1. 8E International Business COMPETING IN THE GLOBAL MARKETPLACE

2. 8E

3. International Business COMPETING IN THE GLOBAL MARKETPLACE Charles W. L. Hill UNIVERSITY OF WASHINGTON

4. INTERNATIONAL BUSINESS: COMPETING IN THE GLOBAL MARKETPLACE Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright 2011, 2009, 2007, 2005, 2003, 2000, 1997, 1994 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0 ISBN 978-0-07-813719-8 MHID 0-07-813719-5 Vice president and editor-in-chief: Brent Gordon Publisher: Paul Ducham Executive editor: John Weimeister Director of development: Ann Torbert Development editor: Megan Richter Vice president and director of marketing: Robin J. Zwettler Senior marketing manager: Anke Braun Weekes Vice president of editing, design and production: Sesha Bolisetty Senior project manager: Bruce Gin Senior production supervisor: Debra R. Sylvester Interior designer: Cara Hawthorne, cara david DESIGN Senior photo research coordinator: Jeremy Cheshareck Photo researcher: Keri Johnson Senior media project manager: Joyce Chappetto Cover design: Cara Hawthorne, cara david DESIGN Typeface: 10.5/12 Goudy Compositor: Aptara, Inc. Printer: R. R. Donnelley Library of Congress Cataloging-in-Publication Data

5. Hill, Charles W. L. International business: competing in the global marketplace/Charles W. L. Hill.8th ed. p. cm. Includes index. ISBN-13: 978-0-07-813719-8 (alk. paper) ISBN-10: 0-07-813719-5 (alk. paper) 1. International business enterprisesManagement. 2. Competition, International. I. Title. HD62.4.H55 2011 658.049dc22 2009033378 www.mhhe.com

6. For June & Mike Hill, my parents

7. about the AUTHOR Charles W. L. Hill University of Washington Charles W. L. Hill is the Hughes M. Blake Professor of International Business at the School of Business, University of Washington. Professor Hill received his Ph.D. from the University of Manchesters Institute of Science and Technology (UMIST) in Britain. In addition to the University of Washington, he has served on the faculties of UMIST, Texas A&M University, and Michigan State University. Professor Hill has published over 50 articles in peer-reviewed academic journals, including the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, and Organization Science. He has also published two college texts: one on strategic management and the other on international business. Professor Hill has served on the editorial boards of several academic journals, including the Strategic Management Journal and Organization Science. Between 1993 and 1996 he was consulting editor at the Academy of Management Review. Professor Hill teaches in the MBA, Executive MBA, Management, and Ph.D. programs at the University of Washington. He has received awards for teaching excellence in the MBA, Executive MBA, and Management programs. He has also taught customized executive programs.

8. Professor Hill works on a consulting basis with a number of organizations. His clients have included ATL, Boeing, BF Goodrich, Hexcel, House of Fraser, Microsoft, Seattle City Light, Tacoma City Light, Thompson Financial Services, and Wizards of the Coast.

9. brief CONTENTS part one Introduction and Overview Chapter 1 Globalization part two Country Differences Chapter 2 National Differences in Political Economy Chapter 3 Differences in Culture Chapter 4 Ethics in International Business Cases: Google in China Mired in CorruptionKellogg, Brown & Root in Nigeria part three The Global Trade and Investment Environment Chapter 5 International Trade Theory Chapter 6 The Political Economy of International Trade Chapter 7 Foreign Direct Investment Chapter 8 Regional Economic Integration Cases NAFTA and the U.S. Textile Industry Martins Textiles Agricultural Subsidies and Development Boeing versus Airbus Starbucks Foreign Direct Investment

10. part four The Global Monetary System Chapter 9 The Foreign Exchange Market Chapter 10 The International Monetary System Chapter 11 The Global Capital Market Case Argentinas Monetary Crisis part five The Strategy and Structure of International Business Chapter 12 The Strategy of International Business Chapter 13 The Organization of International Business Chapter 14 Entry Strategy and Strategic Alliances Cases The Global Automobile Industry in 2009 IKEA: Furniture Retailer to the World Downeys Soup part six International Business Operations Chapter 15 Exporting, Importing, and Countertrade Chapter 16 Global Production, Outsourcing, and Logistics Chapter 17 Global Marketing and R&D Chapter 18 Global Human Resource Management Chapter 19 Accounting in the International Business Chapter 20 Financial Management in the International Business Cases Li & Fung Castrol Oil in Vietnam

11. China Mobile Glossary Photo Credits Index

12. CONTENTS part one Introduction and Overview CHAPTER 1 Globalization Opening Case The Globalization of Health Care Introduction What Is Globalization? The Globalization of Markets The Globalization of Production Management Focus Vizio and the Market for Flat Panel TVs The Emergence of Global Institutions Drivers of Globalization Declining Trade and Investment Barriers The Role of Technological Change Microprocessors and Telecommunications The Changing Demographics of the Global Economy The Changing World Output and World Trade Picture Country Focus Indias Software Sector The Changing Foreign Direct Investment Picture The Changing Nature of the Multinational Enterprise Management Focus Chinas HisenseAn Emerging Multinational The Changing World Order The Global Economy of the 21st Century The Globalization Debate Antiglobalization Protests Globalization, Jobs, and Income Country Focus

13. Protesting Globalization in France Globalization, Labor Policies, and the Environment Globalization and National Sovereignty Globalization and the Worlds Poor Managing in the Global Marketplace Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Globalization at General Electric part two Country Differences CHAPTER 2 National Differences in Political Economy Opening Case Egypt, the Troubled Giant Introduction Political Systems Collectivism and Individualism Democracy and Totalitarianism Country Focus Chavezs Venezuela Economic Systems Market Economy Command Economy Mixed Economy Legal Systems Different Legal Systems Differences in Contract Law Property Rights and Corruption Country Focus Corruption in Nigeria The Protection of Intellectual Property Product Safety and Liability Management Focus

14. Starbucks Wins Key Trademark Case in China The Determinants of Economic Development Differences in Economic Development Broader Conceptions of Development: Amartya Sen Political Economy and Economic Progress Country Focus Emerging Property Rights in China Geography, Education, and Economic Development States in Transition The Spread of Democracy The New World Order and Global Terrorism The Spread of Market-Based Systems The Nature of Economic Transformation Deregulation Privatization Legal Systems Implications of Changing Political Economy Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Indias Transformation CHAPTER 3 Differences in Culture Opening Case McDonalds in India Introduction What Is Culture? Values and Norms Culture, Society, and the Nation-State The Determinants of Culture Social Structure Individuals and Groups Social Stratification Country Focus

15. Breaking Indias Caste System Religious and Ethical Systems Christianity Islam Country Focus Islamic Capitalism in Turkey Hinduism Buddhism Confucianism Management Focus DMG-Shanghai Language Spoken Language Unspoken Language Education Culture and the Workplace Cultural Change Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Wal-Marts Foreign Expansion CHAPTER 4 Ethics in International Business Opening Case Siemens Bribery Scandal Introduction Ethical Issues in International Business Employment Practices Human Rights Management Focus Making Apples iPod Environmental Pollution Corruption

16. Management Focus Unocal in Myanmar Moral Obligations Ethical Dilemmas The Roots of Unethical Behavior Personal Ethics Decision-Making Processes Organization Culture Unrealistic Performance Expectations Management Focus Pfizers Drug-Testing Strategy in Nigeria Leadership Philosophical Approaches to Ethics Straw Men Utilitarian and Kantian Ethics Rights Theories Justice Theories Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Wal-Marts Chinese Suppliers Part Two Cases Google in China Mired in CorruptionKellogg, Brown & Root in Nigeria part three The Global Trade and Investment Environment CHAPTER 5 International Trade Theory Opening Case Bangladeshs Textile Trade Introduction An Overview of Trade Theory The Benefits of Trade

17. The Pattern of International Trade Trade Theory and Government Policy Mercantilism Absolute Advantage Country Focus Is China a Neo-Mercantilist Nation? Comparative Advantage The Gains from Trade Qualifications and Assumptions Extensions of the Ricardian Model Country Focus Moving U.S. White-Collar Jobs Offshore Heckscher-Ohlin Theory The Leontief Paradox The Product Life-Cycle Theory Evaluating the Product Life-Cycle Theory New Trade Theory Increasing Product Variety and Reducing Costs Economies of Scale, First-Mover Advantages, and the Pattern of Trade Implications of New Trade Theory National Competitive Advantage: Porters Diamond Factor Endowments Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry Evaluating Porters Theory Management Focus The Rise of Finlands Nokia Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case The Ecuadoran Rose Industry

18. Appendix International Trade and the Balance of Payments CHAPTER 6 The Political Economy of International Trade Opening Case The Global Financial Crisis and Protectionism Introduction Instruments of Trade Policy Tariffs Subsidies Country Focus Subsidized Wheat Production in Japan Import Quotas and Voluntary Export Restraints Local Content Requirements Administrative Policies Management Focus U.S. Magnesium Seeks Protection Antidumping Policies The Case for Government Intervention Political Arguments for Intervention Economic Arguments for Intervention Country Focus Trade in Hormone-Treated Beef The Revised Case for Free Trade Retaliation and Trade War Domestic Policies Development of the World Trading System From Smith to the Great Depression 19471979: GATT, Trade Liberalization, and Economic Growth 19801993: Protectionist Trends The Uruguay Round and the World Trade Organization WTO: Experience to Date The Future of the WTO: Unresolved Issues and the Doha Round Country Focus Estimating the Gains from Trade for America Implications for Managers Chapter Summary

19. Critical Thinking and Discussion Questions Research Task Closing Case Why Did Global Food Prices Rise? CHAPTER 7 Foreign Direct Investment Opening Case Spains Telefonica Introduction Foreign Direct Investment in the World Economy Trends in FDI The Direction of FDI Country Focus Foreign Direct Investment in China The Source of FDI The Form of FDI: Acquisitions versus Greenfield Investments The Shift to Services Theories of Foreign Direct Investment Why Foreign Direct Investment? Management Focus Foreign Direct Investment by Cemex The Pattern of Foreign Direct Investment The Eclectic Paradigm Political Ideology and Foreign Direct Investment The Radical View The Free Market View Pragmatic Nationalism Shifting Ideology Management Focus DP World and the United States Benefits and Costs of FDI Host-Country Benefits Host-Country Costs Home-Country Benefits Home-Country Costs International Trade Theory and FDI Government Policy Instruments and FDI Home-Country Policies Host-Country Policies

20. International Institutions and the Liberalization of FDI Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Lakshmi Mittal and the Growth of Mittal Steel CHAPTER 8 Regional Economic Integration Opening Case NAFTA and Mexican Trucking Introduction Levels of Economic Integration The Case for Regional Integration The Economic Case for Integration The Political Case for Integration Impediments to Integration The Case against Regional Integration Regional Economic Integration in Europe Evolution of the European Union Political Structure of the European Union Management Focus The European Commission and Media Industry Mergers The Single European Act Country Focus Creating a Single European Market in Financial Services The Establishment of the Euro Enlargement of the European Union Regional Economic Integration in the Americas The North American Free Trade Agreement The Andean Community MERCOSUR Central American Common Market, CAFTA, and CARICOM Free Trade Area of the Americas Regional Economic Integration Elsewhere Association of Southeast Asian Nations

21. Asia-Pacific Economic Cooperation Regional Trade Blocs in Africa Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case The Euro Energy Market Part Three Cases NAFTA and the U.S. Textile Industry Martins Textiles Agricultural Subsidies and Development Boeing versus Airbus Starbucks Foreign Direct Investment part four The Global Monetary System CHAPTER 9 The Foreign Exchange Market Opening Case Caterpillar Tractor Introduction The Function of the Foreign Exchange Market Currency Conversion Insuring against Foreign Exchange Risk Management Focus Volkswagens Hedging Strategy The Nature of the Foreign Exchange Market Economic Theories of Exchange Rate Determination Prices and Exchange Rates Country Focus Anatomy of a Currency Crisis Summary Exchange Rate Forecasting The Efficient Market School

22. The Inefficient Market School Approaches to Forecasting Currency Convertibility Implications for Managers Management Focus Dealing with the Rising Euro Reducing Economic Exposure Other Steps for Managing Foreign Exchange Risk Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Hyundai and Kia CHAPTER 10 The International Monetary System Opening Case Economic Turmoil in Latvia Introduction The Gold Standard Mechanics of the Gold Standard Strength of the Gold Standard The Period between the Wars, 19181939 The Bretton Woods System The Role of the IMF The Role of the World Bank The Collapse of the Fixed Exchange Rate System The Floating Exchange Rate Regime The Jamaica Agreement Exchange Rates since 1973 Fixed versus Floating Exchange Rates Country Focus The U.S. Dollar, Oil Prices, and Recycling Petrodollars The Case for Floating Exchange Rates The Case for Fixed Exchange Rates Who Is Right?

23. Exchange Rate Regimes in Practice Pegged Exchange Rates Currency Boards IMF Crisis Management Financial Crises in the PostBretton Woods Era Mexican Currency Crisis of 1995 The Asian Crisis Evaluating the IMFs Policy Prescriptions Country Focus Turkey and the IMF Implications for Managers Management Focus Airbus and the Euro Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Chinas Managed Float CHAPTER 11 The Global Capital Market Opening Case Global Capital Markets in Crisis Introduction Benefits of the Global Capital Market Functions of a Generic Capital Market Attractions of the Global Capital Market Management Focus Deutsche Telekom Taps the Global Capital Market Growth of the Global Capital Market Global Capital Market Risks Country Focus Did the Global Capital Markets Fail Mexico? The Eurocurrency Market Genesis and Growth of the Market Attractions of the Eurocurrency Market Drawbacks of the Eurocurrency Market

24. The Global Bond Market Attractions of the Eurobond Market The Global Equity Market Foreign Exchange Risk and the Cost of Capital Country Focus The Search for Capital in the Czech Republic Implications for Managers Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Industrial and Commercial Bank of China Part Four Case Argentinas Monetary Crisis part five The Strategy and Structure of International Business CHAPTER 12 The Strategy of International Business Opening Case The Evolving Strategy of IBM Introduction Strategy and the Firm Value Creation Strategic Positioning Operations: The Firm as a Value Chain Global Expansion, Profitability, and Profit Growth Expanding the Market: Leveraging Products and Competencies Location Economies Experience Effects Leveraging Subsidiary Skills Summary Cost Pressures and Pressures for Local Responsiveness Pressures for Cost Reductions Pressures for Local Responsiveness

25. Management Focus Local Responsiveness at MTV Networks Choosing a Strategy Global Standardization Strategy Management Focus Vodaphone in Japan Localization Strategy Transnational Strategy International Strategy Management Focus Evolution of Strategy at Procter & Gamble The Evolution of Strategy Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Coca Cola Appendix Profitability, Growth, and Valuation CHAPTER 13 The Organization of International Business Opening Case Nestl Introduction Organizational Architecture Organizational Structure Vertical Differentiation: Centralization and Decentralization Management Focus The International Division at Wal-Mart Horizontal Differentiation: The Design of Structure Management Focus The Rise and Fall of Dow Chemicals Matrix Structure Integrating Mechanisms Control Systems and Incentives Types of Control Systems Incentive Systems Control Systems, Incentives, and Strategy in the International Business

26. Processes Organizational Culture Creating and Maintaining Organizational Culture Organizational Culture and Performance in the International Business Management Focus Culture and Incentives at Lincoln Electric Synthesis: Strategy and Architecture Localization Strategy International Strategy Global Standardization Strategy Transnational Strategy Environment, Strategy, Architecture, and Performance Organizational Change Organizational Inertia Implementing Organizational Change Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case A Decade of Organizational Change at Unilever CHAPTER 14 Entry Strategy and Strategic Alliances Opening Case General Electrics Joint Ventures Introduction Basic Entry Decisions Which Foreign Markets? Timing of Entry Management Focus Tescos International Growth Strategy Scale of Entry and Strategic Commitments Summary Entry Modes Exporting Management Focus The Jollibee PhenomenonA Philippine Multinational Turnkey Projects

27. Licensing Franchising Joint Ventures Wholly Owned Subsidiaries Selecting an Entry Mode Core Competencies and Entry Mode Pressures for Cost Reductions and Entry Mode Greenfield Ventures or Acquisition? Pros and Cons of Acquisitions Pros and Cons of Greenfield Ventures Greenfield or Acquisition? Strategic Alliances The Advantages of Strategic Alliances The Disadvantages of Strategic Alliances Management Focus Cisco and Fujitsu Making Alliances Work Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case JCB in India Part Five Cases The Global Automobile Industry in 2009 IKEA: Furniture Retailer to the World Downeys Soup part six International Business Operations CHAPTER 15 Exporting, Importing, and Countertrade Opening Case MD International Introduction The Promise and Pitfalls of Exporting Improving Export Performance

28. An International Comparison Management Focus FCX Systems Information Sources Utilizing Export Management Companies Management Focus Exporting with a Little Government Help Export Strategy Export and Import Financing Management Focus Export Strategy at 3M Lack of Trust Management Focus Red Spot Paint & Varnish Letter of Credit Draft Bill of Lading A Typical International Trade Transaction Export Assistance ExportImport Bank Export Credit Insurance Countertrade The Incidence of Countertrade Types of Countertrade The Pros and Cons of Countertrade Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Exporting and Growth for Small Businesses CHAPTER 16 Global Production, Outsourcing, and Logistics Opening Case The Rise of the Indian Automobile Industry Introduction Strategy, Production, and Logistics

29. Where to Produce Country Factors Management Focus Philips in China Technological Factors Product Factors Locating Production Facilities The Strategic Role of Foreign Factories Management Focus Hewlett-Packard in Singapore Outsourcing Production: Make-or-Buy Decisions The Advantages of Make The Advantages of Buy Trade-offs Strategic Alliances with Suppliers Managing a Global Supply Chain The Role of Just-in-Time Inventory The Role of Information Technology and the Internet Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Building the Boeing 787 CHAPTER 17 Global Marketing and R&D Opening Case Microsoft in India Introduction The Globalization of Markets and Brands Market Segmentation Product Attributes Management Focus Marketing to Black Brazil Cultural Differences Economic Development Product and Technical Standards

30. Distribution Strategy Differences between Countries Choosing a Distribution Strategy Communication Strategy Barriers to International Communication Management Focus Overcoming Cultural Barriers to Selling Tampons Push versus Pull Strategies Management Focus UnileverSelling to Indias Poor Global Advertising Pricing Strategy Price Discrimination Strategic Pricing Regulatory Influences on Prices Configuring the Marketing Mix Management Focus Levi Strauss Goes Local New-Product Development The Location of R&D Integrating R&D, Marketing, and Production Cross-Functional Teams Building Global R&D Capabilities Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case DoveBuilding a Global Brand CHAPTER 18 Global Human Resource Management Opening Case AstraZeneca Introduction The Strategic Role of International HRM Staffing Policy Types of Staffing Policy

31. Expatriate Managers Management Focus Managing Expatriates at Royal Dutch/Shell The Global Mind-Set Training and Management Development Training for Expatriate Managers Repatriation of Expatriates Management Development and Strategy Management Focus Monsantos Repatriation Program Performance Appraisal Performance Appraisal Problems Guidelines for Performance Appraisal Compensation National Differences in Compensation Expatriate Pay Management Focus Global Compensation Practices at McDonalds International Labor Relations The Concerns of Organized Labor The Strategy of Organized Labor Approaches to Labor Relations Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Lenovo CHAPTER 19 Accounting in the International Business Opening Case Chinese Accounting Introduction Country Differences in Accounting Standards Relationship between Business and Providers of Capital Political and Economic Ties with Other Countries Inflation Accounting Level of Development

32. Culture National and International Standards Lack of Comparability International Standards Management Focus The Consequences of Different Accounting Standards Multinational Consolidation and Currency Translation Management Focus Novartis Joins the International Accounting Club Consolidated Financial Statements Currency Translation Current U.S. Practice Accounting Aspects of Control Systems Exchange Rate Changes and Control Systems Transfer Pricing and Control Systems Separation of Subsidiary and Manager Performance Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Adopting International Accounting Standards CHAPTER 20 Financial Management in the International Business Opening Case Global Treasury Management at Procter & Gamble Introduction Investment Decisions Capital Budgeting Project and Parent Cash Flows Adjusting for Political and Economic Risk Management Focus Black Sea Energy Ltd. Risk and Capital Budgeting Financing Decisions Source of Financing Financial Structure

33. Global Money Management: The Efficiency Objective Minimizing Cash Balances Reducing Transaction Costs Global Money Management: The Tax Objective Moving Money across Borders: Attaining Efficiencies and Reducing Taxes Dividend Remittances Royalty Payments and Fees Transfer Prices Fronting Loans Techniques for Global Money Management Centralized Depositories Multilateral Netting Chapter Summary Critical Thinking and Discussion Questions Research Task Closing Case Brazils Gol Part Six Cases Li & Fung Castrol Oil in Vietnam China Mobile Glossary Photo Credits Index

34. list of MAPS Map 2.1 GNI per Capita, 2007 Map 2.2 GNI Purchasing Power Parity per Capita, 2007 Map 2.3 Growth Rate in GDP per Capita, 19982007 Map 2.4 The Human Development Index, 2006 Map 2.5 Political Freedom, 2006 Map 2.6 Distribution of Economic Freedom in 2007 Map 3.1 World Religions Map 8.1 Member States of the European Union in 2009 Map 8.2 Economic Integration in the Americas Map 8.3 ASEAN countries Map 8.4 APEC Members

35. PREFACE It is now two decades since I began work on the first edition of International Business: Competing in the Global Marketplace. By the third edition the book was the most widely used international business text in the world. Since then its market share has only increased. I attribute the success of the book to a number of goals I set out for myself when I embarked on the first edition of the book. Specifically, I wanted to write a book that (1) was comprehensive and up-to-date, (2) went beyond an uncritical presentation and shallow explanation of the body of knowledge, (3) maintained a tight, integrated flow between chapters, (4) focused on managerial implications, and (5) made important theories accessible and interesting to students. Over the years, and through eight editions, I have worked hard to adhere to these goals. It has not always been easy. An enormous amount has happened over the last two decades, both in the real world of economics, politics and business, and in the academic world of theory and empirical research. Often I have had to significantly rewrite chapters, scrap old examples, bring in new ones, incorporate new theory and evidence into the book, and phase out older theories that are increasingly less relevant to the modern and dynamic world of international business. That process continues in the current edition. As noted below, there have been significant changes in this edition, and that will no doubt continue to be the case in the future. In deciding what changes to make, I have been guided not only by my own reading, teaching and research, but also by the invaluable feedback I receive from professors and students around the world who use the book, from reviewers, and from the editorial staff at McGraw Hill. My thanks go out to all of them. COMPREHENSIVE AND UP-TO-DATE To be comprehensive, an international business textbook must: Explain how and why the worlds countries differ. Present a thorough review of the economics and politics of international trade and investment. Explain the functions and form of the global monetary system. Examine the strategies and structures of international businesses. Assess the special roles of an international businesss various functions. I have always endeavored to do all of these things in International Business. In my view, many other texts paid insufficient attention to the strategies and structures of international businesses and to the implications of international business for firms various functions. This omission has been a serious deficiency. Many of the students in these international business courses will soon be working in international businesses, and they will be expected to understand the implications of international business for their organizations strategy, structure, and functions. This book pays close attention to these issues. Comprehensiveness and relevance also require coverage of the major theories. It has always been my goal to incorporate the insights gleaned from recent academic work into the text. Consistent with this goal,

36. over the last six editions I have added insights from the following research: The new trade theory and strategic trade policy. The work of Nobel Prizewinning economist Amartya Sen on economic development. The work of Hernando de Soto on the link between property rights and economic development. Samuel Huntingtons influential thesis on the clash of civilizations. The new growth theory of economic development championed by Paul Romer and Gene Grossman. Empirical work by Jeffery Sachs and others on the relationship between international trade and economic growth. Michael Porters theory of the competitive advantage of nations. Robert Reichs work on national competitive advantage. The work of Nobel Prizewinner Douglas North and others on national institutional structures and the protection of property rights. The market imperfections approach to foreign direct investment that has grown out of Ronald Coase and Oliver Williamsons work on transaction cost economics. Bartlett and Ghoshals research on the transnational corporation. The writings of C. K. Prahalad and Gary Hamel on core competencies, global competition, and global strategic alliances. Insights for international business strategy that can be derived from the resource based view of the firm. In addition to including leading edge theory, in light of the fast-changing nature of the international business environment, every effort is being made to ensure that the book is as up-to-date as possible when it goes to press. Much has happened in the world since the first edition of this book was published in 1993. The Uruguay Round of GATT negotiations was successfully concluded and the World Trade Organization was established. In 2001 the WTO embarked upon another major round of talks aimed to reduce barriers to trader, the Doha Round. The European Union moved forward with its post-1992 agenda to achieve a closer economic and monetary union, including the establishment of a common currency in January 1999. The North American Free Trade Agreement passed into law. The former Communist states of Eastern Europe and Asia continued on the road to economic and political reform. As they did, the euphoric mood that followed the collapse of communism in 1989 was slowly replaced with a growing sense of realism about the hard path ahead for many of these countries. The global money market continued its meteoric growth. By 2009 over $2 trillion per day was flowing across national borders. The size of such flows fueled concern about the ability of short-term speculative shifts in global capital markets to destabilize the world economy. The World Wide Web emerged from nowhere to become the backbone of an emerging global network for electronic commerce. The world continued to

37. become more global. Several Asian Pacific economies, including most notably China, continued to grow their economies at a rapid rate. Outsourcing of service functions to places like China and India emerged as a major issue in developed Western nations. New multinationals continued to emerge from developing nations in addition to the worlds established industrial powers. Increasingly, the globalization of the world economy affected a wide range of firms of all sizes, from the very large to the very small. Also, unfortunately, in the wake of the terrorist attacks on the United States that took place on September 11, 2001, global terrorism and the attendant geopolitical risks emerged as a threat to global economic integration and activity. Reflecting this rapid pace of change, in this edition of the book I have tried to ensure that all material and statistics are as up-to-date as possible as of 2009. However, being absolutely up-to-date is impossible since change is always with us. What is current today may be outdated tomorrow. Accordingly, I have established a home page for this book on the World Wide Web at www.mhhe.com/hill. From this home page the reader can access regular updates of chapter material and reports on topical developments that are relevant to students of international business. I hope readers find this a useful addition to the support material for this book. BEYOND UNCRITICAL PRESENTATION AND SHALLOW EXPLANATION Many issues in international business are complex and thus necessitate considerations of pros and cons. To demonstrate both sides of issues to students, I have adopted a critical approach that presents the arguments for and against economic theories, government policies, business strategies, organizational structures, and so on. Therefore, I have attempted to explain the complexities of the many theories and phenomena unique to international business so the student might fully comprehend the statements of a theory or the reasons a phenomenon is the way it is. I believe these theories and phenomena are explained in more depth in this book than they are in competing textbooks, the rationale being that a shallow explanation is little better than no explanation. In international business, a little knowledge is indeed a dangerous thing. INTEGRATED PROGRESSION OF TOPICS A weakness of many texts is that they lack a tight, integrated flow of topics from chapter to chapter. This book explains to students in Chapter 1 how the books topics are related to each other. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous ones in a logical fashion. Part One Chapter 1 provides an overview of the key issues to be addressed and explains the plan of the book. Part Two Chapters 2 and 3 focus on national differences in political economy and culture, and Chapter 4 on ethical issues in international business. Most international business textbooks place this material at a later point, but I believe it is vital to discuss national differences first. After all, many of the central issues in international trade and investment, the global monetary system, international business strategy and structure, and international business operations arise out of national differences in political economy and culture. To fully understand these issues, students must first appreciate the differences in countries and

38. cultures. We discuss ethical issues at this juncture primarily because many ethical dilemmas flow out of national differences in political systems, economic systems, and culture. Part Three Chapters 5 through 8 investigate the political economy of international trade and investment. The purpose of this part is to describe and explain the trade and investment environment in which international business occurs. Part Four Chapters 9 through 11 describe and explain the global monetary system, laying out in detail the monetary framework in which international business transactions are conducted. Part Five In Chapters 12 through 14 attention shifts from the environment to the firm. Here the book examines the strategies and structures that firms adopt to compete effectively in the international business environment. Part Six In Chapters 15 through 20 the focus narrows further to investigate business operations. These chapters explain how firms can perform their key functionsmanufacturing, marketing, R&D, human resource management, accounting, and financein order to compete and succeed in the international business environment. Throughout the book, the relationship of new material to topics discussed in earlier chapters is pointed out to the students to reinforce their understanding of how the material comprises an integrated whole. FOCUS ON MANAGERIAL IMPLICATIONS I have always believed that it is important to show students how the material covered in the text is relevant to the actual practice of international business. This is explicit in the later chapters of the book, which focus on the practice of international business, but it is not always obvious in the first half of the book, which considers many macroeconomic and political issues, from international trade theory and foreign direct investment flows to the IMF and the influence of inflation rates on foreign exchange quotations. Accordingly, at the end of each chapter in Parts Two, Three, and Fourwhere the focus is on the environment of international business, as opposed to particular firmsa section titled Implications for Business clearly explains the managerial implications of the material discussed in the chapter. For example, Chapter 4, International Trade Theory, ends with a detailed discussion of the various trade theories implications for international business management. In addition, each chapter begins with a case that illustrates the relevance of chapter material for the practice of international business. Chapter 2, Country Differences in Political Economy, for example, opens with a case that profiles the economy of Egypt. I have also added a closing case to each chapter. These cases are also designed to illustrate the relevance of chapter material for the practice of international business. The closing case for Chapter 2, for example, looks at the transformation of Indias economy.

39. Another tool that I have used to focus on managerial implications is a Management Focus box. There is at least one Management Focus in each chapter. Like the opening case, the purpose of these boxes is to illustrate the relevance of chapter material for the practice of international business. The Management Focus in Chapter 2, for example, looks at how Starbucks has been able to enforce its trademark in China. This box illustrates the important role that national differences in the protection of intellectual property rights can play in international business. Accessible and Interesting The international business arena is fascinating and exciting, and I have tried to communicate my enthusiasm for it to the student. Learning is easier and better if the subject matter is communicated in an interesting, informative, and accessible manner. One technique I have used to achieve this is weaving interesting anecdotes into the narrative of the text-stories that illustrate theory. The opening cases and focus boxes are also used to make the theory being discussed in the text both accessible and interesting. Each chapter has two kinds of focus boxesa Management Focus box (described above) and a Country Focus box. Country Focus boxes provide background on the political, economic, social, or cultural aspects of countries grappling with an international business issue. In Chapter 2, for example, one Country Focus box discusses how the economy of Venezuela has performed under the leadership of Hugo Chavez. WHATS NEW IN THE 8TH EDITION The success of the first seven editions of International Business was based in part upon the incorporation of leading edge research into the text, the use of the up-to-date examples and statistics to illustrate global trends and enterprise strategy, and the discussion of current events within the context of the appropriate theory. Building on these strengths, my goals for this revision have been threefold: 1. To incorporate new insights from recent scholarly research wherever appropriate. 2. To make sure the content of the text covers all appropriate issues. 3. To make sure the text is as up-to-date as possible with regard to current events, statistics, and examples. As part of the overall revision process, changes have been made to every chapter in the book. All statistics have been updated to incorporate the most recently available data. New examples, cases, and boxes have been added and older examples updated to reflect new developments. Almost all of the chapter opening and closing cases are new to this edition. New material has been inserted wherever appropriate to reflect recent academic work or important current events. Most notably for this edition, detailed discussion of the global financial crisis that occurred in 2008 and 2009, and its implications for international business, has been added to many chapters. For example, Chapter 6 opens with a case that discusses the impact of the global financial crisis on attitudes towards protectionism in many countries. Similarly, Chapter 10 opens with a case that profiles how the global financial crisis triggered economic turmoil and a currency crisis in Latvia. Elsewhere, Chapter 6 has been updated to discuss progress on the current round of talks sponsored by the WTO aimed at reducing barriers to trade, particularly in agriculture (the Doha Round). Chapter 7 now discusses the slump in foreign direct investment flows that took place in 2008 and 2009, and explains

40. how the global financial crisis of 2008 contributed to it. Chapter 9 discusses the weakness in the U.S. dollar between 2004 and 2008, and its paradoxical rebound in late 2008 in the midst of a severe financial crisis in the United States and elsewhere. And so on.

41. ACKNOWLEDGMENTS Numerous people deserve to be thanked for their assistance in preparing this book. First, thank you to all the people at McGraw-Hill/Irwin who have worked with me on this project: Paul Ducham, Publisher John Weimeister, Executive Editor Megan Richter, Developmental Editor Anke Weekes, Marketing Manager Ann Ferro, Marketing Coordinator Bruce Gin, Project Manager Allison Souter, Media Project Manager Debra Sylvester, Production Supervisor Cara Hawthorne, Designer Jeremy Cheshareck, Senior Photo Research Coordinator Second, my thanks go to the reviewers who provided good feedback that helped shape this book. Ron Abernathy, University of North Carolina, Greensboro Kevin Cabe, Indiana Wesleyan University Linda L. Calderone, Farmingdale State College Donna Davisson, Cleveland State University Betty J. Diener, Barry University Andrew Charles Gross, Cleveland State University Ralph Jagodka, Mt. San Antonio College Jeffrey Kulick, George Mason University Kirpalani, V. H. Manek, Bloomsburg University Alan Muller, University of Washington

42. Dr. Ann Langlois, Palm Beach Atlantic University Tomasz Lenartowicz, Florida Atlantic University Eydis Olsen, Drexel University Hoon Park, University of Central Florida Carol Reade, San Jose State University Jane Ross, University of Maryland Robert J. Rustic, University of Findlay Charlie Shi, Diablo Valley College Karen J. Smith, Ph.D., Columbia Southern University Donald S. Vest, Jr., Clark Atlanta University

43. Guided Tour Cases, focus boxes, and exercises throughout the book make theories accessible and interesting and show how theory relates to the practice of international business. Opening Case

44. Cases Closing Case Each chapter concludes with a closing case demonstrating the relevance of the chapter material to the practice of international business. End-of-Part Cases Longer, end-of-part cases allow for more in-depth study of international companies such as IKEA.

45. Focus Boxes and Exercises Country Focus Each Country Focus example provides background on the political, economic, social, or cultural aspects of countries grappling with an international business issue. Management Focus Management Focus examples further illustrate the relevance of chapter material for the practice of international business.

46. Implications for Managers At the end of each chapter in Parts 2, 3, and 4where the focus is on the environment of international business, as opposed to particular firmssections titled Implications for Managers clearly explain the managerial implications of material discussed in the chapter.

47. globalEDGE Research Task Using the text and the globalEDGE Web site, http://globaledge.msu.edu, students solve realistic international business problems related to each chapter. These exercises expose students to the types of tools and data sources international managers use to make informed business decisions.

48. Supplements for the Instructor Instructors Resource CD An updated Instructors Manual and Video Guide (prepared by Veronica Horton) includes course outlines, chapter overviews and teaching suggestions, lecture outlines, ideas for student exercises and projects, teaching notes for all cases in the book, and video notes. Test Bank The Test Bank contains over 100 true/false, multiple choice and essay questions per chapter, each tagged to the Learning Objectives, page number, level of difficulty, AACSB and Blooms Taxonomy standards. Videos A new Video collection features recent news footage. Videos correspond to video teaching notes accessible on the instructors side of the Online Learning Center. PowerPoint One set of slides per chapter (prepared by Veronica Horton) feature original materials not found in the text in addition to reproductions of key text figures, tables and maps. Online Learning Center (OLC)www.mhhe.com/hill A password-protected portion of the books Web site will be available to adopters of International Business, featuring online access to the instructors manual, PowerPoints, video cases and globalEDGE answers. Instructors can also view student resources to make more effective supplementary assignments. For students, this Web site also provides rich interactive resources to help them learn how to practice international business; including chapter quizzes and interactive modules.

49. part one Introduction and Overview

50. 1 Globalization LEARNING OBJECTIVES After you have read this chapter you should be able to: LO1 Understand what is meant by the term globalization. LO2 Be familiar with the main drivers of globalization. LO3 Appreciate the changing nature of the global economy. LO4 Understand the main arguments in the debate over the impact of globalization. LO5 Appreciate how the process of globalization is creating opportunities and challenges for business managers. Opening Case: The Globalization of Health Care Health care has long been considered one of the industries least vulnerable to dislocation from globalization. After all, like many service businesses, health care is normally delivered where it is purchased. However, for some activities and procedures, this assumption is now changing. The trend began with certain diagnostic procedures, such as MRI scans. The United States has a shortage of radiologists, the doctors who specialize in reading and interpreting diagnostic medical images, including X-rays, CT scans, MRI scans, and ultrasounds. Demand for radiologists has been growing twice as fast as the rate at which medical schools are graduating radiologists with the skills and qualifications required to read medical images. This imbalance between supply and demand means that radiologists are expensive; an American radiologist can earn as much as $400,000 a year. In the early 2000s, an Indian radiologist working at Massachusetts General Hospital, Dr. Sanjay Saini, found a way to deal with the shortage and expensesend images over the Internet to India where radiologists could interpret them. This would reduce the workload on Americas radiologists and also cut costs. A radiologist in India might earn one- tenth of his or her U.S. counterpart. Plus, because India is on the opposite side of the globe, the images could be interpreted while it was nighttime in the United States and be ready for the attending physician when he or she arrived for work the following morning. The globalization trend has now spilled over into surgery. In the fall of 2008, for example, Adrienne de

51. Forrest of Colorado had hip surgery in Chennai, India, while Texan David Jones had triple bypass surgery in New Delhi. Both patients were uninsured. De Forrests surgery cost $8,000, and Joness cost $16,000 including travel expenses. Had those operations been done in the United States, they would have cost $45,000 and $250,000 respectively. Forrest and Jones are not alone; in 2007 some 750,000 Americans traveled abroad for medical treatment. The consulting company Deloitte forecasts that those numbers will reach 10 million by 2012, which would be worth about $21 billion to those nations where the procedures are performed. Some might be worried about the quality of medical care in other countries, but medical tourists typically go to new hospitals, most of which are private, where highly skilled physicians treat them, many of whom trained in places like the United States or Britain. The three largest recipient countries of American patients are Mexico (due to its proximity), India (where 450,000 were treated in 2007), and Singapore (where over 400,000 were treated in 2007, and where the local medical schools are considered to be among the very best in the world). Costs in these countries generally run from 20 to 35 percent of costs for the same procedure in the United States. A number of factors are driving the globalization trend. First is the high cost of medical care in the United States, which is the source of the largest number of patients. Then is the fact that over 45 million Americans are uninsured and many more are underinsured and face high co-payments for expensive procedures. Many of these people find it far cheaper to fly abroad to get treatment. Third, is the emergence of high-quality private hospital chains in places like India and Singapore. Fourth, the rising costs of insuring their workforces are starting to persuade some large American companies to look abroad. And finally, some insurance companies are starting to experiment with payment for foreign treatment at internationally accredited hospitals. In 2008, for example, Aetna, a large insurer, launched a pilot scheme in partnership with Singaporean hospitals. Aetna started to give Americans the option to have procedures costing $20,000 or more in the United States performed in Singapore, where the company reckons that the quality of care is better than at the average American hospital.1 Introduction Over the last three decades a fundamental shift has been occurring in the world economy. We have been moving away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. And we are moving toward a world in which barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent, integrated global economic system. The process by which this is occurring is commonly referred to as globalization. In todays interdependent global economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by Ford from components made in the United States and Japan that were fabricated from Korean steel and Malaysian rubber. She may have filled the car with gasoline at a BP service station owned by a British multinational company. The gasoline could have been made from oil pumped out of a well off the coast of Africa by a French oil company that transported it to the United States in a ship owned by a Greek shipping line. While driving to work, the American might talk to her stockbroker on a Nokia cell phone that was designed in Finland and assembled in Texas using chip sets

52. produced in Taiwan that were designed by Indian engineers working for Texas Instruments. She could tell the stockbroker to purchase shares in Deutsche Telekom, a German telecommunications firm that was transformed from a former state-owned monopoly into a global company by an energetic Israeli CEO. She may turn on the car radio, which was made in Malaysia by a Japanese firm, to hear a popular hip-hop song composed by a Swede and sung by a group of Danes in English who signed a record contract with a French music company to promote their record in America. The driver might pull into a drive-through coffee shop run by a Korean immigrant and order a single, tall, nonfat latte and chocolate-covered biscotti. The coffee beans came from Brazil and the chocolate from Peru, while the biscotti was made locally using an old Italian recipe. After the song ends, a news announcer might inform the American listener that antiglobalization protests at a meeting of the World Economic Forum in Davos, Switzerland, have turned violent. One protester has been killed. The announcer then turns to the next item, a story about how financial crisis that started in the United States banking sector may trigger a global recession and is sending stock markets down all over the world. This is the world in which we live. It is a world where the volume of goods, services, and investment crossing national borders has expanded faster than world output for more than half a century. It is a world where over $4 trillion in foreign exchange transactions are made every day, where more than $15 trillion of goods and $3.7 trillion of services are sold across national borders.2 It is a world in which international institutions such as the World Trade Organization and gatherings of leaders from the worlds most powerful economies have repeatedly called for even lower barriers to cross-border trade and investment. It is a world where the symbols of material and popular culture are increasingly global: from Coca-Cola and Starbucks to Sony PlayStations, Nokia cell phones, MTV shows, Disney films, IKEA stores, and Apple iPods and iPhones. It is a world in which products are made from inputs that come from all over the world. It is a world in which a financial crisis in America can trigger a global economic recession, which is exactly what occurred in 2008 and 2009. It is also a world in which vigorous and vocal groups protest against globalization, which they blame for a list of ills, from unemployment in developed nations to environmental degradation and the Americanization of popular culture. And yes, these protests have on occasion turned violent. For businesses, this process has produced many opportunities. Firms can expand their revenues by selling around the world and/or reduce their costs by producing in nations where key inputs, including labor, are cheap. The global expansion of enterprises has been facilitated by favorable political and economic trends. Since the collapse of communism at the end of the 1980s, the pendulum of public policy in nation after nation has swung toward the free market end of the economic spectrum. Regulatory and administrative barriers to doing business in foreign nations have come down, while those nations have often transformed their economies, privatizing state-owned enterprises, deregulating markets, increasing competition, and welcoming investment by foreign businesses. This has allowed businesses both large and small, from both advanced nations and developing nations, to expand internationally. What is now starting to happen in the health care industry exemplifies the changes now taking place (see the Opening Case). Health care has long been thought to be immune from the effects of globalization, but this is now no longer true. Medical tourism is becoming a significant business, with Americans in particular traveling to places like India and Singapore to have surgical procedures performed because the costs of surgery are lower and the quality of care often comparable to what they would receive in the United States. Obviously this creates opportunities for health care providers in India and Singapore to grow their businesses, for U.S. insurance companies to lower their costs by agreeing to pay for treatment in accredited hospitals overseas, and for health brokers in the United States, who make money by arranging for U.S. citizens to have treatment overseas. The trend also clearly benefits some health care consumers. At the same time, globalization has created new threats for businesses accustomed to dominating their

53. domestic markets. Foreign companies have entered many formerly protected industries in developing nations, increasing competition and driving down prices. For three decades, U.S. automobile companies have been battling foreign enterprises, as Japanese, European, and now Korean companies have taken business from them. General Motors has seen its U.S. market share decline from more than 50 percent to around 20 percent, while Japans Toyota has surpassed first Ford, and now GM, to become the largest automobile company in the world. As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition. Historically, while many workers in manufacturing industries worried about the impact foreign competition might have on their jobs, workers in service industries felt more secure. Now this too is changing. Advances in technology, lower transportation costs, and the rise of skilled workers in developing countries imply that many services no longer need to be performed where they are delivered, as the example of health care clearly indicates (see the Opening Case). For example, accounting work is being outsourced from America to India. In 2005, some 400,000 individual tax returns were compiled in India. Indian accountants, trained in U.S. tax rules, perform work for U.S. accounting firms.3 They access individual tax returns stored on computers in the United States, perform routine calculations, and save their work so that it can be inspected by a U.S. accountant, who then bills clients. As the best-selling author Thomas Friedman has argued, the world is becoming flat.4 People living in developed nations no longer have the playing field tilted in their favor. Increasingly, enterprising individuals based in India, China, or Brazil have the same opportunities to better themselves as those living in Western Europe, the United States, or Canada. In this book we will take a close look at the issues introduced here, and at many more besides. We will explore how changes in regulations governing international trade and investment, when coupled with changes in political systems and technology, have dramatically altered the competitive playing field confronting many businesses. We will discuss the resulting opportunities and threats and review the different strategies that managers can pursue to exploit the opportunities and counter the threats. We will consider whether globalization benefits or harms national economies. We will look at what economic theory has to say about outsourcing manufacturing and service jobs to places such as India and China, and at the benefits and costs of outsourcing, not just to business firms and their employees, but also to entire economies. First, though, we need to get a better overview of the nature and process of globalization, and that is the function of the current chapter. What is Globalization? As used in this book, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the globalization of markets and the globalization of production. THE GLOBALIZATION OF MARKETS The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market.5 Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation

54. video games, McDonalds hamburgers, Starbucks coffee, and IKEA furniture are frequently held up as prototypical examples of this trend. Firms such as those just cited are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help to create a global market. A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets. In the United States, for example, nearly 90 percent of firms that export are small businesses employing less than 100 people, and their share of total U.S. exports has grown steadily over the last decade to now exceed 20 percent.6 Firms with fewer than 500 employees account for 97 percent of all U.S. exporters and almost 30 percent of all exports by value.7 Typical of these is Hytech, a New Yorkbased manufacturer of solar panels that generates 40 percent of its $3 million in annual sales from exports to five countries, or B&S Aircraft Alloys, another New York company whose exports account for 40 percent of its $8 million annual revenues.8 The situation is similar in several other nations. In Germany, for example, which is the worlds largest exporter, a staggering 98 percent of small and midsized companies have exposure to international markets, either via exports or international production.9 Despite the global prevalence of Citigroup credit cards, McDonalds hamburgers, Starbucks coffee, and IKEA stores, it is important not to push too far the view that national markets are giving way to the global market. As we shall see in later chapters, significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. These differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country. The most global markets currently are not markets for consumer productswhere national differences in tastes and preferences are still often important enough to act as a brake on globalizationbut markets for industrial goods and materials that serve a universal need the world over. These include the markets for commodities such as aluminum, oil, and wheat; for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; for computer software; and for financial assets from U.S. Treasury bills to eurobonds and futures on the Nikkei index or the Mexican peso. Beijing, China: Chinese shoppers walk through Beijings main downtown shopping promenade past a Kentucky Fried Chicken (KFC) franchise. KFC is one of the most successful international businesses in China due to its adaptation and appeal to the Chinese market. In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca-Colas rivalry with PepsiCo is a global one, as are the rivalries between Ford and Toyota,

55. Boeing and Airbus, Caterpillar and Komatsu in earthmoving equipment, General Electric and Rolls Royce in aero engines, and Sony, Nintendo, and Microsoft in video games. If a firm moves into a nation not currently served by its rivals, many of those rivals are sure to follow to prevent their competitor from gaining an advantage.10 As firms follow each other around the world, they bring with them many of the assets that served them well in other national marketsincluding their products, operating strategies, marketing strategies, and brand namescreating some homogeneity across markets. Thus, greater uniformity replaces diversity. In an increasing number of industries, it is no longer meaningful to talk about the German market, the American market, the Brazilian market, or the Japanese market; for many firms there is only the global market. THE GLOBALIZATION OF PRODUCTION The globalization of production refers to sourcing goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By using global sourcing, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Consider the Boeings 777, a commercial jet airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.11 In total, foreign companies build about 30 percent of the 777, by value. For its most recent jet airliner, the 787, Boeing has pushed this trend even further, with some 65 percent of the total value of the aircraft scheduled to be outsourced to foreign companies, 35 percent of which will go to three major Japanese companies.12 Part of Boeings rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at their particular activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival Airbus Industrie. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country. For another example of a global web of activities, consider the example of Vizio profiled in the Management Focus feature. Boeings new global product, the 787, rolls out.

56. MANAGEMENT FOCUS Vizio and the Market for Flat Panel TVs They begin as glass panels that are manufactured in high-tech fabrication centers in South Korean, Taiwan, and Japan. Operating sophisticated tooling in environments that must be kept absolutely clean, these factories produce sheets of glass twice as large as king size beds to exacting specifications. From there, the glass panels travel to Mexican plants located alongside the U.S. border. There they are cut to size, combined with electronic components shipped in from Asia and the United States, assembled into finished TVs, and loaded onto trucks bound for retail stores in the United States. Its a huge business. U.S. consumers spend over $35 billion a year on flat panel TVs. The underlying technology for flat panel displays was invented in the United States in the late 1960s by RCA. But after RCA and rivals Westinghouse and Xerox opted not to pursue the technology, the Japanese company Sharp made aggressive investments in flat panel displays. By the early 1990s Sharp was selling the first flat panel screens, but as the Japanese economy plunged into a decade-long recession, investment leadership shifted to South Korean companies such as Samsung. Then the 1997 Asian crisis hit Korea hard, and Taiwanese companies seized leadership. Today, Chinese companies are starting to elbow their way into the flat panel display manufacturing business. As production for flat panel displays migrates its way around the globe to low cost locations, there are clear winners and losers. U.S. consumers, who have benefited from the falling prices of flat panel TVs and are snapping them up. Efficient manufacturers have taken advantage of globally dispersed supply chains to make and sell low-cost, high-quality flat panel TVs. Foremost among these has been the California-based company, Vizio. Founded by a Taiwanese immigrant, in just six years sales of Vizio flat panel TVs ballooned from nothing to over $2 billion in 2008, and in early 2009, the company was the largest provider to the United States market with a 21.7 percent share. Vizio, however, has less than 100 employees. They focus on final product design, sales, and customer service. Vizio outsources most of its engineering work, all of its manufacturing and much of its logistics. For each of its models, Vizio assembles a team of supplier partners strung across the globe. Its 42-inch flat panel TV, for example, contains a panel from South Korea, electronic components from China, and processors from the United States, and it is assembled in Mexico. Vizios managers scour the globe continually for the cheapest manufacturers of flat panel displays and electronic components. They sell most of their TVs to large discount retailers such as Costco and Sams Club. Good order visibility from retailers, coupled with tight management of global logistics, allows Vizio to turn over its inventory every three weeks, twice as fast as many of its competitors, which is a major source of cost saving in a business where prices are falling continually. On the other hand, the shift to flat panel TVs has caused pain in certain sectors of the economy, such as those firms that make traditional cathode ray TVs in high-cost locations. In 2006, for example, Japanese electronics manufacturers Sanyo laid off 300 employees at its U.S. factory, and Hitachi closed its TV manufacturing plant in South Carolina, laying off 200 employees. Both Sony and Hitachi of course both make still make TVs, but they are flat panel TVs assembled in Mexico from components manufactured in Asia.13 Early outsourcing efforts were primarily confined to manufacturing activities, such as those undertaken by Boeing and Vizio; increasingly, however, companies are taking advantage of modern communications

57. technology, particularly the Internet, to outsource service activities to low-cost producers in other nations. As described in the opening discussion of health care, the Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep and the results are ready for them in the morning. Many software companies, including IBM, now use Indian engineers to perform maintenance functions on software designed in the United States. The time difference allows Indian engineers to run debugging tests on software written in the United States when U.S. engineers sleep, transmitting the corrected code back to the United States over secure Internet connections so it is ready for U.S. engineers to work on the following day. Dispersing value-creation activities in this way can compress the time and lower the costs required to develop new software programs. Other companies, from computer makers to banks, are outsourcing customer service functions, such as customer call centers, to developing nations where labor is cheaper. In another example from health care, in 2008 some 34,000 Filipinos were employed in the business of transcribing American medical files (such as audio files from doctors seeking approval from insurance companies for performing a procedure). More generally, some estimates suggest that the outsourcing of many administrative procedures in health care, such as customer service and claims processing, could reduce health care costs in America by as much as $70 billion.14 Robert Reich, who served as secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by companies such as Boeing, IBM, and Vizio, in many cases it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, outsourcing productive activities to different suppliers results in the creation of products that are global in nature, that is, global products.15 But as with the globalization of markets, companies must be careful not to push the globalization of production too far. As we will see in later chapters, substantial impediments still make it difficult for firms to achieve the optimal dispersion of their productive activities to locations around the globe. These impediments include formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs, and issues associated with economic and political risk. For example, government regulations ultimately limit the ability of hospitals to outsource the process of interpreting MRI scans to developing nations where radiologists are cheaper. Nevertheless, the globalization of markets and production will continue. Modern firms are important actors in this trend, their very actions fostering increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environmentas well they should. The Emergence of Global Institutions As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace, and to promote the establishment of multinational treaties to govern the global business system. Over the past half century, a number of important global institutions have been created to help perform these functions, including the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO); the International Monetary Fund (IMF) and its sister institution, the World Bank; and the United Nations (UN). All these institutions were created by voluntary agreement between individual nation- states, and their functions are enshrined in international treaties. The World Trade Organization (like the GATT before it) is primarily responsible for policing the

58. world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states. As of 2009, 153 nations that collectively accounted for 97 percent of world trade were WTO members, thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements between WTO member states. Over its entire history, and that of the GATT before it, the WTO has promoted lowering barriers to cross-border trade and investment. In doing so, the WTO has been the instrument of its member states, which have sought to create a more open global business system unencumbered by barriers to trade and investment between countries. Without an institution such as the WTO, it is unlikely that the globalization of markets and production could have proceeded as far as it has. However, as we shall see in this chapter and in Chapter 6 when we look closely at the WTO, critics charge that the organization is usurping the national sovereignty of individual nation-states. The International Monetary Fund and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the international monetary system; the World Bank was set up to promote economic development. In the 65 years since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the two sister institutions. It has focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads). The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations. During the past two decades, for example, the IMF has lent money to the governments of troubled states, including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey. More recently, the IMF has taken a very proactive role in helping countries to cope with some of the effects of the 20082009 global financial crises. IMF loans come with strings attached, however; in return for loans, the IMF requires nation-states to adopt specific economic policies aimed at returning their troubled economies to stability and growth. These requirements have sparked controversy. Some critics charge that the IMFs policy recommendations are often inappropriate; others maintain that by telling national governments what economic policies they must adopt, the IMF, like the WTO, is usurping the sovereignty of nation-states. We will look at the debate over the role of the IMF in Chapter 10. The United Nations was established October 24, 1945, by 51 countries committed to preserving peace through international cooperation and collective security. Today nearly every nation in the world belongs to the United Nations; membership now totals 191 countries. When states become members of the United Nations, they agree to accept the obligations of the UN Charter, an international treaty that establishes basic principles of international relations. According to the charter, the UN has four purposes: to maintain international peace and security, to develop friendly relations among nations, to cooperate in solving international problems and in promoting respect for human rights, and to be a center for harmonizing the actions of nations. Although the UN is perhaps best known for its peace-keeping role, one of the organizations central mandates is the promotion of higher standards of living, full employment, and conditions of economic and social progress and developmentall issues that are central to the creation of a vibrant global economy. As much as 70 percent of the work of the UN system is devoted to accomplishing this mandate. To do so, the UN works closely with other international institutions such as the World Bank. Guiding the work is the belief that eradicating poverty and improving the well-being of people everywhere are necessary steps in creating conditions for lasting world peace.16 The United Nations has the important goal of improving the well-being of people around the world.

59. Another institution that has been in the news of late is the G20. Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank. Originally established to formulate a coordinated policy response to financial crises in developing nations, in 2008 and 2009, G20 became the forum through which major nations attempted to launch a coordinated policy response to the global financial crisis that started in America and then rapidly spread around the world, ushering in the first serious global economic recession since 1981. Drivers of Globalization Two macro factors underlie the trend toward greater globalization.17 The first is the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II. The second factor is technological change, particularly the dramatic developments in recent years in communication, information processing, and transportation technologies. DECLINING TRADE AND INVESTMENT BARRIERS During the 1920s and 30s many of the worlds nation-states erected formidable barriers to international trade and foreign direct investment. International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition. One consequence, however, was beggar thy neighbor retaliatory trade policies, with countries progressively raising trade barriers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s. Having learned from this experience, the advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.18 This goal was enshrined in the General Agreement on Tariffs and Trade. Under the umbrella of GATT, eight rounds of negotiations among member states (now numbering 153) have worked to lower barriers to the free flow of goods and services. The most recent round of negotiations to be completed, known as the Uruguay Round, were finalized in December 1993. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the World Trade Organization to