove Elusive in ‘London Whale’ Trading Case,” New York Times (July 17, 2015); Lucy McNulty and Gregory Zuckerman, “London Whale Breaks Silence,” Wall Street Journal (February 2, 2016), accessed online March 28, 2016.

23 Steve Bills, “State St.’s Forex Deal a Lure for Hedge Funds,” American Banker (January 23, 2007): 10.

24 Nathaniel Popper, “New Kid on the Blockchain,” New York Times (March 28, 2016): B1; Robert McMillan, “IGBM Bets on Bitcoin Ledger,” Wall Street Journal (February 16, 2016): B1, “Bitcoin’s Schism: Stumbling Blocks,” The Economist (December 12, 2015): 72.

25 Sources include the following: Keith Bradsher, “IMF Designates China’s Renminbi Global Currency,” New York Times (December 1, 2015): A1; Ian Talley, “China Joins World’s Elite Currency Club,” Wall Street Journal (December 1, 2015): A1; Justin Baer, “Group Promotes Trading of China Currency in U.S,” Wall Street Journal (November 30, 2015): C3; Lingling Wei, Jason Douglas, and Chiara Albanese, “Yuan’s Adventure Abroad Stumbles in London,” Wall Street Journal (November 15, 2015): C1; Chiara Albanese, “China’s Yuan Goes Global,” Wall Street Journal (October 7, 2015): C12; Ira Iosebashvili and Biman Mukherji, “Markets Jolted by China Devaluation,” Wall Street Journal (August 12, 2015): C1; Lingling Wei, “China Pushes Further to Widen Yuan Use,” Wall Street Journal (June 16, 2015): C1; Lingling Wei, “New Signal on Easing Yuan’s Peg to Dollar,” Wall Street Journal (December 12–13, 2015): B1; Mia Lamar and Anjani Trivei, “Wagers Against Yuan Face Risk from Central Bank,” Wall Street Journal (January 14, 2016); Lingling Wei, “IMF Wants More Data From Beijing on Yuan,” Wall Street Journal (March 23, 2016): C1; Tom Orlick, “Get Ready: Here Comes the Yuan,” Wall Street Journal (June 2, 2011): C7; Peter Stein, “The Chinese Test Kitchen,” Wall Street Journal (June 2, 2011): C8; Peter Stein and Shai Oster, “China Speeds Yuan Push,” Wall Street Journal (April 20, 2011); Lingling Wei, “Beijing Considers New Hub for Yuan,” Wall Street Journal (April 9–10, 2011): B1; “The Rise of the Redback,” The Economist (January 22, 2011): 14; Shai Oster, Dinny McMahon, and Tom Lauricella, “Offshore Trading in Yuan Takes Off,” Wall Street Journal (December 14, 2010): A1; Dinny McMahon, “Yuan Goes Electronic in Global Market Bid,” Wall Street Journal (October 8, 2010): C1.

http://online.wsj.com/mdc/public/page/2_3021-forex.html

http://www.cmegroup.com/trading/fx/?utm_source=trading_flyout&utm_medium=fx&utm_campaign=flyout

https://www.theice.com/products/Futures-Options/FX

http://www.bbc.co.uk/crime/caseclosed/nickleeson.shtml

http://www.cmegroup.com/trading/fx/?utm_source=trading_flyout&utm_medium=fx&utm_campaign=flyout

http://www.bbc.co.uk/crime/caseclosed/nickleeson.shtml

EndnotEs

1 Angelina Rascouet, “Venezuela Needs Oil’s Rally More than Anyone as Economy Teeters,” Bloomberg.com (April 8, 2016, accessed on that date); Andrew Rosati, “Venezuela Doesn’t Have Enough Money to Pay for Its Money,” Bloomberg.com (April 27, 2016) (accessed April 28, 2016); Anatola Kumarev and Mayala Arman, “Venezuelans Seek Leader’s Recall,” Wall Street Journal (April 28, 2016): A10; CIA World Factbook (Washington, DC, CIA) (accessed April 25, 2016); Brian A. Nelson, “Hugo Chavez: President of Venezuela,” www.britanica.com (accessed April 28, 2016); Currency Converter, oanda.com (accessed April 27, 2016); “Spot the Difference,” The Economist (April 2, 2016): 36; Kejal Vayas, “Venezuela Tries to Prop Up Crumbling Economy,” Wall Street Journal (February 18, 2016): A9; Carolyn Cui and Sara Schaefer Munoz, “Venezuela Pulls Out All Stops for Debt,” Wall Street Journal (February 25, 2016): C1; Juan Forero, “Venezuela Data Show World’s Top Inflation,” Wall Street Journal (February 19, 2016): A6; “Reasons to Celebrate,” The Economist (December 12, 2015): 35; Kejal Vyas, “Venezuela Embraces the Dollar—Ambivalently,” Wall Street Journal (May 30–31, 2015): A8; William Neuman, “Venezuela Announces Plan to Relax Currency Controls,” New York Times (February 11, 2015): A10; Analtoly Kurmanaev and Maolis Castro, “Venezuela’s Savage Suffering,” Wall Street Journal (February 13–14, 2016): A1.

2 International Monetary Fund, “IMF Chronology,” imf.org/external/np/ exr/chron/chron.asp (accessed April 28, 2016).

3 IMF, “History,” www.imf.org/external/about/history.htm (accessed April 28, 2016).

4 IMF, “Overview: What Do We Do?” imforg/external/about/overview. htm (accessed April 28, 2016).

5 “Quotas, Governors, & Voting Power,” imf.org/data (accessed April 29, 2016).

6 Keith Bradsher, “I.M.F. Designates China’s Renminbi Global Currency,” New York Times (December 1, 2015): 1.

7 International Monetary Fund, “How the IMF Promotes Global Economic Stability,” http://www.imf.org/external/np/exr/facts/glob- stab.htm (accessed April 29, 2016).

8 Julie Wernau and MatthieuWirz, “World Bank Halts Aid to Mozambique,” Wall Street Journal (April 28, 2016): C2.

9 International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington, DC, IMF, 2014): Table 1, p. 4–7.

10 Ibid. 11 See the following for specific definitions of different degrees of

flexibility in exchange rates: https://www.imf.org/external/np/mfd/ er/2003/eng/1203.htm

12 ”The Euro: Who Can Join and When,” http://ec.europa.eu/economy_ finance/euro/adoption/who_can_join/index_en.htm (accessed April 30, 2016).

13 “The EU: Going Negative,” The Economist (April 30, 2016): 9, 47. 14 Paul Masson and Catherine Patillo, “A Single Currency for Africa?”

Finance & Development (December 2004): 9–15; “History of the CFA Franc,” www.bceao.int/internet/bcweb.nsf/pages/umuse1 (accessed May 30, 2005); IMF, “The Fabric of Reform—An IMF Video,” www.imf .org/external/pubs/ft/fabric/ backgrnd.htm (accessed May 30, 2005).

15 Ann-Marie Gulde, “The CFA Franc Zone: Common Currency, Uncommon Challenges Overview (Washington, DC, IMF, 2008).

16 Isaac Imaka, “East Africans to Wait for 10 Years to Get Common Currency, Officials Say,” Daily Monitor, (May 27, 2013), www.monitor. co.ug/News/National/East-Africans-to-wait-for-10-years–to-get-com- mon/-/688334/1864310/-/sg6wfrz/-/index.html (accessed June 18, 2013).

17 “Foreign Exchange” www.newyorkfed.org/markets/foreignex.html (accessed May 4, 2016).

18 “Currency Composition of Official Foreign Exchange Reserves (COFER),” International Monetary Fund, data.imf.org (accessed May 4, 2016).

19 Neil MacLucas and Brian Blackstone, “Swiss Move Roils Global Markets,” Wall Street Journal (January 16, 2015): A1.

20 Patrick McGroarty and Farai Mutsaka, “How to Turn 100 Trillion Dollars into Five and Feel Good About It,” Wall Street Journal (May 11, 2011), online edition.

21 International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington, October 2014) Table 10, p. 35–9.

22 Tim Callen, “Purchasing Power Parity: Weights Matter,” Finance & Development (Washington, DC: IMF), as cited in http://www.imf.org/ external/pubs/ft/fandd/basics/ppp.htm (accessed May 5, 2016).

23 “The Big Mac Index: After the Dips,” The Economist (January 9, 2016): 60. For more information, see economist.com/bigmac.

24 “The Big Mac Index: Food for Thought,” The Economist (May 27, 2004): 75; quoting Michael Pakko and Patricia Polland, “For Here or to Go? Purchasing Power Parity and the Big Mac” (St. Louis, MO: Federal Reserve Bank of St. Louis, January 1996).

25 Tommy Stubbington, “Torrent of Cash Exits the Eurozone,” Wall Street Journal (March 23, 2015): A1.

26 “Forecasting Currencies: Technical or Fundamental?” Business International Money Report (October 15, 1990): 401–02.

27 See Ian H. Giddy and Gunter Dufey, “The Random Behavior of Flexible Exchange Rates: Implications for Forecasting,” Journal of International Business Studies 6:1 (1975): 1–32; Christopher J. Neely and Lucio Sarno, “How Well Do Monetary Fundamentals Forecast Exchange Rates?” St. Louis Fed (September/October 2002), 51–74, www.research.stlouisfed.org/publications/review/ 02/09/51-74Neely. pdf (accessed October 8, 2009).

28 Andrew C. Pollock and Mary E. Wilkie, “Briefing,” Euromoney (June 1991): 123–24.

29 David A. Moss, A Concise Guide to Macro Economics (Boston: Harvard Business School Press, 2007): 131.

30 Sam Y. Cross, All about the Foreign Exchange Market in the United States (Federal Reserve Bank of New York, 1998): 114.

31 Sudeep Jain and Debiprasasd Nayak, “Rupee Fall Hits India’s Small Importers,” Wall Street Journal [India] (June 18, 2013), online edition.

32 Theo Francis, “Dollar’s Rise Puts Squeeze on American Companies,” Wall Street Journal (January 21, 2015): A1.

33 “What America Can Learn from Sterling’s Decline as a Reserve Currency,” The Economist (Ocrober 3, 2015): 80.

34 Alex Frangos, “Chinese Foreign-Exchange Reserves Dive as Stresses Mount,” Wall Street Journal (February 8, 2015): C6.

35 Sources include the following: Megumi Fujikawi, “Corporate Profits in Japan Bend to Yen,” Wall Street Journal (February 18, 2016): B1; James Ramage and Anjani Trivedi, “Fumbling the Carry Trade,” Wall Street Journal (March 12, 2015): C1; Yoko Kubota, “Weak Yen Fuels Toyota’s Profit Even as Sales Dip,” Wall Street Journal (August 5, 2015): B4; Takashi Nakamichi, “Japan Caught in Negative Rate Trap,” Wall Street Journal (March 11, 2016): C3; Hiroko Tabuchi, “Weaker Yen Helps Sony Raise Its Profit Outlook,” Wall Street Journal (April 26, 2013): B6; Mayumi Negishi and Daniel Inman, “Falling Yen Sets Stage for Windfall,” Wall Street Journal (April 24, 2013): B6; Thomas Black, “Now, A Weak Link in The Global Supply Chain,” Businessweek (March 21–27, 2011): 18; Hiroko Tabuchi, “Sony Warns of a Loss from Quake,” Wall Street Journal (May 24, 2011) online edi- tion; Jamie McGeever, “Dollar Gets Battered across the Board,” Wall Street Journal (December 9, 2003): C17; Sebastian Moffett, “Japan’s Yen Strategy Offers Economic Relief,” Wall Street Journal (January 12, 2004): A2; Miyako Takebe, “Japan Plans to Keep Intervening in Markets to Hold Down the Yen,” Wall Street Journal (March 17, 2004): B4E; Alan Beattie, “Japan and ECB Consider Joint Currency Move as Dollar Falls,” Financial Times (December 2, 2004): 11; Sony 2008 Annual Report; Robert Flint, “Yen Gains on Dollar, Europe in Flight

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2 Endnotes

from Risk,” Wall Street Journal (January 13, 2009): C2; Joanna Slater, Yuka Hayashi, and Peter Stein, “Move to Stem Yen’s Rise Is Likely,” Wall Street Journal (October 28, 2008): C1; Stanley Reed, “What’s Driving Up the Dollar,” Businessweek (December 8, 2008): 38; John Murphy and Hiroko Tabuchi, “Japan’s Companies, Consumers, React to New Reality,” Wall Street Journal (October 29, 2008): A13; John

Murphy, “Toyota’s Global Woes Start to Hit Home in Japan,” Wall Street Journal (November 4, 2008): A10; Yumiko Ono and Andrew Monahan, “Japan Exports Fall 49% as U.S. Trade Plunges,” Wall Street Journal (March 26, 2009): A7; John Murphy, Peter Stein, and Neil Shah, “Dollar Vexes Asian Central Banks,” Wall Street Journal (May 26, 2009): C1.

EndnotEs

1 “Taxing America Inc.: Pfiasco,” The Economist (April 9, 2016): 63; Kevin Drabaugh, “Burger King to Save Millions in U.S. Taxes in Inversion: Study,” Reuters (December 11, 2014, accessed May 9, 2016); Jon Hartley, “Burger King’s Tax Inversion and Canada’s Favorable Corporate Tax Rates,” Forbes (August 25, 2014, accessed May 9, 2016); David Gelles, “Treasury Urges End to Foreign Tax Flights,” New York Times (July 17, 2014): B1; Julie Hirschfeld Davis, “Obama Sidesteps Congress with Rules to Curb Corporate Flight,” New York Times (September 23, 2014): B1; Liz Hoffman, “Inversion Rules Test Pending Deals,” Wall Street Journal (April 6, 2016): B1; Jonathan D. Rockoff, “Pfizer, Allergan Move On,” Wall Street Journal (April 7, 2016): B1; Richard Rubin and Liz Hoffman, “U.S. Sets Tougher Rules on Tax Deals,” Wall Street Journal (April 5, 2016): 1; Michael J. de la Merced and Leslie Picker, “U.S. Crackdown on Inversions is Tougher than Expected,” New York Times (April 6, 2016): B1; Michael J. de la Merced, David Gelles, and Leslie Picker, “Chief of Pfizer Defends Merger as Good for U.S.,” New York Times (November 24, 2015): 1; Richard Rubin, “Treasury Plans New Anti-Inversion Plans,” Wall Street Journal (November 19, 2015): B6; Richard Rubin, Jonathan D. Rockoff, and Dana Cimilluca, “Pfizer Girds for Fight on Tax-Saving Deal,” Wall Street Journal (November 20, 2015): 1; Liz Hoffman and John D. McKinnon, “Takeovers See U.S. Losing Tax Revenue,” Wall Street Journal (March 6, 2015): C1;Richard Rubin and Jonathan D. Rockoff, “New Tax Rules are Met With Protest,” Wall Street Journal (April 7, 2016): 1; Julie Jargon and Mike Esterl, “Coffee Empire Adds Krispy Kreme,” Wall Street Journal (May 10, 2016): B1.

2 Jonathan Berk, Peter De Marzo and Jarrad Harford, Fundamentals of Corporate Finance, 2nd edition (Upper Saddle River, NJ: Pearson Prentice-Hall, 2012), 9–10.

3 “Theory versus the Real World,” Finance & Treasury (April 26, 1993): 1. 4 Joseph P. F. Han, Sheridan Titman, and Garry Twite, “An International

Comparison of Capital Structure and Debt Maturity Choices,” Journal of Finance and Quantitative Analysis 47:1 (February 2013): 23–56.

5 Ibid., p. 33. 6 Abe de Jong, Rezaul Kabir, and Thuy Thu Nguyen, “Capital

Structure around the World: The Roles of Firm and Country Specific Determinants,” Journal of Banking & Finance 32 (2008): 1954–69.

7 Charles Forelle, “The Isle That Rattled the World – Tiny Iceland Created a Vast Bubble, Leaving Wreckage Everywhere When It Popped, “ Wall Street Journal (December 27, 2008), p. A1.

8 Basel Committee on Banking Supervision, Bank for International Settlements, bis.org, (accessed May 20, 2016).

9 Patrick McGuire, “A Shift in London’s Eurodollar Market,” BIS Quarterly Review (September 2004): 67.

10 Michael J. de La Merced, “Understanding LIBOR,” Wall Street Journal (July 11, 2012): B3; David Enrich and Max Colchester, “Before Scandal, Clash Over Control of LIBOR,” Wall Street Journal (September 11, 2012): A1.

11 “London Interbank Offered Rate (LIBOR) Definition,” www.investo- pedia.com/terms.asp (accessed May 20, 2016) and ICE LIBOR, http:// theice.com/iba/libor (accessed May 20, 2016).

12 Richard Leong, “Banks Identify Possible Replacements for U.S. Libor,” Reuters, www.reuters.com/article/us-libor-idUSKCNYON2DF (accessed May 20, 2016).

13 Colin Barr, “The New Bond Market: Bigger, Riskier, and More Fragile than Ever,” Wall Street Journal (October 5, 2015, accessed May 20, 2016).

14 Financial Market Series, Bond Markets (October 2012): 3, (accessed June 3, 2013).

15 “IMF Global Stability Report, 2009”: 177. 16 Christopher Whittall, “In ECB Moves, Corporate Bonds Score Big,”

Wall Street Journal (March 11, 2016): C1. 17 Fiona Law, “Dim-Sum Bond Issuance Climbs,” Wall Street Journal,

online edition (accessed March 25, 2013).

18 Peter Stein, “’Dim Sum Bonds’ on the Menu for Foreign Investors,” Wall Street Journal (October 31, 2010), retrieved July 13, 2011, from http://wsj.com.

19 Anant Sundaram, “International Financial Markets,” in Handbook of Modern Finance, ed. Dennis E. Logue (New York: Warren, Gorham, Lamont, 1994): F3–F4.

20 Jason Bush, “Gazprom Swiss Franc Bond Shows Reviving Demand for Russian Issues,” Reuters, http://www.reuters.com/article/russia- gazprom-eurobond-idUSL5N16P2EH (accessed May 21,2016).

21 Christopher Whittall, “Apple is Back in Euro-Bond Market” Wall Street Journal (September 11, 2015): C3.

22 “Sovereign Wealth Fund Rankings,” The Sovereign Wealth Fund Institute, swfinstitute.com (accessed May 22, 2016).

23 Ibid. 24 Michael J. de la Merced, “Alibaba Raises Fund-Raising Target for I.P.O.

to $21.8 Billion,” New York Times (September 16, 2014): B4. 25 “Monthly Reports – January 2016,” World Federation of Exchanges,

www.world-exchanges.org/home/index.php/statatistics/monthly- reports (accessed May 23, 2016).

26 Saumya Vishampayan and Min Zeng, “Stocks Near Elusive Record,” Wall Street Journal (April 18, 2016): C1.

27 Saumya Vaishampayan, “Why Markets are in Chaos,” Wall Street Journal (February 11, 2016): C1.

28 Corrie Driebusch and Riva Gold, “China Drags Down Markets,” Wall Street Journal (January 8, 2016): 1.

29 Christopher Whittall and Riva Gold, “Investors Pull Out of Europe,” Wall Street Journal (May 23, 2016): C1.

30 “Definition of Euroequity” Investopedia, (accessed May 23, 2016). 31 Financial Times, http://lexicon.ft.com/Term?term=euro_equity-issue

(accessed June 10, 2013). 32 See the Ford Annual Report, 2015, http://corporate.ford.com/annual-

reports/2015/index.html. 33 Vinod Kumar, “Tata Communications Says to Delist from NYSE,” The

Economic Times (accessed June 4, 2013). 34 http://www.world-exchanges.org/home/index.php/statistics/

monthly-reports (January 2016, listed companies in the excel spreadsheet).

35 OECD, “Tax Database, Table 11:1: Corporate Income Tax Rate,” stats .oecd.org (accessed May 23, 2016).

36 Deloitte, “International Tax and Business Guide: Germany” (2016), www.deloitte.com/taxguides.

37 Deloitte, “International Tax and Business Guide: Hong Kong” (2016). 38 David Cay Johnston, “Enron Avoided Income Taxes in 4 of 5 Years,”

New York Times (Late Edition [East Coast]) (January 17, 2002): A1. 39 OECD, Transfer Pricing Guidelines for Multinational Enterprises and

Tax Administrations (Paris: OECD Publishing, August 11, 2009), accessed May 24, 2016.

40 Ronald Fink, “Haven or Hell,” CFO Magazine (March 2004), www .cfo.com/article.cfm/3012017 (accessed October 23, 2009); Helen Shaw, “Transfer Students,” CFO Magazine (April 2007), www.cfo .com/article.cfm/8885626/c_8910395?f=insidecfo (accessed August 30, 2007).

41 IRS Publication 901, U.S. Tax Treaties, Revised April 2013, www.irs .gov/pub/irs-pdf/p901.pdf.

42 Eric Pfanner, “European Countries Seek More Taxes from U.S. Multinational Companies,” New York Times (November 19, 2012): B1.

43 Mark Scott, “Ireland Adjusts Its Corporate Tax Attraction,” New York Times (November 16, 2016): B1.

44 IMF Monetary and Exchange Affairs Department, “IMF Background Paper: Offshore Financial Centers,” www.imf.org/external/np/mae/ oshore/2000/eng/back.htm#1, June 23, 2000.

45 Ibid. 46 “How the Heavyweights Shape Up,” Euromoney (May 1990): 56.

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2 Endnotes

54 Nick Davis, “Tax Spotlight Worries Cayman Islands,” BBC News (March 31, 2009), news.bbc.co.uk/go/pr/fr/-/2/hi/americas/7972695. stm (accessed October 23, 2009).

55 Eric Pfanner, “European Countries Seek More Taxes from U.S. Multinational Companies,” New York Times (November 19, 2012): B1.

56 Sources include the following: “Hong Kong’s Fickle IPO Investors,” Wall Street Journal (July 11, 2011); Kelvin Chan, “Prada Says Hong Kong IPO Roadshow Going Well,” Businessweek (June 12, 2011); George Stalk and David Michael, “What the West Doesn’t Get About China,” Harvard Business Review (June 2011): 25–27; Prudence Ho, “Hong Kong’s IPO Engine Sputters,” Wall Street Journal (online. wsj.com, June 17, 2011); Nisha Gopolan and Prudence Ho, “Prada’s Promising IPO,” Wall Street Journal (June 7, 2011): C3; Laurie Burkett, “In China, Women Begin Splurging,” Wall Street Journal (June 13, 2011): B11; Prudence Ho and Yvonne Lee, “Hong Kong IPOs Back in Fashion,” Wall Street Journal (May 23, 2011): B2; Alison Tudor, “Prada Sees Future in Asia,” Wall Street Journal (June 13, 2011): C3.

47 “On or Off? It’s a Matter of Degree,” in “Places in the Sun: A Special Report on Offshore Finance,” The Economist (February 24, 2007): 7.

48 OECD, Harmful Tax Competition: An Emerging Global Issue (Paris: OECD, 1998): 23.

49 OECD, Harmful Tax Competition: An Emerging Global Issue (Paris: OECD, 1998): 27.

50 OECD, Overview or the OECD’s Work on Countering International Tax Evasion (Paris: OECD, August 11, 2009): 8; www.oecd.org/datao- ecd/32/45/42356522.pdf (accessed October 23, 2009).

51 Eric Lipton, “Documents Show How Wealthy Hid Millions Abroad,” New York Times (June 6, 2016): A1.

52 Lucy Komisar, “Funny Money,” Metroactive News & Issues, January 24, 2002, www.metroactive.com/papers/sonoma/01.24.02/offshorebanking- 0204.html (accessed June 7, 2005).

53 Liz Rappaort, “Bank Settles Iran Money Case,” Wall Street Journal (August 15, 2012): A1.

http://www.oecd.org/dataoecd/32/45/42356522.pdf

http://www.metroactive.com/papers/sonoma/01.24.02/offshorebanking-0204.html

EndnotEs

1 Sources include the following: A. Bonnin, “The Fashion Industry in Galicia: Understanding the ‘Zara’ Phenomenon,” European Planning Studies 10 (2002): 519; “Inditex: The Future of Fast Fashion” The Economist, retrieved May 31, 2011, from www.economist.com/ node/4086117?story_id%3D4086117; “The Stars of Europe—Amancio Ortega, Chairman, Inditex,” Businessweek, (June 11, 2001): 65; Richard Heller, “Galician Beauty,” Forbes (May 28, 2001): 28; Rachel Tiplady, “Zara: Taking the Lead in Fast-Fashion,” Businessweek (June 4, 2006): 19; “Shining Examples,” The Economist (June 15, 2006): 54; “Zara Grows as Retail Rivals Struggle,” Wall Street Journal (March 26, 2009): C1; “Zara, the Lead in Fast Fashion,” Fashion Muse, retrieved May 31, 2011, from www.fashionmuse.com/women-fashion/zara-lead- fast-fashion; Lauren Cochrane, “The Winning and Losing Brands In Fashion Right Now,” The Guardian, (September, 21, 2012); J. L. W. Lo, B. Rabenasolo, and A. M. Jolly-Desodt, “Leveraging Speed as a Competitive Advantage: A Case Study of an International Fashion Chain and Its Competitors,” Conference Paper, Sixth Framework Programme, FashionNet International Conference (September 28–29, 2004): 1; Vertica Bhardwaj, Megan Eickman, and Rodney C. Runyan. “A Case Study on the Internationalization Process of a ‘Born-Global’ Fashion Retailer,” The International Review of Retail, Distribution and Consumer Research 21:3 (2011): 293–307; Paige L. Glovinsky and Jiyeon Kim, “Turning Customer Feedback into Commitment.” GSTF Business Review (GBR) 4:2 (2015): 53; Sasikarn Chatvijit Cook and Jennifer Yurchisin, “Post-Purchase Drama: Do the Retailers Lose from Girls Gone Wild in Fast Fashion Environments?” in Let’s Get Engaged! Crossing the Threshold of Marketing’s Engagement Era, eds. Michael W. Obal, Nina Krey, and Christian Bushardt (Springer International Publishing, 2016): 309–10; Marzieh Mehrjoo and Zbigniew J. Pasek. “Risk Assessment for the Supply Chain of Fast Fashion Apparel Industry: A System Dynamics Framework,”International Journal of Production Research 54:1 (2016): 28–48; Min Jeong Seo, Minjeong Kim, and Kyu-Hye Lee, “Supply Chain Management Strategies for Small Fast Fashion Firms: The Case of the Dongdaemun Fashion District in South Korea,” International Journal of Fashion Design, Technology and Education 9:1 (2016): 51–61.

2 “Global Fashion Industry Statistics—International Apparel,” Fashion United, https://www.fashionunited.com/global-fashion-industry- statistics-international-apparel (accessed March 2, 2016); “30 Shocking Figures and Facts in Global Textile and Apparel Industry,” http://www .business2community.com/fashion-beauty/30-shocking-figures-facts- global-textile-apparel-industry-01222057 (accessed March 2, 2016).

3 Ian Urbina and Keith Bradsher, “Linking Factories to the Malls, Middleman Pushes Low Costs,” New York Times 8 (2013).

4 The final links are markets and customers. Although tastes overlap among countries, local customers’ preferences vary. For example, the British seek stores based on class sensitivities, Germans are value- conscious, Chinese shoppers are brand-aware, and consumers in the United States look for a mix of variety, quality, and price. Collectively, these conditions create a buyer-driven chain that links fragmented factories, global brokers, dispersed retailers, and local customers.

5 James C. Collins and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies, (New York: Harper Business Essentials, 1994); James C. Collins and Jerry I. Porras, “Building Your Company’s Vision,”Harvard Business Review 74:5 (1996): 65; James C. Collins and Jerry I. Porras, “Building Your Company’s Change,” Harvard Business Review on Change (1998): 21–54.

6 The Inditex Group, a Spanish apparel MNE, is the parent corporation of eight global retail chains, including Zara, Bershka, Massimo Dutti, Stradivarius, and Oysho. No matter the brand, the all-trendy, reason- ably priced products are sold in attractive stores worldwide. Zara is the flagship, generating the bulk of total sales. Inditex runs operations from “The Cube,” its gleaming, futuristic headquarters in Artexio, near

La Coruña, a small, seaside town in northwest Spain about 300 miles from Madrid.

7 “Amancio Ortega,” Forbes, http://www.forbes.com/profile/amancio- ortega/ (accessed March 2 2016).

8 The Inditex Group, a Spanish apparel MNE, is the parent corporation of eight global retail chains, including Zara, Bershka, Massimo Dutti, Stradivarius, and Oysho. Inditex is one of the world’s largest fashion retailers with eight brands and over 6,700 stores. Zara is the crown jewel of Inditex, generating roughly two-thirds of total sales.

9 “Zara,” Inditex.com, https://www.inditex.com/brands/zara (accessed March 11, 2016).

10 “Meet Amancio Ortega: The Third-Richest Man in the World,” Fortune, http://fortune.com/2013/01/08/meet-amancio-ortega-the- third-richest-man-in-the-world/ (accessed April 2, 2016).

11 “Our Mission Statement,” ZARA United States, http://www.zara.com/ us/en/info/company/our-mission-statement-c18001.html (accessed April 2, 2016).

12 Jane M. Folpe, “Zara Has a Made-to-Order Plan for Success,” Fortune, European Edition, 142:5 (2000): 18.

13 Derek Thompson, “Zara’s Big Idea: What the World’s Top Fashion Retailer Tells Us About Innovation,” The Atlantic, (November 13, 2012), http://www.theatlantic.com/business/archive/2012/11/zaras- big-idea-what-the-worlds-top-fashion-retailer-tells-us-about-inno- vation/265126/.

14 Some product designs cater to physical, cultural, or climate differ- ences—smaller sizes in Japan, special women’s clothing in Arab countries, different seasonal weights in South America.

15 Pankaj Ghemawat, Jose Luis Nueno, and Melissa Dailey. ZARA: Fast Fashion (Boston, MA: Harvard Business School, 2003). Also, another analyst added, “When you went to Gucci or Chanel in October, you knew the chances were good that clothes would still be there in February.” Adds another manager, “With Zara, you know that if you don’t buy it right then and there, within 11 days the entire stock will change. You buy it now or never. And because the prices are so low, you buy it now.” Suzy Hansen, “How Zara Grew into the World’s Largest Fashion Retailer,” New York Times, (November 9, 2012).

16 About three-quarters of the merchandise on display changes every three to four weeks, which corresponds to the average time between Zara customers’ visits: 17 times a year, versus 3 to 4 visits per year for competitors.

17 Vivienne Walt, “Meet Amancio Ortega: The Third-Richest Man in the World,” Fortune (January 14, 2013): 56–59.

18 “The Stars of Europe—Amancio Ortega, Chairman, Inditex,” Businessweek, (June 11, 2001): 65.

19 On average, its prices are 10 percent higher in other European coun- tries, 40 percent higher in northern European countries, 70 percent higher in the Americas, and 100 percent higher in Japan.

20 “The Fashion Industry in Galicia: Understanding the ‘Zara’ Phenomenon,” European Planning Studies 10 (2002).

21 Patrick Byrne, “Closing the Gap between Strategy and Results,” Logistics Management (March 2004): 13.

22 Jim Collins, “Good to Great,” retrieved April 26, 2011, from www .jimcollins.com/article_topics/articles/good-to-great.html.

23 R. Carruthers, “Rapid Response Retail,” Marketing (April 3, 2003): 43. 24 Alternative questions:

• Describe how Zara persuades customers to buy globally standard- ized apparel? Do you think this approach would work for other types of products? If so, which two come to mind?

• Zara’s senior executives believe that finding store managers capable of effectively running its retail properties is the primary constraint on its global expansion. What skills do you think Zara seeks in its ideal candidates? Why would they be difficult to find?

• From the beginning, Zara’s business model differed from the

http://www.economist.com/node/4086117?story_id%3D4086117

http://www.fashionmuse.com/women-fashion/zara-lead-fast-fashion

https://www.fashionunited.com/global-fashion-industry-statistics-international-apparel

http://www.business2community.com/fashion-beauty/30-shocking-figures-factsglobal-textile-apparel-industry-01222057

http://www.forbes.com/profile/amancio-ortega/

https://www.inditex.com/brands/zara

http://fortune.com/2013/01/08/meet-amancio-ortega-the-third-richest-man-in-the-world/

http://www.zara.com/us/en/info/company/our-mission-statement-c18001.html

http://www.theatlantic.com/business/archive/2012/11/zarasbig-idea-what-the-worlds-top-fashion-retailer-tells-us-about-innovation/265126/

http://www.economist.com/node/4086117?story_id%3D4086117

http://www.business2community.com/fashion-beauty/30-shocking-figures-factsglobal-textile-apparel-industry-01222057

http://www.zara.com/us/en/info/company/our-mission-statement-c18001.html

http://www.jimcollins.com/article_topics/articles/good-to-great.html

2 Endnotes

and Being, eds. Scott Snook, Nitin Nohria, and Rakesh Khurana (Sage Publishing, 2012): 3-21.

32 “The Toyota Way has been called ‘a system designed to provide the tools for people to continually improve their work.’ The 14 principles of The Toyota Way are organized in four sections: • Long-Term Philosophy • The Right Process Will Produce the Right Results • Add Value to the Organization by Developing Your People • Continuously Solving Root Problems Drives Organizational

Learning The two focal points of the principles are continuous improve-

ment and respect for people. The principles for continuous improve- ment include establishing a long-term vision, working on chal- lenges, continual innovation, and going to the source of the issue or problem. The principles relating to respect for people include ways of building respect and teamwork.” See https://en.wikipedia.org/wiki/ The_Toyota_Way.

33 Karl E. Weick, Kathleen M. Sutcliffe, and David Obstfeld, “Organizing and the Process of Sensemaking,” Organization Science 16:4 (2005): 409–21.

34 Perfect competition presumes 1. Many buyers and sellers, such that no individual agent determines

price or quantity. 2. Perfect information for both producers and consumers. 3. Few, if any, barriers to market entry and exit. 4. Full mobility of resources. 5. Perfect knowledge among firms and buyers.

35 As a rule, an attractive industry is one in which far-from-perfect competition lets companies consistently earn above-average profit- ability. An unattractive industry is one in which perfect competition drives down overall profitability. In general, the higher the risk, the higher the return. Therefore, riskier projects and investments must be evaluated differently from their riskless counterparts. By discount- ing risky cash flows against less risky cash flows, risk-adjusted rates account for changes in the profile of the investment.

36 See B. Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal (1984): 171–80; In addition, Rumelt found that corporate-parent effects contributed to the variance in firm performance; Richard Rumelt, “How Much Does Industry Matter?” Strategic Management Journal (1985): 167–86; McGahan and Porter (2002) found similar evidence of corporate-parent effects: see “What Do We Know about Variance in Accounting Profitability?” Management Science (2002): 834–51. Indeed, notable examples include Apple in technology, Facebook in social media, Alibaba in online retailing, SAP in business services, Safaricom in mobile money, Netflix in streaming media, LVMH in luxury products, Baidu in Internet search, and Nestlé in food.

37 “James C. Collins Quotes (Author of Good to Great),” GoodReads, https://www.goodreads.com/author/quotes/2826.James_C_Collins (accessed February 26, 2016).

38 Jim Collins, “Good to Great,” retrieved April 26, 2011, from www .jimcollins.com/article_topics/articles/good-to-great.html.

39 See Wyn Jenkins, “Competing in Times of Evolution and Revolution: An Essay on Long-Term Firm Survival,” Management Decisions 43 (January 1, 2005): 26; Belen Villalonga, “Intangible Resources, Tobin’s Q, and Sustainability of Performance Differences,” Journal of Economic Behavior & Organization 54 (June 2004): 205. Determining whether a money manager outperforms a market index relies on separating the returns available from market movements (beta in the jargon) and managerial skill (alpha). Like great product manag- ers, great money managers find innovative ways to earn in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM). More specifically, we can compare the performance of investment managers by allowing for portfolio risk with the so-called Jensen index, also called Alpha. This measure uses

norm. Today its strategy depends on managing the connections between its various activities, notably design, sourcing production, logistics, and store operations. What do Zara’s managers, working out of “The Cube,” see as the most effective way to manage the relationships among these activities?

25 The first half of our text explained that MNEs operate in environ- ments shaped by cultural, political, legal, economic, trade, monetary, governmental, ethical, capital, and institutional forces. Individually and combined, these forces influence managers’ strategic decisions and operating actions. How managers make their companies com- petitive, given conditions and trends in the IB environment, anchors this chapter’s goal: profile how executives devise a strategy that lever- ages core competencies and exploits location economies and effi- ciencies effects to create value that drives current performance and sustains long-term growth.

26 “How We Classify Countries,” The World Bank, retrieved February 6, 2016, from data.worldbank.org/about/country-classifications. See also “2014 World Development Indicators,” The World Bank at https:// www.google.com/url?sa%3Dt%26rct%3Dj%26q%3D%26esrc%3Ds %26source%3Dweb%26cd%3D3%26cad%3Drja%26uact%3D8%26v ed%3D0ahUKEwiqxPXp6a7LAhXTuB4KHQebCqYQFggoMAI%26ur l%3Dhttp%253A%252F%252Fdata.worldbank.org%252Fsites%252F default%252Ffiles%252Fwdi-2014-book.pdf%26usg%3DAFQjCNF- lJ8959QNSIueBTRUEcKzkre3fw%26sig2%3DNJpvF6SajPK7BAGXD SlgTA.

27 Andrea Ovans, “What Is Strategy, Again?” Harvard Business Review (May 12, 2015).

28 Elements of mission and vision statements are often combined to provide a statement of the company’s purposes, goals, and values. Too, sometimes the two terms are used interchangeably. Interestingly, one study identified the most commonly used descrip- tor words in the vision, mission, and value statements of the 100 largest U.S. corporations based on market capitalization to determine the degree to which they share the same words. This is a significant amount of shared words used in corporate value statements, but not in corporate vision and mission statements; see S. Eric Anderson and Brad Jamison, “Do the Top US Corporations Often Use the Same Words in Their Vision, Mission and Value Statements?” Journal of Marketing & Management 6:1 (2015).

29 Elisa Alt, Emilio Pablo Díez-de-Castro, and Francisco Javier Lloréns-Montes. “Linking Employee Stakeholders to Environmental Performance: The Role of Proactive Environmental Strategies and Shared Vision,” Journal of Business Ethics 128:1 (2015): 167–81; Frank Rothaermel, Strategic Management, (McGraw-Hill, 2012); Marc J. Epstein and Adriana Rejc Buhovac, Making Sustainability Work: Best Practices in Managing and Measuring Corporate Social, Environmental, and Economic Impacts, (Berrett-Koehler Publishers, 2014); William Phanuel Kofi Darbi, “Of Mission and Vision Statements and Their Potential Impact on Employee Behaviour and Attitudes: The Case of a Public but Profit-Oriented Tertiary Institution,” International Journal of Business and Social Science 3:14 (2012): 95–109; Celeste P. M. Wilderom, Peter T. van den Berg, and Uco J. Wiersma, “A Longitudinal Study of the Effects of Charismatic Leadership and Organizational Culture on Objective and Perceived Corporate Performance,” The Leadership Quarterly 23:5 (2012): 835–48; Fenwick Feng Jing, Gayle C. Avery, and Harald Bergsteiner, “Enhancing Performance in Small Professional Firms through Vision Communication and Sharing,” Asia Pacific Journal of Management 31:2 (2014): 599–620.

30 A Vision Statement describes the desired future position of the com- pany. A Mission Statement defines the company’s business, its objec- tives, and its approach to reach those objectives. Elements of Vision and Mission Statements are often combined. Also, the two terms are used interchangeably sometimes.

31 Deborah Ancona, “Sensemaking: Framing and Acting in the Unknown,” in The Handbook for Teaching Leadership: Knowing, Doing,

https://en.wikipedia.org/wiki/The_Toyota_Way

https://www.goodreads.com/author/quotes/2826.James_C_Collins

https://www.google.com/url?sa%3Dt%26rct%3Dj%26q%3D%26esrc%3Ds%26source%3Dweb%26cd%3D3%26cad%3Drja%26uact%3D8%26ved%3D0ahUKEwiqxPXp6a7LAhXTuB4KHQebCqYQFggoMAI%26url%3Dhttp%253A%252F%252Fdata.worldbank.org%252Fsites%252Fdefault%252Ffiles%252Fwdi-2014-book.pdf%26usg%3DAFQjCNFlJ8959QNSIueBTRUEcKzkre3fw%26sig2%3DNJpvF6SajPK7BAGXDSlgTA

https://en.wikipedia.org/wiki/The_Toyota_Way

http://www.jimcollins.com/article_topics/articles/good-to-great.html

Endnotes 3

the CAPM as its basis for determining whether a money manager outperformed a market index. The sum of the outperformance is known as alpha.

40 Technically, a core competency satisfies three conditions: It provides consumer benefits, it is difficult for competitors to imitate, and it is leveraged to different products and markets. The fact that rivals can- not easily match or replicate a firm’s core competency serves as a powerful competitive advantage.

41 Difficult for all, these issues are especially tough for the MNE. Besides dealing with domestic issues, it must operate in different countries, which puts it in a more challenging mix of consumers, industries, and institutions.

42 Creating value requires an MNE develop a compelling value proposi- tion (why a customer should buy its goods or use its services) that specifies its targeted markets (those customers for whom it creates goods or services).

43 iPhone configuration came with 16 GB of memory “How Much Does an iPhone 6 Really Cost? (Hint: It’s Way More than $199),” ZDNet, http://www.zdnet.com/article/how-much-does-an-iphone-6-really- cost-hint-its-way-more-than-199/ (accessed October 7, 2015).

44 More elaborately, the idea of business strategy profiles how a com- pany devises a strategy that, subject to industry conditions and man- agerial insight, configures resources and competencies to either do what rivals are doing, but do it more efficiently (the strategy of cost leadership), or do something no other rival can do and do it effec- tively (the strategy of differentiation). In far fewer cases, some firms, integrate the two goals. All companies, no matter the scale and scope of its international operations, formulate business strategy to set the basis of its sustainable strategic advantage. Developing resources and capabilities in the domestic market typically presages the company’s international expansion. Granted there are born-globals who imme- diately head internationally upon inception; they too still must have the competitive advantages to do so successfully. So, general rule is that companies rely upon home-market business level strategies as the foundation for competitive advantage in international markets. The second half of the chapter profiles how MNEs do so within the context of international corporate level strategy.

45 Take a look at Chinese pearl farmers, who have begun flooding the world with low-cost, high-quality pearls. By late 2011, a Chinese half-inch pearl sold for $4 to $8 at wholesale; a Tahitian pearl of simi- lar size rang in at $25 to $35. A strand of perfectly round, blemish- free, half-inch pearls from China ran $1,800 whereas the same sort from Tahiti, although displaying a richer luster, cost $14,000.The influx from China, noted one observer, “has made pearls affordable for the average working woman.” Not content to rest on their current price advantage, Chinese pearl farmers are investing in automation and sequencing the genome of the mussels that produce freshwater pearls. If successful, the price of higher-quality Chinese pearls will fall further.

See “Special Report: The China Price,” Businessweek (Decem- ber 6, 2004), retrieved June 25, 2005, from www.businessweek.com/ magazine/ content/04_49/b3911401.htm; Keith Bradsher, “China’s High-Quality Pearls Enter the Mass Market,” NYTimes.com, retrieved August 16, 2011, from www.nytimes.com/2011/08/02/business/ global/chinas-high-quality-pearls-enter-the-mass-market.html. This situation spans a broad range of product markets. Consequently, Chinese companies’ successful implementation of cost leadership strategies leaves rivals a stark choice. Advised one analyst, “If you still make anything labor-intensive, get out now rather than bleed to death. Shaving 5 percent here and there won’t work. Chinese producers can make the same adjustments. You need an entirely new business model to compete.” The Director of Nalco China concurred, noting that “once you compete on price here, the game’s over.” Oded Shenkar, The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job (Up-

per Saddle River, NJ: Pearson Prentice Hall, 2006); Nalco quote from personal conversation, Daniel Sullivan and Peter Leung, Director Nalco China, Beijing, March 1, 2011.

46 Similarly, Sony began selling its first netbook computer in the fall of 2009, finally entering the only sector of the PC market then show- ing significant growth. Its netbook used the same processor found in competing products and, like other netbooks, had a 10-inch screen. However, its display resolution was 1,366 × 768 pixels rather than the standard 1,024 × 600 pixels, meaning that more of a website would fit onto the screen. For scrolling, Sony’s machine provided a touch panel of the same size as the larger one found on laptops. Hence, Sony used the higher resolution and larger touch pad as key differentiators between its product and competing netbooks. Granted, improv- ing screen resolution or touch pad size are not revolutionary design innovations. However, they supported Sony’s claim that its products are different, better, and therefore justifiably more expensive than those offered by rivals.

47 “Apple iPhone 6 Is Now Cheaper to Buy in India than US, Now Available for Rs 32,999 under Exchange Scheme,” BGR India, http://www.bgr.in/news/apple-iphone-6-is-now-cheaper-to-buy- in-india-than-us-now-available-for-rs-32999-under-exchange- scheme/ (accessed October 9, 2015); “Apple’s Prices Are Too High,” Business Insider, http://www.businessinsider.com/apple-prices- too-high-2013-11 (accessed October 9, 2015); “India Online,” The Economist, http://www.economist.com/news/leaders/21693925-bat- tle-indias-e-commerce-market-about-much-more-retailing-india- online (accessed March 9, 2016).

“Apple Inc. Eyes India as iPhone’s Next Big Market, but China- Style Success Won’t Be Easy,” International Business Times, http://www .ibtimes.com/apple-inc-eyes-india-iphones-next-big-market-china- style-success-wont-be-easy-2184065 (accessed February 21, 2016); “comScore Reports July 2015 U.S. Smartphone Subscriber Market Share,” comScore, Inc., https://www.comscore.com/Insights/Market- Rankings/comScore-Reports-July-2015-US-Smartphone-Subscriber- Market-Share (accessed February 21, 2016).

48 “Hungry Tiger, Dancing Elephant: How India Is Changing IBM’s World,” The Economist (April 4, 2007): 58–61.

49 “Profitable Growth: Target 2012 Annual Report,” Target Corporate, https://corporate.target.com/annual-reports/2012/business/ profitable-growth (accessed October 11, 2015).

50 See http://www.investopedia.com/terms/1/3_6_3_rule.asp; https:// en.wikipedia.org/wiki/3-6-3_Rule.

51 See Torben Juul Andersen, “Strategic Planning, Autonomous Actions and Corporate Performance,” Long Range Planning 33:2 (2000): 184–200; Peter J. Brews and Michelle R. Hunt, “Learning to Plan and Planning to Learn: Resolving the Planning School/Learning School Debate,” Strategic Management Journal 20:10 (1999): 889–913; C. Chet Miller and Laura B. Cardinal, “Strategic Planning and Firm Performance: A Synthesis of More than Two Decades of Research,” Academy of Management Journal 37:6 (1994): 1649–65; John M. Rudd, Gordon E. Greenley, Amanda T. Beatson, and Ian N. Lings, “Strategic Planning and Performance: Extending the Debate,” Journal of Business Research 61:2 (2008): 99–108; Michael Song, Subin Im, Hans van der Bij, and Lisa Z. Song, “Does Strategic Planning Enhance or Impede Innovation and Firm Performance?” Journal of Product Innovation Management 28:4 (2011): 503–20.

52 See Henry Mintzberg, Rise and Fall of Strategic Planning, (Simon and Schuster, 1994); John A. Pearce, Elizabeth B. Freeman, and Richard B. Robinson, “The Tenuous Link between Formal Strategic Planning and Financial Performance,” Academy of Management Review 12:4 (1987): 658–67; Robert M Grant, “Strategic Planning in a Turbulent Environment: Evidence from the Oil Majors,” Strategic Management Journal 24 (2003): 491–517.

53 The S&P 500 stock market index, maintained by S&P Dow Jones Indices, comprises 505 common stocks issued by 500 large-cap

http://www.zdnet.com/article/how-much-does-an-iphone-6-really-cost-hint-its-way-more-than-199/

http://www.businessweek.com/magazine/ content/04_49/b3911401.htm

http://www.nytimes.com/2011/08/02/business/global/chinas-high-quality-pearls-enter-the-mass-market.html

http://www.bgr.in/news/apple-iphone-6-is-now-cheaper-to-buy-in-india-than-us-now-available-for-rs-32999-under-exchange-scheme/

http://www.businessinsider.com/apple-prices-too-high-2013-11

http://www.economist.com/news/leaders/21693925-battle-indias-e-commerce-market-about-much-more-retailing-india-online

http://www.ibtimes.com/apple-inc-eyes-india-iphones-next-big-market-chinastyle-success-wont-be-easy-2184065

https://www.comscore.com/Insights/Market-Rankings/comScore-Reports-July-2015-US-Smartphone-Subscriber-Market-Share

https://corporate.target.com/annual-reports/2012/business/profitable-growth

http://www.investopedia.com/terms/1/3_6_3_rule.asp

https://en.wikipedia.org/wiki/3-6-3_Rule

http://www.businessweek.com/magazine/ content/04_49/b3911401.htm

http://www.nytimes.com/2011/08/02/business/global/chinas-high-quality-pearls-enter-the-mass-market.html

http://www.economist.com/news/leaders/21693925-battle-indias-e-commerce-market-about-much-more-retailing-india-online

http://www.ibtimes.com/apple-inc-eyes-india-iphones-next-big-market-chinastyle-success-wont-be-easy-2184065

https://corporate.target.com/annual-reports/2012/business/profitable-growth

4 Endnotes

companies and traded on American stock exchanges, and covers about 75 percent of the American equity market by capitalization. The Standard & Poor’s 500 Index (S&P 500) is an index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The S&P 500 is a market value weighted index— each stock’s weight is proportionate to its market value.

54 “S&P 500 Index Constituent Turnover - Business Insider.” 2016. Accessed July 29. http://www.businessinsider.com/ sp-500-index-constituent-turnover-2015-6; “Charts of the Day: Creative Destruction in the S&P500 Index.” 2016. AEI. Accessed July 29. https://www.aei.org/publication/ charts-of-the-day-creative-destruction-in-the-sp500-index/

55 “Schumpeter: Fail Often, Fail Well,” The Economist, retrieved April 28, 2011, from www.economist.com/node/18557776?story_ id%3D18557776%26 fsrc=rss; “S&P 500 Index Constituent Turnover,” Business Insider, http://www.businessinsider.com/sp-500-index- constituent-turnover-2015-6 (accessed October 12, 2015); http:// www.bcg.com/expertise/capabilities/strategy/business-model- innovation.aspx.

56 “Luck Inc.,” The Boston Globe, http://www.boston.com/bostonglobe/ ideas/articles/2009/04/12/luck_inc/ (accessed February 21, 2016); Geoffrey Colvin, Talent is Overrated: What Really Separated World- Class Performers from Everybody Else (Penguin, 2008).

57 Dan Kahneman and Daniel Lovallo, “Delusions of Success: How Optimism Undermines Executives’ Decisions,” Harvard Business Review, https://hbr.org/2003/07/delusions-of-success-how-opti- mism-undermines-executives-decisions (accessed October 13, 2015); Phil Rosenzweig, The Halo Effect: … and the Eight Other Business Delusions That Deceive Managers (Simon and Schuster, 2014).

58 “The World’s New Growth Frontier: Midsize Cities in Emerging Markets,” McKinsey & Company, http://www.mckinsey.com/global- themes/urbanization/the-worlds-new-growth-frontier-midsize- cities-in-emerging-markets (accessed March 9, 2016).

59 Lovallo and Kahneman, “Delusions of Success.” Often, analysis of examples of a bright, ingenious management decision fall prey to inflated halo effects, whereby a positive impression in one area, say the ease of Google’s search algorithm, influences assessment of other aspects of the company, say Google’s executive leadership. Moreover, the often anecdotal “lessons learned” are not easily distilled into objective principles or useful to companies in dissimilar industries and countries.

60 Phil Rosenzweig, The Halo Effect: … and the Eight Other Business Delusions That Deceive Managers (Simon and Schuster, 2014).

61 The value chain, reflecting the notion that “every firm is a collec- tion of discrete activities performed to do business that occur within the scope of the firm,” specifies the system of activity the firm sets to implement its strategy. Michael Porter, “Competition in Global Industries: A Conceptual Framework,” in Competition in Global Industries, ed. M. Porter (Boston: Harvard Business School Press, 1986). These questions shape how Zara, like other MNEs, organizes its operations to design, make, move, and sell products; how it finds efficiencies in various countries in doing so; and how it coordinates decisions in one part of the business with those made in others. Managers may make decisions that they strongly reason support the firm’s strategy but, in actuality, more often do not support it. Challenges emerge because often few managers understand the full demands of the company’s strategy and its implications for inter- national operations. More worrisome, managers are far more likely to make the wrong than right decision. See Dan Lovallo and Daniel Kahneman, “Delusions of Success: How Optimism Undermines Executives’ Decisions,” Harvard Business Review (July 2003): 56.

62 Building and then linking the resulting system of primary and sup- port activities is the task of organization, coordination, control, and culture; we cover those topics in Chapter 15.

63 United Technologies, for instance, a diversified conglomerate that makes Pratt and Whitney jet engines, Carrier air-conditioners, and Otis elevators, opts to locate production close to customers wher- ever possible. Dispersing value activities means that elevators for the Chinese market are built in China while workers in Europe make air-conditioners that are sold in Europe. “As Dollar Heats Up Overseas, U.S. Manufacturers Feel a Chill,” New York Times, http:// www.nytimes.com/2015/03/27/business/economy/as-dollar-heats- up-overseas-us-manufacturers-feel-a-chill.html?hp% 26action%3Dclick%26pgtype%3DHomepage%26module%3Dsec ond-column-region%26region%3Dtop-news%26WT.nav%3Dtop- news (accessed October 12, 2015).

64 Today, conflicting pressures for global integration and national responsiveness means fewer MNEs have the option to concentrate their value chain in a single location. Our opening case highlighted this dilemma as Zara’s key challenge: Should it continue concentrat- ing its value chain in Spain, thereby maximizing global efficiencies, or disperse some value activities to its fastest-growing markets in Asia, thereby adapting activities to optimize local effectiveness? Its decision to reject industry practice, preferring to stay close to home, has been an anchor of its competitiveness. Changing industry trends pressure it to change its configuration strategy.

65 At present, doing business remains easiest in high-income countries such as Singapore, Denmark, Hong Kong, New Zealand, Canada, Sweden, and the United States. Their combination of stable public institutions, extensive infrastructure, expansive financial systems, flexible labor markets, and economic outlook supports business development. Likewise, there are risky environments. Countries whose governments condone the rule of man, for instance, often deter firms fearful of intellectual property theft. Venezuela, Zimbabwe, Chad, Burundi, Cameroon, Bolivia, and Tajikistan are currently rated among the worst business environments. Generally, circumstances are improving worldwide. The importance of business activity to economic growth spurs many countries to reform the local environment.

66 Basically, just as birds of a feather flock together, so too with MNEs in particular industries—New York City for global finance, Baden-Württemberg for cars and electrical engineering, Dhahran Techno-Valley for energy, Holland for cut flowers, Silicon Valley for technology, Silicon Wadi for wireless telecom, Belluno for eyewear products, Mumbai and Hollywood for entertainment, and so on. The geographic mechanics of a business cluster are straightforward, see the Cluster Profiles Project of the Institute for Strategy and Competitiveness at Harvard Business School, data.isc.hbs.edu/cp/ index.jsp.

67 Problems with moving a company’s stuff can threaten its success. Walmart relies on a sophisticated inbound and outbound truck sys- tem to move goods among its stores; without that system, it could not compete. In India, bad roads, many middlemen, government red tape, and tough thugs slow, if not stop, the flow of goods. Goods that make it through, after all the various charges, can see their price, set that morning by the farmer, shoot up 500 percent by delivery that evening. “Bad Roads, Red Tape, Burly Thugs Slow Wal-Mart’s Passage in India,” WSJ.com, retrieved January 12, 2013, from online. wsj.com/artile/SB10001424127887323622904578129294224588914. html?mod=WSJ_hpp_LEFTTopStories.

68 “Liability of Foreignness and Internationalisation of Emerging Market Firms : Dynamics of Globalization: Location-Specific Advantages or Liabilities of Foreignness?” http://www.emeraldin- sight.com/doi/abs/10.1108/S1571-5027(2011)0000024016 (accessed January 20, 2016); Nan Zhou and Mauro F. Guillén, “From Home Country to Home Base: A Dynamic Approach to the Liability of

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http://www.boston.com/bostonglobe/ideas/articles/2009/04/12/luck_inc/

Endnotes 5

Foreignness,” Strategic Management Journal 36:6 (2015): 907–17; Donal Crilly, Na Ni, and Yuwei Jiang. “Do-No-Harm versus Do-Good Social Responsibility: Attributional Thinking and the Liability of Foreignness,” Strategic Management Journal (2015); Ravi Chinta, Mee-Shew Cheung, and Nejat Capar, “Double Whammy or Double Advantage: ‘Foreignness’ and ‘Newness’ as Determinants of Success in International Business,” Journal of Management and Strategy 6:1 (2015): 76.

69 Michael Porter, Competitive Advantage (New York: Free Press, 1985). Research reports that industry effects explain 75 percent of the difference in average returns for companies in an industry. Jens Boyd, “Intra-Industry Structure and Performance: Strategic Groups and Strategic Blocks in the Worldwide Airline Industry,” European Management Review 1 (2004): 132–45; Schmalensee, “Do Markets Differ Much?” American Economic Review 75:3 (1985): 341–51. See B. Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal (1984): 171–80. In addition, Rumelt found that corporate-parent effects contributed to the variance in firm perfor- mance; Richard Rumelt, “How Much Does Industry Matter?” Strategic Management Journal (1985): 167–86; McGahan and Porter (2002) found similar evidence of corporate-parent effects: see “What Do We Know about Variance in Accounting Profitability?” Management Science (2002): 834–51.

70 Janet C. Lowe, Welch: An American Icon (New York: Wiley and Sons, 2002).

71 Quote from Bain’s Mark Gottfredson, reported in “Financial Firms Hasten Their Move to Outsourcing,” New York Times (August 18, 2004): C1.

72 W. Brian Arthur, “The Second Economy,” McKinsey Quarterly, retrieved January 8, 2013, from www.mckinseyquarterly.com/ The_second_economy_2853.

73 Heather Timmons, “Outsourcing to India Draws Western Lawyers,” NYTimes.com, retrieved April 26, 2011, from www.nytimes. com/2010/08/05/business/global/05legal.html?_r%3D1. Presently, Pangea3 is “getting more résumés from United States lawyers than we know what to do with,” said the managing director of its litigation services group.

74 The consolidation of existing communication technologies, to say nothing of the construction of Internet bases with wireless transmis- sions in increasingly remote locations, supports “new business mod- els to connect the poorest two billion people to the evolving nervous system of civilization.” See “2009 State of the Future,” The Millennium Project, 22.

75 John Markoff, “New Wave of Deft Robots Is Changing Global Industry,” New York Times (August 18, 2012).

76 “Rise of the Robot Journalist,” The Slow Journalism Magazine, http:// www.slow-journalism.com/rise-of-the-robot-journalist (accessed October 13, 2015); Aviva Rutkin, “Rise of Robot Reporters: When Software Writes the News,” New Scientist 221:2962 (2014): 22; Noam Lemelshtrich Latar, “The Robot Journalist in the Age of Social Physics: The End of Human Journalism?” in The New World of Transitioned Media (Springer International Publishing, 2015): 65–80; Christer Clerwall, “Enter the Robot Journalist: Users’ Perceptions of Automated Content,” Journalism Practice 8:5 (2014): 519–31.

77 “The Future of Employment: How Susceptible Are Jobs to Computerisation?” Oxford Martin School, http://www.oxfordmartin. ox.ac.uk/publications/view/1314 (accessed October 13, 2015).

78 Add it up, say some experts, and up to 60 percent of current jobs in America, and by extension other nations, will be lost to automa- tion. Moreover, they warn, education and upscaling won’t help us as there will simply be fewer jobs to go around, as everything from accountancy to journalism will be done faster, cheaper, and more efficiently by machines. The result is that up to half of the jobs in some advanced Western economies are at risk with some forecasting billions will be left jobless. Martin Ford, Rise of the Robots: Technology

and the Threat of a Jobless Future (Basic Books, 2015); Hassan DuRant and Jia You, “Humans Need Not Apply,” Science 346:6206 (2014): 190–1.

79 John Markoff, “New Wave of Deft Robots Is Changing Global Industry,” NYTimes.com, retrieved February 25, 2013, from www.nytimes.com/2012/08/19/business/new-wave-of-adept-robots- is-changing-global-industry.html?pagewanted%3Dall.

80 “Manufacturing the Future: The Next Era of Global Growth and Innovation,” McKinsey Global Institute, retrieved January 13, 2013, from www.mckinsey.com/insights/mgi/research/productiv- ity_competitiveness_and_growth/the_future_of_manufacturing; “Manufacturing: The New Maker Rules,” The Economist, (November 12, 2012): 73.

81 “The Digitization of Manufacturing Will Transform the Way Goods are Made—And Change the Politics of Jobs too,” The Economist (April 21 2012): 56.

82 “More Than a Third of Large Manufacturers Are Considering Reshoring from China to the U.S.,” Boston Consulting Group, retrieved January 8, 2013, from www.bcg.com/media/ PressReleaseDetails.aspx?id%3Dtcm:12-104216.

83 Peter Marsh, The New Industrial Revolution: Consumers, Globalisation and the End of Mass Production (Yale University Press, 2013).

84 Research suggests straightforward relationships: The higher the pressure for global integration, the greater the need to centralize decision-making, concentrate configuration, and standardize coor- dination in order to gain cost leadership. The matters of exploiting location economies and experience effect to leverage resources and capabilities anchor strategic planning. Conversely, the higher the pressure for local responsiveness, the greater the need to decentral- ize decision-making, disperse value activities, and localize operations in order to customize activity to local circumstances. The matters of adapting resources and capabilities to national differences in con- sumer preferences, industry structures, market patterns, and govern- ment policies anchor strategic planning.

85 Encyclopedia Britannica, www.britannica.com/EBchecked/ topic/1357503/cultural-globalization.

86 Global buying patterns indicate that consumers worldwide seek global products—think of, for example, the global appeal of Apple iPhones, Starbucks lattes, Samsung LED screens, Huawei routers, Nokia cell phones, American Express charge cards, or Zara blouses. Consumer behavior in many product areas transcends geography, moving national markets to the global standard. The quest to maxi- mize individual purchasing power, coupled with the increasing avail- ability of increasingly standardized goods at increasingly lower prices, drives this trend. Essentially, the intrinsic functions of money power the globalization of markets

Supply-push conditions feed the globalization machine. Earlier discussion of digitization and logistics highlighted the increasing availability of the same product worldwide. The expanding trading network of globalization, regulated by institutions such as the World Trade Organization, sanctioned by governments committed to free trade, and driven by companies intent on expanding operations, make it increasingly easy to supply the same products everywhere. See Theodore Levitt, “The Globalization of Markets,” Harvard Busi- ness Review 61 (1983): 92–102; “What Is the WTO?” retrieved January 8, 2013, from www.wto.org/ english/thewto_e/whatis_e/whatis_e .htm.

87 Already, Global markets produce and consume more than 20 per- cent of world output and are projected to approach 80 percent by 2025. Similarly, more cross-national economic integration will take place in the next 30 years than occurred in the previous 10,000. Again, think of the agents promoting globalization: from 30,000 MNEs in 1990 to more than 70,000 today, operating more than 900,000 subsidiaries spread around the world. Managers, companies, and industries react accordingly, as seen in the ongoing formation of

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6 Endnotes

global markets in chemicals, credit cards, financial services, account- ing, food, health care, mass media, forest products, information technology, automobiles, telecommunications, and so on. Moreover, emerging economies intensify these processes. The United Nations estimates there are approximately 22,000 multinationals based in the emerging world; few of these existed 10 years ago. More will exist in a decade given that the ten fastest-growing economies during the years ahead will all be in emerging markets. Combined, nearly 70 percent of the world growth over the next few years will come from emerging markets, with 40 percent in just China and India; see Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “ The Global Company’s Challenge,” McKinsey Quarterly, retrieved December 31, 2012, from www.mckinseyquarterly .com/The_global_companys_challenge_2979; “A Special Report on Innovation in Emerging Markets: The World Turned Upside Down,” The Economist, retrieved April 21, 2011, from www.economist.com/ node/15879369.

88 Walter Isaacson, Steve Jobs (Simon & Schuster, 2011). 89 Adrian Wooldridge, Masters of Management: How the Business

Gurus and Their Ideas Have Changed the World—for Better and for Worse (HarperCollins, 2011): 273; “The Web Is Not Actually Getting Any More Global,” Quartz, http://qz.com/202665/the-web-is-not- actually-getting-any-more-global/ (accessed March 7, 2016).

90 Pankaj Ghemawat, “Distance Still Matters,” Harvard Business Review 79:8 (2001): 137–47; Alan M. Rugman and Alain Verbeke, “A Perspective on Regional and Global Strategies of Multinational Enterprises,” Journal of International Business Studies 35:1 (2004): 3–18; Pankaj Ghemawat, “Semiglobalization and International Business Strategy,” Journal of International Business Studies (2003): 138–52.

91 Lui Hebron and John F. Stack, Globalization: Debunking The Myths (Pearson Prentice Hall, 2008); Jan Nederveen Pieterse, Globalization & Culture: Global Mélange (Rowman & Littlefield Publishers, 2009); Michael Veseth, Globaloney: Unraveling the Myths of Globalization (Rowman & Littlefield, 2006).

92 Regarding cultural predisposition, Japanese doctors disfavor the American-style, high-pressure sales force. Pharmaceutical sales rep- resentatives, therefore, adapt their marketing practices in that coun- try. Regarding historical legacy, people drive on the left side of the road in England, thereby creating demand for right-hand-drive cars, whereas people in Italy drive on the right side of the road, thereby creating demand for left-hand-drive cars. Similarly, consumer elec- trical systems are based on 110 volts in the United States, whereas many European countries use a 240-volt standard.

93 “What Is the WTO?” retrieved January 8, 2016, from www.wto.org/ english/thewto_e/whatis_e/whatis_e.htm. See https://www.wto.org/ english/thewto_e/whatis_e/tif_e/org6_e.htm for current membership directory.

94 “IMD World Competitiveness Yearbook,” retrieved January 24, 2013, from www.imd.org/research/publications/wcy/.

95 “Brazil’s Trade Policy: Seeking Protection,” The Economist, (January 14, 2012): 35; Regarding Thailand, see U.S. Trade Representative, 2010 National Trade Estimate Report on Foreign Trade Barriers, 2010; www.ustr.gov/about-us/press-office/reports-and-publica- tions/2010 (accessed April 21, 2013). Regarding Uber, see “Uber’s No-Holds-Barred Expansion Strategy Fizzles in Germany,” New York Times, http://www.nytimes.com/2016/01/04/technology/ubers- no-holds-barred-expansion-strategy-fizzles-in-germany.html?hp- %26action%3Dclick%26pgtype%3DHomepage%26clickSource%3Ds tory-heading%26module%3Dsecond-column-region%26region%3D top-news%26WT.nav%3Dtop-news%26_r%3D1 (accessed January 3, 2016).

96 C. Prahalad and Y. Doz, The Multinational Mission: Balancing Local Demands and Global Vision (New York: Free Press, 1987).

97 A firm’s success in its home market spurs it to expand internation- ally. Or, if already abroad, expand operations to leverage earlier

achievements. Its business-level strategy—whether anchored in doing what others are doing but doing it more efficiently, doing something no one else can do and doing it effectively, or an inge- nious mix of both—influences the choices its make overseas.

98 “Google in Asia: Seeking Success,” The Economist, retrieved March 15, 2011, from www.economist.com/node/13185891? story_id%3D13185891.

99 Similarly, if the host government offers incentives for local manu- facturing, the subsidiary can build its own plant; if local consumers prefer dealing directly with salespeople rather than relying on mass media, the subsidiary can build a sales force; if the country changes labor laws, the subsidiary can adjust human resource policies.

100 “A Special Report on Entrepreneurship: Global Heroes,” The Economist, retrieved March 15, 2011, from www.economist.com/ node/13216025.

101 Interestingly, a 150 pound bag of coffee beans might earn a farmer approximately $50. The “street value” of that same bag, once pro- cessed into approximately 10,000 cups of coffee and depending upon the particular outlet, is anywhere between $10,000 to $40,000.

102 Localizing value activities also helps the MNE reduce political risk given its company’s local standing, lower exchange-rate risks given less need to repatriate funds, and translate local performance into national prominence

103 Carrefour, for instance, found difficulties in the United States when, to deal with local preferences, it shifted from its successful interna- tional strategy to a localization approach. Costly problems ultimately forced Carrefour to close its failing U.S. operations. Similar troubles hit Tesco, the British supermarket MNE. After six years of struggling to understand American consumer behaviour, Tesco surrendered. It announced its withdrawal from the United States at a direct cost of $1.8 billion, atop the many hundreds of millions it had already spent trying to localize operations. Julia Werdigier, “Tesco to Pay Dearly to Leave United States,” New York Times (April 17, 2013): C2.

104 For instance, J&J launched Tylenol in 1960 as an over-the-counter pain reliever in the United States. The product was available to for- eign units shortly thereafter. The quasi-independent Japanese unit, despite duress from headquarters, did not begin selling it until 2000.

105 Toby Gibbs, Suzanne Heywood, and Leigh Weiss, “Organizing for an Emerging World,” McKinsey Quarterly, June 2012.

106 The so-called China Price phenomenon profiles the stakes of the global strategy. The China Price refers to situations in which Chinese firms make something for significantly less than can be done in Western countries. In the extreme case, it means Chinese rivals sell products for less than the cost of materials in the West. Many Chinese companies apply the China Price approach within the context of the global strategy. Rival MNEs implementing a global strategy must ingeniously configure and coordinate value activities. If not, the alter- native is dire. See Alexandra Harney, The China Price: The True Cost of Chinese Competitive Advantage (New York: Penguin, 2008); “The China Price,” Businessweek, retrieved March 30, 2011, from www .businessweek.com/magazine/content/04_49/b3911401.htm; “The China Price,” retrieved January 10, 2013, from thechinaprice.blogspot .com/.

107 Theodore Levitt, “The Globalization of Markets,” Harvard Business Review 61 (1983): 92–102; Saeed Samiee and Kendall Roth, “The Influence of Global Marketing Standardization on Performance,” The Journal of Marketing (1992): 1–17; Robert Dow Buzzell, Can You Standardize Multinational Marketing? (Reprint Service, Harvard Business Review, 1968); Subhash C. Jain, “Standardization of International Marketing Strategy: Some Research Hypotheses,” The Journal of Marketing (1989): 70–9.

108 Jan Aart Scholte, Globalization: A Critical Introduction (Palgrave Macmillan, 2005).

109 Ibid, Scholte; Luigi Dumitrescu and Simona Vinerean, “The Glocal Strategy of Global Brands,” Studies in Business and Economics 5:3 (2010): 147–55; Douglas B. Holt, John A. Quelch, and Earl L.

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Endnotes 7

Taylor, “How Global Brands Compete,” Harvard Business Review 82:9 (2004): 68–75; Marcus Alexander and Harry Korine, “When You Shouldn’t Go Global,”Harvard Business Review 86:12 (2008): 70–7; Göran Svensson, “‘Glocalization’ of Business Activities: A ‘Glocal Strategy’ approach,” Management Decision 39:1 (2001): 6–18.

110 “The New Champions,” The Economist (September 18, 2008); Thomas Friedman, The World Is Flat: A Brief History of the Twenty- First Century (New York: Farrar, Straus and Giroux, 2005); Clyde V. Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East (New York: Basic Books, 2006); “The Next Billions: Unleashing Business Potential in Untapped Markets,” World Economic Forum (January 2009): 44; C. K. Prahalad and S. L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy+Business 26 (2002): 54–67; C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia: Wharton School Publishing, 2004); Antoine van Agtmael, The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World (Minneapolis, MN: Free Press, 2007).

111 “Hungry Tiger, Dancing Elephant: How India Is Changing IBM’s World,” The Economist (April 4, 2007): 58–61.

112 Headquarters sent home-nation executives to run its satellite units. Expatriates typically commanded technical expertise but little cultural fluency and minimal foreign-language competency. Often, the only thing multinational about these executives was the location of their international assignment.

113 Harold Sirkin, James Hemerling, Arindam Bhattacharya, Globality: Competing with Everyone from Everywhere for Everything (New York: Business Plus, 2008).

114 Ibid. 115 Yves Doz, Jose Santos, and Peter Williamson, Global to Metanational:

How Companies Win in the Knowledge Economy (Cambridge, MA: Harvard Business School Press, 2001).

116 Keeley Wilson and Yves L. Doz, “10 Rules for Managing Global Innovation,” Harvard Business Review, October 12, 2012.

117 “McDonald’s Eyes Russia Growth with 40 New Stores,” Reuters, retrieved February 26, 2009, from uk.reuters.com/article/ idUKLQ86281720090226.

118 “McDonald’s to Invest More in Russia,” Crain’s Chicago Business, retrieved March 17, 2011, from www.chicagobusiness.com/ article/20110302/NEWS0702/110309970/mcdonalds-to-invest-more- in-russia; Andrew Kramer, “The Evolution of Russia, as Seen from McDonald’s,” NYTimes.com, retrieved March 17, 2011, from www .nytimes.com/2010/02/02/business/global/02mcdonalds.html.

119 Andrew Kramer, “The Evolution of Russia, as Seen From McDonald’s,” NYTimes.com, retrieved March 17, 2011, from www .nytimes.com/2010/02/02/business/global/02mcdonalds.html.

120 “Globalization Feature: Why Being Multinational Is No Longer Enough,” HBS Working Knowledge Archive, Harvard Business School, http://hbswk.hbs.edu/archive/2679.html (accessed March 7, 2016).

121 Sophia Jones, “Little Is the New Big,” Foreign Policy (August 19, 2011): 39.

122 “Number of MNCs in the World,” NumberOf.net, http://www .numberof.net/number%25C2%25A0of%25C2%25A0mncs-in- the-world/ (accessed March 10, 2016); “Multinational Corporation,” Wikipedia, the Free Encyclopedia, https://en.wikipedia.org/ wiki/Multinational_corporation (accessed March 10, 2016); “Are Multinationals Becoming Less Global?” Harvard Business Review, https://hbr.org/2013/10/are-multinationals-becoming-less-global (accessed March 10, 2016).

123 Michael V. Copeland, “How Startups Go Global,” Business 2.0 (July 28, 2006): 424; Jim Hopkins, “The Rise of the Micro-Multinationals,” USA Today (February 11, 2005): B1.

124 “Emerging Exporters: Australia’s High Value-added Manufacturing Exporters,” Australian Manufacturing Council, (Melbourne: McKinsey & Co. 1993), retrieved May 17, 2011, from catalogue.nla.gov.au/ Record/2621131.

125 Examples cited in T. Koed Madsen and P. Servais, “The Internationalization of Born Globals: An Evolutionary Process?” IB Review (1997): 561–83.

126 O. Moen, R. Sorbeim, and T. Erikson. “Born Global Firms and Informal Investors: Examining Investor Characteristics,” Journal of Small Business Management (October 2008): 536.

127 Alan Rugman and Alain Verbeke, “A Perspective on Regional and Global Strategies of Multinational Enterprises,” Journal of IB Studies 35 (2004): 3–18; Pankaj Ghemawat, “Regional Strategies for Global Leadership,” Harvard Business Review (December 2005).

128 Marc Singer, “Beyond the Unbundled Corporation,” The McKinsey Quarterly, retrieved July 12, 2009, from www.mckinseyquarterly. com/Beyond_the_unbundled_corporation_1085; Remo Hacki and Julian Lighton, “The Future of the Networked Company,” McKinsey Quarterly, retrieved July 12, 2009, from www.mckinseyquarterly.com/ The_future_of_the_networked_company_1091; James Martin, “Only the Cyber-Fit Will Survive,” Datamation (November 1996): 60.

129 “Facebook Will Be Hiring Number of Employees by 2017,” retrieved January 11, 2013, from techblog.weblineindia.com/news/ facebook-will-be-hiring-number-of-employees-by-2017.

130 “2009 State of the Future,” The Millennium Project, 22. 131 The technological singularity is a hypothetical event in which arti-

ficial general intelligence (constituting, for example, intelligent computers, computer networks, or robots) would be capable of recursive self-improvement (progressively redesigning itself) or of autonomously building ever smarter and more powerful machines than itself, up to the point of a runaway effect—an intelligence explo- sion—that yields an intelligence surpassing all current human control or understanding. Because the capabilities of such superintelligence may be impossible for a human to comprehend, the technological singularity is the point beyond which events may become unpredict- able or even unfathomable to human intelligence.

132 Jim Collins, “Good to Great,” retrieved April 26, 2011, from www .jimcollins.com/article_topics/articles/good-to-great.html.

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EndnotEs

1 Sources include the following: We’d like to acknowledge the invalu- able assistance of Jonathan Fitzpatrick, former Executive V.P. and Chief Brand Operations Officer; Julio A. Ramirez, former Executive Vice President Global Operations; Arianne Cento, Senior Analyst, Global Communications; and Ana Miranda, Senior Manager Investor Relations, all with Burger King Corporation. Additional information came from Philip G. Gayle and Zijun Luo, “Choosing between Order-of-Entry Assumptions in Empirical Entry Models: Evidence from Competition between Burger King and McDonald’s Restaurant Outlets,” The Journal of Industrial Economics 63:1 (March 2015): 129–51; Julie Jargon, “Burger King: The Assetless Company,” Wall Street Journal (August 2014): B1; Michael Stothard, “Burger King Swallows UP Quick Fast-Food Chain,” Financial Times (September 29, 2015): 18; Avinder Batra, “Burger King Drops Tradition for Indian Taste Buds, Gets Vegetarian Delicacies on Its Menu,” The Economic Times [New Delhi] (June 17, 2015): n.p.; “Seventh Time Lucky? Burger King,” The Economist, (August 30, 2014): 60; “Burger King Scouting for Locations in Major Siberian Cities,” Interfax: Russia & CIS Business and Financial Newswire (January 22, 2013): n.p.; Elaine Walker, “Burger King Goes for New Look,” Miami Herald (May 31, 2011): 1A–2A; Rebecca Ordish, “Testing the Franchising Waters in China,” The China Business Review 33:6 (November–December 2006): 30–3; “Burger King Plans to Double Restaurant Count in Russia in 2011,” Interfax, Ukraine Business Daily (Kiev) (November 17, 2010); “Negocio de Resturantes Aumenta 8% en Colombia,” Noticieras Financieras (December 22, 2010); Business Monitor International, Colombia Food & Drink Report Q1 2009 (London: Business Monitor International, 2009); Gemma Charles, “Burger King Adds First ‘Value Meal’ to Menu,” Marketing (February 11, 2009): 3; “The Burger King’s Brand Enters Colombia,” Business Wire (December 13, 2007): n.p.

2 Paul Glader, “GE Is Reassigning Veteran Rice to Job Focusing on Overseas Sales,” Wall Street Journal (November 9, 2010): B2.

3 Thomas Hutzschenreuter and Martin Hommes, “What Determines the Speed of New Product Area International Rollout?” Proceedings of the 54th Annual Meeting of the Academy of International Business (June 30–July 3, 2012) emphasize the further need to consider location when companies add new products to their portfolios.

4 Shige Makino, Takehiko Isobe, and Christine M. Chan, “Does Country Matter?” Strategic Management Journal 25 (2004): 1027–43.

5 Tony W. Tong, Todd M. Alessandri, Jeffrey J. Reuer, and Asda Chintakananda, “How Much Does Country Matter? An Analysis of Firms’ Growth Options,” Journal of International Business Studies 39:3 (2008): 387–405.

6 Peter Enderwick, “The Imperative of Global Environmental Scanning,” AIB Insights 11:1 (2011): 12–15.

7 David Gonzalez, “Fried Chicken Takes Flight, Happily Nesting in U.S.,” New York Times (September 20, 2002): A4; Joel Millman, “California City Fends Off Arrival of Mexican Supermarket,” Wall Street Journal (August 7, 2002): B1+ illustrates how Gigante, a Mexican supermarket chain has targeted U.S. cities with large Mexican populations.

8 Don E. Schultz, “China May Leapfrog the West in Marketing,” Marketing News (August 19, 2002): 8–9.

9 Amol Sharma, “In India, Subsidies Upend Car Sales,” Wall Street Journal (July 1, 2012): B1+.

10 Kejal Vyas, “Venezuelans Opt for Rum over Pricey Scotch,” Wall Street Journal (August 13, 2014): B4.

11 “Africa’s Middle Class Few and Far Between,” The Economist, October 24, 2015, 43-44 refers to data from Pew Research Centre that just 6 percent of Africans qualify as middle class.

12 C. Denbour, “Competition for Business Location: A Survey,” Journal of Industry, Competition and Trade, 8:2 (June 2008): 89–111.

13 Nicholas Casey, “In Mexico, Auto Plants Hit the Gas,” Wall Street Journal (November 20, 2012): A1+; “The Rise of Mexico,” The Economist (November 24, 2012): 14; Keith Bradsher, “Hello, Cambodia,” New York Times (April 9, 2013): Business 1+.

14 Anil Khurana, “Strategies for Global R&D,” Research Technology Management (March/April 2006): 48–59.

15 Michael Peel, “Bitter-Sweet Confections of Business in Nigeria,” Financial Times (November 20, 2002): 10; “Dairy Farming in Nigeria: Uncowed,” The Economist (June 6, 2015): 38.

16 G. Bruce Knecht, “Going the Wrong Way down a One-Way Street,” Wall Street Journal (March 18, 2002): A1.

17 Alfredo J. Mauri and Arvind V. Phatak, “Global Integration as Inter- Area Product Flows: The Internationalization of Ownership and Location Factors Influencing Product Flows across MNC Units,” Management International Review 41 (2001): 233–49.

18 Cynthia O’Murchu and Jan Cienski, “Multinationals Reap the Rewards,” Financial Times (December 2, 2010): 9. For a description of the EU financial support, see European Commission, “Research Structures: EU Financial Support,” (August 11, 2015) http://ec.europa. eu/research/infrastructure/index (accessed September 14, 2015).

19 Nicholas James Bailey, “MNE Bargaining Power Under Constrained Location Choices: Evidence from the Tourism Industry,” Proceedings of the 54th Annual Meeting of the Academy of International Business (June 30–July 3, 2012).

20 Colin Kirkpatrick and Kenichi Shimamoto, “The Effect of Environmental Regulation on the Locational Choice of Japanese Direct Investment,” Applied Economics 40:11 (June 2008): 1399; and George Z. Peng and Paul W. Beamish, “The Effect of National Corporate Responsibility Environment on Japanese Foreign Direct Investment,” Journal of Business Ethics 80:4 (July 2008): 677–95.

21 Hoon Park, “Determinants of Corruption: A Cross-National Analysis,” Multinational Business Review 11:2 (2003): 29–48.

22 Mario I. Kafouros, Peter J. Buckley, and Jeremy Clegg, “The Effects of Global Knowledge Reservoirs on the Productivity of Multinational Enterprises: The Role of International Depth and Breadth,” Research Policy 41:5 (June 2012): 848–61.

23 John D. Daniels and James A. Schweikart, “Political Risk, Assessment and Management of,” in IEBM Handbook of International Business, ed. Rosalie L. Tung (London: International Thomson Business Press, 1999): 502–14.

24 “Political Consultants: Risk Premiums,” The Economist (May 21, 2016): 61.

25 Robert Wright, “Continuity Planning is Strengthened,” Financial Times (March 20, 2012): Risk Management/Supply Chain 1.

26 Jing-Lin Duanmu, “State-Owned MNCs and Host Country Expropriation Risk: The Role of Home State Soft Power and Economic Gunboat Diplomacy,” Journal of International Business Studies 45:8 (2015): 1044–60.

27 Haig Simonian, “Venezuela to Pay Holcim $650M Compensation for Seized Assets,” Financial Times (September 14, 2010): 17.

28 This preference for liquidity is associated with options theory in the work of Robert C. Merton, Myron S. Scholes, and Fisher Black. For good, succinct coverage, see John Krainer, “The 1997 Nobel Prize in Economics,” FRBSF Economic Letter No. 98–05 (February 13, 1998).

29 Sharon Terlep and Mike Ramsey, “Disaster in Japan: Supply Shortages Stall Auto Makers,” Wall Street Journal (March 19, 2011): 9.

30 WHO, Public Health Mapping and GIS, Map Library, retrieved June 11, 2007, from gamapserver.who.int/mapLibrary/default.aspx. Also see World Health Organization, World Health Statistics 2012 (Geneva: World Health Organization, 2012) for statistics on communicable and noncommunicable diseases by country.

http://ec.europa.eu/research/infrastructure/index

2 Endnotes

and Michael Storper, “The Economic Geography of the Internet Age,” Journal of International Business Studies 32 (2001): 641–65.

45 Heeyon Kim, “Should Birds of a Feather Flock Together? Agglomeration by Nationality as a Constraint in International Expansion,” AIB Insights 15:3 (2015): 11–12; Exequiel Hernandez “Finding a Home Away from Home: Effects of Immigrants on Firms’ Foreign Location Choice and Performance,” Administrative Science Quarterly 59:1 (2014): 73–108.

46 Jedrzej George Frynas, Kamel Mellah, and Geoffrey Allen Pigman, “First Mover Advantages in International Business and Firm-Specific Political Resources,” Strategic Management Journal 27 (2006): 321–45; Makino, Isobe, and Chan, “Does Country Matter?”

47 Joel Millman, “PriceSmart to Restate Results Due to an Accounting Error,” Wall Street Journal (November 11, 2003): B9.

48 “Economic Data: Funny Numbers,” The Economist (October 24, 2015): 68.

49 “Maduro’s Muzzle,” The Economist (April 4, 2015): 32+. 50 Josh Zumbrun, “Sex, Drugs and a GDP Rethink,” Wall Street Journal

(June 9, 2014): 2; Liz Alderman, “Black Markets, Red-Light Districts and Measuring G.D.P.s in Europe,” New York Times (July 10, 2014): Business 1+.

51 “China: Bottoms Up,” The Economist (March 30, 2013): 43–4. 52 Andrea Cheng, “Limited Brands Defends Its International Plan,”

Market Watch (October 19, 2011): n.p. 53 Azam Ahmed, “Suicide Bombers Attack a Red Cross Compound in

Eastern Afghanistan,” New York Times (May 30, 2014): A6. 54 Moisés Naím, “The Five Wars of Globalization,” Foreign Policy

(January–February 2003): 29–36. 55 Benjamin Bader and Nicola Berg, “An Empirical Investigation of

Terrorism-Induced Stress on Expatriate Performance,” Proceedings of the 54th Annual Meeting of the Academy of International Business (June 30–July 3, 2012).

56 “Doing Business in Dangerous Places,” The Economist (August 14, 2004): 11.

57 Most of these variables are discussed in Igal Ayal and Jehiel Zif, “Marketing Expansion Strategies in Multinational Marketing,” Journal of Marketing (Spring 1979): 84–94.

58 Makino, Isobe, and Chan, “Does Country Matter?” 59 Susan Freeman, Kate Hutchings, and Sylvie Chetty, “Born-Global

and Culturally Proximate Markets,” Management International Review 52 (2012): 425–60.

60 Nikki Tait, “Dana Set to Sell UK-Based Components Arm,” Financial Times (November 29, 2000): 22.

61 Makino, Isobe, and Chan, “Does Country Matter?”; Bernard Simon, “Goodyear Sells Its Last Plantation,” Financial Times (December 1, 2004): 18.

62 See Jean J. Boddewyn, “Foreign and Domestic Divestment and Investment Decisions: Like or Unlike?” Journal of International Business Studies 14:3 (Winter 1983): 28; Michelle Haynes, Steve Thompson, and Mike Wright, “The Determinants of Corporate Divestment in the U.K.,” Journal of Industrial Organization 18 (2000): 1201–22; Jose Mata and Pedro Portugal, “Closure and Divestiture by Foreign Entrants: The Impact of Entry and Post-Entry Strategies,” Strategic Management Journal 21 (2000): 549–62.

63 Mexico Telecommunications Report (Second Quarter 2015). 64 International Monetary Fund, World Economic Outlook, September

2004 (Washington, DC: International Monetary Fund, 2004): 143–49. 65 Peter Hall, Cities in Civilization: Culture, Technology, and Urban

Order (London: Weidenfeld & Nicholson, 1998). 66 “A Sense of Place,” The Economist (October 27, 2012): Special Report

on Technology and Geography, 6. 67 David Aviel, “The Causes and Consequences of Public Attitudes

to Technology: A United States Analysis,” International Journal of Management 18 (2001): 166.

31 KPMG Services Ltd. (2015) “Doing Business in Africa in Sickness and Health: A Focus on the Business and Economic of Ebola,” http:// www.kpmg.com/Africa/en/IssuesAndInsights/Articles-Publications/ Documents/Business%201nd%20economics%20impact%20ofEbola. pdf (accessed August 3, 2016).

32 Julie Creswell and David Segal, “Companies Confront Zika Virus and Safety,” New York Times (February 15, 2016): B1–B2.

33 Samantha Pearson, Ralph Oliver, Robert Wright, “Business Take Stock as Zika Outbreak Spreads,” Financial Times February 16, 2016: 16.

34 Paul D. Ellis, “Does Psychic Distance Moderate the Market Size-Entry Sequence Relationship?” Journal of International Business Studies 39:3 (2008): 351–69; Katarina Blomkvist and Rian Drogendijk, “The Impact of Psychic Distance on Chinese Outward Foreign Direct Investment,” Management International Review 53:5(2013): 659–86; David W. Williams and Denis A. Grégoire, “Seeking Commonalities or Avoiding Differences? Re-conceptualizing Distance and its Effects on Internationalization Decisions,” Journal of International Business Studies 46:3 (2015): 253–84.

35 See Srilata Zaheer and Elaine Mosakowski, “The Dynamics of the Liability of Foreignness: A Global Study of Survival in Financial Services,” Strategic Management Journal 18 (1997): 439–64; Stewart R. Miller and Arvind Parkhe, “Is There a Liability of Foreignness in Global Banking? An Empirical Test of Banks’ X-Efficiency,” Strategic Management Journal 23 (2002): 55–75.

36 Mikhail V. Gratchev, “Making the Most of Cultural Differences,” Harvard Business Review (October 2001): 28–30.

37 John Cantwell, “Location and the Multinational Company,” Journal of International Business Studies 40:1 (January 2009): 35–41; Nandini Lahiri, “Geographic Distribution of R&D Activity: How Does It Affect Innovation Quality?” Academy of Management Journal 53:5 (2010): 1194–209; and Lilach Nachum and Sangyoung Song, “The MNE as a Portfolio: Interdependencies in MNE Growth Trajectory,” Journal of International Business Studies 42:3 (April 2011): 381–405.

38 Shige Makino and Eric W.K. Tsang, “Historical Ties and Foreign Direct Investment: An Exploratory Study,” Journal of International Business Studies 42:4 (May 2011): 545–57.

39 Khanh T. L. Tran, “Blockbuster Finds Success in Japan,” Wall Street Journal (August 19, 1998): A14; Cecile Rohwedder, “Blockbuster Hits Eject Button as Stores in Germany See Video-Rental Sales Sag,” Wall Street Journal (January 16, 1998): B9A.

40 Jon A. Doukas and Ozgur B. Kan, “Does Global Diversification Destroy Firm Values?” Journal of International Business Studies 37 (2006): 352–71.

41 B. Kazaz, M. Dada, and H. Moskowitz, “Global Production Planning under Exchange-Rate Uncertainty,” Management Science 51 (2005): 1101–09.

42 Mario I. Kafouros, Peter J. Buckley, and Jeremy Clegg, “The Effects of Global Knowledge Reservoirs on the Productivity of Multinational Enterprises: The Role of International Depth and Breadth,” Research Policy 41:5 (June 2012): 848–61.

43 Edward B. Flowers, “Oligopolistic Reactions in European and Canadian Direct Investment in the United States,” Journal of International Business Studies 7:2 (Fall–Winter 1976): 43–55; Frederick Knickerbocker, Oligopolistic Reaction and Multinational Enterprise (Cambridge, MA: Harvard University, Graduate School of Business, Division of Research, 1973); Keith Head, John C. Ries, and Thierry Mayer, “Revisiting Oligopolistic Reaction: Are Decisions on Foreign Direct Investment Strategic Complements?” Journal of Economics & Management Strategy 11:3 (2002): 453–72.

44 See J. Myles Shaver and Fredrick Flyer, “Agglomeration Economies, Firm Heterogeneity, and Foreign Direct Investment in the United States,” Strategic Management Journal 21 (2000): 1175–93; Philippe Martin and Gianmarco I. P. Ottaviano, “Growth and Agglomeration,” International Economic Review 42 (2001): 947–68; Edward E. Leamer

http://www.kpmg.com/Africa/en/IssuesAndInsights/Articles-Publications/Documents/Business%201nd%20economics%20impact%20ofEbola.pdf

Endnotes 3

68 Sources include the following: Nick Kostov, “Carrefour Sales Lifted by Latin America; French Retailer is Battling Slowing Growth in its Home Market and Weak Consumption in China,” Wall Street Journal (July 16, 2015): n.p.; Registration Document: 2014 Annual Financial Report, Carrefour; “Up the Right Aisle,” The Economist (February 16, 2013): 66–7; Nadya Masidover, “Carrefour Shows Signs of Stemming Home Slide,” Wall Street Journal Online (January 17, 2013): n.p.; Mimosa Spencer, “Carrefour Sells 42 Thai Stores to French Rival,” Wall Street Journal (November 16, 2010): B4; Scheherazade Daneshkhu, “Carrefour’s Upbeat Tone Brings Little Cheer,” Financial Times (December 2, 2010): 20; “Business Crossroads: Carrefour,” The Economist (March 17, 2007): 87; Elena Berton, “Carrefour Unveils Three-Year Growth Plan,” WWD 198:1 (July 1, 2009): 7; Matthew

Saltmarsh and Andrew E. Kramer, “French Retailer to Close Its Russian Stores,” New York Times (October 16, 2009): n.p.; Eirmalasare Bani, “Carrefour Gives Priority to Locally-Made Products,” Business Times [Malaysia] (November 9, 1998): 3; Michiyo Nakamoto, “Carrefour Sounds Alarm for Japan’s Ailing Retail Market,” Financial Times (December 8, 2000): 36; Rosabeth Moss Kanter, “Global Competitiveness Revisited,” Washington Quarterly (Spring 1999): 39–58; “Global Strategy—Why Tesco Will Beat Carrefour,” JRetail Week (April 6, 2001): 14; “Carrefour Beats Wal-Mart to Global Crown,” JRetail Week (December 15, 2000): 5; “Carrefour Aims to Win Global Retail Battle,” MMR (June 26, 2000): 60; “Hypermarkets for Britain,” The Economist (July 3, 1976): 77; and “French Retailer Abandons ‘Hypermarkets’ in U.S.,” New York Times (September 8, 1993): D4.

EndnotEs

1 Sources include the following: Case developed based on profiles of company management, company activities, and country profiles reported at www.export.gov; United States International Trade Administration; United States Census Bureau, Profile of U.S. Exporting Companies, at www.census.gov/foreign-trade/aip/ edbrel-0203.pdf; Small & Medium-Sized Exporting Companies: Statistical Overview, tse.export.gov/EDB/SelectReports. aspx?DATA=ExporterDB. SpinCent represents the reported experiences of active exporters as well as the observations expressed by their management. In particular, please visit www.export.gov/ articles/successstories/eg_success_story_021417.asp for an overview of the source documents.

2 United States International Trade Association, Export Fact Sheet April 2015,http://www.trade.gov/press/press-releases/2015/export- factsheet-060315.pdf (accessed July 15, 2015).

3 United States International Trade Association, Export Fact Sheet April 2015, http://www.trade.gov/press/press-releases/2015/export- factsheet-060315.pdf (accessed July 15, 2015).

4 The Ex-Im Bank is the official export-credit agency of the United States. It helps create and maintain U.S. jobs by financing the sales of U.S. exports, primarily to emerging markets, providing loan guaran- tees, export-credit insurance, and direct loans.

5 “WTO Releases 2011 Trade and Tariff Data,” retrieved December 18, 2012, from www.wto.org/english/news_e/news12_e/stat_23oct12_e. htm. The composition and direction of trade flows continue changing. Export and import flows reflect the ongoing transformation of devel- oping economies into industrializing versions, emerging markets tapping developed countries for tools to continue doing so, and developed countries looking to their developing counterparts for competitively priced goods and services. For instance, emerging markets increasingly drive the growth of Irish food and drink exports: during 2011, Ireland’s exports to China rose by 47 percent, South Africa by 43 percent, Nigeria by 38 percent, and Russia by 30 percent. Likewise, U.S. companies continued expanding markets and now trade with 233 countries and territories. Also, as Ireland has experi- enced, the United States saw increasing trade involving companies in Brazil, Chile, Australia, Colombia, Saudi Arabia, and Nigeria.

6 Indeed, the United States saw the value of its total exports grow 21 percent and total imports 22.7 percent in 2010. The headcount for identified exporters rose 6 percent that year compared to 2009, climbing to 293,000. The roll of importers also expanded, from 179,800 to 181,600.

These statistics underestimate the number of exporters and importers; the complexity of trade means that we cannot link all international shipments to specific firms. Many products, for example, are indirectly exported—embedded in other products that are exported via other firms—and tracking them is tough. The key takeaway, though, is straightforward: Exports and imports are a major part of the global economy, a critical feature of the nations’ economic performance, and a big strategic choice for companies of all sizes in countries worldwide.

7 Conversely, it helps to clarify what some misinterpret as a service export. Opening a Starbucks in Argentina, which is a service enter- prise, does not qualify as a service export. Rather, Starbuck’s for- eign ownership of some or all of the productive assets of the local operation qualifies it as a foreign direct investment. Likewise, if Starbucks USA does not invest any capital, instead collecting a royalty fee paid by the local owner, then the Argentinean outlet qualifies as a licensing agreement.

8 The International Student Economic Value Tool, retrieved April 10, 2015, from http://www.nafsa.org/Explore_International_Education/ Impact/Data_And_Statistics/The_International_Student_ Economic_Value_Tool/; also, see “International Students,” Institute

of International Education, http://www.iie.org/Research-and- Publications/Open-Doors/Data/International-Students; “International Students in the United States,” Project Atlas, http://www.iie.org/ Services/Project-Atlas/United-States/International-Students-In-US (accessed December 16, 2015).

9 Saeed Samiee and Peter Walters, “Segmenting Corporate Exporting Activities: Sporadic Versus Regular Exporters,” Journal of the Academy of Marketing Science 19:2 (1991): 93–104.

10 C. Katsikeas “Ongoing Export Motivation: Differences Between Regular and Sporadic Exporters,” International Marketing Review 14:2 (1996): 4–19.

11 John H. Dunning, “The Eclectic Paradigm of International Production: Some Empirical Tests,” Journal of International Business Studies (Spring 1988): 1–31.

12 “A Profile of U.S. Importing and Exporting Companies, 2009–2010.” We see the same shares for the big importers in the United States.

13 “A Profile of U.S. Importing and Exporting Companies, 2009–2010”; USITC, “Small and Medium-Sized Enterprises: Overview of Participation in U.S. Exports,” January 2010; USITC, “Small and Medium-Sized Enterprises: U.S. and EU Export Activities, and Barriers and Opportunities Experienced by U.S. Firms,” July 2010.

14 Ministry of Commerce, “Small and Medium-Size Enterprises,” People’s Republic of China, http://english.mofcom.gov.cn/aarticle/ zm/201205/20120508136044.html (accessed February 28, 2016); Hernan Roxas, Vai Lindsay, Nicholas Ashill, and Antong Victorio, “Institutional Analysis of Strategic Choice of Micro, Small, and Medium Enterprises: Development of a Conceptual Framework,” Singapore Management Review 30:2 (July–Dec 2008): 47; Nancy Ku, “SMEs Look to Non-Traditional Lenders,” China Brief, American Chamber of Commerce in China (March 2009).

15 “SME Sector: ‘We Must Follow China’s Example,” The Express Tribune, http://tribune.com.pk/story/757930/sme-sector-we-must-follow- chinas-example/ (accessed July 14, 2015).

16 S. Cavusgil and S. Zou, “Marketing Strategic Performance Relationship,” Journal of Marketing (1994); J. Meran and A. Moini, “Firm’s Export Behavior,” American Business Review (1999): 86.

17 D. Greenway, J. Gullstrand, and R. Kneller, “Exporting May Not Always Boost Firm Productivity,” Review of World Economics 4 (December 1, 2005): 561–82.

18 L. Yun, “Determinants of Export Intensity and FDI Presence: Case of Manufacturing Industries of Guangdong Province, the People’s Republic of China,” International Journal of Logistics Systems and Management (2006): 230–54.

19 B. Aw, M. Roberts, and D. Xu, “R&D Investment, Exporting, and Productivity Dynamics,” retrieved December 18, 2012, from www. econ.psu.edu/~mroberts/arxmarch2010.pdf.

20 D. Crick, “UK SMEs’ Motives for Internationalizing: Differences between Firms Employing Particular Overseas Market Servicing Strategies,” Journal of International Entrepreneurship (2007): 11–23 (accessed May 15, 2011).

21 Coffee & More, LLC, retrieved May 15, 2011, from www.export.gov/ articles/successstories/eg_success_story_022775.asp.

22 Certified Worldwide LLC, retrieved May 15, 2011, from www.export. gov/articles/successstories/eg_success_story_020902.asp.

23 “Direct vs. Indirect Exporting,” http://onlinefx.westernunion.com/ business/learning-center/import-and-export/direct-vs-indirect- exporting/ (accessed July 14, 2015).

24 “Exporting Is Good For Your Bottom Line,” www.trade.gov/cs/fact- sheet.asp (accessed September 14, 2014); A. Bernard and B. Jensen, “Exceptional Exporter Performance: Cause, Effect, or Both?” retrieved December 18, 2012, from www.nber.org/papers/w6272.

25 USITC, “Small and Medium-Sized Enterprises: Overview of Participation in U.S. Exports,” January 2010; USITC, “Small and

http://www.export.gov

http://www.census.gov/foreign-trade/aip/edbrel-0203.pdf

http://www.export.gov/articles/successstories/eg_success_story_021417.asp

http://www.trade.gov/press/press-releases/2015/export-factsheet-060315.pdf

http://www.wto.org/english/news_e/news12_e/stat_23oct12_e.htm

http://www.nafsa.org/Explore_International_Education/Impact/Data_And_Statistics/The_International_Student_Economic_Value_Tool/

http://www.iie.org/Research-and-Publications/Open-Doors/Data/International-Students

http://www.iie.org/Services/Project-Atlas/United-States/International-Students-In-US

http://english.mofcom.gov.cn/aarticle/zm/201205/20120508136044.html

http://tribune.com.pk/story/757930/sme-sector-we-must-follow-chinas-example/

http://www.econ.psu.edu/~mroberts/arxmarch2010.pdf

http://www.export.gov/articles/successstories/eg_success_story_022775.asp

http://www.export.gov/articles/successstories/eg_success_story_020902.asp

http://onlinefx.westernunion.com/business/learning-center/import-and-export/direct-vs-indirectexporting/

http://www.trade.gov/cs/fact-sheet.asp

http://www.nber.org/papers/w6272

http://www.census.gov/foreign-trade/aip/edbrel-0203.pdf

http://www.export.gov/articles/successstories/eg_success_story_021417.asp

http://www.wto.org/english/news_e/news12_e/stat_23oct12_e.htm

http://www.nafsa.org/Explore_International_Education/Impact/Data_And_Statistics/The_International_Student_Economic_Value_Tool/

http://www.iie.org/Services/Project-Atlas/United-States/International-Students-In-US

http://english.mofcom.gov.cn/aarticle/zm/201205/20120508136044.html

http://www.export.gov/articles/successstories/eg_success_story_022775.asp

http://www.export.gov/articles/successstories/eg_success_story_020902.asp

http://onlinefx.westernunion.com/business/learning-center/import-and-export/direct-vs-indirectexporting/

2 Endnotes

39 “Zady Takes Socially Conscious Fashion Global with Pitney Bowes’ Borderfree,” Pitney Bowes, retrieved July 31, 2015, from http://news. pb.com/article_display.cfm?article_id=5632.

40 Evertek Computer Corp., retrieved May 15, 2011, from www.export. gov/articles/successstories/eg_success_story_021490.asp.

41 Ibid, Evertek. 42 Ibid, Evertek. 43 “A Profile of U.S. Importing and Exporting Companies, 2009 – 2010,”

U.S. Department of Commerce, retrieved April 24, 2013, from www.census.gov/foreign-trade/Press-Release/edb/2010/edbrel.pdf.

44 Daniel Sullivan and Alan Bauerschmidt, “Incremental Internationalization: A Test of Johanson and Vahlne’s Thesis,” Management International Review (1990): 19–30.

45 Some folks object to the abrasives, flavors, tartar-control agents, and bleaches found in mass-market toothpaste.

46 Mark Stein, “Export Opportunities Aren’t Just for the Big Guys,” New York Times (March 24, 2005): C1.

47 Vellus Products, retrieved May 15, 2011, from www.export.gov/ articles/successstories/eg_main_020763.asp.

48 Adapted from A Basic Guide to Exporting, 10th edition (Washington, DC: Commerce Dept., International Trade Administration, 2011).

49 If overwhelmed, a direct exporter can offload sales and distribution activity to in-country agents and distributors. For example, in the case of SpinCent, its CEO analyzed markets, assessed industries, and prepped his company. But, he then traveled overseas and sought, screened, and hired trustworthy distributors to supervise sales in Asian markets.

50 Mark Stein, “Export Opportunities Aren’t Just for the Big Guys,” New York Times (March 24, 2005): C1.

51 Similar situations exist with respect to selling to domestic buyers who represent foreign end users or customers. MNEs, general con- tractors, foreign trading companies, foreign governments, and for- eign distributors and retailers purchase goods that they then send to overseas markets. These buyers either need a product or see demand for it in foreign markets, so they buy it here and ship it there.

52 In 2007, for example, an estimated 85 percent of foreign sales by large firms were conducted through foreign affiliates of U.S. firms, versus approximately 16 percent of foreign sales conducted via direct exports. Source: “Small and Medium-Sized Enterprises: Overview of Participation in U.S. Exports.”

53 “Small and Medium-Sized Enterprises: Characteristics and Performance,” United States International Trade Commission, Investigation No. 332-510, USITC Publication 4189, November 2010.

54 Jiang Jingjing, “Walmart’s China Inventory to Hit US $18B this Year,” China Business Weekly, retrieved November 29, 2004, from www. chinadaily.com.cn/english/doc/2004–11/29/content_395728.htm.

55 Anna Thomas and Susan Bridgewater, “Internet and Exporting: Determinants of Success in Virtual Export Channels,” International Marketing Review 21:4 (2004): 393.

56 Merlin Bettina, “Internet Marketing in Exports—A Useful Tool for Small Businesses,” Small Enterprise Development (December 2004): 38.

57 Profile of Analytical Graphics, Inc. at export.gov, retrieved Saturday, December 15, 2012, from export.gov/articles/successstories/eg_ main_033668.asp.

58 “Municipal Solid Waste Generation, Recycling and Disposal in the United States; Tables and figures for 2012,” U.S. EPA, February 2014, Tables 12–14, https://www.epa.gov/sites/production/files/2015- 09/documents/2012_msw_fs.pdf; “Basel Conference Addresses Electronic Wastes Challenge,” United Nations Environment Programme (UNEP), November 27, 2006, http://www.unep.org/ Documents.Multilingual/Default.asp?DocumentID=485&ArticleID =5431&l=en; “Electronics Waste Management in the United States Through 2009,” U.S. EPA, May 2011, EPA 530-R-11-002, http://www. epa.gov/wastes/conserve/materials/ecycling/docs/fullbaselinere- port2011.pdf; J. Laurie Flynn, “Poor Nations Are Littered with Old PC’s, Report Says,” New York Times (October 24, 2005): C2.

Medium-Sized Enterprises: U.S. and EU Export Activities, and Barriers and Opportunities Experienced by U.S. Firms,” July 2010.

26 Elena Golovko and Giovanni Valentini, “Exploring the Complementarity Between Innovation and Export for SME’s Growth,” Journal of International Business Studies 42 (2011): 362–80.

27 Domes International, retrieved May 15, 2011, from www.export.gov/ articles/successstories/eg_success_story_021027.asp.

28 In the aftermath of the global financial crisis, national unemployment hit a high of 10.6 percent in the United States. In Greene County, Tennessee, it soared to 17.9 percent. Jarden Zinc Products, headquar- tered there, makes solid zinc strips and zinc-based products used in coinage, automotive and electronic applications, building materials, rain goods, plumbing hardware, and cathodic protection products. Anxiety about sustaining sales moved managers to look to export- ing. Scanning global markets identified an opportunity in a call for bids by the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines. After several months of effort, BSP awarded the coin- age contract to Jarden Zinc, which enabled the SME to retain jobs that had been at risk, recall over 20 employees from earlier layoffs, and create 15 new jobs. Explained its vice president of coinage sales, “Having a global presence has been essential in Jarden’s growth. The diversity of the opportunities abroad has provided us with the ability to prosper even during challenging economic times in the U.S. domestic market.” See “Jarden Zinc Products of Tennessee,” retrieved December 17, 2012, from export.gov/articles/successstories/ eg_main_035140.asp.

29 “Hey Big Spenders,” The World in 2012, The Economist, retrieved December 22, 2012, from www.economist.com/theworldin/2012.

30 “Global Development Horizons 2011—Multipolarity: The New Global Economy,” The World Bank, retrieved May 30, 2011, http://siteresources.worldbank.org/INTGDH/Resources/GDH_ CompleteReport2011.pdf.

31 Hans Gemunden, “Success Factors of Export Marketing: A Meta- Analytic Critique of the Empirical Studies,” in New Perspectives on International Marketing, ed. S. Paliwoda (London: Routledge, 1991): 33–62; Julia Armario, David Ruiz, and Enrique Armario, “Market Orientation and Internationalization in Small and Medium-Sized Enterprises,” Journal of Small Business Management (October 2008): 485.

32 Jan Johanson and Jan-Erik Vahlne, “The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments,” Journal of International Business Studies (1977): 23–32; Daniel Sullivan and Alan Bauerschmidt, “Incremental Internationalization: A Test of Johanson and Vahlne’s Thesis,” MIR: Management International Review (1990): 19–30; Daniel Sullivan, “Measuring the Degree of Internationalization of a Firm,” Journal of International Business Studies (1994): 325–42.

33 “Schumpeter: The Case against Globaloney,” The Economist (April 23, 2011): 72.

34 Profile of Analytical Graphics, Inc. at export.gov, retrieved December 15, 2012, from export.gov/articles/successstories/eg_main_033668.asp.

35 Paul Westhead, Mike Wright, and Deniz Ucbasaran, “International Market Selection Strategies Selected by ‘Micro’ and ‘Small’ Firms,” Omega (February 2002): 51; Daniel Sullivan and Alan Bauerschmidt, “Incremental Internationalization: A Test of Johanson and Vahlne’s Thesis,” Management International Review (1990): 19–30.

36 McKinsey & Co. (1993), “Emerging Exporters: Australia’s High Value-added Manufacturing Exporters,” Melbourne: Australian Manufacturing Council, retrieved May 17, 2011, from catalogue.nla. gov.au/Record/2621131.

37 Examples cited in T. Koed Madsen and P. Servais, “The Internationalization of Born Globals: An Evolutionary Process?” International Business Review (1997): 561–83.

38 O. Moen, R. Sorbeim, and T. Erikson. “Born Global Firms and Informal Investors: Examining Investor Characteristics,” Journal of Small Business Management (October 2008): 536.

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Endnotes 3

59 “Africa Waste Trade,” retrieved May 4, 2011, from www1.american. edu/TED/oauwaste.htm; Estimates for developed economies taken from Hazardous Waste Disposal, www.uos.harvard.edu/ehs/envi- ronmental/hw_faq_answers.shtml; Leslie Kaufman, “A Green Way to Dump Low-Tech Electronics,” New York Times (June 30, 2009).

60 Helen Baulch, “Error: Dumping Does Not Compute,” Alternatives Journal (Summer 2002): 2.

61 “Electronic Waste in Guiyu” Wikipedia, retrieved December 22, 2012, from en.wikipedia.org/wiki/Electronic_waste_in_Guiyu.

62 Elisabeth Rosenthal, “Recycled Battery Lead Puts Mexicans in Danger,” NYTimes.com, retrieved December 23, 2012, from www.nytimes.com/2011/12/09/science/earth/recycled-battery-lead- puts-mexicans-in-danger.html?pagewanted=all&_r=0.

63 Reported by Karl Schoenberger, “E-Waste Ignored in India,” Mercury News, retrieved May 4, 2011, from www.ban.org/ban_news/ewaste_ ignored_031228.html.

64 Matthew Khan, “Environmental and Urban Economics: October 2005,” retrieved February 25, 2013, from greeneconomics.blogspot. com/2005_10_01_archive.html.

65 “After Dump, What Happens to Electronic Waste?” NPR, retrieved April 19, 2011, from www.npr.org/2010/12/21/132204954/ after-dump-what-happens-to-electronic-waste.

66 Michelle Castillo, “Electronic Waste: Where Does It Go and What Happens To It?” TIME.com, retrieved February 25, 2013, from techland.time.com/2011/01/14/ electronic-waste-where-does-it-go-and-what-happens-to-it/.

67 Elisabeth Rosenthal, “Recycled Battery Lead Puts Mexicans in Danger,” NYTimes.com, retrieved February 25, 2013, from www. nytimes.com/2011/12/09/science/earth/recycled-battery-lead-puts- mexicans-in-danger.html?pagewanted=all&_r=0.

68 Helen Baulch, “Error: Dumping Does Not Compute,” Alternatives Journal (Summer 2002): 2.

69 “The Digital Dump: Exporting Reuse and Abuse to Africa,” Basel Action Network, retrieved May 4, 2011, from www.ban.org/ banreports/10-24-05/index.htm.

70 Basel Action Network, retrieved May 5, 2007, from www.ban.org/ index.html; Flynn, “Poor Nations Littered with Old PCs.”

71 “E-Waste Importers,” Hazardous Waste Superfund Week (December 23, 2002).

72 “Where Does E-Waste End Up?” retrieved May 4, 2011, from www.greenpeace.org/international/campaigns/toxics/ electronics/where-does-e-waste-end-up; John Vidal, “Toxic ‘E-Waste’ Dumped in Poor Nations, Says United Nations,” The Guardian (December 14, 2013): Global Development,, http:// www.theguardian.com/global-development/2013/dec/14/ toxic-ewaste-illegal-dumping-developing-countries.

73 Kaufman, “A Green Way to Dump Low-Tech Electronics”; “The Politics of E-waste: A Cadmium Lining,” The Economist (January 26, 2013): 56.

74 See “Secretariat of the Basel Convention, Competent Authorities.” By definition, a “Competent Authority” means one governmental authority designated by a Party to be responsible within such geo- graphic areas as the Party may think fit, for receiving the notification of a transboundary movement of hazardous wastes or other wastes, and any information related to it, and for responding to such a notification. “Basel Convention Home Page,” http://www.basel.int/ (accessed December 17, 2015). Also, see en.wikipedia.org/wiki/Basel_ Convention. Possible Discussion Question: The export of e-waste to recycling facilities worldwide seems like a win for the world given that recycling is always considered a beneficial activity. However, there are serious costs. Identify some benefits and costs of recycling U.S. e-waste in other countries. Then decide whether the benefits exceed the costs.

75 Andrew Bernard, Bradford Jensen, and Peter Schott, “Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods,” NBER Working Paper No. 11404, June 2005.

76 Ibid, Export Fact Sheet.

77 Andrew Bernard, Bradford Jensen, and Peter Schott, “Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods,” NBER Working Paper No. 11404, June 2005.

78 Pascal-Emmanuel Gobry, “Asian Scalpers Are Wiping Out Apple’s Supply Of iPad 2s In New York,” retrieved May 31, 2011, from www.businessinsider.com/ipad-scalpers-new-york-2011-3.

79 Small & Medium-Sized Exporting Companies: Statistical Overview, tse. export.gov/EDB/SelectReports.aspx?DATA=ExporterDB.

80 L. Leonidou, “An Analysis of the Export Barriers Hindering Small Business Export Development,” Journal of Small Business Management (2004): 279–302; Martina Battisti and Martin Perry, “Creating Opportunity for Small-Firm Exporters through Regional Free Trade Agreements: A Strategic Perspective from New Zealand,” Australasian Journal of Regional Studies (2008): 275–86.

81 OECD, OECD-APEC paper on removing barriers to SME access to international markets (2006). See also Alan Bauerschmidt, Daniel Sullivan, and Kate Gillespie, “Common Factors Underlying Barriers to Export Studies in the U.S. Paper Industry,” Journal of International Business Studies, 16:3 (1985): 111–23.

82 “Congress Pushes More Export Financing for Small Business,” Associated Press (September 5, 2006).

83 Technically, a trade credit is an agreement where a customer can purchase goods on account (without paying cash), paying the supplier at a later date. Usually when the goods are delivered, a trade credit is given for a specific number of days—30, 60, or 90.

84 Source: The United States International Trade Commission asked 3,500 U.S. large and SME in manufacturing and service firms if they had ever exported or considered exporting (the latter point was included to determine if a firm had perceived insurmountable barriers). Firms were then asked whether they had encountered the various impedi- ments. If yes, they then rated the impediment’s severity on a scale of 1 to 5, with 1 representing ‘none,’ 3, ‘some,’ and 5, ‘major.’ See “Small and Medium-Sized Enterprises: Characteristics and Performance,” United States International Trade Commission, Investigation No. 332-510, November 2010.

85 John Kerr, “Exporters Need to Connect with Customers,” Logistics Management (March 1, 2006): 41.

86 C. O’Gorman, (2000), “Strategy and the Small Firm,” in Enterprise and Small Business: Principles, Practice, and Policy, eds. S. Carter and D. Jones-Evans (Harlow: Prentice Hall, FT Pearson).

87 “A Profile of U.S. Importing and Exporting Companies, 2009–2010.” 88 Spectra Colors of NJ, retrieved May 15, 2011, from www.export.gov/

articles/successstories/eg_success_story_023038.asp. 89 Banerjee, “REACH-Like Regulations Enacted Globally: A Regulatory

World Tour,” ICIS Chemical Business, May 26, 2010 (accessed June 25, 2010). For more detailed information about REACH, see European Chemicals Agency Helsinki, “About Reach,” (accessed June 25, 2010); European Commission, Enterprise and Industry, Chemicals, “REACH: Registration, Evaluation, Authorization and Restriction of Chemicals,” (accessed June 25, 2010).

90 U.S. Trade Representative, “2010 National Trade Estimate Report on Foreign Trade Barriers,” 2010.

91 U.S. Department of Commerce, International Trade Administration, “Country Commercial Guide: Thailand,” February 18, 2008, 64.

92 U.S. Trade Representative, “2010 National Trade Estimate Report on Foreign Trade Barriers,” 2010.

93 WTO, “Trade Policy Review: India,” April 18, 2007, 147. 94 “China to Amazon Re Kindle Store: Not So Fast,” DBW, retrieved

December 17, 2012, from www.digitalbookworld.com/2012/ china-to-amazon-re-kindle-store-not-so-fast/.

95 Kerr, “Exporters Need to Connect with Customers.” 96 “Schumpeter: The Case against Globaloney,” The Economist (April 20,

2011): 52. 97 “Exporters Hit by Air Freight Restrictions” Telegraph, retrieved

December 21, 2012, from www.telegraph.co.uk/finance/yourbusiness/ 8860814/Exporters-hit-by-air-freight-restrictions.html.

http://www.uos.harvard.edu/ehs/environmental/hw_faq_answers.shtml

http://www.nytimes.com/2011/12/09/science/earth/recycled-battery-lead-puts-mexicans-in-danger.html?pagewanted=all&_r=0

http://www.ban.org/ban_news/ewaste_ignored_031228.html

http://www.npr.org/2010/12/21/132204954/after-dump-what-happens-to-electronic-waste

http://www.nytimes.com/2011/12/09/science/earth/recycled-battery-lead-puts-mexicans-in-danger.html?pagewanted=all&_r=0

http://www.ban.org/banreports/10-24-05/index.htm

http://www.ban.org/index.html

http://www.greenpeace.org/international/campaigns/toxics/electronics/where-does-e-waste-end-up

http://www.theguardian.com/global-development/2013/dec/14/toxic-ewaste-illegal-dumping-developing-countries

http://www.basel.int/

http://www.businessinsider.com/ipad-scalpers-new-york-2011-3

http://www.export.gov/articles/successstories/eg_success_story_023038.asp

http://www.digitalbookworld.com/2012/china-to-amazon-re-kindle-store-not-so-fast/

http://www.telegraph.co.uk/finance/yourbusiness/8860814/Exporters-hit-by-air-freight-restrictions.html

http://www.ban.org/ban_news/ewaste_ignored_031228.html

http://www.npr.org/2010/12/21/132204954/after-dump-what-happens-to-electronic-waste

http://www.ban.org/banreports/10-24-05/index.htm

http://www.ban.org/index.html

http://www.greenpeace.org/international/campaigns/toxics/electronics/where-does-e-waste-end-up

http://www.export.gov/articles/successstories/eg_success_story_023038.asp

http://www.digitalbookworld.com/2012/china-to-amazon-re-kindle-store-not-so-fast/

http://www.telegraph.co.uk/finance/yourbusiness/8860814/Exporters-hit-by-air-freight-restrictions.html

http://www1.american.edu/TED/oauwaste.htm

4 Endnotes

98 “Supply Chain Security Programs and Issues, World Shipping Council,” http://www.worldshipping.org/industry-issues/security/ cargo-and-the-supply-chain/supply-chain-security-programs-and- issues (accessed July 17, 2015).

99 “A ‘Green Zone’ for Firms in Ciudad Juárez: Business on the Bloody Border,” The Economist, retrieved December 22, 2012, from www.economist.com/node/21540262; “Canada and the United States: The Border Two-Step,” The Economist, retrieved December 22, 2012, from www.economist.com/node/21541421.

100 Mandatory when when a shipment contains merchandise, regardless of value, that requires an export license or permit; is subject to the International Traffic in Arms Regulations; contains rough diamonds; or is being sent to Iran, North Korea, Sudan, or Syria.

101 Incoterms are the rules for the division of cost and risk in interna- tional sales transactions. They set three-letter standard trade terms that are commonly used in international sales contracts that help exporters avoid disputes with customers by specifying each party’s responsibilities.

102 Certainly, many could boost profits and improve productivity by entering new markets. Presently about 60 percent of U.S. SME exporters sell to customers in only one foreign market, whereas more than half of big exporters recorded sales to five or more foreign markets. A tiny share of exporters, just 0.4 percent, ship goods to 50 or more countries. We see similar characteristics on the import side. Sixty-one percent of U.S. SMEs import from one foreign mar- ket, while 57 percent of large firms import from five or more foreign markets. Likewise, fewer than 0.1 percent of importing companies traded with 50 or more countries.

103 International Bank/World Bank, “Doing Business in 2007.” 104 Ibid. 105 This, as we saw in Chapter 7, often proves controversial as well as

violates policies and programs of the WTO. 106 For instance, Analytical Graphics, Commercial Service supports its

Asian market expansion, setting up meetings with potential resellers in Japan and South Korea. See Analytical Graphics, retrieved January 15, 2013, from export.gov/articles/successstories/eg_main_033668. asp.

107 “Garmin Marine Navigation GPS Units Navigate Turkish Customs,” retrieved January 15, 2013, from export.gov/articles/successstories/ eg_main_046466.asp.

108 Japan, for instance, relies on several offices, such as the Small and Medium Enterprise Agency, the Agency of Industrial Science and Technology, and the Ministry of International Trade and Industry. The latter, often referred to as MITI, develops policies and provides assis- tance to help Japanese companies trade.

109 Lee Li, “Joint Effects of Factors Affecting Exchanges Between Exporters and Their Foreign Intermediaries: An Exploratory Study,” Journal of Business & Industrial Marketing (February–March 2003): 162–78. Trade intermediaries help navigate complex homeland secu- rity concerns. Increasing government regulation regarding what can be shipped where and to whom has prolonged border delays.

110 See U.S. Department of Commerce, Guide to Exporting, 1998, p. 20; Philip MacDonald, Practical Exporting and Importing, 2nd edition (New York: Ronald Press, 1959): 30–40.

111 Courtney Fingar, “ABCs of EMCs,” The Federation of International Trade Associations (July 2001); Nelson T. Joyner, “How to Find and Use an Export Management Company,” retrieved May 9, 2007, from www.fita.org/aotm/0499.html.

112 In 1982, the United States enacted the Export Trading Company Act, which relaxed some antitrust regulations that had restricted some foreign market behaviors. Groups of direct competitors, once prohib- ited, were now allowed to form ETCs to develop exports jointly with- out fear of antitrust action. Dutch, Japanese, and British competitors had long done so profitably. Free of legal barriers that had prevented

joining forces with rivals, ETCs boost the export competitiveness of U.S. companies.

113 U.S. Department of Commerce, Guide to Exporting (Washington, DC: U.S. Government Printing Office, 1998): 63.

114 Certified Worldwide LLC, retrieved May 4, 2011, from www.export. gov/articles/successstories/eg_success_story_020902.asp.

115 Richard Armstrong, “The Top 40 3PLs 2010,” Logistics Quarterly Magazine (2011).

116 In principle, customs agents enforce the rules of trade for a par- ticular country by controlling the flow of goods moving in and out of it. In the United States, for example, the Bureau of Customs and Border Protection (CBP, formerly the U.S. Customs Service) of the Department of Homeland Security monitors imports and exports. The CBP assesses and collects duties, taxes, and fees on imported merchandise, enforces customs and related laws, and administers navigation laws and treaties. It also polices smuggling threats and protects the United States from threatening imports.

117 “Basic Question: To Export Yourself or to Hire Someone to Do It for You?” Business America (April 27, 1987): 14–17.

118 W. Chan Kim, and Renee Mauborgne, Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant (Harvard Business Review Press, 2015).

119 Quote from CEO Robert Allen, Coffee & More, LLC, retrieved May 15, 2011, from www.export.gov/articles/successstories/eg_suc- cess_story_022775.asp.

120 Profile of Analytical Graphics, Inc. at export.gov, retrieved December 15, 2012, from export.gov/articles/successstories/eg_main_033668.asp.

121 Benson Smith and Tony Rutigliano, Discover Your Sales Strengths (New York: Warner Business Books, 2003).

122 Julie Sloane, Justin Martin, and Alessandra Bianchi, “Small Companies That Play Big,” FSB Magazine (November 1, 2006), quoting Ram Iyer.

123 Justin Lahart, “For Small Businesses, Big World Beckons,” WSJ.com, retrieved January 27, 2011, from online.wsj.com/ article/SB10001424052748703951704576092010276714424. html?mod=WSJ_hp_MIDDLENexttoWhatsNewsFifth.

124 Gary Hamel, “What Matters Now: How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation (Wiley, 2012).

125 Javier Blas, “Nations Turn to Barter Deals to Secure Food,” Financial Times, retrieved March 11, 2009, from www.ft.com/cms/s/0/3e5c633c- ebdc-11dd-8838-0000779fd2ac.html; Dan West, “Countertrade—An Innovative Approach to Marketing,” retrieved May 15, 2007, from www.barternews.com/approach_marketing.htm. On a more exotic note, Pepsi-Cola, which has the marketing rights for all Stolichnaya Vodka in the United States, delivers syrup that is paid for with Stolichnaya Vodka. In addition, early on, Pepsi took delivery of 17 submarines, a cruiser, a frigate, and a destroyer from the Russian government in payment for Pepsi products. In turn, Pepsi sold its “fleet” of 20 naval vessels for scrap steel, thereby paying for the Pepsi products sent to the Soviet Union. V. S. Rama Rao, “Counter Trade,” retrieved May 23, 2011, from www.citeman.com/2390-counter-trade; “Zimbabwe Country Profile 2015: Desperation Leads to Russian Roulette,” The Africa Report, http://www.theafricareport.com/South/ zimbabwe-country-profile-2015-desperation-leads-to-russian- roulette.html (accessed December 18, 2015).

126 One can divide countertrade into two classes: barter, based on clearing arrangements used to avoid money-based exchange; and buybacks, offsets, and counter-purchases, which are used to impose reciprocal commitments between the various parties.

127 Dan West, “Countertrade—An Innovative Approach to Marketing,” retrieved March 12, 2009, from BarterNews.com; “Counter trade,” Wikipedia, retrieved December 20, 2012, from en.wikipedia.org/wiki/ Counter_trade.

http://www.worldshipping.org/industry-issues/security/cargo-and-the-supply-chain/supply-chain-security-programs-andissues

http://www.economist.com/node/21540262

http://www.economist.com/node/21541421

http://www.fita.org/aotm/0499.html

http://www.export.gov/articles/successstories/eg_success_story_020902.asp

http://www.export.gov/articles/successstories/eg_success_story_022775.asp

http://www.ft.com/cms/s/0/3e5c633cebdc-11dd-8838-0000779fd2ac.html

http://www.barternews.com/approach_marketing.htm

http://www.citeman.com/2390-counter-trade

http://www.theafricareport.com/South/zimbabwe-country-profile-2015-desperation-leads-to-russianroulette.html

http://www.worldshipping.org/industry-issues/security/cargo-and-the-supply-chain/supply-chain-security-programs-andissues

http://www.export.gov/articles/successstories/eg_success_story_020902.asp

http://www.theafricareport.com/South/zimbabwe-country-profile-2015-desperation-leads-to-russianroulette.html

Endnotes 5

128 Sources include the following:: “Borderfree, Global Ecommerce Solutions for Retailers,” http://www.borderfree.com/ (accessed September 8, 2015); “eMarketer Q&A with Mary Ransom of Borderfree,” http://www.emarketer.com/corporate/clients/border- free (accessed September 12, 2015); “About Borderfree | Global Ecommerce Solution for Enterprise Companies,” http://www.bor- derfree.com/about (accessed September 8, 2015); “Investor Relations | Investor Relations | Pitney Bowes,” www.investorrelations.pit- neybowes.com/phoenix.zhtml?c=83377&p=irol-irhome (accessed September 9, 2015).

129 Possible Responses 1. Borderfree is an e-commerce technology and services platform that

enables U.S. retailers to sell seamlessly to over 200 countries and territories and transact in more than 70 currencies.

2. Borderfree partners with many of the world’s top retail brands so they can reach new international markets more easily. Its software solution includes tools to create localized website experiences— country-specific marketing messages, pricing strategies, inter- national checkouts with translation, local payment options, and fully landed delivery quotes. On the services side, they manage international fraud, customs clearance, and all global logistics.

http://www.borderfree.com/

http://www.emarketer.com/corporate/clients/borderfree

http://www.borderfree.com/about

http://www.investorrelations.pitneybowes.com/phoenix.zhtml?c=83377&p=irol-irhome

EndnotEs

1 Sources include the following: J. Pla-Barber, F. León-Darder, and C. Villar, “The Internationalization of Soft-Services: Entry Modes and Main Determinants in the Spanish Hotel Industry,” Service Business 5:2 (2011): 139–154; M. M. Massot, L. M. Vegas, and M. A. García, “Sol Meliá: Un Nuevo Paradigma en la Gestión Hotelera,” in Multinacionales Españolas II: Nuevas Experiencias de Internacionalización, ed. J. J. Durán (Madrid: Pirámide, 1997): 73–110; www.meliahotelsinternational.com (accessed April 19, 2013); “Sol Meliá Absorbe la Cadena TRYP en una Operación Valorada en 72,500 Millones,” Cinco Días (August 22, 2001) at www.cincodías. com (accessed January 5, 2013); “Sol Meliá Compra una Cadena en Alemania por 16.5 Millones,” Cinco Días (November 9, 2007) at www.cincodias.com (accessed February 7, 2013); “La Cadena Sol Meliá Vende la Marca TRYP al Grupo Hotelero Americano Wyndham: La Operación, Cifrada en unos 32 Millones, No Implica la Transacción de Establecimientos,” Diario de Mallorca (June 9, 2010) at www.diariodemallorca.es (accessed March 21, 2013); F. Contractor and S. Kundu, “Modal Choice in a World of Alliances: Analyzing Organizational Forms in International Hotel Sector,” Journal of International Business Studies 29:2 (1998): 325–57; F. León-Darder, C. Villar, and J. Pla-Barber, “Entry Mode Choice in the Internationalization of the Hotel Industry: A Holistic Approach,” Service Industries Journal 31:1 (2011): 107–22; “La Primera Aventura Británica de Escarrer – Meliá White House, un Hotel en Londres ‘Made in Spain’,” Actualidad Económica (September 23, 2002) at www.actualidad-economica.com (accessed February 7, 2013); “Sol Meliá Renueva su Portfolio en el Exterior con Siete Altas y Ocho Bajas,” Alimarket (March 1, 2008) at www.alimarket.es (accessed January 19, 2013); “Sol MeliáControla Ya el 32% del Mercado Turístico Cubano,” El País (May 16, 2005) at www.elpais.com (accessed March 21, 2013); “Sol Meliá Busca una Alianza para Crecer en EE.UU,” La Vanguardia (September 18, 1999) at www.lavanguardia. es (accessed February 7, 2013); “Sol Meliá, Barceló y Blau Hotels Entrarán en China con la Gestión de Hoteles en Shanghai,” Cinco Días (May 5, 1999) at www.cincodias.com (accessed January 5, 2013); “Sol Meliá, Barceló y Riu Descartan Nuevas Inversiones en Asia a Corto Plazo por la ‘Complejidad’ del Mercado,” Europa Press (February 6, 2006) at www.europapress.es (accessed January 5, 2013); “Barceló Abandona la Gestión de su Primer Hotel en China,” Cinco Días (January 5, 2001) at www.cincodias.com (accessed January 5, 2013); “Sol Meliá Entra en China de la Mano de un Grupo Local y otro de Cuba,” Cinco Días (July 10, 2010) at www. cincodias.com (accessed January 5, 2013); “Meliá Apuesta por la Internacionalización en 2013 Para Reforzar su Liderazgo y Hacer Frente al Entorno,” at www.meliahotelsinternational.com/es/sala-de- prensa/30012013/melia-apuesta-internacionalizacion-2013-reforzar- su-liderazgo-hacer-frente (accessed April 19, 2013); “Meliá Hotels International Anuncia en Kenia su Interés de Expansión en África Subsahariana,” at www.meliahotelsinternational.com/es/sala-de- prensa/26092012/melia-hotels-international-anuncia-kenia-su- interes-expansion-africa; Joseph A. Mann, Jr. “Meliá Expanding in the Americas,” Miami Herald (May 4, 2015): 13G.

2 Fidel León-Darder is Associate Professor and Cristina Villar is Assistant Professor, both in the Department of Management, Universitat de València (Spain).

3 This should not imply that entry mode choice is unimportant inasmuch as it may influence changes in operating modes because of being a poor choice or because it leads to replication in other locales. See Jean- François Hennart and Arjen Hl Slangen, “Yes, We Really Do Need More Entry Mode Studies! A Commentary on Shaver,” Journal of International Business Studies 46:1 (2015): 114–22.

4 “Looking to the Future,” Business Europe 50:18 (October 1, 2010): 7; Birsen Altayli, “Turkish Auto Production and Exports to Hit Record

– Association,” Reuters (July 15, 2015), http://www.reuters.com/article/ turkey-autos-idUSL5N0ZT0MD20150713#qEQKTil3mtCseYDl.97, (accessed December 4, 2015).

5 John Griffiths, “VW May Build Beetle in Europe to Meet Demand,” Financial Times (November 11, 1998): 17.

6 Peter Marsh, “The World’s Wash Day,” Financial Times (April 29, 2002): 6.

7 “India–EU FTA to Include Tariff Reduction on Import of Vehicles,” Accord Fintech [Mumbai] (May 20, 2011).

8 Jill Gabrielle Klein, “Us versus Them, or Us versus Everyone? Delineating Consumer Aversion to Foreign Goods,” Journal of International Business Studies 33:2 (2002): 34563; and Jing Yang, “An Examination of Brand Equity Differences between Utilitarian and Hedonic Products,” International Journal of Marketing Studies 7:4 (2015): 42–50.

9 “‘Made in Australia’ Label Confuses Shoppers: Choice Survey,” Asia Pulse (May 18, 2011).

10 John S. Hulland, “The Effects of Country-of-Brand and Brand Name on Product Evaluation and Consideration: A Cross-Country Comparison,” Journal of International Consumer Marketing 11 (1999): 23–39; Ali Riza Apil and Erdener Kaynak, “Georgian Consumers’ Evaluation of Products Sourced from European Union Member Countries,” International Journal of Commerce and Management 20:2 (2010): 167–87.

11 Peter J. Lane, Jane E. Salk, and Marjorie A. Lyles, “Absorptive Capacity, Learning, and Performance in International Joint Ventures,” Strategic Management Journal 22 (2001): 1139–61.

12 Excellent overviews of the literature are Jean-François Hennart, “Transaction Cost Theory and International Business,” Journal of Retailing 86:3 (September 2010): 257–69; and Christian G. Asmussen, Torben Pedersen, Timothy M. Devinney, and Laszlo Tihani, eds., Dynamics of Globalization: Location-Specific Advantages or Liability of Foreignness? (Wagon Lane, UK: Emerald Group Publishing, 2011), 45–54.

13 Internalization theory, or holding a monopoly control over certain information or other proprietary assets, builds on earlier market- imperfections work by Ronald H. Coase, “The Nature of the Firm,” Economica 4 (1937): 386–405. It has been noted by such writers as M. Casson, “The Theory of Foreign Direct Investment,” Discussion Paper No. 50 (Reading, UK: University of Reading International Investment and Business Studies, November 1980); Alan M. Rugman, Inside the Multinationals: The Economics of Internal Markets (New York: Columbia University Press, 1981); David J. Teece, “Transactions Cost Economics and the Multinational Enterprise,” Berkeley Business School International Business Working Paper Series No. IB-3 (1985); B. Kogut and U. Zander, “Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation,” Journal of International Business Studies 24:4 (1993): 625–45; Peter W. Liesch and Gary A. Knight, “Information Internalization and Hurdle Rates in Small and Medium Enterprise Internationalization,” Journal of International Business Studies 30:2 (1999): 383–96.

14 Eric M. Johnson, “Harnessing the Power of Partnerships,” Financial Times (October 8, 2004): Mastering Innovation, Section 4.

15 Paul Marer and Vincent Mabert, “GE Acquires and Restructures Tungsram: The First Six Years (1990–1995),” OECD, Trends and Policies in Privatization III: 1 (Paris: OECD, 1996): 149–85; and their unpublished 1999 revision, “GE’s Acquisition of Hungary’s Tungsram.”

16 Kalle Pajunen and Liang Fang, “Dialectical Tensions and Path Dependence in International Joint Venture Evolution and Termination,” Asia Pacific Journal of Management 30:2 (2013): 577–600.

17 Kathy Chu, “L’Occitane Joins Alibaba’s Tmall—French Skin-Care Brand Launches Store on Shopping Site in Move to Combat Unauthorized Sales,” Wall Street Journal (December 10, 2014): n.a.;

http://www.meliahotelsinternational.com

http://www.cincod�as.com

http://www.cincodias.com

http://www.diariodemallorca.es

http://www.actualidad-economica.com

http://www.alimarket.es

http://www.elpais.com

http://www.lavanguardia.es

http://www.cincodias.com

http://www.europapress.es

http://www.cincodias.com

http://www.meliahotelsinternational.com/es/sala-deprensa/30012013/melia-apuesta-internacionalizacion-2013-reforzarsu-liderazgo-hacer-frente

http://www.meliahotelsinternational.com/es/sala-deprensa/26092012/melia-hotels-international-anuncia-kenia-suinteres-expansion-africa

http://www.reuters.com/article/turkey-autos-idUSL5N0ZT0MD20150713#qEQKTil3mtCseYDl.97

http://www.cincod�as.com

http://www.lavanguardia.es

http://www.reuters.com/article/turkey-autos-idUSL5N0ZT0MD20150713#qEQKTil3mtCseYDl.97

2 Endnotes

and Iolanda D’Amato and Thanos Papadimitriou, “Legitimate vs. Illegitimate: The Luxury Supply Chain and Its Doppelganger,” International Journal of Retail & Distribution Management 41:11/12 (2013): 986–1007.

18 Stephen Magee, “Information and the MNC: An Appropriability Theory of Direct Foreign Investment,” in Jagdish N. Bhagwati, ed., The New International Economic Order (Cambridge, MA: MIT Press, 1977): 317–40; C. W. Hill, L. P. Hwang, and W. C. Kim, “An Eclectic Theory of the Choice on International Entry Mode,” Strategic Management Journal 11 (1990): 117–18; Ashish Arora and Andrea Fosfuri, “Wholly Owned Subsidiary versus Technology Licensing in the Worldwide Chemical Industry,” Journal of International Business Studies 31:4 (2000): 555–72.

19 Li Liu and Sajjad M. Jasimuddin, “Does Strategic Alliance Matter in Managing Innovation in China?” Journal of Applied Business Research 30:3 (2014): n.a.

20 Jack Ewing, “The Royal Family Business,” New York Times (December 4, 2013): B1+.

21 Zaheer Kahn, Oded Shenkar, and Yong Kyu Lew, “Knowledge Transfer from International Joint Ventures to Local Suppliers in a Developing Economy,” Journal of International Business Studies 46:6 (2015): 656–75; and Liliana Pérez-Nordtvedt, Debmalya Mukherjee, and Ben L. Kedia, “Cross-Border Learning, Technological Turbulence and Firm Performance,” Management International Review 55:1 (2014): 32–51.

22 Anne-Wil Harzing, “Acquisitions versus Greenfield Investments: International Strategy and Management of Entry Modes,” Strategic Management Journal 23:3 (2002): 211–27.

23 Jaideep Anand and Andrew Delios, “Absolute and Relative Resources as Determinants of International Acquisitions,” Strategic Management Journal 23:2 (2002): 119–34.

24 Sergery Filippov, “Innovation and R&D in Emerging Russian Multiantionals,” Economics, Management and Financial Markets, 6:1 (March 2011): 182–206.

25 Geoff Dyer, Francesco Guerrera, and Alexandra Harney, “Chinese Companies Make Plans to Join the Multinational Club,” Financial Times (June 23, 2005): 19.

26 “Beefed Up—The World’s Largest Meat Company is Brazilian, But Mostly Operates Abroad,” The Economist (September 24, 2011): Special Report on the World Economy, 16.

27 Two such indications are from studies by Alan Gregory, which is cited in Kate Burgess, “Acquisitions in U.S. ‘Disastrous’ for British Companies,” Financial Times (October 11, 2004): 18; and Ping Deng, “Absorptive Capacity and a Failed Cross-Border M&A,” Management Research Review 33:7 (2010): 673–82.

28 John Child, David Faulkner, and Robert Pitethly, The Management of International Acquisitions (Oxford: Oxford University Press, 2001); Peter Martin, “A Clash of Corporate Cultures,” Financial Times (June 2–3, 2001): Weekend section, xxiv.

29 “From Guard Shack to Global Giant,” The Economist (January 12, 2013): 55–6.

30 Rajesh Chakrabarti, Swasti Gupta-Mukherjee, and Narayanan Jayaraman, “Mars-Venus Marriages: Culture and Cross-Border M&A,” Journal of International Business Studies 40:2 (2009): 216–36; See also Mary Yoki Brannen and Mark F. Peterson, “Merging Without Alienating: Interventions Promoting Cross-Cultural Organization and Their Limitations,” Journal of International Business Studies 40:3 (2009): 468–89.

31 Gabriel Baffour Awuah, Amal Mohamed, “Impact of Globalization: The Ability of Less Developed Countries’ (LDCs’) Firms to Cope with Opportunities and Challenges,” European Business Review 23:1 (2011): 120–32; Rodney C. Shrader, “Collaboration and Performance in Foreign Markets: The Case of Young High-Technology Manufacturing Firms,” Academy of Management Journal 44:1 (2001): 45–60.

32 Rahul Jacob, “Hong Kong Banks on New Disney Park for Boost,” Financial Times (August 31, 2001): 6.

33 Paavo Ritala, “Coopetition Strategy—When Is It Successful? Empirical Evidence on Innovation and Market Performance,” British Journal of Management 23:3 (September 2012): 307–24.

34 Phred Dvorak and Scott Kilman, “BHP Roils Potash Cartel,” Wall Street Journal (August 25, 2010): 1.

35 John M. Connor, “Global Antitrust Prosecutions of Modern International Cartels,” Journal of Industry, Competition and Trade 4:3 (2004): 239.

36 Luiz F. Mesquita and Sergio G. Lazzarini, “Horizontal and Vertical Relationships in Developing Economies: Implications for SMEs’ Access to Global Markets,” Academy of Management Journal 51:2 (2008): 359–80.

37 Destan Kandemir and G. Tomas Hult, “A Conceptualization of an Organizational Learning Culture in International Joint Ventures,” Industrial Marketing Management 34:5 (2005): 440.

38 Robert F. Howe, “The Fall of the House of Mondavi,” Business 2.0 6:3 (2005): 98.

39 Yumiko Ono and Ann Zimmerman, “Wal-Mart Enters Japan with Seiyu Stake,” Wall Street Journal (March 15, 2002): B5.

40 Yuping Zeng, Oded Shenkar, Seung-Hyun Lee, and Sangcheol Song, “Cultural Differences, MNE Learning Abilities, and the Effect of Experience on Subsidiary Mortality in a Dissimilar Culture: Evidence from Korean MNEs,” Journal of International Business Studies 44 (2013): 42–65.

41 Sebastian-Andrei Labes, “FDI Determinants in BRICs,” CES Working Papers 13 (2015): 1–13.

42 Jia-Ruey Ou, “An Analytical Model for Innovating Localization Policy,” International Journal of Electronic Business Management 8:2 (2010): 110–19.

43 “H&M Wins Back Name in Russia,” Managing Intellectual Property (April 2007): 1; and Steven Seidenberg, “Trademark Squatting on the Rise in U.S.” Inside Counsel (May 2010): n.p.

44 Julie Bennett, “Road to Foreign Franchises Is Paved with New Problems,” Wall Street Journal (May 14, 2001): B10.

45 Pierre Dussauge, Bernard Garrette, and Will Mitchell, “Asymmetric Performance: The Market Share Impact of Scale and Link Alliances in the Global Auto Industry,” Strategic Management Journal 25 (2004): 701–11; and Candace E. Ybarra and Thomas A. Turk, “Strategic Alliances with Competing Firms and Shareholder Value,” Journal of Management and Marketing Research 6 (January 2011): 1–10.

46 Koen Dittrich and Geert Duysters, “Networking as a Means to Strategy Change: The Case of Open Innovation in Mobile Telephony,” Journal of Product Innovation Management 24:6 (November 2007): 510–21.

47 Barry J. Dickinson, “Symbiotic Marketing: A Network Perspective,” Journal of Management and Marketing Research 11 (September 2012): 1–27 offers many examples of horizontal alliances.

48 Viknesh Vijayenthiran, “Mercedes and Infiniti Form Mexican Joint Venture for Next-Generation Compact Car Production,” Motor Authority (August 4, 2015), http://motorauthority.com/news/1028353 (accessed September 25, 2015).

49 For an extensive discussion of these variables, see Farok J. Contractor and James Woodley, “How Do Alliance Partners Share the Value They Create? Determinants of the Value Split in International Technology Transfer Alliances,” Proceedings of the 54th Annual Meeting of the Academy of International Business (Washington: 2012): n.p.

50 Melissa Maleske, “OFAC’s Global Reach,” Inside Counsel (August 2012): n.a.

51 Miguel Angel Asturias, Strong Wind, trans. Gregory Rabassa (New York: Delacorte Press, 1968): 112.

52 For an extensive treatise on the theory, see Robert A. Packenham, The Dependency Movement: Scholarship and Politics in Development Studies (Cambridge, MA: Harvard University Press, 1992). For some different national views of its validity, see Ndiva Kofele-Kale, “The Political Economy of Foreign Direct Investment: A Framework for Analyzing Investment Laws and Regulations in Developing

http://motorauthority.com/news/1028353

Endnotes 3

Countries,” Law & Policy in International Business 23:2/3 (1992): 619–71; and Stanley K. Sheinbaum, “Very Recent History Has Absolved Socialism,” New Perspectives Quarterly 13:1 (1996).

53 Ravi Ramamurti, “The Obsolescing ‘Bargaining Model’? MNC-Host Developing Country Relations Revisited,” Journal of International Business Studies 32 (2001): 23; Yadong Luo, “Toward a Cooperative View of MNC-Host Government Relations: Building Blocks and Performance Implication,” Journal of International Business Studies 32 (2001): 401.

54 “Google and Samsung in Deal to Cooperate on Patents,” New York Times (January 14, 2014): B4.

55 Lauren Collins, “Danish Postmodern,” New Yorker (January 7, 2013): 22; Lizette Alvarez, “Spreading Scandinavian Genes, without Viking Boats,” New York Times (September 30, 2004): A4; and “Cryos Sets Up Sperm Banks in Mumbai,” Businessline (September 25, 2008).

56 Fred Burton, Adam R. Cross, and Mark Rhodes, “Foreign Market Servicing Strategies of UK Franchisors: An Empirical Enquiry from a Transactions Cost Perspective,” Management International Review 40:4 (2000): 373–400.

57 Christine Gaul, “What Makes a Franchisee Successful: Attitudes and Pre-requisities of Profitable Franchise Partners,” The International Business & Economics Research Journal 14:2 (2015): 387–94.

58 John K. Ryans, Jr., Sherry Lotz, and Robert Krampf, “Do Master Franchisors Drive Global Franchising?” Marketing Management 8:2 (1999): 33–8.

59 Janet Adamy, “Chinese Food the KFC Way,” Wall Street Journal Asian Edition (October 20–22, 2006): 14–15.

60 British Airport Authority, “International Airports” (2007), retrieved July 6, 2007, from www.baa.com/portal/page/ Corporate%5EAbout+BAA%5 EWho+does+what%5EInternational+ airports/b0ccadc5c5c72010V gnVCM100000147e120a__/448c6a4c7f1 b0010VgnVCM200000357e1 20a__/.

61 “Four Seasons Signs Management Contract with Three C Universal Developers,” Mint [New Delhi] (April 21, 2011).

62 “Great Wall Builders,” The Economist (October 27, 2012): 66. 63 “Flagship Ventures Forms Strategic Innovation Partnerships with

AstraZeneca, Nestlé Health Science and Bayer CropScience,” News Bites US – NASDAQ, (May 6, 2015): n.p.

64 Hiroko Tabuchi, “ANA and AirAsia End Venture on Low-Cost Carrier,” New York Times (June 26, 2013): B2.

65 Daniel Michaels and Robert Wall, “Airbus-Boeing Speed Race Increasingly Takes Place on the Ground,” Wall Street Journal Online (June 2015):11, http://www.wsj.com/articles/airbus-boeing- speed-race-increasingly-takes-place-on-the-ground-1434042301 (accessed December 7, 2015).

66 “Essar Ports Announces Strategic Alliance with Port of Antwerp International,” PR Newswire (May 31, 2012): n.p.

67 Luis Zalamea, “AeroRepublica, Copa Offer Details of New Alliance,” Aviation Daily (March 11, 2005): 5.

68 Terrence Chea, “No Perfect Partnership,” Washington Post (June 3, 2002): E1.

69 Anna Shaojie Cui, Roger J. Calantone, and David A. Griffith, “Strategic Change and Termination of Interfirm Partnerships,” Strategic Management Journal 32:4 (April 2011): 402–23.

70 Mikhail Fridman, “BP Has Been Treating Russians as Subjects,” Financial Times (July 7, 2008): 9.

71 David Ibison, “Culture Clashes Prove Biggest Hurdle to International Links,” Financial Times (January 24, 2002): 17.

72 William H. Meyers, “Maxim’s Name Is the Game,” New York Times Magazine (May 3, 1987): 33–5; Cristina Passariello, “Pierre Cardin Ready to Sell His Overstretched Label,” Wall Street Journal (May 3, 2011): 1.

73 Ramit Plushnick-Masti, “German Firm Faulted for Taking Vitamin out of Baby Formula,” Miami Herald (November 12, 2003): 19A.

74 Diana Elena Ranf, “Cultural Differences in Project Management,” Annales Universitatis Apulensis Series Oeconomica 12:2 (2010):

657–62; and Marshall Geiger and Joyce van der Laan Smith, “The Effect of Institutional and Cultural Factors on the Perceptions of Earnings Management,” Journal of International Accounting Research 9:2 (2010): 21–43.

75 James T. Areddy, “Danone Pulls Out of Disputed China Venture,” Wall Street Journal (October 1, 2009): B1.

76 Gokhun Ertug, Ilya R. P. Cuypers, Niels G. Noorderhaven, and Ben B. Bensaou, “Trust Between International Joint Venture Partners: Effects of Home Countries,” Journal of International Business Studies 44 (2013): 263–82.

77 Seung Ho Park and Gerardo R. Ungson, “The Effect of National Culture, Organizational Complementarity, and Economic Motivation on Joint Venture Dissolution,” Academy of Management Journal 40:2 (April 1997): 279–307; Harry G. Barkema, Oded Shenkar, Freek Vermeulen, and John H. J. Bell, “Working Abroad, Working with Others: How Firms Learn to Operate International Joint Ventures,” Academy of Management Journal 40:2 (April 1997): 426–42, found survival differences only for differences in uncertainty avoidance.

78 Rikka M. Sarala and Eero Vaara, “Cultural Differences, Convergence, and Crossvergence as Explanations of Knowledge Transfer in International Acquisitions,” Journal of International Business Studies 41:8 (October–November 2010): 1365–90.

79 Tabuchi, loc.cit. 80 Akbar Zaheer, Exequiel Hernandez, and Sanjay Banerjee, “Prior

Alliances with Targets and Acquisition Performance in Knowledge- Intensive Industries,” Organization Science 21:5 (September–October 2010): 1072–91+.

81 Mike W. Peng and Oded Shenkar, “Joint Venture Dissolution as Corporate Divorce,” Academy of Management Executive 16:2 (May 2002): 92–105.

82 Doug Cameron, “U.S. Airline Merger to Affect Alliances,” Wall Street Journal (Online) (February 14, 2013): n.p.; Adrian Schofield, “JAL, British Airways Code-Share Another Step Toward Joint Venture,” Aviation Daily 389:46 (September 5, 2012): n.p.; Anne Smith and Marie-Claude Reney, “The Mating Dance: A Case Study of Local Partnering Processes in Developing Countries,” European Management Journal 15:2 (1997): 174–82.

83 Linda H.Y. Hsieh and Suzana B. Rodrigues, “Partner Trustworthiness and Ex Post Governance Choice in International Joint Ventures: The Role of Performance Satisfaction,” AIB 2012 Proceedings of 54th Annual Meeting (Washington: June 30–July 3, 2012).

84 Africa Ariño and Jeffrey J. Reuer, “Designing and Renegotiating Strategic Alliance Contracts,” Academy of Management Executive 18:3 (2004): 37–48.

85 Sanjiv Kumar and Anju Seth, “The Design of Coordination and Control Mechanisms for Managing Joint Venture–Parent Relationships,” Strategic Management Journal 19:6 (June 1998): 579–99; T. K. Das and Bing-Sheng Teng, “Between Trust and Control: Developing Confidence in Partner Cooperation in Alliances,” Academy of Management Journal 23:3 (July 1998): 491–512; Arvind Parkhe, “Building Trust in International Alliances,” Journal of World Business 33:4 (1998): 417–37; Prashant Kale, Harbir Singh, and Howard Perlmutter, “Learning and Protection of Proprietary Assets in Strategic Alliances: Building Relational Capital,” Strategic Management Journal 21:3 (March 2000): 217–37; and Dina Preston- Ortiz, “The Effects of Trust in Virtual Strategic-Alliance Performance Outcomes,” unpublished doctoral dissertation (Phoenix: University of Phoenix, 2010).

86 Srilata Zaheer and Akbar Zaheer, “Trust across Borders,” Journal of International Business Studies 37:1 (2006): 21.

87 Gary D. Burton, David Ahlstrom, Michael N. Young, and Yuri Rubanik, “In Emerging Markets, Know What Your Partners Expect,” Wall Street Journal (December 15, 2008): R5.

88 Bharat Anand and Tarun Khanna, “Do Firms Learn to Create Value? The Case of Alliances,” Strategic Management Journal 21:3 (March 2000): 295–315; Anthony Goerzen and Paul W. Beamish,

http://www.baa.com/portal/page/Corporate%5EAbout+BAA%5 EWho+does+what%5EInternational+airports/b0ccadc5c5c72010V gnVCM100000147e120a__/448c6a4c7f1b0010VgnVCM200000357e1 20a__/

http://www.wsj.com/articles/airbus-boeing-speed-race-increasingly-takes-place-on-the-ground-1434042301

http://www.baa.com/portal/page/Corporate%5EAbout+BAA%5 EWho+does+what%5EInternational+airports/b0ccadc5c5c72010V gnVCM100000147e120a__/448c6a4c7f1b0010VgnVCM200000357e1 20a__/

4 Endnotes

“The Effect of Alliance Network Diversity on Multinational Enterprise Performance,” Strategic Management Journal 26 (2005): 333–54; and Maurizio Zollo and Jeffrey J. Reuer, “Experience Spillovers Across Corporate Development Activities,” Organization Science 21:6 (November-December 2010): 1195–1212.

89 Prashant Kale and Harbir Singh, “Managing Strategic Alliances: What Do We Know Now and Where Do We Go from Here?” Academy of Management Perspectives 23:3 (August 2009): 45–62.

90 Rachelle C. Sampson, “Experience Effects and Collaborative Returns in R&D Alliances,” Strategic Management Journal 26 (2005): 1009–31.

91 John Kenneth Galbraith, American Capitalism (Boston: Houghton Mifflin, 1952): 91–2.

92 “Schumpeter: Managing Partners,” The Economist (May 23, 2013): 57. 93 Eric H. Kessler, Paul E. Bierly, and Shanthi Gopalakrishnan, “Internal

vs. External Learning in New Product Development: Effects of Speed, Costs and Competitive Advantage,” R & D Management 30:3 (2000): 213–23.

94 Adrian Wooldridge, “Return of the Giants,” The Economist (The World in 2013 edition): 25.

95 These are adapted from Arvind Parkhe, “Interfirm Diversity, Organizational Learning, and Longevity in Global Strategic Alliances,” Journal of International Business Studies 22:4 (1991): 579–601.

96 Sources include the following: We wish to acknowledge the assistance of several American Airlines and oneworld executives,

who, although wishing to remain anonymous, supplied useful infor- mation for and feedback on this case. Additional information came from “American Airlines to Operate Only Service between New York and Japan’s Tokyo International Airport at Haneda After Historic Open Skies Agreement,” Entertainment Newsweekly (March 4, 2011): 172; Andrea Ahles, “American Airlines, Japan Airlines Announce Joint Venture,” McClatchy–Tribune Business News (January 12, 2011): n.p.; Julie Johnsson, “American Airlines Combining Pacific Flights with Japan Airlines,” McClatchy–Tribune Business News (January 12, 2011): n.p.; “American to Move Its Asia–Pacific Regional Office to the Japan Airlines Building in Tokyo,” Journal of Transportation (September 18, 2010): 26; “Japan Airlines and American Airlines Announce Joint Business Benefits for Trans-Pacific Consumers,” The Pak Banker (January 11, 2011): n.p.; “Airline Profits to Tumble in 2011: IATA,” The Pak Banker (June 8, 2011): n.p.; “Europe: Trans- Atlantic Alliances Are Set to Tighten,” Oxford Analytica Daily Brief Service (January 3, 2008): 1; Alfred Kahn and Dorothy Robyn, “The Sky Must Be No Limit to Global Competition,” Financial Times (February 15, 2006): 17; Bruce Bernard, “American Airlines Seeks OK for Trans-Atlantic Tie-up,” Journal of Commerce Online (August 15, 2008); International Air Transport Association, Annual Report (2008); “Aer Lingus Set for Second oneworld,” Airline Business 31:7 (2015): 43; Linda Ball, “Will Qater Pull Out of oneworld?” Air Cargo World 18: 6 (2015): 16.

EndnotEs

1 For the record, DuPont’s trade name for PTFE is Teflon. 2 “Innovation Democracy: W.L. Gore’s Original Management Model,”

Management Innovation eXchange, http://www.managementexchange. com/story/innovation-democracy-wl-gores-original-management- model (accessed March 16, 2016).

3 “The World’s Best Multinational Workplaces,” Great Place to Work® Institute, http://www.greatplacetowork.net/best-companies/ worlds-best-multinationals/the-list (accessed March 16, 2016).

4 Technically, the titles of president and secretary-treasurer were used only because they were required by the laws of incorporation.

5 This document specifies general characteristics of a lattice structure: 1. Lines of communication are direct—person to person—with no

intermediary. 2. No fixed or assigned authority. 3. Sponsors, not bosses. 4. Natural leadership defined by followership. 5. Objectives are set by those who must “make them happen.” 6. Tasks and functions organized through commitments. 7. In many ways, current business theory expresses these character-

istics in terms of a so-called flat structure. 6 For those wondering how this happens, officially, the company

explains that “Associates (not employees) are hired for general work areas. With the guidance of their sponsors (not bosses) and a grow- ing understanding of opportunities and team objectives, associates commit to projects that match their skills. All of this takes place in an environment that combines freedom with cooperation and autonomy with synergy. Everyone can earn the credibility to define and drive projects. Sponsors help associates chart a course in the organization that will offer personal fulfillment while maximizing their contribu- tion to the enterprise. Leaders may be appointed, but are defined by ‘followership.’ More often, leaders emerge naturally by demonstrat- ing special knowledge, skill, or experience that advances a business objective.”

7 “Gore Culture,” W. L. Gore & Associates, http://www.gore.com/en_xx/ aboutus/culture/index.html (accessed March 17, 2016).

8 “Working in Gore’s Unique Culture,” W. L. Gore & Associates, http:// www.gore.com/en_xx/careers/whoweare/ourculture/gore-company- culture.html (accessed September 16, 2015).

9 Quote extracted from “Gore Recognized as One of the World’s Best Multinational Workplaces by Great Place to Work®,” http://www. gore.com/en_xx/news/best-multinational-places-to-work-2014.html (accessed September 23, 2015).

10 Personal conversation, March 17, 2016, e-mail exchange. 11 This unique kind of corporate structure has proven to be a significant

contributor to Associate satisfaction and retention. 12 Quote extracted from “W. L. Gore & Associates: Developing Global

Teams to Meet 21st-Century Challenges,” http://webcache. googleusercontent.com/search?q=cache:ho6ojanoI68J:cets.coop/ moodle/pluginfile.php/179/mod_data/content/754/Gore_case26_ C391-C405.pdf+&cd=1&hl=en&ct=clnk&gl=us (accessed Septem- ber 23, 2015).

13 Others similarly wonder how Gore might change its principles and practices to accommodate changing technologies and market.

14 Superior performance has a clear mandate: Create value by standard- izing some activities to maximize global efficiency while simultane- ously adapting other activities to optimize local effectiveness. This understanding, as we saw in Chapter 11, sets an MNE’s strategy. Once done, managers then build, bit by bit, the requisite organiza- tion that converts their ambitions into accomplishments. Organiz- ing operations for IB is not merely fine-tuning the ingenuity of an MNE’s strategy. Think of it this way: If formulating strategy is the first step of a long march, then the ensuing steps implement it. Advised

Jack Welch, former CEO of GE, “In real life, strategy is actually very straightforward. You pick a general direction and implement like hell.” Jack Welch and Suzy Welch, Winning (HarperCollins Publishers, 2005). See also “The Organization Man, Dead at 76,” Journal of Business Strategy 18 (1997): 6.

15 Alfred P. Sloan, John McDonald, eds., My Years with General Motors (New York: Doubleday, 1964).

16 Chris Bartlett, “MNCs: Get Off the Reorganization Merry-Go-Round,” Harvard Business Review (March–April 1983): 88–101.

17 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly, December 31, 2012, www.mckinseyquarterly.com/The_global_companys_ challenge_2979.

18 “Hungry Tiger, Dancing Elephant: How India Is Changing IBM’s World,” The Economist (April 4, 2007): 58–61.

19 As some have suggested: Before: “Thanks for letting me work here.” Today: “Improve my professional mobility or I will find a company that will.”

20 Richard Florida, The Rise of the Creative Class (New York: Basic Books, 2004); Charlotta Mellander and Richard Florida, “The Rise of the Global Creative Class,” In The Handbook of Global Science, Technology, and Innovation, eds. Daniele Archibugi and Andrea Filipppetti (Wiley-Blackwell, 2015): 313–42.

21 Adam Bryant, “Google’s 8-Point Plan to Help Managers Improve,” NYTimes.com, retrieved March 12, 2011, from www.nytimes.com/ 2011/03/13/business/13hire.html?hp.

22 Ian Urbina and Keith Bradsher, “Linking Factories to the Malls, Middleman Pushes Low Costs,” New York Times 8 (2013).

23 Craig W. Fontaine, “Organization Structure,” Human Resource Man- agement Knowledge Base, Northeastern University (August 2007).

24 The Tao offers insight on this standard: The second principle of Taoism is that of Dynamic Balance. There are always two basic distinctions in nature, symbolized by the yin and yang (sun and moon, heaven and earth, dark and light, chaos and order, etc.), but Taoism sees balance as the basic characteristic underlying these distinctions.

25 Less favorably, some characterize the role of the headquarters as an ‘imperialist corporate centre.’ “Identity Crisis: What Is the Corporate Center’s Role in a Globalized Business?” BCG.perspectives, retrieved January 3, 2013, from www.bcgperspectives.com/content/articles/ role_of_center_globalization_identity_crisis_corporate_centers_role_ globalized_business/.

26 Harold Sirkin, James Hemerling, and Arindam Bhattacharya, Globality: Competing with Everyone from Everywhere for Everything (New York: Business Plus, 2008).

27 Richard Daft, Organization Theory and Design (Cengage Learning, 2015); Rajesh K. Pillania, “State of Strategy and Structure in India: A Study of Top 100 Firms,” Technology 2.2 (2012): 1; Dirk Morschett, Hanna Schramm-Klein, and Joachim Zentes, “International Organ- isational Structures as Coordination Mechanism,” Strategic Inter- national Management (Springer Fachmedien Wiesbaden, 2015): 251–74; Chu-Ching Wang, et al., “The Organizational Evolutions and Strategies of Family Businesses in Taiwan,” Open Journal of Business and Management 2.04 (2014): 329; Olatunji Fadeyi, et al., “Review of Organizational Strategy and Structure (1962–2015),” International Conference on African Development Issues (2015): 342–48; Charles C. Snow, “ Organizing in the Age of Competition, Cooperation, and Collaboration,” Journal of Leadership & Organizational Studies (2015); Geert Hofstede, Gert Jan Hofstede, and Michael Minkov, “Cultures and Organizations: Pyramids, Machines, Markets, and Families: Orga- nizing Across Nations,” Classics of Organization Theory (2015): 314.

28 One other quick note. We discuss types of structure in simplified terms. It’s helpful, as you read a profile and review its depictions, to think of each structure as an MNE’s “anatomy” or “skeleton” that

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2 Endnotes

specifies how it has organized the company’s workflow. Also, keep in mind that the architecture of an MNE structure, whether set by function, product, area, or a mix, defines the company’s idealized view of who should do what job where. Julian Birkinshaw, “The Structures behind Global Companies,” Financial Times (December 4, 2000): 2–4.

29 Too, product division configures manufacturing to maximize effi- ciencies; Flagstaff, Arizona, is the hub of Gore’s medical products division, while Feldkirchen-Westerham, Germany, is the hub for fabrics, membranes, industrial sealants, filtration products, and vents. Specifically, within the German market, Gore plants are clustered in Putzbrunn and Feldkirchen-Westerham, near Munich, and Plein- feld, which is close to Nuremberg. The Pleinfeld team focuses on electronic interconnect products. Associates in Putzbrunn and nearby Feldkirchen-Westerham produce fabrics, membranes, industrial sealants, filtration products, and vents. Medical product sales are cen- tered in Putzbrunn. Gore GmbH also supports markets throughout the Middle East, Central Europe, Eastern Europe, and Africa.

30 The merger of Moët Hennessy and Louis Vuitton, for instance, formed the world’s largest luxury goods group, LVMH. It also created a wide portfolio of brands that included Christian Dior perfume, Tag Heuer watches, Louis Vuitton bags, and Moët & Chandon cham- pagne. Although each product targets the high-end market segment, the significant dissimilarity from fragrances to watches to luggage to liquor led managers to split LVMH into five product divisions: wines and spirits, fashion and leather goods, perfumes and cosmet- ics, watches and jewelry, and selective retailing. Each product division then runs its product portfolio on a global basis.

31 For example, financial service institutions often have local units that are unaware that customers who signed up for one service, say credit cards, were already customers for other services provided by another unit, say brokerages services.

32 “Nestlé Is Starting to Slim Down at Last,” Businessweek (October 27, 2003): 56–8; “Daring, Defying, to Grow,” The Economist (August 7, 2004): 55–7.

33 Andria Cheng, “Nike Reorganizes into Six Geographic Regions: Faster-Growing China, Eastern Europe regions to be Managed Sepa- rately,” MarketWatch (March 20, 2009).

34 “Japanese Firms Push into Emerging Markets: The New Frontier for Corporate Japan,” The Economist (April 19, 2011), www.economist. com/node/16743435

35 John W. Hunt, “Is Matrix Management a Recipe for Chaos?” Financial Times (January 12, 1998): 10.

36 More precisely, Christopher Bartlett and Sumantra Ghoshal identi- fied several key limitations of the matrix format, suggesting that: “Dual reporting led to conflict and confusion; the proliferation of channels created informational log-jams as a proliferation of com- mittees and reports bogged down the organization; and overlapping responsibilities produced turf battles and a loss of accountability. Separated by barriers of distance, language, time, and culture, man- agers found it virtually impossible to clarify the confusion and resolve the conflicts.” Many years after their article was published, many MNES are still trying to break free; C. Bartlett and S. Ghoshal, “Matrix Management: Not a Structure, a Frame of Mind,” Harvard Business Review (July–August 1990).

37 Richard Hodgetts, “Dow Chemical CEO William Stavropoulos on Structure,” Academy of Management Executive (May 30, 1999): 30.

38 IBM’s North American and Asian operations, implementing different strategies given different opportunities, adopted different structures, and IBM instituted a mixed structure. Halliburton, a U.S.-based energy MNE, set up a second headquarters in Dubai to better serve its customers throughout the Middle East; Diageo, the British multi- national alcoholic beverages company, responded to slowing Euro- pean growth with a structure that moved strategic decisions to the regional level while handling customer relations nationally. Relatedly, IBM reorganized its European operations to move decision-making

staff closer to customers. This change reduced the scale of its EMEA (Europe, Middle East, and Africa) headquarters in Paris, a major unit in place since the end of World War II. Many of its responsibilities moved to smaller hubs in Madrid and Zurich. “Axe to Fall Heavily at IBM, Unions Fear,” New York Times (May 6, 2005): A1.

39 The strategy-structure-systems model was first adopted by General Motors, DuPont, Sears, and Standard Oil in the 1920s. Not until the post–World War II era did many companies began to develop divi- sional structures that then led to the rapid adoption of diversification strategies. Some reason that the network structure and its variants will follow the same pattern, moving from the few in the early 2000s to the many over the ensuing decades.

40 “The New Organisation,” The Economist, (February 24, 2013): 63. 41 For example, in the case of the latter, people see that the more

senior executives have specialized knowledge that gives them personal respect as well as positional power. Hence, the more power their knowledge gives them, the less incentive they have to share with others. This develops boundaries between different levels of hierarchy.

42 Hiroko Tabuchi and Brooks Barnes, “Sony Chief Is Still in Search of a Turnaround,” New York Times, (May 26, 2011): A1; Sony adds another angle of analysis. In Chapter 11, we described how Sony ran big losses as markets, weakened by the global crisis, exposed weaknesses in its system. Fighting to rescue the company, CEO Sir Howard Stringer felt the need to revitalize the company’s culture in order to jump-start new relationships and trigger new ways of thinking. Reorganization began in spring 2009. Senior executives opposed to restructuring efforts were replaced by four young, loyal lieutenants—dubbed “the Four Musketeers”—to lead Sony’s rede- signed businesses. Ironically, explained Sir Howard, “When this crisis came along, for me it was a godsend, because I could reorganize the company without having to battle the forces of the status quo”; “Game On: Sir Howard Stringer Believes He Is Finally in a Position to Fix Sony,” The Economist (March 5, 2009): 73.

43 Statement from Jack Welch’s Letter to Shareholders, “Boundaryless Company in a Decade of Change,” reported in GE’s 1990 Annual Report.

44 Often, discussion of these themes takes place in the context of so- called flat organizations or open allocation. Specifically, open alloca- tion has been described as a process of self-organization whereby, rather than teams and leadership arrangements existing permanently in a company, these arrangements form as they are needed (around important projects) and disband when they are no longer necessary. Additionally, open allocation implies that projects are not unilaterally created and staffed by executive mandate. Rather, the person forming the project (who might not be an official manager) is responsible for convincing others to invest their time, energy, and careers into the effort.

45 “Gore: Our Culture,” retrieved May 1, 2013, from www.gore.com/ en_xx/aboutus/culture/; “W. L. Gore & Associates—Best Companies to Work For 2012,” Fortune, retrieved May 1, 2013, from money.cnn. com/magazines/fortune/best-companies/2012/snapshots/38.html.

46 W. Baker, “The Network Organization in Theory and Practice,” in Net- works and Organizations, eds. N. Nohria and R. Eccles (Cambridge, MA: Harvard Business School Press, 1992): 327–429.

47 Yves Doz and Keeley Wilson, Managing Global Innovation: Frame- works for Integrating Capabilities around the World (Harvard Business Press Books, 2012).

48 The keiretsu appeared in Japan during the “economic miracle” fol- lowing World War II. Before Japan’s surrender, Japanese industry was controlled by large family-controlled vertical monopolies called zaibatsu.

49 “The New, Improved Keiretsu,” Harvard Business Review, https://hbr. org/2013/09/the-new-improved-keiretsu (accessed March 7, 2016).

50 “Presidential Politics in South Korea: Bashing the Big Guys,” The Economist (October 13, 2012): 49.

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Endnotes 3

51 “A Tangled Web,” Financial Times (June 12, 2001): 7. 52 J. Lipnack and J. Stamps, Virtual Teams: Researching across

Space, Time, and Organizations with Technology (New York: John Wiley and Sons, 1997); Sonny Ariss, Nick Nykodym, and Aimee Cole-Laramore, “Trust and Technology in the Virtual Organiza- tion,” SAM Advanced Management Journal 67 (Autumn 2002): 22–6; William M. Fitzpatrick and Donald R. Burke, “Competitive Intelli- gence, Corporate Security and the Virtual Organization,” Advances in Competitiveness Research 11 (2003): 20–46.

53 D. Greenberg and R. Heneman, eds., Human Resource Management in Virtual Organizations (USA: Information Age Publishing, 2002).

54 Manju Ahuja and Kathleen Carley, “Network Structure in Virtual Organizations,” Journal of Computer-Mediated Communication 3:4 (June 1998), from jcmc.indiana.edu/vol3/issue4/ahuja.html.

55 Operationally, a virtual organization consists of a core of full-time employees that rely on outside specialists to work on opportunities. The international advertising agency StrawberryFrog illustrates the process. Its peculiar name was inspired by a rare amphibian with a red body and blue legs—a nimble creature that, as the firm’s CEO explains, represents the opposite of the existing “dinosaur agencies, established in the industrial age as monoliths, which have the great- est difficulty in adapting to the new era.” Competing with MNEs employing thousands, StrawberryFrog has a small staff, known as “frogs,” based in New York, São Paulo, Amsterdam, and Mumbai. It bulks up as needed by hiring freelancers from around the world. Free of the overhead, constraints, and complexity of hierarchies, it devel- ops the agility and cost-effectiveness of a high-powered, loosely coupled organization. Similar trend are afoot in other industries. The legal field, for example, increasingly rewards efficiency. “Clearspire, a virtual organization, relies on some 20 or so lawyers who work mostly from home, collaborating on a multi-million-dollar platform that mimics a virtual office. A lawyer checking in on a colleague automatically sees a picture of her on the phone when she is, in fact, on the phone. Clients use the platform too, commenting on and even changing their own documents as they are being drawn up. Conventional lawyers are far less open”; “Bargain Briefs,” The Econo- mist (August 13, 2011): 64.

56 Alf Crossman and Liz Lee-Kelley, “Trust, Commitment and Team Working: The Paradox of Virtual Organizations,” Global Networks: A Journal of Transnational Affairs 4 (October 2004): 375–91; Philip J. Holt and James E. Lodge, “Merging Collaboration and Technology: The Virtual Research Organization,” Applied Clinical Trials 12 (October 2003): 38–42.

57 Toby Gibbs, Suzanne Heywood, and Leigh Weiss, “Organizing for an Emerging World,” McKinsey Quarterly, June 2012.

58 “The New Organisation,” The Economist, retrieved January 3, 2013, from www.economist.com/node/5380483.

59 “Hungry Tiger, Dancing Elephant: How India Is Changing IBM’s World,” The Economist (April 4, 2007): 58–61.

60 “The World According to Chambers,” The Economist (August 27, 2009): 81–4.

61 Dmitry Ivanov, Boris Sokolov, and Joachim Kaeschel, “Structure Dynamics Control-Based Framework for Adaptive Reconfigura- tion of Collaborative Enterprise Networks,” International Journal of Manufacturing Technology and Management 17 (2009): 23.

62 “Schumpeter: Corporate Burlesque,” The Economist (November 3, 2012): 68.

63 Nicolai J. Foss, “Selective Intervention and Internal Hybrids: Interpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization,” Organization Science 14 (May–June 2003): 331–50.

64 Patrick Kiger, “Hidden Hierarchies,” Workforce Management (February 27, 2006): 24.

65 Karen Beaman, “An Interview with Christopher Bartlett,” Boundary- less HR: Human Capital Management in the Global Economy (San Francisco: IHRIM Press, June 2002).

66 Darrell Rigby, “Bain & Company’s 2005 Management Tools & Trends,” August 2, 2005, from www.bain.com/management_tools.

67 Adam Lashinsky, “Chaos by Design,” Fortune (October 2, 2006); Geoffrey Colvin, “Managing in Chaos,” Fortune (October 2, 2006).

68 Lowell Bryan and Claudia Joyce, “The 21st-Century Organization,” The McKinsey Quarterly 3 (2005).

69 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly.

70 Loren Cary, “The Rise of Hyperarchies,” Harvard Business Review (March 2004).

71 Karl-Heinrich Grote and Erik K. Antonsson, eds., Springer Handbook of Mechanical Engineering (New York: Springer, 2009): 1344.

72 The Boston Consulting Group, “Reorganized Information Process- ing Vital to Improving U.S. Intelligence Capabilities,” BCG Media Releases, May 6, 2007, www.bcg.com/news_media/news_media_ releases.jsp?id=928.

73 “Lessons from TED: Corporate TEDucation,” The Economist (November 3, 2012): 67.

74 In contrast, one could precisely design a structure that looks great on paper but struggles in the stress test of reality.

75 “The New Organisation,” The Economist, (February 24, 2013): 63. 76 More specifically, Grove reasoned: “Let chaos reign, then rein in

chaos. Does that mean that you shouldn’t plan? Not at all. You need to plan the way a fire department plans. It cannot anticipate fires, so it has to shape a flexible organization that is capable of responding to unpredictable events”; Michael E. Rock, “Case Example: Intel’s Andy Grove,” CanadaOne, October 31, 2007, from www.canadaone. com/magazine/mr2060198.html.

77 Related question: Identify three defining features of a classical hier- archy as well as three defining features of a neoclassical heterarchy. Which type would you prefer to work in, and why?

78 The importance of coordination follows from the reality of life in the MNE. Designing products in Taiwan, sourcing inputs from Australia into production processes in China, and distributing them to con- sumers worldwide creates interdependencies among many parts of the company.

79 “Innovations to Create New Streams of Profitable Growth,” Accen- ture Outlook, retrieved June 9, 2011, from www.accenture.com/in-en/ outlook/ Pages/outlook-journal-2010-less-is-new-more-innovation. aspx.

80 “Starbucks Opens in India with Pomp and Tempered Ambition,” New York Times, http://india.blogs.nytimes.com/2012/10/19/ starbucks-opens-in-india-with-pomp-and-tempered-ambition/?_ r=0 (accessed September 28, 2015).

81 Michel Domsch and Elena Hristozova, eds., Human Resource Management in Consulting (New York: Springer, 2006).

82 Daniel Erasmus, “A Common Language for Strategy,” Financial Times (April 5, 1999): 7–8.

83 Anoop Madhok, “Revisiting Multinational Firms’ Tolerance for Joint Ventures: A Trust-Based Approach,” Journal of International Business Studies (2006): 30–43.

84 Sumantra Ghoshal and Christopher Bartlett, “Changing the Role of Top Management: Beyond Structure to Process,” Harvard Business Review 73 (January–February 1995): 93–4.

85 F. Shipper, C. C, Manz, B. Nobles, and K. P. Manz, “Shared Entrepre- neurship: Toward an Empowering, Ethical, Dynamic, and Freedom- Based Process of Collaborative Innovation,” Organization Manage- ment Journal, 11:3 (2014): 133–46.

86 Innovations can arise anywhere within the firm’s global network, not just at the center. The role of headquarters changes fundamentally.

87 For example, consider how Red Hat resolved this sort of situa- tion. That is, given the intricate technical architecture of Red Hat’s software, many questions from customers were unique in nature and necessitated personal consultations. Improving their perfor- mance, management realized, depended on finding ways to leverage Red Hat’s collective knowledge. The fact that solutions were often

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4 Endnotes

unique to a particular technical problem ruled out standardiza- tion and reduced the effectiveness of planning scripts. Still, even though many answers were unique to a particular client, overlapping aspects meant that Red Hat’s consultants often reinvented parts of the software wheel. Improving the ability of its globally dispersed and diverse technical support associates, it decided, depended on improving collaboration among them through processes of mutual adjustment.

Over the course of a year or so, Red Hat relied on cross-national teams to bust the structural, cultural, and procedural boundaries that separated colleagues. Social-network analyses mapped the frequency and effectiveness of communications, thereby clarifying the flow of information among personnel. Red Hat’s coordination by mutual adjustment systems ultimately connected people from several different functional roles, across 16 countries, through 9 languages, and in dozens of areas of domain knowledge. Red Hat also created its Knowledge Centered Support unit and fostered its intelligent swarming model to resolve complicated problems more quickly as well as handle greater call volumes without adding staff. Resulting improvements in accuracy, consistency, and respon- siveness boosted customer satisfaction, improved retention, and increased profitability.

88 Ultimately, every MNE regulates what people do. If they don’t, the consequences can be grave. Failure, as we saw in the global credit crisis, permits opportunistic managers to take actions that crash the MNE. Experiences at several companies, such as Citibank, UBS, Siemens, Merrill Lynch, Lehman, Royal Bank of Scotland, AIG, and Société Générale, dramatize how weak controls enable destructive opportunism.

89 Toby Gibbs, Suzanne Heywood, and Leigh Weiss, “Organizing for an Emerging World,” McKinsey Quarterly (June 2012).

90 Clan control represents humanist values that contrast with the scientific norms of bureaucratic control.

91 If conducted poorly, visits fan tension. Experience suggests “rules” for optimizing such visits. If subsidiary managers overload social activities and underplay hard business reviews, corporate personnel will see the trip as wasteful. If corporate personnel visit warm- weather subsidiaries during their home’s cold-weather seasons, locals may perceive the trips as diversions. Further, if visitors arrive only when upset about local performance, subsidiary folks may be defensive.

92 “The World According to Chambers,” The Economist (August 27, 2009): 81–4.

93 For instance, the Japanese retailer Ito-Yokado, which owns and operates the 7-Eleven convenience store franchise in Japan, links stores’ cash registers into an ERP system. It records sales and moni- tors inventory as well as scheduling daily and weekly tasks. It also benchmarks managers’ use of analytical tools, graphs, and forecasts; N. Shirouzu and J. Bigness, “7-Eleven Operators Resist System to Monitor Managers,” Wall Street Journal (June 16, 1997): B1.

94 Platforms include ebXML Business Process Specification Schema, Web Services Business Process Execution Language, and so on. See lsdis.cs.uga.edu/proj/meteor/mwscf/standards.html for a fuller profile.

95 MNEs reevaluate the sources they use to preempt information overload. The preferred approach to coordination and control guides triage.

96 In some companies, few matters are left untouched. For generations, managers of IBM wore only dark blue suits, white shirts and dark ties, symbols of their lifetime allegiance to Big Blue.

97 Sumantra Ghoshal, Gita Piramal, Christopher A. Bartlett, Managing Radical Change (Penguin Books India, 2002): 318; Jack Welch and Suzy Welch, Winning (HarperCollins Publishers, 2005). Likewise, on the other side of the globe, Infosys’s message, “Powered by Intellect, Driven by Values,” anchors its organizational culture.

98 See H. Schwartz, “Matching Corporate Culture and Business Strategy,” Organizational Dynamics 81:10 (1981): 30; Andrew Klein, “Corporate Culture: Its Value as a Resource for Competitive Advantage,” Journal of Business Strategy, (2011): 21–8; J. B. Barney, “Organizational Culture: Can It Be a Source of Sustained Com- petitive Advantage?” Academy of Management Review 11:3 (1986): 656–65; Rohit Deshpandé and John U. Farley, “Organizational Cul- ture, Market Orientation, Innovativeness, and Firm Performance: An International Research Odyssey,” International Journal of Research in Marketing 21:1 (2004): 3–22; Gary S. Hansen and Birger Wernerfelt, “Determinants of Firm Performance: The Relative Importance of Economic and Organizational Factors,” Strategic Management Jour- nal 10:5 (1989): 399–411; Suellen J. Hogan and Leonard V. Coote, “Organizational Culture, Innovation, and Performance: A Test of Schein’s Model,” Journal of Business Research 67:8 (2014): 1609–21; Julie I. Hancock, David G. Allen, Frank A. Bosco, Karen R. McDaniel, and Charles A. Pierce, “Meta-Analytic Review of Employee Turnover as a Predictor of Firm Performance,” Journal of Management 39:3 (2013): 573–603; Tsun-yan Hsieh, J. Lavoie, and R. A. P. Samek, “Think Global, Hire Local,” McKinsey Quarterly 4 (1999): 92–101; S. Shankar and V. Vishwanath, “Winning in Emerging Markets,” June 17, 2008, www.bain.com; T. Barta, M. Kleiner, and T. Neumann, “Is There a Payoff From Top-Team Diversity?” McKinsey Quarterly (April 2012); Eric Flamholtz and Rangapriya Kannan-Narasimhan, “Differential Impact of Cultural Elements in Financial Performance,” European Management Journal (February 2005): 50–65; Ursula Fair- bairn, “HR as a Strategic Partner: Culture Change as an American Express Case Study,” Human Resource Management 44 (Spring 2005): 79–84.

99 David Wessel, “Big US Firms Shift Hiring Abroad,” Wall Street Journal (April 19, 2011): B1.

100 Adam Bryant, “Google’s 8-Point Plan to Help Managers Improve,” NYTimes.com, retrieved March 12, 2011, from www.nytimes. com/2011/03/13/business/13hire.html?hp.

101 Likewise, Gore relies on its “Associates’ Standards of Ethical Conduct,” a summary document that explains Gore’s policies and procedures and guides Associates in conducting business with integ- rity, legally, and ethically. All Gore Associates have received a copy of these standards in their native languages and have undergone training in applying them during the course of business activities. Complying with the legal and ethical issues addressed in this docu- ment is a condition of employment with Gore.

102 James Charles Collins, Good to Great: Why Some Companies Make the Leap… and Others Don’t (New York: Random House, 2001).

103 Jim Collins, Good to Great: Why Some Companies Make the Leap…and Others Don’t (New York: HarperCollins, 2001). For example, on the importance of technology, Collins reports “80 percent of the good- to-great executives—from more than 1400 companies over a 15 year span—we interviewed didn’t even mention technology as one of the top five factors in the transition.”

104 Dinker Raval and Bala Subramanian, “Effective Transfer of Best Practices across Cultures,” Competitiveness Review (Summer–Fall 2000): 183.

105 The source of an organization’s culture is multidimensional. Indi- viduals and institutions create, legitimate, and sustain the values and norms that anchor an organization’s culture. More precisely, research identifies a variety of dimensions and dynamics, including (1) Founding Visions: Founders often leave indelible impressions on an organization. Choices made by a founder, such as Sam Walton of Walmart for everyday low prices, Bill Gore’s (of W. L. Gore) rejection of the hierarchy, or Steven Jobs’ vision to turn powerful technology into tools that were easy to use, often anchor an MNE’s collective values, beliefs, behaviors, and, longer term, its idealized vision. (2) The Influence of Decisive Leaders: Dramatic actions taken by cur- rent executives, when disruptive and innovative, institutionalize

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Endnotes 5

new values and visions of excellence. (3) Cultural Context of the Home Nation: A nation’s culture moderates company and individual behavior. Individualism in the United States influences cultural dynamics in American companies. Collectivism prevails in Japan, and one is far more likely to see group norms prevail in Japanese MNEs. And (4) Evolution of the Enterprise: A company’s capabilities and competencies, distribution of managerial responsibilities and influ- ence, and long-running relationships, develop over many years and can set a powerful administrative heritage that explains its history and frames its future.

106 The severity of this problem is proportional to the importance of knowledge-generating and decision-making relationships to the MNE’s organization; Alison Maitland, “Bridging the Culture Gap,” Financial Times (January 28, 2002): 8.

107 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly.

108 Tatiana Kostova, “Transnational Transfer of Strategic Organiza- tional Practices: A Contextual Perspective,” Academy of Management Review 24 (1999): 308–24; Nitin Nohria and Sumantra Ghoshal, “Differentiated Fit and Shared Values: Alternatives for Managing Headquarters-Subsidiary Relations,” Strategic Management Journal 15 (July 1994): 491–502. For a discussion of how capabilities improve with experience, see Andrew Delios and Paul Beamish, “Survival and Profitability: The Roles of Experience and Intangible Assets in Foreign Subsidiary Performance,” Academy of Management Journal 44 (2001): 1028–38.

109 “Staffing Globalisation: Travelling More Lightly,” The Economist (June 23, 2006): 55.

110 Quote extracted from “Gore Recognized as One of the World’s Best Multinational Workplaces by Great Place to Work®,” http://www .gore.com/en_xx/news/best-multinational-places-to-work-2014.html (accessed September 23, 2015).

111 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” New York Times, retrieved August 5, 2010, from www.nytimes.com/2007/02/15/business/worldbusiness/15toyota .html.

112 The Toyota Way, May 25, 2011, from secure.wikimedia.org/wikipedia/ en/wiki/The_Toyota_Way.

113 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” New York Times, retrieved August 5, 2010, from www.nytimes.com/2007/02/15/business/worldbusiness/15toyota. html.

114 Rebecca Knight, “Corporate Universities: Move to a Collabora- tive Effort,” Financial Times (March 19, 2007); Kasper Spiro, “Book Review: Corporate Universities. Drivers of the Learning Organiza- tion,” kasperspiro.com, http://kasperspiro.com/2015/05/11/book- review-corporate-universities-drivers-of-the-learning-organization/ (accessed January 7, 2016).

115 Melissa Korn and Jennifer Levitz, “Online Courses Look for a Busi- ness Model,” WSJ.com, retrieved January 2, 2013, from online.wsj. com/article/SB10001424127887324339204578173421673664106. html?mod=googl news_wsj.

116 The compelling economics of online education calls into question the practicality of the traditional infrastructure—classrooms, hotels, and transportation—of corporate universities.

117 “The Role of Corporate Universities in Addressing the Talent Gap,” MIT Sloan Executive Education, http://executive.mit.edu/blog/ corp-edu-the-role-of-corporate-universities-in-addressing- the-talent-gap (accessed January 7, 2016); Donna Fenn, “Corporate Universities for Small Companies,” Inc.com, www.inc.com/ magazine/19990201/730.html (accessed May 6, 2007).

118 Mattel highlights a variation of this approach. It has more than 25,000 employees based in 36 countries who oversee toy sales in 150 nations. Although you would think selling the fun of toys would unify employees’ cultural ideals, transcending different values has

proven problematic. As a result, Mattel runs executive development programs via a global e-learning system that puts its people and its principles into play. Improving managers’ understanding at both headquarters and subsidiaries means that “global management is more closely aligned with the corporate strategies and goals. This, in turn, produces innovative and creative products, reduces costs, and improves employee satisfaction.” Leslie Gross Klaff, “Many People, One Mattel,” Workforce Management (March 2004): 42–44.

119 Jeanne C. Meister, Corporate Universities: Lessons in Building a World-Class Work Force (New York: McGraw-Hill, 1998); “Memphis Author Says Corporate Universities Would Spur Neglected Workforce Training,” http://www.commercialappeal.com/business/memphis- author-says-corporate-universities-would-spur-neglected-workforce- training-ep-1262221535-327923841.html (accessed January 7, 2016).

120 “Keeping It on the Company Campus,” The Economist, http://www. economist.com/news/business/21651217-more-firms-have-set-up- their-own-corporate-universities-they-have-become-less-willing- pay (accessed January 7, 2016).

121 John Griffiths, “Unipart University,” Financial Times (March 21, 2002); “Is the Corporate University Dead?” Your Training Edge ®, http:// www.yourtrainingedge.com/is-the-corporate-university-dead/ (accessed January 7, 2016).

122 The Pit is the well of a bright, multitier lecture hall. 123 Della Bradshaw, “LVMH,” Financial Times (March 21, 2002). 124 The global financial crisis boosted the role of corporate universities—

but for less-than-charitable reasons. Analysts and educators debate whether the manner of teaching business students in traditional university settings may have aggravated the crisis. Critics hold that conventionally designed MBA programs grew too scientific, too detached from real-world issues, and too isolated from the moral implications of choice and consequence. The orthodoxy of MBA pro- grams, some contend, distorted students’ view of the moral, ethical, and social considerations of business leadership. These shortcomings poorly prepared graduates to do the right thing for their company and for society. Consequently, more companies increasingly look to their universities to develop socially responsible outlooks.

125 Steve Trehern, “More Than Just Learning Process,” Financial Times (March 21, 2002).

126 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” New York Times, retrieved August 5, 2010, from www.nytimes.com/2007/02/15/business/ worldbusiness/15toyota.html.

127 Sources include the following: www.jnj.com; J&J’s 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, and 2015 Annual Reports; “J&J Shares Climb after Upbeat Update on Its Drugs,” Businessweek, www.busi- nessweek.com/ap/financialnews/D9NFV7U00.htm (accessed June 1, 2011); Avi Salzman, “J&J Now the ‘Best Biotech Play’ Says Goldman,” Barrons.com, blogs.barrons.com/stockstowatchtoday/2011/05/27/ jj-now-the-best-biotech-play-says-goldman/ (accessed June 1, 2011); Margaret Cronin Fisk and Beth Hawkins, “Johnson & Johnson Hid Antibiotic Levaquin Risk, Lawyer Says,” Bloomberg, www.bloomberg. com/news/2011-06-01/johnson-johnson-hid-risks-of-antibiotic- levaquin-lawyer-says-at-trial.html (accessed June 1, 2011); “Patients Versus Profits at Johnson & Johnson: Has the Company Lost Its Way?” View of Cowen & Co. analyst Ian Sanderson, Knowledge@ Wharton, retrieved January 2, 2013, from knowledge.wharton.upenn. edu/article.cfm?articleid=2943; “Johnson & Johnson Primed for M&A,” Barron’s, http://www.barrons.com/articles/johnson-john- son-primed-for-m-a-1442310535 (accessed September 28, 2015); “Johnson & Johnson: Company Profile from Hoover’s,” http://www. hoovers.com/company-information/cs/company-profile.JOHN- SON__JOHNSON.74b634d0cb4011bf.html (accessed September 28, 2015); “Johnson & Johnson News—The CIO Report,” Wall Street Journal, http://blogs.wsj.com/cio/tag/johnson-johnson/ (accessed September 28, 2015).

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6 Endnotes

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133 Johnson & Johnson’s 2007 Annual Report.

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http://www.jnj.com/strategic-framework

EndnotEs

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2 Endnotes

36 Loretta Chao, “PC Makers Cultivate Buyers in Rural China,” Wall Street Journal (September 23, 2009): B1.

37 Jamie Anderson, Martin Kupp, and Ronan Moaligou, “Lessons from the Developing World,” Wall Street Journal (August 17, 2009): R6.

38 Owen M. Bradfield, Caroline Parker, and Leonie Goodwin, “Sustaining Performance: Learning from Buyers’ Experience,” Journal of Medical Marketing 9:4 (October 2009): 343–53.

39 Ed Hammond, loc cit. 40 Charles Goldsmith, “Dubbing in Product Plugs,” Wall Street Journal

(December 6, 2004): B1+. 41 Ouidade Sabri, Delphine Manceau, and Bernard Pras, “Taboo: An

Underexplored Concept in Marketing: RAM,” Recherche et Applications en Marketing 25:1 (2010): 59–85.

42 Amy Guthrie, “Mexico Hits Food Ads for Children,” Wall Street Journal (August 22, 2016): B6.

43 Gemma Charles, “Don’t Be a Code Breaker,” Marketing (March 17, 2010): 17; Ernest Cyril De Run, “Attitudes Towards Offensive Advertising: Malaysian Muslims’ Views,” Journal of Islamic Marketing 1:1 (2010): 25–36.

44 Deborah Ball, “Women in Italy Like to Clean but Shun the Quick and Easy,” Wall Street Journal (April 25, 2006): A1+.

45 Andrew Ward, “Home Improvements Abroad,” Financial Times (April 6, 2006): 8.

46 Sarah Ellison, “Sex-Themed Ads Often Don’t Travel Well,” Wall Street Journal (March 31, 2000): B7.

47 Arvind Sahay, “Finding the Right International Mix,” Financial Times (November 16, 1998): Mastering Marketing section, 2–3.

48 “Stalkers, Inc.” The Economist (September 13, 2014): 18. 49 Thomas G. Brashear, Vishal Kashyap, Michael D. Musante, and

Naveen Donthu, “A Profile of the Internet Shopper: Evidence from Six Countries,” Journal of Marketing Theory and Practice 17:3 (Summer 2009): 267–81.

50 New Zealand Business 18:11 (2004): 21–27. 51 Rita Marcella and Sylvie Davies, “The Use of Customer Language in

International Marketing Communication in the Scottish Food and Drink Industry,” European Journal of Marketing 38:11/12 (2004): 1382.

52 Moen Øystein, Iver Endresen, and Morten Gavlen, “Executive Insights: Use of the Internet in International Marketing: A Case Study of Small Computer Software Firms,” Journal of International Marketing 11:4 (2003): 129–44.

53 “What Are Brands For?” The Economist (August 30, 2014): 57–8; Jo Roberts, “The 100 Most Valuable Global Brands,” Marketing Week (May 24, 2012): 1+.

54 Tulin Erdem, Joffre Swait, and Ana Valenzuela, “Brands as Signals: A Cross-Country Validation Study,” Journal of Marketing 70:1 (2006): 34; Desmond Lam, “Cultural Influence on Proneness to Brand Loyalty,” Journal of International Consumer Marketing 19:3 (2006): 7.

55 Andreas B. Eisingerich and Gale Rubera, “Drivers of Brand Commitment: A Cross-National Investigation,” Journal of International Marketing 18:2 (2010): 64–79.

56 Claudiu V. Dimofte, Johny K. Johansson, and Richard P. Bagozzi, “Global Brands in the United States: How Consumer Ethnicity Mediates the Global Brand Effect,” Journal of International Marketing 18:1 (2010): 81–106.

57 Andrews Adugudaa Akolaa, “Cultural Diagnosis and By Passing: The Effect on Successful Internationalizaton,” Review of Business & Finance Case Studies 3:1 (2012): 69–84.

58 James Hookway, “IKEA’s Products Make Shoppers Blush in Thailand,” Wall Street Journal (June 5, 2012): n.p.

59 Michael Wines, “Picking the Pitch-Perfect Brand Name in China,” New York Times (November 12, 2011): A4.

60 Lee Simmons and Robert M. Schindler, “Cultural Superstitions and the Price Endings Used in Chinese Advertising,” Journal of Interna- tional Marketing 11:2 (2003): 101.

61 Miriam Jordan, “Sara Lee Wants to Percolate through All of Brazil,” Wall Street Journal (May 8, 2002): A14+; “Sara Lee Buys Brazilian

Out-of-Home Player Expresso Coffee: Sara Lee Reinforces its Leadership in Fast-Growing São Paulo and Rio de Janeiro Markets,” PR Newswire [New York] (April 10, 2012): n.p.

62 Isabelle Schuiling and Jean-Noël Kapferer, “Executive Insights: Real Differences between Local and International Brands: Strategic Impli- cations for International Marketers,” Journal of International Marketing 12:4 (2004): 197.

63 Jan-Benedict, E. M. Steenkamp, and Martijn G. de Jong, “A Global Investigation into the Constellation of Consumer Attitudes Toward Global and Local Products,” Journal of Marketing 74 (November 2010): 18–40.

64 Saeed Samiee, Terrence A. Shimp, and Subash Sharma, “Brand Origin Recognition Accuracy: Its Antecedents and Consumers’ Cogni- tive Limitations,” Journal of International Business Studies 36 (2005): 379–97; George Balabanis and Adamantios Diamantopoulos, “Gains and Losses from the Misperception of Brand Origin: The Role of Brand Strength and Country-of Origin Image,” Journal of International Marketing 19:2 (2011): 95–116.

65 Daniel Laufer, Kate Gillespie, and David H. Silvera, “The Role of Country of Manufacture in Consumers’ Attributions of Blame in an Ambiguous Product-Harm Crisis,” Journal of International Consumer Marketing 21 (2009): 189–201.

66 Daniel Laufer, Kate Gillespie, and David H. Silvera, “The Role of Country of Manufacture in Consumers’ Attributions of Blame in an Ambiguous Product-Harm Crisis,” Journal of International Consumer Marketing 21 (2009): 189–201.

67 P. Sharma, “Country of Origin Effects in Developed and Emerg- ing Markets: Exploring the Contrasting Roles of Materialism and Value Consciousness,” Journal of IBIB Studies, 42:2 (2012): 285–306; Terence Motsi and Ji Eun Park, “Consumer Evaluation of Developing Country Products: The Moderating Role of Product Ethnicity,” Paper presented at the Academy of IBIB annual meeting, Washington, DC (2012); Zhongqi Jin, Richard Lynch, Samaa Attia, Bal Chansarkar, Tanses Gulsoy, Paul Lapoule, “Antecedents of Home and Foreign Product Country Images in Developed and Developing Countries: A Comparative Study,” Paper presented at the Academy of IBIB annual meeting, Washington, DC (2012); Stephen Gould, Mike Chen-Ho Chao, Andreas Grein, and Rania Semaan, “The Biasing Effects of Country-of-Origin: A Cross-Cultural Application of Preference Reversals,” Paper presented at the Academy of IBIB annual meeting, Washington, DC (2012).

68 “Chin-Chin in China,” The Economist (May 9, 2015): 44. 69 Seah Park, “LG’s Kitchen Makeover,” Wall Street Journal (September

22, 2004): A19. 70 Matthew Dalton, “Salty Issue in U.S.—European Trade Talks,” Wall

Street Journal Online (October 19, 2015). 71 Kevin McCallum, “Grape Debate,” Miami Herald (March 27, 2009):

1C+. 72 “CEC Finalizing Report on SLAB Exports,” Business Wire [New York]

(November 30, 2012): n.p.; Don Hopey, “Rachel Carson’s Book Turned the Environmental World on Its Ear 50 Years Ago,” McClatchy - Tribune Business News [Washington] (September 27, 2012): n.p.

73 Robert Kennedy, “Tobacco Firms Accused of Thwarting Controls,” McClatchy - Tribune Business News [Washington] (May 30, 2012): n.p.

74 Andrew Jack, “Economic Reality Spurs Intervention: More Is Being Done to Tackle ’NTDs’ as Research Reveals Their Impact on Coun- tries’ Growth,” Financial Times (October 11, 2012): 2.

75 Rick Gladstone, “W.H.O. Deplores Delay in Ebola Vaccine,” New York Times (November 4, 2014): A9.

76 Andrew Jack, “FDA to Stimulate Tropical Disease Research,” Financial Times (May 1, 2008): 6.

77 Rebecca Perl, Nandita Murukutla, Jessica Occleston, Megen Bayly, and Mego Lien, “Responses to Antismoking Radio and Television Advertisements Among Adult Smokers and Non-smokers Across Africa: Message-Testing Results from Senegal, Nigeria, and Kenya,” Tobacco Control 24:6 (November 2015): 601.

Endnotes 3

78 Danny Hakim, “Banned Abroad,” New York Times (February 24, 2015): Business 1+.

79 Daniel Greenfield, “DDT Might Have Stopped Zika, but Envi- ronmentalists Chose Mosquitos over People,” Frontpage Magazine (January 28, 2016) http://www.frontpagemag.com/point/261639 (accessed June 10, 2016).

80 Michael Finkel, “Bedlam in the Blood: Malaria,” National Geographic (July 2007): 63; and Richard Tren and Roger Bate, “Malaria and the DDT Story,” SSRN Working Paper Series (April 2012).

81 Kevin Helliker, “Smokeless Tobacco to Get Push by Venture Over- seas,” Wall Street Journal (February 4, 2009): B1+.

82 “Smoke Signals,” The Economist (April 23, 2016): 55–6. 83 ”Coca-Cola Releases 2011–2012 Global Sustainability Report,”

Professional Services Close-Up (November 11, 2012). 84 Avery Johnson, “Drug Firms See Poorer Nations as Sales Cure,” Wall

Street Journal (July 7, 2009): A1+. 85 Andrew Jack, “Anti-Malaria Drug to Sell at Cost Price,” Financial

Times (March 2, 2007): 3; Jennifer Corbett Dooren, “Research to Target Neglected Diseases,” Wall Street Journal (May 21, 2009): 16.

86 Susanna Khavul, Mark Peterson, Drake Mullens, and Abdul A. Rasheed, “Going Global with Innovations from Emerging Economies: Investment in Customer Support Capabilities Pays Off,” Journal of International Marketing 18:4 (2010): 22–42.

87 Mobolaji Olaseni and Wale Alade, “Vision 20:2020 and the Challenges of Infrastructural Development in Nigeria,” Journal of Sustainable Development 5:2 (February 2012): 63–76.

88 Tomasz Lenartowicz and Sridhar Balasubramanian, “Practices and Performance of Small Retail Stores in Developing Economies,” Journal of International Marketing 17:1 (2009): 58–90.

89 Ibid. 90 J. A. Weber, “Comparing Growth Opportunities in the International

Marketplace,” Management International Review 1 (1979): 47–54; Van R. Wood, John R. Darling, and Mark Siders, “Consumer Desire to Buy and Use Products in International Markets: How to Capture It, How to Sustain It,” International Marketing Review 16:3 (1999): 231–42.

91 “Mintel: India’s Craving for Chocolate to Create Business Oppor- tunities for Manufacturers,” Entertainment Close - Up (November 17, 2012): n.p.; Anu Kaimal, “What May Be the Reasons Why Per Capita Chocolate Consumption of India is Comparatively Lower?” https:// www.quora.com (accessed April 21, 2016).

92 Oliver Nieburg, “The New World of Chocolate: How Is Consumption in Emerging Markets Developing?” Confectionarynews.com (October 9, 2014) (accessed April 21, 2016).

93 Elizabeth Crawford, “5 Marketing Tactics Helping Premium Chocolate Sales Outpace Overall Category,” (December 9, 2014) http://www. foodnavigator-usa-com/Markets/5 (accessed April 21, 2016).

94 Dermot Doherty, “Godiva’s Sweet on China,” Miami Herald (June 12, 2012): 6B.

95 Haig Simonian, “Nestlé Enriches Its Choc Value,” Financial Times (March 24, 2006): 9.

96 “A Billion Shades of Grey,” The Economist (April 26, 2014): 13. 97 Michiyo Nakamoto, “Japanese Fall out of Love with Luxury,” Financial

Times (June 3, 2009): 15. 98 Allen L. Hammond and C. K. Prahalad, “Selling to the Poor,” Foreign

Policy (May/June 2004): 30–7. 99 Stephanie Strom, “New Tack on Snacks,” New York Times (June 13,

2012): B1+. 100 Kelvin Chan, “Foreign Vineyards Keen to Tap China Wine Market,”

Miami Herald (November 7, 2011): n.p. 101 For an excellent discussion of these traits and their interactions,

see Mark Cleveland, Michel Laroche, and Nicolas Papadopoulos, “Cosmopolitanism, Consumer Ethnocentrism, and Materialism: An Eight-Country Study of Antecedents and Outcomes,” Journal of International Marketing 17:1 (2009): 116–46.

102 Information for the case was taken from Muhammad Yunus, Creating a World Without Poverty (New York: Public Affairs, 2007); C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Upper Saddle River, NJ: Wharton School Publishing, 2010); IMF World Economic Outlook Database, April 2015 (www.imf.org/external/ pubs/ft/weo/2015/02/index.htm) and UNICEF Country Statistics (www.unicef.org/infobycountry/bangladesh_bangladesh_statis- tics.html#119); Grameen Danone Foods Ltd. PowerPoint (Jan. 2012) available at www.danonecommunities.com; www.grameen- intel.com (accessed January 16, 2013); Grameen Bank Monthly Report, October 2015; Danone Annual Report, 2015; Social Busi- ness: BASF Grameen Ltd. available at www.basf.com (accessed February 7, 2013); “GAIN and Grameen Danone: A Study About Nutrition,” www.youtube.com/watch?v=EQJ0Qco7JhE (accessed on February 8, 2013); Sheridan Prasso, “Saving the World With a Cup of Yogurt,” Fortune 155:2 (March 15, 2007): 44; John F. Jones, “Social Finance: Commerce and Community in Developing Countries,” International Journal of Social Economics 37:6 (2010): 415–28; Nevin S. Scrimshaw, “History and Early Development of INCAP1, 2,” The Journal of Nutrition 140:2 (February 2010): 394–96; Sarah Murray, “Yogurt Maker’s Recipe for Funding Social Businesses,” Financial Times (July 7, 2008): 16; Christina Passari- ello, “Danone Expands Its Pantry to Woo the World’s Poor,” Wall Street Journal (June 29, 2010): A1; Paul Bennet, “The Biggest Idea Might Be Learning to Think Small,” Financial Times (December 31, 2009): 10; Michael Fitzgerald, “As the World Turns,” 133 Fast Company (March 2009): 33–4; Scheherazade Daneshkhu, “The Off-the-Wall Executive,” Financial Times (November 22, 2010): 12; “Top CEOs Talk on Global Social Business in Germany,” The Global Express [Dhaka] (November 12, 2010): n.p.; and Dean Nelson, “Pioneer Bank in Turmoil,” The Sunday Telegraph [London] (February 13, 2011): 3.

http://www.frontpagemag.com/point/261639

https://www.quora.com

http://www.foodnavigator-usa-com/Markets/5

http://www.imf.org/external/pubs/ft/weo/2015/02/index.htm

http://www.unicef.org/infobycountry/bangladesh_bangladesh_statistics.html#119

http://www.danonecommunities.com

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http://www.youtube.com/watch?v=EQJ0Qco7JhE

http://www.foodnavigator-usa-com/Markets/5

EndnotEs

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2 “The Fourth Annual Global Survey of Supply Chain Progress,” Computer Sciences Corporation (CSC) and Supply Chain Manage- ment Review (2006); Darrell Rigby, “Management Tools 2005,” Bain & Company (2005): 58.

3 Council of Supply Chain Management Professionals, cscmp.org/ about-us/supply-chain-management-definitions (accessed June 1, 2013).

4 Homin Chen and Tain-Jy Chen, “Network Linkages and Location Choice in Foreign Direct Investment,” Journal of International Business Studies 29:3 (1998): 447.

5 Lauren Sherman, “It Takes a Village to Make a Barbie,” Forbes (March 5, 2009), http://www.forbes.com/2009/03/05/barbie-design- manufacturing-business_numbers.html (accessed June 6, 2016).

6 Stanley E. Fawcett and Anthony S. Roath, “The Viability of Mexican Production Sharing: Assessing the Four Cs of Strategic Fit,” Urbana 3:1 (1996): 29.

7 See S. C. Wheelwright, “Reflecting Corporate Strategy in Manufac- turing Decisions,” Business Horizons (1978): 21; S. C. Wheelwright, “Manufacturing Strategy: Defining the Missing Link,” Strategic Management Journal 5 (1984): 77–91; Frank DuBois, Brian Toyne, and Michael D. Oliff, “International Manufacturing Strategies of U.S. Multinationals: A Conceptual Framework Based on a Four-Industry Study,” Journal of International Business Studies 24:2 (1993): 313–14; Robert H. Hayes, Steven C. Wheelwright, and Kim B. Clark, Dynamic Manufacturing (New York: Free Press, 1988): 10–11.

8 Interview by author of Wall’s Unilever personnel in Beijing, China (June 2006).

9 Christina Rogers, “Ford Aims to Raise Output from Mexico,” Wall Street Journal (February 8, 2016): B3.

10 Kathy Chu, “China Loses Edge on Labor Costs,” Wall Street Journal (December 3, 2015): B1.

11 Rogers, op. cit. 12 Rogers, op. cit. 13 Michael E. McGrath and Richard W. Hoole, “Manufacturing’s New

Economies of Scale,” Harvard Business Review (May–June 1992): 94. 14 Christina Rogers and John D. Stoll, “Ford to Shift Work Abroad,” Wall

Street Journal (July 10, 2015): B1 and Kathy Chu, “Made in Vietnam Ready for Boost,” Wall Street Journal (October 19, 2015): B1.

15 Fawcett and Roath, “The Viability of Mexican Production Sharing,” 29.

16 Amy Schoenfeld, “A Multinational Loaf,” New York Times (June 20, 2007), www.nytimes.com/imagepages/2007/06/15/business/20070616_ FOOD_GRAPHIC.html (accessed November 9, 2007).

17 Alexei Barrionuevo, “Globalization in Every Loaf,” New York Times (June 16, 2007), www.nytimes.com/2007/06/16/business/ worldbusiness/16food.html?partner=rssnyt&emc=rss (accessed November 9, 2007).

18 Masaaki Kotabe and Glen S. Omura, “Sourcing Strategies of Euro- pean and Japanese Multinationals: A Comparison,” Journal of Interna- tional Business Studies (Spring 1989): 120–22.

19 Thomas L. Friedman, The World Is Flat (New York: Picador/Farrar, Straus and Giroux): 152.

20 Robert M. Monczka and Robert J. Trent, “Global Sourcing: A Develop- ment Approach,” International Journal of Purchasing and Materials Management (Spring 1991): 3.

21 Doug Cameron, “Pentagon Hires Foreign Chips Supplier,” Wall Street Journal (June 6, 2016): B3.

22 R. D’Aveni and D. Ravenscraft, “Economies of Integration versus Bureaucracy Costs: Does Vertical Integration Improve Performance?” Academy of Management Journal 37:5 (1994): 1167–206; O. William- son, “Vertical Integration and Related Variations on a Transaction-Cost Theme,” in New Developments in the Analysis of Market Structure, eds. J. Stiglitz and G. Mathewson (Cambridge, MA: MIT Press, 1986): 149–95; O. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985): 85–130.

23 Russell Johnston and Paul R. Lawrence, “Beyond Vertical Integration— The Rise of the Value-Adding Partnership,” Harvard Business Review (July–August 1988): 98.

24 Chester Dawson, “A ‘China Price’ for Toyota,” Businessweek (February 21, 2005): 50–51.

25 John McMillan, “Managing Suppliers: Incentive Systems in Japanese and U.S. Industry,” California Management Review (Summer 1990): 38.

26 Rigby, “Management Tools 2005.” 27 “Still Made in Japan,” Economist.com (April 7, 2004), www.economist.

com/printedition/displayStory. cfm?Story_ id=2571689 (accessed November 9, 2007).

28 “Still Made in Japan,” Economist.com. 29 Paul Mozur, “Eye on Apple, Foxconn Bets Billions on Sharp,” New York

Times (March 31, 2016): B1. 30 Adapted from Pete Engardio and Bruce Einhorn, “Outsourcing

Innovation,” Businessweek (March 21, 2005): 84–94. 31 IKEA Group FY15 Sustainability Report, p. 60-61 (accessed June 8,

2016). 32 Apple Supplier Responsibility 2016 Progress Report, p. 27,

www.apple,com/supplier-responsibility/pdf/Apple_SR_2016_ Progress_Report.pdf.

33 Lynnley Browning, “Complex Law on Conflict Mineral,” New York Times (September 8, 2015): B1.

34 Apple Supplier Responsibility 2016 Progress Report, op. cit, p.13 and 14.

35 Monczka and Trent, “Global Sourcing: A Development Approach,” 4–5.

36 Stanley E. Fawcett, “The Globalization of the Supply Environment,” The Supply Environment 2 (Tempe, AZ: NAPM, 2000): 11.

37 Thomas L. Friedman, The World is Flat: a Brief History of the Twenty- First Century, Release 3.0 (New York, NY: Picador, 2007): 77.

38 Richard Karpinski, “Wal-Mart Mandates Secure, Internet-Based EDI for Suppliers,” Internetweek.com (September 12, 2002), www.inter- netweek.com/supplyChain/INW20020912S0011 (accessed October 1, 2002); R. Sridharan and Shamni Pande, “Surviving Wal-Mart,” Busi- ness Today (July 29, 2007): 166.

39 Scott McCartney, “A New Way to Prevent Lost Luggage,” Wall Street Journal (February 27, 2007): D1.

http://tech.fortune.cnn.com/2012/10/07/whats-really-going-on-at-apples-iphone-5-factory-in-zhengzhou-china/

http://www.statista.com/statistics/263465/non-us-share-of-apples-revenue/

http://www.apple.com/retail/storelist/

http://www.forbes.com/2009/03/05/barbie-design-manufacturing-business_numbers.html

http://www.nytimes.com/imagepages/2007/06/15/business/20070616_FOOD_GRAPHIC.html

http://www.nytimes.com/2007/06/16/business/worldbusiness/16food.html?partner=rssnyt&emc=rss

http://www.economist.com/printedition/displayStory. cfm?Story_ id=2571689

http://www.apple.com/supplier-responsibility/pdf/Apple_SR_2016_Progress_Report.pdf

http://www.internetweek.com/supplyChain/INW20020912S0011

http://www.statista.com/statistics/263465/non-us-share-of-apples-revenue/

http://www.nytimes.com/imagepages/2007/06/15/business/20070616_FOOD_GRAPHIC.html

http://www.nytimes.com/2007/06/16/business/worldbusiness/16food.html?partner=rssnyt&emc=rss

http://www.economist.com/printedition/displayStory. cfm?Story_ id=2571689

2 Endnotes

40 Vlad Krotov and Iris Junglas, “RFID as a Disruptive Innovation,” Journal of Theoretical and Applied Electronic Commerce Research 3:2 (August 2008): 44.

41 Miguel Bustillo, “Wal-Mart Radio Tags to Track Clothing,” Wall Street Journal (July 22, 2010), www.wsj.com (accessed July 25, 2011).

42 Karpinski, “Wal-Mart Mandates Secure, Internet-Based EDI for Suppliers.”

43 “You’ll Never Walk Alone,” 17. 44 “Internet Growth Statistics,” www. Internetworldstats.com/

emarketing.htm (accessed June 9 2016). 45 Lee J. Krajewski and Larry P. Ritzman, Operations Management:

Strategy and Analysis, 4th ed. (Reading, MA: Addison-Wesley, 1996): 141–42.

46 F. Robert Jacobs and Richard B. Chase, Operations and Supply Man- agement: The Core, 4th Edition (New York: McGraw-Hill Irwin, 2017), Chapter 10.

47 “Takata Airbag Recall—Everything You Need to Know,” Consumer Reports, updated on June 9, 2016, www.consumerreports.org/cro/ news/2016/05/everything-you-need-to-know-about-the-takata- air-bag-recall/index.htm.

48 Mike Spector and Megumi Fijikawa, “Auto Makers Expand Air-Bag Recalls,” Wall Street Journal (May 28–29, 2016): B3; Neil Gough, Jonathan Sable, and Hiroko Tabuchi, “Defective Airbag Grows into Global Problem for Manufacturer,” New York Times (November 19, 2014): B1.

49 Hayes, Wheelwright, and Clark, Dynamic Manufacturing, 17. 50 Foster, Managing Quality: Integrating the Supply Chain, 6th edition

(Upper Saddle River, NJ: Pearson, 2016). 51 Ibid. 52 Krajewski and Ritzman, Operations Management, 140. 53 Krajewski and Ritzman, Operations Management, 156. 54 Krajewski and Ritzman, Operations Management, 732. 55 Gabriel Kahn, Trish Saywell, and Quenna Sook Kim, “Backlog at

West Coast Docks Keeps Christmas Toys at Sea,” Wall Street Journal (October 21, 2002), www.wsj.com (accessed October 25, 2002).

56 Shawnee K. Vickery, “International Sourcing: Implications for Just-in- Time Manufacturing,” Production and Inventory Management Journal (1989): 67.

57 “What Is Six Sigma?” www.isixsigma.com/new-to-six-sigma/ getting-started/what-six-sigma/ (accessed June 9, 2016).

58 Brian Hindo and Brian Grow, “Six Sigma: So Yesterday?” Businessweek (June 11, 2007): 11.

59 Robert McClusky, “The Rise, Fall and Revival of Six Sigma Quality,” Quality Focus 4:2 (2000): 6.

60 International Organization for Standardization, “ISO Standards,” www.iso.org (accessed June 9, 2016).

61 See Jonathan B. Levine, “Want EC Business? You Have Two Choices,” Businessweek (October 19, 1992): 58; International Organization for Standardization, ibid.

62 International Organization for Standardization, “ISO/TS 16949:2009,” www.iso.org/iso/catalogue_detail?csnumber=52844 (accessed June 9, 2016).

63 The information on Nokero is from the author’s personal interviews with Steve Katsaros, Founder and CEO of Nokero, and Tom Boyd, Director of Communications and Marketing, Nokero. Nokero’s Steve Katsaros, Evan Husney, Tom Boyd, and Beth Polizzotto, University of Colorado Denver, provided research materials for the initial version of the case. Updates on the case were provided by Steve Katsaros. John Collins Rudolf, “A Solar Bulb May Light the Way,” New York Times (June 25, 2010), http://green.blogs.nytimes.com/2010/06/25/ a-solar-bulb-may-light-the-way/?_r=0 (accessed June 1, 2013). Jason Blevins, “The Power of Light,” The Denver Post, (July 10, 2010): 1. Tom Boyd, “A Year After Quake, Nokero and American Green Light up Orphanage, Tent City in Haiti,” Nokero.com (January 14, 2010), accessed June 1, 2013; “Solar Powered Lightbulb Invented for World’s Powerless,” Nokero website, January 8, 2013, http://nokero. com/2013/01/08/solar-powered-lightbulb-invented-for-worlds- powerless/ (accessed June 1, 2013). This case was written by Manuel G. Serapio, Associate Professor and IB Program Director, Business School and Faculty Director of the University of Colorado Denver CIBER.

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EndnotEs

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2 “Chief Financial Officer—CFO,” www.investopedia.com/terms/c/cfo .asp (accessed May 27, 2016).

3 Adidas Group, Annual Report 2015, p. 110. Accessed May 27, 2016. 4 Geert Hofstede, Culture’s Consequences: International Differences in

Work-Related Values (Beverly Hills: Sage, 1980): 327; Geert Hofstede and Michael H. Bond, “The Confucius Connection: From Cultural Roots to Economic Growth,” Organizational Dynamics 16:4 (1988): 4; Geert Hofstede, Gert Jan Hofstede, and Michael Minkov, Cultures and Organizations: Software of the Mind, Third Edition (Maidenhead, England: McGraw-Hill, 2010): 561.

5 Sidney J. Gray, “Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally,” Abacus (March 1988): 1.

6 European Union, “Third Countries/Convergence,” ec.europa.eu/ internal_market/accounting/third_countries/index_en.htm (accessed May 27, 2016).

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9 IFRS Foundation, “About the IFRS Foundation and the IASB,” www .ifrs.org/The-organisation/Pages/IFRS-Foundation-and-the-IASB .aspx (accessed May 28, 2016).

10 Paul Pacter, “Pocket Guide to IFRS’ Standards: The Global Financial Reporting Language,” (UK: IFRS Foundation, 2016). Accessible in PDF from ifrs.org.

11 Financial Accounting Standards Board, “Memorandum of Under- standing: The Norwalk Agreement,” http://www.fasb.org/news/ memorandum.pdf (accessed May 28, 2016).

12 FASB, “Convergence with the International Accounting Standards Board.”

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15 “Finance and Economics: Speaking in Tongues,” The Economist (May 19, 2007): 77–78.

16 “Uniform Rules for International Accounting Standards from 2005 Onwards,” European Parliament Daily Notebook, Report on the Proposal for a European Parliament and Council Regulation on the Application of International Accounting Standards, (COM 2001) 80-C5-0061/2001–2001/004 (COD), Doc.: A5-0070/2002, www.europarl .europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+PRESS+DN- 20020312-1+0+DOC+XML+V0//EN&language=EN#SECTION5 (accessed October 21, 2009).

17 “Organization of the SEC,” www.sec.gov/about/whatwedo.shtm#org (accessed May 30, 2016).

18 FASB, “Foreign Currency Translation,” Statement of Financial Account- ing Standards No. 52 (Stamford, CT: FASB, December 1981): 6–7.

19 http://www.ifrs.org/IFRSs/Pages/IFRS.aspx. 20 Coca-Cola, 2015 Form 10-K (Securities and Exchange Commission),

p. 69. 21 David K. Eiteman, Arthur I. Stonehill, and Michael H. Moffett, Multi-

national Business Finance, 14th edition (Pearson: Upper Saddle Ridge, NJ:, 2016): Chapter 18.

22 “Working Capital,” Investopedia.com/terms/w/workingcapital.asp (accessed May 30, 2016).

23 Mike Ramsey, “VW Chops Labor Costs in U.S.,” Wall Street Journal (May 23, 2011): B1; Stephen Power, “BMW’s Profit Softened in Quar- ter,” Wall Street Journal (May 4, 2005): A12.

24 Tatyana Shumsky, “SEC Nods to Multinationals,” Wall Street Journal (February 23, 2016): B5.

25 Ibid. 26 Michael Rapoport and Jean Eaglesham,”SEC Nears Settlement with

China Auditors,” Wall Street Journal (February 5, 2015): C3. 27 “International Listings,” NYSE.com (accessed May 30, 2016). 28 Various annual reports of The Gap, H&M, and Inditex for 2015, ac-

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EndnotEs

1 S. Green, F. Hassan, J. Immelt, M. Marks, and D. Meiland, “In Search of Global Leaders,” Harvard Business Review 81:8 (2003): 44.

2 “Many Still Live with Homesickness,” New York Times, http://www. nytimes.com/2012/03/22/opinion/many-still-live-with-homesickness. html?_r=0 (accessed February 28, 2016).

3 Mark Schoeff Jr., “P&G Places a Premium on International Experience,” Workforce, www.workforce.com/apps/pbcs.dll/ article?AID=/20060412/NEWS02/304129985&template=printarticle (accessed February 25, 2013).

4 Ibid, Green, Hassan, Immelt, Marks, and Meiland. 5 Barbara Ettorre, “A Brave New World,” Management Review 82:4 (April

1993): 10–16. 6 “Staffing Globalisation: Travelling More Lightly,” The Economist (June

23, 2006): 67 7 “Globalisation: The Empire Strikes Back,” The Economist (September

18, 2008): 51. 8 HSBC Expat Explorer Survey 2010, Page 8. Retrieved June 10, 2013.

See https://www.expatexplorer.hsbc.com/ for additional analysis and elaboration.

9 Melinda Ligos, “The Foreign Assignment: An Incubator, or Exile?” New York Times (October 22, 2000).

10 Mark Larson, “More Employees Go Abroad as International Opera- tions Grow,” Workforce Management (June 1, 2006): 12.

11 Joe Sharkey, “Global Economy Is Leading To More Dangerous Places,” New York Times (April 19, 2005): C3.

12 Sandra Jones, “Going Stateside: Once the Overseas Hitch is Over, Homeward-Bound Expats Hit Turbulence,” Crain’s Chicago Business (July 24, 2000): 23.

13 Global Relocation Trends, GMAC Global Relocations Services 2012, www.gmac.com (accessed December 23, 2012).

14 Newman, Barry, “Expat Archipelago,” Wall Street Journal (December 12, 1995): A1.

15 “Mindful Mobility: Brookfield GRS’ 2015 Global Mobility Trends Sur- vey,” http://globalmobilitytrends.brookfieldgrs.com/#/collapse0?q=84 (accessed October 6). The 2015 Global Mobility Trends Survey results are based on input from global mobility and human resources profes- sionals from 143 multinational companies representing different global mobility program sizes, all major industry sectors, and diverse global headquarter locations. The survey samples MNEs in the fol- lowing industry clusters Health care = Biotechnology, Medical Equip- ment, and Pharmaceuticals; Financial Services = Banking, Investment Funds, Insurance, and Real Estate; Consumer Products = Consumer Products and Retailing;

Information Technology = Computers, e-commerce, Electronics, Semiconductor, Software, and Telecommunications; Engineering and Manufacturing = Construction, Engineering, Aerospace, Machinery, Manufacturing, Shipbuilding, and Transportation (Airline, Auto- motive, Railroad, Shipping); Other = Agriculture, Chemicals, and Services (Advertising, Business Consulting, Entertainment, Hospital- ity, Law, Publishing). See query “International Assignment Objectives: Select the primary objectives for sending employees on assignment.”

16 Ibid. Ligos. 17 “The World at Work,” McKinsey Global Institute, www.mckinsey.com/

insights/ (accessed December 27, 2012). 18 “Routes to the Top: How CEOs Embrace Global Mobility,” Global

Mobility Articles and Studies, www.articles.totallyexpat.com/ routes-to-the-top-how-ceos-embrace-global-mobility (accessed April 18, 2013).

19 Ibid, Mark Schoeff Jr. 20 “Schumpeter: The Tussle for Talent,” The Economist (January 6,

2011): 58. 21 “Schumpeter: Davos Man and His Defects,” The Economist (January

26, 2013): 63.

22 Leslie Kwoh, “One Foreign Posting Isn’t Enough for Managers Seeking Top Jobs,” WSJ.com, online.wsj.com/article/ SB10001424052702303630404577390573349379782.html?mod= WSJ_Careers_CareerJournal_4 (accessed December 27, 2012); “How Global Is Your C-Suite?” http://sloanreview.mit.edu/article/how- global-is-your-c-suite/ (accessed February 22, 2016).

23 S. Green, F. Hassan, J. Immelt, M. Marks, and D. Meiland, “In Search of Global Leaders,” Harvard Business Review 81:8 (2003): 44.

24 Paula Caligiuri and Victoria Di Santo, “Global Competence: What Is it, and Can It Be Developed through Global Assignments?” Human Resource Planning (September 2001): 27–36; Mark Morgan, “Career- Building Strategies: It’s Time to Do a Job Assessment: Are Your Skills Helping You up the Corporate Ladder?” Strategic Finance (June 2002): 38–44.

25 Hoon Park, “Global Human Resource Management: A Synthetic Approach,” The Journal of IB and Economics (2002): 28–51.

26 William Judge, “Is a Leader’s Character Culture-Bound or Culture- Free? An Empirical Comparison of the Character Traits of American and Taiwanese CEOs,” Journal of Leadership Studies 8 (Fall 2001): 63–79.

27 Similarly, labor markets vary in the mix of workers, costs, productiv- ity, and regulations. National labor laws often require MNEs to adapt their local workplace standards. In Malaysia, for instance, foreign engineers cannot work on building projects unless the hiring com- pany demonstrates to the Malaysian Board of Engineers that a native engineer cannot do the job. It’s stricter in Thailand—the country’s Alien Occupation Act reserves many architecture and engineer- ing services jobs for Thai nationals. U.S. Trade Representative, “2010 National Trade Estimate Report on Foreign Trade Barriers, 2010,” www.ustr.gov/about-us/press-office/reports-and-publications/2010 (accessed April 21, 2013). Adjusting IHRM practices for these sorts of regulations complicates decision-making.

28 Keith Brouthers, “Institutional, Cultural and Transaction Cost Influ- ences on Entry Mode Choice and Performance,” Journal of IB Studies 33 (Summer 2002): 203–22. See also Ben Kedia, Richard Nordtvedt, and Liliana M. Perez, “IB Strategies, Decision-Making Theories, and Leadership Styles: An Integrated Framework,” Competitiveness Review 12 (Winter–Spring 2002): 38–53.

29 Sully Taylor, Schon Beechler, and Nancy Napier, “Toward an Integra- tive Model of Strategic International Resource Management,” Acad- emy of Management Review 21 (1996): 959–85.

30 S. Green, F. Hassan, J. Immelt, M. Marks, and D. Meiland, “In Search of Global Leaders,” Harvard Business Review 81:8 (2003): 44.

31 Watson Wyatt Worldwide, “Human Capital Index: Human Capital as a Lead Indicator of Shareholder Value,” www.watsonwyatt.com/ research/resrender.asp?id=w-488&page=1 (accessed November 27, 2007); H. B. Gregersen, A. J. Morrison, and J. S. Black, “Developing Leaders for the Global Frontier,” MIT Sloan Management Review 40(1) (1998): 22; Jorge A. Gonzalez and Subhajit Chakraborty, “Expa- triate Knowledge Utilization and MNE Performance: A Multilevel Framework,” Human Resource Management Review 24:4 (2014): 299–312; Ulf Andersson, Peter J. Buckley, and Henrik Dellestrand, “In the Right Place at the Right Time!: The Influence of Knowledge Governance Tools on Knowledge Transfer and Utilization in MNEs,” Global Strategy Journal 5:1 (2015): 27–47; Hora Widjaja Tjitra, Mano Ramakrishnan, and Hana Panggabean, “Building the Global Com- petence of Asian Leaders,” Advances in Global Leadership 7 (2012): 273–94.

32 See, for example, N. Khatri, “Managing Human Resource for Com- petitive Advantage: A Study of MNEs in Singapore,” International Journal of Human Resource Management 11:2 (2000): 336.

33 S. Green, F. Hassan, J. Immelt, M. Marks, and D. Meiland, “In Search of Global Leaders,” Harvard Business Review 81:8 (2003): 44.

http://www.nytimes.com/2012/03/22/opinion/many-still-live-with-homesickness.html?_r=0

http://www.workforce.com/apps/pbcs.dll/article?AID=/20060412/NEWS02/304129985&template=printarticle

https://www.expatexplorer.hsbc.com/

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http://www.mckinsey.com/insights/

http://www.articles.totallyexpat.com/routes-to-the-top-how-ceos-embrace-global-mobility

http://sloanreview.mit.edu/article/how-global-is-your-c-suite/

http://www.ustr.gov/about-us/press-office/reports-and-publications/2010

http://www.watsonwyatt.com/research/resrender.asp?id=w-488&page=1

http://www.nytimes.com/2012/03/22/opinion/many-still-live-with-homesickness.html?_r=0

http://www.workforce.com/apps/pbcs.dll/article?AID=/20060412/NEWS02/304129985&template=printarticle

http://www.mckinsey.com/insights/

http://www.articles.totallyexpat.com/routes-to-the-top-how-ceos-embrace-global-mobility

http://www.watsonwyatt.com/research/resrender.asp?id=w-488&page=1

2 Endnotes

34 Simply put, an executive perspective unconditionally directs our attention to the principles and practices IHRM uses to specify the selection, role, responsibility, development, compensation, and reten- tion of expatriates.

35 “How Global Is Your C-Suite?” http://sloanreview.mit.edu/article/ how-global-is-your-c-suite/ (accessed February 29, 2016); “China’s Rising Demand for Expats,” The Nation, http://www .nationmultimedia.com/opinion/Chinas-rising-demand-for- expats-30228779.html (accessed February 29, 2016); “Does Asia Still Need ‘Traditional’ Western Expats?,” WSJ.com, http://blogs.wsj.com/ expat/2015/09/13/does-asia-still-need-traditional-western-expats/ (accessed February 29, 2016).

36 See “World Investment Report 2015 - Reforming International Invest- ment Governance,” Unctad.org (2015), http://unctad.org/en/pages/ PublicationWebflyer.aspx?publicationid=1245 (accessed Janu- ary 6, 2016); UNCTAD World Investment Report 2012 Launched,” http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionI D=170&Sitemap_x0020_Taxonomy=Investment percent20and percent20Enterprise;#640;#World percent20Investment percent20Report;#20;#UNCTAD percent20Home (accessed October 3, 2015).

37 “A Special Report on Innovation in Emerging Markets: The World Turned Upside Down,” The Economist, www.economist.com/ node/15879369 (accessed December 21, 2011).

38 “Up or Out: Next Moves for the Modern Expatriate,” The Economist Intelligence Unit, graphics.eiu.com/upload/eb/LON_PL_Regus_ WEB2.pdf (accessed December 31, 2012); Leslie Klaff, “Thinning the Ranks of the Career Expats,” Workforce Management (October 2004): 84–7.

39 Statement by Yvonne Sonsino, reported in “Travelling More Lightly,” The Economist (June 22, 2006): 67.

40 Sven Hemli, Carl Allwood, and Ben Martin, “Creative Knowledge Environments,” Creativity Research Journal (April–June 2008): 20; Claire Cain Miller and Catherine Rampell, “Yahoo Orders Home Workers Back to the Office, New York Times (February 25, 2013): A1; David Wessel, “Chinese Firm Experiments with Telecommuting,” Wall Street Journal (December 19, 2012): C3; “The Future of Telecommut- ing: Corralling the Yahoos,” The Economist (March 2, 2013): 61–2; “What Google Learned From Its Quest to Build the Perfect Team,” New York Times, http://www.nytimes.com/2016/02/28/magazine/ what-google-learned-from-its-quest-to-build-the-perfect-team.html (accessed February 29, 2016).

41 H. Mayerhofer, L. Hartmann, G. Michelitsch-Riedl, and I. Kollinger, “Flexpatriates Assignments: A Neglected Issue in Global Staffing,” International Journal of Human Resource Management 15 (2004): 1371–89.

42 Leslie Kwoh, “One Foreign Posting Isn’t Enough for Managers Seek- ing Top Jobs.”

43 Ibid, 13. See response to query “International Assignees by Age Group: Estimate the percentage of your current international assignees by age group.”

44 “Expat Explorer Survey: How Countries Compare,” HSBC, https:// www.expatexplorer.hsbc.com/survey/ (accessed February 7, 2016).

45 See “Early PwC International Challenge (EPIC),” PwC, http://www .pwc.com/gx/en/careers/early-pwc-international-challenge- programme.html (accessed October 3, 2015).

46 “PwC International Challenge (EPIC),” www.pwc.com/extweb/career. nsf/docid/9204374F898F3E5A8525748F00741E9D (accessed May 4, 2009).

47 Peter Saalfield and Rebecca Appel, “Business Schools: Looking Local for a Global Reach,” New York Times (May 17, 2012): B3; “The Geography of Foreign Students in U.S. Higher Education: Origins and Destinations,” Brookings Institution, http://www.brookings.edu/ research/interactives/2014/geography-of-foreign-students#/M10420 (accessed October 3, 2015); Margaret Shaffer, Maria Kraimer, Yu-Ping

Chen, and Mark Bolino, “Choices, Challenges, and Career Conse- quences of Global Work Experiences: A Review and Future Agenda,” Journal of Management 38 (2012): 1282–327.

48 “Americans Look Overseas for Global MBA Courses and Diversity,” TOPMBA, www.topmba.com/articles/north-america/americans-look- overseas-global-mba-courses-and-diversity (accessed December 27, 2012).

49 Ibid, 13. See response to query “International Assignees by Gender: Estimate the percentage of your current international assignees by gender”; “Where Are Women in the Expatriate Workforce?” http:// www.sIHRM.org/hrdisciplines/global/articles/pages/women-expatri- ate-workforce.aspx (accessed October 3, 2015).

50 “More Females Sent on International Assignment than ever Before, Survey Finds,” www.mercer.com/pressrelease/details. htm?idContent=1246090 (accessed April 25, 2009).

51 Calvin Reynolds, “Strategic Employment of Third Country Nation- als: Keys to Sustaining the Transformation of HR Functions,” Human Resource Planning 20 (March 1997): 33–50.

52 Keith Bradsher, “China’s Ambitious Goal for Boom in College Gradu- ates,” New York Times (March 21, 2013): A1.

53 Technically, the fly in and fly out position involves designated work in the host location followed by designated rest in the home location.

54 Ibid, 13. See response to query “Assignments to/from Headquarters Country: Estimate the percentage of your international assignments to/from headquarters country.”

55 Jeffrey Joerres, “Beyond Expats: Better Managers for Emerging Mar- kets,” McKinsey Quarterly (May 2011): 5

56 “Financial Careers: Go East, Young Moneyman,” The Economist (April 16, 2011): 79–80.

57 “Focus: Expatriate Costs and Assignments,” The Economist, http:// www.economist.com/blogs/graphicdetail/2012/07/focus-3 (accessed January 11, 2016).

58 Ibid 13. See response to query “Pressure to Reduce Assignment Costs: In response to business and economic conditions that may be affecting your company, has there been an effort to reduce international assignment costs?” 59 Ibid, 13. See response to query “Single Status Assignments by Assign-

ment Length: Estimate the percentage of single status assignments by assignment length (short-term vs. long-term assignment).”

60 Karina Frayter, “IBM to Laid-off: Want a Job in India?” money.cnn. com/2009/02/05/news/MNEs/ibm_jobs (accessed April 29, 2009).

61 Adrian Wooldridge, “The Battle for the Best,” The Economist: The World in 2007: 48.

62 Chi-fai Chan and Neil Holbert, “Marketing Home and Away: Percep- tions of Managers in Headquarters and Subsidiaries,” Journal of World Business 36 (Summer 2001): 205.

63 Tsun-yan Hsieh, Johanne Lavoie, and Robert Samek, “Are You Taking Your Expatriate Talent Seriously?” The McKinsey Quarterly (Summer 1999): 71; http://www.wipro.com/about-wipro/; “Rishad Premji: A Quiet Doer,” The Hindu Business Line, http://www .thehindubusinessline.com/info-tech/rishad-premji-a-quiet-doer/ article7146595.ece (accessed April 27, 2015).

64 “Staffing Globalisation: Travelling More Lightly,” The Economist (June 23, 2006): 67.

65 “Staffing Globalisation: Travelling More Lightly.” 66 C. Schmidt, “The Battle for China’s Talent,” Harvard Business Review

89, no. 3 (March 2011): 25–7. 67 “Why Toyota Has Flopped In China,” Business Insider, www

.businessinsider.com/why-toyota-has-flopped-in-china-2012-10 (accessed January 6, 2013).

68 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly, www. mckinseyquarterly.com/The_global_companys_challenge_2979 (accessed December 31, 2012).

http://sloanreview.mit.edu/article/how-global-is-your-c-suite/

http://www.nationmultimedia.com/opinion/Chinas-rising-demand-forexpats-30228779.html

http://blogs.wsj.com/expat/2015/09/13/does-asia-still-need-traditional-western-expats/

http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1245

http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=170&Sitemap_x0020_Taxonomy=Investment percent20andpercent20Enterprise;#640;#World percent20Investmentpercent20Report;#20;#UNCTAD percent20Home

http://www.nytimes.com/2016/02/28/magazine/what-google-learned-from-its-quest-to-build-the-perfect-team.html

https://www.expatexplorer.hsbc.com/survey/

http://www.pwc.com/gx/en/careers/early-pwc-international-challengeprogramme.html

http://www.pwc.com/extweb/career.nsf/docid/9204374F898F3E5A8525748F00741E9D

http://www.brookings.edu/research/interactives/2014/geography-of-foreign-students#/M10420

http://www.topmba.com/articles/north-america/americans-look-overseas-global-mba-courses-and-diversity

http://www.sIHRM.org/hrdisciplines/global/articles/pages/women-expatriate-workforce.aspx

http://www.mercer.com/pressrelease/details.htm?idContent=1246090

http://www.economist.com/blogs/graphicdetail/2012/07/focus-3

http://www.wipro.com/about-wipro/

http://www.thehindubusinessline.com/info-tech/rishad-premji-a-quiet-doer/article7146595.ece

http://www.mckinseyquarterly.com/The_global_companys_challenge_2979

http://sloanreview.mit.edu/article/how-global-is-your-c-suite/

http://www.nationmultimedia.com/opinion/Chinas-rising-demand-forexpats-30228779.html

http://blogs.wsj.com/expat/2015/09/13/does-asia-still-need-traditional-western-expats/

http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1245

http://www.nytimes.com/2016/02/28/magazine/what-google-learned-from-its-quest-to-build-the-perfect-team.html

http://www.pwc.com/gx/en/careers/early-pwc-international-challengeprogramme.html

http://www.pwc.com/extweb/career.nsf/docid/9204374F898F3E5A8525748F00741E9D

http://www.brookings.edu/research/interactives/2014/geography-of-foreign-students#/M10420

http://www.mercer.com/pressrelease/details.htm?idContent=1246090

http://www.thehindubusinessline.com/info-tech/rishad-premji-a-quiet-doer/article7146595.ece

http://www.businessinsider.com/why-toyota-has-flopped-in-china-2012-10

Endnotes 3

69 J. Kahn, “The World’s Most Admired MNEs,” Fortune (October 11, 1999): 267.

70 Kahn, “The World’s Most Admired MNEs.” 71 William C. Weldon, “Chairman’s Letter: To Our Shareholders,” Annual

Report 2006 (Johnson & Johnson, 2007), jnj.v1.papiervirtuel.com/ report/2007030901 (accessed November 27, 2007).

72 “Why Toyota Has Flopped In China,” Business Insider, www .businessinsider.com/why-toyota-has-flopped-in-china-2012-10 (accessed January 6, 2013).

73 “Focus: Expatriate Costs and Assignments,” The Economist, http:// www.economist.com/blogs/graphicdetail/2012/07/focus-3 (accessed October 4, 2015).

74 More precisely, supporting expatriates requires, on average, twice as many HR professionals (1 HR professional to 37 expats) versus non- expatriates (1 HR professional to 70 managers).

PricewaterhouseCoopers LLP and Cranfield School of Manage- ment, “Measuring the Value of International Assignments” (Novem- ber 9, 2006), www.som.cranfield.ac.uk/som/news/story.asp?id=329 (accessed May 15, 2008).

75 “Tylenol (Acetaminophen) to Be Available in Japan in Early Fall, 2000,” Doctor’s Guide, www.pslgroup.com/dg/1d9dfa.htm (accessed June 15, 2011).

76 David Ahlstrom, Garry Bruton, and Eunice S. Chan, “IHRM of Foreign Firms in China: The Challenge of Managing Host Country Person- nel,” Business Horizons 44 (May 2001): 59.

77 A subtle drawback of polycentric staffing is the potential disengage- ment of local staff from the parent company. Coordination can also suffer as language barriers, cultural outlooks, national loyalties, and local ambitions transform a subsidiary network into a federation of relatively autonomous local units with few meaningful links to others.

78 S. Green, F. Hassan, J. Immelt, M. Marks, and D. Meiland, “In Search of Global Leaders,” Harvard Business Review 81:8 (2003): 44.

79 “High-Tech Nomads: These Engineers Work as Temps on Wireless Projects All over the World,” Time (November 26, 2001): B20; B. Kedia and A. Mukherji, “Global Managers: Developing a Mindset for Global Competitiveness,” Journal of World Business 34 (Fall 1999): 30.

80 S. Green, F. Hassan, J. Immelt, M. Marks, and D. Meiland, “In Search of Global Leaders,” Harvard Business Review 81:8 (2003): 44.

81 Thomas Barta, Markus Kleiner, and Tilo Neumann, “Is There a Payoff from Top-Team Diversity?” McKinsey Quarterly, www .mckinseyquarterly.com/Is_there_a_payoff_from_top-team_ diversity_2954 (accessed December 27, 2012); “How Global Is Your C-Suite?” http://sloanreview.mit.edu/article/how-global-is-your- c-suite/ (accessed February 22, 2016); B. B. Nielsen and S. Nielsen, “Top Management Team Nationality Diversity and Firm Performance: A Multilevel Study,” Strategic Management Journal 34:3 (March 2013): 373–82.

82 See B. B. Nielsen and S. Nielsen, “Top Management Team National- ity Diversity and Firm Performance: A Multilevel Study,” Strategic Management Journal 34:3 (March 2013): 373–82.

83 Alex Pentland, “The New Science of Building Great Teams,” Harvard Business Review, hbr.org/2012/04/the-new-science-of-building- great-teams (accessed December 27, 2012); T. Barta, M. Kleiner, and T. Neumann, “Is There a Payoff From Top-Team Diversity?” McKinsey Quarterly (April 2012).

84 See, for instance, K. Y. Williams and C. A. O’Reilly III, “Demography and Diversity in Organizations: A Review of 40 Years of Research,” in Research in Organizational Behavior, eds. B. M. Staw and L. L. Cummings (Greenwich, Connecticut: JAI Press, 1998): 77–140; S. Kaczmarek and W. Ruigrok, “In at the Deep End of Firm Internation- alization” [in English], Management International Review 53:4 (August 2013): 513–34. Others, of course, disagree. See B. B. Nielsen and S. Nielsen, “Top Management Team Nationality Diversity and Firm Performance: A Multilevel Study,” Strategic Management Journal 34:3 (March 2013): 373–82.

85 Tsun-yan Hsieh, J. Lavoie, and R. A. P. Samek, “Think Global, Hire Local,” McKinsey Quarterly 4 (1999): 92–101; and S. Shankar and V. Vishwanath, “Winning in Emerging Markets,” June 17, 2008, www .bain.com.

86 Margaret Schweer, Dimitris Assimakopoulos, Rob Cross, and Robert Thomas, “Building a Well-Networked Organization,” MIT Sloan Management Review, sloanreview.mit.edu/the-magazine/ 2012-winter/53211/building-a-well-networked-organization (accessed December 27, 2012). For instance, the type of ownership of its foreign operations influences an MNE’s staffing policy. Expatriates transferred abroad to a foreign joint venture, for example, may find themselves in ambiguous situations, unsure of whom they represent and uncertain of whether they report to both partners or to the part- ner that transferred them. Typically, MNEs insist on using their own executives when they’re concerned that local personnel may make decisions in their own interest rather than that of the joint venture. “Global Relocation Trends,” GMAC Global Relocations Services, www .gmac.com (accessed April 21, 2011). Understandably, MNEs face situations that prevent adopting universal staffing policies. Administrative legacies, geographic circumstances, leadership changes, acquisitions, and divestitures mean staffing policies may vary significantly from unit to unit.

87 Again, recall how Honeywell screens candidates years before they might go abroad in order to maximize the probability of success.

88 Joyce Osland, Mark E. Mendenhall, Allan Bird, Gary R. Oddou, Martha L. Maznevski, Michael Stevens, and Günter K. Stahl, “Global Leadership: Research, Practice, and Development,” (2012); Günter K. Stahl, Mark E. Mendenhall, and Gary R. Oddou, Readings and Cases in International Human Resource Management and Organizational Behavior (Routledge, 2012); Thomas Hippler, Paula Caligiuri, and Johanna Johnson, “Revisiting the Construct of Expatriate Adjustment: Implications for Theory and Measurement,” International Studies of Management & Organization 44:3 (2014): 8–24.

89 Caligiuri and Di Santo, “Global Competence”; Hsieh et al., “Are You Taking Your Expatriate Talent Seriously?”

90 M. Tahvanainen, D. Welch, and V. Worm, “Implications of Short-Term International Assignments,” European Management Journal, 2005 (23): 663–73; “Mindful Mobility: Brookfield GRS’ 2015 Global Mobility Trends Survey,” http://globalmobilitytrends.brookfieldgrs.com/#/ collapse0?q=84 (accessed October 6, 2015), see query “International Assignment Objectives: Select the primary objectives for sending employees on assignment.”

91 Susan Schneider and Rosalie Tung, “Introduction to the International Human Resource Management Special Issue,” Journal of World Business 36 (Winter 2001): 341–46. We should note that this predis- position is slowly relaxing; some MNEs seek younger employees to staff international slots, rebalancing the trade-off between perfor- mance and potential.

92 Data results for query: What are the criteria for including a candidate into the candidate pool?” http://globalmobilitytrends.brookfieldgrs. com/#/collapse5?q=90, “Mindful Mobility: Brookfield GRS’ 2015 Global Mobility Trends Survey.” Results are based on input from global mobility and human resources professionals from 143 multi- national companies representing different global mobility program sizes, all major industry sectors, and diverse global headquarter loca- tions. Respondents provided multiple answers.

93 J. Ramsey, J. Leonel, G. Gomes, and P. Monteiro, “Cultural Intelli- gence’s Influence on IB Travelers’ Stress,” Cross Cultural Management, 2011 (18): 21–37.

94 “In Search of Global Leaders: View of Stephen Green, Group CEO, HSBC,” Harvard Business Review (August 1, 2003): 44.

95 S. Jun, J. Gentry, and Y. Hyun, “Cultural Adaptation of Business Expa- triates in the Host Marketplace,” Journal of IB Studies 32 (Summer 2001): 369.

http://www.economist.com/blogs/graphicdetail/2012/07/focus-3

http://www.som.cranfield.ac.uk/som/news/story.asp?id=329

http://www.pslgroup.com/dg/1d9dfa.htm

http://sloanreview.mit.edu/article/how-global-is-your-c-suite/

http://globalmobilitytrends.brookfieldgrs.com/#/collapse0?q=84

http://globalmobilitytrends.brookfieldgrs.com/#/collapse5?q=90

http://globalmobilitytrends.brookfieldgrs.com/#/collapse0?q=84

http://globalmobilitytrends.brookfieldgrs.com/#/collapse5?q=90

http://www.businessinsider.com/why-toyota-has-flopped-in-china-2012-10

http://www.mckinseyquarterly.com/Is_there_a_payoff_from_top-team_diversity_2954

http://www.bain.com

https://www.yumpu.com/en/document/view/22564379/to-download-jeitosa-groupinternational/5

4 Endnotes

96 M. Van der Bank and S. Rothmann, “Correlates of Expatriates’ Cross- Cultural Adjustment,” Management Dynamics 15:4 (2006): 29; Maria L. Kraimer, Sandy J. Wayne, and Renata A. Jaworski, “Sources of Support and Expatriate Performance: The Mediating Role of Expatri- ate Adjustment,” Personnel Psychology 54:1 (2001): 71–99. Paula M. Caligiuri, “Assessing Expatriate Success: Beyond Just ‘Being There,’” New Approaches to Employee Management, 4 (1997): 117–40.

97 “Business in China and the West: A Tale of Two Expats,” The Econo- mist (December 29, 2010).

98 Karen Beaman, “2010–2011 Going Global Report,” Jeitosa Group International, Adapted from Table 7, page 5; https://www.yumpu. com/en/document/view/22564379/to-download-jeitosa-group- international/5.

99 Tsun-yan Hsieh, Johanne Lavoie, and Robert Samek, “Are You Taking Your Expatriate Talent Seriously?” The McKinsey Quarterly (Summer 1999): 71.

100 Lisa Littrell, Eduardo Salas, Kathleen Hess, Michael Paley, and Sharon Riedel “Expatriate Preparation: A Critical Analysis of 25 Years of Cross-Cultural Training Research,” Human Resource Development Review 5 (2006): 355–388; Margaret Shaffer, Maria Kraimer, Yu-Ping Chen, and Mark Bolino, “Choices, Challenges, and Career Conse- quences of Global Work Experiences: A Review and Future Agenda,” Journal of Management 38 (2012): 1282–327.

101 M. Van der Bank and S. Rothmann, “Correlates of Expatriates’ Cross-Cultural Adjustment,” Management Dynamics 15:4 (2006): 29; Maria L. Kraimer, Sandy J. Wayne, and Renata A. Jaworski, “Sources of Support and Expatriate Performance: The Mediating Role of Expa- triate Adjustment,” Personnel Psychology 54:1 (2001): 71–99. Paula M. Caligiuri, “Assessing Expatriate Success: Beyond Just ‘Being There,’” New Approaches to Employee Management, 4 (1997): 117–40.

102 HSBC Expat Explorer Survey 2010, Page 8. Retrieved June 10, 2013. See https://www.expatexplorer.hsbc.com/ for additional analysis and elaboration.

103 M. Shaffer, D. Harrison, M. Gilley, and D. Luk, “Struggling for Bal- ance Amid Turbulence on International Assignments: Work-Family Conflict, Support, and Commitment,” Journal of Management 27 (January–February 2001): 99; Chris Moss, “Expats: Thinking of Living and Working Abroad?” The Guardian (October 19, 2000): 4.

104 Commonly used tools include candidate self-assessment, formal assessment programs directed by IHRM, and assessments by an external agent or the business unit. The resulting data benchmarks an expat’s understanding of the assignment and frames programs to improve cultural awareness and refine practical skills. See, for example, Ellen Ernst Kossek, Jason L. Huang, Matthew M. Piszczek, John W. Fleenor, and Marian Ruderman. “Rating Expatriate Leader Effectiveness in Multisource Feedback Systems: Cultural Distance and Hierarchical Effects.”Human Resource Management (2015); Liu, Mengqiao, and Jason L. Huang. “Cross-cultural adjustment to the United States: The role of contextualized extraversion change.” Frontiers in psychology 6 (2015); Cumberland, Denise M., Ann Herd, Meera Alagaraja, and Sharon A. Kerrick. “Assessment and Develop- ment of Global Leadership Competencies in the Workplace A Review of Literature.” Advances in Developing Human Resources (2016): 1523422316645883.

105 Jessica Twentyman, “An Expat Job Can Be a Move Too Far,” FT.com, www.ft.com/cms/s/0/c1d1b668-d22b-11df-8fbe-00144feabdc0.html (accessed February 25, 2013).

106 Margaret Shaffer, Maria Kraimer, Yu-Ping Chen, and Mark Bolino, “Choices, Challenges, and Career Consequences of Global Work Experiences: A Review and Future Agenda,” Journal of Management 38 (2012): 1282–327.

107 S. Larson, “More Employees Go Abroad as International Operations Grow,” Workforce.com, www.workforce.com/index.html (accessed April 27, 2009).

108 Ibid, 13. See response to query “Primary Purpose of Media-/ Web-based Intercultural Training: Select the primary purpose for your web-based and/or media-based intercultural training program.”

109 Global Relocation Trends: 2011 Survey Report, www .relocatemagazine.com/relocation-news-blog-format/3-general- relocation-news/2212-brookfield-grs-2011-global-relocation-trends- survey-report (accessed March 31, 2011); Global Relocation Trends: 2012 Survey Report, www. reloroundtable.com/blog/trends-in-relo- cation/brookfield-reports-2012-relocation-trends/ (accessed April 21, 2012).

110 Ibid, 13. See response to query “Reasons for International Assign- ment Refusal: Select the most common reasons candidates provide for turning down assignments.” “Mindful Mobility: Brookfield GRS’ 2015 Global Mobility Trends Survey,” Brookfield GRS, http://global- mobilitytrends.brookfieldgrs.com/ (accessed January 13, 2016).

111 The predictability of this cycle compels IHRM to better prepare the expat, spouse, and family. Diane E. Lewis, “Families Make, Break Overseas Moves,” Boston Globe (October 4, 1998): 5D; “Expat Spouses: It Takes Two,” Financial Times (March 1, 2002): C1.

112 Global Relocation Trends: 2015 Survey Report; The Expat Explorer Sur- vey 2014, HSBC Bank International, survey of 4,127 expatriates form more than 100 countries. Combined, these sorts of solutions are changing the demography of expatriates. For instance 47 percent of expats had children 18 years or younger accompany them on foreign assignments in 2010; it dropped to 40 percent in 2012. J. Selmer and J. Lauring, “Self-Initiated Academic Expatriates: Inherent Demo- graphics and Reasons to Expatriate,” European Management Review 7 (2010): 169–79.

113 Suzy Harris, The University in Translation: Internationalizing Higher Education (New York: Continuum International Publishing Group, 2011).

114 “English Is Coming: The Adverse Side-Effects of the Growing Dominance of English,” The Economist (February 14, 2009): 85.

115 M. Joseph, “India Faces a Linguistic Truth—English Spoken Here,” New York Times (February 16, 2011): B1; “Schumpeter: New Rules for Schools,” The Economist (March 26, 2013): 74.

116 “Lingua Franca,” http://www.chinadaily.com.cn/life/2011-02/25/ content_12079783.htm (accessed February 25, 2016).

117 “Language-Teaching Firms: Linguists Online,” The Economist (January 5, 2013): 52; David Goldberg, Dennis Looney, and Natalia Lusin, “Enrollments in Languages Other Than English in United States Institutions of Higher Education, Fall 2013,” Modern Language Association of America, https://apps.mla.org/pdf/2013_ enrollment_survey.pdf.

118 European Commission, “Languages of Europe,” Education and Training, europa.eu. int/comm/education/policies/lang/languages/ index_en.html (accessed July 18, 2007); “Proportion of Pupils in Primary Education Learning Foreign Languages, by Language, 2013, Statistics Explained,” http://ec.europa.eu/eurostat/statistics- explained/index.php/Foreign_language_learning_statistics.

119 Doreen Carvajal, “In Many Business Schools, the Bottom Line is in English,” New York Times (April 10, 2007), www.nytimes. com/2007/04/10/world/europe/10iht-engbiz.2.5212499. html?pagewanted=all (accessed June 12, 2007).

120 “Global Spread of English Poses Problems for UK,” People’s Daily Online (February 18, 2006): B3.

121 A. Sitze, “Language of Business: Can E-Learning Help International MNEs Speak a Common Language?” Online Learning (March 2002): 19–23.

122 “Machine Translation: Conquering Babel,” The Economist (January 5, 2013): 63.

123 “Facebook Will Be Hiring Number of Employees by 2017,” techblog. weblineindia.com/news/facebook-will-be-hiring-number-of- employees-by-2017 (accessed January 11, 2013).

https://www.expatexplorer.hsbc.com/

http://www.ft.com/cms/s/0/c1d1b668-d22b-11df-8fbe-00144feabdc0.html

http://www.workforce.com/index.html

http://www.reloroundtable.com/blog/trends-in-relocation/brookfield-reports-2012-relocation-trends/

http://global-mobilitytrends.brookfieldgrs.com/

http://www.chinadaily.com.cn/life/2011-02/25/content_12079783.htm

https://apps.mla.org/pdf/2013_enrollment_survey.pdf

http://ec.europa.eu/eurostat/statistics-explained/index.php/Foreign_language_learning_statistics

http://www.nytimes.com/2007/04/10/world/europe/10iht-engbiz.2.5212499.html?pagewanted=all

https://www.yumpu.com/en/document/view/22564379/to-download-jeitosa-groupinternational/5

http://www.chinadaily.com.cn/life/2011-02/25/content_12079783.htm

https://apps.mla.org/pdf/2013_enrollment_survey.pdf

http://www.nytimes.com/2007/04/10/world/europe/10iht-engbiz.2.5212499.html?pagewanted=all

http://www.relocatemagazine.com/relocation-news-blog-format/3-generalrelocation-news/2212-brookfield-grs-2011-global-relocation-trendssurvey-report

Endnotes 5

124 Jenna Wortham, “A Surge in Learning the Language of the Inter- net,” NYTimes.com, /www.nytimes.com/2012/03/28/technology/ for-an-edge-on-the-internet-computer-code-gains-a-following. html?_r=1&hpw (accessed December 26, 2012).

125 PricewaterhouseCoopers, International Assignments: European Policy and Practice (1997), www.pwcglobal.com/extweb/ncsurvres.nsf (accessed April 3, 2000).

126 Tsedal Neely, “Global Business Speaks English,” Harvard Business Review, hbr.org/2012/05/global-business-speaks-english/ar/1 (accessed December 27, 2012); “The English Empire,” The Economist, http://www .economist.com/news/business/21596538-growing-number-firms- worldwide-are-adopting-english-their-official-language-english (accessed February 25, 2016).

127 “In Search of Global Leaders: View of Fred Hassan, Chairman and CEO, Schering-Plough,” Harvard Business Review (August 1, 2003).

128 Lera Boroditsky, “How Language Shapes Thought,” The Long Now, longnow.org/seminars/02010/oct/26/how-language-shapes-thought/ (accessed December 27, 2012); “For a Better Brain, Learn Another Language,” The Atlantic, http://www.theatlantic.com/health/ archive/2014/10/more-languages-better-brain/381193/ (accessed October 6, 2015).

129 C. Panella, “Meeting the Needs of IB: A Customer Service-Oriented Business Language Course,” The Journal of Language for IB 9 (1998): 65–75; M. Inman, “How Foreign Language Study Can Enhance Career Possibilities” (Washington, DC: ERIC Clearinghouse on Lan- guages and Linguistics, 1987), www.ericdigests.org/pre-927/career. htm (accessed November 27, 2007); C. Randlesome and A. Myers, “Cultural Fluency: Results from a UK and Irish Survey,” Business Communication Quarterly 60:3 (1997): 9–22.

130 Yudhijit Bhattacharjee, “Benefits of Bilingualism,” NYTimes.com, www .nytimes.com/2012/03/18/opinion/sunday/the-benefits-of-bilingualism. html?_r=1&src=me&ref=general (accessed December 31, 2012).

131 “Learning a New Language Makes the Brain Grow,” Psych Central News, psychcentral.com/news/2012/10/09/learning-a-new- language-makes-the-brain-grow/45761.html (accessed December 27, 2012).

132 “Enduring Voices Project,” National Geographic, travel .nationalgeographic.com/travel/enduring-voices/ (accessed December 27, 2012).

133 Explained an observer, “There is a feeling that Arabic is fast becom- ing a second language in the Gulf, as people need to use English as a common language with the huge number of expatriate workers who make up most of the private sector, and as the wealthy and educated youth increasingly speak to each other in English.” D. D. Guttenplan, “Battling to Preserve Arabic from English’s Onslaught” NYTimes. com, www.nytimes.com/2012/06/11/world/middleeast/ 11iht-educlede11.html?src=rechp (accessed December 26, 2012); “How Teaching in English Divides the Arab World,” Al-Fanar Media, http://www.al-fanarmedia.org/2015/06/how-teaching-in-english- divides-the-arab-world/ (accessed October 6, 2015).

134 “It’s Time to Protect Chinese Language,” China Daily, www .chinadaily.com.cn/life/2011-01/06/content_11803112.htm (accessed December 27, 2012); “Breaking News English ESL Lesson Plan on Chinese,” www.breakingnewsenglish.com/1012/101225-chinese.html (accessed December 27, 2012); “Protecting Chinese Characters: New Regulations Ban English Words in Chinese Publications,” BeijingToday, www.beijingtoday.com.cn/debate/protecting-chinese- characters-new-regulations-ban-english-words-in-chinese- publications (accessed December 27, 2012).

135 “Foreign Words to Be Standardized,” http://www.chinadaily.com.cn/ cndy/2010-12/22/content_11736899.htm (accessed February 25, 2016).

136 S. Baker, “Catching the Continental Drift: These Days, English Will Suffice for Americans Working in Europe,” Businessweek (August 14, 2001): 35.

137 C. Cole, “Bridging the Language Gap: Expatriates Find Learning Korean Key to Enjoying a More Satisfying Life,” The Korea Herald (August 16, 2002): B1.

138 M. Ligos, “The Foreign Assignment: An Incubator, or Exile?” New York Times (October 22, 2000): A1.

139 View of the American Council on the Teaching of Foreign Languages, reported in Tanya Mohn, “All Aboard the Foreign Language Express,” New York Times (October 11, 2000): A1.

140 “Europeans Should Learn Two Foreign Languages says Commissioner Vassiliou,” Fair Languages, (March 24, 2013), http://fairlanguages.com/europeans-should-learn-two-foreign- languages-says-commissioner-vassiliou/. See “EUR-Lex - c11068 - EN - EUR-Lex,” http://eur-lex.europa.eu/legal-content/EN/ TXT/?uri=uriserv:c11068 (accessed February 29, 2016).

141 “Measuring the Value of International Assignments,” PricewaterhouseCoopers, www.pwc.fi/fi_FI/fi/palvelut/tiedostot/ pwc_measuring_the_value.pdf, (accessed March 12, 2013).

142 C. Gould, “What’s the Latest in Global Compensation?” Global Workforce (July 1997): 28.

143 G. Latta, “Expatriate Policy and Practice: A Ten-Year Comparison of Trends,” Compensation and Benefits Review 31:4 (1999): 35–39, quoting studies reported by Organization Resources Counselors.

144 The strength of this approach follows from tailoring financial incen- tives to offset the differences in living standards between the home and host locale.

145 Ibid, 13. See response to query “Approach to Long-Term Assignment Compensation: Approach taken to assignee compensation philoso- phy/methodology for long-term assignments (1 year or greater).”

146 Compensating an Expatriate: A Sample Wage and Benefits Package Consider the following scenario: An Atlanta-based MNE assigns an U.S.-based executive to run its local subsidiary in Mexico City. In the United States, the executive, who has a working spouse and two children, earns an annual income of $250,000. This balance sheet profiles how IHRM typically organizes the compensation package for his foreign assignment.

Direct Compensation

Base salary $250, 000 Foreign-service premium 25, 000 Cost-of-living allowances 120, 000 Housing 97, 000 U.S. taxes (38, 000) Education (schooling for two children) 30, 000 Mexican income taxes (presuming no reciprocity) 115, 000 Transfer moving costs 47, 000 Miscellaneous benefits (i.e., shipping and storage; home sale or property management fees; cultural, practical, and language training; pre-assignment orientation trip, destination assistance)

85, 000

Working spouse allowance 75, 000 Annual home leave (airfare for family of four, hotel,

and meals) 15, 000

Additional health insurance, pension supplements, evacuation coverage

20, 000

147 For those interested, please visit ERI’s Relocation Assessor at www. erieri.com and head to Sample Sceenshots to get a sense of the going rates.

148 “The Expat Explorer Survey 2010,” HSBC Bank International, www. expatexplorer.hsbc.com/files/pdfs/overall-reports/2010/ experience. pdf (accessed April 4, 2011).

http://www.nytimes.com/2012/03/28/technology/for-an-edge-on-the-internet-computer-code-gains-a-following.html?_r=1&hpw

http://www.pwcglobal.com/extweb/ncsurvres.nsf

http://www.economist.com/news/business/21596538-growing-number-firmsworldwide-are-adopting-english-their-official-language-english

http://www.theatlantic.com/health/archive/2014/10/more-languages-better-brain/381193/

http://www.ericdigests.org/pre-927/career.htm

http://www.nytimes.com/2012/06/11/world/middleeast/11iht-educlede11.html?src=rechp

http://www.al-fanarmedia.org/2015/06/how-teaching-in-english-divides-the-arab-world/

http://www.breakingnewsenglish.com/1012/101225-chinese.html

http://www.beijingtoday.com.cn/debate/protecting-chinese-characters-new-regulations-ban-english-words-in-chinese-publications

http://www.chinadaily.com.cn/cndy/2010-12/22/content_11736899.htm

http://fairlanguages.com/europeans-should-learn-two-foreign-languages-says-commissioner-vassiliou/

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:c11068

http://www.pwc.fi/fi_FI/fi/palvelut/tiedostot/pwc_measuring_the_value.pdf

http://www.erieri.com

http://www.expatexplorer.hsbc.com/files/pdfs/overall-reports/2010/experience.pdf

http://www.nytimes.com/2012/03/28/technology/for-an-edge-on-the-internet-computer-code-gains-a-following.html?_r=1&hpw

http://www.economist.com/news/business/21596538-growing-number-firmsworldwide-are-adopting-english-their-official-language-english

http://www.theatlantic.com/health/archive/2014/10/more-languages-better-brain/381193/

http://www.ericdigests.org/pre-927/career.htm

http://www.nytimes.com/2012/06/11/world/middleeast/11iht-educlede11.html?src=rechp

http://www.chinadaily.com.cn/life/2011-01/06/content_11803112.htm

http://www.chinadaily.com.cn/cndy/2010-12/22/content_11736899.htm

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:c11068

http://www.pwc.fi/fi_FI/fi/palvelut/tiedostot/pwc_measuring_the_value.pdf

http://www.expatexplorer.hsbc.com/files/pdfs/overall-reports/2010/experience.pdf

http://www.nytimes.com/2012/03/18/opinion/sunday/the-benefits-of-bilingualism.html?_r=1&src=me&ref=general

http://www.psychcentral.com/news/2012/10/09/learning-a-newlanguage-makes-the-brain-grow/45761.html

http://www.travel.nationalgeographic.com/travel/enduring-voices/

6 Endnotes

149 “International Assignments Increasing, Mercer Survey Finds,” Mercer, www.mercerhr.com/summary.jhtml?idContent=1222700 (accessed May 6, 2006).

150 This practice is slowly fading, especially for assignments in so-called world capitals like New York, London, and Tokyo, in which many executives are interested and where there is (relatively) little “depriva- tion.” In addition, the number and nature of “hardships” resulting from foreign assignments are in decline, particularly as advances in transportation and communications enable expatriates to keep in closer contact with home countries; the openness of economies allows them to buy familiar goods and services; and the general level of housing, schooling, and medical services increasingly meets their needs. Some companies progressively reduce the cost-of-living differential over time, reasoning that as the expatriate adapts to her environment, she should adopt local purchasing practices, such as substituting items from a neighbourhood market in place of imported packaged goods. A U.S. family based in China, for example, com- monly spends more money to get the same goods than they would buy back home. Why? Because they prefer Western items that must be imported and have thus been subjected to high tariffs. Expatriates often obtain food and housing at rates higher than going local rates because they don’t know the language well, where to buy, or how to bargain.

151 Towers Perrin and Cigna, for example, specialize in international compensation. In addition, MNEs rely on estimates of cost-of-living differences—even if they are imperfect. MNEs commonly use such sources as the U.S. State Department’s cost-of-living index, published yearly in Labor Developments Abroad, the UN Monthly Bulletin of Statistics, and surveys by the Financial Times, P-E International, Business International, and the Staff Papers of the International Monetary Fund. Also, setting New York as the benchmark, cost-of- living estimates for 133 cities around the world indicate Singapore, Zürich, Hong Kong, Geneva, Paris, London, New York, Copenhagen, Seoul, and Los Angeles as the world’s top ten expensive cities for expatriates. Lusaka, Bangalore, Mumbai, Karachi, Chennai, Algeiers, Almaty, New Delhi, Caracas, and Damacus rank as the world’s least expensive cities for expatriates See“Worldwide Cost of Living June 2016,” Economist Intelligence Unit, http://www.economist.com/blogs/ graphicdetail/2016/03/daily-chart-4 (accessed June 19, 2016).

152 Variations in health-care standards across countries is an endur- ing concern. Care in a second-tier city in an emerging market is far less desirable than care in one’s home country. Hence, MNEs provide expatriates with access to medical resource benefits abroad equivalent to those available at home. They customarily expand these benefits to deal with local contingencies, such as bearing the cost of transferring ill expats or family members to suitable medical facilities. Likewise, it is not unusual for an expatriate to have a spouse, who may then receive cross-cultural preparation. Previously employed spouses/partners typically struggle to find employment during an international assignment. In some cases, the company supports the spouse’s search for employment. About a quarter of MNEs provide trailing spouses with job-search assistance, often through networks with other MNEs. In 2011, for example, 60 percent of spouses/part- ners were employed before, but just 12 percent during the assign- ments. Difficulties arise due to economic conditions, locations, and language and cultural differences. Immigration and visa complica- tions further discourage potential local employers. Global Relocation Trends: 2012 Survey Report, Brookfield Global Relocation Services, knowledge.brookfieldgrs.com/content/insights_ideas-2012_GRTS (accessed December 23, 2012).

153 One may also receive miscellaneous allowances that offset the burden of particular local difficulties. Popular options include travel allowances that let the expat, along with his or her family, come home periodically as well as education allowances for schools that resolve language difficulties or quality concerns. Joe Sharkey, “Global

Economy Is Leading to More Dangerous Places,” NYTimes.com, query.nytimes.com/gst/fullpage.html?res=9C06E0DD1F3EF93AA257 57C0A9639C8B63 (accessed December 26, 2012).

154 Moving from, say, mid-priced Salt Lake City to high-priced Singapore is a tough sell to potential expatriates. Housing costs vary because of crowded conditions that boost land prices as well as shortages of homes that are acceptable to expatriates. In addi- tion, Westerners pay steep premiums in some parts of Asia to rent accommodations with Western-style bathrooms and kitchens. “Tokyo Tops in H.K. Survey on Living Cost for Expatriates,” Japan Economic Newswire (January 24, 2002); “Home Away from Home: Expatriate Housing in Asia,” The Korea Herald (May 2, 2002): B1.

155 “Business in China and the West: A Tale of Two Expats,” The Econo- mist (December 29, 2010): 65.

156 Generally, pay practices at the top set standards throughout the com- pany. On average, CEOs in the United States enjoy the most com- prehensive pay packages, both in terms of base compensation and total remuneration. CEOs in France, Germany, Italy, Switzerland, and the United Kingdom command higher levels of total compensation than their peers elsewhere. This model inspires emulation; Asian and South American MNEs have begun instituting similar pay practices, particularly the use of performance-based pay that ties compensa- tion to business results. For China Mobile, say, this would require compensating its foreign nationals, no matter where they worked, in terms of Chinese salary levels. If China Mobile opts not to develop an equitable arrangement, it will likely result in underpaid expatriates resenting their higher-paid counterparts. Long-term incentives, such as options on restricted stock, are popular in the United States but less so in Germany. However, German managers often receive com- pensation that U.S. managers do not, such as housing allowances and partial payment of salary outside Germany, neither of which is taxable. Similarly, countries with aggressive personal income tax rates privilege pay plans that reduce taxable base salaries in favor of tax-exempt fringe benefits. Ultimately, as MNEs from more countries broaden operations, they compete globally for executive talent. Likewise, local firms must tailor compensation to retain executives. Therefore, convergence in compensation practices is the order of the day.

157 G. Stahl, C. Chua, P. Caligiuri, J. Cerdin, and M. Taniguchi, “Predictors of Turnover Intentions in Learning-Driven and Demand-Driven International Assignments: The Role Of Repatria- tion Concerns, Satisfaction with Company Support, and Perceived Career Advancement Opportunities,” Human Resource Management, 2009 (48): 89–109.

158 Ibid, 13. See response to query “Career Impact of International Assignment: Upon repatriation, what is the impact on the assignee career in comparison to peers without international experience within your company?”

159 “Global Relocation Trends 2008,” GMAC Global Relocations Services, www.gmac.com (accessed June 1, 2008).

160 Margaret Shaffer, Maria Kraimer, Yu-Ping Chen, and Mark Bolino, “Choices, Challenges, and Career Consequences of Global Work Experiences: A Review and Future Agenda,” Journal of Management 38 (2012): 1282–327.

161 “Abroad but Not Forgotten: Improving the Career Management of Employees on International Assignments,” Human Resource Manage- ment International Digest 15 (2007): 29–31.

162 “In Search of Global Leaders: View of Daniel Meiland, Executive Chairman, Egon Zehender International,” Harvard Business Review (August 1, 2003): 81.

163 M. Lazarova and P. Caligiuri, “Retaining Repatriates: The Role of Organizational Support Practices,” Journal of World Business 36 (Winter 2001): 389–402.

164 Liz Bleacher, “Students Return from Study Abroad, Experience Reverse Culture Shock,” Delaware Review (February 19, 2013): 8.

http://www.mercerhr.com/summary.jhtml?idContent=1222700

http://www.economist.com/blogs/graphicdetail/2016/03/daily-chart-4

http://www.economist.com/blogs/graphicdetail/2016/03/daily-chart-4

Endnotes 7

165 Ibid, 13. See response to query “Job Identification for Repatriating International Assignees: How does your company most commonly help to identify new jobs within the company for repatriating inter- national assignees?”; PricewaterhouseCoopers LLP and Cranfield School of Management, “Understanding and Avoiding Barriers to International Mobility,” Geodesy (October 2005), www.pwc.extweb/ pwcpublications.nfs/docid/7ACA93FA424E80E88525121E006E82C/ $file/geodesy.pdf (accessed November 27, 2007).

166 Prior to the international assignment, EPIC participants link to a mentor at home and a colleague overseas to smooth the transition. Both share responsibility for supporting the expat’s career develop- ment. PwC International Challenge, www.pwc.com/extweb/career. nsf/docid/9204374F898F3E5A8525748F00741E9D (accessed May 4, 2009). Avaya charges the manager who originally sponsored the expatriate with the job of helping his protégé find a job upon repa- triation. Avaya monitors the expat’s career plan for a simple reason: it has “invested in this person. To leave him overseas or to lose him to another company is a waste of money. Leslie Klaff, “Thinning the Ranks of the Career Expats,” Workforce Management (October 2004): 84–7.

167 Recall from our opening case the experience of Bryan Krueger, who accepted a four-year assignment in Tokyo without guarantee of a pro- motion when he got home. Krueger was conscientiously “proactive,” networking avidly, keeping up with events at headquarters, and visit- ing the home office. I. Varner and T. Palmer, “Successful Expatriation and Organizational Strategies,” Review of Business 23 (Spring 2002): 8–12; J. Selmer, “Practice Makes Perfect? International Experience and Expatriate Adjustment,” Management International Review 42 (January 2002): 71–88.

168 Ibid, 13. See responses to query “International Assignment Failure: What percentage of your international assignments fail?,” “Reasons for Early Return from an Assignment: Select the primary reasons for early returns from international assignments,” and “Causes of Assignment Failure: However you define ‘assignment failure’, what factors do you feel are most responsible?”; John Daniels and Gary Insch, “Why Are Early Departure Rates from Foreign Assignments Lower Than Historically Reported?” Multinational Business Review 6:1 (1998): 13–23.

169 Global Relocation Trends 2010, GMAC Global Relocations Services www. reloroundtable.com/blog/trends-in-relocation/brookfield- reports-2012-relocation-trends/ (accessed April 21, 2011).

170 Data provided by National Foreign Trade Council; Maria L. Kraimer, Sandy Wayne, and Renata Jaworski, “Sources of Support and Expatri- ate Performance: The Mediating Role of Expatriate Adjustment,” Personnel Psychology 54 (Spring 2001): 71.

171 Global Relocation Trends, GMAC Global Relocations Services, www. gmac.com (accessed April 21, 2011).

172 Susan J. Matt, Homesickness: An American History: The Story of How We Became a Nation of Nostalgic Homebodies (Oxford: Oxford University Press, 2011).

173 N. Doherty, M. Dickmann, and T. Mills, “Exploring the Motives of Company-Backed and Self-Initiated Expatriates,” International Jour- nal of Human Resource Management 22 (2011): 595–611.

174 The relentless pressures of global competition, turbocharged by accelerating technologies, mean that MNEs tend to under- rather than over-prepare expatriates. Many expats receive cursory training, often scanning reports and reviewing resources on the flight to their new home. Usually an MNE will blame the urgency of the situa- tion, noting crisis management left no time for a familiarization trip; profile of history, politics, economy, and business environment; and cultural orientation. Headquarters, fearing deteriorating performance

or missed opportunities, see speed and immediacy, not pru- dence and preparation, take precedence. Hence, the MNE quickly dispatches help, worrying more about technical competency than perceptual abilities and cultural toughness.

175 Certainly, some were scattered throughout Africa, Asia, South Amer- ica, and the Middle East; generally, these folks worked in primary or extractive industries, such as a petroleum engineer posted to Saudi Arabia to support ExxonMobil’s drilling operations. Expats posted to Tokyo, Paris, or London, by and large, worked in finance, marketing, or general management.

176 “African Hospitality: No Vacancy,” The Economist, www.economist. com/news/business/21566017-race-build-new-hotels-africa- no-vacancy (accessed December 31, 2012).

177 “Big US Firms Shift Hiring Abroad,” Wall Street Journal (April 19, 2011): B1.

178 Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “The Global Company’s Challenge,” McKinsey Quarterly, www .mckinseyquarterly.com/The_global_companys_challenge_2979 (accessed December 31, 2012).

179 “Financial Careers: Go East, Young Moneyman,” The Economist (April 16, 2011): 79–80.

180 “Up or Out: Next Moves for the Modern Expatriate,” The Economist Intelligence Unit, graphics.eiu.com/upload/eb/LON_PL_Regus_ WEB2.pdf (accessed December 31, 2012).

181 H. Seligson, “Shut Out at Home, Americans Seek Opportunity in China,” NYTimes.com, www.nytimes.com/2009/08/11/business/ economy/11expats.html (accessed May 4, 2011).

182 Global Relocation Trends: 2011 Survey Report. 183 The Aditya Birla Group, a multinational conglomerate based in India,

operates in 40 countries and earns more than half its revenue outside India. Its expanding international operations, like those of many emerging market MNEs, work the expat model the other direction. It, like counterparts in China, Brazil, or Mexico, posts expatriates to Western markets.

184 Sources include the following: Central Intelligence Agency, “India,” The World Factbook, www.cia.gov/cia/publications/factbook/geos/ in.html (accessed May 22, 2013); Library of Congress, “A Country Study: India,” Country Studies, memory.loc.gov/frd/cs/intoc.html (accessed May 22, 2013); “Hungry Tiger, Dancing Elephant,” The Economist (April 4, 2007): 58–61; “Virtual Champions, Survey: Busi- ness in India,” The Economist (June 1, 2006): 45; Manu Joseph, “India Faces a Linguistic Truth—English Spoken Here,” New York Times (February 16, 2011) C1; “Economics Focus: The Himalayas of Hiring,” The Economist (August 7, 2010): 76.

185 Ibid. “Economics Focus: The Himalayas of Hiring”; “India Labor Laws Strangle Growth, Critics Say,” The Seattle Times, http://www. seattletimes.com/business/india-labor-laws-strangle-growth-critics- say/ (accessed January 13, 2016); “India’s Labour Laws: Protecting to Hurt.” http://www.ideasforindia.in/article.aspx?article_id=398 (accessed January 13, 2016).

186 K. Bradsher, “A Younger India Is Flexing Its Industrial Brawn,” New York Times (September 1, 2006): A1; “Commentary: India’s Promise Hinges on Strategic Reforms, Infrastructure,” Global Atlanta, http:// www.globalatlanta.com/commentary-indias-promise-hinges-on- strategic-reforms-infrastructure/ (accessed January 13, 2016).

187 “Transparency International—Country Profiles,” www.transparency. org/country#IND (accessed January 15, 2016).

188 “Infosys Rejects 94 Percent Job Applicants, Also Gets Rejected by Many,” Economic Times, articles.economictimes.indiatimes. com/2010-05-31/news/27624027_1_net-addition-gross-addition- applicants (accessed May 24, 2011).

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