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International Business: Competing in the Global Marketplace
In English. International Business: Competing in the Global Marketplace Charles W.L. Hill ... Table of Contents Part I - Introduction and Overview ... enbv.narod.ru/text/Econom/ib/ Opening Case Chapter 1: The Emerging Global Telecommunications Industry
A generation ago, telecommunications markets around the world shared many characteristics. In most nations, there was a dominant telecommunications provider--AT&T in the United States, British Telecom in Britain, Deutsche Telekom in Germany, NTT in Japan, Telebras in Brazil, and so on. The provider was often state-owned, and even when it wasn't, its operations were tightly regulated by the state. Cross-border competition between telecommunications providers was all but nonexistent. Typically, regulations prohibited foreign firms from entering a country's telecommunications market and competing head-to-head with the domestic carrier. Most of the traffic carried by telecommunications firms was voice traffic, almost all of it was carried over copper wires, and most telecommunications firms charged their customers a hefty premium to make long-distance and international calls.
A generation later, the landscape is radically different. Telecommunications markets around the world have been deregulated. This has allowed new competitors to emerge and compete with the dominant provider. State-owned monopolies have been privatized, including British Telecom and Deutsche Telekom. Several dominant telecommunications firms, state-owned or otherwise, have been broken up into smaller companies. For example, in 1998 Brazil's state-owned telecommunications monopoly, Telebras, was privatized and broken up into 12 smaller companies that will be allowed to compete with each other.
New wireless technologies have facilitated the emergence of new competitors, such as Orange and Vodfone in Britain, which now compete head-to-head with the former state monopoly, British Telecom. Thanks to the Internet, the volume of data traffic (e.g., Web graphics) is now growing much more rapidly than that of voice traffic. By 2005, the volume of data traffic may triple that of voice. Much of this data traffic is being transmitted over new digital networks that utilize fiber optics, Internet protocols, digital switches, and photons to send data around the world at the speed of light. Telecommunications firms are investing billions in digital networks to handle this traffic.
To cap it all, under a 1997 agreement brokered by the World Trade Organization, 68 countries accounting for more than 90 percent of the world's telecommunications revenues have agreed to open their telecommunications markets to foreign competition and to abide by common rules for fair competition in telecommunications. Most of the world's biggest markets, including the United States, European Union, and Japan, were fully liberalized and open to foreign competition on January 1, 1998.
The consequences of these changes are becoming apparent. A global market for telecommunications services is rapidly emerging. Telecommunications companies are starting to penetrate each other's markets. Prices are falling, both in the international market, where prices have long been kept artificially high by a lack of competition, and in the wireless market, which is rapidly becoming price competitive with traditional wire-line telecommunications services. Estimates from the World Trade Organization suggest that, following the deal that went into effect in 1998, the price for international telephone calls should fall 80 percent by 2001 as competition increases, saving consumers $1,000 billion. Soon it will cost no more to place a call halfway around the world than next door.
As competition intensifies, national telecommunications companies are entering into marketing alliances and joint ventures with each other to offer multinational companies a single global telecommunications provider for all their international voice and data needs. For example, in July 1998, AT&T and British Telecom announced they would merge most of their international operations into a jointly owned company that will have $10 billion in revenues. The venture will focus on serving the global telecommunications needs of multinational corporations, enabling workers in Manhattan to communicate as easily with computer systems in New Delhi, say, as with colleagues in New Jersey. AT&T and British Telecom estimate the market for providing international communications services to large and medium-sized business customers will expand from $36 billion in 1998 to $180 billion in 2007. Other companies that are working together on a global basis include MCI-WorldCom, the number two long-distance carrier in the United States, and Telefonica of Spain, which is also Latin America's biggest telecommunications carrier. The Sprint Corporation, the number three long-distance carrier in the United States, is partly owned by Deutsche Telekom and France Telecom. This trio is positioning itself to compete with the Worldcom/Telefonica and AT&T/BT ventures to gain the business of multinational customers in the brave new world of global telecommunications. http://www.att.com Source: A. Kupfer, "The Big Switch," Fortune, October 13, 1997, p. 105 - 16; S. Schiesel, "AT&T and British Telecom Merge Overseas Operations," New York Times, July 27, 1998, p. A1; and F. Cairncross, The Death of Distance (Boston: Harvard Business School Press, 1997).
Introduction
A fundamental shift is occurring in the world economy. We are moving progressively further away from a world in which national economies were relatively 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 national economies are merging into an interdependent global economic system, commonly referred to as globalization. The trend toward a more integrated global economic system has been in place for many years. However, the rate at which this shift is occurring has been accelerating recently, and it looks set to continue to do so during the early years of the new millennium.
The global telecommunications industry, which was profiled in the opening case, is one industry at the forefront of this development. A decade ago most national telecommunications markets were dominated by state-owned monopolies and isolated from each other by substantial barriers to cross-border trade and investment. This is rapidly becoming a thing of the past. A global telecommunications market is emerging. In this new market, prices are being bargained down as telecommunications providers compete with each other around the world for residential and business customers. The big winners are the customers, who should see the price of telecommunications services plummet, saving them billions of dollars.
The rapidly emerging global economy raises a multitude of issues for businesses both large and small. It creates opportunities for businesses to expand their revenues, drive down their costs, and boost their profits. For example, companies can take advantage of the falling cost and enhanced functionality of global telecommunications services to more easily establish global markets for their products. Ten years ago no one would have thought that a small British company based in Stafford would have been able to build a global market for its products by utilizing the Internet, but that is exactly what Bridgewater Pottery has done.1 Bridgewater has traditionally sold premium pottery through exclusive distribution channels, but the company found it difficult and laborious to identify new retail outlets. Since establishing an Internet presence in 1997, Bridgewater is now conducting a significant amount of business with consumers in other countries who could not be reached through existing channels of distribution or could not be reached cost effectively. Nor is Bridgewater alone; thousands of companies around the world are now taking advantage of the new global communications infrastructure to build new global markets for their products. As I sit in Seattle writing this book, I do so using an ergonomic computer mouse that was designed by a former farmer in Norway who found that repeated computer use gave him carpal tunnel syndrome. The farmer designed a mouse that alleviates his problem, started a company to manufacture it, and has now sold the mouse to consumers worldwide, using the Internet as his distribution channel.2
While the emerging global economy creates opportunities such as this for new entrepreneurs and established businesses around the world, it also gives rise to challenges and threats that yesterday's business managers did not have to deal with. For example, managers now routinely have to decide how best to expand into a foreign market. Should they export to that market from their home base; should they invest in productive facilities in that market, producing locally to sell locally; or should they produce in some third country where the cost of production is favorable and export from that base to other foreign markets and, perhaps, to their home market? Managers have to decide whether and how to customize their product offerings, marketing policies, human resource practices, and business strategies to deal with national differences in culture, language, business practices, and government regulations. And managers have to decide how best to deal with the threat posed by efficient foreign competitors entering their home marketplace.
Again, the opening case offers an example of how service providers in the telecommunications industry are positioning themselves to cope with this new global reality. Companies such as AT&T and British Telecom, which for years had monopolies within their protected national markets, are now competing head-to-head with other telecommunications service providers. As the case tells us, to improve their chances of capturing the business of multinational corporations that prefer a single telecommunications provider for their worldwide operations (and most do), AT&T and British Telecom have formed a joint venture. Other competitors, such as MCI-WorldCom and Telefonica of Spain, have entered into more loosely structured marketing alliances in an attempt to achieve the same basic goal. These companies are experimenting with different strategies to better compete and prosper in the emerging global marketplace. Only time will tell which strategy makes the most sense. Such strategic experimentation, however, is occurring in a broad range of industries as firms struggle to come to grips with the new realities of global markets and global competition. Against the background of rapid globalization, the goal of this book is to explain how and why globalization is occurring and to explore globalization's impact on the business firm and its management. In this introductory chapter, we discuss what we mean by globalization, review the main drivers of globalization, look at the changing profile of firms that do business outside their national borders, highlight concerns raised by critics of globalization, and explore the challenges that globalization holds for managers within an international business.
What is Globalization
As used in this book, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has two main components: 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. 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.3 The global acceptance of consumer products such as Citicorp credit cards, Coca-Cola, Levi's jeans, Sony Walkmans, Nintendo game players, and McDonald's hamburgers are all frequently held up as prototypical examples of this trend. Firms such as Citicorp, Coca-Cola, McDonald's, and Levi Strauss are more than just benefactors of this trend; they are also instrumental in facilitating it. By offering a standardized product worldwide, they are helping 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. For example, the accompanying Management Focus describes how a small British enterprise with annual sales in 1997 of just ?6.8 million ($10 million) is trying to build a global market for the traditional British fare of fish 'n' chips.
Despite the global prevalence of Citicorp credit cards, Coca-Cola, Levi blue jeans, McDonald's hamburgers, and (perhaps one day) Harry Ramsden's fish 'n' chips, 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, very significant differences still exist between national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, and the like. In the case of many products, these differences frequently require that marketing strategies, product features, and operating practices be customized to best match conditions in a country. Thus, for example, automobile companies will promote different car models depending on a whole range of factors such as local fuel costs, income levels, traffic congestion, and cultural values.
The most global markets currently are not markets for consumer products--where national differences in tastes and preferences are still often important enough to act as a brake on globalization--but 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, the markets for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; and the markets for financial assets from US Treasury Bills to eurobonds and futures on the Nikkei index or the Mexican peso.
In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca-Cola's rivalry with Pepsi is a global one, as are the rivalries between Ford and Toyota, Boeing and Airbus, Caterpillar and Komatsu, and Nintendo and Sega. If one firm moves into a nation that is currently unserved by its rivals, those rivals are sure to follow lest their competitor gain an advantage. These firms bring with them many of the assets that have served them well in other national markets--including their products, operating strategies, marketing strategies, and brand names--creating a certain degree of homogeneity across markets. Thus, diversity is replaced by greater uniformity. As rivals follow rivals around the world, these multinational enterprises emerge as an important driver of the convergence of different national markets into a single, and increasingly homogenous, global marketplace. Due to such developments, 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 the tendency among firms to source 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 doing so, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Consider the Boeing Company's latest commercial jet airliner, the 777. The 777 contains 132,500 major component parts that are produced around the world by 545 suppliers. 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.5 Part of Boeing's rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at performing their particular activity. The result of having a global web of suppliers is a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airliners based in that country.
The global dispersal of productive activities is not limited to giants such as Boeing. Many much smaller firms are also getting into the act. Consider Swan Optical, a US-based manufacturer and distributor of eyewear. With sales revenues of $20 to $30 million, Swan is hardly a giant, yet Swan manufactures its eyewear in low-cost factories in Hong Kong and China that it jointly owns with a Hong Kong-based partner. Swan also has a minority stake in eyewear design houses in Japan, France, and Italy. Swan has dispersed its manufacturing and design processes to different locations around the world to take advantage of the favorable skill base and cost structure found in foreign countries. Foreign investments in Hong Kong and then China have helped Swan lower its cost structure, while investments in Japan, France, and Italy have helped it produce designer eyewear for which it can charge a premium price. By dispersing its manufacturing and design activities, Swan has established a competitive advantage for itself in the global marketplace for eyewear, just as Boeing has tried to do by dispersing some of its activities to other countries.
Robert Reich, the former secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by Boeing and Swan Optical, in many industries it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, the outsourcing of productive activities to different suppliers results in the creation of products that are global in nature; that is, "global products." But as with the globalization of markets, one 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.
Nevertheless, we are traveling down the road toward a future characterized by the increased globalization of markets and production. Modern firms are important actors in this drama, fostering by their very actions increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment--as well they should. In the next section, we look at the main drivers of globalization.
Drivers of Globalization
Two macro factors seem to underlie the trend toward greater globalization. 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 communications, information processing, and transportation technologies.
Declining Trade and Investment Barriers
During the 1920s and 30s, many of the nation-states of the world 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 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, after World War II, the advanced industrial nations of the West--under US leadership--committed themselves to removing barriers to the free flow of goods, services, and capital between nations.8 This goal was enshrined in the treaty known as the General Agreement on Tariffs and Trade (GATT). Under the umbrella of GATT, there have been eight rounds of negotiations among member states--which now number over 130--designed to lower barriers to the free flow of goods and services. The most recent round of negotiations, known as the Uruguay Round, was completed 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 (WTO) to police the international trading system.9 Table 1.1 summarizes the impact of GATT agreements on average tariff rates for manufactured goods. As can be seen, average tariff rates have fallen significantly since 1950 and under the Uruguay agreement should hit 3.9 percent in 2000.
In addition to reducing trade barriers, many countries have also been progressively removing restrictions to foreign direct investment (FDI). According to the United Nations, between 1991 and 1996, more than 100 countries made 599 changes in legislation governing FDI. Some 95 percent of these changes involved liberalizing a country's foreign investment regulations to make it easier for foreign companies to enter their markets. The desire to facilitate FDI has also been reflected in a dramatic increase in the number of bilateral investment treaties designed to protect and promote investment between two countries. As of January 1, 1997, there were 1,330 such treaties in the world involving 162 countries, a threefold increase in five years.
Table 1.1
Average Tariff Rates on Manufactured Products as Percent of Value | 1913 | 1950 | 1990 | 2000* | France | 21 | 18 | 5.9 | 3.9 | Germany | 20 | 26 | 5.9 | 3.9 | Italy | 18 | 25 | 5.9 | 3.9 | Japan | 30 | -- | 5.3 | 3.9 | Holland | 5 | 11 | 5.9 | 3.9 | Sweden | 20 | 9 | 4.4 | 3.9 | Britain | -- | 23 | 5.9 | 3.9 | United States | 44 | 14 | 4.8 | 3.9 |
*Rates for 2000 based on full implementation of Uruguay agreement.
Source: "Who Wants to Be a Giant?" The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3 - 4.
Figure 1.1
The Growth of World Trade and World Output

Source: WORLD TRADE ORGANIZATION. World Development Report 1998: Trends and Determinants
Such trends facilitate both the globalization of markets and the globalization of production. The lowering of barriers to international trade enables firms to view the world, rather than a single country, as their market. The lowering of trade and investment barriers also allows firms to base production at the optimal location for that activity, serving the world market from that location. Thus, a firm might design a product in one country, produce component parts in two other countries, assemble the product in yet another country, and then export the finished product around the world.
There is plenty of evidence that the lowering of trade barriers has facilitated the globalization of production. According to data from the World Trade Organization, the volume of world trade has grown consistently faster than the volume of world output since 1950.11 Figure 1.1 gives data for 1950 to 1997. Over this period, world trade has expanded sixteen fold, far outstripping world output, which has grown six fold. As suggested by Figure 1.1, the growth in world trade seems to have accelerated in recent years.
The data summarized in Figure 1.1 imply two things. First, more firms are doing what Boeing does with the 777, dispersing parts of their overall production process to different locations around the globe to drive down production costs and increase product quality. Second, the economies of the world's nation-states are becoming more intertwined. As trade expands, nations are becoming increasingly dependent on each other for important goods and services.
The evidence also suggests that foreign direct investment is playing an increasing role in the global economy as firms ranging in size from Boeing to Swan Optical and Harry Ramsden's increase their cross-border investments. Between 1984 and 1997, the total annual flow of FDI from all countries increased tenfold from $42 billion to $430 billion, more than twice as fast as the growth rate in world trade.12 The major investors have been US, Japanese, and Western European companies investing in Europe, Asia (particularly China), and the United States. For example, Japanese auto companies have been investing rapidly in Asian, European, and US-based auto assembly operations.
Finally, the globalization of markets and production and the resulting growth of world trade, foreign direct investment, and imports all imply that firms are finding their home markets under attack from foreign competitors. This is true in Japan, where US companies such as Kodak, Procter & Gamble, and Merrill Lynch are expanding their presence. It is true in the United States, where Japanese automobile firms have taken market share away from General Motors and Ford. And it is true in Europe, where the once-dominant Dutch company Philips has seen its market share in the consumer electronics industry taken by Japan's JVC, Matsushita, and Sony.
The bottom line is that the growing integration of the world economy into a single, huge marketplace is increasing the intensity of competition in a range of manufacturing and service industries.
Having said all this, declining trade barriers can't be taken for granted. As we shall see in the following chapters, demands for "protection" from foreign competitors are still often heard in countries around the world, including the United States. Although a return to the restrictive trade policies of the 1920s and 30s is unlikely, it is not clear whether the political majority in the industrialized world favors further reductions in trade barriers. If trade barriers decline no further, at least for the time being, a temporary limit may have been reached in the globalization of both markets and production.
The Role of Technological Change
The lowering of trade barriers made globalization of markets and production a theoretical possibility, and technological change has made it a tangible reality. Since the end of World War II, the world has seen major advances in communications, information processing, and transportation technology including, most recently, the explosive emergence of the Internet and World Wide Web. In the words of Renato Ruggiero, director general of the World Trade Organization,
Telecommunications is creating a global audience. Transport is creating a global village. From Buenos Aires to Boston to Beijing, ordinary people are watching MTV, they're wearing Levi's jeans, and they're listening to Sony Walkmans as they commute to work.13

Microprocessors and Telecommunications
Perhaps the single most important innovation has been development of the microprocessor, which enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed by individuals and firms. The microprocessor also underlies many recent advances in telecommunications technology. Over the past 30 years, global communications have been revolutionized by developments in satellite, optical fiber, and wireless technologies, and now the Internet and the World Wide Web. These technologies rely on the microprocessor to encode, transmit, and decode the vast amount of information that flows along these electronic highways. The cost of microprocessors continues to fall, while their power increases (a phenomenon known as Moore's Law, which predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months).14 As this happens, the costs of global communications are plummeting, which lowers the costs of coordinating and controlling a global organization.
The Internet and World Wide Web
The phenomenal recent growth of the Internet and the associated World Wide Web (which utilizes the Internet to communicate between World Wide Web sites) is the latest expression of this development. In 1990, fewer than 1 million users were connected to the Internet. By mid-1998 the Internet had about 147 million users, of which some 70 million were in the United States. By the year 2000, the Internet may have over 330 million users.15 In July 1993, some 1.8 million host computers were connected to the Internet (host computers host the Web pages of local users). By July 1998, the number of host computers had increased to 36.8 million, and the number is still growing rapidly.16
The Internet and World Wide Web (WWW) promise to develop into the information backbone of tomorrow's global economy. From virtually nothing in 1994, the value of Web-based transactions hit $7.5 billion in 1997. According to a recent report issued by the United States Department of Commerce, this figure could reach $300 billion in the United States alone by 2003.17 Companies such as Dell Computer are booking over $4 million a day in Web-based sales, while Internet equipment giant Cisco Systems books more than $20 million per day in Web-based sales transactions. Viewed globally, the Web is emerging as the great equalizer. It rolls back some of the constraints of location, scale, and time zones. The Web allows businesses, both small and large, to expand their global presence at a lower cost than ever before. One example is a small California-based start-up, Cardiac Science, which makes defibrillators and heart monitors. In 1996, Cardiac Science was itching to break into international markets but had little idea of how to establish an international presence. By 1998, the company was selling to customers in 46 countries and foreign sales accounted for 85 percent of its $1.2 million revenues. Although some of this business was developed through conventional export channels, a growing percentage of it came from "hits" to the company's Web site, which according to the company's CEO, "attracts international business people like bees to honey."18 The Web makes it much easier for buyers and sellers to find each other, wherever they may be located, and whatever their size.

Transportation Technology
In addition to developments in communications technology, several major innovations in transportation technology have occurred since World War II. In economic terms, the most important are probably the development of commercial jet aircraft and superfreighters and the introduction of containerization, which simplifies transshipment from one mode of transport to another. The advent of commercial jet travel, by reducing the time needed to get from one location to another, has effectively shrunk the globe (see Figure 1.2). In terms of travel time, New York is now "closer" to Tokyo than it was to Philadelphia in the Colonial days.
Containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances. Before the advent of containerization, moving goods from one mode of transport to another was very labor intensive, lengthy, and costly. It could take days and several hundred longshoremen to unload a ship and reload goods onto trucks and trains. With the advent of widespread containerization in the 1970s and 1980s, the whole process can be executed by a handful of longshoremen in a couple of days. Since 1980, the world's containership fleet has more than quadrupled, reflecting in part the growing volume of international trade and in part the switch to this mode of transportation. As a result of the efficiency gains associated with containerization, transportation costs have plummeted, making it much more economical to ship goods around the globe, thereby helping to drive the globalization of markets and production. In the United States, for example, the cost of shipping freight per ton mile on railroads has fallen from 3 cents in 1985 to 2.4 cents in 1997, largely as a result of efficiency gains from the widespread use of containers.19
Implications for the Globalization of Production
Due to containerization, the transportation costs associated with the globalization of production have declined. Plus, as a result of the technological innovations discussed above, the real costs of information processing and communication have fallen dramatically in the past two decades. This makes it possible for a firm to manage a globally dispersed production system, further facilitating the globalization of production. A worldwide communications network has become essential for many international businesses. For example, Texas Instruments (TI), the US electronics firm, has approximately 50 plants in 19 countries. A satellite-based communications system allows TI to coordinate, on a global scale, its production planning, cost accounting, financial planning, marketing, customer service, and personnel management. The system consists of more than 300 remote job-entry terminals, 8,000 inquiry terminals, and 140 mainframe computers. The system enables managers of TI's worldwide operations to send vast amounts of information to each other instantaneously and to coordinate the firm's different plants and activities.20
Another US electronics firm, Hewlett-Packard, uses satellite communications and information processing technologies to link its worldwide operations. Hewlett-Packard has new-product development teams composed of individuals based in different countries (e.g., Japan, the United States, Great Britain, and Germany). When developing new products, these individuals use videoconferencing to "meet" on a weekly basis. They also communicate with each other daily via telephone, electronic mail, and fax. Communication technologies have enabled Hewlett-Packard to increase the integration of its globally dispersed operations and to reduce the time needed for developing new products.21
The development of commercial jet aircraft has also helped knit together the worldwide operations of many international businesses. Using jet travel, an American manager need spend a day at most traveling to her firm's European or Asian operations. This enables her to oversee a globally dispersed production system.
Implications for the Globalization of Markets
In addition to the globalization of production, technological innovations have also facilitated the globalization of markets. As noted above, low-cost transportation has made it more economical to ship products around the world, thereby helping to create global markets. Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces. In addition, low-cost jet travel has resulted in the mass movement of people between countries. This has reduced the cultural distance between countries and is bringing about some convergence of consumer tastes and preferences. At the same time, global communications networks and global media are creating a worldwide culture. US television networks such as CNN, MTV, and HBO are now received in many countries around the world, and Hollywood films are shown the world over. In any society, the media are primary conveyers of culture; as global media develop, we must expect the evolution of something akin to a global culture. A logical result of this evolution is the emergence of global markets for consumer products. The first signs of this are already apparent. It is now as easy to find a McDonald's restaurant in Tokyo as it is in New York, to buy a Sony Walkman in Rio as it is in Berlin, and to buy Levi's jeans in Paris as it is in San Francisco.
We must be careful not to overemphasize this trend. While modern communications and transportation technologies are ushering in the "global village," very significant national differences remain in culture, consumer preferences, and business practices. A firm that ignores differences between countries does so at its peril. We shall stress this point repeatedly throughout this book and elaborate on it in later chapters.
The Changing Demographics of the Global Economy
Hand in hand with the trend toward globalization has been a fairly dramatic change in the demographics of the global economy over the past 30 years or so. As late as the 1960s, four stylized facts described the demographics of the global economy. The first was US dominance in the world economy and world trade picture. The second was US dominance in world foreign direct investment. Related to this, the third fact was the dominance of large, multinational US firms on the international business scene. The fourth was that roughly half the globe--the centrally planned economies of the Communist world--was off-limits to Western international businesses. As will be explained below, all four of these qualities either have changed or are now changing rapidly.
The Changing World Output and World Trade Picture
In the early 1960s, the United States was still by far the world's dominant industrial power. In 1963, for example, the United States accounted for 40.3 percent of world output. By 1996, the United States accounted for only 20.8 percent (see Table 1.2). Nor was the United States the only developed nation to see its relative standing slip.
Table 1.2
The Changing Pattern of World Output and Trade
Source: Export data from World Trade Organization, International Trade Trends and Statistics, 1996. World Output data from CIA Factbook, 1996 (1995 world output figures are estimates). | | | Country | Share of World
Output, 1963 ** | Share of World
Output, 1996 | Share of World
Exports, 1997*** | | United States | 40.3% | 20.8% | 12.6% | | Japan | 5.5% | 8.3% | 7.76% | | Germany* | 9.7% | 4.8% | 9.9% | | France | 6.3% | 3.5% | 5.46% | | United Kingdom | 6.5% | 3.2% | 4.94% | | Italy | 3.4% | 3.2% | 4.76% | | Canada | 3% | 1.7% | 3.81% | | China§ | NA | 11.3% | 2.85% | | South Korea | NA | 1.7% | 2.45% |
* 1963 figure for Germany refers to the former West Germany.
** Output is measured by gross national product.
*** The 1997 estimates are based on purchasing power parity (PPP) statistics that adjust GNP for differences in prices (the cost of living) between countries.
§ The Chinese figures are somewhat suspect. When calculated using unadjusted GNP data, China's share of world output shrinks to 3.1%. Thus, China's high share of world output on a PPP basis is partly due to the relatively low cost of living in China.
The same occurred to Germany, France, and the United Kingdom, all nations that were among the first to industrialize. This decline in the US position was not an absolute decline, since the US economy grew at a relatively robust average annual rate of close to 3.0 percent in the 1963 - 96 time period (the economies of Germany, France, and the United Kingdom also grew over the time period). Rather, it was a relative decline, reflecting the faster economic growth of several other economies, particularly in Asia. For example, as can be seen from Table 1.2, over the 1963 - 96 time period, Japan's share of world output increased from 5.5 percent to 8.3 percent. Other countries that markedly increased their share of world output included China, Thailand, Malaysia, Taiwan, and South Korea. By virtue of its huge population and rapid industrialization, China in particular is emerging as an economic colossus.
The Changing Foreign Direct Investment Picture
Reflecting the relative decline in US dominance, by the end of the 1980s, its position as the world's leading exporter was threatened. Over the past thirty years, US dominance in export markets has waned as Japan, Germany, and a number of newly industrialized countries such as South Korea and China have taken a larger share of world exports. During the 1960s, the United States routinely accounted for 20 percent of world exports of manufactured goods. Table 1.2 also reports manufacturing exports as a percentage of the world total in 1997. As can be seen, the US share of world exports of manufactured goods had slipped to 12.6 percent by 1997. But despite the fall, the United States still remained the world's largest exporter, ahead of Germany and Japan.
In 1997 and 1998 the dynamic economies of the Asian Pacific region were hit by a serious financial crisis that threatened to slow their economic growth rates for several years. Despite this, their powerful growth may continue over the long run, as will that of several other important emerging economies in Latin America (e.g., Brazil) and Eastern Europe (e.g., Poland). Thus, a further relative decline in the share of world output and world exports accounted for by the United States and other long-established developed nations seems likely. By itself, this is not a bad thing. The relative decline of the United States reflects the growing economic development and industrialization of the world economy, as opposed to any absolute decline in the health of the US economy, which in the late 1990s was stronger than it had ever been.
Notwithstanding the financial crisis that is gripping some Asian economies, if we look 20 years into the future, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China, India, Indonesia, Thailand, South Korea, and Brazil, and a commensurate decline in the share enjoyed by rich industrialized countries such as Britain, Germany, Japan, and the United States. The World Bank, for example, has estimated that if current trends continue for the next quarter of a century, by 2020 the Chinese economy could be 40 percent larger than that of the United States, while the economy of India will be larger than that of Germany. Moreover, the bank estimates that today's developing nations may account for over 60 percent of world economic activity by 2020, while today's rich nations, which currently account for over 55 percent of world economic activity, may account for only about 38 percent by 2020.22 These forecasts suggest that a dramatic shift in the economic geography of the world is now under way. For international businesses, the implications of this changing economic geography are clear; many of tomorrow's economic opportunities may be found in the developing nations of the world, and many of tomorrow's most capable competitors will probably also emerge from these regions.
Reflecting the dominance of the United States in the global economy, US firms accounted for 66.3 percent of worldwide foreign direct investment flows in the 1960s. British firms were second, accounting for 10.5 percent, while Japanese firms were a distant eighth, with only 2 percent. The dominance of US firms was so great that in Europe, books were written about the economic threat posed to Europe by US corporations.23 Several European governments, most notably that of France, talked of limiting inward investment by US firms in their economies.
However, as the barriers to the free flow of goods, services, and capital fell, and as other countries increased their shares of world output, non-US firms increasingly

Figure 1.3
Percentage Share of Total FDI Stock, 1980 - 1996
Source: Data are taken from the United Nations, World Investment Report, 1997 (New York: United Nations, 1997). began to invest across national borders. The motivation for much of this foreign direct investment by non-US firms was the desire to disperse production activities to optimal locations and to build a direct presence in major foreign markets. Thus, during the 1970s and 80s, European and Japanese firms began to shift labor-intensive manufacturing operations from their home markets to developing nations where labor costs were lower. In addition, many Japanese firms have invested in North America and Europe--often as a hedge against unfavorable currency movements and the possible imposition of trade barriers. For example, Toyota, the Japanese automobile company, rapidly increased its investment in automobile production facilities in the United States and Britain during the late 1980s and early 1990s. Toyota executives believed that an increasingly strong Japanese yen would price Japanese automobile exports out of foreign markets; therefore, production in the most important foreign markets, as opposed to exports from Japan, made sense. Toyota also undertook these investments to head off growing political pressures in the United States and Europe to restrict Japanese automobile exports into those markets.
One consequence of these developments is illustrated in Figure 1.3, which shows how the stock of foreign direct investment by the world's six most important national sources--the United States, Britain, Japan, Germany, France, and the Netherlands--changed between 1980 and 1996. (The stock of foreign direct investment refers to the total cumulative value of foreign investments.) Figure 1.3 also shows the stock accounted for by firms from other developed nations and from developing economies. As can be seen, the share of the total stock accounted for by US firms declined substantially from around 44 percent in 1980 to 25 percent in 1996. Meanwhile, the shares accounted for by Japan, France, other developed nations, and the world's developing nations increased markedly. The rise in the share for developing nations reflects a small but growing trend for firms from these countries, such as South Korea, to invest outside their borders. In 1996 firms based in developing nations accounted for 8.9 percent of the stock of foreign direct investment, up from only 1.2 percent in 1980.
Figure 1.4 illustrates another important trend--the increasing tendency for cross-border investments to be directed at developing rather than rich industrialized nations. Figure 1.4 details recent changes in the annual inflows of foreign direct investment (the flow of foreign direct investment refers to amounts invested across

Figure 1.4
FDI Inflows, 1985 - 1997 (in US$ billions)
Source: United Nations, World Development Report, 1998: Trends and Determinants. national borders each year). What stands out in Figure 1.4 is the increase in the share of foreign direct investment inflows accounted for by developing countries during the 1990s, and the commensurate decline in the share of inflows directed at developed nations. In 1997, foreign direct investment inflows into developing nations hit a record $149 billion, or 37 percent of the total, up from just $42 billion in 1991, or 26 percent of the total. Among developing nations, China has received the greatest volume of inward FDI in recent years. China took a record $45 billion out of the investment that went to developing nations in 1997. Other developing nations receiving a large amount of FDI in 1997 were Indonesia, Malaysia, the Philippines, Thailand, and Mexico. At the other end of the spectrum, the smallest 100 recipient countries accounted for just 1 percent of all FDI inflows.24 Foreign investment into developing nations is focused on a relatively small group of countries experiencing rapid industrialization and economic growth. Businesses investing in these nations are positioning themselves to be active participants in those areas of the world that are expected to grow most rapidly over the next quarter of a century.
The Changing Nature of the Multinational Enterprise
A multinational enterprise is any business that has productive activities in two or more countries. Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise: (1) the rise of non-US multinationals, particularly Japanese multinationals, and (2) the growth of mini-multinationals.
Non-US Multinationals
In the 1960s, global business activity was dominated by large US multinational corporations. With US firms accounting for about two-thirds of foreign direct investment during the 1960s, one would expect most multinationals to be US enterprises. According to the data presented in Table 1.3, in 1973, 48.5 percent of the world's 260 largest multinationals were US firms. The second-largest source country was Great Britain, with 18.8 percent of the largest multinationals. Japan accounted for only 3.5 percent of the world's largest multinationals at the time. The large number of US
Table 1.3
The National Composition of the Largest Multinationals
Source: Figures for 1973 from Neil Hood and John Young, The Economics of the Multinational Enterprise (New York: Longman, 1979). Figures for 1997 from "The Global 500," Fortune, August 4, 1997, pp. 130 - 31. | | | | Of the Top 260 in 1973 | Of the Top 500 in 1997 | | United States | 126 (48.5%) | 162 (32.4%) | | Japan | 9 (3.5%) | 126 (25.2%) | | Britain | 49 (18.8%) | 34 (6.8%) | | France | 19 (7.3%) | 42 (8.4%) | | Germany | 21 (8.1%) | 41 (8.3%) | multinationals reflected US economic dominance in the three decades after World War II, while the large number of British multinationals reflected that country's industrial dominance in the early decades of the 20th century.
By 1997, however, things had shifted significantly. US firms accounted for 32.4 percent of the world's 500 largest multinationals, followed closely by Japan with 25.2 percent. France was a distant third with 8.4 percent. Although the two sets of figures in Table 1.3 are not strictly comparable (the 1973 figures are based on the largest 260 firms, whereas the 1997 figures are based on the largest 500 firms), they illustrate the trend. The globalization of the world economy together with Japan's rise to the top rank of economic powers have resulted in a relative decline in the dominance of US (and, to a lesser extent, British) firms in the global marketplace. Table 1.4 adds detail to this picture by listing the largest 25 multinational corporations ranked by foreign assets in 1996. Six of the top 25 are US enterprises, four are Japanese, five are German, three are French, three are Swiss, two are jointly incorporated in the United Kingdom and the Netherlands. The remainder are accounted for by the Netherlands and Italy.
Looking to the future, we can reasonably expect growth of new multinational enterprises from the world's developing nations. As the accompanying Country Focus demonstrates, South Korean firms are starting to invest outside their national borders. The South Koreans may soon be followed by firms from countries such as Mexico, China, Russia, and Brazil.
The Rise of Mini-Multinationals
Another trend in international business has been the growth of medium-sized and small multinationals (mini-multinationals). When people think of international businesses they tend to think of firms such as Exxon, General Motors, Ford, Fuji, Kodak, Matsushita, Procter & Gamble, Sony, and Unilever--large, complex multinational corporations with operations that span the globe. Although it is certainly true that most international trade and investment is still conducted by large firms, it is also true that many medium-sized and small businesses are becoming increasingly involved in international trade and investment. We have already discussed several examples in this chapter--Swan Optical, Harry Ramsden's, and Cardiac Science--and we have noted how the rise of the Internet is lowering the barriers that small firms face in building international sales.
For another example, consider Lubricating Systems, Inc., of Kent, Washington. Lubricating Systems, which manufactures lubricating fluids for machine tools, employs 25 people and generates sales of $6.5 million. Hardly a large, complex multinational, yet more than $2 million of the company's sales are generated by exports to a score of countries from Japan to Israel and the United Arab Emirates. Lubricating Systems also has set up a joint venture with a German company to serve the European market.25 Consider also Lixi, Inc., a small US manufacturer of industrial X-ray equipment; 70 percent of Lixi's $4.5 million in revenues come from exports to Japan.26 Or take G. W. Barth, a manufacturer of cocoa-bean roasting machinery based in Ludwigsburg, Germany. Employing just 65 people, this small company has captured 70 percent of the global market for cocoa-bean roasting machines.27 The point is, international business is conducted not just by large firms but also by medium-sized and small enterprises. | | | | Ranking by: | | Assets | | Sales | | Employment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For. assets | | Index | | Corporation | | Economy | | Industry | | Foreign | | Total | | Foreign | | Total | | Foreign | | Total | | Index | | | | | | 1 | | 17 | | Shell, Royal Dutch | | United Kingdom/ Netherlands | | Oil, gas, coal and rel. services | | 79.7 | | 117.6 | | 80.6 | | 109.9 | | 81000 | | 104000 | | 73.0 | | | | 2 | | 83 | | Ford Motor Company | | United States | | Automotive | | 69.2 | | 238.5 | | 41.9 | | 137.1 | | 103334 | | 346990 | | 29.8 | | | | 3 | | 87 | | General Electric Company | | United States | | Electronics | | 69.2 | | 228.0 | | 17.1 | | 70.0 | | 72000 | | 222000 | | 29.1 | | | | 4 | | 22 | | Exxon Corporation | | United States | | Oil, gas, coal and rel. services | | 66.7 | | 91.3 | | 96.9 | | 121.8 | | 44000 | | 82000 | | 68.8 | | | | 5 | | 86 | | General Motors | | United States | | Automotive | | 54.1 | | 217.1 | | 47.8 | | 163.9 | | 252699 | | 745000 | | 29.3 | | | | 6 | | 27 | | Volkswagen AG | | Germany | | Automotive | | 49.8 | | 58.7 | | 37.4 | | 61.5 | | 114000 | | 257000 | | 63.4 | | | | 7 | | 43 | | IBM | | United States | | Computers | | 41.7 | | 80.3 | | 45.1 | | 71.9 | | 112944 | | 225347 | | 54.9 | | | | 8 | | 78 | | Toyota Motor Corporation | | Japan | | Automotive | | 36.0 | | 118.2 | | 50.4 | | 111.7 | | 33796 | | 146855 | | 32.9 | | | | 9 | | 1 | | NestlЋ SA | | Switzerland | | Food | | 33.2 | | 38.2 | | 47.8 | | 48.7 | | 213637 | | 220172 | | 94.0 | | | | 10 | | 71 | | Mitsubishi Corporation | | Japan | | Diversified | | . . . | | 79.3 | | 51.0 | | 124.9 | | 3859 | | 9241 | | 39.5 | | | | 11 | | 18 | | Bayer AG | | Germany | | Chemicals | | 28.1 | | 31.3 | | 19.7 | | 31.1 | | 78000 | | 142900 | | 69.3 | | | | 12 | | 6 | | ABB Asea Brown Boveri Ltd. | | Switzerland | | Electrical equipment | | 27.2 | | 32.1 | | 29.4 | | 33.7 | | 196937 | | 209637 | | 88.6 | | | | 13 | | 66 | | Nissan Motor Co., Ltd. | | Japan | | Automotive | | 26.9 | | 63.0 | | 24.9 | | 56.3 | | 60795 | | 139856 | | 43.5 | | | | 14 | | 40 | | Elf Aquitaine SA | | France | | Oil, gas, coal and rel. services | | 26.9 | | 49.4 | | 27.8 | | 42.5 | | 40650 | | 85500 | | 55.8 | | | | 15 | | 32 | | Mobil Corporation | | United States | | Oil, gas, coal | | 26.0 | | 42.1 | | 48.4 | | 73.4 | | 26300 | | 50400 | | 60.0 | | | | 16 | | 70 | | Daimler-Benz AG | | Germany | | Automotive | | 26.0 | | 66.3 | | 45.6 | | 72.1 | | 68907 | | 310993 | | 41.5 | | | | 17 | | 8 | | Unilever | | United Kingdom/ Netherlands | | Food | | 25.8 | | 30.1 | | 42.7 | | 49.7 | | 276000 | | 307000 | | 87.1 | | | | 18 | | 9 | | Philips Electronics N.V. | | Netherlands | | Electronics | | 25.2 | | 32.7 | | 38.4 | | 40.1 | | 221000 | | 265100 | | 85.4 | | | | 19 | | 10 | | Roche Holding AG | | Switzerland | | Pharmaceuticals | | 24.5 | | 30.9 | | 12.0 | | 12.5 | | 40422 | | 50497 | | 85.1 | | | | 20 | | 54 | | Fiat Spa | | Italy | | Automotive | | 24.4 | | 59.1 | | 26.3 | | 40.6 | | 95930 | | 248180 | | 48.2 | | | | 21 | | 59 | | Siemens AG | | Germany | | Electronics | | 24.0 | | 57.7 | | 35.5 | | 62.0 | | 162000 | | 373000 | | 47.4 | | | | 22 | | 33 | | Sony Corporation | | Japan | | Electronics | | | | 47.6 | | 30.3 | | 43.3 | | 90000 | | 151000 | | 59.1 | | | | 23 | | 30 | | Alcatel Alsthom | | France | | Electronics | | 22.7 | | 51.2 | | 24.2 | | 32.1 | | 117400 | | 191830 | | 60.3 | | | | 24 | | 53 | | Hoechst | | Germany | | Chemicals | | 21.9 | | 36.7 | | 13.4 | | 36.3 | | 100035 | | 161618 | | 48.3 | | | | 25 | | 68 | | Renault SA | | France | | Automotive | | 21.2 | | 44.6 | | 19.1 | | 36.8 | | 40066 | | 139950 | | 42.7 | |
Table 1.4
The Top 25 Multinational Businesses in 1996 (ranked by foreign assets)
Source: Adapted from Table 1.7 in United Nations, World Investment Report, 1997 (New York and Geneva: United Nations 1997).
The Changing World Order
Between 1989 and 1991 a series of remarkable democratic revolutions swept the communist world. For reasons that are explored in more detail in Chapter 2, in country after country throughout Eastern Europe and eventually in the Soviet Union itself, Communist governments collapsed like the shells of rotten eggs. The Soviet Union is now history, having been replaced by 15 independent republics. Czechoslovakia has divided itself into two states, while Yugoslavia has dissolved into a bloody civil war among its five successor states.
Many of the former communist nations of Europe and Asia seem to share a commitment to democratic politics and free market economics. If this continues, the opportunities for international businesses may be enormous. For the best part of half a century, these countries were essentially closed to Western international businesses. Now they present a host of export and investment opportunities. Just how this will play out over the next 10 to 20 years is difficult to say. The economies of most of the former communist states are in very poor condition, and their continued commitment to democracy and free market economics cannot be taken for granted. Disturbing signs of growing unrest and totalitarian tendencies are seen in many Eastern European states. Thus, the risks involved in doing business in such countries are very high, but then, so may be the returns.
In addition to these changes, more quiet revolutions have been occurring in China and Latin America. Their implications for international businesses may be just as profound as the collapse of communism in Eastern Europe. China suppressed its own prodemocracy movement in the bloody Tiananmen Square massacre of 1989. Despite this, China seems to be moving progressively toward greater free market reforms. The southern Chinese province of Guangdong, where these reforms have been pushed the furthest, now frequently ranks as the fastest-growing economy in the world.28 If what is now occurring in southern China continues, and particularly if it spreads throughout the country, China may move from Third World to industrial superpower status even more rapidly than Japan did. If China's GDP per capita grows by an average of 6 percent to 7 percent, which is slower than the 8 percent growth rate achieved during the last decade, then by 2020 this nation of 1.2 billion people could boast an average income per capita of about $13,000, roughly equivalent to that of Spain today.
The potential consequences for Western international business are enormous. On the one hand, with 1.2 billion people, China represents a huge and largely untapped market. Reflecting this, between 1983 and 1997, annual foreign direct investment in China increased from less than $2 billion to $45 billion. On the other hand, China's new firms are proving to be very capable competitors, and they could take global market share away from Western and Japanese enterprises. Thus, the changes in China are creating both opportunities and threats for established international businesses.
As for Latin America, here too both democracy and free market reforms seem to have taken hold. For decades, most Latin American countries were ruled by dictators, many of whom seemed to view Western international businesses as instruments of imperialist domination. Accordingly, they restricted direct investment by foreign firms. In addition, the poorly managed economies of Latin America were characterized by low growth, high debt, and hyperinflation--all of which discouraged investment by international businesses. Now all this seems to be changing. Throughout most of Latin America, debt and inflation are down, governments are selling state-owned enterprises to private investors, foreign investment is welcomed, and the region's economies are growing rapidly. These changes have increased the attractiveness of Latin America, both as a market for exports and as a site for foreign direct investment. At the same time, given the long history of economic mismanagement in Latin America, there is no guarantee that these favorable trends will continue. As in the case of Eastern Europe, substantial opportunities are accompanied by substantial risks.
In sum, the last quarter of century has seen rapid changes in the global economy. Barriers to the free flow of goods, services, and capital have been coming down. The volume of cross-border trade and investment has been growing more rapidly than global output, indicating that national economies are become more closely integrated into a single, interdependent, global economic system. As their economies advance, more nations are joining the ranks of the developed world. A generation ago, South Korea and Taiwan were viewed as second-tier developing nations. Now they boast powerful economies, and their firms are major players in many global industries from shipbuilding and steel to electronics and chemicals. The move toward a global economy has been further strengthened by the widespread adoption of liberal economic policies by countries that for two generations or more were firmly opposed to them. Thus, following the normative prescriptions of liberal economic ideology, in country after country we are seeing state-owned businesses privatized, widespread deregulation, markets being opened to more competition, and increased commitment to removing barriers to cross-border trade and investment. This suggests that over the next few decades, countries such as the Czech Republic, Poland, Brazil, China, and South Africa may build powerful market-oriented economies. In short, current trends suggest that the world is moving rapidly toward an economic system that is more favorable for the practice of international business.
On the other hand, it is always hazardous to take established trends and use them to predict the future. The world may be moving toward a more global economic system, but globalization is not inevitable. Countries may pull back from the recent commitment to liberal economic ideology if their experiences do not match their expectations. There are signs, for example, of a retreat from liberal economic ideology in Russia. Russia has experienced considerable economic pain as it tries to shift from a centrally planned economy to a market economy. If Russia's hesitation were to become more permanent and widespread, the liberal vision of a more prosperous global economy based on free market principles might not come to pass as quickly as many hope. Clearly, this would be a tougher world for international businesses to compete in.
Moreover, greater globalization brings with it risks of its own. This was starkly demonstrated in 1997 and 1998 when a financial crisis in Thailand spread first to other East Asian nations and then in 1998 to Russia and Brazil. Ultimately the crisis threatened to plunge the economies of the developed world, including the United States, into a recession. We explore the causes and consequences of this and other similar global financial crises later in this book (see Chapters 10 and 11). For now it is simply worth noting that even from a purely economic perspective, globalization is not all good. The opportunities for doing business in a global economy may be significantly enhanced, but as we saw in 1997 - 98, the risks associated with global financial contagion are also greater. Still, as explained later in this book, there are ways for firms to exploit the opportunities associated with globalization, while at the same time reducing the risks through appropriate hedging strategies.
The Globalization Debate: Prosperity or Impoverishment?
Is the shift toward a more integrated and interdependent global economy a good thing? Many influential economists, politicians, and business leaders seem to think so. They argue that falling barriers to international trade and investment are the twin engines that are driving the global economy toward greater prosperity. They argue that increased international trade and cross-border investment will result in lower prices for goods and services. They believe that globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global trading system.
The arguments of those who support globalization are covered in detail in Chapters 4, 5, 6, and 8 of this book. As we shall see, there are good theoretical reasons for believing that declining barriers to international trade and investment do stimulate economic growth, create jobs, and raise income levels. Moreover, as described in Chapters 5 to 7, empirical evidence lends support to the predictions of this theory. However, despite the existence of a compelling body of theory and evidence, globalization has its critics.29 Here we briefly review the main themes of the debate. In later chapters we shall elaborate on many of the points mentioned below.
Globalization, Jobs, and Incomes
One frequently voiced concern is that far from creating jobs, falling barriers to international trade actually destroy manufacturing jobs in wealthy advanced economies such as the United States and United Kingdom. The critics argue that falling trade barriers allow firms to move their manufacturing activities offshore to countries where wage rates are much lower. D. L. Bartlett and J. B. Steele, two journalists for the Philadelphia Inquirer who have gained notoriety for their attacks on free trade, cite the case of Harwood Industries, a US clothing manufacturer that closed its US operations, where it paid workers $9 per hour, and shifted manufacturing to Honduras, where textile workers receive 48 cents per hour. Because of moves like this, argue Bartlett and Steele, the wage rates of poorer Americans have fallen significantly over the last quarter of a century.
Supporters of globalization reply that critics such as Bartlett and Steele miss the essential point about free trade--the benefits outweigh the costs. They argue that free trade results in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods that they cannot produce as efficiently. When a country embraces free trade, there is always some dislocation--lost textile jobs at Harwood Industries, for example--but the whole economy is better off as a result. According to this view, it makes little sense for the United States to produce textiles at home when they can be produced at a lower cost in Honduras or China (which, unlike Honduras, is a major source of US textile imports). Importing textiles from China leads to lower prices for clothes in the United States, which enables consumers to spend more of their money on other items. At the same time, the increased income generated in China from textile exports increases income levels in that country, which helps the Chinese to purchase more products produced in the United States, such as Boeing jets, Intel-based computers, Microsoft software, and Motorola cellular telephones. In this manner, supporters of globalization argue that free trade benefits all countries that adhere to a free trade regime.
Supporters of globalization do concede that the wage rate enjoyed by unskilled workers in many advanced economies has declined in recent years. For example, data for the Organization for Economic Cooperation and Development suggest that since 1980 the lowest 10 percent of American workers have seen a drop in their real wages (adjusted for inflation) of about 20 percent, while the top 10 percent have enjoyed a real pay increase of around 10 percent. Similar trends can be seen in many other countries. However, while globalization critics argue that the decline in unskilled wage rates is due to the migration of low-wage manufacturing jobs offshore and a corresponding reduction in demand for unskilled workers, supporters of globalization see a more complex picture. They maintain that the declining real wage rates of unskilled workers owes far more to a technology-induced shift within advanced economies away from jobs where the only qualification was a willingness to turn up for work every day and toward jobs that require significant education and skills. They point out that many advanced economies report a shortage of highly skilled workers and an excess supply of unskilled workers. Thus, growing income inequality is a result of the wages for skilled workers being bid up by the labor market, and the wages for unskilled workers being discounted. If one agrees with this logic, a solution to the problem of declining incomes is to be found not in limiting free trade and globalization, but in increasing society's investment in education to reduce the supply of unskilled workers.
Globalization, Labor Policies, and the Environment
A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous. Globalization critics often argue that adhering to labor and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace vis-a-vis firms based in developing nations that do not have to comply with such regulations. Firms deal with this cost disadvantage, the theory goes, by moving their production facilities to nations that do not have such burdensome regulations, or by failing to enforce the regulations they have on their books. If this is the case, one might expect free trade to lead to an increase in pollution and result in firms from advanced nations exploiting the labor of less developed nations. This argument was used repeatedly by those who opposed the 1994 formation of the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States. They painted a picture of US manufacturing firms moving to Mexico in droves so that they would be free to pollute the environment, employ child labor, and ignore workplace safety and health issues, all in the name of higher profits.
Supporters of free trade and greater globalization express serious doubts about this scenario. They point out that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. In general, as countries get richer, they enact tougher environmental and labor regulations. Because free trade enables developing countries to increase their economic growth rates and become richer, this should lead to tougher environmental and labor laws. In this view, the critics of free trade have got it backward--free trade does not lead to more pollution and labor exploitation, it leads to less. Supporters of free trade also point out that it is possible to tie free trade agreements to the implementation of tougher environmental and labor laws in less developed countries. NAFTA, for example, was passed only after side agreements had been negotiated that committed Mexico to tougher enforcement of environmental protection regulations. Thus, supporters of free trade argue that factories based in Mexico are now cleaner than they would have been without the passage of NAFTA.
Supporters of free trade also argue that business firms are not the amoral organizations that critics suggest. While there may be a few rotten apples, the vast majority of business enterprises are staffed by managers who are committed to behave in an ethical manner and would be unlikely to move production offshore just so they could pump more pollution into the atmosphere or exploit labor. Furthermore, the relationship between pollution, labor exploitation, and production costs may not be that suggested by critics. In general, a well-treated labor force is productive, and it is productivity rather than base wage rates that often has the greatest influence on costs. Given this, in the vast majority of cases, the vision of greedy managers who shift production to low-wage companies to "exploit" their labor force may be misplaced.
Globalization and National Sovereignty
A final concern voiced by critics of globalization is that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization, the European Union, and the United Nations. As perceived by critics, unelected bureaucrats are now able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. In this manner, claim critics, the national state's ability to control its own destiny is being limited.
The World Trade Organization is a favorite target of those who attack the world's headlong rush toward a global economy. The WTO was founded in 1994 to police the world trading system established by the General Agreement on Tariffs and Trade. The WTO arbitrates trade disputes between the 120 or so states that are signatories to the GATT. The WTO arbitration panel can issue a ruling instructing a member state to change trade policies that violate GATT regulations. If the violator refuses to comply with the ruling, the WTO allows other states to impose appropriate trade sanctions on the transgressor. As a result, according to one prominent critic, the US environmentalist and consumer rights advocate Ralph Nader:
Under the new system, many decisions that affect billions of people are no longer made by local or national governments but instead, if challenged by any WTO member nation, would be deferred to a group of unelected bureaucrats sitting behind closed doors in Geneva (which is where the headquarters of the WTO are located). The bureaucrats can decide whether or not people in California can prevent the destruction of the last virgin forests or determine if carcinogenic pesticides can be banned from their foods; or whether European countries have the right to ban dangerous biotech hormones in meat . . . At risk is the very basis of democracy and accountable decision making.
In contrast to Nader's inflammatory rhetoric, many economists and politicians maintain that the power of supranational organizations such as the WTO is limited to that which nation-states collectively agree to grant. They argue that bodies such as the United Nations and the WTO exist to serve the collective interests of member states, not to subvert those interests. Moreover, supporters of supranational organizations point out that in reality, the power of these bodies rests largely on their ability to persuade member states to follow a certain action. If these bodies fail to serve the collective interests of member states, those states will withdraw their support and the supranational organization will quickly collapse. In this view then, real power still resides with individual nation-states, not supranational organizations.
Managing in the Global Marketplace
Much of this book is concerned with the challenges of managing in an international business. An international business is any firm that engages in international trade or investment. A firm does not have to become a multinational enterprise, investing directly in operations in other countries, to engage in international business, although multinational enterprises are international businesses. All a firm has to do is export or import products from other countries. As the world shifts toward a truly integrated global economy, more firms, both large and small, are becoming international businesses. What does this shift toward a global economy mean for managers within an international business?
As their organizations increasingly engage in cross-border trade and investment, it means managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. At the most fundamental level, the differences arise from the simple fact that countries are different. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. Despite all the talk about the emerging global village, and despite the trend toward globalization of markets and production, as we shall see in this book, many of these differences are very profound and enduring.
Differences between countries require that an international business vary its practices country by country. Marketing a product in Brazil may require a different approach than marketing the product in Germany; managing US workers might require different skills than managing Japanese workers; maintaining close relations with a particular level of government may be very important in Mexico and irrelevant in Great Britain; the business strategy pursued in Canada might not work in South Korea; and so on. Managers in an international business must not only be sensitive to these differences, but they must also adopt the appropriate policies and strategies for coping with them. Much of this book is devoted to explaining the sources of these differences and the methods for coping with them successfully. The accompanying Management Focus, which reviews Procter & Gamble's experiences in Japan, shows what happens when managers don't consider country differences.
A further way in which international business differs from domestic business is the greater complexity of managing an international business. In addition to the problems that arise from the differences between countries, a manager in an international business is confronted with a range of other issues that the manager in a domestic business never confronts. An international business must decide where in the world to site its production activities to minimize costs and to maximize value added. Then it must decide how best to coordinate and control its globally dispersed production activities (which, as we shall see later in the book, is not a trivial problem). An international business also must decide which foreign markets to enter and which to avoid. It also must choose the appropriate mode for entering a particular foreign country. Is it best to export its product to the foreign country? Should the firm allow a local company to produce its product under license in that country? Should the firm enter into a joint venture with a local firm to produce its product in that country? Or should the firm set up a wholly owned subsidiary to serve the market in that country? As we shall see, the choice of entry mode is critical, because it has major implications for the long-term health of the firm.
Conducting business transactions across national borders requires understanding the rules governing the international trading and investment system. Managers in an international business must also deal with government restrictions on international trade and investment. They must find ways to work within the limits imposed by specific governmental interventions. As this book explains, even though many governments are nominally committed to free trade, they often intervene to regulate cross-border trade and investment. Managers within international businesses must develop strategies and policies for dealing with such interventions.
Cross-border transactions also require that money be converted from the firm's home currency into a foreign currency and vice versa. Since currency exchange rates vary in response to changing economic conditions, an international business must develop policies for dealing with exchange rate movements. A firm that adopts a wrong policy can lose large amounts of money, while a firm that adopts the right policy can increase the profitability of its international transactions.
In sum, managing an international business is different from managing a purely domestic business for at least four reasons: (1) countries are different, (2) the range of problems confronted by a manager in an international business is wider, and the problems themselves more complex than those confronted by a manager in a domestic business, (3) an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system, and (4) international transactions involve converting money into different currencies.
In this book we examine all these issues in depth, paying close attention to the different strategies and policies that managers pursue in order to deal with the various challenges created when a firm becomes an international business. Chapters 2 and 3 explore how countries differ from each other with regard to their political, economic, legal, and cultural institutions. Chapters 4 to 8 look at the international trade and investment environment within which international businesses must operate. Chapters 9 through 11 review the international monetary system. These chapters focus on the nature of the foreign exchange market and the emerging global monetary system.
Chapters 12 to 14 explore the strategies and structures of international businesses. Then Chapters 15 to 20 look at the management of various functional operations within an international business, including production, marketing, human relations, finance, and accounting. By the time you complete this book, you should have a good grasp of the issues that managers working within international business have to grapple with on a daily basis, and you should be familiar with the range of strategies and operating policies available to compete more effectively in today's rapidly emerging global economy.
Chapter Summary

This chapter sets the scene for the rest of the book. We have seen how the world economy is becoming more global, and we have reviewed the main drivers of globalization and argued that they seem to be thrusting nation-states toward a more tightly integrated global economy. We have looked at how the nature of international business is changing in response to the changing global economy; we have discussed some concerns raised by rapid globalization; and we have reviewed implications of rapid globalization for individual managers. These major points were made in the chapter: 1. Over the past two decades, we have witnessed the globalization of markets and production. 2. The globalization of markets implies that national markets are merging into one huge marketplace. However, it is important not to push this view too far. 3. The globalization of production implies that firms are basing individual productive activities at the optimal world locations for the particular activities. As a consequence, it is increasingly irrelevant to talk about American products, Japanese products, or German products, since these are being replaced by "global" products. 4. Two factors seem to underlie the trend toward globalization: declining trade barriers and changes in communication, information, and transportation technologies. 5. Since the end of World War II, there has been a significant lowering of barriers to the free flow of goods, services, and capital. More than anything else, this has facilitated the trend toward the globalization of production and has enabled firms to view the world as a single market. 6. As a consequence of the globalization of production and markets, in the last decade, world trade has grown faster than world output, foreign direct investment has surged, imports have penetrated more deeply into the world's industrial nations, and competitive pressures have increased in industry after industry. 7. The development of the microprocessor and related developments in communications and information processing technology have helped firms link their worldwide operations into sophisticated information networks. Jet air travel, by shrinking travel time, has also helped to link the worldwide operations of international businesses. These changes have enabled firms to achieve tight coordination of their worldwide operations and to view the world as a single market. 8. Over the past three decades, a number of dramatic changes have occurred in the nature of international business. In the 1960s, the US economy was dominant in the world, US firms accounted for most of the foreign direct investment in the world economy, US firms dominated the list of large multinationals, and roughly half the world-the centrally planned economies of the communist world-was closed to Western businesses. 9. By the mid-1990s, the US share of world output had been cut in half, with major shares now being accounted for by Western European and Southeast Asian economies. The US share of worldwide foreign direct investment had also fallen, by about two-thirds. US multinationals were now facing competition from a large number of Japanese and European multinationals. In addition, the emergence of mini-multinationals was noted. 10. The most dramatic environmental trend has been the collapse of communist power in Eastern Europe, which has created enormous long-run opportunities for international businesses. In addition, the move toward free market economies in China and Latin America is creating opportunities (and threats) for Western international businesses. 11. The benefits and costs of the emerging global economy are being hotly debated among business people, economists, and politicians. The debate focuses on the impact of globalization on jobs, wages, the environment, working conditions, and national sovereignty. 12. Managing an international business is different from managing a domestic business for at least four reasons: (i) countries are different, (ii) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business, (iii) managers in an international business must find ways to work within the limits imposed by governments' intervention in the international trade and investment system, and (iv) international transactions involve converting money into different currencies
Critical Discussion Questions 1. Describe the shifts in the world economy over the past 30 years. What are the implications of these shifts for international businesses based in Britain? North America? Hong Kong? 2. "The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in small firms." Evaluate this statement. 3. How have changes in technology contributed to the globalization of markets and production? Would the globalization of production and markets have been possible without these technological changes? 4. How might the Internet and the associated World Wide Web affect international business activity and the globalization of the world economy? 5. If current trends continue, China may emerge as the world's largest economy by 2020. Discuss the possible implications for such a development for * The world trading system. * The world monetary system. * The business strategy of today's European and US-based global corporations. 6. "Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate course on international business." Evaluate this statement.
Closing Case Citigroup--Building a Global Financial Services Giant
In the largest merger ever in the financial services business, Citicorp joined forces with Travelers Group in the autumn of 1998. The combined group has revenues of close to $50 billion, assets in excess of $700 billion, and global reach.
Before the merger, Travelers Group was the largest property-casualty and life insurance business in the United States. In addition, Travelers had considerable investment banking, retail brokerage, and asset management operations. Travelers' insurance operations were almost exclusively domestic in their focus, although its investment banking and asset management business had some foreign exposure.
Citicorp was one of the world's most global banks. Citicorp had two main legs to its business, its corporate banking activities and its consumer banking activities. The corporate banking side of Citicorp focused on providing a wide range of financial services to 20,000 corporations in 75 emerging economies and 22 developed economies. This business, which always had an international focus, generated revenues of $8.0 billion in 1997, over half of which came from activities in the world's emerging economies. What captured the attention of many observers, however, was the rapid growth of Citicorp's global consumer banking business. The consumer banking business focuses on providing basic financial services to individuals, including checking accounts, credit cards, and personal loans. In 1997 this business served 50 million consumers in 56 countries through a global network of 1,200 retail branches and generated revenues of $15 billion.
The merger talks were initiated by Travelers CEO Sandy Weill. Given the rapid globalization of the world economy, Weill felt it was important for Travelers to start selling its insurance products in foreign countries. Until recently, the barriers to cross-border trade and investment in financial services were such that this would have been difficult. However, under the terms of a deal brokered by the World Trade Organization in December 1997, over 100 countries agreed to open their banking, insurance, and securities markets to foreign competition. The deal, which was scheduled to take effect on March 1, 1999, included all developed nations and many developing nations. The deal would allow insurance companies such as Travelers to sell their products in foreign markets for the first time. To take advantage of this opportunity, however, Travelers needed a global retail distribution system, which is where Citicorp came in. For the past 20 years, the central strategy of Citicorp has been to build just such a distribution channel.
The architect of Citicorp's global retail banking strategy was its longtime CEO, John Reed (Reed is now co-CEO of Travelers, a position he shares with Weill). Reed has been on a quest to establish "Citicorp" as a global brand, positioning the bank as the Coca-Cola or McDonald's of financial services. The basic belief underpinning Reed's consumer banking strategy is that people everywhere have the same financial needs--needs that broaden as they pass through various life stages and levels of affluence. At the outset customers need the basics--a checking account, a credit card, and perhaps a loan for college. As they mature financially, customers add a mortgage, car loan, and investments (and insurance). As they accumulate wealth, portfolio management and estate planning become priorities. Citicorp aimed to provide these services to customers around the globe in a standardized fashion, in much the same way as McDonald's provides the same basic menu of fast food to consumers everywhere. With the merger with Travelers, the company will be able to push this concept further than ever, cross-selling insurance products and asset management services through its global retail distribution system.
Reed believes that global demographic, economic, and political forces strongly favor such a strategy. In the developed world, aging populations are buying more financial services. In the rapidly growing economies of many developing nations, Citigroup is targeting the emerging middle classes, whose needs for consumer banking services and insurance are rising with their affluence. This world view got Citicorp into many developing economies years ahead of its slowly awakening rivals. As a result, Citigroup is today the largest credit card issuer in Asia and Latin American, with 7 million cards issued in Asia and 9 million in Latin America. As for political forces, the worldwide movement toward greater deregulation of financial services allowed Citigroup to set up consumer banking operations in countries that only a decade ago did not allow foreign banks into their markets. Examples in the fast-growing Asian region include India, Indonesia, Japan, Taiwan, Vietnam, and the biggest potential prize of them all, China.
A key element of Citigroup's global strategy for its consumer bank is the standardization of operations around the globe. This has found its most visible expression in the so-called model branch. Originally designed in Chile and refined in Athens, the idea is to give the company's mobile customers the same retail experience everywhere in the world, from the greeter by the door to the standard blue sign overhead to the ATM machine to the gilded doorway through which the retail-elite "Citi-Gold" customers pass to meet with their "personal financial executives." By the end of 1997 this model branch was in place at 600 of Citicorp's 1,200 retail locations, and it is being rapidly introduced elsewhere. Another element of standardization, less obvious to customers, is Citigroup's emphasis on the uniformity of a range of back-office systems throughout its branches, including the systems to manage checking and savings accounts, mutual fund investments, and so on. According to Citigroup, this emphasis on uniformity makes it much easier for the company to roll out branches in a new market. Citigroup has also taken advantage of its global reach to centralize certain aspects of its operations to realize savings from economies of scale. For example, in Citigroup's fast-growing European credit card business, all credit cards are manufactured in Nevada; printing and mailing are done in the Netherlands; and data processing is done in South Dakota. Within each country, credit card operations are limited to marketing people and two staff units, customer service and collections.
Case Discussion Questions 1. What is the rationale for the merger between Travelers and Citicorp? How will this merger create value for (a) the stockholders of Citigroup and (b) the customers of Citigroup's global retail bank? 2. In 1997 the World Trade Organization brokered an agreement to liberalize cross-border trade and investment in global financial services. What will be the impact of this deal on competition in national markets? What would you expect to see occur? 3. Does the 1997 WTO agreement represent an opportunity for Citigroup or a threat? 4. How is Citigroup trying to build a global retail brand in financial services? What assumptions is this strategy based on? Do you think the assumptions and strategy make sense?