Do you have any foreign connections through work, family, Facebook, etc.?

1-1What Is Global Business?

1-1aDefining International Business and Global Business

1-1 Learning Objective

Explain the concepts of international business and global business, with a focus on emerging economies.

Traditionally,  international business (IB)  is defined as a business (firm) that engages in international (cross-border) economic activities. It can also refer to the action of doing business abroad. The previous generation of IB textbooks almost always takes the foreign entrant’s perspective. Consequently, such books deal with issues such as how to enter foreign markets and how to select alliance partners. The most frequently discussed foreign entrant is the  multinational enterprise (MNE) , defined as a firm that engages in  foreign direct investment (FDI)  by directly investing in, controlling, and managing value-added activities in other countries.  Of course, MNEs and their cross-border activities are important. But they only cover one aspect of IB—the foreign side. Students educated by these books often come away with the impression that the other aspect of IB—namely, domestic firms—does not exist. Obviously, this is not true. Domestic firms do not just sit around in the face of foreign entrants. They often actively compete and/or collaborate with foreign entrants in their markets. Sometimes, strong domestic firms have also gone overseas themselves. Overall, focusing on the foreign entrant side captures only one side of the coin at best.

There are  two key words in IB: international (I) and business (B).  However, many previous textbooks focus on the international aspect (the foreign entrant) to such an extent that the business part (which also includes domestic business) almost disappears. This is unfortunate, because IB is fundamentally about B (business) in addition to being I. To put it differently, the IB course in the undergraduate and MBA curricula at numerous business schools is probably the  only one with the word “business” in its title. All other courses are labeled management, marketing, finance, and so on, representing one functional area but not the overall picture of business. Does it matter? Of course! It means that your IB course is an  integrative course that can provide you with an overall business perspective (rather than a functional view) grounded in a global environment. Therefore, it makes sense that your textbook should give you both the I and B parts, not just the I part.

To cover both the I and the B parts,  global business  is defined in this book as business around the globe—thus, the title of this book is  Global Business (not IB). In other words, global business includes both

· (1)

international (cross-border) business activities covered by traditional IB books  and

· (2)

domestic business activities.

Such deliberate blurring of the traditional boundaries separating international and domestic business is increasingly important today, because many previously domestic markets are now globalized.

Consider the competition in college textbooks, such as this  Global Business book you are studying now. Not long ago, competition among college business textbook publishers was primarily on a nation-by-nation basis. The Big Three—Cengage Learning (our publisher, which is the biggest in the college business textbook market), Prentice Hall, and McGraw-Hill—primarily competed in the United States. A different set of publishers competed in other countries. As a result, most textbooks studied by British students would be authored by British professors and published by British publishers, most textbooks studied by Brazilian students would be authored by Brazilian professors and published by Brazilian publishers, and so on. Now Cengage Learning (under British and Canadian ownership), Pearson Prentice Hall (under British ownership), and McGraw-Hill (under US ownership) have significantly globalized their competition, thanks to the rising demand for high-quality business textbooks in English. Around the globe, they are competing against each other in many markets, publishing in multiple languages and versions. For instance,  Global Business and its sister books,  Global Strategy,  Global (paperback), and  International Business (an adaptation for the European market), are published by different subsidiaries in Chinese, Spanish, and Portuguese in addition to English, reaching customers in more than 30 countries. Despite such worldwide spread of competition, in each market—down to each school—textbook publishers have to compete locally. Since no professor teaches globally and all students study locally, this means  Global Business has to win adoption every class, every semester. Overall, it becomes difficult to tell in this competition what is international and what is domestic. Thus, “global” seems to be a better word to capture the essence of this competition.

1-1bGlobal Business and Emerging Economies

Global Business also differs from other books on IB because most of them focus on competition in developed economies. Here, by contrast, we devote extensive space to competitive battles waged throughout  emerging economies , a term that has gradually replaced the term “developing countries” since the 1990s. Another commonly used term is  emerging markets  (see PengAtlas Map 1). How important are emerging economies? Collectively, they command 48% of world trade, attract 60% of FDI inflows, and generate 40% FDI outflows. Overall, emerging economies contribute approximately 50% of the global gross domestic product (GDP).  In 1990, they accounted for less than one-third of a much smaller world GDP. Note that this percentage is adjusted for  purchasing power parity (PPP) , which is an adjustment to reflect the differences in cost of living (see  In Focus 1.1). Using official (nominal) exchange rates without adjusting for PPP, emerging economies contribute about 30% of the global GDP. Why is there such a huge difference between the two measures? Because the cost of living (such as housing and haircuts) in emerging economies tends to be lower than that in developed economies. For instance, US$1 spent in Mexico can buy a lot more than US$1 spent in the United States.

In Focus 1.1

Setting the Terms Straight

GDP, GNP, GNI, PPP—there is a bewildering variety of acronyms that are used to measure economic development. It is useful to set these terms straight before proceeding.  Gross domestic product (GDP)  is measured as the sum of value added by resident firms, households, and governments operating in an economy. For example, the value added by foreign-owned firms operating in Mexico would be counted as part of Mexico’s GDP. However, the earnings of non-resident sources that are sent back to Mexico (such as earnings of Mexicans who do not live and work in Mexico, and dividends received by Mexicans who own non-Mexican stocks) are not included in Mexico’s GDP. One measure that captures this is  gross national product (GNP) . Recently, the World Bank and other international organizations have used a new term,  gross national income (GNI) , to supersede GNP. Conceptually, there is no difference between GNI and GNP. What exactly is GNI/GNP? It comprises GDP plus income from non-resident sources abroad.

While GDP, GNP, and now GNI are often used as yardsticks of economic development, differences in cost of living make such a direct comparison less meaningful. A dollar of spending in Thailand can buy a lot more than in Japan. Therefore, conversion based on purchasing power parity (PPP) is often necessary. The PPP between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country’s currency will purchase the same volume of goods and services in the second country (see  Chapter 7 for details). According to the International Monetary Fund (IMF), the Swiss per capita GDP is US$81,276 based on official (nominal) exchange rates—a lot higher than the official US per capita GDP of US$53,001. However, everything is more expensive in Switzerland. A Big Mac costs US$6.83 in Switzerland versus US$4.80 in the United States. Thus, Switzerland’s per capita GDP based on PPP shrinks to US$53,977—only slightly higher than the US per capita GDP based on PPP of US$53,001 (the IMF uses the United States as a benchmark in PPP calculation, which does not change from the nominal number).

One of the most recent and probably most important debates concerns the size of the Chinese GDP. Calculations based on the nominal exchange rates would find China’s GDP to be 47% of the US GDP. But new calculations based on PPP released by the World Bank in 2014 reported China’s GDP to be 87% as large as the US GDP. Given that the Chinese economy grows a lot more quickly than the US economy, some experts believe that China may become the world’s largest economy by the time you read this book—as opposed to in the next decade or so (see the  Closing Case). Overall, when you read statistics about GDP, GNP, and GNI, always pay attention to whether these numbers are based on official exchange rates or PPP, which can make a huge difference.

Sources: Based on (1) Bloomberg Businessweek, 2014, Recognizing China’s clout, May 12: 14; (2) Economist, 2014, Calculating European GDP, August 23: 68–69; (3) Economist, 2014, The dragon takes wing, May 3: 65; (3) Economist, 2014, The Big Mac index, July 26: 61; (4) International Monetary Fund, 2014, Report for Selected Countries and Subjects (PPP Valuation of Country GDP), October, Washington, DC.

Of many emerging economies, Brazil, Russia, India, and China—commonly referred to as  BRIC —command more attention. With the addition of South Africa, BRIC becomes  BRICS . As a group, BRICS countries have 40% of the world’s population, cover a quarter of the world’s land area, and contribute more than 25% of global GDP (on a PPP basis). In addition to BRICS, other interesting terms include BRICM (BRIC + Mexico), BRICET (BRIC + Eastern Europe and Turkey), and Next Eleven (N-11—consisting of Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam).

Does it make sense to group together as “emerging economies” so many countries with tremendous diversity in terms of history, geography, politics, and economics? As compared to developed economies, the label of “emerging economies,” rightly or wrongly, has emphasized the presumably homogenous nature of so many different countries. While this single label has been useful, more recent research has endeavored to enrich it. Specifically, the two dimensions illustrated in  Figure 1.1 can help us differentiate various emerging economies.  Vertically, the development of market-supporting political, legal, and economic institutions has been noted as a crucial dimension of institutional transitions. Horizontally, the development of infrastructure and factor markets is also crucial.

Figure 1.1

A Typology of Emerging Economies

Source: Adapted from R. Hoskisson, M. Wright, I. Filatotchev, & M. W. Peng, 2013, Emerging multinationals from mid-range economies: The influence of institutions and factor markets (p. 1297), Journal of Management Studies, 50: 1295–1321.

Traditional (or stereotypical) emerging economies suffer from both the lack of institutional development and the lack of infrastructure and factor market development. Most emerging economies 20 years ago would have fit this description. Today, some emerging economies still have made relatively little progress along these two dimensions (such as Belarus and Zimbabwe).

However, much has changed. A great deal of institutional development and infrastructure and factor market development has taken place. Such wide-ranging development has resulted in the emergence of a class of mid-range emerging economies that differ from both traditional emerging economies and developed economies. For example, the top-down approach to government found in China has facilitated infrastructure and factor market development. But China’s political and market institutions tend to be underdeveloped relative to physical infrastructure. Alternatively, India has strong political institutions supporting market institutions. While Indian government policy reforms have facilitated better market institutions and associated economic development, world-class physical infrastructure is lacking. In the middle area of  Figure 1.1, Brazil and Russia are examples, with democratic political institutions and some infrastructure and factor market development. Finally, some economies have clearly graduated from the “emerging” phase and become what we call “newly developed economies.” South Korea is such an exemplar country.

Overall, the  Great Transformation  of the global economy is embodied by the tremendous shift in economic weight and engines of growth toward emerging economies in general and BRIC(S) in particular.  Led by BRIC(S), emerging economies accomplished “the biggest economic transformation in modern economy,” according to the Economist.  In China, per capita income doubled in about ten years, an achievement that took Britain 150 years and the United States 50 years as they industrialized.  Throughout emerging economies, China is not alone. While groupings such as BRIC(S) and N-11 are always arbitrary, they serve a useful purpose—namely, highlighting the economic and demographic scale and trajectory that enable them to challenge developed economies in terms of weight and influence in the global economy.

Of course, the Great Transformation is not a linear story of endless and uniform high-speed growth. All BRIC(S) countries and most emerging economies have experienced some significant slowdown recently.  It is possible that they may not be able to repeat their extraordinary growth sprints of the decade between 1998 (the Asian economic crisis) and 2008 (the global financial crisis). For example, in 2007, Brazil accomplished an annual economic growth of 6%, Russia 8%, India 10%, and China 14%. In 2017, they would be lucky to achieve half of these enviable growth rates. However, it seems that emerging economies as a group are destined to grow both their absolute GDP and their percentage of world GDP relative to developed economies. The debate centers on how much and how quickly (or slowly) such growth will be in the future (see the  Closing Case).

1-1cBase of the Pyramid and Reverse Innovation

The global economy can be viewed as a pyramid ( Figure 1.2). The top consists of about one billion people with per capita annual income of US$20,000 or higher. These are mostly people who live in the developed economies in the  Triad , which consists of North America, Western Europe, and Japan. Another one billion people earning US$2,000 to US$20,000 per year make up the second tier. The vast majority of humanity—about five billion people—earn less than US$2,000 per year and comprise the  base of the pyramid (BoP) . Most MNEs focus on the top and second tiers and end up ignoring the BoP markets.  An increasing number of such low-income countries have shown a great deal of economic opportunities as income levels have risen. More Western MNEs, such as General Electric (GE), are investing aggressively in the BoP and leveraging their investment to tackle markets in both emerging and developed economies.

Figure 1.2

The Global Economic Pyramid

Sources: Adapted from (1) C. K. Prahalad & S. Hart, 2002, The fortune at the bottom of the pyramid, Strategy + Business, 26: 54–67; (2) S. Hart, 2005, Capitalism at the Crossroads, Philadelphia: Wharton School Publishing, 111.

One interesting recent development out of emerging economies is  reverse innovation —an innovation that is adopted first in emerging economies and then diffused around the world.  Traditionally, innovations are generated by Triad-based multinationals, with the needs and wants of rich customers at the top of the pyramid in mind. When such multinationals entered lower-income economies, they tended to simplify the product features and lower prices. In other words, the innovation flow is top-down. However, as Deere & Company found out in India, its large-horsepower tractors designed for American farmers were a poor fit for the different needs and wants of Indian farmers. Despite Deere’s efforts to simplify the product and reduce the price, the price was still too high in India. Instead, Mahindra & Mahindra brought its widely popular small-horsepower tractors that were developed in India to the United States and carved out a growing niche that eventually propelled it to be the world’s largest tractor maker by units sold.  (Mahindra & Mahindra is now so committed to the United States that it sponsors bull-riding tournaments in Texas.) In response, Deere abandoned its US tractor designs and “went native” in India, by launching a local design team charged with developing something from scratch—with the needs and wants of farmers in India (or, more broadly, in emerging economies) in mind. The result was a 35-horsepower tractor that was competitive with Mahindra & Mahindra not only in India, but also in the United States and elsewhere. In both cases, the origin of new innovations is from the BoP. The flow of innovation is bottom-up—in other words, reverse innovation.

Does this Mahindra & Mahindra tractor developed from a BoP market have potential elsewhere?

India Pictures RM/Dinodia Photos/Alamy Limited

The reverse innovation movement suggests that emerging economies are no longer merely low-cost production locations or attractive new markets (hence the term “emerging markets”). They are also sources of new innovations that may not only grow out of BoP markets, but also have the potential to go uphill to penetrate into the top of the global economic pyramid. For example, a Chinese start-up, Xiaomi, has recently dethroned Samsung and Apple in the smartphone market in both China and India, selling its smartphones for only US$100 (see  Emerging Markets 1.1). Relative to a feature-rich US$600 Apple iPhone or a US$500 Samsung Galaxy, a Xiaomi phone is merely good enough. It is 3G-capable and has a solid processor, a passable camera, and barely decent but expandable memory (8 GB), which can be expanded to 64 GB with cheap SD cards. But its performance is certainly more than 20% of an Apple or a Samsung. Thus, to customers in the BoP and beyond, Xiaomi’s reverse innovation delivers tremendous value relative to its price. In a Harvard Business Review article, Jeff Immelt, chairman and CEO of a leading practitioner of reverse innovation, GE, noted:

Emerging Markets 1.1

Fighting in and out of the Chinese Smartphone Industry

Commanding one-third of worldwide sales, China is now the largest smartphone market in the world. Not surprisingly, global leaders Samsung and Apple (in that order) sell a lot in China, which absorbs approximately 20% of their output. What is interesting is that six of the top eight vendors are Chinese firms, and that neither Samsung nor Apple is the volume leader. Competing intensely among themselves, the “Gang of Six” consists of computer king Lenovo, telecom equipment giants Huawei and ZTE, consumer electronics firms TCL and Coolpad, and red-hot start-up Xiaomi.

Which firm is the market leader by volume in China? Surprise: it is Xiaomi (pronounced “shee-owl-mee,” meaning “Little Rice”). In the second quarter of 2014, Xiaomi, which only sells online, dethroned Samsung to be the market champion by volume, with a 14% market share. Xiaomi’s secrets? From a resource-based view, plenty. Fast prototyping, with very short “launch-test-improve” cycles. Offering special software not available in other Android devices. Undercutting rivals with rock-bottom prices—US$100 for most Xiaomi models vis-à-vis Samsung’s high-end Galaxy smartphones that retail for US$500. Imitating leading brands—Xiaomi’s founder, Lei Jun, is famous for wearing Steve Jobs-style black T-shirts and jeans when showing off new models on stage. Overall, Xiaomi grew 240% in the second quarter of 2014, compared with the second quarter of 2013. Its extraordinary performance propelled it to become the fifth-largest smartphone player in the world—behind Samsung, Apple, Huawei, and Lenovo (in that order).

Chinese smartphone makers are naturally salivating about global markets. Xiaomi only sells 3% of its smartphones outside of China, Lenovo 16%, and Huawei 41%. They are likely to drive smartphones’ commoditization—a process of competition through which unique products that command high prices and high margins are no longer able to do so, thus becoming commodities. Just as in China, Xiaomi at US$98 apiece has rapidly become the market leader in India. But here is a catch from an institution-based view. As they increasingly venture outside China, similarities in design between Chinese brands and global leaders—and potential intellectual property (IP) infringement inside the devices—are likely to incur the wrath of Apple and Samsung. IP disputes, of course, are nothing unusual among smartphone giants. Apple and Samsung themselves fought nasty court battles for years. Xiaomi and other Chinese smartphone makers have armed themselves with Google executives and Silicon Valley lawyers seasoned at navigating the perilous waters between war and peace in IP. While the last page of Chinese smartphone makers’ story is not likely to be written any time soon, their performance will ultimately be driven by a combination of their technological and marketing capabilities and their institutional and legal savvy.

Sources: Based on (1) Bloomberg Businessweek, 2014, Samsung’s China problems come to India, October 27: 44–45; (2) Economist, 2014, Smartening up their act, October 25; (3) Forbes, 2014, China’s Xiaomi becomes world’s 5th largest smartphone maker, July 31; (4) T. Hout & D. Michael, 2014, A Chinese approach to management, Harvard Business Review, September; (5) South China Morning Post, 2014, Chinese companies drive commoditization of smartphone market, August 18; (6) Wall Street Journal, 2014, Xiaomi overtakes Samsung in China smartphone market, August 4; (7) P. Williamson & E. Yin, 2014, Accelerated innovation, MIT Sloan Management Review, summer.

To be honest, the company is also embracing reverse innovation for defensive reasons. If GE doesn’t come up with innovations in poor countries and take them global, new competitors from the developing world—like Mindray, Suzlon, Goldwind, and Haier—will … GE has tremendous respect for traditional rivals like Siemens, Philips, and Rolls-Royce. But it knows how to compete with them; they will never destroy GE. By introducing products that create a new price-performance paradigm, however, the emerging giants very well could. Reverse innovation isn’t optional; it is oxygen.

As advised by GE’s Immelt, today’s students—and tomorrow’s business leaders—will ignore the opportunities and challenges at the BoP at their own peril. This book will help ensure that you will not ignore these opportunities and challenges.

1-2Why Study Global Business?

1-2 Learning Objective

Give three reasons why it is important to study global business.

Global business (or IB) is one of the most exciting, most challenging, and most relevant subjects offered by business schools. Why study it?  Table 1.1 outlines three compelling reasons.

Table 1.1

Why Study Global Business?

· Enhance your employability and advance your career in the global economy · Better preparation for possible expatriate assignments abroad · Stronger competence in interacting with foreign suppliers, partners, and competitors, and in working for foreign-owned employers in your own country

First, you don’t want to be a loser. Mastering global business knowledge helps advance your employability and career in an increasingly competitive global economy. Take a look at the Opening Day Quiz in  Table 1.2. Can you answer all the questions correctly? If not, you will definitely benefit from studying global business.

Table 1.2

Opening Day Quiz

1. Which country made the shirt you are wearing?

· (A) China

· (B) Malaysia

· (C) Mexico

· (D) Romania

· (E) US

2. Which country made your mobile device?

· (A) China

· (B) Germany

· (C) Singapore

· (D) Taiwan

· (E) US

3. How many member countries does the G-20 have?

· (A) 20

· (B) 21

· (C) 22

· (D) 19

· (E) 18

4. Which city has the largest number of Fortune Global 500 company headquarters? (operational headquarters where top executives go to work, not place of registration)

· (A) Beijing

· (B) Hong Kong

· (C) London

· (D) New York

· (E) Tokyo

5. A 2,000-employee manufacturing plant is closing in a developed economy, and production is moving to an emerging economy. How many of the 2,000 jobs will the company keep?

· (A) 0

· (B) 5–10

· (C) 10–20

· (D) 20–30

· (E) 30–50

The answer to  Question 1 is empirical—that is, based on data. You should guess first and then look at the label of your shirt yourself or ask a friend to help you. The key here is international trade. Do you wear a shirt made in your own country or another country? Why?

In  Question 2, smart students typically ask whether the mobile device (such as a smartphone or an iPad) means the motherboard or the components. My answer is: “I mean the whole device, all the production that went into making the machine.” Then some students respond: “But they could be made in different countries!” My point exactly. Specifically, the point here is to appreciate the complexity of a global value chain, with different countries making different components and handling different tasks. It is likely the tiny components inside your mobile device have crossed borders a dozen or more times. Such a value chain is typically managed by an MNE—such as Apple, Dell, Foxconn, HP, Lenovo, or Samsung. The capabilities necessary to organize a global supply chain hints at the importance of resources and capabilities—one of the two key themes of this book.

Question 3 is deceptively simple. Unfortunately, 100% of my own students—-ranging from undergraduates to PhDs—miss it. Surprise! The  Group of 20 (G-20)  only has 19 member countries. The 20th member is the European Union (EU)—a regional bloc, not a single country. Ideally, why the G-20 is formed in such an interesting way will make you more curious about how the rules of the game are made around the world. In this case, why are 19 countries in, but numerous others out? What is special about the EU? Why are other regional blocs not included in the G-20? A focus on the rules of the game—more technically, institutions—is another key theme of the book.

Question 4 is interesting. Most of my own students pick New York, which has the third-largest number of headquarters of Fortune Global 500 companies (measured by sales). Beijing now has 52 Fortune Global 500 headquarters, followed by 41 in Tokyo, which until recently dethroned by Beijing had had the largest cluster of Fortune Global 500 headquarters. In comparison, New York has 20 such headquarters (17 in New York City and three outside the city).  The rise of Beijing is indicative of the changing global economic winds, which have propelled China to become the world’s second-largest economy in the years between the second and third editions of this book. To gain a better understanding of global economy, you need to pay more attention to companies based in Beijing (and in China and other emerging economies).

Do you know Beijing now has the world’s largest number of Fortune Global 500 headquarters?

© Sean Pavone/ Shutterstock.com

Question 5 will really frighten you. Some students typically clarify: “Do you mean the few security guards looking after the closed plant?” “Not necessarily,” I point out. “The question is: How many jobs will be kept by the company?” Students eventually get it: even adding a few jobs as security guards at the closed plant, the most optimistic estimates are that only 30 to 50 jobs may be kept. Yes, you guessed it: these jobs typically are high-level positions such as the CEO, CFO, CIO, factory director, and chief engineer. These managers will be sent by the MNE to start up operations in an emerging economy. You need to realize that in a 2,000-employee plant, even if you may be the 51st-highest-ranked employee, your fate may be the same as the 2,000th employee. You really need to work hard and work smart to position yourself as one of the top 50 (preferably one of the top 30). Doing well in this class and mastering global business knowledge may help make that happen.

In addition to the first reason to equip you with relevant knowledge, the second compelling reason why you should study global business is related to Question 5. Because many ambitious students aspire to join the top ranks of large firms, expertise in global business is often a prerequisite. Today, it is increasingly difficult, if not impossible, to find top managers at large firms without significant global competence. Of course, eventually, hands-on experience, not merely knowledge acquired from this course, will be required. However, mastery of the knowledge of, and demonstration of interest in, global business during your education will set you apart as a more ideal candidate to be selected as an  expatriate manager (“expat”) —a manager who works abroad—to gain such an experience (see  Chapter 15 for details).

Thanks to globalization, low-level jobs not only command lower salaries, but are also more vulnerable.  However, high-level jobs, especially those held by expats, are both financially rewarding and relatively secure. Expats often command a significant  international premium  in compensation—a significant pay raise when working overseas. In US firms, an expat’s total compensation package is approximately US$250,000 to US$300,000 (including perks and benefits; not all is take-home pay). When they return to the United States after a tour of duty (usually two to three years), a firm that does not provide attractive career opportunities to experienced expats often finds them to be lured away by competitor firms. Competitor firms also want to globalize their business, and tapping into the expertise and experience of these former expats makes such expansion more likely to succeed. And yes, to hire away these internationally experienced managers, competitor firms have to pay an even larger premium. This indeed is a virtuous cycle. This hypothetical example is designed to motivate you to study hard so that, someday, you may become one of these sought-after globetrotting managers. But even if you don’t want to be an expat, you really don’t want to join the army of the unemployed due to factory closings and business failures (see  Figure 1.3).

Figure 1.3

Jobs Outsourced

Source: Harvard Business Review, April 2012: 34.

Lastly, even if you do not aspire to compete for the top job at a large company and instead work at a small firm or are self-employed, you may find yourself dealing with foreign-owned suppliers and buyers, competing with foreign-invested firms in your home market, or perhaps even selling and investing overseas. Alternatively, you may find yourself working for a foreign-owned firm, your domestic employer acquired by a foreign player, or your unit ordered to shut down for global consolidation. Understanding how global business decisions are made may facilitate your own career in such firms. If there is a strategic rationale to downsize your unit, you want to be prepared and start polishing your résumé right away. In other words, it is your career that is at stake. Don’t be the last in the know!

1-3A Unified Framework

1-3 Learning Objective

Articulate one fundamental question and two core perspectives in the study of global business.

Global business is a vast subject area. It is one of the few courses that will make you appreciate why your university requires you to take a number of seemingly unrelated courses in general education. We will draw on major social sciences, such as economics, geography, history, political science, psychology, and sociology. We will also draw on a number of business disciplines, such as strategy, finance, and marketing. The study of global business is, thus, quite interdisciplinary. It is easy to lose sight of the “forest” while scrutinizing various “trees” or even “branches.” The subject is not difficult, and most students find it to be fun. The number-one student complaint (based on previous student feedback) is that there is an overwhelming amount of information. Honestly, this is also  my number-one complaint as your author. You may have to read and learn this material, but I have to bring it all together in a way that makes sense and in a (relatively) compact book that does not go on and on and on for 990 pages.

To make your learning more focused, more manageable, and (hopefully) more fun, in this section—and throughout the book—we will develop a unified framework (shown in  Figure 1.4 ). This will provide great continuity to facilitate your learning. Specifically, we will discipline ourselves by focusing only on one most fundamental question and two core perspectives. A fundamental question acts to define a field and to orient the attention of students, practitioners, and scholars in a certain direction. Our “big question” is:  What determines the success and failure of firms around the globe?  To answer this question, we will introduce only two core perspectives throughout this book:

· (1)

an institution-based view

· (2)

a resource-based view

The remainder of this section outlines this framework.

Figure 1.4

A Unified Framework for Global Business

1-3aOne Fundamental Question

What is it that we do in global business? Why is it so important that practically all students in business schools around the world are either required or recommended to take this course? While there are certainly many questions to raise, a relentless interest in what determines the success and failure of firms around the globe serves to focus the energy of our field. Global business is fundamentally about not limiting yourself to your home country. It is about treating the global economy as your potential playground (or battlefield). Some firms may be successful domestically but fail miserably overseas. Other firms successfully translate their strengths from their home markets to other countries. If you were expected to lead your firm’s efforts to enter a particular foreign market, wouldn’t you want to find out what drives the success and failure of other firms in that market?

Overall, the focus on firm performance around the globe defines the field of global business (or IB) more than anything else. Numerous other questions all relate in one way or another to this most fundamental question. Therefore, all chapters in this book will be centered on this consistent theme: What determines the success and failure of firms around the globe?

1-3bFirst Core Perspective: An Institution-Based View

An institution-based view suggests that the success and failure of firms are enabled and constrained by institutions. By institutions, we mean the rules of the game. Doing business around the globe requires intimate knowledge about both formal rules (such as laws) and informal rules (such as values) that govern competition in various countries. Firms that do not do their homework and thus remain ignorant of the rules of the game in a certain country are not likely to emerge as winners.

Formal institutions include laws, regulations, and rules. For example, Hong Kong’s laws are well known for treating all entrants, whether from neighboring mainland China (whose firms are still technically regarded as “non-domestic”) or far-away Chile, the same as they treat indigenous Hong Kong firms. Such equal treatment enhances the potential odds for foreign firms’ success. Thus, it is not surprising that Hong Kong attracts numerous outside firms. Other rules of the game discriminate against foreign firms and undermine their chances for success. India’s recent attraction as a site for FDI was only possible after its regulations changed from confrontational to accommodating. Prior to 1991, India’s rules severely discriminated against foreign firms. For example, in the 1970s, the Indian government demanded that Coca-Cola either hand over the recipe for its secret syrup, which it does not even share with the US government, or get out of India. Painfully, Coca-Cola chose to leave India. Its return to India since the 1990s speaks volumes about how much the rules of the game have changed in India.

Informal institutions include cultures, ethics, and norms. They also play an important part in shaping the success and failure of firms around the globe (see the  Opening Case). For example, individualistic societies, particularly the English-speaking countries, such as Australia, Britain, and the United States, tend to have a relatively higher level of entrepreneurship, as reflected in the number of business start-ups. Why? Because the act of founding a new firm is a widely accepted practice in individualistic societies. Conversely, collectivistic societies, such as Japan, often have a hard time fostering entrepreneurship. Most people there refuse to stick their neck out to found new businesses, because it is contrary to the norm.

Overall, an institution-based view suggests that institutions shed a great deal of light on what drives firm performance around the globe. Next, we turn to our second core perspective.

Second Core Perspective: A Resource-Based View

The institution-based view suggests that the success and failure of firms around the globe are largely determined by their environments. This is certainly correct. Because of their institutions (or specifically, institutional imperfections), India did not attract much FDI prior to 1991 and Japan does not nurture a lot of internationally competitive start-ups. However, insightful as this perspective is, there is a major drawback. If we push this view to its logical extreme, then firm performance around the globe would be entirely determined by environments. The validity of this extreme version is certainly questionable.

The resource-based view helps overcome this drawback. While the institution-based view primarily deals with the external environment, the resource-based view focuses on a firm’s internal resources and capabilities. It starts with a simple observation: In harsh, unattractive environments, most firms either suffer or exit. However, against all odds, a few superstars thrive in these environments. For instance, despite the former Soviet Union’s obvious hostility toward the United States during the Cold War, PepsiCo began successfully operating in the former Soviet Union in the 1970s (!). In another example, airlines often lose money. But a small number of players, such as Southwest in the United States, Ryanair in Ireland, Hainan in China, and IndiGo in India, have been raking in profits year after year. In the fiercely competitive fashion industry, Zara has been defying gravity. How can these firms succeed in such challenging environments? What is special about them? A short answer is that PepsiCo, Southwest, Ryanair, Hainan, IndiGo, and Zara must have certain valuable and unique firm-specific resources and capabilities that are not shared by competitors in the same environments.

Doing business outside one’s home country is challenging. Foreign firms have to overcome a  liability of foreignness , which is the inherent disadvantage that foreign firms experience in host countries because of their non-native status.  Just think about all the differences in regulations, languages, cultures, and norms. Think about the odds against Mahindra & Mahindra when it tried to eat some of John Deere’s lunch in the American heartland. Against such significant odds, the primary weapons that foreign firms such as Mahindra & Mahindra employ are overwhelming resources and capabilities that can offset their liability of foreignness ( Figure 1.5). Today, many of us take it for granted that the best-selling car in the United States rotates between the Toyota Camry and the Honda Civic, that Coca-Cola is the best-selling soft drink in Mexico, and that Microsoft Word is the world’s number-one word processing software. We really shouldn’t. Why? Because it is not natural for these foreign firms to dominate nonnative markets. These firms must possess some very rare and powerful firm-specific resources and capabilities that drive these remarkable success stories. This is a key theme of the resource-based view, which focuses on how winning firms acquire and develop such unique and enviable resources and capabilities, and how competitor firms imitate and then innovate in an effort to outcompete the winning firms.

Figure 1.5

In Every Country, Multinationals Possess Better Management Capabilities than Do Local Firms

Source: Adapted from N. Bloom, C. Genakos, R. Sadun, & J. Van Reenen, 2012, Management practices across firms and countries (p. 23), Academy of Management Perspectives, February: 12–33. Sample of 7,262 manufacturing and 661 retail firms, of which 5,441 are purely domestic and 2,482 are foreign multinationals. Domestic multinationals (such as the domestic subsidiaries of Toyota in Japan) are excluded.

1-3dA Consistent Theme

Given our focus on the fundamental question of what determines the success and failure of firms around the globe, we will develop a unified framework by organizing the material in every chapter according to the two core perspectives, namely, the institution-based and resource-based views (see  Emerging Markets 1.1). With our unified framework—an innovation in IB textbooks—we will not only explore the global business “trees,” but also see the global business “forest.”

1-4What Is Globalization?

1-4 Learning Objective

Identify three ways of understanding what globalization is.

Globalization , generally speaking, is the close integration of countries and peoples of the world. This abstract five-syllable word is now frequently heard and debated. Those who approve of globalization count its contributions to include greater economic growth, higher standards of living, increased technology sharing, and more extensive cultural integration. Critics argue that globalization undermines wages in rich countries, exploits workers in poor countries, grants MNEs too much power, destroys the environment, and promotes inequality. So, what exactly is globalization? This section outlines three views on globalization, recommends the pendulum view, and introduces the idea of semiglobalization.

1-4aThree Views on Globalization

Depending on what sources you read, globalization could be

· a new force sweeping through the world in recent times

· a long-run historical evolution since the dawn of human history

· a pendulum that swings from one extreme to another from time to time

An understanding of these views helps put into perspective the debate about globalization. First, opponents of globalization suggest that it is a new phenomenon beginning in the late 20th century, driven by recent technological innovations and a Western ideology focused on exploiting and dominating the world through MNEs. The arguments against globalization focus on environmental stress, social injustice, and sweatshop labor, but present few clear alternatives to the present economic order. Nevertheless, anti-globalization advocates and protesters often argue that globalization needs to be slowed down if not stopped.

A second view contends that globalization has always been part and parcel of human history. Historians debate whether globalization started 2,000 or 8,000 years ago. The earliest traces of MNEs have been discovered in Assyrian, Phoenician, and Roman times.  International competition from low-cost countries is nothing new. In the first century a.d., the Roman emperor Tiberius was so concerned about the massive quantity of low-cost Chinese silk imports that he imposed the world’s first known import quota of textiles.  Today’s most successful MNEs do not come close to wielding the historical clout of some MNEs, such as the (old) East India Company during colonial times (see the  Opening Case). In a nutshell, globalization is nothing new and will probably always exist.

A third view suggests that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.”  Globalization is neither recent nor one-directional. It is, more accurately, a process similar to the bi-directional swing of a pendulum.

1-4bThe Pendulum View on Globalization

The pendulum view probably makes the most sense because it can help us understand the ups and downs of globalization. The current era of globalization originated in the aftermath of World War II, when major Western countries committed to global trade and investment. However, between the 1950s and the 1970s, this view was not widely shared. Communist countries, such as China and the Soviet Union, sought to develop self-sufficiency. Many noncommunist developing countries, such as Brazil, India, and Mexico, focused on fostering and protecting domestic industries. But refusing to participate in global trade and investment ended up breeding uncompetitive industries. In contrast, four developing economies in Asia—Hong Kong, Singapore, South Korea, and Taiwan—earned their stripes as the “Four Tigers” by participating in the global economy. They became the only economies once recognized as less developed (low-income) by the World Bank to have subsequently achieved developed (high-income) status.

Inspired by the Four Tigers, more countries and regions—such as China in the late 1970s, Latin America in the mid-1980s, Central and Eastern Europe in the late 1980s, and India in the 1990s—realized that joining the global economy was a must. As these countries started to emerge as new players in the global economy, they became collectively known as “emerging economies.” As a result, globalization rapidly accelerated.

However, globalization, like a pendulum, is unable to keep going in one direction. Rapid globalization in the 1990s and the 2000s saw some significant backlash. First, the rapid growth of globalization led to the historically inaccurate view that globalization is new. Second, it created fear among many people in developed economies that they would lose jobs. Emerging economies not only seem to attract many low-end jobs away from developed economies, but they also increasingly appear to threaten some high-end jobs. Finally, some factions in emerging economies complained against the onslaught of MNEs, alleging that they destroy local companies as well as local cultures, values, and environments.

The December 1999 anti-globalization protests in Seattle and the September 2001 terrorist attacks in New York and Washington were undoubtedly some of the most visible and most extreme acts of anti-globalization forces at work. As a result, international travel was curtailed, and global trade and investment flows slowed in the early 2000s. Then in the mid-2000s, however, worldwide GDP, cross-border trade, and per capita GDP all soared to historically high levels. It was during that period that “BRIC” became a buzzword (discussed earlier).

Unfortunately, the party suddenly ended in 2008. The 2008–2009 global economic crisis was unlike anything the world had seen since the Great Depression (1929–1933). The crisis showed, for better or worse, how interconnected the global economy has become. Deteriorating housing markets in the United States, fueled by unsustainable subprime lending practices, led to massive government bailouts of failed firms. The crisis quickly spread around the world, forcing numerous governments to bail out their own troubled banks. Global output, trade, and investment plummeted, while unemployment skyrocketed. The 2008–2009 crisis became known as the Great Recession. Many people blamed globalization for the Great Recession.

After unprecedented government intervention in developed economies, confidence was growing that the global economy had turned the corner and that the recession was ending.  However, starting in 2010, the Greek debt crisis and then the broader PIGS debt crisis erupted. (“PIGS” refers to Portugal, Ireland or Italy, Greece, and Spain). The already-slow recovery in Europe thus became slower, and unemployment hovered at very high levels (see  Chapter 8).

The Great Recession reminds all firms and managers of the importance of  risk management —the identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events.  As a technique to prepare and plan for multiple scenarios (either high risk or low risk),  scenario planning  is now used extensively around the world.  The recovery has seen more protectionist measures, since the stimulus packages and job-creation schemes of various governments often emphasize “buy national” (such as “buy American”) and “hire locals.” In short, the pendulum is swinging back. The Closing Case shows a pendulum consisting of two polar scenarios—continued globalization and de-globalization—with a view toward 2050.

Like the proverbial elephant, globalization is seen by everyone, yet rarely comprehended. The sudden ferocity of the 2008–2009 crisis surprised everybody—ranging from central bankers to academic experts. Remember, all of us felt sorry when we read the story of a bunch of blind men trying to figure out the shape and form of the elephant. We really shouldn’t have. Although we are not blind, our task is more challenging than the blind men who study a standing animal. Our beast—globalization—does not stand still and often rapidly moves, back and forth (!). Yet, we try to live with it, avoid being crushed by it, and even attempt to profit from it. Overall, relative to the other two views, the view of globalization as a bi-directional pendulum is more balanced and more realistic. In other words, globalization has both rosy and dark sides, and these change over time.

1-4cSemiglobalization

Despite the debate over it, globalization is not complete. Do we really live in a globalized world? Are selling and investing abroad just as easy as at home? Obviously not. Most measures of market integration, such as trade and FDI, have recently scaled new heights, but still fall far short of pointing to a single, globally integrated market. In other words, what we have may be labeled  semiglobalization, which is more complex than extremes of total isolation and total globalization. Semiglobalization suggests that barriers to market integration at borders are high, but not high enough to insulate countries from each other completely.

Semiglobalization calls for more than one way of doing business around the globe. Total isolation on a nation-state basis would suggest localization—a strategy of treating each country as a unique market. So an MNE marketing products to 100 countries will need to come up with 100 versions of local cars or drinks. This approach is clearly too costly. Total globalization, on the other hand, would lead to standardization—a strategy of treating the entire world as one market. The MNE in our previous example can just market one version of “world car” or “world drink.” But the world obviously is not that simple. Between total isolation and total globalization, semiglobalization has no single correct strategy, resulting in a wide variety of experimentations (see  Emerging Markets 1.2). Overall, (semi)globalization is neither to be opposed as a menace nor to be celebrated as a panacea; it is to be engaged.

Emerging Markets 1.2

Coca-Cola’s Deep Dive in Africa

Founded in 1892, Coca-Cola first entered Africa in 1929. While Africa had always been viewed as a “backwater,” it has recently emerged as a major growth market commanding strategic attention. Of the US$27 billion that Coca-Cola would invest in emerging economies between 2010 and 2020, US$12 billion will be used to beef up the plants and distribution facilities in Africa. Why does Coca-Cola show such a strong interest in a “deep dive” in Africa? Both the push and pull effects are at work.

The push comes from the necessity to find new sources of growth for this mature firm, which has promised investors of 7% to 9% earnings growth. In 1998, its stock reached a high-water mark at US$88. But it dropped to US$37 in 2003. Since 2004, the share price has rallied again, rising from US$43 to a new peak of US$90 in November 2014 (adjusted for a 2:1 share split in 2012). Can Coca-Cola’s stock reach higher?

Its home markets are unlikely to help. Between 2006 and 2011, US sales declined for five consecutive years. Further, health advocates accused Coca-Cola of contributing to an epidemic of obesity in the United States and proposed to tax soft drinks to pay for health care. While Coca-Cola defeated the tax initiative, it is fair to say that the room for growth at home is limited. In Europe and Japan, sales are similarly flat. Elsewhere, in China, strong local rivals have made it tough for Coca-Cola to break out. Its acquisition of a leading local fruit juice firm was blocked by the government, which did not seem to bless Coca-Cola’s further growth. In India, Pepsi is so popular that “Pepsi” has become the Hindi shorthand for all bottled soft drinks (including Coke!). In Latin America, sales are encouraging, but growth may be limited. Mexicans, on average, are already guzzling 665 servings of Coca-Cola products every year, the highest in the world. There is only so much sugary water one can drink every day.

In contrast, Coca-Cola is pulled by Africa, where it has a commanding 29% market share versus Pepsi’s 15%. With 65,000 employees and 160 plants, Coca-Cola is Africa’s largest private-sector employer. Yet, annual per capita consumption of Coca-Cola products is only 39 servings in Kenya. For the continent as a whole, disposable income is growing. In 2014, 100 million Africans earned at least US$5,000 per person. While Africa indeed has some of the poorest countries in the world, 12 African countries (with a combined population of 100 million) have a GDP per capita that is greater than China’s. Coca-Cola is hoping to capitalize on Africa’s improved political stability and physical infrastructure. Countries not fighting civil wars make Coke’s operations less disruptive, and new roads penetrating the jungle can obviously elevate sales.

Coca-Cola is already in all African countries. The challenge now, according to chairman and CEO Muhtar Kent, will be to deep dive into “every town, every village, every township.” This will not be easy. War, poverty, and poor infrastructure make it extremely difficult to distribute and market products in hard-to-access regions. Undaunted, Coca-Cola is in a street-by-street campaign to increase awareness and consumption of its products. The crowds and the poor roads dictate that some of the deliveries have to be done manually on pushcarts or trolleys. Throughout the continent, Coca-Cola has set up 3,000 Manual Distribution Centers. Taking a page from its playbook in Latin America, especially Mexico, Coca-Cola has aggressively courted small corner stores. Coca-Cola and its bottlers offer small corner store owners delivery, credit, and direct coaching—ranging from the tip not to ice down the Cokes until the midday rush to save electricity, to helping on how to buy a house after vendors make enough money.

In Africa, US-style accusations of Coca-Cola’s alleged contribution to the obesity problem are unlikely. After all, the primary concern in many communities is too few available calories of any kind. However, this does not mean Africa is Coca-Cola’s marketing Shangri-La, free from any criticisms. It has to defend itself from critics who accuse it of depleting fresh water, encouraging expensive and environmentally harmful refrigeration, and hurting local competitors who hawk beverages. In response, Coca-Cola often points out the benefits it has brought. In addition to the 65,000 jobs it has directly created, one million local jobs are indirectly created by its vast system of distribution, which moves beverages from bottling plants deep into the slums and the bush a few crates at a time.

Sources: Based on (1) M. Blanding, 2010, The Coke Machine, New York: Avery; (2) Bloomberg Businessweek, 2010, Coke’s last round, November 1: 54–61; (3) Bloomberg Businessweek, 2010, For India’s consumers, Pepsi is the real thing, September 20: 26–27; (4) Bloomberg Businessweek, 2011, Can Coke surpass its record high of $88 a share? June 6: 49–50; (5) D. Zoogah, M. W. Peng, & H. Woldu, 2015, Institutions, resources, and organizational effectiveness in Africa, Academy of Management Perspectives, 29(1): 7–31.

1-5Global Business and Globalization at a Crossroads

1-5 Learning Objective

State the size of the global economy and its broad trends, and understand your likely bias in the globalization debate.

Twenty-first-century business leaders face enormous challenges. This book helps overcome these challenges. As a backdrop for the remainder of this book, this section makes two points. First, a basic understanding of the global economy is necessary. Second, it is important to critically examine your own personal views and biases regarding globalization.

1-5aA Glance at the Global Economy

The global economy in 2013 was an approximately US$75 trillion economy (total global GDP calculated at official, nominal exchange rates—US$100 trillion on PPP basis).  While there is no need to memorize a lot of statistics, it is useful to remember this US$75 trillion (or US$100 trillion) figure to put things in perspective.

One frequent observation in the globalization debate is the enormous size of MNEs. Take a look at the largest MNE within one sizeable country: Volkswagen’s worldwide sales would represent 10% of German GDP, Samsung’s sales 17% of South Korean GDP, and BP’s sales 26% of British GDP.   Table 1.3 shows the most recent top ten firms. The top three largest MNEs—measured by sales—happened to be headquartered in North America, Europe, and Asia. If the largest MNE, Wal-Mart, were an independent country, it would be the 27th largest economy—its sales are smaller than Belgium’s GDP but larger than Venezuela’s. The sales of the largest EU-based MNE, Royal Dutch Shell, were larger than the GDP of each of the following EU member countries: Austria, Denmark, Finland, Portugal, and Ireland. The sales of the largest Asia-based MNE, SINOPEC, were larger than the GDP of each of the following Asian economies: Thailand, Malaysia, Hong Kong, Singapore, and the Philippines. Today, more than 82,000 MNEs manage at least 810,000 subsidiaries overseas.  Total annual sales for the largest 500 MNEs exceed US$31 trillion (about one-third of global output).

Table 1.3

Top Ten Largest Firms in the World (Measured by Sales in US$)

	Corporate name	Home country	Revenues
1	Wal-Mart Stores	USA	$476 billion
2	Royal Dutch Shell	Netherlands	$460 billion
3	SINOPEC Group	China	$457 billion
4	China National Petroleum Corporation	China	$432 billion
5	ExxonMobil	USA	$408 billion
6	BP	UK	$396 billion
7	State Grid	China	$333 billion
8	Volkswagen	Germany	$261 billion
9	Toyota Motor	Japan	$256 billion
10	Glencore	Switzerland	$233 billion

Source: Adapted from Fortune, 2014, Global 500, July 21: F-1. Data refer to 2013.

Table 1.4 documents the change in the makeup of the 500 largest MNEs. While MNEs from the Triad (North America, Europe, and Japan) dominate the list, their share has been shrinking—thanks to the Great Transformation (discussed earlier). Among MNEs from emerging economies, those from BRIC contribute 118 firms to the Fortune Global 500 list. In particular, MNEs from China have come on strong.

Table 1.4

Recent Changes in the Fortune Global 500

	2005	2010	2014
Developed economies
United States	170	133	128
European Union	165	149	128
Japan	70	68	57
Switzerland	12	15	13
Canada	14	11	10
Australia	8	8	8
Emerging economies
China	20	61	95
India	6	8	8
Brazil	4	7	7
Russia	5	7	8
BRIC	35	83	118

Sources: Adapted from various Fortune issues. The most recent Fortune Global 500 list (for 2014) was published in Fortune, July 21, 2014.

Beijing is now headquarters to 52 Fortune Global 500 firms, more than New York’s 20—remember Question 4 in Opening Day Quiz. Clearly, Western rivals cannot afford to ignore these emerging multinationals, and students studying this book need to pay attention to these emerging multinationals.

1-5bThe Globalization Debate and You

As a future business leader, you are not a detached reader. The globalization debate directly affects your future.  Therefore, it is imperative that you participate in the globalization debate instead of letting other people make decisions on globalization that will significantly affect your career, your consumption, and your country. It is important to know your own biases when joining the debate. By the very act of taking an IB course and reading this book, you probably already have some pro-globalization biases, compared to non-business majors elsewhere on campus and the general public in your country.

Why do protestors like these object to globalization?

© Shalunts/ Shutterstock.com

You are not alone. In the last several decades, most executives, policy makers, and scholars in both developed and emerging economies, who are generally held to be the elite in these societies, are biased toward acknowledging the benefits of globalization. However, many other members of the society do not necessarily share the same views. Unfortunately, many of the elite fail to understand the limits of their beliefs and mistakenly assume that the rest of the world thinks like them. To the extent that powerful economic and political institutions are largely controlled by the elite in almost every country, it is not surprising that some anti-globalization groups, feeling powerless, end up resorting to unconventional tactics, such as mass protests, to make their point.

Many of the opponents of globalization are  nongovernmental organizations (NGOs) , such as environmentalists, human rights activists, and consumer groups. Ignoring them will be a grave failure when doing business around the globe. Instead of viewing NGOs as opponents, many firms view them as partners. NGOs do raise a valid point when they insist that firms, especially MNEs, should have a broader concern for the various stakeholders affected by the actions of MNEs actions around the world. At present, this view is increasingly moving from the peripheral to the mainstream (see  Chapters 3 and  17).

It is certainly interesting, and perhaps alarming, to note that as would-be business leaders who will shape the global economy in the future, current business school students already exhibit values and beliefs in favor of globalization similar to those held by executives, policy makers, and scholars and different from those held by the general public. Shown in  Table 1.5, US business students have significantly more positive (almost one-sided) views toward globalization than does the general public. My lectures around the world suggest that most business students—regardless of their nationality—seem to share such positive views on globalization. This is not surprising. Both self-selection to study business and socialization within the curriculum, in which free trade is widely regarded as positive, may lead to certain attitudes in favor of globalization. Consequently, business students tend to focus more on the economic gains of globalization and to be less concerned with its darker sides.

Table 1.5

Views on Globalization: General Public versus Business Students

Percentage answering “good” for the question: Overall, do you think globalization is good or bad for	General public1	Business students2
US consumers like you	68%	96%
US companies	63%	77%
The US economy	64%	88%
Strengthening poor countries’ economies	75%	82%

Sources: Based on (1) A. Bernstein, 2000, Backlash against globalization, BusinessWeek, April 24: 43; (2) M. W. Peng & H. Shin, 2008, How do future business leaders view globalization? Thunderbird International Business Review, 50 (3): 175–182. All differences are statistically significant.

Current and would-be business leaders must be aware of their own biases embodied in such one-sided views toward globalization. Since business schools aspire to train future business leaders by indoctrinating students with the dominant values that managers hold, business schools may have largely succeeded in this mission. However, to the extent that current managers (and professors) have some strategic blind spots, these findings are potentially alarming. They reveal that business students already share these blind spots. Despite possible self-selection in choosing to major in business, there is no denying that student values are shaped, at least in part, by the educational experience that business schools provide. Knowing such limitations, business school professors and students need to work especially hard to break out of this mental straitjacket.

In order to combat the widespread tendency to have one-sided, rosy views, a significant portion of this book is devoted to the numerous debates that surround globalization.  Debates are systematically introduced in every chapter to provoke more critical thinking—a hallmark for high-level university training. Virtually all textbooks uncritically present knowledge “as is” and ignore the fact that the field is alive with numerous debates. No doubt, debates drive practice and research forward. Therefore, it is imperative that you be exposed to cutting-edge debates and encouraged to form your own views. In addition, business ethics are emphasized throughout the book. A featured Ethical Dilemma can be found in every chapter. Two whole chapters are devoted to ethics, norms, and cultures ( Chapter 3) and corporate social responsibility ( Chapter 17).

1-6Organization of the Content

This book has four parts.  Part I is foundations. Following this chapter,  Chapters 2,  3, and  4 address the two leading perspectives—namely, institution-based and resource-based views.  Part II covers tools, focusing on trade ( Chapter 5), foreign investment ( Chapter 6), foreign exchange ( Chapter 7), and global and regional integration ( Chapter 8). Part III sheds light on strategy. We start with the internationalization of small, entrepreneurial firms ( Chapter 9), followed by ways to enter foreign markets ( Chapter 10), to manage competitive dynamics ( Chapter 11), to make alliances and acquisitions work ( Chapter 12), and to strategize, structure, and learn ( Chapter 13). Finally,  Part IV builds excellence in different functional areas: marketing and supply chain ( Chapter 14), human resource management ( Chapter 15), finance and corporate governance ( Chapter 16), and corporate social responsibility ( Chapter 17).

Chapter Review

Chapter Summary/Learning Objectives

· 1-1Explain the concepts of international business and global business, with a focus on emerging economies.

· IB is typically defined as

· (1)

a business (firm) that engages in international (cross-border) economic activities, and/or

· (2)

the action of doing business abroad.

· Global business is defined in this book as business around the globe.

· This book has gone beyond competition in developed economies by devoting extensive space to competitive battles waged in emerging economies and the base of the global economic pyramid.

· An interesting recent development out of emerging economies is reverse innovation.

· 1-2Give three reasons why it is important to study global business.

· Enhance your employability and advance your career in the global economy by equipping yourself with global business knowledge.

· Better preparation for possible expatriate assignments abroad.

· Stronger competence in interacting with foreign suppliers, partners, and competitors, and in working for foreign-owned employers in your own country.

· 1-3Articulate one fundamental question and two core perspectives in the study of global business.

· IB’s most fundamental question is: What determines the success and failure of firms around the globe?

· The two core perspectives are

· (1)

the institution-based view and

· (2)

the resource-based view.

· We develop a unified framework by organizing materials in  every chapter according to the two perspectives guided by the fundamental question.

· 1-4Identify three ways of understanding what globalization is.

· Some view globalization as a recent phenomenon, and others believe that it has been a one-directional evolution since the dawn of human history.

· We suggest that globalization is best viewed as a process similar to the bi-directional swing of a pendulum.

· 1-5State the size of the global economy and its broad trends, and understand your likely bias in the globalization debate.

· MNEs, especially large ones from developed economies, are sizable economic entities.

· Current and would-be business leaders need to be aware of their own hidden pro-globalization bias.