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10E International

Business

COMPETING IN THE

GLOBAL MARKETPLACE

Charles W. L. Hill

UNIVERSITY OF WASHINGTON

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CONTENTS

Ag pcxrt one Critical Thinking and Discussion Questions 32


™ Introduction and Overview Research Task 32
Closing Case
CHAPTER 1 Who Makes the Apple iPhone? 33
Globalization 2 Endnotes 34
Opening Case
Colombian Coffee: Adapting to an Ever Changing
Global Market 3 ^ part two
Introduction 4 igP Country Differences
What Is Globalization 5
The Globalization ofMarkets 5 CHAPTER 2
The Globalization of Production 6 National Differences in Political
Economy 36
Vizio and the Market for Flat-Panel TVs 8 Opening Case
The Emergency of Global Institutions 8 Ethiopia: A Land of Opportunity 37

Drivers of Globalization 10 Introduction 38


Declining Trade and Investment Barriers 10 Political Systems 39
The Role ofTechnological Change 12 Collectivism and Individualism 39
The Changing Demographics of the Global Economy 14 Democracy and Totalitarianism 41
The Changing World Output and World Trade Picture 14
The Changing Foreign Direct Investment Picture 15 Venezuela under Hugo Chävez, 1999-2013 42
Economic Systems 43
India's Software Sector 16 Market Economy 44
The Chan ging Nature of the Multinational Command Economy 44
Enterprise 18 Mixed Economy 45
The Changing World Order 19
Legal Systems 46
The Global Economy of the Twenty-First
Different Legal Systems 46
Century 20
Differences in Contract Law 47
Property Rights and Corruption 48
China's Hisense—An Emerging Multinational 21
The Globalization Debate 22 Corruption in Nigeria 50
Antiglobalization Protests 22
Did JP Morgan Violate the Foreign Corrupt
Practices Act? 51
Protesting Globalization in France 23
The Protection of Intellectual Property 51
Globalization, Jobs, and Income 24
Product Safety and Product Liability 53
Globalization, Labor Policies, and the
Environment 26
Globalization and National Sovereignty 27 Starbucks Wins Key Trademark Case
Globalization and the World's Poor 28 in China 54
Managing in the Global Marketplace 29 Implications for Managers 54
Chapter Summary 31 Chapter Summary 55

ix
X tWy Contents

Critical Thinking and Discussion Questions 56 Implications of Changing Political


Economy 79
Research Task 56
Implications for Managers 80
Closing Case
France's Troubled Economy 57 Chapter Summary 84
:.ndnotes 58 Critical Thinking and Discussion Questions
Research Task 85
Closing Case
CHARTER 3 Revolution in Egypt 85
Political Economy and Economic
Endnotes 86
Development 60
Opening Case
Cuba and Economic Liberalization 61 CHAPTER 4
Introduction 62 Differences in Culture 88

Differences in Economic Development 62 Opening Case


Carrefour's Struggles in China 89
Map 3.1 GNI per Capita, 2011 63
Map 3.2 GNI PPP per Capita, 2011 65 Introduction 90
Broader Conceptions of Development: What Is Culture? 91
Amartya Sen 65 Values and Norms 91
Map 3.3 Average Annual Growth Rate in GDP per Culture, Society, and the Nation-State 92
Capita, 2002-2011 66 The Determinants of Culture 93
Map 3.4 Human Development Index, 2012 67 Social Structure 94
Political Economy and Economic Progress 67 Individuais and Croups 94
Innovation and Entrepreneurship Are the Engines Social Stratification 95
of Growth 67
Innovation and Entrepreneurship Require a - - n Ii ? f
Market Economy 68 Breaking India's Gaste System 96
Innovation and Entrepreneurship Require Strang Religious and Ethical Systems 99
Property Rights 68
Christianity 99
The Required Political System 69
Map 4.1 World Religions 100
Islam 101
Emerging Property Rights in China 70
Economic Progress Begets Democracy 70
Geography, Education, and Economic Islamic Capitalism in Turkey 103
Development 71 Hinduism 104
Buddhism 105
States in Transition 71 Confucianism 105
The Spread of Democracy 71
Map 3.5 Political Freedom in 2012 72 DMG-Shanghai 107
The New World Order and Global Terrorism 73
The Spread of Market-Based Systems 74 Language 107
Spoken Language JOS
Map 3.6 Distribution of Economic Freedom,
2013 76 Unspoken Language 108

The Nature of Economic Transformation 76 Education 109


Deregulation 76 Culture and the Workplace 110
Privatization 77
Legal Systems 77 Cultural Change 112

Country Fetus Implications for Managers 114


India's Economic Transformation 78 Chapter Summary 117
Contents

Critical Thinking and Discussion Questions 118 Cases


Siemens Bribery Scandal 150
Research Task 118
Disaster in Bangladesh 151
Closing Case Knights Apparel 153
The United Arab Emirates 118 Japan's Economic Malaise 154
Indonesia: The Next Asian Giant? 156
Endnotes 120

part three
CHARTER 5
The Global Trade and Investment
Ethics in International Business 122
Environment
Opening Case
Apple s Suppfy Chain 123
CHAPTER 6
Introduction 124
International Trade Theory 158
Ethical Issues in International Business 124
Opening Case
Employment Practices 124
The Trans Pacific Partnership (TPP):
Human Rights 125
The Mother of All Free Trade Agreements? 159
Introduction 160
Making Apple's iPod 126
Environmental Pollution 127 An Overview of Trade Theory 160
The Benefits of Trade 160
The Pattern of International Trade 161
Unocal in Myanmar 128
Trade Theory and Government Policy 162
Corruption 129
Mercantilism 162
Corruption at Daimler 130 Absolute Advantage 163
Moral Obligations 131
Ethical Dilemmas 131 Is China a Neo-mercantilist Nation? 164
The Roots of Unethical Behavior 133 Comparative Advantage 166
Personal Ethics 133 The Gains from Trade 167
Decision-Making Processes 134 Qualifications and Assumptions 168
Organization Culture 134 Extensions of the Ricardian Model 169
Unrealistic Performance Expectations 134
Leadership 134
Moving U.S. White-Collar Jobs Offshore 172
Societal Culture 135
Heckscher-Ohlin Theory 174
Philosophical Approaches to Ethics 135
The Leontief Paradox 174
Straw Men 135
Utilitarian and Kantian Ethics 137 The Product Life-Cycle Theory 175
Rights Theories 138 Product Life-Cycle Theory in the 2Ist Century 176
Justice Theories 139
New Trade Theory 178
Implications for Managers 140 Increasing Product Variety and Reducing Costs 178
Economies of Scale, First-Mover Advantages, and the
Chapter Summary 144
Pattern of Trade 179
Critical Thinking and Discussion Questions 145 Implications of New Trade Theory 179
Research Task 146 National Competitive Advantage: Porter's Diamond 1
Factor Endowments 182
Closing Case
Demand Conditions 182
Working Conditions in Bangladeshi
Related and Supporting Industries 182
Factories 146
Firm Strategy, Structure, and Rivalry 183
Endnotes 147 Evaluating Porter's Theory 183
xii Contents

Implications for Managers 184


Estimating the Gains from Trade for America 215
Chapter Summary 185
Implications for Managers 216
Critical Thinking and Discussion Questions 186
Chapter Summary 218
Research Task 187
Critical Thinking and Discussion Questions 218
Closing Case
Morocco's Growing Aviation Industry 187 Research Task 219
Appendix Closing Case
International Trade and the Balance of U.S. Tariffs on Tire Imports from China 219
Payments 189
Endnotes 220
Endnotes 191

CHAPTER 8
CHAPTER 7 Foreign Direct Investment 223
The Political Economy of International Trade 194 Opening Case
Mexico s Oil Market Open to Foreign Investment 223
Opening Case
Got Milk? The Russia-Lithuania Trade Introduction 224
Row Over Dairy Products 195
Foreign Direct Investment in the World Economy 224
Introduction 196 Trends in FDI 224
The Direction ofFDI 225
Instruments of Trade Policy 197
The Source ofFDI 226
Tariffs 197

Foreign Direct Investment in China 227


Are the Chinese lllegally Subsidizing Auto Exports? 198
The Form ofFDI: Acquisitions versus Greenfield
Subsidies 198
Investments 228
Import Quotas and Voluntary Export Restraints 199
Local Content Requirements 200
Administrative Policies 201 Foreign Direct Investment by Cemex 229
Antidumping Policies 201
Theories of Foreign Direct Investment 229
Why Foreign Direct Investment? 230
U.S. Magnesium Seeks Protection 202 The Pattern of Foreign Direct Investment 232
The Eclectic Paradigm 233
The Case for Government Intervention 203
Political Arguments for Intervention 203 Political Ideology and Foreign Direct Investment 235
The Radical View 235
The Free Market View 235
Trade in Hormone-Treated Beef 205
Pragmatic Nationalism 236
Economic Arguments for Intervention 206
Shifting Ideology 236
The Revised Case for Free Trade 207
Retaliation and Trade War 207
Domestic Politics 208 DP World and the United States 237
Benefits and Costs of FDI 238
Development of the World Trading System 208
Host-Country Benefits 238
From Smith to the Great Depression 209
Host-Country Costs 240
1947-1979: GATT, Trade Liberalization, and
Economic Growth 209 Home-Country Benefits 242
1980-1993: Protectionist Trends 209 Home-Country Costs 242
The Uruguay Round and the World Trade International Trade Theory and FDI 242
Organization 210 Government Policy Instruments and FDI 243
WTO: Experience to Date 211 Home-Country Policies 243
The Future of the WTO: Unresolved Issues and the Host-Country Policies 244
Doha Round 212 International Institutions and the Liberalization of FDI 245
Contents xiii

Implications for Managers 245 Map 9.4 APEC Members 279


Chapter Summary 248 Asia-Pacific Economic Cooperation 279
Regional Trade Blocs in Africa 280
Critical Thinking and Discussion Questions 248
Implications for Managers 280
Research Task 249
Chapter Summary 282
Closing Case
Wal-mart in Japan 249 Critical Thinking and Discussion Questions 283

Endnotes 251 Research Task 283


Closing Case
CHAPTER 9 I Want My Greek TV! 284
Regional Economic Integration 254 Endnotes 285
Opening Case Cases
U.S.-Mexico Trade Relations After 20 Years of Legal Outsourcing 288
NAFTA: Is There a Dark Side to Free Trade? 255
The Global Financial Crisis and
Introduction 256 Protectionism 289
NAFTA and Mexican Trucking 290
Levels of Economic Integration 257
The Rise of the Indian Automobile Industry 291
The Case for Regional Integration 259 Logitech 292
The Economic Case for Integration 259
The Political Case for Integration 259
Impediments to Integration 260
part four
The Case against Regional Integration 260
Regional Economic Integration in Europe 261 The Global Monetary System
Evolution ofthe European Union 261
Map 9.1 Member States of the European Union in CHAPTER 10
2012 262 The Foreign Exchange Market 294
Political Structure ofthe European Union 262
Opening Case
Are World Currency Markets Being Manipulated? 295
EU Takes Aim at Google over Anti-trust Accusations 263
Introduction 296
The Single European Act 264
The Establishment of the Euro 265 The Functions of the Foreign Exchange Market 297
Currency Conversion 297
Insuring against Foreign Exchange Risk 298
Why the European Union is Creating a
European Banking Union 266
Enlargement of the European Union 269 Volkswagen's Hedging Strategy 300
The Nature of the Foreign Exchange Market 301
The Looming Debt Crisis in. . . Scandinavia? 270
Economic Theories of Exchange Rate Determination 302
Regional Economic Integration in the Americas 272 Prices and Exchange Rates 303
The North American Free Trade Agreement 272
Map 9.2 Economic Integration in the Americas 272 Abenomics and Japan: Preventing a Third Lost
The Andean Community 275 Decade? 307
Mercosur 275 Interest Rates and Exchange Rates 308
Central American Common Market, CAFTA, and Investor Psychology and Bandwagon Effects 309
CAß/COM 276 Summary of Exchange Rate Theories 310
Free Trade Area ofthe Americas 277
Exchange Rate Forecasting 310
Regional Economic Integration Elsewhere 277 The Efficient Market School 310
Association of Southeast Asian Nations 277 The Inefficient Market School 311
Map 9.3 ASEAN Countries 278 Approaches to Forecasting 311
xiv IM Contents

Currency Convertibility 312


How Nissan Protects Itself from Currency Swings 344
Implications for Managers 313
Chapter Summary 345
Wal-Mart Loses $680 Million 315 Critical Thinking and Discussion Questions 346
Chapter Summary 317 Research Task 347
Critical Thinking and Discussion Questions 317 Closing Case
Africa Currency Union 347
Research Task 318
Endnotes 348
Closing Case
Billabong 318
Endnotes 320
CHAPTER 12
The Global Capital Market 350
CHAPTER 1 1 Opening Case
The International Monetary System 322 Restrictions on Capital Flows are Growing.
But are all Capital Flows Alike? 351
Opening Case
Iceland's Economic Recovery 323 Introduction 352
Introduction 324 Benefits of the Global Capital Market 352
Functions of a Generic Capital Market 353
The Gold Standard 325
Attractions of the Global Capital Market 353
Mechanics of the Gold Standard 325
Strength of the Gold Standard 325
The Period between the Wars: 1918-1939 326 Deutsche Telekom Taps the Global Capital
Market 355
The Bretton Woods System 326
Growth ofthe Global Capital Market 358
The Role of the IMF 327
Global Capital Market Risks 360
The Role of the World Bank 328
The Collapse of the Fixed Exchange Rate
Did the Global Capital Markets
System 328
Fail Mexico? 361
The Floating Exchange Rate Regime 329
The Eurocurrency Market 362
The Jamaica Agreement 330
Genesis and Growth of the Market 362
Exchange Rates since 1973 330
Attractions ofthe Eurocurrency Market 363
Drawbacks of the Eurocurrency Market 364
The U.S. Dollar, Oil Prices, and Recycling
The Global Bond Market 364
Petrodollars 333
Attractions ofthe Eurobond Market 365
Fixed versus Floating Exchange Rates 333
The Global Equity Market 365
The Case for Floating Exchange Rates 334
The Case for Fixed Exchange Rates 335 Foreign Exchange Risk and the Cost
Who Is Right? 336 of Capital 367
Exchange Rate Regimes in Practice 336 Implications for Managers 367
Pegged Exchange Rates 336
Chapter Summary 368
Currency Boards 337
Critical Thinking and Discussion
Crisis Management by the IMF 338
Questions 369
Financial Crises in the Post-Bretton Woods Era 338
Research Task 369
India Has Trouble Defending the Rupee 339 Closing Case
Evaluating the IMF's Policy Prescriptions 340 The Trouble with China s IPOs 369
Implications for Managers 343 Endnotes 370
Contents xv

Cases Closing Case


South Korean Currency Crisis 373 Avon Products 404
Russian Ruble Crisis and Its Aftermath 374
Endnotes 405
Caterpillar: Competing in a World of Fluctuating
Currencies 376
CHAPTER 14
The Organization of International
Business 408
;/Ai| per# five
Opening Case
3|jP The Strategy and Structure of Reorganization at EADS 409
International Business Introduction 410
Organizational Architecture 411
CHARTER 13
Organizational Structure 412
The Strategy of International Business 378
Vertical Differentiation: Centralization and
Opening Case Decentralization 412
Ford s Global Strategy 379
Introduction 380 The International Division at Walmart 414
Horizontal Differentiation: The Design of
Strategy and the Firm 380
Structure 415
Value Creation 381
Strategie Positioning 382 ir'
Operations: The Firm as a Value Chain 383 The Rise and Fall of Dow Chemical's Matrix
Structure 421
Global Expansion, Profitability, and Profit Growth 386
Integrating Mechanisms 422
Expanding the Market: Leveraging Products and
Competencies 386 Control Systems and Incentives 426
Location Economies 387 Types of Control Systems 426
Experience Effects 389 Incentive Systems 427
Leveraging Subsidiary Skills 391 Control Systems, Incentives, and Strategy in the
International Business 428
Leveraging Subsidiary Skills at ArcelorMittal 392 Processes 430
Summary 392
Organizational Culture 431
Cost Pressures and Pressures for Local Creating and Maintaining Organizational
Responsiveness 393 Culture 432
Pressures for Cost Reductions 394 Organizational Culture and Performance in the
Pressures for Local Responsiveness 394 International Business 433
Mfr i.'.r.rHTTucW. Fecus
Local Responsiveness at MTV Networks 395 Culture and Incentives at Lincoln
Electric 434
Choosing a Strategy 397
Global Standardization Strategy 398 Synthesis: Strategy and Architecture 435
Localization Strategy 398 Localization Strategy 435
Transnational Strategy 399 International Strategy 436
International Strategy 400 Global Standardization Strategy 436
Transnational Strategy 437
Environment, Strategy, Architecture, and
Evolution of Strategy at Procter & Gamble 401
Performance 437
The Evolution of Strategy 401
Organizational Change 438
Chapter Summary 402
Organizational Inertia 438
Critical Thinking and Discussion Questions 403 Implementing Organizational Change 439
Research Task 403 Chapter Summary 440
xv: |99 Contents

Critical Thinking and Discussion Questions 441 Closing Case


General Motors in China 471
Research Task 442
Endnotes 472
Closing Case
Philips NV 442 Cases
The Evolving Strategy of IBM 476
indnotes 443
IKEA in 2013 477
General Electric's Joint Ventures 483
The Globalization of Starbucks 484
CHARTER 15 Coca-Cola's Strategy 486
Entry Strategy and Strategie
Alliances 446
Opening Case part six
Sulky Burel in Russia 447
International Business Functions
Introduction 448
Basic Entry Decisions 448 CHARTER 16
Which Foreign Markets? 448
Exporting, Importing, and Countertrade 488
Urning of Entry 449
Opening Case
Ex-Im Bank and Boeing; Even Billion Dollar
Tesco's International Growth Strategy 450
Companies Need a Little Help Sometimes 489
Scale of Entry and Strategie Commitments 451
Summary 452 Introduction 490
The Promise and Pitfalls of Exporting 490
The Jollibee Phenomenon—A Philippine
- t'ociis
Multinational 453
PCX Systems 492
Entry Modes 453
Improving Export Performance 492
Exporting 454
An International Comparison 492
Turnkey Projects 454
Information Sources 493
Licensing 455
Franchising 457
Joint Ventures 458 Exporting with a Little Government Help 494
Wholly Owned Subsidiaries 459 Utilizing Export Management
Companies 495
Selecting an Entry Mode 460
Export Strategy 495
Core Competencies and Entry
Mode 461
Pressures for Cost Reductions and Export Strategy at 3M 496
Entry Mode 461
Export and Import Financing 497
Greenfield Venture or Acquisition? 462 Lack of Trust 497
Pros and Cons of Acquisitions 462 Letter of Credit 498
Pros and Cons of Greenfield Ventures 464 Draft 499
Greenfield Venture or Acquisition? 465 Bill ofLading 500
Strategie Alliances 465 A Typical International Trade Transaction 500
The Advantages of Strategie Alliances 465 Export Assistance 501
The Disadvantages of Strategie A lliances 466 Export-Import Bank 501
Making Alliances Work 466 Export Credit Insurance 502
Chapter Summary 469 Countertrade 502
Critical Thinking and Discussion Questions 470 The Popularity of Countertrade 503
Types of Countertrade 503
Research Task 471 The Pros and Cons of Countertrade 504
Contents xvii

Chapter Summary 505 Closing Case


Making the Amazon Kindle 533
Critical Thinking and Discussion Questions 506
Endnotes 534
Research Task 506
Closing Case
Vellus Products 507
CHAPTER 18
Endnotes 508
Global Marketing and R&D 536
Opening Case
CHAPTER 17 Hyundai's Global Brand; Sign of the Times 537
Global Production, Outsourcing, and Introduction 538
Logistics 510
The Globalization of Markets and Brands 539
Opening Case
Market Segmentation 540
Airbus Re-thinks How it Manages its
Suppliers 511 Fe"
Marketing to Black Brazil 541
Introduction 512
Product Attributes 541
Strategy, Production, and Logistics 512
Cultural Differences 542
Where to Produce 514 Economic Development 542
Country Factors 514 Product and Technical Standards 543
Distribution Strategy 543
Philips in China 515 Differences between Countries 543
Technological Factors 516 Choosing a Distribution Strategy 546
Product Factors 519
Communication Strategy 547
Locating Production Facilities 520
Barriers to International Communication 547
The Hidden Costs of Foreign Locations 521
Push versus Pull Strategies 548
: 1.«
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GE Moves Manufacturing, from China to the
Unilever—Selling to India's Poor 549
United States 522
Global Advertising 551
The Strategie Role of Foreign
Production Sites 522
Dove's Global "Real Beauty" Campaign 552
Pricing Strategy 553
Hewlett-Packard in Singapore 523
Price Discrimination 553
Outsourcing Production: Make-or-Buy Strategie Pricing 554
Decisions 524 Regulatory Influences on Prices 555
The Advantages of Make 525
Configuring the Marketing Mix 556
The Advantages of Buy 527
Trade-offs 529
Strategie Alliances with Suppliers 529 Levi Strauss Goes Local 557
Managing a Global Supply Chain 530 New-Product Development 558
The Role ofJust-in-Time Inventory 530 The Location ofR&D 558
The Role of Information Technology and the Integrating R&D, Marketing, and Production 559
Internet 531 Cross-Functional Teams 560
Building Global R&D Capabilities 561
Chapter Summary 531
Chapter Summary 562
Critical Thinking and Discussion
Questions 532 Critical Thinking and Discussion Questions 563
Research Task 533 Research Task 564
xv::m Contents

Closing Case CHAPTER 20


Domino s Pizza 564 Accounting and Finance in the International
Endnotes 565 Business 596
Opening Case
CHARTER 19 Tax Strategy at Google 597
Global Human Resource Management 568
Introduction 598
Opening Case
National Differences in Accounting Standards 599
Alcatel-Lucent and Talent
Management 569 International Accounting Standards 600
Introduction 570 ' , Ä US
Chinese Accounting 601
The Strategie Role of International HRM 571
Accounting Aspects of Control Systems 602
Staffing Policy 572
Exchange Rate Changes and Control Systems 603
Types of Staffing Policy 572
Transfer Pricing and Control Systems 604
Expatriate Managers 575
Separation of Subsidiary and Manager Performance 605
Financial Management: The Investment Decision 605
Bringing in top global talent at Samsung 578
Capital Budgeting 605
The Global Mind-Set 579
Project and Parent Cash Flows 606
Training and Management Development 580 Adjusting for Political and Economic Risk 606
Training for Expatriate Managers 580
Repatriation of Expatriates 581
Black Sea Oil and Gas Ltd. 607
Risk and Capital Budgeting 608
anto's Repatriation Program 582
Financial Management: The Financing Decision 609
Management Development and Strategy j<S2
Financial Management: Global Money Management 609
Performance Appraisal 583
Minimizing Cash Balances 609
Performance Appraisal Problems 583
Reducing Transaction Costs 611
Guidelines for Performance Appraisal 584
Managing the Tax Bürden 612
Compensation 584 Moving Money across Borders 613
National Differences in Compensation 584
Chapter Summary 617
Critical Thinking and Discussion Questions 618
Global Compensation Practices at McDonald's 585
Expatriate Pay 585 Research Task 618
International Labor Relations 587 Closing Case
The Concerns of Organized Labor 587 Microsoft's Acquisition of Skype 619
The Strategy of Organized Labor 588
Endnotes 620
Approaches to Labor Relations 589
Ccises
Chapter Summary 589
Brazil's Gol Airlines 622
Critical Thinking and Discussion Questions 590 Staffing Policy at AstraZeneca 622
Research Task 591
Glossary 624
Closing Case
MMC China 591 Photo Credits 634
Endnotes 593 Index 635