8E

International Business
C O M P E T I N G IN T H E GLOBAL MARKETPLAG E

C h a r l e s W. L. Hill
UNIVERSITY OE W A S H I N G T O N

part one
Introduction and Overview
CHAPTER 1

Country Differences National Differences in Political Economy 40

Opening Case
Egypt, the Troubled Giant 40 Introduction 42 Political Systems 42 Collectivism and Individualism 43 Democracy and Totalitarianism 45

Globalization 2
Opening Case
The Globalization of Health Care 2 Introduction 4

What Is Globalization? 6
The Globalization of Markets 6 The Globalization of Production 7

Management Focus
Vizio and the Market for Flat Panel TVs The Emergence of Global Institutions 8 9

Country Focus Chavez's Venezuela

46

Economic Systems 48
Market Economy 48 Command Economy 48 Mixed Economy 49 Legal Systems 49 Different Legal Systems 50 Differences in Contract Law 51 Property Rights and Corruption 51

Drivers of Globalization 11 Declining Trade and Investment Barriers J J The Role of Technological Change 14 Microprocessors and Telecommunications 14

The Changing Demographics of the Global Economy 16

The Changing World Output and World Trade Picture 16

Country Focus
India's Software Sector 18 The Changing Foreign Direct Investment Picture 18 The Changing Nature of the Multinational Enterprise 20

Country Focus
Corruption in Nigeria 54 The Protection of Intellectual Property 55 Product Safety and Liability 56

Management Focus China's HisenseAn Emerging Multinational 22

The Changing World Order 22 The Global Economy of the 2 1 st Century 24

Management Focus
Starbucks Wins Key Trademark Case in China 57

The Determinants of Economic Development

The Globalization Debate 24

Antiglobalization Protests 25 Globalization, jobs, and Income 26

57 Differences in Economic Development 57 Broader Conceptions of Development: Amartya Sen 61 Political Economy and Economic Progress 61

Country Focus
Protesting Globalization in France 27 Globalization, Labor Policies, and the Environment 29 Globalization and National Sovereignty 3 J Globalization and the World's Poor 31 Managing in the Global Marketplace 33 Chapter Summary 34 Critical Thinking and Discussion Questions 35 Research Task 36

Country Focus
Emerging Property Rights in China 66 Geography, Education, and Economic Development 67 States in Transition 68 The Spread of Democracy 68 The New World Order and Global Terrorism 70 The Spread of Market-Based Systems 71

The Nature of Economic Transformation

Deregulation 73 Privatization 73 Legal Systems 74

73

Closing Case
Globalization at General Electric 36

iftkft) Contents Implications of Changing Political Economy 75 Implications for Managers Chapter Summary 80 76 Critical Thinking and Discussion Questions 117 Research Task 117 118

Closing Case
Wal-Mart's Foreign Expansion

Critical Thinking and Discussion Questions 80 Research Task 81

Closing Case
India's Transformation 81

Ethics in International Business 122

Opening Case
Siemens Bribery Scandal Introduction 124 122

CHAPTER 3

Differences in Culture 86
Opening Case
McDonald's in India Introduction 88 86

Ethical Issues in International Business 124 Employment Practices 124 Human Rights 125

What Is Culture?

89

Management Focus
Making Apple's iPod 126 Environmental Pollution 128 Corruption 128 91

Values and Norms 89 Culture, Society, and the Nation-State 90 The Determinants of Culture Social Structure 92 Individuals and Groups 92 Social Stratification 94

Management Focus
Unocal in Myanmar
Ethical Dilemmas

129
131

Moral Obligations 131

Country Focus
Breaking India's Caste System 95 Religious and Ethical Systems 97 Christianity 97 Islam 99

The Roots of Unethical Behavior 132 Personal Ethics 132 Decision-Making Processes 133 Organization Culture 133 Unrealistic Performance Expectations 134

Country Focus
Islamic Capitalism in Turkey Hinduism 103 Buddhism 104 Confucianism 104 102

Management Focus
Pfizer's Drug-Testing Strategy in Nigeria 135
Leadership 135

Management Focus
DMG-Shanghai 106 Language 107 Spoken Language 107 Unspoken Language 108 Education 108 109

Philosophical Approaches to Ethics 136 Straw Men 136 Utilitarian and Kantian Ethics 138 Rights Theories 139 justice Theories 141 Implications for Managers 142

Culture and the Workplace Cultural Change 111

Implications for Managers Chapter Summary 116

113

Chapter Summary 146 Critical Thinking and Discussion Questions 147 Research Task 148

Contents

xi 183

Closing Case
Wal-Mart's Chinese Suppliers 148 Part Two Cases Google in China 154 Mired in Corruption Kellogg, Brown & Root in Nigeria 155

Firm Strategy, Structure, and Rivalry Evaluating Porter's Theory 183

Management Focus
The Rise of Finland's Nokia Implications for Managers 184 185

Chapter Summary 187 CriticalThinking and Discussion Questions 188

The Global Trade and Investment Environment

CHAPTER 5

Research Task

189 189

Closing Case
The Ecuadoran Rose Industry

Appendix
International Trade and the Balance of Payments 190

International Trade Theory 158

Opening Case
Bangladesh's Textile Trade Introduction 160 158

CHAPTER

An Overview of Trade Theory

160

The Political Economy of International Trade 196

Opening Case
The Global Financial Crisis and Protectionism Introduction 198 198 196

The Benefits of Trade 161 The Pattern of International Trade 161 Trade Theory and Government Policy 162 Mercantilism 162 163

Absolute Advantage

Instruments of Trade Policy Tariffs 199

Subsidies 200

Country Focus
Is China a Neo-Mercantilist Nation? 164

Country Focus
Subsidized Wheat Production in Japan 201 Import Quotas and Voluntary Export Restraints 201 Local Content Requirements 203 Administrative Policies 203

Comparative Advantage

166

The Gains from Trade 167 Qualifications and Assumptions 168 Extensions of the Ricardian Model 169

Management Focus
U.S. Magnesium Seeks Protection 173 204

Country Focus
Moving U.S. White-Collar Jobs Offshore Heckscher-Ohlin Theory
The Leontief Paradox

The Case for Government Intervention

Political Arguments for Intervention 205 Economic Arguments for Intervention 208

205

174
174

Country Focus
175 176
Trade in Hormone-Treated Beef 209

The Product Life-Cycle Theory

Evaluating the Product Life-Cycle Theory

New Trade Theory 178 Increasing Product Variety and Reducing Costs 178 Economies of Scale, First-Mover Advantages, and the Pattern of Trade 179 Implications of New Trade Theory 179

The Revised Case for Free Trade 211 Retaliation and Trade War 211 Domestic Policies 211 Development of the World Trading System
From Smith to the Great Depression 212 1947-1979: GATT, Trade Liberalization, and Economic Growth 213 1980-1993: Protectionist Trends 213 The Uruguay Round and the World Trade Organization 214

212

National Competitive Advantage: Porter's Diamond

Factor Endowments 182 Demand Conditions 182 Related and Supporting Industries 182

181

xii

!cfct?)) Contents WTO: Experience to Date 215 The Future of the WTO: Unresolved Issues and the Doha Round 218 Home-Country Costs 253 International Trade Theory and FD1

253

Country Focus
Estimating the Gains from Trade for America Implications for Managers Chapter Summary 225 224 222

Government Policy Instruments and FDI 254 Home-Country Policies 254 Host-Country Policies 255 International Institutions and the Liberalization of FDI 256 Implications for Managers Chapter Summary 259 260 257

Critical Thinking and Discussion Questions 226 Research Task 227 227

Critical Thinking and Discussion Questions Research Task 260

Closing Case
Why Did Global Food Prices Rise?

Closing Case
Lakshmi Mitt a I and the Growth of Mittal Steel 261

CHAPTER 7

Foreign Direct Investment

Opening Case
Spain's Telefonica Introduction 232 230

230

Regional Economic Integration 264

Opening Case
NAFTA and Mexican Trucking Introduction 266 264

Foreign Direct Investment in the World Economy 232 Trends in FDI 232 The Direction of FDI 234

Country Focus
Foreign Direct Investment in China 236 The Source of FDI 237 The Form of FDI: Acquisitions versus Greenfield Investments 237 The Shift to Services 238 Theories of Foreign Direct Investment Why Foreign Direct Investment.7 239 239

Levels of Economic Integration 267 The Case for Regional Integration 268 The Economic Case for Integration 269 The Political Case for Integration 269 Impediments to Integration 270 The Case against Regional Integration Regional Economic Integration in Europe 271 Evolution of the European Union 271 Political Structure of the European Union 270

271

Management Focus
Foreign Direct Investment by Cemex 240 The Pattern of Foreign Direct Investment 242 The Eclectic Paradigm 244 Political Ideology and Foreign Direct Investment 245 The Radical View 245 The Free Market View 246 Pragmatic Nationalism 247 Shifting Ideology 247

Management Focus
The European Commission and Media Industry Mergers 274 The Single European Act 274

Country Focus
Creating a Single European Market in Financial Services 276 The Establishment of the Euro 277 Enlargement of the European Union 279 Regional Economic Integration in the Americas 280 The North American Free Trade Agreement 280 The Andean Community 283 MERCOSUR 284 Central American Common Market, CAFTA, and CARICOM 285 Free Trade Area of the Americas 285

Management Focus
DP World and the United States 248

Benefits and Costs of FDI

249

Host-Country Benefits 249 Host-Country Costs 251 Home-Country Benefits 253

Contents i^k Regional Economic Integration Elsewhere 286

Association of Southeast Asian Nations 286 Asia-Pacific Economic Cooperation 286 Regional Trade Blocs in Africa 288 Implications for Managers 289 Chapter Summary 291 Critical Thinking and Discussion Questions 292 Research Task 292 Currency Convertibility 330 Implications for Managers 331

xiii

Management Focus
Dealing with the Rising Euro 333 Chapter Summary 335 CriticalThinking and Discussion Questions 336 Research Task 336

Closing Case
The Euro Energy Market 293

Closing Case
Hyundai and Kia 337

Part Three Cases

NAFTA and the U.S.Textile Industry 298 Martin's Textiles 299 Agricultural Subsidies and Development 300 Boeing versus Airbus 302 Starbucks Foreign Direct Investment 308

CHAPTER 10

The International Monetary System

Opening Case
Economic Turmoil in Latvia 340 Introduction 342 The Gold Standard 343 Mechanics of the Gold Standard 343 Strength of the Gold Standard 344 344 The Period between the Wars, 1918-1939 The Bretton Woods System 345 The Role of the IMF 345 The Role of the World Bank 347 The Collapse of the Fixed Exchange Rate System 347

340

The Global Monetary System The Foreign Exchange Market 310

Opening Case
Caterpillar Tractor Introduction 312 The Function of the Foreign Exchange Market 313 Currency Conversion 313 Insuring against Foreign Exchange Risk 315 310

The Floating Exchange Rate Regime 348 The Jamaica Agreement 348
Exchange Rates since 1973 349 Fixed versus Floating Exchange Rates 351

Country Focus
The U.S. Dollar, Oil Prices, and Recycling Petrodollars 352 The Case for Floating Exchange Rates 352 The Case for Fixed Exchange Rates 353 Who Is Right? 354

Management Focus Volkswagen's Hedging Strategy 317

The Nature of the Foreign Exchange Market 318 Economic Theories of Exchange Rate Determination 319 Prices and Exchange Rates 319

Exchange Rate Regimes in Practice

Pegged Exchange Rates 355 Currency Boards 356

355

Country Focus Anatomy of a Currency Crisis 326

Summary 328

Exchange Rate Forecasting 328

The Efficient Market School 328 The Inefficient Market School 328 Approaches to Forecasting 329

IMF Crisis Management 357 Financial Crises in the Post-Bretton Woods Era 357 Mexican Currency Crisis of 1995 358 The Asian Crisis 359 Evaluating the IMF's Policy Prescriptions 363

Country Focus Turkey and the IMF 364

xiv
Implications for Managers 366

Contents

Closing Case
Industrial and Commercial Bank of China 395

Management Focus
Airbus and the Euro Chapter Summary 368 369

Part Four Case

Argentina's Monetary Crisis 399

Critical Thinking and Discussion Questions 370 Research Task 370 371

Closing Case
China's Managed Float

The Strategy and Structure of International Business The Strategy of International Business 400
Opening Case
The Evolving Strategy of IBM Introduction 402 400

CHAPTER I I

The Global Capital Market 374

Opening Case
Global Capital Markets in Crisis Introduction 376 374

Benefits of the Global Capital Market

376

Functions of a Generic Capital Market 376 Attractions of the Global Capital Market 377

Strategy and the Firm

402

Management Focus
Deutsche Telekom Taps the Global Capital Market 379 Growth of the Global Capital Market 382 Global Capital Market Risks 384

Value Creation 403 Strategic Positioning 404 Operations: The Firm as a Value Chain

405

Country Focus
Did the Global Capital Markets Fail Mexico? 385 The Eurocurrency Market 386 Genesis and Growth of the Market 386 Attractions of the Eurocurrency Market 386 Drawbacks of the Eurocurrency Market 388 The Global Bond Market 388 Attractions of the Eurobond Market The Global Equity Market 389 389

Global Expansion, Profitability, and Profit Growth 408 Expanding the Market: Leveraging Products and Competencies 408 Location Economies 409 Experience Effects 411 Leveraging Subsidiary Skills 414 Summary 414 Cost Pressures and Pressures for Local Responsiveness 415 Pressures for Cost Reductions 415 Pressures for Local Responsiveness 416

Management Focus
Local Responsiveness at MTV Networks 417 Choosing a Strategy 419 Global Standardization Strategy 419

Foreign Exchange Risk and the Cost of Capital 390

Country Focus
The Search for Capital in the Czech Republic 391 392

Management Focus Vodaphone in Japan 420

Localization Strategy 420 Transnational Strategy 421 International Strategy 422

Implications for Managers Chapter Summary 393

Management Focus
Evolution of Strategy at Procter & Gamble 423 The Evolution of Strategy 423 Chapter Summary 424

Critical Thinking and Discussion Questions 394 Research Task 394

Contents i/HJ
CriticalThinking and Discussion Questions 425 Research Task 425 CriticalThinking and Discussion Questions 464 Research Task 464

xv

Closing Case
Coca Cola 426

Closing Case
A Decade of Organizational Change at Unilever 465

Appendix
Profitability, Growth, and Valuation 428

CHAPTER 113

Entry Strategy and Strategic Alliances 468

Opening Case
General Electric's Joint Ventures 468 Introduction 470

The Organization of International Business 430

Opening Case
Nestle 430 Introduction 432 Organizational Architecture 433 Organizational Structure 434 Vertical Differentiation: Centralization and Decentralization 434

Basic Entry Decisions 470

Which Foreign Markets? 470 Timing of Entry 471

Management Focus
Tesco's International Growth Strategy 472 Scale of Entry and Strategic Commitments 472 Summary 474

Management Focus
The International Division at Wal-Mart Horizontal Differentiation: The Design of Structure 437 436

Entry Modes 475 Exporting 475 Management Focus

The Jollibee PhenomenonA Philippine Multinational 476 Turnkey Projects 477 Licensing 478 Franchising 480 joint Ventures 481 Wholly Owned Subsidiaries 482

Management Focus The Rise and Fall of Dow Chemical's Matrix Structure 442
Integrating Mechanisms 444

Control Systems and Incentives' 448

Types of Control Systems 448 Incentive Systems 449 Control Systems, Incentives, and Strategy in the International Business 451 Processes 452 Organizational Culture 454 Creating and Maintaining Organizational Culture 454 Organizational Culture and Performance in the International Business 455

Selecting an Entry Mode 483

Core Competencies and Entry Mode Pressures for Cost Reductions and Entry Mode 484

484

Greenfield Ventures or Acquisition?

Management Focus
Culture and Incentives at Lincoln Electric 456

485 Pros and Cons of Acquisitions 485 Pros and Cons of Greenfield Ventures 487 Greenfield or Acquisition? 488

Synthesis: Strategy and Architecture 458

Localisation Strategy 458 International Strategy 459 Global Standardization Strategy 459 Transnational Strategy 459 Environment, Strategy, Architecture, and Performance 460

Strategic Alliances 488 The Advantages of Strategic Alliances 489 The Disadvantages of Strategic Alliances

Management Focus Cisco and Fujitsu 490

Making Alliances Work 490 Chapter Summary 493 CriticalThinking and Discussion Questions 494 Research Task 495

Organizational Change 460 Organisational Inertia 461

Implementing Organizational Change 462 Chapter Summary 463

xvi Closing Case JCB in India 495 P a r t Five Cases The Global Automobile Industry in 2009 502 IKEA: Furniture Retailer to the World 512 Downey's Soup 518

Contents
Chapter Summary 538 CriticalThinking and Discussion Questions 539 Research Task 539 Closing Case Exporting and Growth for Small Businesses 539

part six
International Business Operations
CHAPTER 15

CHAPTER H

Global Production, Outsourcing, and Logistics 542

Opening Case
The Rise of the Indian Automobile Industry 542 Introduction 544 Strategy, Production, and Logistics 544 Where to Produce 547
Country Factors 547

Exporting, Importing, and Countertrade 520

Opening Case
MD International 520 Introduction 522 The Promise and Pitfalls of Exporting 522 Improving Export Performance 523
A n International Comparison 523

Management Focus
Philips in China 548 Technological Factors 548 Product Factors 552 Locating Production Facilities 552 The Strategic Role of Foreign Factories 554

Management Focus FCX Systems 524

Information Sources 525 Utilizing Export Management Companies 525

Management Focus
Exporting with a Little Government Help 526 Export Strategy 527 Export and Import Financing 527

Management Focus
Hewlett-Packard in Singapore 555 Outsourcing Production: Make-or-Buy Decisions 556 The Advantages of Make 557 The Advantages of Buy 558
Trade-offs 560

Management Focus
Export Strategy at 3M 528
Lack of Trust 528

Management Focus
Red Spot Paint & Varnish 529 Letter of Credit 530 Draft 531 Bill of Lading 532 A Typical International Trade Transaction 532

Strategic Alliances with Suppliers 560

Managing a Global Supply Chain 561

The Role of just-in-Time Inventory 561 The Role of Information Technology and the Internet 562 Chapter Summary 562 CriticalThinking and Discussion Questions 563 Research Task 564

Export Assistance 534

Export-Import Bank 534 Export Credit Insurance 535 Countertrade 535 The Incidence of Countertrade 535 Types of Countertrade 536 The Pros and Cons of Countertrade 537

Closing Case
Building the Boeing 787 564

Contents

xvii

CHAPTER 11

CHAPTER 118

Global Marketing and R&D

Opening Case
Microsoft in India Introduction 570 568

568

Global Human Resource Management 602

Opening Case
AstraZeneca 602 Introduction 604 The Strategic Role of International HRM 604 Staffing Policy 606 Types of S taffing Policy 606 Expatriate Managers 609

The Globalization of Markets and Brands 570 Market Segmentation 571 Product Attributes 572

Management Focus Marketing to Black Brazil 573 Cultural Differences 573

Economic Development 574 Product and Technical Standards 575 Distribution Strategy 575 Differences between Countries 576 Choosing a Distribution Strategy 578

Management Focus
Managing Expatriates at Royal Dutch/Shell 612 The Global Mind-Set 613 Training and Management Development 613 Training for Expatriate Managers 614 Repatriation of Expatriates 615 Management Development and Strategy 615

Communication Strategy 579

Barriers to International Communication 579

Management Focus
Monsanto's Repatriation Program 616 Performance Appraisal 617 Performance Appraisal Problems 617 Guidelines for Performance Appraisal 617 Compensation 618 National Differences in Compensation 618 Expatriate Pay 619

Management Focus
Overcoming Cultural Barriers to Selling Tampons 581 Push versus Pull Strategies 582

Management Focus UnileverSelling to India's Poor 583

Global Advertising 584

Pricing Strategy 585

Price Discrimination 585 Sti'ategic Pricing 587 Regulatory Influences on Prices 588 Configuring the Marketing Mix 589

Management Focus
Global Compensation Practices at McDonald's 620

International Labor Relations 622

The Concerns of Organized Labor 622 The Strategy of Organized Labor 622 Approaches to Labor Relations 623 Chapter Summary 624 CriticalThinking and Discussion Questions 625 Research Task 625

Management Focus
Levi Strauss Goes Local 590

New-Product Development 590

The Location of R&D 591 Integrating R&D, Marketing, and Production 592 Cross-Functional Teams 593 Building Global R(S?D Capabilities 594 Chapter Summary 595 CriticalThinking and Discussion Questions 596 Research Task 597

Closing Case
Lenovo 626

CHAPTER IB

Accounting in the International Business 630

Opening Case
Chinese Accounting 630 Introduction 632

Closing Case
DoveBuilding a Global Brand 597

xviii

Contents Management Focus Black Sea Energy Ltd. 657

Risk and Capital Budgeting 658

Country Differences in Accounting Standards 632

Relationship between Business and Providers of Capital 633 Political and Economic Ties with Other Countries 635 Inflation Accounting 635 Level of Development 635 Culture 636

Financing Decisions 658

Source of Financing 659 Financial Structure 659 Global Money Management: The Efficiency Objective 660 Minimizing Cash Balances 660 Reducing Transaction Costs 660 Global Money Management: TheTax Objective 661

National and International Standards 636

Lack of Comparability 636 International Standards 637

Management Focus
The Consequences of Different Accounting Standards 638 Multinational Consolidation and Currency Translation 639

Management Focus
Novartis Joins the International Accounting Club Consolidated Financial Statements 640 Currency Translation 642 Current U.S. Practice 643 640

Moving Money across Borders: Attaining Efficiencies and Reducing Taxes 662 Dividend Remittances 662 Royalty Payments and Fees 662 Transfer Prices 663 Fronting Loans 664

Accounting Aspects of Control Systems 644

Exchange Rate Changes and Control Systems 644 Transfer Pricing and Control Systems 646 Separation of Subsidiary and Manager Performance 646 Chapter Summary 647 648

Techniques for Global Money Management 666 Centralized Depositories 666

Multilateral Netting Chapter Summary 667 669 670

CriticalThinking and Discussion Questions Research Task 670

CriticalThinking and Discussion Questions Research Task 649

Closing Case
Brazil's Gol 670 649 Part Six Cases Li & Fung 676 Castrol Oil in Vietnam China Mobile 678

Closing Case
Adopting International Accounting Standards

677

Financial Management in the International Business 652

Opening Case
Global Treasury Management at Procter & Gamble 652 Introduction 654

Glossary

680 692

Photo Credits Index 694

Investment Decisions 655

Capital Budgeting 655 Project and Parent Cash Flows 656 Adjusting for Political and Economic Risk 656