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The Nature of International Business

section one

coming
T
he world we share is becoming increasingly interconnected in complex and interesting ways. Section One describes the nature and scope of international business and introduces the three environments in which international business managers must operate. How well they perform in their undertakings depends in great measure on their understanding of domestic, international, and foreign environments. Chapter 1 discusses what international business is and also presents the concepts of the three environments and their forces. From the history of international business, we learn that international firms have been in existence for centuries, but that present-day global companies–characterized by explosive growth and closer central control of foreign operations–are markedly different from their predecessors. We discuss what is driving globalization of business and why firms go abroad, and examine the debate about pros and cons of globalization of business. We also examine the seven dimensions along which managers can globalize if they take their companies international. In Chapter 2, information is presented to help you comprehend the dynamic growth and the magnitude of both international trade and foreign investment. We also provide an overview of the major theories of international trade and investment. A basic understanding of this material will help explain the actions already taken by managers and by government officials and provide insight into what they plan to do in the future. Chapter 3 discusses institutions that operate in the international environment and that may affect international businesses in fundamental ways. International institutions can be both a help and a hindrance to businesses, and the international institutions and agreements discussed in this chapter are organizations of governments, along with some private organizations, whose main purpose is political, economic, or a combination of the two. Some of these organizations have large amounts of power (such as the European Union), and others have less power, but all are important to business. ■ CHAPTER 1 | The Challenging World of International Business 3

THE NATURE OF INTERNATIONAL BUSINESS
section one
THE NATURE OF INTERNATIONAL BUSINESS
ch. 1 The Challenging World of International Business ch. 2 International Trade and Investment ch. 3 International Institutions from an International Business Perspective

section two
INTERNATIONAL ENVORONMENTAL FORCES

section three
THE ORGANIZATIONAL ENVIRONMENT

the challenging world of

international business

In the past, complex international transactions were the domain of diplomats and international policy and business experts. Today a converging set of powerful economic, technological, demographic and geopolitical trends will demand that all citizens, not just the elite, have that kind of global fluency. Knowledge of the world is no longer a luxury, it is a necessity.” —Nicholas Platt, president emeritus of the Asia Society

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o think about how you are involved in the global economy, think back to how you began your

JanSport backpacks, put on their North Face jackets and Oakley sunglasses, and turn on their iPods.

own day. After you awoke, you may have looked at your Casio watch for the time, checked your Samsung cell phone for messages, and turned on your Toshiba TV for the news and weather while you showered. After drying your hair with a Conair dryer, maybe you slipped into some Diesel jeans, quickly swallowed some Dannon yogurt and a glass of Mott’s apple juice, brushed your teeth with Close-Up toothpaste, and drove off to class in your Honda with its Firestone tires and a tank full of Shell gasoline. Meanwhile, on the other side of the world, a group of Nike-clad Japanese students may be turning off their H-P computers after watching videos on YouTube.com and debating whether they should stop for hamburgers and Cokes at McDonald’s or coffee at Starbucks. As they leave, they place their books and other materials into their LEARNING OBJECTIVES After reading this chapter, you should be able to: LO1 Understand what international business is and why it is important. LO2 Comprehend why and how international business differs from domestic business. LO3 Appreciate that international business has a long and important history in the world’s development. LO4 Appreciate the dramatic internationalization of markets. LO5 Understand the five kinds of drivers, all based on change, that are leading firms to internationalize their operations. LO6 Recognize the key arguments for and against the globalization of business. LO7 Explain the reasons for entering foreign markets. LO8 Recognize that globalization of an international firm occurs over at least seven dimensions and that a company can be partially global in some dimensions and completely global in others.

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international business A business
whose activities are carried out across national borders

foreign business The
operations of a company outside its home or domestic market

multidomestic company (MDC)
An organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences

global company (GC) An organization that
attempts to standardize and integrate operations worldwide in all functional areas

international company (IC) Either
a global or a multidomestic company

What do you and the Japanese students have in common? You are all consuming products made by foreign-owned companies. This is international business. All that you have read so far points to one salient fact: all managers need to have a basic knowledge of international business to be able to meet the challenge of global competition. Acquiring this knowledge consists, in part, of learning the special terminology of international business, an important function, as you already know, of every introductory course. To assist you in learning the international business “language,” we’ve included a glossary at the end of the book and listed the most important terms at the end of each chapter. They also appear in bold print where they are first used in the text, with their definitions in the margin. LO1 Understand what international business is and why it is important.

business by some writers, although that will not be the practice in this book. 3. A multidomestic company (MDC) is an organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences. 4. A global company (GC) is an organization that attempts to standardize and integrate operations worldwide in most or all functional areas. 5. An international company (IC) is a global or multidomestic company.

WHAT IS INTERNATIONAL BUSINESS?
Because international business is a relatively new discipline and is extremely dynamic, you will find that the definitions of a number of terms vary among users. To avoid confusion due to the range of different definitions of terms in international business, in this text we will employ the definitions listed below, which are generally accepted by managers: 1. International business is business whose activities are carried out across national borders. This definition includes not only international trade and foreign manufacturing but also the growing service industry in areas such as transportation, tourism, advertising, construction, retailing, wholesaling, and mass communications. 2. Foreign business denotes the operations of a company outside its home or domestic market; many refer to this as business conducted within a foreign country. This term sometimes is used interchangeably with international

Although we primarily use the terms global, multidomestic, and international firms or companies, at times we may use multinational enterprise (MNE) or multinational company (MNC) interchangeably with international company (IC), inasmuch as both terms are employed in the literature and in practice. Although you may find those who consider multinational corporation to be synonymous with multinational enterprise and transnational corporation,1 the United Nations and the governments of many developing nations use transnational instead of multinational to describe any firm doing business in more than one country. The specialized agency, the United Nations Conference on Trade and Development (UNCTAD), for example, employs the following definition: “A transnational corporation is generally regarded as an enterprise comprising entities in more than one country which operate under a system of decision making that permits coherent policies and a common strategy. The entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the others and, in particular, to share knowledge, resources and responsibilities with the others.”2 More recently, some academic writers have employed the term transnational for a company that combines the characteristics of global and multinational firms: (1) trying to achieve economies of scale through global integration of its functional areas and at the same time (2) being highly responsive to different local environments (a newer name is multicultural multinational).3

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environment All the
4. Socioeconomic: characteristics and distribution of the human population. 5. Financial: variables such as interest rates, inflation rates, and taxation. 6. Legal: the many foreign and domestic laws governing how international firms must operate. 7. Physical: elements of nature such as topography, climate, and natural resources. 8. Political: elements of nations’ political climates such as nationalism, forms of government, and international organizations. forces surrounding and influencing the life and development of the firm

LO2 Comprehend why and how international business differs from domestic business.

uncontrollable forces External forces
over which management has no direct control, although it can exert an influence

WHAT IS DIFFERENT ABOUT INTERNATIONAL BUSINESS?
International business differs from domestic business in that a firm operating across borders must deal with the forces of three kinds of environments—domestic, foreign, and international. In contrast, a firm whose business activities are carried out within the borders of one country needs to be concerned essentially with only the domestic environment. However, no domestic firm is entirely free from foreign or international environmental forces because the possibility of having to face competition from foreign imports or from foreign competitors that set up operations in its own market is always present. Let us first examine these forces and then see how they operate in the three environments.

controllable forces Internal
forces that management administers to adapt to changes in the uncontrollable forces

9. Sociocultural: elements of culture (such as attitudes, beliefs, and opinions) important to international managers. 10. Labor: composition, skills, and attitudes of labor. 11. Technological: the technical skills and equipment that affect how resources are converted to products.

Influence of External and Internal Environmental Forces
The term environment as used here means all the forces influencing the life and development of the firm. The forces themselves can be classified as external or internal. The external

The elements over which management does have some control are the internal forces, such as the factors of production (capital, raw materials, and people) and the activities of the organization (personnel, finance, production, and marketing). These are the controllable forces management must administer in order to adapt to changes in the uncontrollable

ONE CHANGE IN THE POLITICAL FORCES—THE EXPANSION OF THE EUROPEAN UNION (EU) IN 2007—AFFECTED ALL THE CONTROLLABLE FORCES OF FIRMS WORLDWIDE THAT DO BUSINESS IN OR WITH THE 27 EU MEMBER-NATIONS. forces are commonly called uncontrollable forces. Management has no direct control over them, although it can exert influence–such as lobbying for a change in a law and heavily promoting a new product that requires a change in a cultural attitude. External forces consist of the following: 1. Competitive: kinds and numbers of competitors, their locations, and their activities. 2. Distributive: national and international agencies available for distributing goods and services. 3. Economic: variables (such as gross national product [GNP], unit labor cost, and personal consumption expenditure) that influence a firm’s ability to do business.

environmental variables. Look at how one change in the political forces—the expansion of the European Union (EU) in 2007—affected all the controllable forces of firms worldwide that do business in or with the 27 EU member-nations. Suddenly these firms had to examine their business practices and change those affected by this new expansion. For example, some European concerns and foreign subsidiaries in the EU relocated parts of their operations to other nations in the Union to exploit the lower wages there. Some American and Asian companies set up production in one of the membercountries to supply this giant free trade area. By doing this, they avoid paying import duties on products coming from their home countries.

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domestic environment All
the uncontrollable forces originating in the home country that surround and influence the firm’s life and development

The Domestic Environment

The domestic environment is all the uncontrollable forces originating in the home country that foreign environment All influence the life and development the uncontrollable forces of the firm. Obviously, these are originating outside the the forces with which managers home country that surround are most familiar. Being domestic and influence the firm forces, however, does not preclude their affecting foreign operations. international For example, if the home counenvironment try is suffering from a shortage Interaction between of foreign currency, the governdomestic and foreign environmental forces or ment may place restrictions on between sets of foreign overseas investment to reduce environmental forces its outflow. As a result, managers of multinationals find that they cannot expand overseas facilities as they would like to do. In another instance from real life, a labor union striking the home-based plants learned that management was supplying parts from its foreign subsidiaries. The strikers contacted the foreign unions, which pledged not to work overtime to supply what the struck plants could not. The impact of this domestic environmental force was felt overseas as well as at home.

the Argentine government ordered the Argentine subsidiary to fill the order. The Argentine government said that Argentine companies, of which the subsidiary was one, did not answer to the demands of a foreign government. The Argentine management of the subsidiary was in a quandary. Finally, headquarters relented and permitted its Argentine subsidiary to fill the order.

Forces Can Be Difficult to Assess Another problem with foreign forces is that they are frequently difficult to assess. This is especially true of legal and political forces. A highly nationalistic law may be passed to appease a section of the local population. To all outward appearances, the government may appear to be against foreign investment; yet pragmatic leaders may actually encourage it. A good example is Mexico, which until 1988 had a law prohibiting foreigners from owning a majority interest in a Mexican company. However, a clause permitted exceptions “if the investment contributes to the welfare of the nation.” IBM, Eaton, and others were successful in obtaining permission to establish a wholly owned subsidiary under this clause. The Forces Are Interrelated In the chapters that follow, it will be evident that the forces are often interrelated. This in itself is not a novelty because the same situation confronts a domestic manager. On the foreign scene, however, the kinds of interaction that occur and the outcomes may differ. For instance, the combination of high-cost capital and

BARRIERS TO THE FREE MOVEMENT OF A NATION’S PEOPLE, SUCH AS MOUNTAIN RANGES AND DESERTS, HELP MAINTAIN POCKETS OF DISTINCT CULTURES WITHIN A COUNTRY. The Foreign Environment
The forces in the foreign environment are the same as those in the domestic environment except that they occur outside the firm’s home country. However, they operate differently for several reasons, including those provided here. an abundance of unskilled labor in many developing countries may lead to the use of a lower level of technology than would be employed in the more industrialized nations. In other words, given a choice between installing costly, specialized machinery needing few workers and installing less expensive, general-purpose machinery requiring a larger labor force, management will frequently choose the latter when faced with high interest rates and a large pool of available workers. Another example is the interaction between physical and sociocultural forces. Barriers to the free movement of a nation’s people, such as mountain ranges and deserts, help maintain pockets of distinct cultures within a country, and this has an effect on decision making.

Forces Have Different Values Even though the kinds of forces in the two environments are identical, their values often differ widely, and at times they are completely opposed to each other. A classic example of diametrically opposed political-force values and the bewilderment they create for multinational managers involves the American export embargo on shipments of most goods to Cuba. This embargo meant that Cuba could not buy buses from a U.S. manufacturer. To circumvent the embargo, the Cuban government ordered the buses from the American firm’s Argentine subsidiary. When word came from the firm’s American headquarters that the order should not be filled because of the American embargo, 8 SECTION 1 | The Nature of International Business

The International Environment
The international environment consists of the interactions (1) between the domestic environmental forces and the foreign environmental forces and (2) between the foreign

self-reference criterion Unconscious environmental forces of two countries when an affiliate in one country does business with customers in another. This agrees with the definition of international business: business that involves the crossing of national borders. For example, personnel at the headquarters of a multidomestic or global company work in the international environment if they are involved in any way with another nation, whereas those in a foreign subsidiary do not unless they too are engaged in international business through exporting or the management of other affiliates. In other words, a sales manager of Nokia’s China operations does not work in the international environment if he or she sells cellular phones only in China. If Nokia’s China operations export cell phones to Thailand, then the sales manager is affected by forces of both the domestic environment of China and the foreign environment of Thailand and therefore is working in the international environment. International organizations whose actions affect the international environment are also properly part of it. These organizations include (1) worldwide bodies (e.g., World Bank), (2) regional economic some managers will ascribe to cultural values when judging others their own preferences and behaviors of others in a new reactions. Thus, a foreign producand different environment tion manager, facing a backlog of orders, may offer her workers extra pay for overtime. When they fail to show up, the manager is perplexed: “Back home they always want to earn more money.” This manager has failed to understand that the workers prefer time off to more money. This unconscious reference to the manager’s own cultural values, called the self-reference criterion, is probably the biggest cause of international business blunders. Successful managers are careful to examine a problem in terms of the local cultural traits as well as their own. reference to one’s own

LO3 Appreciate that international business has a long and important history in the world’s development.

[

“The self-reference criterion is probably the biggest cause of international business blunders.”

]

groupings of nations (e.g., North American Free Trade Agreement, European Union), and (3) organizations bound by industry agreements (e.g., Organization of Petroleum Exporting Countries).

Decision Making Is More Complex

Those who work in the international environment find that decision making is more complex than it is in a purely domestic environment. Consider managers in a home office who must make decisions affecting subsidiaries in just 10 different countries (many ICs are in 20 or more countries). They not only must take into account the domestic forces but also must evaluate the influence of 10 foreign national environments. Instead of having to consider the effects of a single set of 10 forces, as do their domestic counterparts, they have to contend with 10 sets of 10 forces, both individually and collectively, because there may be some interaction. For example, if management agrees to labor’s demands at one foreign subsidiary, chances are it will have to offer a similar settlement at another subsidiary because of the tendency of unions to exchange information across borders. Furthermore, as we shall observe throughout this text, not only are there many sets of forces, but there are also extreme differences among them.

A BRIEF HISTORY OF INTERNATIONAL BUSINESS
While international business as a discipline is relatively new, as a business practice it is not, so let’s briefly explore the history of international business. Well before the time of Christ, Phoenician and Greek merchants were sending representatives abroad to sell their goods. Subsequently, a vast expansion of agricultural and industrial production in China stimulated the emergence of an internationally integrated trading system. The saying that “all roads lead to China” had relevance within the international trade system, as China was the world’s leading manufacturing country for about 1,800 years, until it was replaced by Britain in about 1840. The impact of the emerging international trading system was extensive. Politics, the arts, agriculture, industry, and other sectors of human life were profoundly influenced by the goods and ideas that came with trade. Public health was also affected. An interesting precursor to contemporary concerns about global health epidemics, such as severe acute respiratory syndrome (SARS) and the so-called “swine flu,” was international trade’s association with the spread of the plague, one of the worst natural disasters in history. Believed to have originated in Asia, the

Self-Reference Criterion

Another common cause of the added complexity of foreign environments is managers’ unfamiliarity with other cultures. To make matters worse,

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THE RISE OF THE OTTOMAN EMPIRE BEFORE 1300, ULTIMATELY SPANNING EUROPE, NORTH AFRICA, AND THE MIDDLE EAST, PROFOUNDLY INFLUENCED THE EMERGING TRADE ROUTES FOR PEOPLE, GOODS, MONEY, ANIMALS, AND MICROORGANISMS. plague moved west with traders and soldiers, carried by oriental rat fleas that lived on rodents that stowed away on ships and caravans. Called the Black Death in Europe and repeated in waves from the mid-1300s through the 1500s, the plague ravaged cities, caused widespread hysteria, and killed one-quarter of China’s people and one-third of the population of Europe.4 The rise of the Ottoman Empire before 1300, ultimately spanning Europe, North Africa, and the Middle East, profoundly influenced the emerging trade routes for people, goods, money, animals, and microorganisms that spanned from England to China, across the Mediterranean and Northern Africa, and through Central Asia and the Indian Ocean region. The powerful central location of the Ottomans within this trading web had the effect of raising the cost of Asian trade for the Europeans. This spawned a search for sea routes to Asia, including expeditions that discovered the Americas. In 1600, Great Britain’s British East India Company, a newly formed trading firm, began to establish foreign branches throughout Asia, an action soon followed by many of the other European nations intent on exploiting trade opportunities for national advantage, including Portugal, the Netherlands, and France. In 1602, the Dutch East India Company was formed to carry out colonial activities in Asia and to open ocean trade routes to the East. The first company to issue stock, it is also frequently identified as the world’s first multinational corporation.5 By the end of the 1600s, ships commissioned by European trading companies regularly traveled to Asia via an interconnected Atlantic, Indian, and Pacific Ocean system of government-protected trade routes. Their goal was to acquire goods for sale or resale within various Asian markets and ultimately to return to Europe with valuable cargoes of cloth, spices, and other goods that would yield significant profits for investors. The 17th and 18th centuries have frequently been termed the “age of mercantilism” because the power of nations depended directly on the sponsorship and control of merchant capital, which expanded under the direct subsidization and protection of national governments. The concept of mercantilism is discussed in Chapter 2. A number of multinational companies existed in the late 1800s. One of the first American companies to own foreign production facilities, have worldwide distribution networks, and market its products under global brands was Singer Sewing Machine. In 1868, it built a factory in Scotland and, by 1880, the company had become a global organization with an outstanding international sales organization and several overseas manufacturing plants. Other firms, such as J&P Coats (United Kingdom) and Ford Motor Company, soon followed, and by 10 SECTION 1 | The Nature of International Business

1914, at least 37 American companies had production facilities in two or more overseas locations.6 Interestingly, and quite a contrast to today’s situation, in the 1920s all cars sold in Japan were made in the United States by Ford and General Motors and sent to Japan in knocked-down kits to be assembled locally. European companies were also moving overseas. For example, Friedrich Bayer purchased an interest in a New York plant in 1865, two years after setting up his plant in Germany. Then, because of high import duties in his overseas markets, he proceeded to establish plants in Russia (1876), France (1882), and Belgium (1908).7 As you have just read, multinational firms existed well before World War I, and the level of intracompany trade of multinationals in 1930, as a percentage of overall world trade, may have exceeded the proportion at the end of the 20th century.8 Yet only in recent years have multinationals become the object of much discussion and investigation, especially concerning the increasing globalization of their operations. LO4 Appreciate the dramatic internationalization of markets.

GROWTH OF INTERNATIONAL FIRMS AND INTERNATIONAL BUSINESS
The size and the number of U.S. and foreign international concerns have been increasing rapidly in recent years, as have the levels of foreign direct investment (FDI) and exporting.

Expanding Number of International Companies
UNCTAD, the United Nations agency in charge of all matters relating to FDI and international corporations, estimates that there are 64,000 transnational corporations with international production activities. These transnationals have approximately 866,000 foreign affiliates that collectively employ more than 53 million people (versus only 19 million two decades ago). These transnationals account for approximately 25 percent of total global output and two-thirds of world trade. Foreign affiliates’ sales have grown about 700 percent in the past 20 years.9

As a result of this expansion, the subsidiaries of forForeign Direct in equipment, structures, eign companies have become increasingly important in the and organizations in a Investment and industrial and economic life of many nations, developed and foreign country at a level developing. This situation is in sharp contrast to the one Exporting Are that is sufficient to obtain that existed when the dominant economic interests were in significant management Growing Rapidly the hands of local citizens. The expanding importance of control; does not include One variable commonly used to mere foreign investment in foreign-owned firms in local economies came to be viewed measure where and how fast interstock markets by a number of governments as a threat to their autonomy. nationalization is taking place is However, there has been a marked liberalization of governexporting The the increase in total foreign direct ment policies and attitudes toward foreign investment in transportation of any investment. Foreign direct both developed and developing nations since the early 1980s. domestic good or service investment (FDI) refers to direct Many government leaders know that local firms must obtain to a destination outside a investments in equipment, strucmodern commercial technology in the form of direct investcountry or region tures, and organizations in a foreign ment, purchase of capital goods, and the right to use the country at a level that is sufficient importing The international company’s expertise if they are to be competito obtain significant management transportation of any good tive in world markets. control. It does not include mere or service into a country Despite this change in attitude, there are still critics of large or region, from a foreign foreign investment in stock marglobal firms who cite such statistics as the following to “prove” origination point kets. The world stock of outward that host governments are powerless before them: In 2008, only FDI was $16.2 trillion in 2008, 19 nations had gross national incomes (GNIs) greater than the which was 9 times larger than what total annual sales of Royal Dutch Shell, the company with the it was 18 years earlier, in 1990.12 10 greatest level of sales in the world. Further, when nations and Of course, a substantial amount of international business corporations are ranked by GNI and total sales, respectively, involves exporting rather than FDI. Exporting is the transpornearly half of the first 100 on the list are corporations. Howtation of any domestic good or service to a destination outside ever, a nation’s GNI and a company’s sales a country or region. It is the opposite of are not directly comparable because GNI importing, which is the transportation is a measure of value added, not sales. If of any good or service into a country or a nation’s total sales were computed, the region, from a foreign origination point. result would be far greater than its GNI The subsidiaries Merchandise exports have grown faster because there would be triple and quathan world output in nearly each of the of foreign companies druple counting. For example, suppose past 60 years. World merchandise exports a steel manufacturer sells steel wire to a have become grew from $2.0 trillion in 1980 to $3.45 tire company, which uses it to build tires. trillion in 1990, $6.46 trillion in 2000, and increasingly important Then the tire company sells the tires to $16.1 trillion in 2008, before declining automakers, which mount them on their in the industrial and to $12.5 trillion during the global recesautomobiles, which they in turn sell to the sion in 2009. This represents an eightfold economic life of many public. Sales of the wire would be counted increase from 1980 to 2008, and with 2008 three times. However, in calculating GNI, nations. exports being 250 percent of the figure governments merely sum the values added for 2000.13 The level of service exports in each transaction, which is the differworldwide grew even more during this ence between the sales of the company and the costs of materials time, from $365 billion in 1980 to $781 billion in 1990, $1.48 bought outside the company. If company sales were measured trillion in 2000, and $3.80 trillion in 2008, before declining by value added, Shell’s revenues of $458 billion would have to $3.31 trillion in 2009. This represented more than a ten11 been $63 billion on a value-added basis. While Shell’s sales are fold increase between 1980 and 2008.14 Trends regarding FDI about the same as Poland’s GNI, when both the economy and and exporting, along with theories that help explain the level the company are measured by the value added, Poland’s econand location of exports and FDI, are discussed in Chapter 2. omy is more than seven times the size of Shell. Figure 1.1 shows the growth in FDI and in services and merA firm’s size may at times give it bargaining power, as in chandise exports from 1980 to 2009. the case of a government that wants a firm to set up a subsidiary because of the employment it will offer and the purchases What Is Driving the Globalization it will make from other firms in that country. Yet, regardless of Business? of the parent firm’s size, each subsidiary is a local company that must comply with the laws in the country in which it is Although globalization is discussed everywhere—television located. If it does not, it can be subject to legal action or even shows, Internet chat rooms, political demonstrations, government seizure. parliaments, management boardrooms, and labor union CHAPTER 1 | The Challenging World of International Business 11

foreign direct investment (FDI) Direct investments

economic globalization The tendency toward an international integration of goods, technology, information, labor and capital, or the process of making this integration happen 1.8 1.6 1.4 US$ Trillions 1.2 1.0 0.8 0.6 0.4 0.2 0

80 90 00 19 95 85 19 19 20 05 19 09

meetings—so far it has no widely accepted definition. In fact, its definition continues to broaden. Now, for example, social scientists discuss the political, social, environmental, historical, geographic, and even cultural implications of globalization.15 Some also speak of technological globalization, political globalization, and the like.

WHAT IS GLOBALIZATION?
The most common definition and the one used in international business is that of economic globalization—the tendency toward an international integration of goods, technology, information, labor, and capital, or the process of making this integration happen. The term globalization was first coined by Theodore Levitt in a Harvard Business Review article in which he maintained that new technologies had “proletarianized” communication, transport, and travel, creating worldwide markets for standardized consumer products at lower prices. He maintained that the future belonged to global corporations that did not cater to local differences in taste but, instead, adopted strategies that operated “as if the entire world (or major regions of it) were a single entity; [such an organization] sells the same things in the same way everywhere.”16 LO5 Understand the five kinds of drivers, all based on change, which are leading firms to internationalize their operations.

Year 4.0 3.5 US$ Trillions 3.0 2.5 2.0 1.5 1.0 0.5 0
80 19 90 19 85 20 00 95 05 09

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Year 2.5 2.0 US$ Trillions 1.5 1.0 0.5 0
19 80 19 90 20 00 19 95 19 8

THE DRIVERS OF GLOBALIZATION
Five major kinds of drivers, all based on change, are leading international firms to globalize their operations: (1) political, (2) technological, (3) market, (4) cost, and (5) competitive.

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19

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20

Year

FIGURE 1.1 World Merchandise Exports, Commercial Services Exports, and Outward Foreign Direct Investment, 1980-2009 (US$ trillions) Sources: United Nations Conference on Trade and Development (UNCTAD), “FDI stock, by region and economy, 1990, 2000, 2008,” World Investment Report 2009 (New York: United Nations, 2009), p. 251; “Total Merchandise Trade,” World Trade Organization, http://stat.wto.org/StatisticalProgram/ WsdbExport.aspx?Language=E (May 2, 2010); and “Trade in Commercial Services,” World Trade Organization, http://stat.wto.org/StatisticalProgram/ WSDBStatProgramSeries.aspx?Language=E (May 2, 2010).

Political There is a trend toward the unification and socialization of the global community. Preferential trading arrangements, such as the North American Free Trade Agreement and the European Union, that group several nations into a single market have presented firms with significant marketing opportunities. Many firms have moved swiftly to gain access to the combined markets of these trading partners, either through exporting or by producing in the area. Two other aspects of this trend are contributing to the globalization of business operations: (1) the progressive reduction of barriers to trade and foreign investment by most governments, which is hastening the opening of new markets by international firms that are both exporting to them and building production facilities in them, and (2) the privatization of much of the industry in formerly communist nations and the opening of their economies to global competition. Technological Advances in computers and communications technology are permitting an increased flow of ideas and

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information across borders, enabling customers to learn about foreign goods. Cable and satellite TV systems in Europe and Asia, for example, allow an advertiser to reach numerous countries simultaneously, thus creating regional and sometimes global demand. Global communications networks enable manufacturing personnel to coordinate production and design functions worldwide so that plants in many parts of the world may be working on the same product. The Internet and network computing enable small companies to compete globally because they make possible the rapid flow of information regardless of the physical location of the buyer and seller. Internet videoconferencing allows sellers to demonstrate their products to prospective buyers all over the world without the need to travel. It also permits international companies to hold corporate meetings between managers from headquarters and overseas subsidiaries without expensive, time-consuming travel. In addition, communicating by e-mail on the Internet is faster and more reliable than using postal mail and much less expensive than using a fax machine. Both Internet uses have given home office managers greater confidence in their ability to direct overseas operations. As companies globalize, they also become global customers. When Nokia announced its intention to set up a cell phone assembly plant in Chennai, India, suppliers of key components quickly confirmed that they would also establish plants adjacent to Nokia’s facilities in order to avoid having a competitor capture the business. Likewise, for years, advertising agencies established offices in foreign markets when their major clients entered those markets to avoid having a competitor steal the accounts. Finding the home market saturated also sends companies into foreign markets. According to a recent Dow Jones survey of the world’s largest companies, 84 percent of the respondents expect that international markets will generate most of their growth in the next five years.17 Indeed, the United States has only about 5 percent of the world’s population, so the vast proportion of most companies’ potential customers are located elsewhere.

GLOBAL g a u n tle t
The Globalization Debate and You
The merits of globalization have been the subject of many heated debates in recent years. There have been extensive public protests about globalization and the liberalization of international trade at World Trade Organization meetings and at other gatherings of international organizations and leaders. The debate is, in many respects, waged by diametrically opposed groups with extremely different views regarding the consequences of globalization. Sifting through the propaganda and hyperbole spouted by both sides is a challenge. However, it is important to recognize the various perspectives on globalization, as their arguments can generate appeal (or rejection) both intellectually and emotionally. The contributions of free trade and globalization to dramatic reductions in worldwide poverty are contrasted with anecdotal stories of people losing their livelihoods under the growing power of multinationals. Likewise, increases in service sector employment are contrasted against losses in high-paying manufacturing jobs.

Market

Cost Economies of scale to reduce unit costs are a common management goal. One means of achieving them is to globalize product lines to reduce development, production, and inventory costs. Management can also move production or other parts of the company’s value chain to countries where costs are lower. Dramatic reductions in the cost of generating and transmitting information due to innovations in computing and telecommunications, as well as the decline in transportation costs, have facilitated this trend toward relocating activities worldwide. Competitive Competition continues to increase in intensity. New firms, many from newly industrialized and

developing countries, have entered world markets in automobiles, computers, and electronics, for example. Another competitive driving force for globalization is the fact that companies are defending their home markets from competitors by entering the competitors’ home markets to distract them. Many firms that would not have entered a single country because it lacked sufficient market size have established plants in the comparatively larger trading groups (European Union, Association of Southeast Asian Nation [ASEAN], Mercosur). It is one thing to be shut out of Belgium, but it is another to be excluded from all Europe. The result of this rush to globalization has been an explosive growth in international business. Many of the issues associated with globalization are highly complex, and there is no single measure of globalization or of integration within the world economy. Each element of global integration can have different effects. Following are some of the arguments for and against the globalization process and its outcomes.

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EXPANDING TRADE BY COLLECTIVELY REDUCING BARRIERS IS THE MOST POWERFUL TOOL THAT COUNTRIES, WORKING TOGETHER, CAN DEPLOY TO REDUCE POVERTY AND RAISE LIVING STANDARDS. —Horst Kohler and James Wolfensohn

LO6 Recognize the key arguments for and against the globalization of business.

Arguments Supporting Globalization18
Free Trade Enhances Socioeconomic Development That free trade is the best strategy for advancing the world’s economic development is one of the few propositions on which almost all economists agree, not only because it is theoretically compelling but also because it has been demonstrated in practice. Data have shown a clear and definitive link between liberalization of trade and economic growth.19 On a wide range of measures—poverty, education, health, and life expectancy—more people have become better off at a faster pace in the past 60 years than at any other time in history. Evidence is strong regarding the dramatic decline in both the proportion and the absolute number of destitute people. The World Development Indicators from the World Bank show that the number of people in extreme poverty fell from 1.5 billion in 1981 to 1.1 billion in 2001. Measured as a proportion of the population in developing countries, the decline was from 39.5 percent in 1981 to 21.3 percent in 2001. Between 1981 and 1999, the proportion of people in the East Asia and Pacific region living on less than $1 a day fell from 56 to 16 percent. In China, it plummeted from 61 to 17 percent. The proportion of

people living in nations with daily food supplies under 2,200 calories per capita has declined from 56 percent in the mid1960s to less than 10 percent. Life expectancy in the developing world has nearly doubled since World War II, and infant mortality has decreased in all of the developing regions of the world. The proportion of children in the labor force fell from 24 percent in 1960 to 10 percent in 2000. Global literacy grew from 52 percent in 1950 to 81 percent in 1999, and on average the more globally integrated countries spend more on public education, especially in developing countries. Citizens from more globally integrated countries have greater levels of civil liberties and political rights. Within a generation’s time, there has been an enormous improvement in the human condition, and every one of the development success stories was based on export-led growth facilitated by the liberalization of trade. Of course, countries can reject globalization, and some have, including Myanmar, the Democratic Republic of Congo, Sierra Leone, Rwanda, Madagascar, Guinea-Bissau, Algeria, the Republic of Congo, Burundi, Albania, Syria, and Ukraine. They are among the most impoverished countries in the world. As an article in the Financial Times puts it, “They are victims of their refusal to globalize.”20

Free Trade Promotes More and Better Jobs
Expanded trade is also linked with the creation of more and better jobs. Over the past two decades—a period of immense technological change and growth in trade—around 40 million more jobs were created than were destroyed in the United States. It is true that when a country opens to trade, just as when new technologies are developed, some of its sectors may not be competitive. Companies may go out of business, and some jobs will be lost. But trade creates new jobs, and these tend to be better than the old ones. The key is not to block change but, instead, to manage the costs of trade adjustment and to support the transition of workers to more competitive employment.

Concerns with Globalization21
Those expressing concern with globalization have come from a range of sectors of society, and they express a correspondingly diverse set of concerns. Some fundamentally oppose the very process and outcomes of globalization on ideological grounds, while others may merely be concerned about finding ways to better manage globalization processes and the resulting outcomes. Some of the opponents’ concerns may be viewed as naïve or clearly inconsistent with the preponderance of evidence. Other challenges to globalization may have theoretic merit or other supporting evidence and

Demonstrators at a World Trade Organization meeting. 14 SECTION 1 | The Nature of International Business

WE’RE NOT AGAINST TRADE; WE WANT TRADE RULES THAT ALLOW AMERICANS TO COMPETE FAIRLY IN THE MARKETPLACE. THE RECORD IS CLEAR: CURRENT TRADE POLICY ISN’T WORKING. IT HAS LED TO TREMENDOUS JOB LOSS AND HUMAN RIGHTS ABUSES. THE [PROPOSED] FTAA [FREE TRADE AREA OF THE AMERICAS] WILL LEAVE PLANT CLOSINGS, TRASHED ENVIRONMENTS AND SWEATSHOPS IN ITS WAKE. —Richard Trumka, secretary-treasurer, AFL-CIO

certainly may be worthy of discussion and the fostering of substantive change. Although perspectives on the globalization debate may in many respects depend on one’s values and ideology, thus further compounding efforts to reach a mutually agreedon resolution, let us first ask this question: what are some of the primary concerns of the opponents of globalization? While many of the antiglobalizers concede that globalization “increases the size of the pie,” they also claim that it has been accompanied by a broad array of injurious social implications. Among their concerns, let us briefly examine three primary ones here: (1) that globalization has produced uneven results across nations and people, (2) that globalization has had deleterious effects on labor and labor standards, and (3) that globalization has contributed to a decline in environmental and health conditions.

shows that income inequality has not risen in most developing countries that have integrated with the world economy, it does show that inequality has increased in some places, most notably in China. Inequality has risen in some high-income countries as well, but he attributes that more to the nature of technological change than to globalization. When income data are adjusted to reflect relative purchasing power, the inequality in income between poor and rich nations diminishes. Wolf also notes that while globalization of trade and investment is an enabler to improved income and living standards, the results may vary if obstacles exist such as poor governance or excessive borrowing.22

Globalization Has Had Deleterious Effects on Labor and Labor Standards The issue of the impact of globalization on labor standards has become an oft-mentioned concern of workers in the United States and other nations. With trade liberalization through the World Trade Organization and increased mobility of capital, measures to keep a country’s industries within its borders have been reduced, and companies have an easier time divesting their interests in one country and moving to another. Workers in developed countries frequently voice concerns that their jobs will migrate to developing nations where there are lower standards, and thus lower costs, leading to the infamous “race to the bottom,” where developed nations with more rigorous labor standards become disadvantaged. Indeed, the Labor Secretariat for the North American Free Trade Agreement (NAFTA) commissioned a report that found more than half of firms surveyed used threats to close U.S. operations as a tool to fight union-organizing efforts. Since NAFTA’s inception and the subsequent reduction in trade and investment barriers, these threats have become more plausible. As reported by Alan Tonelson, “In fact, more than 10 percent of employers studied . . . ‘directly threatened to move to Mexico,’ and 15 percent of firms, when forced to bargain with a union, actually closed part or all of a factory—triple the rate found in the late 1980s, before NAFTA.”23 The concern can run both ways, however. Although labor standards in developing countries are usually lower than in industrialized countries, they are rising—and evidence shows CHAPTER 1 | The Challenging World of International Business 15

Globalization Has Produced Uneven Results across Nations and People In stark contrast to the positive picture presented by supporters of globalization, opponents describe the painful impact of foreign investment and trade liberalization on the people of the world. Far from everyone has been a winner, they say. The promise of export-led growth has failed to materialize in several places. For example, most of Latin America has failed to replicate Asia’s success despite efforts to liberalize, privatize, and deregulate its economies, with results ranging from disappointment in Mexico to catastrophe in Argentina. Similarly, efforts in sub-Saharan Africa have produced only limited benefits, and the share of the population living in extreme poverty there rose from 42 to 47 percent between 1981 and 2001. Open world markets, it seems, may offer the possibility of economic development—but the recipe is neither easy in its implementation nor universal in its outcomes. Many opponents of globalization have claimed that there is a huge gap between the world’s rich and poor and that globalization has caused that gap to increase. That there is a gap between rich and poor is unquestionable, but the evidence is perhaps not so clear regarding the charge that globalization has increased this inequality. Although Martin Wolf’s analysis

that multinationals investing in host nations pay higher wages, create new jobs at a faster rate, and spend more on R&D than do local firms. Developing countries may also view the imposition of more demanding labor standards within their borders as a barrier to free trade. They may feel that lower-cost labor constitutes their competitive advantage and that if they are forced to implement more stringent labor standards, then companies may no longer have an incentive to set up operations in their countries, damaging their prospects for improved economic development. As the authors of Globaphobia ask, “Is it humane for the United States to refuse to trade with these countries because their labor standards are not as high as we would prefer? The consequence of taking this position is that many third-world workers will have no jobs at all, or must take jobs that pay even lower wages and have even worse working conditions than those currently available in the export-oriented sector.”24 A study by the Carnegie Endowment for International Peace found that Mexico’s agricultural sector, which provides most of the country’s employment, had lost 1.3 million jobs in the first decade since NAFTA was implemented. In addition, far from diminishing under NAFTA, the flow of impoverished Mexicans into the United States has risen dramatically, the study says.25

more than similar U.S. trucks and these vehicles do not use the cleaner fuels required in the United States. Protesters have also claimed that, under liberalized rules regarding the globalization of trade and investment, businesses have an incentive to move their highly polluting activities to nations that have the least rigorous environmental regulations or a lower risk of liability associated with operations that can create environmental or health-related problems. On the other hand, the economic growth fostered by globalization can help generate and distribute additional resources for protecting the environment, and improved trade and investment can enhance the exchange of more environmentally friendly technologies and best practices, particularly within developing nations. As you read the preceding synopsis of the complex issues and arguments of supporters and opponents of globalization, are you convinced one way or the other? Is there a way the debate can move beyond a simplistic argument for or against globalization and toward how best to strengthen the working of the global economy in order to enhance the welfare of the world and its inhabitants?

LO7

Explain the reasons for entering foreign markets.

Globalization Has Contributed to a Decline in Environmental and Health Conditions Regarding concerns of antiglobalization forces that globalization contributes to declining environmental standards, former president Zedillo of Mexico stated, “Economic integration tends to favor, not worsen the environment. Since trade favors economic growth, it brings about at least part of the necessary means to preserve the environment. The better off people are, the more they demand a clean environment. Furthermore, it is not uncommon that employment opportunities in export activities encourage people to give up highly polluting marginal occupations.” Yet a difficulty caused by the North American Free Trade Agreement and the maquiladora program that began before NAFTA has been the substantial increases in ground, water, and air pollution along the Mexico–U.S. border. Damage to the environment has been caused by the many new production facilities and the movement of thousands of Mexicans to that area to work in them. In addition, some health and environmental issues extend beyond the scope of trade agreements. Some of NAFTA’s rules on trade in services may cause governments to weaken environmental standards for sometimes hazardous industries like logging, trucking, water supply, and real estate development. For example, to comply with NAFTA’s rules on trade in services, the Bush administration waived U.S. clean air standards in order to allow trucks based in Mexico to haul freight on U.S. highways. Globalization opponents argue that this could increase air pollution and associated health concerns in border states, as the aging Mexican truck fleet pollutes

MOTIVES FOR ENTERING FOREIGN MARKETS
Now let us briefly examine the reasons international firms enter foreign markets, which are all linked to either (1) the desire to increase profits and sales or (2) the desire to protect these profits and sales from being eroded by competitors.

Increase Profits and Sales
Enter New Markets Managers are always under pressure to increase the sales and profits of their firms, and when they face a mature, saturated market at home, they begin to search for new markets outside the home country. They find that (1) markets with a rising gross domestic product (GDP) per capita and population growth appear to be viable candidates for their operations and (2) the economies of some nations where they are not doing business are growing at a considerably faster rate than is the economy of their own market. New Market Creation As we will discuss in Chapter 12, there are many ways in which potential new markets can be identified and assessed. Sources of potential market size and overall market growth rate can be found in publications such as the annual Human Development Report of the United Nations Development Program (http://hdr.undp.org/en/). Reviewing data in such reports will reveal great variety in growth rates

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among countries when ranked by variables such as GDP (gross domestic product) per capita. Data from sources such as the Human Development Report indicate that from a macro perspective, markets around the world are growing. However, this does not mean that equally good opportunities exist for all kinds of business. Perhaps surprisingly, economic growth in a nation causes markets for some products to be lost forever while, simultaneously, markets for other products are being created. Take the case of a country in the initial stage of development. With little local manufacturing, it is a good market for exporters of consumer goods. As economic development continues, however, managers see profit-making opportunities in (1) producing locally the kinds of consumer goods that require simple technology or (2) assembling from imported parts the products that demand a more advanced technology. Given the tendency of governments to protect local industry, the importation of goods being produced in that country will normally be prohibited or discouraged through taxes, tariffs, or other means once local production of those goods has been established. Thus, exporters of easy-to-manufacture consumer goods, such as paint, adhesives, toiletries, clothing, and almost anything made of plastic, will begin to lose this market, which

Improved Communications

This might be considered a supportive reason for opening up new markets overseas, because certainly the ability to communicate rapidly and less expensively with customers and subordinates by electronic mail, wireless and wired telephones, and videoconferencing has given managers confidence in their ability to control foreign operations. Advances in computer-based communications are allowing virtual integration, which permits firms to become more physically fragmented as they search the world for lower-cost inputs. For example, good, relatively inexpensive international communication enables large insurance, banking, software, and other firms to “body shop,” that is, transmit computer-oriented tasks worldwide to a cheap but skilled labor force. The clients of numerous Indian software companies are in the United States. A few years ago, software teams were required to fly back and forth between the two countries. Now, at the end of the day, customers in the United States e-mail their problems to India. The Indians then work on the solutions and have them back in the United States before the Americans have had breakfast the next day. For their work, Indian software engineers often receive only 15 to 20 percent as much pay as do their American counterparts.

[

“83 of the 182 countries . . . for which data were available (46 percent) had average annual GDP per capita growth rates that were higher than the U.S. growth rate.”

]

now becomes a new market for producers of the inputs to these “infant industries.”

Faster-Growing Markets

Not only are new foreign markets appearing, but many of them are growing at a faster rate than is the home market. A firm looking for a market large enough to support the local production of appliances or machinery, for example, might be attracted by the wealth, growth, and population size of Japan and Spain. When you examine the low GDP per capita and negative growth rates of many of the African nations, you realize why foreign direct investment in that entire continent is so low. Clearly, market analysts will investigate other factors, such as the legal and political situations (discussed in Chapters 6 and 7), but an examination of variables such as those contained in the Human Development Report mentioned earlier is a good place to start. Interestingly, 83 of the 182 countries in the 2009 Human Development Report for which data were available (46 percent) had average annual GDP per capita growth rates that were higher than the U.S. growth rate for the period 1990–2007.26

Obtain Greater Profits As you know, greater profits may be obtained by either increasing total revenue or decreasing the cost of goods sold, and often conditions are such that a firm can do both. Greater Revenue Rarely will all of a firm’s domestic competitors be in every foreign market in which it is located. Where there is less competition, the firm may be able to obtain a better price for its goods or services. Increasingly, firms are also obtaining greater revenue by simultaneously introducing products in foreign markets and in their domestic markets as they move toward greater globalization of their operations. This can result in greater sales volume while lowering the cost of the goods sold.

Lower Cost of Goods Sold Going abroad, whether by exporting or by producing overseas, can frequently lower the cost of goods sold. Increasing total sales by exporting not only will reduce research and development (R&D) costs per unit but also will make other economies of scale

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possible. Another factor that can positively affect the cost of goods sold is the inducements—such as reduced taxes or subsidies for R&D—that some governments offer to attract new investment.

Higher Overseas Profits as an Investment Motive
There is no question that greater profits on overseas investments has been a strong motive for going abroad. Business International, for example, reported that 90 percent of 140 Fortune 500 companies surveyed had achieved higher profitability on foreign than on domestic assets. One study of the 100 largest multinationals showed that only 18 of them earned more than 50 percent of their revenue overseas, but 33 earned more than 50 percent of their profits from foreign operations. Let’s now look at some reasons for going abroad that are more related to the protection of present markets, profits, and sales.

moving part or all of its production facilities to the countries from which its competition is coming, it can enjoy such advantages as less costly labor, raw materials, and energy. Managers may decide to produce certain components abroad and assemble them in the home country, or, if the final product requires considerable labor in the final assembly, it may send the components overseas for this activity. Many nations, especially developing countries, offer export processing zones in which firms, mostly foreign manufacturers, enjoy almost complete absence of taxation and regulation of materials brought into the zones for processing and subsequent re-export.

Protect Markets, Profits, and Sales
Protect Domestic Market by Following Customers Overseas Frequently, a firm will go abroad to protect its home market. Service companies (e.g., accounting, advertising, marketing research, banking, law) will establish

Protect Foreign Markets Changing the method of going abroad from exporting to overseas production is often necessary to protect foreign markets. Managers of a firm supplying a profitable overseas market via exports may begin to note some ominous signs that this market is being threatened. Lack of Foreign Exchange One of the first signs is a delay in payment by the importers. The importers may have sufficient local currency but may be facing delays in buying foreign exchange (currency) from the government’s central bank. The credit manager in the exporting firm, by checking with his

In examining the country’s balance of payments, the financial manager may find that the company’s export revenue has declined while the import volume remains high. foreign operations in markets where their principal accounts are located to prevent competitors from gaining access to those accounts. They know that once a competitor has been able to demonstrate to top management what it can do by servicing a foreign subsidiary, it may be able to take over the entire account. Similarly, suppliers to original equipment manufacturers (e.g., battery manufacturers supplying automobile producers) often follow their large customers. These suppliers have an added advantage in that they are moving into new markets with a guaranteed customer base. or her bank and other exporters, learns that this condition is becoming endemic—a reliable sign that the country is facing a lack of foreign exchange. In examining the country’s balance of payments, the financial manager may find that the company’s export revenue has declined while the import volume remains high. Experienced exporters know that import and foreign exchange controls are in the offing and that there is a good chance of losing the market, especially if they sell consumer products. In times of foreign exchange scarcity, governments will invariably give priority to the importation of raw materials and capital goods. If the advantages of making the investment outweigh the disadvantages, the company may decide to protect this market by producing locally. Managers know that once the company has a plant in the country, the government will do its utmost to provide foreign exchange for raw materials to keep the plant, a source of employment, in operation. Because imports of competing products are prohibited, the only competition, if any, will have to come from other local manufacturers.

Attack in Competitor’s Home Market

Occasionally, a firm will set up an operation in the home country of a major competitor with the idea of keeping the competitor so occupied defending that market that it will have less energy to compete in the firm’s home country.

Using Foreign Production to Lower Costs A company may go abroad to protect its domestic market when it faces competition from lower-priced foreign imports. By 18 SECTION 1 | The Nature of International Business

Local Production by Competitors Lack of
foreign exchange is not the only reason a company might change from exporting to manufacturing in a market. For instance, while a firm may enjoy a growing export business and prompt payments, it still may be forced to set up a plant in the market if competitors have also noticed their export volumes will support local production. If a competing firm moves to put up a factory in the market, management must decide rapidly whether to follow suit or risk losing the market forever. Managers know that many governments, especially those in developing nations, not only will prohibit further imports once the product is produced in the country but also will permit only two or three companies to enter so as to maintain a sufficient market for these local firms.

Acquire Technology and Management Know-How A
reason often cited by foreign firms for investing in the United States is the acquisition of technology and management know-how. Nippon Mining, for example, a Japanese copper mining company, came to Illinois and paid $1 billion for Gould Inc. to acquire technology leadership and market share in producing the copper foil used in printed circuit boards for electronics products.

Geographic Diversification
Many companies have chosen geographic diversification as a means of maintaining stable sales and earnings when the domestic economy or their industry goes into a slump, since the industry or the other economies may still be at their peak in other parts of the world.

Satisfy Management’s Desire for Expansion The faster growth mentioned previously helps fulfill management’s desire for expansion. Stockholders and financial analysts also expect firms to continue to grow, and those companies operating only in the domestic market have found it increasingly difficult to meet that expectation. As a result, many firms have expanded into foreign markets. This, of course, is what companies based in small countries, such as Nestlé (Switzerland) and Nokia (Finland), discovered decades ago. LO8 Recognize that globalization of an international firm occurs over at least seven dimensions and that a company can be partially global in some dimensions and completely global in others.

Downstream Markets
A number of Organization of Petroleum Exporting Countries (OPEC) nations have invested in refining and marketing outlets, such as filling stations and heating-oil distributors, to guarantee a market for their crude oil at more favorable prices. Petrôleos de Venezuela, owner of Citgo, is one of the largest foreign investors in the United States.

Protectionism

When a government sees that local industry is threatened by imports, it may erect import barriers to stop or reduce these imports. Even threats to do this can be sufficient to induce the exporter to invest in production facilities in the importing country.

Guarantee Supply of Raw Materials Few developed nations possess sufficient domestic supplies of raw materials. Japan and Europe are almost totally dependent on foreign sources for many important materials, and even the United States depends on imports for more than half of its consumption of aluminum, chromium, manganese, nickel, tin, and zinc. To ensure a continuous supply, manufacturers in the industrialized countries are being forced to invest, primarily in the developing nations where most new deposits are being discovered.

THE SEVEN DIMENSIONS FOR GLOBALIZING A BUSINESS
In organizing their international activities, there are at least seven dimensions along which management can globalize (standardize): (1) product, (2) markets, (3) promotion,

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cuinib
Explore International Job Opportunities
If you are considering an international career but not sure where to look to find one, there are numerous websites with Internet listings for private industry and government jobs. The website for this book, www.mhhe.com/geringerM, includes a broad range of sites, such as the following: • The Riley Guide has hundreds of worldwide listings for companies and governments. The Targeting and Research section has information on Business and Employer Research and Living and Working Overseas: www.rileyguide.com • GoingGlobal.com offers a wide range of information on international careers, international job search resources, job opportunities worldwide, and information to help build your international career: http://www.goinglobal.com/ HotTopics.asp • Expertise in Labour Mobility (ELM) is a knowledge provider on international work issues for companies and individuals entering the global workplace. ELM’s “Looking for work in . . .” guides cover 40 countries and are “must have” tools for everybody involved in securing a job abroad: http://www. labourmobility.com • Escape Artist provides a broad range of international job postings as well as related reference materials: http://www.escapeartist .com/jobs/overseas1.htm • International Jobs Center provides extensive international business and international development job postings: http://www.internationaljobs.org/ • Jobs Abroad supplies listings for jobs in many nations of the world, along with other resources: jobsabroad.com/ http://www. • International Careers and Jobs by Profession provides resources for work abroad, study abroad, volunteering abroad, and international travel: http://www. transitionsabroad.com/listings/work/ careers/-keywebsitesprofessionspecific. shtml • Partnerjob.com facilitates the geographic mobility of members’ employees by helping find jobs for those employees’ spouses and partners at their new location: http://www. partnerjob.com/ Look For International Internship Opportunities While You Are Still in School • Internships Abroad is an internship program offered through Ohio University for internships in the United Nations, in the U.S. Department of State, and in over 65 countries: www.ohiou.edu/ studyabroad/internships.htm • U.S. Department of Commerce has various intern programs. For example, Student Employment Opportunities covers a broad range of student employment and internship opportunities: www.ohrm .os.doc.gov • U.S. Department of State holds oral prep sessions all across the United States and Asia to assist candidates for the Foreign Service oral exam. It also offers an extremely helpful description of Student Employment Programs with good information on how to apply for them: www.careers.state.gov/index.html • Organization of American States offers a program designed for juniors, seniors, and graduate students at the university level to allow them to work within their fields of study. They must have at least a 3.0 GPA and command of two of the four official languages: English, Portuguese, Spanish, and French. The program has three sessions during the year: Fall, Winter-Spring, and Summer: www.oas .org/EN/PINFO/HR/gen_information.htm Set Realistic Job and Career Objectives for Your First International Job More than likely, your first job in international business will NOT come with a business class airline ticket to Shanghai, Paris, or Rio de Janeiro and a “sky’s the limit” expense account. More realistically, it will come with a desk, computer, FAX machine, e-mail, and smartphone (e.g., Blackberry, iPhone). Many entrylevel jobs in international business involve import/export documentation to move shipments across international borders, tracking shipments by boat, plane, train and truck, following sales to make sure orders and payments are received, as well as dealing with foreign customers by phone, FAX, and e-mail. Is this the glamour of international business? Probably not. But it is business, and it is international, and it does put your career track in the international arena, which is where you need to be to start your international business career. However, some entrylevel jobs in many SMEs will involve short international visits to client meetings, conferences, trade shows, or corporate meetings in international locations. In addition to your willingness to take that all important entry-level international job and work to be successful at it, here are several other suggestions to build your international career:

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Inform your boss and your company’s Human Resources Department about your interest in a career in international business. Join several international business trade associations in your city and regularly attend their meetings: • International Chamber of Commerce— http://www.iccwbo.org/ • International Association of Business Communicators (IABC)—http:// www.iabc.com/

• • • • • •

International Herald www.iht.com/

Tribune—



Financial Times—www.ft.com The Economist—www.economist .com Reuters—www.reuters.com BBC—www.bbc.co.uk • • • • • • • •

Engineering, Information Technology and Computer Science—experiencing major worldwide growth Health Professions and Health Care Management Translation and Language Teaching Abroad The Fine and Performing Arts Architecture Environmental and Natural Resource Management International Chambers of Commerce Foreign Trade Divisions of State Offices of Economic Development The United States Government • • • U.S. Counselor Service Foreign Service—U.S. State Department The Central Intelligence Agency and the National Security Agency



Find a mentor to teach, guide, and assist you in building your international business career. Be ready to travel internationally at a moment’s notice—hold a valid passport. Since not all international jobs are in business, explore the possibilities and you just might be surprised with the range of international opportunities available to you.

• •

• International Trade Association of the U.S. Department of Commerce seminars and workshops—http://trade. gov/index.asp • Federation of International Trade Associations (FITA) offers a directory of international trade associations by specialty with locations—www.fita.org

• Your state’s Department of Commerce or Economic Development offers workshops and seminars on international trade. By attending these meetings, you will network and get to know their members so they get to know you and learn about your interest in a career in international business. • Read international business publications and listen to international news and business broadcasts so you are current with issues, trends, and practices in international trade. Here are several: • World Trade (this is free)—http:// www.worldtrademag.com/

Alternatives for Working Globally—Consider International Jobs and Careers Other than in Business The first thought that typically comes to mind when you hear “International Careers” is a job in the corporate world working for a Fortune 500 firm that services international markets and has a global reputation. This is not the only track into an international career. There are many outstanding international career opportunities for people with desirable interpersonal and language skills that are not in mainstream business but may require basic business expertise. Explore these options to become a part of the global workforce: • Travel, Tourism & Hospitality—a major international industry found in virtually every country of the world. • •

• The Agency for International Development (AID) • • • • The Export-Import Bank The International Trade Commission U.S. Information Agency The Peace Corps

International Education Exchange— teach abroad Volunteer and Social Service Agencies

The skills and experiences offered by any of these career options are highly sought after and readily transferable between the public and the private sector.

• International Trade Update— published monthly by the International Trade Association of the U.S. Department of Commerce— http://trade.gov/press/publications/ newsletters/ita_0506/index_0506.asp

(4) where value is added to the product, (5) competitive strategy, (6) use of non-home-country personnel, and (7) extent of global ownership in the firm. The possibilities range from zero standardization (multidomestic) to standardization along all seven dimensions (completely global). The challenge for company managers is to determine how far the firm should go with each one. Usually the amount of globalization will vary among

the dimensions. For example, promotional activities for washing machines might be standardized to a great extent: people use them to get their clothes clean. However, for economic reasons, in poorer countries the machines must be simpler and less costly and, therefore, the product is not standardized worldwide. We return to this topic in various parts of the text, particularly in Chapter 10. CHAPTER 1 | The Challenging World of International Business 21

ORGANIZATION OF THIS BOOK
After describing the nature of international business and the institutions associated with it in Section One, we analyze several of the key uncontrollable forces that make up the foreign and domestic environments and illustrate their effect on management functions in Section Two. In Section Three, we reverse the procedure and deal with the management functions, demonstrating how they are influenced by the uncontrollable forces. A solid understanding of the business concepts and techniques employed in the United States and other advanced industrial nations is a requisite for success in international business. However, because transactions take place across national borders, three environments—domestic, foreign, and international—may be involved instead of just one. Thus, in international business, the international manager has three choices in deciding what to do with a concept or a technique employed in domestic operations: (1) transfer it intact, (2) adapt it to local conditions, or (3) not use it overseas. International managers who have discovered that there are differences in the environmental forces are better prepared to decide which option to follow. To be sure, no one can be an expert on all these forces for all nations, but just knowing that differences may exist will cause people to “work with their antennas extended.” In other words, when they enter international business, they will know they must look out for important variations in many of the forces that they take as given in the domestic environment. It is to the study of these three environments that this text is directed. ■

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22

SECTION 1

|

The Nature of International Business

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