Fictional Case Exercise

Authors’ Letter Dear reader:

We understand today’s students are different! today’s students—often referred to as ‘Millennials’ or ‘’Digital Natives’—have grown up in a constantly connected world. they are highly social and

work well in teams. they multi-task, have dynamic attention spans, and want to stay connected. they are optimistic and determined to make the world

better. Finally, they are kinesthetic and visual learners.

the unmet needs and desires of today’s millennial students can be grouped into three categories:

Visual and Collaborative Learning: Millennials prefer to be engaged visually. they prefer interactive media, videos and textbooks with an emphasis on useful exhibits, photos, maps and other visual learning aids. Millennials prefer content that they can read or digitally access at a time and place of their choosing. they prefer self-paced

learning. they enjoy group tasks.

Relevant Knowledge and Job Related Skills: Millennials want relevant company examples, more concise foundational course content and tools that develop specific IB skills that will better prepare them for jobs as they enter the global working community.

Focus on Contemporary Issues that Matter to Millennials: Millennials desire content with a strong emphasis on culture, ethics, corporate social responsibility, sustainability, governance, social trends and other contemporary issues that matter to them.

the new 4th edition of our textbook, International Business: The New Realities©, and the MyManagementLab® online assessment and preparation

solution, have been completely redesigned and rewritten to address these unmet needs and desires.

this new 4th edition has been carefully crafted to:

• Engage students—make them want to learn more about international business • Ensure students are prepared to learn the material by using collaborative learning and realistic experiences that enable interaction, demon-

stration, and social networking

• Show students how to apply the material by incorporating content on contemporary issues that matter to millennials which will better prepare them as they enter the global working community.

• Enable students to acquire critical thinking and problem-solving skills

specifically, here is what the 4th edition offers:

VISuaL and CoLLaboRatIVe LeaRnIng Reduced number of chapters from 20 to 17. Market research with educators indicates that the ideal number of chapters for comprehensive course coverage is 17. the authors have condensed the writing and eliminated certain non-essential content in this new edition to address these needs.

Writing style and comprehension enhancement. the authors have utilized a writing style in the 4th edition to optimize reading and compre- hension. Average sentence length is approximately 12 words per sentence. the reading level is fully accessible to Millennials.

New chapter organization designed to optimize student learning. each chapter objective is linked to a specific CKr Learning Module© that can be read in approximately 20 minutes.

171 new and updated Exhibits designed to improve understanding and retention with specific links to chapter content. this is more than double the number of exhibits found in competing textbooks.

New and updated Maps specifically designed for the Millennial student learning style. this is double the number of maps as in competing textbooks.

Videos. the new Watch It feature links most chapters to one or two custom-designed videos on international business that clarify complex material and facilitate learning.

ReLeVant KnowLedge and Job ReLated SKILLS More concise foundational content development based upon marketing research from professors. the 4th edition puts more focus on founda- tional content. the authors have streamlined the narrative, emphasizing simplified explanations that have been classroom-tested.

Currency of examples and references. More than 70 percent of the references in the new edition are from 2008 or later, as compared to about 30 percent in leading competing textbooks. We have included company examples that are exciting and relevant to today’s student.

Career Toolbox—IB Skills Building. IB skill Building exercises facilitate the development of specific and relevant international business expertise that prepare Millennials for the work world. IB skill Building exercises are unique to the 4th edition.

GlobalEDGE Internet Exercises in each chapter provide instructors a basis for student assignments and projects. the GlobaleDGe™ knowledge portal was developed under the direction of co-author s. tamer Cavusgil while at Michigan state university.

You Can Do It—Recent Grads in IB. this edition offers nine biographies of real university graduates who have embarked on fascinating careers in international business. these inspiring stories, three of them new to this edition, bring the prospect of an exciting IB career to life.

FoCuS on ConteMpoRaRy ISSueS that MatteR Emphasis on the new IB environment. Compared to leading competing texts, the new 4th edition presents more current and deeper coverage of contemporary IB topics such as emerging markets, developing economies, growth of the service sector, risks in IB, globalization and technology,

women in IB and other important trends.

Ethics, CSR, Sustainability and Governance chapter. the authors have rewritten, updated and expanded the chapter to include the most current topics, issues and company examples.

Ethical dilemmas throughout the book. ethical dilemmas are presented in the majority of chapters and focus on the dilemmas that managers encounter at the boundary of ethical norms and business practice. students can apply the CKr ethical Framework© from Chapter 4 to address each

dilemma.

Group project on corporate social responsibility. the 4th edition contains a new, comprehensive activity in which students debate corporate social responsibility in international business. In this extended classroom-tested exercise, located in the Instructor’s Manual, students debate the merits

and consequences of Csr as ‘executives,’ ‘consumers’, and ‘activists.’

Culture chapter expanded, updated and rewritten to address the issues and topics of greatest importance and interest to Millennials and professors.

Dedicated chapter on emerging markets and developing economies. the only leading IB text with a specific chapter devoted to emerging markets and developing economies.

Women in international business. Women comprise about 50 percent of the undergraduate enrollment in business degree programs. Women increasingly pursue careers in international business. the 4th edition is the only text with a dedicated section devoted to the unique needs and chal-

lenges women face in international business.

Balanced coverage of multinational enterprises, small and medium size enterprises and born globals.

unlike numerous other IB textbooks, the 4th edition features substantial content on the variety of firms active in international business today.

Balanced focus. the 4th edition offers a global perspective, avoiding excessive focus on specific nations or regions.

peRSonaLIzed LeaRnIng MyManagementLab delivers online assessment and preparation material that helps students study and prepare actively for class. Chapter-by- chapter activities, including pre-tests, post-tests, and video and critical-thinking exercises, emphasize content that students need to review and learn

to succeed.

The Pearson eText lets students access their textbook anytime, anywhere, and any way they want—including online or downloading to tablet computers.

A personalized study plan for each student promotes better critical thinking skills and helps students succeed in the course and beyond.

InStRuCtoR SuppoRt AACSB tagging accompanies all end-of-chapter exercises to help instructors identify the AACsB learning goals that each exercise supports and to aid in measuring student learning of course content within AACsB guidelines. All test bank items are tagged as well.

Instructor’s Manual. the Instructor’s Manual is authored by Marta szabo White of Georgia state university, winner of numerous teaching awards. the cutting-edge Manual provides numerous resources for each chapter such as exercises, critical-thinking assignments, debate topics, and research

assignments.

Test Item File, authored by an assessment expert with extensive experience in test authoring. It includes approximately 100 questions per chapter, all reviewed and edited by the authors to ensure accuracy and appropriateness. testGen test Generating software is also available.

Newly prepared PowerPoint slides and an Image Library contain all of the exhibits from the textbook. All PowerPoints have been developed and classroom-tested by the authors. these are available electronically for instructors to download.

http://www.pearsonmylabandmastering.com

The New Realities

S. Tamer Cavusgil Fuller E. Callaway Professorial Chair, Georgia State University

Gary Knight Helen Simpson Jackson Chair in International Management, Willamette University

John R. Riesenberger President, Consilium Partners Thunderbird School of Global Management (retired)

International Business

Fourth Edition

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Authorized adaptation from the United States edition, entitled International Business: The New Realities, Fourth Edition, ISBN 978-0-13-432483-8 by S. Tamer Cavusgil, Gary Knight and John R. Riesenberger, published by Pearson Education © 2017.

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Dedicated to…

This book is dedicated to all those who feel passionate about

cross-border business, our readers around the world. I trust that this

edition will inspire and help you discover the magic of international

business. Since any journey is much more rewarding when you are

accompanied by others, I also dedicate this edition to my students of

four decades whom I had the opportunity to mentor over the years.

S. Tamer Cavusgil Atlanta, Georgia

This book is dedicated to my wife, Mari, for her intellect, patience,

and adventurous spirit; to Bill and Audrey, and to Hiroshi and Hisako,

for being great parents and role models; and to the many students I

have had the good fortune to influence over the years.

Gary Knight Portland, Oregon

This book is dedicated to my parents, Richard and Marie

Riesenberger, for their example, many sacrifices, and love. To my

wife and best friend, Pat, for her enthusiasm and loving support.

To my daughters, Chris and Jen, and their husbands, Byron and

Martijn, of whom I am so very proud and thankful. To my amazing

grandchildren, Ryan, Paige, Ethan, and Emma—the future of the New

Realities.

John R. Riesenberger Basking Ridge, New Jersey

6

> About the Authors S. Tamer Cavusgil Georgia State University, Fuller E. Callaway Professorial Chair Executive Director, Center for International Business Education and Research (CIBER), J. Mack Robinson College of Business Professor Cavusgil has been mentoring students, executives, and educators in international business for the past four decades. A native of Turkey, his professional work has taken him to numerous other emerging markets.

Tamer serves as Fuller E. Callaway Professorial Chair at Georgia State University’s Robinson College of Business. He is also a visiting professor at Leeds University Business School, U.K.; University of South Australia; and Xi’an Jiaotong University.

Previously, Tamer served as Senior Fulbright Scholar to Australia and taught at Monash University. Tamer also served as a visiting professor at Manchester Business School and held the Gianni and Joan Montezemolo Visiting Chair at the University of Cambridge, United Kingdom, where he is also an Honorary Fellow of Sidney Sussex College. At Michigan State University, where he served for 21 years, he was the inaugural holder of the John Byington Chair in Global Marketing and Founding Director of CIBER.

Professor Cavusgil is an elected Fellow of the Academy of International Business, a distinction earned by a select group of intellectual leaders in international business. He also served as Vice President of the AIB, and on the Board of Directors of the American Marketing Association.

Tamer was named International Trade Educator of the Year in 1996 by the National Association of Small Business International Trade Educators (NASBITE). Most recently, he was inducted as Doctor Honoris Causa (Honorary Doctorate) by the Universiteit Hasselt, Belgium, “in recognition of seminal research in, and groundbreaking contribu- tions to the field of international marketing and international business performance.”

Tamer has authored more than two dozen books and some 200 refereed journal articles. His work is among the most cited contributions in international business. He is the founding editor of the Journal of International Marketing and Advances in International Marketing. He serves on the editorial review boards of a dozen professional journals.

Tamer holds a Bachelor of Science degree in business and economics from the Middle East Technical University in Ankara, Turkey. He earned his MBA and PhD degrees in business from the University of Wisconsin.

Gary Knight Willamette University, Professor of Global Management and Helen Simpson Jackson Chair in International Management University of Southern Denmark, Visiting Professor Professor Gary Knight has been teaching international business for more than 20 years. A native of the United States, he has lived and worked in many countries around the world.

Gary has been Helen Simpson Jackson Chair in International Management at Willamette University since 2012. He is also Visiting Professor at the University of Southern Denmark, Odense. He was professor at Florida State University for 15 years where he directed the school’s International Business Program.

Gary has been an invited speaker at institutions worldwide and developed study abroad programs in Asia, Europe, and Latin America. He has won several awards, including the Jerry Hudson Award for Excellence in Teaching, Willamette University, and Best Teacher in the MBA Program, Florida State University.

About the Authors 7

Gary has co-authored six books and more than 100 refereed articles in academic journals and conference proceedings. His research emphasizes international business strategy, international services, emerging markets, and internationalization of small and medium- sized firms.

Gary won the Hans Thorelli Best Paper Award for his article “Entrepreneurship and Strategy: The SME Under Globalization.” Along with S. Tamer Cavusgil, he won the 2014 Decade Award at the Journal of International Business Studies for their article on born global firms.

Gary is ranked in the top five percent of scholars who have published in the Journal of International Business Studies since 1995, based on number of articles published. He re- cently was ranked one of the top 10 scholars in the United States, and top 15 worldwide, in international business research impact based on Google Scholar citation data. He is on the editorial review boards of several international journals. He has provided expert testimony on global commerce and small business to the U.S. House of Representatives.

Gary is Chair of the Academy of International Business, Western United States Chapter. Prior to joining academia, he was Export Manager of a medium-sized enterprise, direct- ing the firm’s operations in Canada, Europe, Japan, and Mexico and supervising some 50 distributors. He enjoyed a brief career in banking and as a teacher in Japan.

Gary earned his MBA at the University of Washington and PhD at Michigan State University, both in international business. Earlier degrees were in finance and modern lan- guages. He also attended the University of Paris in France and Sophia University in Japan and is fluent in French, Japanese, and Spanish.

John R. Riesenberger President, Consilium Partners Thunderbird School of Global Management, Clinical Professor of Executive Development, Corporate Learning Group (retired) Professor Riesenberger’s teaching activities centered on leadership and global project management at the Thunderbird School of Global Management, Corporate Learning Group. His passion is to help students and young professionals develop the managerial skills frequently required of new graduates entering careers in international business.

John is an accomplished author, consultant, and international executive with senior ex- ecutive positions in major pharmaceutical firms, biotechnology firms, and pharmaceutical agencies. John’s international business career spans more than three decades in the global pharmaceutical industry. He has conducted business transactions in 21 countries.

Currently, he also serves as the president of Consilium Partners, Inc., a pharmaceutical consulting firm with clients in pharmaceutical, biotechnology, and pharmaceutical agency firms.

He worked for 30 years with Pharmacia & Upjohn and The Upjohn Company as a senior international executive. His experience covered a diverse range of divisional, geo- graphic, and functional accountabilities. His most recent position was as vice president of Global Business Management. He also served as corporate vice president and Chief Commercialization Officer for a biotechnology firm and as the executive vice president of a pharmaceutical science agency.

John serves as a member of the board of directors of the Ontario Institute for Cancer Research. He was a member of the Global Advisory Board of the American Marketing Association. He served as an executive in residence at the Michigan State University Center for International Business Education and Research. He served on the editorial review board of the Journal of International Marketing. He served as chairman of the Industry Advisory Board’s Value of Marketing Program, SEI Center for the Advanced Studies in Management at the Wharton School of the University of Pennsylvania. He is the former chairman of the Pharmaceutical Manufacturing Association Marketing

8 About the Authors

Practices Committee. Professor Riesenberger is the coauthor, with Robert T. Moran, of The Global Challenge: Building the New Worldwide Enterprise (McGraw-Hill, London).

John holds a Bachelor of Science degree in Economics–Business and an MBA in Management from Hofstra University. He attended the Harvard Business School’s International Senior Management Program.

9

Preface 23

Part 1 Foundation Concepts 32 1. Introduction: What Is International Business? 32

2. Globalization of Markets and the Internationalization of the Firm 56

Part 2 The Environment of International Business 84 3. The Cultural Environment of International Business 84

4. Ethics, Corporate Social Responsibility, Sustainability, and Governance

in International Business 114

5. Theories of International Trade and Investment 142

6. Political and Legal Systems in National Environments 172

7. Government Intervention and Regional Economic Integration 198

8. Understanding Emerging Markets 230

9. The International Monetary and Financial Environment 260

10. Financial Management and Accounting in the Global Firm 286

Part 3 Strategy and Opportunity Assessment 316 11. Strategy and Organization in the International Firm 316

12. Global Market Opportunity Assessment 348

Part 4 Entering and Working in International Markets 374 13. Exporting and Global Sourcing 374

14. Foreign Direct Investment and Collaborative Ventures 408

15. Licensing, Franchising, and Other Contractual Strategies 438

Part 5 Functional Area Excellence 464 16. Marketing in the Global Firm 464

17. Human Resource Management in the Global Firm 492

Glossary 521 Author Index 525 Company Index 531 Subject Index 535

Brief Contents>

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11

Preface 23

Part 1 Foundation Concepts 32

1 Introduction: What Is International Business? 32 > China Globalises London’s Black Cabs 32 What Are the Key Concepts in International Business? 35 The Nature of International Trade 36 The Nature of International Investment 37 Services as Well as Products 38 The International Financial Services Sector 39 How Does International Business Differ from Domestic Business? 40 The Four Risks in Internationalization 40 Who Participates in International Business? 42 Focal Firms in International Business 43 Small- and Medium-Sized Enterprises 45 Born Global Firms 45 Governments and Nongovernmental Organizations 46 Why do Firms Internationalize? 46 Why Study International Business? 48 Facilitator of the Global Economy and Interconnectedness 48 Contributor to National Economic Well-Being 48 A Competitive Advantage for the Firm 48

■ You Can Do It | Recent Grad in IB: Ashley Lumb 49 A Competitive Advantage for You 49 An Opportunity to Support Sustainability and Corporate Citizenship 50

■ Closing Case: Internationalization at Vodafone 50

■ End of Chapter Review: Key Terms 52 Summary 52 Test Your Comprehension 53 Apply Your Understanding 53

globalEDGE™ Internet Exercises 54

Endnotes 55

2 Globalization of Markets and the Internationalization of the Firm 56

> The Emergence of Born Global Firms 56 Phases of Globalization 58 Market Globalization: Organizing Framework 60 Drivers of Globalization 61 Technological Advances and Globalization 62 Information Technology 62 Communications 63 Manufacturing 66 Transportation 66 Dimensions of Market Globalization 68

Contents>

12 Contents

Firm-Level Consequences of Market Globalization: Internationalization of The Firm’s Value Chain 69

■ You Can Do It | Recent Grads in IB: Terrance Rogers 71

Societal Consequences of Globalization 71 Contagion: Rapid Spread of Monetary or Financial Crises 72 Loss of National Sovereignty 72 Offshoring 73 Reshoring 73 Effect on the Poor 73 Effect on Sustainability and the Natural Environment 76 Effect on National Culture 77 Globalization and Africa 78

■ Closing Case: Debating the Good and Harm of Globalization 78

■ End of Chapter Review: Key Terms 80 Summary 80 Test Your Comprehension 81 Apply Your Understanding 81

globalEDGE™ Internet Exercises 81

Endnotes 82

Part 2 The Environment of International Business 84

3 The Cultural Environment of International Business 84 > Baidu: Culture and Social Media in China 84 Culture and Cross-Cultural Risk 86 What Culture Is Not 87 Socialization and Acculturation 88 Dimensions of Culture 89 Values and Attitudes 89 Manners and Customs 89 Perceptions of Time 90 Perceptions of Space 91 Symbolic Productions 91 Material Productions and Creative Expressions 91 Education 92 Social Structure 92 Role of Language and Religion in Culture 93 Verbal Language 93 Nonverbal Communication 95 Religion 95 Culture’s Effect In International Business 100 Models and Explanations of Culture 102 Cultural Metaphors 102 High- and Low-Context Cultures 103 Hofstede’s Research on National Culture 104 Deal versus Relationship Orientation 105 Managerial Implications of Culture 105 Cultural Orientations 106 How to Acquire Cross-Cultural Competence 107

■ Closing Case: Hollywood and Global Culture 109

Contents 13

■ End of Chapter Review: Key Terms 110 Summary 110 Test Your Comprehension 111 Apply Your Understanding 111

globalEDGE™ Internet Exercises 112

Endnotes 112

4 Ethics, Corporate Social Responsibility, Sustainability, and Governance in International Business 114

> Improving the lives of Bangladeshi Garments factory workers 114 Ethical Behavior and Its Importance in International Business 116 Components of Ethical Behavior 116 Value of Ethical Behavior 117 Unethical Behavior 117 Ethical Standards and Dilemmas Around the World 118 Relativism and Normativism 119

Ethical Challenges in International Business 120 Corruption 120 Bribery 121 Unethical Management Practices 123 Harmful Global Sourcing 123 Illicit Products and Marketing 123 Intellectual Property Infringement 123

Corporate Social Responsibility 125 Settings of Corporate Social Responsibility 125 Successes and Failures of CSR 126

Sustainability 127 MNE Role in Sustainability 129

The Role of Corporate Governance 130 Embracing Ethical Behavior 131 Ethical Standard Approaches for Corporate Governance 131 A Global Consensus 131 Going Deep, Wide, and Local 132 Benefits of Corporate Governance 132

■ You Can Do It | Recent Grad in IB: Javier Estrada 133

A Framework for Making Ethical Decisions 133

■ Closing Case: Bribery and Corruption at Siemens 135

■ End of Chapter Review: Key Terms 137 Summary 137 Test Your Comprehension 138 Apply Your Understanding 138

globalEDGE™ Internet Exercises 139

Endnotes 139

5 Theories of International Trade and Investment 142 > Taobao’s Rise 142 Why Do Nations Trade? 146 Classical Theories 146 How Can Nations Enhance Their Competitive Advantage? 152 The Competitive Advantage of Nations 152 Determinants of National Competitiveness 153 National Industrial Policy 154

14 Contents

National Industrial Policy in Practice 155 Why and How Do Firms Internationalize? 156 Internationalization Process of the Firm 157 Born Global Firms 157 How Can Internationalizing Firms Gain and Sustain Competitive Advantage? 158 FDI-Based Explanations 158 Dunning’s Eclectic Paradigm 162 Non-FDI-Based Explanations 163

■ Closing Case: Hyundai: Leading the Way in the Global Auto Industry 164

■ End of Chapter Review: Key Terms 166 Summary 166 Test Your Comprehension 167 Apply Your Understanding 167

globalEDGE™ Internet Exercises 168

Career Toolbox 168

Endnotes 170

6 Political and Legal Systems in National Environments 172 > Risks in Russia’s Political and Legal Systems 172 How Prevalent Is Country Risk? 175 Political and Legal Environments in International Business 176 Political Systems 177 Totalitarianism 177 Socialism 178 Democracy 178 Democracy’s Link to Economic Freedom and Transparency 179 The Relationship Between Political Systems and Economic Systems 180

Legal Systems 181 Common Law 181 Civil Law 181 Religious Law 182 Mixed Systems 183

Participants in Political and Legal Systems 183 Government 183 International Organizations 183 Regional Trade Organizations 184 Special Interest Groups 184 Competing Firms 184

Types of Country Risk Produced by Political Systems 185 Government Takeover of Corporate Assets 185 Embargoes and Sanctions 185 Boycotts Against Firms or Nations 186 Terrorism 186 War, Insurrection, and Violence 186

Types of Country Risk Produced by Legal Systems 187 Country Risk Arising from the Host-Country Legal Environment 187

■ You Can Do It | Recent Grad in IB: Christopher Johnson 189 Country Risk Arising from the Home–Country Legal Environment 189

Contents 15

Managing Country Risk 191 Proactive Environmental Scanning 191 Strict Adherence to Ethical Standards 191 Alliances with Qualified Local Partners 191 Protection Through Legal Contracts 191

■ Closing Case: Political Legal, and Ethical Dilemmas in the Global Pharmaceutical Industry 192

■ End of Chapter Review Key Terms 194 Summary 194 Test Your Comprehension 195 Apply Your Understanding 195

globalEDGE™ Internet Exercises 196

Endnotes 196

7 Government Intervention and Regional Economic Integration 198

> Qatar Welcomes New Foreign Investment 198 The Nature of Government Intervention 201 Defensive Rationale 202 Offensive Rationale 203 Instruments of Government Intervention 203 Tariffs 203 Nontariff Trade Barriers 206 Investment Barriers 207 Subsidies and Other Government Support Programs 207 Evolution and Consequences of Government Intervention 209 How Firms Can Respond to Government Intervention 211 Strategies for Managers 211 Regional Integration and Economic Blocs 215 Levels of Regional Integration 215 Leading Economic Blocs 217 The European Union 217 North American Free Trade Agreement (NAFTA) 220 Advantages and Implications of Regional Integration 221 Expand Market Size 221 Achieve Scale Economies and Enhanced Productivity 221 Attract Direct Investment From Outside the Bloc 221 Acquire Stronger Defensive and Political Posture 222

■ Closing Case: Government Intervention at Airbus and Boeing 222

■ End of Chapter Review: Key Terms 224 Summary 224 Test Your Comprehension 225 Apply Your Understanding 225

globalEDGE™ Internet Exercises 226

Career Toolbox 227

Endnotes 228

8 Understanding Emerging Markets 230 > The New Global Challengers: MNEs from Emerging Markets 230 Advanced Economies, Developing Economies, and Emerging Markets 232 Advanced Economies 233

16 Contents

Developing Economies 233 Emerging Market Economies 236 What Makes Emerging Markets Attractive for International Business? 240 Emerging Markets as Target Markets 240 Emerging Markets as Manufacturing Bases 240 Emerging Markets as Sourcing Destinations 241 Assessing the True Potential of Emerging Markets 241 Per Capita Income as an Indicator of Market Potential 241 Middle Class as an Indicator of Market Potential 243 Risks and Challenges of Emerging Markets 244 Political Instability 245 Weak Intellectual Property Protection 245 Bureaucracy, Red Tape, and Lack of Transparency 245 Poor Physical Infrastructure 245 Partner Availability and Qualifications 245 Likely Resistance from Family Conglomerates 246 Success Strategies for Emerging Markets 247 Customize Offerings to Unique Emerging Market Needs 247 Partner with Family Conglomerates 248 Target Governments in Emerging Markets 248

■ You Can Do It | Recent Grads in IB: Andrew & Jamie Waskey 249 Skillfully Challenge Emerging Market Competitors 249 Corporate Social Responsibility, Sustainability, and the Crisis Of Global Poverty 250 Foster Economic Development 250 Microfinance to Facilitate Entrepreneurship 251 The Special Case of Africa 251

■ Closing Case: Prowling for Success: The Revival of Jaguar Land Rover 252

■ End of Chapter Review: Key Terms 254 Summary 255 Test Your Comprehension 255 Apply Your Understanding 256

globalEDGE™ Internet Exercises 256

Career Toolbox 257

Endnotes 257

9 The International Monetary and Financial Environment 260 > The European Union and the Euro 260 Exchange Rates and Currencies in International Business 262 Convertible and Nonconvertible Currencies 263 Foreign Exchange Markets 264 Currency Risk 264 How Exchange Rates are Determined 266 Economic Growth 266 Inflation and Interest Rates 266 Market Psychology 267 Government Action 267 Emergence of the Modern Exchange Rate System 268 The Bretton Woods Agreement 268 The Modern Exchange Rate System 269

Contents 17

The Monetary and Financial Systems 270 International Monetary System 270 Global Financial System 270 Key Players in the Monetary and Financial Systems 271 The Firm 271 National Stock Exchanges and Bond Markets 273 Commercial Banks 273

■ You Can Do It | Recent Grad in IB: Maria Petit 274 Central Banks 275 The Bank for International Settlements 276 International Monetary Fund 276 The World Bank 277 The Global Debt Crisis 277

■ Closing Case: Asian IFCs–Singapore and Hong Kong 279

■ End of Chapter Review: Key Terms 281 Summary 281 Test Your Comprehension 282 Apply Your Understanding 282

globalEDGE™ Internet Exercises 283

Endnotes 284

10 Financial Management and Accounting in the Global Firm 286

> The Netherlands and the Euro: A Continuous Debate 286 Key Tasks in International Financial Management 288 Choosing a Capital Structure 289 Raising Funds for the Firm 289 Financial Centers 290 Sources of Funds for International Operations 291 Managing Working Capital and Cash Flow 294 Methods for Transferring Funds within the MNE 294 Multilateral Netting 295 Performing Capital Budgeting 296 Net Present Value Analysis of Capital Investment Projects 296 Managing Currency Risk 297 Three Types of Currency Exposure 297 Foreign-Exchange Trading 298 Types of Currency Traders 299 Exchange-Rate Forecasting 300 Managing Exposure to Currency Risk Through Hedging 300 Hedging Instruments 301 Best Practice in Minimizing Currency Exposure 302 Managing the Diversity of International Accounting and Tax Practices 303 Transparency in Financial Reporting 303 Trends Toward Harmonization 303 Consolidating the Financial Statements of Subsidiaries 304 International Taxation 304 Managing International Finance to Minimize Tax Burden 306

18 Contents

■ Closing Case: International Financial Management at Tektronix 307

■ End of Chapter Review: Key Terms 308 Summary 309 Test Your Comprehension 310 Apply Your Understanding 310

globalEDGE™ Internet Exercises 311

Career Toolbox 312

Endnotes 314

Part 3 Strategy and Opportunity Assessment 316

11 Strategy and Organization in the International Firm 316 > IKEA’s Strategies for Global Success 316 Strategy in International Business 319 Efficiency 319 Flexibility 319 Learning 319 Building the Global Firm 320 Visionary Leadership 321 Organizational Culture 322 Organizational Processes 323 The Distinction Between Multidomestic and Global Industries 324 The Integration-Responsiveness Framework 324 Strategies Based on the Integration-Responsiveness Framework 326 Organizational Structure in International Business 330 Centralized or Decentralized Structure? 330 Organizational Structures for International Operations 331 Foreign Market Entry Strategies 337

■ Closing Case: Global Strategy at Lenovo 340

■ End of Chapter Review: Key Terms 342 Summary 343 Test Your Comprehension 344 Apply Your Understanding 344

globalEDGE™ Internet Exercises 345

Career Toolbox 345

Endnotes 346

12 Global Market Opportunity Assessment 348 > Estimating Demand in Emerging Markets 348 Analyzing Organizational Readiness to Internationalize 351 Assessing the Suitability of Products and Services for Foreign Markets 353 Screening Countries to Identify Target Markets 355 Screening Countries for Exporting 355 Country Screening for Foreign Direct Investment 359 Country Screening for Sourcing 360 Assessing Industry Market Potential 360 Data Sources for Estimating Industry Market Potential 362

■ You Can Do It | Recent Grad in IB: Natasha Brown 363

Choosing Foreign Business Partners 363 Criteria for Choosing a Partner 364

Contents 19

Searching for Prospective Partners 364 Estimating Company Sales Potential 365 Practical Approaches to Estimating Company Sales Potential 365 In Conclusion 367

■ Closing Case: Advanced Biomedical Devices: Assessing Readiness to Export 368

■ End of Chapter Review: Key Terms 370 Summary 370 Test Your Comprehension 371 Apply Your Understanding 371

globalEDGE™ Internet Exercises 372

Career Toolbox 372

Endnotes 373

Part 4 Entering and Working in International Markets 374

13 Exporting and Global Sourcing 374 > Maersk and the global container business 374 Exporting as a Foreign Market Entry Strategy 376 Service Sector Exports 377 A Systematic Approach to Exporting 378 Importing 380 Managing Export-Import Transactions 380 Documentation 380 Shipping and Incoterms 381 Payment Methods in Exporting and Importing 382 Financing 385 Identifying and Working with Foreign Intermediaries 386 Finding Foreign Intermediaries 387 Working with Foreign Intermediaries 387 When Intermediary Relations Go Bad 389 Outsourcing, Global Sourcing, and Offshoring 389 Decision 1: Outsource or Not? 389 Decision 2: Where in the World Should Value-Adding Activities Be Located? 390 Global Sourcing 390 Benefits, Risks, and Responsibilities of Global Sourcing 394 Benefits of Global Sourcing 394 Risks of Global Sourcing 396 Corporate Social Responsibility 397 Global Sourcing Strategies and Supply Chain Management 398 Global Supply-Chain Management 399

■ Closing Case: Barrett Farm Foods: A Small Firm’s International Launch 401

■ End of Chapter Review: Key Terms 402 Summary 402 Test Your Comprehension 403 Apply Your Understanding 404

globalEDGE™ Internet Exercises 405

Career Toolbox 405

Endnotes 406

20 Contents

14 Foreign Direct Investment and Collaborative Ventures 408

> Huawei’s Investments in Africa 408 International Investment and Collaboration 410 Volume of Foreign Direct Investment and Collaborative Ventures 411 Most Active Firms in FDI 411 Service Firms and FDI 412 Leading Destinations for FDI 412 Factors to Consider in Choosing FDI Locations 413 Characteristics of Foreign Direct Investment 414 Ethics, Social Responsibility, and FDI 415 Motives for FDI and Collaborative Ventures 416 Market-Seeking Motives 416 Resource- or Asset-Seeking Motives 417 Efficiency-Seeking Motives 417 Types of Foreign Direct Investment 419 Greenfield Investment versus Mergers and Acquisitions 419 The Nature of Ownership in FDI 420 Vertical versus Horizontal Integration 421 International Collaborative Ventures 421

■ You Can Do It | Recent Grad in IB: Jennifer Knippen 422 Equity Joint Ventures 422 Project-Based, Nonequity Ventures 423 Differences Between Equity and Project-Based, Nonequity Ventures 423 Consortium 424 Cross-Licensing Agreements 424 Potential Risks in Collaboration 424 Managing Collaborative Ventures 425 The Experience of Retailers in Foreign Markets 427 International Retailing Success Factors 428

■ Closing Case: China’s Going Out Strategy 429

■ End of Chapter Review: Key Terms 431 Summary 431 Test Your Comprehension 432 Apply Your Understanding 433

globalEDGE™ Internet Exercises 433

Career Toolbox 434

Endnotes 435

15 Licensing, Franchising, and Other Contractual Strategies 438

> How LEGO Built Global Value in the Toy Industry—Block By Block 438 Contractual Entry Strategies 440 Unique Aspects of Contractual Relationships 441 Licensing as an Entry Strategy 442 Trademark and Copyright Licensing 443 Know-How Licensing 444 The World’s Top Licensing Firms 444 Advantages and Disadvantages of Licensing 444

Contents 21

Advantages of Licensing 445 Disadvantages of Licensing 446 Franchising as an Entry Strategy 447 Who Are the Top Global Franchisors? 448 Advantages and Disadvantages of Franchising 449 The Franchisor Perspective 449 The Franchisee Perspective 450 Managerial Guidelines for Licensing and Franchising 451 Other Contractual Entry Strategies 451 Turnkey Contracting 452 Build-Operate-Transfer Arrangements (BOT) 452 Management Contracts 453 Leasing 453 The Special Case of Internationalization by Professional Service Firms 453 Infringement of Intellectual Property: A Global Problem 454 Guidelines for Protecting Intellectual Property 455

■ Closing Case: Subway’s Franchising Challenges in China 456

■ End of Chapter Review: Key Terms 458 Summary 458 Test Your Comprehension 459 Apply Your Understanding 460

globalEDGE™ Internet Exercises 460

Endnotes 461

Part 5 Functional Area Excellence 464

16 Marketing in the Global Firm 464 > Uber Technologies Inc.: Available locally, expanding globally ride service 464 Global Market Segmentation 466 Standardization and Adaptation of International Marketing 468 Standardization 469 Adaptation 470

■ You Can Do It | Recent Grad in IB: John Dykhouse 471 Standardization and Adaptation: A Balancing Act 472 Global Branding and Product Development 473 Global Branding 473 Global Product Development 474 International Pricing 475 Factors That Affect International Pricing 475 Framework for Setting International Prices 477 Managing International Price Escalation 478 Managing Pricing Under Varying Currency Conditions 479 Transfer Pricing 479 Gray Market Activity (Parallel Imports) 480 International Marketing Communications 482 International Advertising 482 International Promotional Activities 484 International Distribution 484 Global Account Management 485

22 Contents

■ Closing Case: H&M: International Marketing Success Story 485

■ End of Chapter Review: Key Terms 487 Summary 487 Test Your Comprehension 488 Apply Your Understanding 488

globalEDGE™ Internet Exercises 489

Career Toolbox 489

Endnotes 490

17 Human Resource Management in the Global Firm 492 > Etisalat Egypt: Attracting and Maintaining the Best Employees 492 The Strategic Role Of Human Resources In International Business 494 Differences Between Domestic and International HRM 495 Key Tasks in International Human Resource Management 496 International Staffing Policy 497 Recruiting, Selecting, and Developing Talent 498 Cultivating Global Mind-Sets 498 Cultural Intelligence 499 Expatriate Assignment Failure and Culture Shock 499 Preparation and Training of International Employees 500 Preparing Employees for Repatriation 501 Charting Global Careers for Employees 501 Performance Appraisal and Compensation of International Employees 501 Compensation 502 International Labor Relations 504 Distinctive Features of Labor Around the World 505 Cost, Quality, and Productivity of Labor 505 Workforce Reduction and Employee Termination 506 International Labor Trends 507 Firm Strategy in International Labor Relations 507 Diversity in the International Workforce 508 Women in International Business 508 Success Strategies for Women Managers in International Business 510

■ Closing Case: Human Resource Challenges at Sony 511

■ End of Chapter Review: Key Terms 513 Summary 513 Test Your Comprehension 514 Apply Your Understanding 514

globalEDGE™ Internet Exercises 515

Career Toolbox 516

Endnotes 516

Glossary 521 Author Index 525 Company Index 531 Subject Index 535

23

Today’s students are different! The current generation of college students are Millennials. In creating the fourth edition of

Cavusgil, Knight, and Riesenberger (CKR 4e), we have designed a textbook with this important group in mind. Millennials share distinctive characteristics:

• Dynamic attention spans • Tendency to multitask • Visual learners accessing content from exhibits, photos, maps, and digital content, usually • Through high-tech devices • Need to stay connected through social media and their networks • Work well in teams • Sheltered and special • Optimistic • Need to achieve • Bear increased pressure to perform

Millennials are the most diverse and educated generation to date. They prefer learning with a heart that is empathic and responds to their hopes and needs. They often experience the world through multimedia. Those starting college today have never known a time without the Internet.

Millennial college graduates face an evolving economic environment. In Europe, Japan, North America, Australia, New Zealand, and other advanced economies, many confront new challenges and an increasingly competitive job market.

Millennials have been shaped by technology. Revolutionary developments in computers and information technology have coincided with Millennials’ coming of age. More than any previous generation, they use tablets, smartphones, and similar devices to acquire information and knowl- edge. High technology has shaped how they learn and relate to their world. Technology has affected their expectations about innovation and creativity in their own work lives. Millennials prefer realistic experiences.

Millennials are oriented to achievement and their communities. Many yearn to play mean- ingful roles in their communities and the world at large. More than previous generations, they value ethical behavior, sustainability, and social responsibility. They want to learn how inter- nationally active companies and other organizations employ ethics, sustainability, and social responsibility to foster a better world.

When it comes to work and career, Millennials want to be successful. They want to acquire skills in their coursework that they can use to obtain meaningful jobs and excel in their careers. They view creativity and critical thinking as important qualities for the job market. Today’s col- lege students seek interesting careers with opportunities for advancement. Millennial women are sophisticated. They value equality, fairness, and attaining rewarding careers that leverage their resourcefulness and creativity.

To address the characteristics of the Millennial generation, we have designed CKR 4e to emphasize the following features:

• Visual learning CKR 4e puts more emphasis on interactive media and videos as well as exhibits, maps, and other visual learning aids. The MyManagementLab portal provides ac- cess to a wide array of additional visual resources.

• Collaborative learning Millennials are connected through networks of friends and associ- ates with whom they communicate continually. Most prefer learning in the company of their peers, frequently working in groups. Learning is facilitated through information tech- nology, the Internet, and social media. CKR 4e has been developed accordingly.

• Relevant knowledge and job-related skills CKR 4e includes more relevant examples and activities, concise foundational course content, and tools that develop specific international business (IB) skills that will prepare Millennials for the work world.

Preface>

24 Preface

• Digital platform Millennials prefer content that they can read or access digitally at a time and place of their choosing. Digital learning enhances engagement, self-pacing, and the ability to customize content to individual needs. Digital platforms help ensure timely, up- to-date content and the ability to collaborate with peers. In these and other ways, CKR 4e provides such digital options.

• Contemporary issues that matter to Millennials CKR 4e emphasizes the new IB environ- ment. Compared to the leading competitor, the fourth edition presents more current and more in-depth coverage of contemporary IB topics such as emerging markets, developing economies, growth of the service sector, risks in IB, globalization and technology, women in IB, and other important trends.

• Meaningful content CKR 4e provides substantial content oriented to ethics, corporate so- cial responsibility, and sustainability in international business.

In addition, CKR 4e has the following features:

• Highly accessible writing and explanations that engage students. Opening and closing cases appeal to students, featuring firms and subjects such as Apple, Disney, Facebook, Harley-Davidson, H&M, born global firms, social media in China, and the global movie industry. The content stimulates student desire to learn more about international business.

• Content that helps ensure that students are prepared to learn the material by using collab- orative learning and realistic experiences that enable interaction, demonstration, and social networking.

• More content on contemporary issues that matter to Millennials and will prepare them bet- ter as they enter the global working community.

• More exercises and activities that enable students to acquire critical thinking and problem- solving skills.

• Fewer chapters and greater focus on essential foundational content. We have streamlined the narrative, improved readability and clarity, and simplified some explanations.

• New and improved organization of chapters. We have improved the organization of each chapter, in part by aligning learning objectives more systematically with individual sections within chapters.

• More exhibits that enhance readability and explanatory value. CKR 4e contains 171 exhib- its (about three times more than leading competitors). Students like exhibits because they help clarify complex material and facilitate reading the chapters.

• More videos that enrich the learning process. Through the new Watch It feature, each chap- ter links to one or two custom-designed videos on international business that clarify and provide real-world context to concepts and explanations.

• Simulations that enhance and reinforce learning. Most chapters link to a simulation that reinforces key material and learning enjoyment.

• Career Toolbox exercises, a new feature in CKR 4e designed to simulate real-world deci- sion-making. Nearly every chapter contains a Career Toolbox exercise, intended to famil- iarize students with key managerial challenges and decisions that professionals encounter in international business. Students can complete Career Toolbox exercises individually or in teams.

• Group project on international corporate social responsibility. CKR 4e contains a new, comprehensive activity in which students debate corporate social responsibility (CSR) in international business. In this extended exercise, located in the Instructor’s Manual, stu- dents debate the merits and consequences of CSR as executives, consumers, or activists.

• You Can Do It—Recent Grad in IB biographies. CKR 4e offers nine biographies (three new to this edition) of actual university graduates who have embarked on fascinating ca- reers in international business. These inspiring stories bring the prospect of an exciting IB career to life.

• Content that is contemporary, reflecting international business conditions today. CKR 4e presents more current and more in-depth, globally balanced coverage of material, exam- ples, cases, and exercises. More than 70 percent of the references in CKR 4e are from 2008 or later (versus only about 30 percent in the leading competitor).

Preface 25

Learning Goals and Standards

This book supports Association to Advance Collegiate Schools of Business (AACSB) interna- tional accreditation. In every chapter, next to each end-of-chapter exercise, we provide a specific AACSB tagging logo to help instructors identify which AACSB learning goals that activity sup- ports. We also provide AACSB tagging for all the questions in the Test Item File that accompa- nies the textbook.

What are aaCSB Learning StandardS? One of the criteria for AACSB accreditation is the quality of the curricula. Although no specific courses are required, the AACSB expects a cur- riculum to include learning experiences in such areas as:

• Communication abilities • Ethical understanding and reasoning abilities • Analytic skills • Use of information technology • Dynamics of the global economy • Multicultural and diversity understanding • Reflective thinking skills

These seven categories are AACSB Learning Standards. Questions that test skills relevant to these standards are tagged with the appropriate standard. For example, a question testing the moral questions associated with externalities would receive the ethical understanding and rea- soning abilities tag.

hoW Can i USe theSe tagS? Tagged exercises help you measure whether students are grasping the course content that aligns with AACSB guidelines noted previously. In addition, the tagged exercises may help identify potential applications of these skills. This, in turn, may suggest enrichment activities or other educational experiences to help students achieve these goals.

Supplements

At the Instructor Resource Center, www.pearsonglobaleditions.com/Cavusgil, instructors can easily register to gain access to a variety of instructor resources available with this text in down- loadable format. If assistance is needed, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://247.pearsoned.com for an- swers to frequently asked questions and toll-free user support phone numbers.

The following supplements are available with this text:

• Instructor’s Resource Manual • Test Bank • TestGen® Computerized Test Bank • PowerPoint Presentation

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27

Our Reviewers

Through numerous drafts of the manuscript, we received guidance and insights at several critical junctures from many trusted reviewers who provided specific recommendations on how to im- prove and refine the content, presentation, and organization. Their contributions were invaluable in crystallizing our thinking. We extend our gratitude to:

Acknowledgments>

Anil Agarwal, University of Arizona Raj Aggarwal, University of Akron Anshu Arora, Savannah State University Richard Ajayi, University of Central Florida Hamid Ali, Chicago State University Allen Amason, University of Georgia Gary Anders, Arizona State University Robert Armstrong, University of North

Alabama Mathias Arrfelt, Arizona State University Bulent Aybar, Southern New Hampshire

University Nizamettin Aydin, Suffolk University Peter Banfe, Ohio Northern University Eric Baumgardner, Xavier University Mack Bean, Franklin Pierce University Lawrence Beer, Arizona State University Enoch Beraho, South Carolina State

University David Berg, University of

Wisconsin–Milwaukee Jean Boddewyn, Baruch College, City

University of New York Henry Bohleke, Owens Community College Santanu Borah, University of Northern

Alabama Darrell Brown, Indiana University, Purdue

University, Indianapolis Linda Brown, Scottsdale Community College Diana Bullen, Mesa Community College Nancy Bush, Wingate University Kirt Butler, Michigan State University Michael Campo, Regis University Tom Cary, City University, Seattle Erin Cavusgil, University of Michigan–Flint Kalyan Chakravarty, California State

University, Northridge Aruna Chandra, Indiana State University Kent Cofoid, Seminole State College Tim Curran, University of South Florida Madeline Calabrese Damkar, California State

University–East Bay Donna Davisson, Cleveland State University Seyda Deligonul, St. John Fisher College Peter Dowling, Latrobe University, Australia

Juan España, National University Bradley Farnsworth, University of Michigan,

Ann Arbor Aysun Ficici, Southern New Hampshire

University John Finley, Columbus State University Ian Gladding, Lewis University Jorge Gonzalez, University of Texas–Pan

American Tom Head, Roosevelt University Bruce Heiman, San Francisco State University David Hrovat, Northern Kentucky University Douglas Johansen, Jacksonville University Paul Jones, Regis University Ali Kara, Pennsylvania State University–

University Park Bruce Keillor, Youngstown University Daekwan Kim, Florida State University Ki Hee Kim, William Patterson University Konghee Kim, St. Cloud State University Ahmet Kirca, Michigan State University Leonard Kloft, Wright State University Peter Knight, Santa Clara University Anthony Koh, University of Toledo Stephanie Kontrim-Baumann, Missouri

Baptist University Tatiana Kostova, University of South Carolina Chuck Kwok, University of South Carolina Ann Langlois, Palm Beach Atlantic University Romas Laskauskas, Stevenson University Yikuan Lee, San Francisco State University Bijou Lester, Drexel University Phil Lewis, Eastern Michigan University Charles Main, Northern Arizona University Minghua Li, Franklin Pierce University Peter Liesch, University of Queensland Bob McNeal, Alabama State

University–Montgomery Bulent Menguc, Kadir Has University Janis Miller, Clemson University Barbara Moebius, Waukesha County

Technical College Bruce Money, Brigham Young University Bill Murray, University of San Francisco Paul Myer, University of Maine

28 Acknowledgments

Matthew B. Myers, University of Tennessee Max Grunbaum Nagiel, Daytona State

College Kuei-Hsien Niu, Sacramento State University Bernard O’Rourke, Caldwell College Braimoh Oseghale, Fairleigh Dickinson

University Jeffrey W. Overby, Belmont University Susan Peterson, Scottsdale Community

College Iordanis Petsas, University of Scranton Zahir Quraeshi, Western Michigan University Roberto Ragozzino, University of Central

Florida Brandon Randolph-Seng, Texas Tech

University Michelle Reina, Wisconsin Lutheran College Elizabeth Rose, University of Otago Michael Rubach, University of Central

Arkansas Carol Sanchez, Grand Valley State

University Hakan Saraoglu, Bryant University Jeff Sarbaum, University of North Carolina at

Greensboro Amit Sen, Xavier University Deepak Sethi, Old Dominion University Karen Sneary, Northwestern Oklahoma State

University Kurt Stanberry, University of

Houston–Downtown John Stanbury, George Mason University William Streeter, Olin Business School,

Washington University in Saint Louis Philip Sussan, University of Central Florida

Charles Ray Taylor, Villanova University Deanna Teel, Houston Community College Gladys Torres-Baumgarten, Ramapo College

of New Jersey Kimberly Townsend, Syracuse University Thuhang Tran, Middle Tennessee State

University Joseph Trendowski, Old Dominion University Sameer Vaidya, Texas Wesleyan University Chandu Valluki, St. Mary’s University of

Minnesota Cheryl Van Deusen, University of North

Florida Linn Van Dyne, Michigan State University Davina Vora, State University of New York–

New Paltz William Walker, University of Houston Paula Weber, St. Cloud State University Mindy West, Arizona State University Sidney Wheeler, Embry-Riddle Aeronautical

University Marta Szabo White, Georgia State University Richard Wilson, Hofstra University Yim-Yu Wong, San Francisco State University Jennifer Woolley, Santa Clara University Alan Wright, Troy University Alex Xu, University of Michigan–Flint Attila Yaprak, Wayne State University Betty Yobaccio, Bryant University Pierre Yourougou, Whitman School of

Management, Syracuse University Bashar Zakaria, California State

University–Sacramento Anatoly Zhuplev, Loyola Marymount

University

Focus Group Participants

We were also fortunate that so many colleagues generously gave their time and offered perspec- tives on our teaching resources. We met with these colleagues in person, teleconferenced with them, or otherwise received their input. The insights and recommendations of these educators were instrumental in the design and format of our teaching system. We extend our gratitude and thanks to the following reviewers and colleagues.

David Ahlstrom, The Chinese University of Hong Kong

Yusaf Akbar, Southern New Hampshire University

Victor Alicea, Normandale Community College

Gail Arch, Curry College Anke Arnaud, University of Central Florida Choton Basu, University of

Wisconsin–Whitewater Eric Baumgardner, Xavier University Mark Bean, Franklin Pierce College

Enoch Beraho, South Carolina State University

Paula Bobrowski, Auburn University Teresa Brosnan, City University, Bellevue Darrell Brown, Indiana University, Purdue

University–Indianapolis Nichole Castater, Clark Atlanta University Aruna Chandra, Indiana State University Mike C. H. (Chen-Ho) Chao, Baruch College,

City University of New York David Chaplin, Waldorf College Dong Chen, Loyola Marymount University

Acknowledgments 29

Our Colleagues, Doctoral Students, and Practitioners

Numerous individuals have contributed to our thinking over the years. Through conversations, conferences, seminars, and writings, we have greatly benefited from the views and experience of international business educators and professionals from around the world. We also have had many rich conversations with the doctoral students whom we have mentored over the years.

Chen Oi Chin, Lawrence Technological University

Patrick Chinon, Syracuse University Farok J. Contractor, Rutgers University Angelica Cortes, University of Texas–Pan

American Michael Deis, Clayton State University Les Dlabay, Lake Forest College Gary Donnelly, Casper College Gideon Falk, Purdue University–Calumet Marc Fetscherin, Rollins College Charles Fishel, San Jose State University Frank Flauto, Austin Community College Georgine K. Fogel, Salem International

University Frank Franzak, Virginia Commonwealth

University Debbie Gilliard, Metropolitan State College Robert Goddard, Appalachian State University Andy Grein, Baruch College, City University

of New York Andrew C. Gross, Cleveland State University David Grossman, Goucher College Seid Hassan, Murray State University Wei He, Indiana State University Xiaohong He, Quinnipiac University Christina Heiss, University of Missouri–

Kansas City Pol Herrmann, Iowa State University Guy Holburn, University of Western Ontario Anisul Islam, University of

Houston–Downtown Basil Janavaras, Minnesota State University Raj Javalgi, Cleveland State University Ruihua Jiang, Oakland University Yikuan Jiang, California State University–

East Bay James Kennelly, Skidmore College Ken Kim, University of Toledo Leonard Kloft, Wright State University Anthony C. Koh, The University of Toledo Ann Langlois, Palm Beach Atlantic

University Michael La Rocco, University of Saint

Francis Romas A. Laskauskas, Villa Julie College Shaomin Li, Old Dominion University Ted London, University of Michigan Peter Magnusson, Saint Louis University

Charles Mambula, Suffolk University David McArthur, Utah Valley State College Ofer Meilich, Bradley University Lauryn Migenes, University of Central

Florida Mortada Mohamed, Austin Community

College Robert T. Moran, Thunderbird Carolyn Mueller, Stetson University Kelly J. Murphrey, Texas A&M University Lilach Nachum, Baruch College, CUNY William Newburry, Florida International

University Stanley Nollen, Georgetown University Augustine Nwabuzor, Florida A&M

University Bernard O’Rourke, Caldwell College David Paul, California State University–

East Bay Christine Cope Pence, University of

California Riverside Heather Pendarvis-McCord, Bradley

University Kathleen Rehbein, Marquette University Liesl Riddle, George Washington University John Rushing, Barry University Mary Saladino, Montclair State University Carol Sanchez, Grand Valley State University Camille Schuster, California State University–

San Marcos Eugene Seeley, Utah Valley State College Deepak Sethi, Old Dominion University Mandep Singh, Western Illinois University Rajendra Sinhaa, Des Moines Area

Community College John E. Spillan, Pennsylvania State

University–DuBois Uday S. Tate, Marshall University Janell Townsend, Oakland University Sameer Vaidya, Texas Wesleyan University Robert Ware, Savannah State University Marta Szabo White, Georgia State University Steve Williamson, University of North Florida Lynn Wilson, Saint Leo University Attila Yaprak, Wayne State University Rama Yelkur, University of Wisconsin–Eau

Claire Minyuan Zhao, University of Michigan Christopher Ziemnowicz, Concord University

30 Acknowledgments

Their names appear below if they have not been previously mentioned. Directly or indirectly, their thoughtful ideas and suggestions have had a significant impact on the development of this book. Our appreciation goes to many individuals, including:

John Abbott, The Upjohn Company Billur Akdeniz, University of New Hampshire Catherine N. Axinn, Ohio University Nizam Aydin, Suffolk University Ted Bany, The Upjohn Company Christopher Bartlett, Harvard Business School Vicky Bamiatzi, Leeds University Simon Bell, University of Melbourne Daniel C. Bello, Georgia State University Muzaffer Bodur, Bogazici University Jacobus Boers, Georgia State University Nakiye Boyacigiller, Sabanci University John Brawley, The Upjohn Company David Bruce, Georgia State University Kostas Bozos, Leeds University Peter Buckley, Leeds University Susan Caolo, Georgia State University Jorge Carneiro, PUC–Rio, Brazil Pedro Carrillo, Georgia State University Erin Cavusgil, University of Michigan–Flint Brian Chabowski, University of Tulsa Emin Civi, University of New Brunswick, St.

John, Canada Mourad Dakhli, Georgia State University Tevfik Dalgic, University of Texas at Dallas Guillermo D’Andrea, Universidad

Austral–Argentina Angela da Rocha, PUC–Rio Brazil Seyda Deligonul, St. John Fisher College Fernando Doria, Georgia State University Rick Della Guardia, The Upjohn Company Deniz Erden, Bogazici University Felicitas Evangelista, University of Western

Sydney, Australia Cuneyt Evirgen, Sabanci University J. Betty Feng, Farmingdale State College

(SUNY) Carol Finnegan, University of Colorado at

Colorado Springs Harold Fishkin, The Upjohn Company Michael Fishkin, Stony Brook University Richard Fletcher, University of Western

Sydney, Australia Susan Freeman, University of South Australia Esra Gencturk, Ozyegin University Pervez Ghauri, Kings College London Tracy Gonzalez-Padron, University of

Colorado at Colorado Springs David Grossman, Goucher College Qian Gu, Georgia State University Bill Hahn, Science Branding Communications Tomas Hult, Michigan State University Bryan Jean, National Cheng-Chi University

Raj Javalgi, Cleveland State University Destan Kandemir, Bilkent University Ilke Kardes, Georgia State University George Kaufman, The Upjohn Company Ihsen Ketata, Georgia State University Irem Kiyak, Michigan State University Tunga Kiyak, Michigan State University Yener Kandogan, University of

Michigan–Flint Tuba Koc, Georgia State University Phillip Kotler, Northwestern University David Kuhlmeier, Valdosta State University John Lavaca, Pearson Prentice Hall Tiger Li, Florida International University Karen Loch, Georgia State University Mushtaq Luqmani, Western Michigan

University Robert McCarthy, The Upjohn Company Ellen Miller, The Upjohn Company Myron Miller, Michigan State University

(ret.) Vincent Mongello, The Upjohn Company Robert T. Moran, Thunderbird G. M. Naidu, University of Wisconsin–

Whitewater (ret.) John R. Nevin, University of Wisconsin Sushil Nifadkar, Georgia State University Gregory Osland, Butler University Erkan Ozkaya, California Polytechnic

University-Pomona Aysegul Ozsomer, Koc University Ayse Ozturk, Georgia State University Ed Perper, Science Branding Communications Morys Perry, University of Michigan–Flint Penny Prime, Georgia State University Hussain Rammal, University of South

Australia Vivas Reyes, Georgia State University Alex Rialp, Universidad Autonoma de

Barcelona, Spain Tony Roath, University of Bath Carol Sanchez, Grand Valley State University Hakan Saraoglu, Bryant University Michael Savitt, The Upjohn Company Peter Seaver, The Upjohn Company Oktay Sekercisoy, Binghamton University Linda Hui Shi, University of Victoria Rudolf R. Sinkovics, The University of

Manchester Carl Arthur Solberg, Norwegian School of

Management, Norway Elif Sonmez-Persinger, Eastern Michigan

University

Acknowledgments 31

Douglas Squires, The Upjohn Company of Canada

Barbara Stoettinger, Wirtschaftuniversität, Wien, Austria

Detmar Straub, Georgia State University Berk Talay, University of

Massachusetts–Lowell Cherian Thachenkary, Georgia State

University David Tse, University of Hong Kong Mithat Uner, Gazi University Nukhet Vardar, Yeditepe University Marta Szabo White, Georgia State

University

Joachim Wolf, University of Kiel Peter Wright, University of Melbourne Fang Wu, University of Texas–Dallas Shichun (Alex) Xu, University of

Michigan–Flint Goksel Yalcinkaya, University of New

Hampshire Attila Yaprak, Wayne State University Ugur Yavas, East Tennessee State University Sengun Yeniyurt, Rutgers University Poh-Lin Yeoh, Bentley College Eden Yin, University of Cambridge Chun Zhang, University of Vermont Shaoming Zou, University of Missouri

Contributors

Mamoun Benmamoun, St. Louis University Susan Leshnower, Midland College Marta Szabo White, Georgia State Universtiy

Our Pearson Team

This book would not have been possible without the tireless efforts of many dedicated profes- sionals at our publisher, Pearson. We are especially grateful to Emily Tamburri, Acquisitions Editor, Stephanie Wall, Editor-in-Chief; Eric Santucci, Editorial Assistant; Jessica Quazza, Product Marketing Assistant; Denise Weiss, Program Manager; and Meghan DeMaio, Project Manager. Our appreciation goes to many other individuals at Pearson, including Jeff Holcomb, Maggie Moylan, Kris Ellis-Levy, Sarah Holle, and Ashley Santora.

Pearson Education wishes to acknowledge and thank Jon and Diane Sutherland, Stefania Paladini (Coventry University), Krish Saha (Coventry University), Neil Pyper (Coventry University), Chin Tee Suan (Multimedia University), Bernard Bouwman (Avans Hogeschool Breda), Fuad Aliyev (Khazar University), Hamed Shamma (The American University in Cairo), Suresh George (Coventry University), and Jacques Couvas (Bilkent University) for contributing to the Global Edition, and Alice Shiu (Hong Kong Polytechnic University), Loik Allain (ESG Rennes), Anna Rosinus (University of Applied Sciences), Suresh George (Coventry University) and Panagiota Sapouna (Glasgow Caledonian University) for reviewing the Global Edition.

Chapter 1 Part 1 Foundation Concepts

Globalisation refers to international transactions, co-operation, and competition among firms. China has become one of the most active trading nations in an increasingly globalised world. China’s pursuit in transforming itself into an industrial economy gave birth to a thriving auto- mobile industry and Geely Automobile Holdings Limited was founded in 1986. Geely is a subsidiary of Li Shufu’s Zhejiang Geely Group. They began with motorcycle production and eventually started manufacturing cars in 1997. Geely’s moto of ‘Happy Life, Geely Drive’ encompasses its customers, sup- pliers and human resource to manufacture safe, environmental friendly and god value automobiles. Relentless pursuit of bet- ter technology, foreign brands and oversees market resulted in Geely’s European acquisition of Volvo cars in 2010 and London Taxi Company (LTC) in 2012.

London Taxi Company is the manufacturer of the iconic London Black Cabs. Coventry has been the home of the

company for last 70 years. Coventry city is the birth place of British motor industry and has long tradition of manufacturing iconic automobile brands like Jaguar, Rover, Triumph, and Armstrong Siddeley. The FX4 model taxis rolled out in 1959 from Coventry plant set the quintessential shape for the black cabs. They formed partnership with Geely in 2006 which fi- nally acquired the taxi maker in 2012 for £11.4 million after it went into administration. London Taxi Company’s current annual production is approximately 2000 taxis. Geely has been con- stantly investing to increase capacity and competitiveness since acquisition. The company has recently announced a £250 million investment to build a new factory with a production capacity of approximately 36000 cars annually. This new in- vestment is celebrated locally and nationally due to 1000 new jobs creation and boost to the local economy. Geely’s ambition to put iconic London taxis in all major cities in the world require lots of innovation in emission technology and globalising the

China Globalises London’s Black Cabs

Learning Objectives After studying this chapter, you should be able to:

Introduction: What Is International Business?

1.1 Describe the key concepts in international business.

1.2 Understand how international business differs from domestic business.

1.3 Identify major participants in international business.

1.4 Describe why firms internationalize. 1.5 Appreciate why you should study

international business.

32

London taxi experience. The current technology is not suitable for bigger cities due to high emission, less fuel efficiency and bulky weight. The company has pledged to invest a further £80 million in research and development of TX5 model with hybrid engines. Hybrid and electric taxis are expected to roll out from the new factory in 2018.

Western manufacturers are also developing strong manu- facturing bases in China to tap the opportunities presented by the increasing purchasing powers of Chinese people. Competition from foreign manufacturer, cost pressures due to stringent regulatory requirements at home and volatility in some export markets are some of the current challenges for Geely. The management is searching for new opportunities to overcome these challenges.

The Chinese state extended its support to fund Geely’s oversees ambitions. China EXIM bank is offering a 20 billion yuan credit line to Geely. This is exciting news for privately owned enterprises in China as favourable credit lines were mostly available for the state owned enterprises (SOEs) until recently. This is an expected move from new Chinese leader- ship team under chronic overcapacity and mounting losses of the State Owned Enterprises.

Geely’s ownership of London Taxi Company is an ex- ample of multinational corporations (MNCs) from emerging economies acquisition in the industrial hearts of developed countries. This is a fairly new phenomenon in international business which becoming more and more common with grow- ing powers of emerging economies.

33

Source: aslysun/Shutterstock

34 Part 1 • Foundation ConCePts

Questions 1-1. What might be the underlying motivations of emerging markets MNCs like Geely’s acqui-

sition of foreign auto brand? 1-2. How does cooperation in international business offer competitiveness? 1-3. What role can the government play in promoting internationalisation?

SourceS: Geely warns of growing international pressure on Chinese brands’ The Financial Times, March 19, 2014 [www.ft.com]; ‘London Taxi Company Coventry plant to create 1,000 jobs’ BBC, March 26, 2015 [www.bbc.co.uk]; The London Taxi Company official website [London-taxis.co.uk]; ‘Coventry’s Motor Industry, Warwickshire’ Warwickshire Life, February 07, 2010 [www.warwickshirelife.co.uk]; Geely official website [www. global.geely.com]; ‘London’s Black Cabs. A Resilient, Iconic Industry In A Time Of Upheaval’ Huffington Post, February 20, 2015 [www.huffingtonpost.co.uk]; China ExIm Bank official website [English.eximbank.gov.cn]. ‘China SOE’s restructuring leaves state ownership intact’ The Financial Times, March 12, 2015 [www.ft.com].

As revealed in the opening case, international business touches our daily experiences. International business refers to firms’ performance of trade and investment activities across national borders. Because it emphasizes crossing national boundaries, we also refer to inter- national business as cross-border business. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners. Although international business is performed mainly by individual firms, governments and international agencies also conduct international business activities.1 Firms and nations exchange many physical and intel- lectual assets, including products, services, capital, technology, know-how, and labor. In this book, we are mainly concerned with the international business activities of the individual firm.

International business is characterized by six major dimensions, as illustrated in Exhibit 1.1. Firms’ growing international activities give rise to the globalization of markets. As they venture abroad, firms undertake international trade and investment activities. In doing so, they encoun- ter various types of risks and challenges that occur to a lesser degree, or not at all, in the home country. Participants in international business are diverse and include firms, distribution chan- nel intermediaries, and facilitators. When they expand abroad, firms employ such international market entry strategies as exporting and direct investment. We explore each of the six dimen- sions in detail in this chapter.

International business Performance of trade and investment activities by firms across national borders.

ExhIbIt 1.1 Elements of International business

ChaPter 1 • introduCtion: What is international Business? 35

Although trading across borders has been around for centuries, contemporary international business has gained much momentum and complexity over the past four decades. Firms seek international market opportunities more than ever before. Like Vodafone, international business affects the everyday lives of people worldwide. Daily activities such as shopping, listening to music, watching a movie, or surfing the Internet involve interactions and transactions that con- nect you to the global economy. Internationalization of business gives you access to products and services from around the world. It profoundly affects your quality of life and economic well-being.

Modern online platforms such as Amazon, Alibaba, Facebook, and Instagram are also expressions of ongoing economic integration and growing interdependency of countries world- wide, known as the globalization of markets. Globalization is a macro-trend of intense economic interconnectedness among the nations of the world. A parallel trend is the ongoing internation- alization of countless firms and dramatic growth in the volume and variety of cross-border transactions in goods, services, and capital flows. Internationalization refers to the tendency of companies to deepen their international business activities systematically. It has led to widespread diffusion of products, technology, and knowledge worldwide.

Internationalization The tendency of companies to deepen their international business activities systematically.

Globalization of markets Ongoing economic integration and growing interdependency of countries worldwide.

The globalization of markets is evident in several related trends. • Unprecedented growth of international trade. In 1960, cross-border trade was modest—

about $100 billion per year. Today, it accounts for a substantial proportion of the world economy, with world exports alone amounting to some $18 trillion annually—that is, $18,000,000,000,000!

• Trade between nations, accompanied by substantial flows of capital, technology, and knowledge.

• Development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge.

• Greater collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO, www.wto.org) and the International Monetary Fund (IMF, www.imf.org).

Source: UNCTAD, World Investment Report, New York: United Nations (2015), www.unctad.org; World Trade Organization, World Trade Report, Geneva: World Trade Organization (2015), www.wto.org.

Globalization both compels and facilitates firms to expand abroad. Simultaneously, company internationalization has become easier than ever before. A few decades ago, international business was largely the domain of large, multinational firms. Recent developments have created a more level playing field that allows all types of firms to benefit from active participation in interna- tional business. In this book, you will read about the international activities of smaller firms and those of large, multinational enterprises. You will learn about companies in the services sector that are internationalizing in such industries as banking, engineering, insurance, and retailing.

What Are the Key Concepts in International Business? International trade describes the exchange of products (merchandise) and services (intan- gibles) across national borders. Exchange can occur through exporting, the sale of products or services to customers located abroad from a base in the home country or a third country. Exchange also can take the form of importing or global sourcing—the procurement of prod- ucts or services from suppliers located abroad for consumption in the home country or a third country. While exporting represents the outbound flow of products and services, importing is an inbound activity. Both finished products and intermediate goods (for example, raw materials and components) can be imported and exported.

1.1 Describe the key concepts in international business

International trade Exchange of products and services across national borders, typically through exporting and importing.

Exporting Sale of products or services to customers located abroad from a base in the home country or a third country.

Importing or global sourcing Procurement of products or services from suppliers located abroad for consumption in the home country or a third country.

36 Part 1 • Foundation ConCePts

International investment refers to the transfer of assets to another country or the acqui- sition of assets in that country. Economists refer to such assets as factors of production; they include capital, technology, managerial talent, and manufacturing infrastructure. Trade implies that products and services cross national borders. By contrast, investment implies that the firm itself crosses borders to secure ownership of assets located abroad.

The two essential types of cross-border investment are international portfolio investment and foreign direct investment. International portfolio investment refers to the passive owner- ship of foreign securities such as stocks and bonds to gain financial returns. It does not entail active management or control over these assets. The foreign investor has a relatively short-term interest in the ownership of these assets.

Foreign direct investment (FDI) is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as land, plant, equipment, capital, and technology. It is a foreign-market entry strategy that gives inves- tors partial or full ownership of a productive enterprise typically dedicated to manufacturing, marketing, or management activities. Investing such resources abroad is generally for the long term and involves extensive planning.

The Nature of International Trade Overall, export growth has outpaced the growth of domestic production during the past few decades, illustrating the fast pace of globalization. Exhibit 1.2 contrasts the growth of total world exports with the growth of total world gross domestic product (GDP) since 1980. GDP is defined as the total value of products and services produced in a country in the course of a year. Following a 27-year boom, world trade declined in 2009 due to the global recession. However, trade revived and returned to normal levels by 2012. Trade was a key factor reduc- ing the impact of the global recession.2 What is remarkable is that, since 2008, the annual rate of growth in world exports surpassed that of world GDP by almost a factor of two (5.4 versus 2.8 percent).

Three factors have been especially notable in explaining why trade growth has long out- paced GDP growth. First is the rise of emerging markets during the past three decades. These rapidly developing economies are home to swiftly growing middle-class households possessing substantial disposable income. Second, advanced (or developed) economies such as the United States and the European Union are now sourcing many of the products they consume from such low-cost manufacturing locations as China, India, and Mexico. Third, advances in information

Foreign direct investment (FDI) An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment.

0

50

100

150

200

250

300

350

1980 1984 1988 1992 1996 2000 2004 2008 2012 2015

World Exports

World GDP

In de

x: 1

98 0

= 10

0

Year

ExhIbIt 1.2 Comparing the Growth Rates of World GDP and World Exports

Source: Based on data from the International Monetary Fund, World Economic Outlook Database April 2015, http://www.imf.org/external/ pubs/ft/weo/2015/01/weodata/index .aspx.

International investment The transfer of assets to another country or the acquisition of assets in that country.

International portfolio investment Passive ownership of foreign securities such as stocks and bonds to generate financial returns.

ChaPter 1 • introduCtion: What is international Business? 37

and transportation technologies, decline of trade barriers, and liberalization of markets all con- tribute to rapid growth of trade among nations.

Exhibit 1.3 identifies leading nations in merchandise exports (not services). Panel (a) shows the total annual value of merchandise exports and imports in billions of U.S. dollars. Panel (b) shows the annual value of products traded as a percentage of each nation’s GDP. During the re- cent global recession, China surpassed the United States to become the world’s leading exporter in total dollar terms. Trade accounts for about 45 percent of China’s GDP as opposed to 23 per- cent for the United States. Merchandise trade is a much larger component of economic activity in countries such as Belgium (125 percent) and the Netherlands (118 percent). These percent- ages suggest that some countries depend very heavily on international trade relative to the value of all goods and services they produce domestically.

How can the magnitude of trade activity surpass 100 percent of a nation’s GDP? How can trade activity be a multiple of national value added? The answer is that countries such as Singapore, Hong Kong, and the Netherlands are known as entrepôt economies. Entrepôt is from the French for “intermediate depot.” Such countries import a large volume of prod- ucts, some of which they process into higher value-added products and some they simply re-export to other destinations. For example, Singapore is a major entrepôt for petroleum products it receives from the Middle East, which it then exports to China and other destina- tions in Asia.

The Nature of International Investment Of the two types of investment flows—portfolio investment versus foreign direct investment— we are concerned primarily with foreign direct investment (FDI) in this text because it is the ultimate form of internationalization and encompasses the widest range of international business involvement. FDI is the foreign entry strategy practiced by the most internationally active firms. Companies usually undertake FDI for the long term and retain partial or complete ownership of the assets they acquire. In the process, the firm establishes a new legal business entity in the host country, subject to the regulations of the host government.

FDI is especially common among large, resourceful companies with substantial inter- national operations. For example, many European and U.S. firms have invested in China, India, and Russia to establish plants to manufacture or assemble products, taking advantage of low-cost labor or natural resources in these countries. At the same time, companies from these rapidly developing economies have begun to invest in Western markets. In 2008, the Turkish company Yildiz acquired the premium chocolate maker Godiva from U.S.-based Campbell

ExhIbIt 1.3 Leading Countries in International Merchandise trade

Sources: Based on data from the World Bank, World Development Indicators, World Bank, Washington, DC, 2015 (www.worldbank.org); World Trade Organization, Statistics Database, Geneva: World Trade Organization (2015), www.wto.org; UNCTAD, World Investment Report, New York: United Nations (2015), www.unctad.org.

38 Part 1 • Foundation ConCePts

Soup Company in a deal valued at $850 million. In 2014, it paid more than $3 billion dollars to acquire British-based cookie and snack maker United Biscuits.3

Exhibit 1.4 illustrates the dramatic growth of FDI since the 1980s. The exhibit reveals that the dollar volume of FDI has grown immensely since the 1980s, especially in developed (advanced) economies such as Japan, Europe, and North America. FDI inflows to the develop- ing economies began to surpass those to the advanced economies in about 2010. FDI inflows were interrupted in 2001 as investors panicked following the September 11 terrorist attacks in the United States. The inflows were interrupted again in 2008 by the global recession. These dips underscore the importance of maintaining stability in the world economy. Despite these setbacks, the overall trend remains strong and growing over time. Particularly significant is the growth of FDI into developing economies, much of which results from their need for modern industrial infrastructure. It reflects the growing importance of developing economies and emerg- ing markets as target markets and sourcing bases.

Services as Well as Products Historically, international trade and investment were mainly the domain of companies that make and sell products—tangible merchandise such as clothing, computers, and motor vehicles. Today, firms that produce services (intangibles) are key international business players as well. Services are deeds, performances, or efforts performed directly by people working in banks, consulting firms, hotels, construction companies, retailers, and countless other firms in the ser- vices sector. International trade in services accounts for about one-quarter of all international trade and is growing rapidly.

Vodafone in the opening case is a leading services firm that has internationalized rapidly. If you own a house, your mortgage might be underwritten by the Dutch bank ABN Amro. Perhaps you eat lunch in a cafeteria owned by the French firm Sodexho, which manages the food and beverage operations on numerous university campuses. Recently, Riot Games expanded its op- erations into Germany, Ireland, China, and Turkey to meet rapidly rising demand for its online video games. Demand for the firm’s League of Legends game has spread rapidly, prompting the need to establish offices at gamer locations worldwide. The 2015 League of Legends World Championship attracted fans from around the world for two weeks of competition and more than 100 hours of live content broadcast in 19 languages.4

ExhIbIt 1.4 Foreign Direct Investment (FDI) Inflows into World Regions (in billions of U.S. Dollars per Year)

Sources: UNCTAD, UNCTADSTAT Database, Inward FDI Flows, Annual, 2015; UNCTAD, Global Investment Trends Monitor No. 18, January 29, 2015; UNCTAD, World Investment Prospects Survey 2013–2015, 2013.

ChaPter 1 • introduCtion: What is international Business? 39

Exhibit 1.5 identifies countries leading in total international services trade. Panel (a) shows the total annual value of services exports and imports in billions of U.S. dollars. Panel (b) shows the total annual value of services trade as a percentage of each nation’s GDP. As with products, larger advanced economies account for most world services trade. This is expected because services typically comprise more than two-thirds of the GDPs of these countries. Recently, the emerging markets of China and India have gained strong reputations in this area. Ireland has emerged as the leader in world services trade as a percentage of GDP. Compare the value of merchandise trade in Exhibit 1.3 with the value of services trade in Exhibit 1.5 for each country. Although services trade is growing rapidly, the value of merchandise trade is still much larger. One reason is that services face greater challenges and barriers in cross-border trade than mer- chandise goods do.

Not all services can be exported. Examples are repair work done on your car or the experi- ence of eating a meal in a restaurant. Although some services can be digitized and moved across borders, most service providers can operate internationally only by establishing a physical pres- ence abroad through direct investment. Firms invest abroad to set up restaurants, retail stores, and other physical facilities through which they sell billions of dollars’ worth of services every year.

There are numerous industries in the services sector with strong potential for interna- tionalization. The giant Internet retailer eBay earned more than $75 billion in 2014, of which more than 50 percent came from international sales. The company expects that most future revenue growth will come from abroad. When developing its business in India, eBay acquired the Mumbai-based e-retailer Baazee, which followed eBay’s expansion into China, Korea, and Europe.5 Exhibit 1.6 illustrates the diversity of service sectors that are internationalizing, extending their reach beyond the countries where they are based. If you are considering a career in international business, keep these industries in mind.

The International Financial Services Sector International banking and financial services are among the most internationally active service industries. Explosive growth of investment and financial flows has led to the emergence of capi- tal markets worldwide. It resulted from two main factors: the internationalization of banks and the massive flow of money across national borders into pension funds and portfolio investments. In the developing economies, banks and other financial institutions have fostered economic activity by increasing the availability of local investment capital, which stimulates the develop- ment of financial markets and encourages locals to save money.

ExhIbIt 1.5 Countries Leading in International Services trade

Sources: Based on data from the World Bank, World Development Indicators, Washington, DC: World Bank (2015), www.worldbank.org; World Trade Organization, Statistics Database, Geneva: World Trade Organization (2015), www.wto.org; UNCTAD, World Investment Report, New York: United Nations (2015), www.unctad. org.

40 Part 1 • Foundation ConCePts

International banking is flourishing in the Middle East. For example, the return on equity in Saudi Arabia often exceeds 20 percent (compared to 15 percent in the United States and much less in France and Germany). National Commercial Bank, the biggest bank in the region, calculates that non-interest-bearing deposits comprise nearly 50 percent of total deposits in Saudi Arabia. Banks lend this free money to companies and consumers at high margins. By structuring loans as partnerships, they comply with Islamic rules that forbid banks to pay interest.6

How Does International Business Differ from Domestic Business? Firms operate in countries characterized by distinctive economic, cultural, and political condi- tions. For example, the economic environment of Colombia differs sharply from that of Canada, the legal environment of Saudi Arabia does not resemble that of Japan, and the cultural environ- ment of China is very distinct from that of Kenya. Not only does the firm find itself in unfamiliar surroundings, it encounters many uncontrollable variables—factors over which management has little control. These factors introduce new or elevated business risks. As exemplified by Vodafone in the opening case, distinctive conditions in each country require firms to adapt their products and approaches from country to country.

The Four Risks in Internationalization Globalization is not without risks. When companies undertake international business, they are routinely exposed to four major types of risk, as illustrated in Exhibit 1.7. These are cross-cultural risk, country risk, currency risk, and commercial risk. The firm must manage these risks to avoid financial loss or product failures.

1.2 Understand how international business differs from domestic business

Architectural, construction, and engineering

Industry Representative Activities Representative Companies

Construction, power utilities, design, engineering services, for airports, hospitals, dams

ABB, Bechtel Group, Halliburton, Kajima, Philip Holzman, Skanska AB

Banking, finance, and insurance

Banks, insurance, risk evaluation, management

Bank of America, CIGNA, Barclays, HSBC, Ernst & Young

Education, training, and publishing

Management training, technical training, language training

Berlitz, Kumon Math & Reading Centers, NOVA, Pearson, Elsevier

Entertainment Movies, recorded music, Internet-based entertainment

Time Warner, Sony, Virgin, MGM

Information services

E-commerce, e-mail, funds transfer, data interchange, data processing, computer services

Infosys, EDI, Hitachi, Qualcomm, Cisco

Professional business services

Accounting, advertising, legal, management consulting

Leo Burnett, EYLaw, McKinsey, A.T. Kearney, Booz Allen Hamilton

Transportation Aviation, ocean shipping, railroads, trucking, airports

Maersk, Santa Fe, Port Authority of New Jersey, SNCF (French railroads)

Travel and tourism

Transportation, lodging, food and beverage, aircraft travel, ocean carriers, railways

Carlson Wagonlit, Marriott, British Airways

ExhIbIt 1.6 Service Industry Sectors that Are Rapidly Internationalizing

Source: Based on International Trade Administration, Washington, DC: U.S. Department of Commerce.

ChaPter 1 • introduCtion: What is international Business? 41

Cross-cultural risk occurs when a cultural misunderstanding puts some human value at stake. Cross-cultural risk arises from differences in language, lifestyles, mind-sets, customs, and religion. Values unique to a culture tend to be long lasting and transmitted from one generation to the next. Values influence the mind-set and work style of employees and the shopping pat- terns of buyers. Foreign customer characteristics can differ significantly from those of buyers in the home market.

Language is a critical dimension of culture. In addition to facilitating communication, lan- guage is a window on people’s value systems and living conditions. For example, Inuit (Eskimo) languages have various words for snow, whereas the South American Aztecs used the same basic word stem for snow, ice, and cold. When translating from one language to another, it is often diffi- cult to find words that convey the same meanings. For example, a one-word equivalent to aftertaste does not exist in many languages. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate busi- ness strategies and ineffective relations with customers. Cross-cultural risk most often occurs in encounters in foreign countries. However, the risk also can occur domestically, as when manage- ment meets with customers or business associates who visit company headquarters from abroad.

Country risk (also known as political risk) refers to the potentially adverse effects on com- pany operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. Country risk includes the possibility of foreign government intervention in firms’ business activities. For example, governments may restrict access to mar- kets, impose bureaucratic procedures on business transactions, and limit the amount of income that firms can take home from foreign operations. The degree of government intervention in commercial activities varies from country to country. Singapore and Ireland are characterized by substantial economic freedom—that is, a fairly liberal economic environment. By contrast, the Chinese and Russian governments regularly intervene in business affairs.7 Country risk also includes laws and regulations that potentially hinder company operations and performance. Critical legal dimensions include intellectual property protection, product liability, and taxation policies. Nations also experience potentially harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade.

Cross-cultural risk A situation or event in which a cultural misunderstanding puts some human value at stake.

Country risk Potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.

ExhIbIt 1.7 the Four Risks of International business

42 Part 1 • Foundation ConCePts

Currency risk (also known as financial risk) refers to the risk of adverse fluctuations in exchange rates. Fluctuation is common for exchange rates—the value of one currency in terms of another. Currency risk arises because international transactions are often conducted in more than one national currency. For example, when U.S. fruit processor Graceland Fruit Inc. exports dried cherries to Japan, it is normally paid in Japanese yen.

When currencies fluctuate significantly, the value of the firm’s earnings can be reduced. The cost of importing parts or components used in manufacturing finished products can increase dramatically if the value of the currency in which the imports are denominated rises sharply. Inflation and other harmful economic conditions experienced in one country may have immedi- ate consequences for exchange rates due to the interconnectedness of national economies.

Rising value of the U.S. dollar during 2014 and 2015 relative to most currencies has cut into revenues of U.S. multinational firms such as Apple, Caterpillar, and Pfizer. Procter and Gamble’s Duracell battery business experienced a 31 percent decline in profits due to weaker currencies in its foreign markets.8

Commercial risk refers to the firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. Although such failures also exist in domestic business, the consequences are usually more costly when committed abroad. For example, in domestic busi- ness, a company might terminate a poorly performing distributor simply with advance notice. In foreign markets, however, terminating business partners can be costly due to regulations that protect local firms. Marketing inferior or harmful products, falling short of customer expecta- tions, or failing to provide adequate customer service can also damage the firm’s reputation and profitability. Furthermore, commercial risk is often affected by currency risk because fluctuating exchange rates can affect various types of business deals.

The four types of international business risks are omnipresent; the firm may encounter them around every corner. Some international risks, such as global financial disruptions, are ex- tremely challenging. The Greek debt crisis has now lingered on for several years and affects not only the European Union but creditors elsewhere.9

Although risk cannot be avoided, it can be anticipated and managed. Experienced interna- tional firms constantly assess their environments and conduct research to anticipate potential risks, understand their implications, and take proactive action to reduce their effects. This book is dedicated to providing you, the future manager, with a solid understanding of these risks as well as managerial skills and strategies to counter them effectively.

Who Participates in International Business? International business requires numerous organizations, with varying motives, to work together as a coordinated team, contributing different types of expertise and inputs. There are four major categories of participants.

• A focal firm is the initiator of an international business transaction; it conceives, designs, and produces offerings intended for consumption by customers worldwide. Focal firms take center stage in international business. They are primarily large multinational enterprises (MNEs; also known as multinational corporations, or MNCs) and small and medium-sized enterprises (SMEs). Some are privately owned companies, others are public, stock-held firms, and still others are state enterprises owned by governments. Some focal firms are manufacturing businesses; others are in the service sector.

• A distribution channel intermediary is a specialist firm that provides various logis- tics and marketing services for focal firms as part of international supply chains, both in the focal firm’s home country and abroad. Typical intermediaries include independent distributors and sales representatives, usually located in foreign markets where they provide distribution and marketing services to focal firms on a contractual basis.

• A facilitator is a firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services that helps focal firms perform international business transactions. Facilitators include logistics service providers, freight forwarders,

Currency risk Risk of adverse fluctuations in exchange rates.

Commercial risk Firms’ potential loss or failure from poorly developed or executed business strategies, tactics, or procedures.

1.3 Identify major participants in international business

Focal firm The initiator of an international business transaction, which conceives, designs, and produces offerings intended for consumption by customers worldwide. Focal firms are primarily MNEs and SMEs.

Distribution channel intermediary A specialist firm that provides various logistics and marketing services for focal firms as part of international supply chains, both in the home country and abroad.

Facilitator A firm or an individual with special expertise in banking, legal advice, customs clearance, or related support services that assists focal firms in the performance of international business transactions.

ChaPter 1 • introduCtion: What is international Business? 43

banks, and other support firms that assist focal firms in performing specific functions. A freight forwarder is a specialized logistics service provider that arranges international shipping on behalf of exporting firms, much like a travel agent for cargo. Facilitators are found in both the home country and abroad.

• Governments, or the public sector, are also active in international business as suppliers, buyers, and regulators. State-owned enterprises account for a substantial portion of eco- nomic value added in many countries, even rapidly liberalizing emerging markets such as Russia, China, and Brazil. Governments in advanced economies such as France, Australia, and Sweden have significant ownership of companies in telecommunications, banking, and natural resources. The recent global financial crisis led governments to step up their involvement in business, especially as regulators.

The activities of firms, intermediaries, and facilitators in international business overlap to some degree. The focal firm performs certain activities internally and delegates other functions to intermediaries and facilitators when their special expertise is needed. In other words, the focal firm becomes a client of intermediaries and facilitators who provide services on a contractual basis.

Whereas focal firms, intermediaries, and facilitators represent the supply side of international business transactions, customers or buyers make up the demand side. Customers consist of:

• Individual consumers and households. • Retailers—businesses that purchase finished goods for the purpose

of resale. • Organizational buyers—businesses, institutions, and governments

that purchase goods and services as inputs to a production process or as supplies needed to run a business or organization. Governments and nonprofit organizations such as CARE (www.care.org) and UNICEF (www.unicef.org) also often constitute important customers around the world.

Focal Firms in International Business Imagine a typical theatrical production. It has script writers, stage man- agers, lighting technicians, musicians, set directors, business managers, and publicity staff in addition to performing actors. Each participant contributes in different ways, and much coordination is required among them. Advanced planning, preparation, timeliness, and synchronization are critical to ultimate success. In the same way, international business transactions require the participation of many specialist organizations, exact timing, and precision.

Focal firms are the most prominent international players. They in- clude well-known multinational enterprises and small and medium-sized exporting firms as well as contemporary organizations such as the born global firms. Let’s learn more about each of these key actors in interna- tional business.

A multinational enterprise (MNE) is a large company with sub- stantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. Leading MNEs are listed in the Fortune Global 500 (www.fortune. com). Examples include well-known companies such as Nestlé, Sony, Citibank, Unilever, Nokia, Ford, Barclays, DHL, Four Seasons Hotels, and Shell Oil. In recent years, the largest MNEs have been firms in the oil industry (such as Exxon-Mobil and Royal Dutch Shell) and the au- tomotive industry (General Motors and Honda) as well as in retailing (Walmart).

Although MNEs employ a range of foreign market entry strategies, they are best known for their foreign direct investment (FDI) activities. They operate in multiple countries, especially in Asia, Europe, and North

Freight forwarder A specialized logistics service provider that arranges international shipping on behalf of exporting firms.

Multinational enterprise (MNE) A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.

The Coca-Cola Company is a leading example of a multinational company. Today, about 80 percent of Coca-Cola’s revenues are generated outside of the United States. As a billion people rise into the middle class in the next decade, the company expects an even greater share of sales to come from emerging and developing markets around the world. Management expects more revenue from sales of juice, tea, coffee, value-added dairy and other beverages that make up its vast portfolio. Pictured is the President of Coca-Cola International, Ahmet Bozer.

Source: Used with permission from The Coca Cola Company

44 Part 1 • Foundation ConCePts

America, by setting up production plants, marketing subsidiaries, and regional headquarters. MNEs such as Exxon, Honda, and Coca-Cola derive much of their total sales and profits, often more than half, from cross-border operations. Although there were fewer than 7,500 MNEs worldwide in 1970, today the total count stands at roughly 80,000.10

Exhibit 1.8 displays the geographic distribution of the world’s largest MNEs, drawn from Fortune’s Global 500 list. These firms are concentrated in the advanced economies. The United States was home to 128 of the top 500 MNEs in 2014, a number that has declined over time as other countries’ firms increase in size. China has the second-most MNEs (95 firms), and Europe is home to many top MNEs: Germany (28 firms), France (20 firms), and the United Kingdom (20 firms).11

In recent years, large MNEs have begun to appear in emerging market countries, such as China, Mexico, and Russia. China currently hosts 95 of the top 500 MNEs, a number that has increased from only 15 countries in the past 10 years. Nearly all of China’s top firms are state enterprises—owned by the Chinese government, which provides them substantial advantages.12

The new global challenge firms from emerging markets are fast becoming key contenders in world markets. For example, the Mexican firm Cemex is one of the world’s largest cement producers; in Russia, Lukoil has big ambitions in the global energy sector; and China Mobile dominates the cell phone industry in Asia. These companies make best use of home–country natural resources and low-cost labor to succeed in world markets. Thousands of firms from emerging markets have big global dreams and pose competitive challenges to companies from the advanced economies.13

China $5,682

(95)

South Korea $917 (16)

Canada $332 (10)

Netherlands $1,024

(11)

Russia $567 (8)

France $2,079

(20)

Germany $2,060

(28)

Italy $728 (8)

Switzerland $796 (12)

Belgium $73 (2)

Spain $450 (7)

Brazil $448 (7)

Taiwan $264 (5)

India $367 (8)

Australia $382 (7)

Japan $3,086

(20)

United States Total revenue: $8,600

Number of firms: (128)

United Kingdom $1,598

(20)

ExhIbIt 1.8 Geographic Distribution of the headquarters of the World’s 500 Largest MNEs (Exhibit shows country name, total revenues of Global 500 firms in U.S. dollars, and total number of Global 500 firms)

Sources: Scott Decarlo, “Global 500: A New World Order,” Fortune, February 1, 2015, pp. 18–19; Fortune, “Global 500,” Special Section, July 21, 2014, pp. F1–F8.

ChaPter 1 • introduCtion: What is international Business? 45

Small- and Medium-Sized Enterprises Another type of focal firm that initiates cross-border business transactions is the SME. As defined in Canada and the United States, small- and medium-sized enterprises (SMEs) are manufactur- ers or service providers with fewer than 500 employees. (In the European Union and numerous other countries, they are defined as having fewer than 250 employees.) SMEs now make up the majority of companies active in international business. Nearly all firms, including large MNEs, started out small. Compared to large multinationals, SMEs can be more flexible and quicker to respond to global business opportunities. They are usually less bureaucratic, more adaptable, and more entrepreneurial and often sustain entrepreneurship and innovation in national economies.

Being smaller organizations, SMEs are constrained by limited financial and human resources. This explains why they usually choose exporting as their main strategy for entering foreign markets. Their limited resources prevent them from undertaking FDI, an expensive entry mode. As their operations grow, some gradually establish company-owned sales offices or sub- sidiaries in key target markets.

Due to their smaller size, SMEs often target specialized products to market niches too small to interest large MNEs. SMEs owe much of their international success to support provided by intermediaries and facilitators in foreign markets and to globe-spanning logistics specialists such as FedEx and DHL. Smaller firms also rely on information and communications technologies that allow them to identify global market niches and efficiently serve specialized buyer needs. SMEs are gaining equal footing with large multinationals in marketing sophisticated products around the world.

Born Global Firms One type of contemporary international SME is the born global firm, a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. Despite the scarce resources typical of most small businesses, born globals usually internationalize within three years of their founding and may export to twenty or more countries, generating over 25 percent of their sales from abroad.

One example is History and Heraldry (www.historyandheraldry.com), a born global in the United Kingdom specializing in gifts for history buffs and those with English ancestry. In its first five years, the firm expanded its sales to sixty countries, exporting about 70 percent of its total production. History and Heraldry’s biggest markets are France, Germany, Italy, Spain, and the Americas. It recently opened a subsidiary in North America.14

The born global phenomenon represents a new reality in international business. In countries like Australia, Denmark, Ireland, and the United States, born globals account for a substantial proportion of national exports. They use the Internet and commu- nications technologies to facilitate early and efficient international operations. In many cases, born globals offer leading-edge products with strong potential to generate international sales.

The emergence of born globals is associated with international entrepreneurship, in which innovative, smaller firms pursue business opportunities every- where, regardless of national borders. Communications and transportation technologies, falling trade barriers, and the emergence of niche markets worldwide have increased the ability of contemporary firms to view the whole world as their marketplace. Entrepreneurial managers are creative, proactive, and comfortable dealing with risk. They are usually quick to adapt com- pany strategies as circumstances evolve. The wide- spread emergence of born globals implies that any firm, regardless of size or experience, can succeed in international business.15

Small and medium- sized enterprise (SME) A company with 500 or fewer employees (as defined in Canada and the United States).

Born global firm A young entrepreneurial company that initiates international business activity early in its evolution, moving rapidly into foreign markets.

Born global firms are international from their founding. Vix Technology is an Australian born global that makes fare management equipment for public transit systems worldwide.

Source: gyn9037/Shutterstock

46 Part 1 • Foundation ConCePts

Governments and Nongovernmental Organizations In addition to profit-seeking focal firms, govern- ments are central participants in international trade and investment. Their role is so important that we devote later chapters to government intervention, political systems, and other government- related topics. In addition, numerous nonprofit organi- zations conduct cross-border activities, including charitable groups and nongovernmental organiza- tions (NGOs). They work on behalf of special causes, such as education, research, health care, human development, and the natural environment, operating internationally either to conduct their activities or to raise funds. Examples of nonprofit organizations include the Bill and Melinda Gates Foundation and the British Wellcome Trust, both of which support health and educational initiatives. CARE is an international nonprofit organization dedicated to reducing poverty. Many MNEs operate charitable foundations that support various initia-

tives. GlaxoSmithKline (GSK), the giant pharmaceutical firm, operates a number of small, country-based foundations in Canada, France, Italy, Romania, Spain, and the United States.

Why do Firms Internationalize? There are multiple motives for international expansion, some strategic in nature, others reactive. An example of a strategic, or proactive, motive is to tap foreign market opportunities or to ac- quire new knowledge. An example of a reactive motive is the need to serve a key customer that has expanded abroad. Specific motivations include the following:

• Seek opportunities for growth through market diversification. Substantial market potential exists abroad. Many firms—for example, Gillette, Siemens, Sony, and Biogen—derive more than half of their sales from international markets.16 In addition to offering sales opportunities that often cannot be matched at home, foreign markets can extend the mar- ketable life of products or services that have reached maturity in the home market. One example is the internationalization of automatic teller machines (ATMs). The first ATMs were installed in London by Barclays Bank. The machines were adopted next in the United States and Japan. As growth of ATMs began to slow in these countries, they were marketed throughout the rest of the world. There were more than three million ATMs worldwide in 2015; a new one is installed somewhere every few minutes.

• Earn higher margins and profits. For many types of products and services, market growth in mature economies is sluggish or flat. Competition is often intense, forcing firms to get by on slim profit margins. By contrast, most foreign markets may be underserved (typical of high-growth emerging markets) or not served at all (typical of developing economies). Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their home markets, bathroom fixture manufacturers American Standard and Toto (of Japan) have found more favorable competitive environments in rapidly industrializing countries such as Indonesia, Mexico, and Vietnam. Just imagine the demand for bathroom fixtures in the thousands of office buildings and residential complexes going up from Taiwan to Turkey!

• Gain new ideas about products, services, and business methods. International markets are characterized by tough competitors and demanding customers with various needs. Unique foreign environments expose firms to new ideas for products, processes, and business

1.4 Describe why firms internationalize

The British Wellcome Trust funds nongovernmental organizations (NGOs) and research initiatives to work in collaboration with private businesses to develop remedies for diseases in Africa and other less developed areas.

Source: Maciej Dakowicz/Alamy

ChaPter 1 • introduCtion: What is international Business? 47

methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. For example, Japan’s Toyota refined just-in-time inventory techniques, which other manufacturers and foreign suppliers around the world then applied to manufacturing in their own countries.

• Serve key customers better that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Nissan opened its first factory in the United Kingdom, many Japanese auto parts suppliers followed, establishing their own operations there.

• Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in product sourcing. Companies in extractive industries such as petroleum, mining, and for- estry establish international operations where raw materials are located. One example is the aluminum producer Alcoa, which established operations in Brazil, Guinea, Jamaica, and elsewhere to extract aluminum’s base mineral bauxite from local mines. Some firms inter- nationalize to gain flexibility from a greater variety of supply bases. Dell Computer has assembly facilities in Asia, Europe, and the Americas that allow management to shift pro- duction quickly from one region to another. This flexibility provides Dell with competitive advantages over less agile rivals—a distinctive capability that allows Dell to outperform competitors and skillfully manage fluctuations in currency exchange rates.

• Gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, and labor at lower costs, higher quality, or better value. For example, some Taiwanese computer manufacturers established subsidiaries in the United States to access low-cost capital. The United States is home to numerous capital sources in the high-tech sector, such as stock exchanges and venture capitalists, which have attracted many firms from abroad seeking funds. More commonly, firms venture abroad in search of skilled or low-cost labor. For example, the Japanese firm Canon relocated much of its production to China to profit from that coun- try’s inexpensive and productive workforce.

• Develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale reduce the per-unit cost of manufacturing by operating at high volume. For example, the per-unit cost of manufacturing 100,000 cameras is much cheaper than the per-unit cost of making just 100 cameras. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of goods it produces. On a per-unit-of- output basis, the greater the volume of production, the lower the total cost. Economies of scale are also present in R&D, sourcing, marketing, distribution, and after-sales service.

• Confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multina- tional competitors invading markets worldwide. The firm can enhance its competitive position- ing by confronting competitors in international markets or preemptively entering a competitor’s home market to destabilize and curb its growth. One example is Caterpillar’s entry in Japan to confront its main rival in the earthmoving equip- ment industry, Komatsu. Caterpillar’s preemptive move hindered Komatsu’s international expansion for at least a decade. Had it not acted proactively to stifle Komatsu’s growth in Japan, Komatsu’s home market, Caterpillar would certainly have had to face a more potent rival sooner.

• Invest in a potentially rewarding relationship with a foreign partner. Firms often have long- term strategic reasons for venturing abroad. Joint ventures or project-based alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term, profit-making opportunities. For example, Black and Decker

A vibrant workforce is driving economic development and buying power in emerging markets. Here consumers flock to a popular shopping street in Beijing, China.

Source: Tim Drape/Dorling Kindersley Limited

48 Part 1 • Foundation ConCePts

International trade is encouraging faster diffusion of consumer products and brands around the world.

Source: Dmitriy Shironosov/123RF

entered a joint venture with Bajaj, an Indian retailer, to position itself for expected long- term sales in the huge Indian market. The French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing the next generation of information technology.

At the broadest level, companies internationalize to enhance competitive advantage and find growth and profit opportunities. Throughout this book, we explore the environment within which firms seek these opportunities, and we discuss the strategies and managerial skills neces- sary for achieving international business success.

MyManagementLab Watch It! If your professor has assigned this, go to the Assignments section of mymanagementlab.com to complete the video exercise titled MINI: Globalization

Why Study International Business? There are many reasons to study international business. We examine them from the perspectives of the global economy, the national economy, the firm, and you as a future manager.

Facilitator of the Global Economy and Interconnectedness International business is transforming the world as never before. In the past 50 years, interna- tional trade and investment have experienced unprecedented growth. Since the 1980s, emerg- ing markets have provided new impetus to worldwide economic interconnectedness. These fast-growth developing economies—some thirty countries, including Brazil, Russia, India, and China, the so-called BRICs—are experiencing substantial market liberalization, privatization, and industrialization, which are fueling global economic transformation.

Contributor to National Economic Well-Being International business contributes to economic prosperity, helps countries use their resources more efficiently, and provides interconnectedness to the world economy and access to a range of products and services. Consequently, governments have become more willing to open their borders to foreign trade and investment.

International trade is a critical engine for job creation. It is estimated that every $1 billion increase in exports creates more than 20,000 new jobs. In the United States, cross-border trade

directly supports at least 12 million jobs. One of every seven dollars of U.S. sales is made abroad. One of every three U.S. farm acres and one of every six U.S. jobs is producing for export markets. On average, exporting firms create jobs faster and provide better pay than nonexporting firms.17

A Competitive Advantage for the Firm To sustain a competitive advantage in the global economy, firms must readily participate in cross- border business and acquire the necessary skills, knowledge, and competence. Procter & Gamble sells shampoo, disposable diapers, and other consumer products in more than 150 countries. MTV broad- casts its programming in some 140 countries. Nestlé sells its food and beverage products worldwide, obtaining nearly all its revenue from foreign opera- tions. As these examples imply, going international offers countless opportunities for firms to grow and earn additional profits.

1.5 Appreciate why you should study international business

49

In Ashley Lumb’s senior year in college, a six-week study abroad program to Europe sparked a desire for an international career. Following graduation, Ashley interned as a Junior Analyst at KPMG in London, where she gained technical training and analytical skills. She took a six-month contract job at Vins Sans Frontieres (VSF), where she enrolled in its wine courses at the company headquarters in the south of France. VSF imports wine from around the world and sells it exclusively to private yachts along the French Riviera. Ashley gained experience in various marketing meth- ods. For example, VSF attends yacht trade fairs and hosts wine tastings. Its marketing reps like Ashley scour the ports from San Remo, Italy, to St. Tropez, France, daily, speaking with yacht chefs, stewards, or captains about wine and distributing wine catalogs.

Ashley then took up a position as a mar- keting associate at Made in Museum (MIM) in Rome, Italy. MIM specializes in the de- sign, production, and delivery of authorized museum reproductions and markets jewelry, sculptures, mosaics, and Etruscan pottery. Ashley organized the products into groups and restructured the inventory and website.

While in Italy, Ashley developed a passion for the fashion industry, so she decided to move to New York. Before leaving Italy, Ashley took a course entitled “Business and Marketing in the Fashion Industry” at the prestigious Polimoda International Institute of Design and Marketing in Florence. In New York, Ashley worked at the headquarters of fashion houses Hermès and J. Crew. Subsequently, she used the services of a bilingual recruiting agency, Euromonde Inc., to land a job at Vogue Italia magazine in Times Square to work as the U.S. advertising/market- ing coordinator. Ashley also worked at Vogue India in Mumbai and Vogue Turkey in Istanbul. In 2014, Ashley held a position in the Middle East Department of the British Museum in London.

Ashley’s Advice for an International Career “Working abroad helped me sort through my career goals, as Europe offered a view into other industries that the U.S. lacked. I was able to experience different cultures and work environments and, although they might seem far apart, I saw a shared passion for exceptional products and dynamism. Back in

the U.S., my international experience was an impressive asset to prospective employers; it is valued as proof of one’s ability to handle chal- lenging assignments and work with people from diverse cultures and backgrounds.”

Success Factors “The two most important factors in working abroad were hard work and networking. I cast a wide net and met many people, sent a lot of résumés, asked many questions, and researched the market. To keep myself afloat between assignments, I took some unglamor- ous jobs. Some days I wanted to give up and go home, but instead I just kept going. . . . Hard work and persistence are crucial.”

Challenges “The decision to work abroad carries some risks. After all, you’re leaving much of what you know behind and stepping outside a clearly defined career path. The language barrier is always pres- ent. The work was usually in English, though I did pick up Italian and a bit of French through classes and immersing myself in the culture.”

Source: Courtesy of Ashley Lumb.

Ashley lumb

Ashley’s Majors: Finance and International Business Objectives: Adventure, international perspective, self-understanding, career growth,

and the opportunity to learn foreign languages Internships during college: Merrill Lynch Jobs held since graduating:

• Junior Analyst, KPMG, London, England • Marketing Representative, Vins Sans Frontieres, Nice, France • Account Representative, The Ultimate Living Group, Monte Carlo, Monaco • Marketing Associate, Made in Museum, Rome, Italy • Advertising/Marketing Coordinator, Vogue Italia, New York, United States

You Can Do It ReCent GRad in iB

A Competitive Advantage for You Although most international careers are based in one’s home country, managers travel the world and meet people from various cultures and backgrounds. Traveling abroad leads to exciting challenges and learning experiences. Managers rising to the top of most of the world’s leading corporations honed their managerial skills in international business. In this text, you will learn about the merits of gaining international business proficiency, through the experiences of people like you, in a special feature called You Can Do It: Recent Grad in IB. Read about Ashley Lumb, a recent graduate who is enjoying her early experiences in international business.

50 Part 1 • Foundation ConCePts

An Opportunity to Support Sustainability and Corporate Citizenship As the world’s population grows, so do pressures to meet consumer demand in a sustainable way. Increasingly, companies operate in environments characterized by limited resources, vulnerable human conditions, and stakeholder consciousness on issues that affect all society. In response to this trend, companies are expanding their awareness about the social and environmental implica- tions of their actions. Rather than being caught off guard, firms increasingly develop socially responsible policies and practices. For example, Starbucks began selling coffee only from grow- ers certified by the Rain Forest Alliance (www.rainforest-alliance.org), a nonprofit organization that promotes the interests of coffee growers and the environment. Such multinational enterprises as Philips, Unilever, and Walmart follow business practices that promote sustainable develop- ment. McDonald’s buys beef from farmers who meet special standards on animal welfare and environmental practices. Its outlets in Austria, Germany, Sweden, and the United Kingdom sell only organic milk.18 Internationally active firms must embed corporate citizenship in their strate- gic decisions as well as their ongoing processes and practices. Ethics and responsible behavior in firms’ international activities are of such importance that we devote Chapter 4 to this topic.

Internationalization at Vodafone

Vodafone, a British company headquartered in Newbury, Berkshire, England, is the world’s second largest mobile communications opera- tor, with networks in 64 countries in five continents, serving 458 mil- lion customers. Its annual revenues in 2015 were UK £ 42.2 billion and its EBIDTA £ 11.9 billion. (1 £ = $ 1.51 or € 1.40).

About 90% of Vodafone’s revenues come from voice communi- cations. But data over mobile devices is gaining momentum. More than 20 million of its customers were already using 4G services in 2015. Industry forecasts predict a total of 7 billion mobile phone subscribers by 2016, with 2 billion using smartphones.

The company’s business is organized in four major product units:

• Consumer Services, Europe: 41% of the company’s service revenues in 2015. This segment is sensitive to availability of 4G networks.

• Unified Communications: 20% of revenues. It aims at sat- isfying increasing customer demand for bundling multiple technologies: 3G, 4G, WiFi, cable, and fibre.

• Consumer Services, Emerging Markets: 23% of revenues. Mobile banking and data are core activities of this business unit, with sales doubling annually since 2011.

• Enterprise Services: 27% of revenues. High growth potential, as ubiquitous round-the-clock customer and employee rela- tions are becoming a standard enterprise practice

Regulatory and Technology Challenges, and Opportunities Vodafone began its activities in 1982 as Racal Electronics, a manu- facturer of military communications equipment, and entered the civil cellular sector in 1985, at a time when telecommunications was a highly regulated industry in most of the world. Deregulation in Europe began in mid-1980s, first in Britain and later in Continental Europe. This development was followed in the 1990s by the in- troduction of a pan-European technological standard, the Global System for Mobiles (‘GSM’), which is now used in 219 countries on harmonized frequencies that enable seamless roaming. Vodafone

was one of the very first telecommunications services providers to convert its network to the new technology.

Threat of Foreign Competitors The advent of GSM and the abolition of state monopolies in EU mobile telephony stimulated speculative investors to get into the industry. By 1998 there were in the average three mobile operators per country. The more ambitious ones, from France and Germany, quickly saw opportunities for expansion in the Continent and Britain. Vodafone came under attack, through alliances built by competitors wanting to exploit the UK market.

International Expansion In a defensive reaction, Vodafone’s management began contem- plating overseas expansion. It considered that confronting its major Continental competitors head-on was risky. Its first internationaliza- tion moves were towards former British colonies and protectorates, such as Gulf States and Malta, where cultural differences were low. The business potential of these markets was, however, limited. In a bold move, the company decided to sail across the Atlantic, where cellular telephony was still fragmented with scores of small operators jockeying for limited geographical territories. The British company was in June 1999 successful in acquiring 45% stake in AirTouch Cellular, a Californian corporation using AMPS technology standard. It was a year later renamed to Verizon Wireless.

Confident after this strategic move, Vodafone made an offer to buy controlling interest in Germany’s second largest mobile op- erator, Mannesmann, which was already in partnership negotiations with two heavyweights of the industry, Hong Kong’s Hutchinson Whampoa and France’s Vivendi. But quickly Mannesmann’s CEO and Board replied they were not interested to sell. Vodafone swiftly made a hostile take-over bid directly to the German company’s shareholders. In spite of resistance from the German government and general public, Vodafone in February 2000 succeeded to strike a friendly merger, paying $180.95 billion for the control of 50.5% of the new company. This transaction, the largest cross-border merger

ClosIng Case

ChaPter 1 • introduCtion: What is international Business? 51

ever, did not involve any cash: Mannesmann’s shareholders received Vodafone shares in lieu of payment.

This company’s global expansion followed rapidly, and the stock-swap payment method has been enshrined in Vodafone’s financial strategy. Its strategic goal has also remained steady: to invest in the number two operator in the target country. Vodafone’s network is today composed of 24 wholly- or majority-owned subsid- iaries and 40 associated, partnership and joint venture operations. Customer billing is done in local currencies. Through interconnection agreements, Vodafone also offers its users roaming to practically any country on the globe. Its submarine cable infrastructure reaches 100 countries.

Vodafone is a truly multicultural organization. It employs 101,443 persons from two-dozen different nationalities. Its CEO is an Italian, while his predecessor was Indian. Women occupy 24% of senior management positions.

The Emerging Markets have taken prominence in the com- pany’s internationalization strategy, with emphasis on Asia and Sub- Saharan Africa. Vodafone is organized in two geographical divisions: Europe and AMAP (Africa, Middle East, Asia-Pacific), which con- tribute at 66% and 32% respectively to total revenues. Vodafone failed to enter the Chinese market with an acquisition, but it broke- through in India, where today it serves 142 million customers.

Expansion Hurdles and the Future Vodafone’s internationalization has not always been smooth. Technology incompatibility with national standards in Japan and America, shareholders’ appetite for dividends, and cross-cultural is- sues in certain markets have forced the management to divest from its ventures in Japan, France, and USA, thus reducing the company’s market value. It has now become a target of take-over bids by China Mobile, world’s largest mobile operator, and AT&T of Dallas, Texas. In Europe, where mobile telephony revenues have fallen 11% between 2009 and 2015, industry consolidation is in the air, with Orange, Telefonica, Hatchinson Whampoa, Liberty, new-entrant Altice, and corporate raiders looking for acquisitions. Vodafone may benefit from this race, or become its victim.

Case Questions

1-4. What is the nature of the international business environments Vodafone faces? What types of risk does the firm face?

1-5. How has Vodafone benefited from expanding abroad? What types of advantages has the company obtained from its inter- national expansion? What advantages acquired overseas can help Vodafone maintain its leadership in Europe?

1-6. What is the underlying rationale for Vodafone’s expansion strategy to invest in the number two operator of a target country, instead of the incumbent number one?

1-7. Why did Vodafone expand first towards the U.S., through the acquisition of 45% of AirTouch’s share, although there was no technology compatibility between North America and Europe, making roaming and other synergies between the UK and U.S. networks impossible? What competences did the company have that it could use in this venture?

1-8. Why did the German government and public resist the acquisi- tion of Mannesmann by Vodafone in late 1999? Are there any similarities with the lack of success of the company to acquire a local Chinese operator, or a stake in China Mobile in recent years?

Sources: Ruth Bender and Shayndi Raice “European Telecom Companies Race to Merge”, Wall Street Journal, June 1, 2015, retrieved from http://www .wjs.com; J. Couvas, Vodafone: An English Saga (Mumbai, Schroff, 2008); GSM Association, The Mobile Economy 2015, retrieved from http://www .gsmaintelligence.com; S. Kedia, Vodafone AirTouch’s Bid for Mannesmann (Boston, HBSP, 2003); Gautam Naik and Anita Raghavan, “Vodafone, Mannesmann Set Takeover at $180.95 Billion After Long Struggle”, Wall Street Journal, February 4, 2000, retrieved from http://www.wsj.com; Markus Walker, “The bid that couldn’t fail”, Euromoney, March 2000, retrieved from http://www.euromoney.com; “Mobile subscriptions near the 7-billion mark”, ITU News, September 2015, retrieved from http://www.itu.int; Vodafone Group Plc Annual Report 2015, retrieved from http://www.vodafone.com.

52 Part 1 • Foundation ConCePts

end of Chapter revIeW

Key terms born global firm 45 commercial risk 42 country risk 41 cross-cultural risk 41 currency risk 42 distribution channel intermediary 42 exporting 35

facilitator 42 focal firm 42 foreign direct investment (FDI) 36 freight forwarder 43 globalization of markets 35 importing or global sourcing 35 international business 45

international investment 36 international portfolio investment 36 international trade 35 internationalization 35 multinational enterprise (MNE) 43 small and medium-sized enterprises

(SMEs) 35

Summary In this chapter, you learned about:

• Key concepts in international business International business refers to the performance of trade and investment activities by firms across national borders. Globalization of markets is the ongoing economic integra- tion and growing interdependency of countries worldwide. International business is characterized by international trade and investment. International trade refers to exchange of products and services across national borders, typically through exporting and importing. Exporting is the sale of products or services to customers located abroad from a base in the home country or a third country. Importing or global sourcing refers to procurement of products or ser- vices from foreign suppliers for consumption in the home country or a third country. International investment refers to international transfer or acquisition of ownership in assets. International portfolio investment is passive ownership of foreign securities such as stocks and bonds to generate financial returns. Using foreign direct investment, the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment.

• how international business differs from domestic business International firms are constantly exposed to four major categories of risk that must be managed. Cross-cultural risk refers to a situation or event when some human value has been put at stake due to a cultural misunder- standing. Country risk refers to the potentially adverse effects on company operations and profitability caused

by developments in the political, legal, and economic environment in a foreign country. Currency risk refers to the risk of adverse fluctuations in exchange rates. Commercial risk arises from the possibility of a firm’s loss or failure from poorly developed or executed business strategies, tactics, or procedures. The risks are ever-present in international business, and firms take proactive steps to reduce their effects.

• Who participates in international business A key participant in international business is the multi- national enterprise (MNE), a large company with many resources whose business activities are performed by a network of subsidiaries located in multiple countries. Also active in international business are small and medium- sized enterprises (SMEs), companies with 500 or fewer employees. Born global firms are entrepreneurial firms that initiate international business from or near their founding. Nongovernmental organizations (NGOs) are nonprofit organizations that pursue special causes and serve as an advocate for the arts, education, politics, reli- gion, and research.

• Why firms internationalize Companies internationalize for various reasons. These include the ability to increase sales and profits, serve cus- tomers better, access lower-cost or superior production factors, optimize sourcing activities, develop economies of scale, confront competitors more effectively, develop rewarding relationships with foreign partners, and gain access to new ideas for creating or improving products and services.

MyManagementLab Go to mymanagementlab.com to complete the problems marked with this icon .

ChaPter 1 • introduCtion: What is international Business? 53

1-13. Who are the major participants in international business?

1-14. What is the difference between a multinational enterprise (MNE) and a small and medium-sized enterprise (SME)?

1-15. What are some of the key motivations for firms to engage in international business?

1-16. Why should you care about international business?

test Your Comprehension AACSB: Reflective Thinking 1-9. What is involved in the process of internationalization?

1-10. What is the difference between exporting and foreign direct investment?

1-11. What makes international business different from do- mestic business?

1-12. What are the various types of risks that firms face when they conduct international business?

He has asked you to outline the contents of a pre- sentation he intends to make to the stock holders in order to gain their backing and additional invest- ment to make it happen.

1-19. You have become the president of the International Business Club at your school. You are trying to recruit new members and find that many students do not recognize the importance of international business or the career opportunities available to them. You decide to give a presentation on this theme. Prepare an outline of a presentation in which you explain what types of companies participate in international business, why students should study international business, and what career opportuni- ties they might find.

Apply Your Understanding AACSB: Communication, Reflective Thinking, Ethical Reasoning

1-17. In the role of financial advisor MaggieCercado, a client has approached you for guidance. The client is convinced that there is no immediate advantage in investing in domestic businesses or markets and wants to invest abroad. He wants advice regarding the transfer of his substantial assets to make a series of international investments in promising emerging mar- kets. He wants you to explain the key elements and differences between international portfolio investment and foreign direct investment. In your view which is the safer option?

1-18. Your CEO has long been frustrated by poor commu- nications, reliability and quality from overseas sup- pliers. He is convinced that the acquisition of assets in the supply chain will make it more efficient, reli- able and responsive to the needs of the corporation.

• Why you should study international business There are many reasons to study international business. It enhances a firm’s competitive positioning in the global market, facilitates development of the global economy and of the interconnectedness among nations, and contributes

to national economic well-being. From a career standpoint, learning about international business will provide you with a competitive edge and enhance your ability to thrive in the job market. Firms have various opportunities for ethical corpo- rate citizenship abroad.

54 Part 1 • Foundation ConCePts

Internet exerCIses (www.globaledGe.msu.edu)

AACSB: Communication, use of Information Technology, Analytical skills

Knowledge Portal globalEDGE™ is a leading knowledge portal for professionals in international business. It is a gateway to specialized knowledge on countries, international business transactions, culture, and firm practice. globalEDGE™ was developed at Michigan State University under the direction of Professor S. Tamer Cavusgil. Consult the globalEDGE™ portal to complete the Internet exer- cises at the end of each chapter.

1-20. You can gain valuable insights into international business by examining how countries compare to each other. Various research groups and international agencies systemati- cally examine economic, political, and other features of nations. Visit globalEDGE™ Tools and Data, scroll down and click Interactive Rankings. Select Countries. You will find dozens of criteria ranking countries based on GDP per capita; Education—literacy rate; People—population total; People—population density; Health—mortality rate; Energy—electricity production; Infrastructure—mobile cellu- lar subscriptions; Infrastructure—roads, total network; Trade and Investment—foreign direct investment net inflows; and many other factors. Choose the ranking criteria that interest you most and then examine the following three countries: Germany, India, and South Africa. Based on your analysis,

explain why they rank where they do. Do their relative positions make sense to you? Does each country seem like a good place to do business? Why or why not? Hint: Evaluate countries on a per-capita basis by dividing each criterion by the country’s population.

1-21. In this chapter, we reviewed the four major risks that firms face in international business: cross-cultural risk, country risk, currency risk, and commercial risk. Identify one or more countries that interest you and then visit globalEDGE™ and research the countries to uncover examples of each of the four types of risks. For example, China is characterized by various cultural differences and a national government that tends to intervene in business. Research by entering the country name in the search engine. Visit Global Insights and Market Potential Index. Illustrate each risk with examples.

1-22. You have recently been hired by a smaller firm that is beginning to expand internationally. When first starting out, most firms choose exporting as their main foreign market entry strategy. However, no one in your firm knows how to conduct exporting. Therefore, your boss has given you an assignment: Prepare a presentation for your coworkers on how to engage in exporting. Using globalEDGE™, find and review Guide to Exporting, which you can use to create your presentation.

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

1-23. What role do distribution channel intermediaries fulfill?

1-24. What risks do companies typically engage in with international business?

1-25. MyManagementLab Only—comprehensive writing assignment for this chapter.

MyManagementLab Try It! The simulation Globalization accompanies this exercise.

ChaPter 1 • introduCtion: What is international Business? 55

1. We use the term international business to refer to the cross- border business activities of individual firms, whereas econo- mists use international trade to refer to aggregate cross-border flows of products and services between nations. Although international business describes an enterprise-level phenom- enon, international trade describes the macrophenomenon of aggregate flows between nations.

2. “Numbers: International Trade Hits a Wall,” BusinessWeek, January 26–February 2, 2009, p. 15; WTO, 2011.

3. BBC News, “United Biscuits Sold to Turkey’s Yildiz for £2bn,” November 3, 2014, retrieved from www.bbc.com.

4. Lawrence Crosby, “What a Riot,” Marketing News, February 2015, pp. 32–33; Paul Tassi, “Riot Combines ‘League of Legends’ with ‘Super Smash Bros’” Forbes, March 21, 2015,  retrieved from http://www.forbes.com/sites/insertcoin/ 2015/03/21/riot-combines-league-of-legends-with-super-smash- bros-and-the-result-needs-to-be-a-reality/.

5. Danielle Kucera, “eBay’s Adventures in Brick and Mortar,” Bloomberg Businessweek, November 11, 2011, pp. 46–48; eBay corporate profile at http://www.hoovers.com; Nick Wingfield, “eBay Sets Sights on Indian Market with Acquisition,” Wall Street Journal, June 23, 2004, p. A3.

6. “Desert Song,” The Economist, October 7, 2004, p. 88; Stephen Timewell, “Another Saudi Success Story,” Banker, May 2014, pp. 106–108.

7. Marc A. Miles et al., 2008 Index of Economic Freedom (Washington, DC: The Heritage Foundation).

8. “Strong Dollar Squeezes U.S. Firms: Rising Currency Takes a Toll on Sales and Profits; Stocks Drop as Capital Spending Slows, Too,” Wall Street Journal, January 27, 2015.

9. Katherine Dunn, “No Country for Young People,” Maclean’s, March 9, 2015, pp. 34–35; Nektaria Stamouli and Stelios Bouras, “Greek Economy Risks Slipping Back into Recession, Say Analysts,” Wall Street Journal, April 7, 2015, p. 1.

10. UNCTAD, World Investment Report 2011, New York: United Nations (2011); UNCTAD, World Investment Report 2015, New York: United Nations (2015).

11. Scott Decarlo, “Global 500: A New World Order,” Fortune, February 1, 2015, pp. 18–19; “Global 500,” Fortune, July 21, 2014, pp. F1–F8 Special Section.

12. Bob Davis and Jason Dean, “State-Run Firms Are the Giants of China’s Economy,” Wall Street Journal, February 23, 2012, p. A12; Scott Decarlo, “Global 500: A New World Order,” Fortune, February 1, 2015, pp. 18–19.

13. Boston Consulting Group, 2014 BCG Global Challengers: Redefining Global Competitive Dynamics (Boston: Boston Consulting Group, 2014).

14. Alison Coleman, “How to Be an Expert at Export,” Financial Times, October 26, 2005, p. 9.

15. S. Tamer Cavusgil and Gary Knight, Born Global Firms: The New International Enterprise (New York: Business Expert Press, 2009); D. De Clercq, R. Yavuz, and L. Zhou, “Learning and Knowledge in Early Internationalization Research: Past Accomplishments and Future Directions,” Journal of Business Venturing 27, No. 1 (2012), pp. 143–165; Daekwan Kim, Choton Basu, GM Naidu, and Erin Cavusgil, “The Innovativeness of Born-Globals and Customer Orientation: Learning from Indian Born-Globals,” Journal of Business Research 64, No. 8 (2011), pp. 879–886.

16. UNCTAD, World Investment Report 2014, New York: United Nations (2014).

17. Jeffrey Hall and Chris Rasmussen, Jobs Supported by State Exports 2014 (Washington DC: International Trade Administration, U.S. Department of Commerce, 2015).

18. Kerry Capell, “McDonald’s Offers Ethics with Those Fries,” BusinessWeek, January 9, 2007, retrieved from http://www. businessweek.com.

Endnotes

The Emergence of Born Global Firms

Instagram is an online photo-sharing service founded in 2010 for use with smartphones. Instagram’s strategy was to enter many international markets quickly. Today, although it has only a few dozen employees, Instagram boasts millions of consumers and businesses worldwide as its customers— constituting one of the largest social networks on the Internet. Only about 12 percent of those users live in North America; the rest are scattered around the world. Virtual InstaMeets allow users from Mumbai to Munich to take photos and share them. People want to share photos to depict their life experi- ences. Instagram’s social feed, paired with easy-to-use editing tools, allows anyone to create and share their distinctive pic- tures. Its advanced technology coincides with a global shift to a more visual style of communication.

Instagram is one of a growing number of small and medium-sized enterprises (SMEs) active in international busi- ness. SMEs make up the majority of all firms in a typical country and often account for more than 50 percent of na- tional economic activity. In contrast to large multinational en- terprises (MNEs) that historically have dominated cross-border business, most SMEs have far fewer financial and human resources. International business was often beyond their reach. Globalization and recent technological advances have now made venturing abroad much less expensive. This has created a commercial environment in which many more small firms can participate in international business. Born global firms target a dozen or more countries within the first few years

2.1 Understand market globalization as an organizing framework.

2.2 Know the drivers of globalization. 2.3 Understand technological

advances and globalization. 2.4 Comprehend the dimensions of

globalization.

2.5 Appreciate firm-level consequences of market globalization.

2.6 Understand the societal consequences of globalization.

Learning Objectives After studying this chapter, you should be able to:

Globalization of Markets and the Internationalization of the Firm

Chapter 2

56

of launching the firm. Their agility and flexibility help them serve both foreign and domestic customers better.

Born globals internationalize early for various reasons, some specializing in a product category for which de- mand is universal. Geo Search (www.geosearch.co.jp) is a Japanese company that develops high-technology equipment to help engineers survey ground surfaces for cavities and build safe roads, airports, and underground utility lines. The firm

developed a land-mine detector to find buried bombs and discovered a ready market in countries such as Afghanistan, Cambodia, and Libya.

Smaller companies such as Instagram and Geo Search demonstrate that any firm of any size and resource base can participate actively in cross-border trade and investment. More companies undertake international business today than ever before.

57

Source: Steve Raymer/Corbis

58 Part 1 • Foundation ConCePts

Questions 2-1. What are the main characteristics of born global firms? 2-2. What drivers and causes of globalization have allowed born global firms such as

Instagram to internationalize at or near their founding? 2-3. What advantages do you think a young company can gain by entering international mar-

kets soon after its founding?

SOURCES: S. Tamer Cavusgil and Gary Knight, “The Born-Global Firm: An Entrepreneurial and Capabilities Perspective on Early and Rapid Internationalization,” Journal of International Business Studies, 46, No. 1 (2015), pp, 3–16; Jessi Hempel, “Instagram is Ready to Take Its Shot,” Fortune, July 21, 2014, pp. 72–78; Lauren Johnson, “Instagram Will Hit 100 Million U.S. Users by 2018,” Adweek, March 6, 2015, p. 1; Daekwan Kim, Choton Basu, GM Naidu, and Erin Cavusgil, “The Innovativeness of Born-Globals and Customer Orientation: Learning from Indian Born-Globals,” Journal of Business Research 64, No. 8 (2011), pp. 879–886; G. Knight and S. Tamer Cavusgil, “Innovation, Organizational Capabilities, and the Born-Global Firm,” Journal of International Business Studies 35, No. 2 (2004), pp. 124–141; Ingrid Lunden, “Instagram Is the Fastest-Growing Social Site Globally,” TechCrunch, January 21, 2014; retrieved 3/15/15 from http://techcrunch.com/2014/01/21/instagram-is-the- fastest-growing-social-site-globally-mobile-devices-rule-over-pcs-for-social-access; B. Oviatt and P. McDougall, “Toward a Theory of International New Ventures,” Journal of International Business Studies 25, No. 1 (1994). pp. 45–64.

The opening case highlights important drivers and causes of market globalization. These include worldwide reduction of barriers to trade and investment, market liberalization and adoption of free markets, and advances in technology.

Globalization of markets refers to the gradual integration and growing interdependence of national economies. Declining trade barriers and rapid changes in communications, manufactur- ing, and transportation technologies are enabling firms to internationalize much more rapidly and easily than ever before.

Globalization allows companies to outsource value-chain activities to the most favor- able locations worldwide. Firms source raw materials, parts, components, and service inputs from suppliers around the globe. Globalization has also made it easier for companies to sell their offerings worldwide. These trends are transforming national economies. Growing world trade and foreign direct investment (FDI) provide buyers with a wider choice of prod- ucts than ever before. Global competition and innovation frequently help to lower consumer prices. Firms with cross-border business create millions of jobs that raise living standards around the world.

Globalization is not new. In early history, civilizations in the Mediterranean, Middle East, Asia, Africa, and Europe all contributed to the growth of cross-border trade. Globalization evolved out of a common desire of civilizations to reach out and touch one another.1 It is a culmination of people’s recognition, thousands of years ago, of the wonders of difference and discovery. Cross-border trading opened the world to innovations and progress by giving societies the opportunity to expand and grow. Trade through the ages fostered civilization; without it, the world would consist of warring tribes bent on getting what they need through combat.2

Phases of Globalization We can identify four distinct phases in the evolution of globalization since the 1800s. Each phase, as illustrated in Exhibit 2.1, was accompanied by revolutionary technological develop-

ments and internationalization trends.

• The first phase of globalization began in about 1830 and peaked around 1880.3 International business became widespread due to the growth of railroads, efficient ocean transport, and the rise of large manufacturing and trading firms. Invention of the telegraph and telephone in the late 1800s enabled information flows between and within nations and aided early efforts to manage companies’ supply chains.

• The second phase of globalization began around 1900 and was associated with the rise of electricity and steel production. This phase reached its height just before the Great Depression, a worldwide economic downturn that began in 1929. In 1900, Western Europe

Globalization of markets Ongoing economic integration and growing interdependency of national economies.

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 59

was the most industrialized world region. Europe’s colonization of countries in Asia, Africa, and the Middle East led to the establishment of some of the earliest subsidiaries of multinational enterprises (MNEs). European companies such as BASF, Nestlé, Shell, Siemens, and British Petroleum established foreign manufacturing plants by 1900.4 In the years before World War I (pre-1914), many firms operated globally. The Italian manufac- turer Fiat supplied vehicles to nations on both sides of the war.

• The third phase of globalization began after World War II. By the war’s end in 1945, a substantial pent-up demand was created for consumer as well as industrial products to rebuild Europe and Japan. Leading industrialized countries, including Australia, the United Kingdom, and the United States, sought to reduce international trade barriers to supply goods to meet this demand.

In 1947, the Bretton Woods Conference of twenty-three nations created the General Agreement on Tariffs and Trade (GATT), which reduced barriers to international trade and investment. Participating governments recognized that liberalized trade would stimulate industrialization, modernization, and better living standards. In turn, the GATT led to the formation of the World Trade Organization (WTO; www.wto.org), which grew to include about 150 member nations. The WTO aims to regulate and ensure fairness and efficiency in global trade and investment. Global cooperation in the post-war era also gave birth to the International Monetary Fund and the World Bank.

Early multinationals from the third phase of globalization originated in the United States, Western Europe, and Japan. European firms such as Unilever, Philips, Royal Dutch- Shell, and Bayer organized their businesses by establishing subsidiaries around the world.

World Trade Organization (WTO) A multilateral governing body empowered to regulate international trade and investment.

ExhibiT 2.1 Phases of Globalization Since the Early 1800s

Phase of Globalization

approximate Period triggers key Characteristics

First phase 1830 to late 1800s, peaking in 1880

Introduction of railroads and ocean transport

Rise of manufacturing: cross-border trade of commodities, largely by trading companies

Second phase 1900 to 1930 Rise of electricity and steel production

Emergence and dominance of early MNEs (mainly from Europe and North America) in manufacturing, extractive, and agricultural industries

Third phase 1948 to 1970s Formation of General Agreement on Tariff and Trade (GATT); conclusion of World War II; Marshall Plan to reconstruct Europe

Focus by industrializing Western countries to reduce trade barriers; rise of MNEs from Japan; development of global capital markets; rise of global trade names

Fourth phase 1980s to present Privatization of state enterprises in transition economies; revolution in information, communication, and transportation technologies; remarkable growth of emerging markets

Rapid growth in cross-border trade of products, services, and capital; rise of internationally active SMEs and services firms; rising prosperity of emerging markets

60 Part 1 • Foundation ConCePts

Many companies developed internationally recognized trade names, including Nestlé, Kraft, Lockheed, Caterpillar, Coca-Cola, and Levi’s. Foreign subsidiaries of such compa- nies operated as miniature versions of the parent firm, marketing their products around the world. MNEs began to seek cost advantages by locating factories in developing countries with low labor costs. International trade and investment expanded significantly in the 1960s. Recovered from World War II, MNEs in Europe and Japan began to challenge the domi- nance of U.S. multinationals. Growing international trade coincided with increased cross- national flows of capital, leading to integration of global financial markets.5

• The fourth phase of globalization began in the early 1980s and featured enormous growth in cross-border trade and investment. It was triggered by the development of personal computers, the Internet, and web browsers. It was also characterized by the collapse of the Soviet Union and the market liberalization of Central and Eastern Europe. Impressive industrialization and modernization in East Asian economies followed. International pros- perity began to develop in the emerging markets, including Brazil, India, and Mexico. The 1980s witnessed huge increases in FDI, especially in capital- and technology-intensive sec- tors. Technological advances in information, communications, and transportation supported the rise of internationally active small and medium-sized enterprises. These advances increased the ability to organize and manage exports more efficiently and at lower cost. Modern technologies also enabled the globalization of the service sector in such areas as banking, entertainment, tourism, insurance, and retailing.

Market Globalization: Organizing Framework Firms expand abroad proactively to increase sales and profit through new markets, find lower- cost inputs, or obtain other advantages. Firms may also internationalize reactively because of unfavorable conditions in the home market such as regulation or declining local industry sales. Exhibit 2.2 presents an organizing framework for examining market globalization. The exhibit makes a distinction among:

• drivers or causes of globalization. • dimensions or manifestations of globalization. • firm-level consequences of globalization. • societal consequences of globalization.

In the exhibit, the double arrows illustrate the interactive nature of the relationship between globalization and its consequences. As globalization intensifies, individual firms respond to the challenges and new advantages that it brings.

America Movil (www.americamovil.com) is a leading wireless phone service provider, with more than 225 million subscribers in 18 countries, that has pursued internationalization as a growth strategy. Based in Mexico, America Movil internationalized mainly through for- eign direct investment (FDI) with initial operations in Brazil and Colombia. It then expanded to Ecuador, Chile, the Netherlands, and numerous other foreign markets. The firm entered into a joint venture with Citigroup to fund expansion in South America. It acquired Verizon’s tele- phone operations in Puerto Rico. In each case, America Movil took advantage of such global- ization trends as harmonizing communications technologies, converging buyer characteristics, and reduced trade and investment barriers. As emerging markets transform into sophisticated economies, they leapfrog older telecom technologies and embrace contemporary mobile phone technology—a boon to America Movil.

To minimize costs, many of the firm’s cell phones are essentially identical worldwide. They are adapted only to accommodate for local languages, regulations, and telephone stan- dards. America Movil’s advertising emphasizes a global brand that is recognized everywhere. Worldwide convergence of buyer lifestyles and incomes help facilitate this transnational approach. Management coordinates operations on a global scale and applies common business processes in procurement and quality control. The strategies of product standardization, global branding, and selling to customers worldwide owe much of their success to the globalization of markets.6

2.1 Understand market globalization as an organizing framework.

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 61

MyManagementLab Watch It! 1 If your professor has assigned this, go to the Assignments section of mymanagementlab.com to complete the video exercise titled Born Global.

Drivers of Globalization Various trends have converged in recent years as causes of globalization. The following are par- ticularly notable:

• Worldwide reduction in barriers to trade and investment. The tendency of national govern- ments to reduce trade and investment barriers has accelerated global economic integration. For example, tariffs on the import of industrial and medical equipment and countless other products have declined nearly to zero in many countries, encouraging freer international exchange of goods and services. Falling trade barriers are facilitated by the WTO. After joining the WTO in 2001, China has made its market increasingly more accessible

2.2 Know the drivers of globalization.

2

1 DRIVERS OF MARKET GLOBALIZATION

DIMENSIONS OF MARKET GLOBALIZATION

3b SOCIETAL CONSEQUENCES OF MARKET GLOBALIZATION

3a FIRM-LEVEL CONSEQUENCES OF MARKET GLOBALIZATION: INTERNATIONALIZATION OF THE FIRM’S VALUE CHAIN

ExhibiT 2.2 The Drivers, Dimensions, and Consequences of Globalization

62 Part 1 • Foundation ConCePts

to foreign firms. The decrease in trade barriers is also associated with the emergence of re- gional economic integration blocs.

• Market liberalization and adoption of free markets. In the past three decades, free-market reforms in China and the former Soviet Union smoothed the integration of former com- mand economies into the global economy. Numerous Asian economies—for example, India, Indonesia, Malaysia, and South Korea—embraced free market norms. These events opened roughly one-third of the world to freer international trade and investment. China, India, and Eastern Europe have become some of the most cost-effective locations for pro- ducing goods and services worldwide. Privatization of previously state-owned industries in these countries has encouraged economic efficiency and attracted massive foreign capital to their national economies.

• Industrialization, economic development, and modernization. Many emerging markets— rapidly developing economies in Asia, Latin America, and Eastern Europe—have now moved from being low value-adding commodity producers to sophisticated, competitive producers and exporters of premium products such as electronics, computers, and aircraft.7 For example, Brazil is now a leading manufacturer of Embraer commercial aircraft. The Czech Republic excels in producing automobiles. India is a leading supplier of software.

Economic development results in increased incomes and living standards, an impor- tant measurement of which is gross national income (GNI) per person.8 Exhibit 2.3 maps the levels of GNI worldwide. It reveals that Africa and several countries in Asia and Latin America are the lowest-income countries. These areas are also characterized by lower levels of globalization.

• Integration of world financial markets. Financial market integration makes it possible for internationally active firms to raise capital, borrow funds, and engage in foreign cur- rency transactions. Financial services firms follow their customers to foreign markets. Cross-border transactions are made easier because of the ease with which funds can be transferred between buyers and sellers. This takes place through networks of international commercial banks. For instance, the SWIFT network connects more than 9,000 financial institutions in some 200 countries. This global financial connectivity assists firms in devel- oping and operating world-scale production and marketing operations. It enables compa- nies to pay suppliers and collect payments from customers worldwide.

• Advances in technology. Technological advances are a remarkable facilitator of cross-border trade and investment. This is an important megatrend that requires greater elaboration.

Technological Advances and Globalization Perhaps the most important driver of market globalization has been technological advances in information, communications, manufacturing, and transportation. Technological advances pro- vide the means for market globalization to happen.

Information Technology Information technology (IT) is the science and process of creating and using information resources. Its effect on business has been revolutionary. The cost of computer processing fell by more than 30 percent per year during the past three decades and continues to fall. IT creates competitive advantages by giving companies new ways to outperform rivals.9 Geographically distant subsidiaries of a multinational firm are now interconnected by intranets that facilitate instant sharing of data, information, and experience across company operations worldwide. MNEs use collaboration software to connect distant product development teams.

IT benefits smaller firms, too, allowing them to design and produce customized prod- ucts they can target to narrow, cross-national market niches. Online search engines provide easy access to unlimited data for researching markets, competitors, and other key informa- tion. At a higher level, IT supports managerial decision making, such as the selection of qualified foreign business partners, by allowing firms to access key information and intel- ligence quickly.

Technology enables firms to interact with foreign partners and value-chain members in a more timely and cost-effective way. Such productivity advances provide substantial competitive

2.3 Understand technological advances and globalization.

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 63

advantages for the firm.10 One result is the increased early international- ization by SMEs. Emerging markets and developing economies benefit from technological leapfrogging. For example, numerous African coun- tries are adopting cell phone technology directly, bypassing the landline technology common to some advanced economies.

Panel (a) of Exhibit 2.4 shows the dramatic decrease in the cost of international communications, expressed as the cost of a 3-minute telephone call from London to New York. Panel (b) reveals the growth in Internet users in various regions since 2000. Africa has the fewest Internet users, whereas Europe and North America have the most, re- flecting the level of economic and infrastructural development in each region.

Communications The Internet, and Internet-dependent systems such as intranets, extranets, social media, and e-mail, connect billions of people and companies. Marketers use the Internet to promote the widest range of products and services to customers worldwide. Transmitting voice, data, and images is essentially costless, making Seoul, Stockholm, and San Jose next- door neighbors. South Korea has nearly 100 percent Internet access and is among the fastest broadband networks worldwide. Koreans use their phones to pay bills, do banking, and watch news programs.

The Internet opens the global marketplace to SMEs and other firms that would normally lack the resources to do international business. By establishing a presence on the web, even tiny enterprises can take the first step to become multinational firms. Services as diverse as designing an engine, monitoring a security camera, selling insurance, and doing secretarial work are easier to export than car parts or refrigerators. In China, thousands of rural farmers use Internet sites such as www.taobao. com to market their produce to urban consumers.11

Ethical Connections In six years, Nigeria increased its telecom infrastructure from just 500,000 phone lines to more than 30 mil- lion cellular subscribers. The result has been a dramatic rise in productivity and commerce, which has helped improve living standards. Greater access to cell phones saves wasted trips, provides access to education and health care services, and facilitates communication between suppliers and customers. MNE telecom invest- ment in Africa allows firms to fulfill social responsibilities and improve the lives of millions of poor people.

Countries need modern infrastructure in communications, such as reliable telephone sys- tems, to support economic development. Mobile phones are the most transformative technology in developing economies. Fortunately, cell phone infrastructure is inexpensive and relatively easy to install.

The Internet of things refers to machine-to-machine connectivity online. Worldwide, mobile telephony and app development have grown enormously, creating millions of jobs, increasing productivity, and producing big GDP gains. The number of smartphone users was expected to reach 3 billion by 2017, double the figure in 2013. People everywhere are online.12

Social media such as Facebook and Instagram facilitate the free flow of information, deep- ening the pace and impact of globalization. Global communities created by platforms such as YouTube and Twitter help mobilize audiences that transcend borders and geographic distance. The 2011 “Arab Spring” in the Middle East was facilitated in large part by social media. In view of this, in some authoritarian countries, national governments restrict access to social media, fearing the role it can play in accelerating social movements. Many companies and other orga- nizations leverage social media to communicate with their publics through direct sales, advertis- ing, and public relations. Social media provide the means to communicate directly with millions of connected individuals in new markets. Puma used Twitter and other platforms to market sportswear to customers in Europe and Latin America ahead of the 2014 World Cup games.

Increasing availability of cell phones in Africa has helped spur economic growth there.

Source: © Gilles Paire/Fotolia

64 Part 1 • Foundation ConCePts

ExhibiT 2.3 Gross National income, in U.S. Dollars

Source: Based on World Bank (2015); World Bank Development Indicator database, http://www.data.worldbank.org.

ALASKA

C A N A D A

MEXICO CUBA

JAMAICA BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND ISLANDS/ MALVINAS

GREENLAND

ICELAND

UNIT KINGD

IRELAND BELG

NETHE

SPAIN PORTUGAL

MOROCCO

WESTERN SAHARA

A L G

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

MA

BURK FAS

IVORY COAST G

H A

N A

UNITED STATES

OF AMERICA

C H

I L

E

AR

SOUTH

ATLANTIC

OCEAN

NORTH

ATLANTIC

OCEAN

PACIFIC

OCEAN

GALAPAGOS ISLANDS

FRANCE

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

POLAND

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

ROMANIA

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B YA

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

ITALY

DENMARK

SWEDEN

ALGERIA

LIECHTENSTEIN

Black SeaBOSNIA- HERZEGOVINA

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 65

Gross National Income Per Capita, in U.S. Dollars, 2014

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

NETHERLANDS

LUXEMBOURG

GERMANY BELGIUM

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ. LIECH.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B YA

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

MALI

BURKINA FASO

IVORY COAST G

H A

N A

TO G

O B

E N

IN NIGERIA

NIGER CHAD

E G Y P T

ERITREA

ETHIOPIACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

MALAYSIA BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJIBOUTI

SLOVENIA

SINGAPORE

ARCTIC OCEAN

SOUTH

ATLANTIC

OCEAN

INDIAN

OCEAN

PACIFIC

OCEAN

UNITED ARAB EMIRATES

CROATIA

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

SOUTH SUDAN

NORTH SUDAN

20,000 or more

8,000 – 19,999

4,000 – 7,999

1,500 – 3,999

less than 1,500

No data

66 Part 1 • Foundation ConCePts

McDonald’s used the social media site Renren.com to market burgers and sundaes to customers in China. Social media provide various means to reach important audiences in markets around the world.13

Manufacturing Computer-aided design (CAD) of products, robotics, and production lines have transformed manufacturing, mainly by reducing production costs. Revolutionary developments facilitate low-scale and low-cost manufacturing; firms can make products cost effectively even in short production runs. Such developments benefit international business by allowing firms to adapt products more efficiently to individual foreign markets, profitably target small national markets, and compete more effectively with foreign competitors that enjoy cost advantages.

Transportation Firms consider the cost of transporting raw materials, components, and finished products when deciding either to export or manufacture abroad. If transport costs to an important market are

high, management may decide to manufacture merchandise in that market. The development of fuel-efficient jumbo jets, giant ocean-going freighters, and new transportation technol- ogy have greatly reduced shipping times and costs. Exhibit 2.5 reveals the progression of this trend. It shows world road sector diesel fuel consumption per capita in kilograms of oil; world container port traffic in TEUs, 20-foot equivalent units of transportation containers, in millions of units; and world air transport carrier departures worldwide in millions of departures. These statistics suggest how transportation of products has been revolutionized over time. They also imply that growing transportation poses an increasing threat to the natural environment in terms of the usage of energy and other resources.

In the 20-year period through 2012, the number of containers transported internationally increased by nearly five times; more than 175 million 20-foot equivalent units are shipped each year. Containers are the big boxes, usually

ExhibiT 2.4 Declining Cost of Global Communication and Growing internet Penetration Rate (as a % of the region’s population)

Sources: IMF, World Economic Outlook (Washington, DC: International Monetary Fund, 2015); United Nations International Telecommunications Union, Statistics Database, (2015) at www.itu.int; Internet World Stats, Internet Usage Statistics, (2015) at www.internetworldstats.com.

Advances in transportation and low freight costs have helped spur market globalization. Triple E class ships can carry thousands of ship- ping containers.

Source: urbans/Shutterstock

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 67

40 feet long (about 12 meters), loaded on top of ships, trucks, and rail cars that carry the world’s cargo. Today’s ocean-going container ships hold more than 2500 containers.14

Shipbuilders, such as Maersk, have recently introduced container ships that can carry upward of 9,000 40-foot shipping containers. The vessels are so massive that only a hand- ful of international ports can handle them, including Shanghai in China and Rotterdam in the Netherlands. These ships are used mainly to transport goods between Europe and Asia because they are too wide to pass through the Panama Canal. Technological advances in these Triple E vessels provide economies of scale that reduce the cost of transportation dramatically. They are energy efficient and environmentally friendly.15

World container port traffic, TEUs, 20-foot equivalent units, in millions of units

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2000 2001 2002 2003 2004 2005 2006 2007 Year

2008 2009 2010 2011 2012 2013 2014 2015

25,000 2000 2001 2002 2003 2004 2005 2006 2007

Year 2008 2009 2010 2011 2012 2013 2014 2015

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000

43,000

45,000

World road sector diesel fuel consumption per capita, in kilograms of oil ExhibiT 2.5 Rising Transportation infrastructure Usage Over Time

Source: World Bank data (data.worldbank.org) and authors’ analysis

68 Part 1 • Foundation ConCePts

Dimensions of Market Globalization The globalization of markets can be characterized by several major dimensions or manifestations.

• Integration and interdependence of national economies. Internationally active firms develop multi-country operations through trade, investment, geographic dispersal of company resources, and integration and coordination of value chain activities. A value chain is the sequence of value-adding activities the firm performs in the course of developing, producing, marketing, and servicing a product. The collective activities of such firms give rise to economic integration, that is, increased trade and other commercial activities among the nations of the world. Governments assist this integration by lowering barriers to international trade and investment, harmonizing their monetary and fiscal policies within regional economic integration blocs, and creating supranational institutions. These include such organizations as the World Bank, International Monetary Fund, and World Trade Organization.

• Rise of regional economic integration blocs. Regional economic integration blocks consist of groups of countries that facilitate reduced trade and investment barriers among them- selves. Examples include the North American Free Trade Agreement area (NAFTA), the Asia Pacific Economic Cooperation zone (APEC), and Mercosur in Latin America. In more advanced arrangements, such as a common market, the barriers to the cross-border flow of labor and capital are completely removed. A notable example is the European Union (www.europa.eu). The European Union has adopted free trade among its member countries and harmonized fiscal and monetary policies and business regulations.

• Growth of global investment and financial flows. In the process of conducting international transactions, firms and governments buy and sell large volumes of national currencies (such as dollars, euros, and yen). The free movement of capital around the world—the globalization of capital—extends economic activities across the globe. It further increases interconnectedness among world economies. The bond market has gained worldwide scope, with foreign bonds representing a major source of debt financing for governments and firms.

• Convergence of consumer lifestyles and preferences. Consumers around the world increas- ingly spend their money and time in similar ways. Many aspects of lifestyles and prefer- ences are converging. Shoppers in New York, Paris, and Shanghai increasingly demand

2.4 Comprehend the dimensions of globalization.

Value chain The sequence of value- adding activities the firm performs in the course of developing, producing, marketing, and servicing a product.

World air transport carrier departures worldwide in millions of departures

100

120

140

160

180

200

220

240

2000 2001 2002 2003 2004 2005 2006 2007 Year

2008 2009 2010 2011 2012 2013 2014 2015

ExhibiT 2.5 (Continued)

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 69

similar household goods, clothing, automobiles, and electron- ics. Teenagers everywhere are attracted to iPods, Levi’s jeans, and Hollywood movies. Major brands enjoy a global follow- ing encouraged by movies, global media, and the Internet. Movies such as Transformers and The Hunger Games have developed global audiences of fans. Convergence of prefer- ences is also occurring in industrial markets, where profes- sional buyers source raw materials, parts, and components that are increasingly standardized—that is, similar or identi- cal in design and structure.

• Globalization of production. Intense global competition is forcing firms to reduce their costs of production. Companies cut their costs and selling prices through economies of scale, standardization of finished products, and shifting manufactur- ing and procurement to foreign locations with less expensive labor. For example, firms in the auto and textile industries have relocated their manufacturing to low labor-cost locations such as China, Mexico, and Poland.

• Globalization of services. The services sector—banking, hos- pitality, retailing, and other service industries—is undergoing widespread internationalization. The real estate firm REMAX has established more than 5,000 offices in some 50 countries. Firms increasingly outsource business processes and other services in the value chain to vendors located abroad. In a relatively new trend, many people go abroad to undergo medical procedures, such as cataract and knee surgeries, to save money.16

Firm-Level Consequences of Market Globalization: Internationalization of The Firm’s Value Chain The most direct consequence of market globalization is on the firm’s value chain. Globalization compels firms to organize their sourcing, manufacturing, marketing, and other value-adding activities on a global scale to achieve cost advantages and time efficiencies. In a typical value chain, the firm conducts research and product development (R&D), purchases production inputs, and assembles or manufactures a product or service. Next, the firm performs marketing activities such as pricing, promotion, and selling, followed by dis- tribution of the product in targeted markets and after-sales service. The value-chain concept is useful in international business because it helps clarify what activities are performed where in the world. For example, exporting firms perform most upstream value-chain activities (R&D and production) in the home market and most downstream activities (marketing and after-sales service) abroad.

Each value-adding activity in the firm’s value chain is subject to internationalization; that is, it can be performed in locations outside the home country. Exhibit 2.6 illustrates a value chain in a typical international firm. As examples in the exhibit suggest, companies have considerable latitude regarding where in the world they can locate or configure key value-adding activities. The most typical reasons for locating value-chain activities in particular countries are to reduce the costs of R&D and production or to gain closer access to customers. Through offshoring, the firm relocates a major value-chain activity by establishing a factory or other subsidiary abroad. A related trend is global outsourcing, in which the firm delegates performance of a value-adding activity to an external supplier or contractor located abroad.

In the same month that German carmaker BMW launched a new factory in South Carolina, an aging textile plant a few miles away, Jackson Mills, closed its doors and shed thousands of

2.5 Appreciate firm-level consequences of market globalization.

Google is one of many multinational enterprises that contribute to convergence of consumer lifestyles and preferences.

Source: Robert Harding Picture Library Ltd/Alamy

70 Part 1 • Foundation ConCePts

workers. Globalization created a new reality for both these firms. By establishing operations in the U.S., BMW found it could manufacture cars cost effectively while more readily accessing the huge U.S. market. In the process, BMW created thousands of high-paying, better-quality jobs for U.S. workers. Simultaneously, Jackson Mills had discovered it could source textiles of com- parable quality more cost effectively from suppliers in Asia. Globalization drove these firms to relocate key value-adding activities to the most advantageous locations around the world.

Without a doubt, globalization has created a crowded and intensely competitive global marketplace. As illustrated in Exhibit 2.7, globalization has meant that firms face intense rivalry from foreign competitors. This exhibit shows that in 1989 General Motors, Ford, and Chrysler together held nearly three-quarters of the market share in light vehicle sales in the United States. By 2015, the percentage had fallen to 46 percent. The market shares of competitors such as Toyota, Hyundai, and others rose dramatically. Over time, the services sector also has been in- ternationalizing at a fast pace. See the You Can Do It: Recent Grad in IB below, which features Terrance Rogers who is working in the global banking industry.

MyManagementLab Watch It! 2 If your professor has assigned this, go to the Assignments section of mymanagementlab.com to complete the video exercise titled Rudi’s Bakery: Management in the Global Environment.ExhibiT 2.7

Market Shares of Automakers in Light- Vehicle Sales in the U.S. 1989 and 2015

Sources: Based on Craig Trudell, “U.S. Automakers Seen Losing Market Share Amid 2012 Growth: Cars,” Bloomberg BusinessWeek, February 8, 2012, retrieved from www.businessweek. com; J. Muller, “Automakers Gold Rush,” Forbes, June 8, 2009, pp. 70–77; Wall Street Journal, “Sales and Share of Total Market by Manufacturer,” March 3, 2015, retrieved from http://online.wsj.com/ mdc/public/page/2_3022-autosales. html#autosalesE, March 16, 2015.

ExhibiT 2.6 Examples of how Firms’ Value-Chain Activities Can be internationalized

After taking his first international busi- ness course, Terrance became fascinated with the idea of working abroad. As a uni- versity student, he enrolled in his college’s International Business Certificate program. The program allowed Terrance to combine his passion for finance with his appetite for learning about culture and doing business abroad. Terrance took his first international trip through a short study abroad course. The course, “Financial and Managerial Issues in the EU”, brought him to Paris and Brussels. Terrance and his classmates visited prominent businesses and the European Union offices to hear from leaders across multiple sectors. The experience allowed Terrance to believe that working abroad could be a real possibility.

After graduation, Terrance started his ca- reer as a business analyst with Deutsche Bank in New York. The position gave him experi- ence in regulatory change, process improve- ment, and crisis management. Terrance got the opportunity to work on several global projects. After being promoted to manage- ment associate, Terrance worked directly with the Chief Operations Officer of the Americas for his division.

After spending four years gaining experi- ence in various areas of the bank, Terrance

took a position with numerous international responsibilities. Today, Terrance is an Executive Management Associate, leading business strategy, finance analysis, and communica- tions for the United Kingdom Executive Team. In this role, he splits his time between London and New York. He is responsible for interpret- ing financial drivers, product strategy, and operational issues that shape each business line in the region. He works directly with the Head of Marketing and Communications to craft and execute communication strategy for the Chief Executive Officer.

Terrance’s Advice for an International Career Terrance owes his success to early exposure at his university to international business and study abroad. Terrance says that “interna- tional careers are a requirement for today’s business leaders. Major clients don’t just re- side in the U.S. anymore, so if you want to have a long impactful career, you must find a way to gain some international exposure. Your boss will rely on you to be able to work with business associates from different cul- tures. Your clients will expect you to under- stand issues with a global perspective, and if you don’t have any global experience, your

competitors (for jobs and clients) will be one step ahead of you.”

Success Factors “If you want to work abroad, do the fol-

lowing things to increase your chances at securing an international role: (a) work on projects that expose you to people in different regions across the globe; (b) mention your interest in work- ing abroad early and bring it up in your annual review; and (c) find a way to impress the people who can make the decision. It becomes easier to make the move when the ‘right people’ know that you can deliver.”

Challenges “Challenges like language barriers and

cultural differences are things that should be faced as soon as you can in your career. Don’t be afraid to make a mistake. It’s much better to learn from cultural missteps now, so that you can be a better business leader tomorrow.” Globalization is a major dimension of business today.

Source: Courtesy of Terrance Rogers.

TERRANCE ROGERS

Terrance’s majors: Finance and International Business Objectives: Exploration, international perspective, self-awareness, career growth, and learning

about foreign markets internships during college: Deutsche Bank Jobs held since graduating: • Business Analyst at Deutsche Bank, New York • Management Associate at Deutsche Bank, New York • Executive Management Rotation at Deutsche Bank, New York • Executive Management Associate at Deutsche Bank, London and New York

You Can Do It RECENT GRADS IN IB

Societal Consequences of Globalization Our discussion so far has highlighted the far-reaching, positive outcomes of globalization. Major advances in living standards have been achieved in virtually all countries that have opened their borders to increased trade and investment.17 Yet the transition to a global marketplace also poses challenges to individuals, organizations, and governments. Low-income countries have not been able to integrate with the global economy as rapidly as others have. Poverty remains a major problem in Africa and in populous nations such as Brazil, China, and India.18 Let’s consider some of the unintended consequences of globalization.

2.6 Understand the societal consequences of globalization.

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72 Part 1 • Foundation ConCePts

Contagion: Rapid Spread of Monetary or Financial Crises Starting in 2008, the world economy experienced a severe financial crisis and global recession that was triggered by unsustainably high prices in housing and commodities. As real estate prices tumbled, it left many owners with mortgage debts greater than the value of their homes. Tens of thousands of those mortgages had been bundled and sold as investments on stock mar- kets worldwide. As the value of these homes and securities plunged or became uncertain, stock markets also plunged.19

The crisis began in the United States and, like a contagious disease, spread around the world. In international economics, contagion refers to the tendency for a financial or monetary crisis in one country to spread rapidly to other countries due to integrated national economies.20 Widespread borrowing by consumers to purchase homes and durable goods led to unsustainable overheating of the U.S. economy. Another cause of the financial crisis was inadequate regulation of the financial and banking sector in the United States. As we will see later in this text, having a strong legal and regulatory framework is critical to national economic well-being.21

Consumer confidence dwindled, triggering substantial declines in spending on cars, consumer electronics, home appliances, luxury goods, gasoline, bank loans, and new homes. Decreased spending, in turn, has been a drag on global commerce.22 Trade has especially slowed or flattened in consumer durables, energy, financial services, new construction, and related industries. During 2009 and 2010, global growth declined sharply to levels not seen since World War II.

Canada and Mexico slipped into recession partly due to their heavy reliance on trade and investment with the United States. Japan, New Zealand, Turkey, the United States, and most countries in Europe experienced significant recessions. Living standards were severely affected, and millions of people worldwide fell into deeper poverty. This occurred partly because develop- ing economies depend on exports to, and direct investments from, the advanced economies that were hurt by the crisis. Economic recovery beginning in 2012 helped drive economic growth in much of the world. However, numerous economies remain sluggish.23

Exhibit 2.8 shows how GDP growth in advanced, developing, and emerging economies varies over time. GDP in all three types of economies declined substantially during the global recession and financial crisis. One lesson the exhibit shows is that, even following deep reces- sions, the global economy has always rebounded, and countries’ GDPs have returned to growth.

Loss of National Sovereignty Sovereignty is defined as the ability of a nation to govern its own affairs; normally one country’s laws cannot be applied or enforced in another country. Globalization, however, can threaten national sovereignty in various ways. MNE activities can interfere with a government’s ability to control its own economy, social structure, and political system. Some corporations are big- ger than the economies of small nations; Walmart’s internal economy—its total revenues—is larger than the GDP of many of the world’s nations, including Israel, Greece, and Poland. Large multinational firms can apply a lot of pressure on governments through lobbying or campaign contributions and can frequently influence the legislative process.

Contagion The tendency of a financial or monetary crisis in one country to spread rapidly to other countries due to the ongoing integration of national economies.

Advanced Economies

World

Pe rc

en t C

ha ng

e

Emerging Markets & Developing Economies

–4

–2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ExhibiT 2.8 Percentage of Change in Annual GDP Growth

Sources: World Bank, Data, GDP Growth (Annual %), data.worldbank. org; IMF, World Economic Outlook (Washington, DC: International Monetary Fund, September 2011); IMF, World Economic Outlook Database, 2015, www.imf.org; United Nations, UNData, “GDP growth (annual %),” data.un.org.

ChaPter 2 • Globalization oF Markets and the internationalization oF the FirM 73

The largest firms are constrained by market forces. In countries with many competing firms, one company cannot force customers to buy its products or force suppliers to supply it with raw materials and inputs. Resources that customers and suppliers use are made through free choice. Compan