International Business - GBV · What Are the Key Concepts in International Trade and Investment? 41 ... DHL, FedEx, and UPS: ... Analysis' 147 • Closing Case

InternationalBusinessThe New Realities

International Edition

Second Edition

S. Tamer CavusgilGeorgia State University

Gary KnightFlorida State University

John R. RiesenbergerThunderbird School of Global Management,Clinical Professor of Executive Development,Corporate Learning Group

Boston Columbus Indianapolis New York San Francisco Upper Saddle River AmsterdamCape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi

Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

ContentsPreface 25

Part 1 Foundation Concepts 38

1 Introduction: What Is International Business? 38P A Typical Day in the Global Economy 39

What Is International Business? 40

What Are the Key Concepts in International Trade and Investment? 41

The Nature of International Trade 41

The Nature of International Investment 43

Services as Well as Products 44

The International Financial Services Sector 45

How Does International Business Differ from Domestic Business? 46

The Four Risks in Internationalization 46

Who Participates in International Business? 48

Multinational Enterprise (MNE) 48

• Global Trend: DIESEL: A Smaller Firm's Smashing International Success 51

Non-governmental Organizations (NGOs) 51

Why Do Firms Internationalize? 52

Why Study International Business? 54

Facilitator of the Global Economy and Interconnectedness 54

Contributor to National Economic Well-Being 54

A Competitive Advantage for the Firm 55

A Competitive Advantage for You 55

H Recent Grad in IB: Ashley Lumb 56

An Opportunity for Global Corporate Citizenship 57

• Closing Case: Whirlpool's Dramatic Turnaround ThroughInternationalization 57

• Chapter Essentials: Key Terms 59 Summary 60 Test YourComprehension 61 Apply Your Understanding 61

O globalEDGE™ Internet Exercises 62

2 Globalization of Markets and the Internationalizationof the Firm 64

. Bangalore: IT's Global Destination 65

Why Globalization Is Not New 67

Phases of Globalization 67

Market Globalization: An Organizing Framework 70

Dimensions of Market Globalization 71

Drivers of Market Globalization 72

Technological Advances 76

a %

10 Contents

Information Technology 77Communications 77Manufacturing 78Transportation 78

• Global Trend: Globalization and E-Business in the Online World 79Societal Consequences of Market Globalization 79Contagion: Rapid Spread of Monetary or Financial Crises 80

Loss of National Sovereignty 81Offshoring and the Flight of Jobs 82Effect on the Poor 83Effect on the Natural Environment 86Effect on National Culture 86Globalization and Africa 87

Firm-Level Consequences of Market Globalization: Internationalizationof the Firm's Value Chain 88

• Closing Case: Debating the Merits of Globalization 89



3 Organizational Participants That Make InternationalBusiness Happen 94

'P The Emergence of Born Global Firms 95

Four Types of Participants in International Business 96

Participants Arranged by Value-Chain Activity 97Illustrating the International Value Chain Using Dell Inc. 98

Focal Firms in International Business 99The Multinational Enterprise (MNE) 100Small and Medium-Sized Enterprises 101Born Global Firms 102

International Entry Strategies of Focal Firms 103A Framework for Classifying International Entry Strategies 103Other Types of International Entry Strategies 104

Distribution Channel Intermediaries in International Business 106Intermediaries Based in the Foreign Market 107Intermediaries Based in the Home Country 108

Online Intermediaries 110

• Global Trend: Online Retailers: Contemporary Global Intermediaries 111

Facilitators in International Business 111

B Recent Grad in IB: Cynthia Asoka 113

Governments in International Business 115

• Closing Case: DHL, FedEx, and UPS: Shifting Fortunes in the GlobalLogistics Services Industry 116

H Chapter Essentials: Key Terms 118 Summary 118 Test YourComprehension 119 Apply Your Understanding 119


Contents 11

Part 2 The Environment of International Business 122

4 The Cultural Environment of International Business 122; American Football . . . in Europe? 123

Culture and Cross-Cultural Risk 124

Key Concepts of Culture 126

What Culture Is Not 127Socialization and Acculturation 127The Many Dimensions of Culture 127National, Professional, and Corporate Culture 129The Role of Culture in International Business 130

@ Recent Grad in IB: Zhibo (Lawrence) Yu 132Cultural Metaphors, Stereotypes, and Idioms 133Cultural Metaphors 133Stereotypes 133Idioms 134

Interpretations of Culture 134High- and Low-Context Cultures 134Hofstede's Research on National Culture 135Subjective versus Objective Dimensions of Culture 137Values and Attitudes 137Deal versus Relationship Orientation 137Manners and Customs 138Perceptions of Time 138Perceptions of Space 139Religion 139Symbolic Productions 142Material Productions and Creative Expressions of Culture 142Language as a Key Dimension of Culture 142Contemporary Issues in Culture 144Culture and the Services Sector 144Technology, the Internet, and Culture 144Globalization's Effect on Culture: Are Cultures Converging? 145Overcoming Cross-Cultural Risk: Managerial Guidelines 145

• Global Trend: Minimizing Cross-Cultural Bias with Critical IncidentAnalysis' 147

• Closing Case: Hollywood's Influence on Global Culture 148



5 Ethics and International Business 154'. The Challenge of Corruption Around the World 155

Ethics in International Business 157The Value of Ethical Behavior 160Variation in Ethical Standards among Countries 160

12 Contents

An Ethical Dilemma 162Linking Ethics, Corruption, and Responsible Behavior 162

Corporate Social Responsibility 163The Value of CSR 164

• Global Trend: Global Corporate Social Responsibility Rises to the Topof the MNE Agenda 165

The Role of Sustainability in International Operations 165Corporate Governance and Its Implications for Managers 167A Framework for Making Ethical Decisions 168Embracing CSR and Sustainability 169

A Global Consensus 169

Ethics, CSR, and Sustainability in Practice 170

H Closing Case: Corruption at Siemens 171



Theories of International Trade and Investment 176"P Dubai: The Path to Creating a Knowledge-Based Economy 177

Theories of International Trade and Investment 178

Why Do Nations Trade? 180Classical Theories 180

How Can Nations Enhance Their Competitive Advantage? 187Contemporary Theories 187

• Global Trend: Moving from Comparative to National CompetitiveAdvantages 193

Why and How Do Firms Internationalize? 193Firm Internationalization 193

How Can Internationalizing Firms Gain and Sustain CompetitiveAdvantage? 195FDI-Based Explanations 195Non-FDI-Based Explanations 200

• Closing Case: Hyundai: Leading the Way in the Global Auto Industry 201



Political and Legal Systems in National Environments 208: The Political and Legal Realities of Doing Business in Russia 209

The Nature of Country Risk 210How Prevalent Is Country Risk? 211

Political and Legal Environments in International Business 212

Political Systems 213Totalitarianism 213Socialism 214

Contents 13

Democracy 215

Democracy's Link to Economic Freedom and Openness 215

The Relationship between Political Systems and Economic Systems 216

Legal Systems 217Common Law -218Civil Law 218Religious Law 219Mixed Systems 220

Participants in Political and Legal Systems 220Government 220International Organizations 221Regional Economic Blocs 221Special Interest Groups 221Competing Firms 222

Types of Country Risk Produced by Political Systems 222Government Takeover of Corporate Assets 222Embargoes and Sanctions 223Boycotts against Firms or Nations 223War, Insurrection, and Violence 224Terrorism 224

Types of Country Risk Produced by Legal Systems 224Country Risk Arising from the Host Country Legal Environment 224Country Risk Arising from the Home Country Legal Environment 227

• Global Trend: Evolving Legal Aspects of E-Commerce 228

Managing Country Risk 229Proactive Environmental Scanning 229Strict Adherence to Ethical Standards 230Alliances with Qualified Local Partners 230Protection through Legal Contracts 230

• Closing Case: Political, Legal, and Ethical Dilemmas in the GlobalPharmaceutical Industry 230



8 Government Intervention in International Business 236,• India's Transition to a Liberal Economy 237

The Nature of Government Intervention 238

Rationale for Government Intervention 240Defensive Rationale 240Offensive Rationale 241

Instruments of Government Intervention 242Tariffs 243Nontariff Trade Barriers 244Investment Barriers 246Subsidies and Other Government Support Programs 247

14 Contents

Consequences of Government Intervention 249

Evolution of Government Intervention 252

• Global Trend: The World Trade Organization and Collapseof the Doha Round 253

Intervention and the Global Financial Crisis 254

How Firms Can Respond to Government Intervention 255Strategies for Managers 255

• Closing Case: Government Intervention at Airbus and Boeing 257



9 Regional Economic Integration 262P Evolution of the European Union 263Regional Integration and Economic Blocs 264Levels of Regional Integration 265The Leading Economic Blocs 267The European Union (EU) 267European Free Trade Association, (EFTA) 272North American Free Trade Agreement (NAFTA) 272

H Global Trend: Integrating Eastern Europe and Turkey into the EU 273El Mercado Comun del Sur (MERCOSUR) 274The Caribbean Community (CARICOM) 275Comunidad Andina de Naciones (CAN) 275Association of Southeast Asian Nations (ASEAN) 275Asia Pacific Economic Cooperation (APEC) 276Australia and New Zealand Closer Economic Relations Agreement (CER) 276Economic Integration in the Middle East and Africa 277Advantages of Regional Integration 277Success Factors for Regional Integration 278Ethical Dilemmas and Drawbacks of Regional Integration 279Management Implications of Regional Integration 281

• Closing Case: Russell Corporation: Choosing between Global and RegionalFree Trade 283• Chapter Essentials: Key Terms 285 Summary 285 Test YourComprehension 286 Apply Your Understanding 286


10 Emerging Markets, Developing Economies,and Advanced Economies 288

> The New Global Challengers: MNEs from Emerging Markets 289Advanced Economies, Developing Economies, andEmerging Markets 290Advanced Economies 291Developing Economies 291

Contents 15

Emerging Market Economies 294

• Global Trend: China's Evolving Challenges and Opportunities 298

What Makes Emerging Markets Attractive for International Business 298Emerging Markets as Target Markets 299Emerging Markets as Manufacturing Bases 299Emerging Markets as Sourcing Destinations 300Assessing the True Potential of Emerging Markets 300Per-Capita Income as an Indicator of Market Potential 300Middle Class as an Indicator of Market Potential 302Risks and Challenges of Emerging Markets 303Political Instability 303Weak Intellectual Property Protection 304Bureaucracy, Red Tape, and Lack of Transparency 304 s.Poor Physical Infrastructure 304Partner Availability and Qualifications 304Dominance of Family Conglomerates 305Strategies for Emerging Markets 306Customize Offerings to Unique Emerging Market Needs 306Partner with Family Conglomerates 307Target Governments in Emerging Markets 307

a Recent Grads in IB: Andrew & Jamie Waskey 308Skillfully Challenge Emerging Market Competitors 309Corporate Social Responsibility in Emerging Markets and DevelopingEconomies 310

Foster Economic Development with Profitable Projects 310Microfinance to Facilitate Entrepreneurship 311The Special Case of Africa 311

• Closing Case: Tata Group: India's New Global Challenger 313



11 The International Monetary and Financial Environment 318' The Complex Monetary and Financial Relationship between China and theUnited States 319Exchange Rates and Currencies in International Business 320Convertible and Nonconvertible Currencies 321Foreign Exchange Markets 322Exchange Rates Fluctuate Constantly 322How Exchange Rates Are Determined 324Economic Growth 324Inflation and Interest Rates 325Market Psychology 325Government Action 326Emergence of the Modern Exchange Rate System 326The Bretton Woods Agreement 327

16 Contents

IMF and the World Bank 327The Modern Exchange Rate System 327The Monetary and Financial Systems 328International Monetary System 328Global Financial System 329

• Global Trend: Global Financial Crisis 330

Key Players in the Monetary and Financial Systems 331The Firm 331National Stock Exchanges and Bond Markets 332Commercial Banks 332

• Recent Grad in IB: Chip Besse 333Central Banks 335

The Bank for International Settlements 335International Monetary Fund 335The World Bank 336

• Closing Case: AIG and Global Financial Contagion 337



Part 3 Strategy and Opportunity Assessment 342

12 Strategy and Organization in the International Firm 342

? IKEA's Global Strategy 343

Strategy in International Business 345

Building the Global Firm 346Visionary Leadership 346Organizational Culture 348Organizational Processes 348The Distinction between Multidomestic and Global Industries 349

The Integration-Responsiveness Framework 350Pressures for Global Integration 351Pressures for Local Responsiveness 351

Strategies Based on the Integration-Responsiveness Framework 352

Organizational Structure 355Centralized or Decentralized Structure? 356

Organizational Structures for International Operations 357Export Department 357International Division Structure 357Geographic Area Structure (Decentralized Structure) 359Product Structure (Centralized Structure) 360Functional Structure (Centralized Structure) 361Global Matrix Structure 361

• Closing Case: Carlos Ghosn: Leading for Global Successat Renault-Nissan 363

Contents 17

B Chapter Essentials: Key Terms 366 Summary 366 Test YourComprehension 367 Apply Your Understanding 367


13 Global Market Opportunity Assessment 370"?• Estimating Demand in Emerging Markets 371

Assessing Global Market Opportunities 372

Task One: Analyze Organizational Readiness to Internationalize 374

Task Two: Assess the Suitability of Products and Services for ForeignMarkets 376Factors Contributing to Product Suitability for International Markets 376Key Issues to Resolve in Measuring Product Potential 377Task Three: Screen Countries to Identify Target Markets 377 „Screening Countries for Exporting 377

• Global Trend: Global Macro Trends That Affect International Business 379Country Screening for Foreign Direct Investment 383

Country Screening for Sourcing 384

Task Four: Assess Industry Market Potential 385Practical Methods for Managers to Assess Industry Market Potential 386

Data Sources for Estimating Industry Market Potential 386

H Recent Grad in IB: Javier Estrada 388

Task Five: Choosing Foreign Business Partners 389Criteria for Choosing a Partner 389

Searching for Prospective Partners 390

Task Six: Estimate Company Sales Potential 390Determinants of Company Sales Potential 390Practical Approaches to Estimating Company Sales Potential 391In Conclusion 393

• Closing Case: Advanced Biomedical Devices: Assessing Readinessto Export 394



Part 4 Entering and Operatingin International Markets 400

14 Exporting and Countertrade 400

Exporter's Dogged Pursuit of International Customers 401An Overview of Foreign Market Entry Strategies 402Internationalization of the Firm 404

Diverse Motives for Pursuing Internationalization 404Characteristics of Firm Internationalization 405Exporting as a Foreign Market Entry Strategy 406Exporting and the Global Economy 407

18 Contents

Exporting: A Popular Entry Strategy 407Service Sector Exports 408Advantages of Exporting 409Limitations of Exporting 409

• Global Trend: The Emergence of SME Exporters 410A Systematic Approach to Exporting 410Importing 413

Managing Export-Import Transactions 414Documentation 414Shipping and Incoterms 415

Payment Methods in Exporting and Importing 416Cash in Advance 416Letter of Credit 417Open Account 418

Export-Import Financing 418Commercial Banks 419Factoring, Forfaiting, and Confirming 419Distribution Channel Intermediaries 419Buyers and Suppliers 419Intracorporate Financing 419Government Assistance Programs 420Multilateral Development Banks (MDBs) 420Identifying and Working with Foreign Intermediaries 420Working with Foreign Intermediaries 421When Intermediary Relations Go Bad 422

Countertrade: A Popular Approach for Emerging Markets and DevelopingEconomies 423Magnitude and Drivers of Countertrade 424Types of Countertrade 424Risks of Countertrade 425Why Consider Countertrade? 425

H Closing Case: Barrett Farm Foods: A Small Firm's InternationalLaunch 426



15 Foreign Direct Investment and Collaborative Ventures 432> Deutsche Post DHL's Rapid International Expansion 433

International Investment and Collaboration 434Trends in Foreign Direct Investment and CollaborativeVentures 435Motives for FDI and Collaborative Ventures 436Market-Seeking Motives 436Resource- or Asset-Seeking Motives 437Efficiency-Seeking Motives 437Characteristics of Foreign Direct Investment 438

Contents 19

• Recent Grad in IB: Jennifer Knippen 4 3 9

Key Features of Foreign Direct Investment 439

Corporate Social Responsibility and FDI 441

Most Active Firms in FDI 441

Service Firms and FDI 441

Leading Destinations for FDI 443

Factors to Consider in Choosing FDI Locations 443

Types of Foreign Direct Investment 444

Greenfield Investment versus Mergers and Acquisitions 444

The Nature of Ownership in FDI 445

Vertical versus Horizontal Integration 445

• Global Trend: FDI in the Global Financial Crisis 4 4 7

International Collaborative Ventures 447

Equity Joint Ventures 448

Project-Based, Nonequity Ventures 448

Differences between Equity and Project-Based, Nonequity Ventures 448

Consortium 449

Cross-Licensing Agreements 449

Managing Collaborative Ventures .450

Understand Potential Risks in Collaboration 450

Pursue a Systematic Process for Partnering 450

Ensure Success with Collaborative Ventures 451

The Experience of Retailers in Foreign Markets 452

Challenges of International Retailing 453

International Retailing Success Factors 454

• Closing Case: AUTOLATINA: A Failed International Partnership 4 5 5

• Chapter Essentials: Key Terms 4 5 7 Summary 4 5 7 Test YourComprehension 4 5 9 Apply Your Understanding 4 6 0

O globalEDGE™ Internet Exercises 4 6 1

16 Licensing, Franchising, and Other ContractualStrategies 462

P Harry Potter: The Magic of Licensing 463

Contractual Entry Strategies 464

Unique Aspects of Contractual Relationships 465

Types of Intellectual Property 465

Licensing as an Entry Strategy 466

Trademark and Copyright Licensing 467

Know-How Licensing 468

The World's Top Licensing Firms 469

Advantages and Disadvantages of Licensing 469

Advantages of Licensing 470

Disadvantages of Licensing 470

Franchising as an Entry Strategy 471

Who Are the Top Global Franchisors? 473

• Global Trend: Internationalization of Franchising: Emerging Markets 4 7 3

Advantages and Disadvantages of Franchising 475

20 Contents

The Franchisor Perspective 475The Franchisee Perspective 476Managerial Guidelines for Licensing and Franchising 476

Other Contractual Entry Strategies 477Turnkey Contracting 477Build-Operate-Transfer Arrangements (BOT) 478Management Contracts 478Leasing 478The Special Case of Internationalization by Professional Service Firms 479

Guidelines for Protecting Intellectual Property 479

• Closing Case: Subway and the Challenges of Franchising in China 482



17 Global Sourcing 488> Global Sourcing of Pharmaceutical Drug Trials 489

Outsourcing, Global Sourcing, and Offshoring 490Decision 1: Outsource or Not? 491Decision 2: Where in the World Should Value-Adding Activities BeLocated? 491Global Sourcing 492Offshoring 494Scope of Global Sourcing 495Diversity of Countries That Initiate and Receive Outsourced Work 495

• Global Trend: China and India: Chief Rivals in the Global SourcingGame 496

Strategic Choices in Global Sourcing 497

Benefits of Global Sourcing 498Cost Efficiency 498Ability to Achieve Strategic Goals 498

Risks of Global Sourcing 501

Strategies for Minimizing the Risks of Global Sourcing 502

Implementing Global Sourcing Through Supply-Chain Management 503Information and Communications Technology 505Logistics and Transportation 506 ,Transportation Modes 506

Global Sourcing and Corporate Social Responsibility 507Potential Harm to Local and National Economy from Global Sourcing 507Public Policy on Global Sourcing 508

• Closing Case: Good Hopes for Global Outsourcing 509



Contents 21

Part5 Functional Area Excellence 514

18 Marketing in the Global Firm 514* Zara's Unique Model for International Marketing Success 515Global Marketing Strategy 516

Targeting Customer Segments and Positioning 517Standardization and Adaptation of International Marketing 518

Standardization 518Adaptation 520

0 Recent Grad in IB: John Dykhouse: Trade Development Manager 521Standardization and Adaptation: A Balancing Act 522Global Branding and Product Development 523Global Branding 523Global Product Development 525

• Global Trend: Growing Role for Marketing in Developing Economies 526

International Pricing 527Factors That Affect International Pricing 527A Framework for Setting International Prices 528Managing International Price Escalation 530Managing Pricing under Varying Currency Conditions 530Transfer Pricing 531Gray Market Activity (Parallel Imports) 532

International Marketing Communications 534International Advertising 534/'International Promotional Activities 536

International Distribution 537Global Account Management 537

• Closing Case: H&M: International Marketing Success Story 538



19 Human Resource Management in the Global Firm 5443; Johnson & Johnson: A Leader in International Human ResourceManagement 545

The Strategic Role of Human Resources in International Business 546Three Employee Categories 546Differences between Domestic and International HRM 547Key Tasks in International Human Resource Management 549International Staffing Policy 549Recruiting, Selecting, and Developing Talent 550Cultivating Global Mind-sets 550Cultural Intelligence 551

22 Contents

Expatriate Assignment Failure and Culture Shock 552

Preparation and Training of International Employees 552Preparing Employees for Repatriation 553Charting Global Careers for Employees 553

International Performance Appraisal 554

Compensation of Employees 554

International Labor Relations 556Distinctive Features of Labor around the World 557Cost, Quality, and Productivity of Labor 558Workforce Reduction 558Trends in International Labor 559Firm Strategy in International Labor Relations 560

Diversity in the International Workforce ,560Women in International Business 560

• Global Trend: Global Corporate Social Responsibility and the Role ofInternational Human Resource Management 561

Success Strategies for Women Managers in International Business 563

• Closing Case: Evolving Human Resource Challenges at Sony 564

B Chapter Essentials: Key Terms 566 Summary 566 Test YourComprehension 567 Apply Your Understanding 567


20 Financial Management and Accountingin the Global Firm 570

S A Small Firm Rides the Waves of Foreign Exchange 571

Key Tasks in International Financial Management 572

Task One: Decide on the Capital Structure 573

Task Two: Raise Funds for the Firm's International Activities 574Financial Centers 574Sources of Funds for International Operations 575Debt Financing 577

• Global Trend: Emerging Markets as International InvestmentDestinations 577

Intracorporate Financing 579

Task Three: Manage Working Capital and Cash Flow 579Methods for Transferring Funds within the MNE 579Multilateral Netting 580Task Four: Perform Capital Budgeting 581Net Present Value Analysis of Capital Investment Projects 581Task Five: Manage Currency Risk 582Three Types of Currency Exposure 582

S Recent Grad in IB: Maria Keeley 583Foreign Exchange Trading 584Types of Currency Traders 585Exchange Rate Forecasting 586

Contents 23

Managing Exposure to Currency Risk through Hedging 587

Best Practice in Minimizing Currency Exposure 588

Task Six: Manage the Diversity of International Accounting and Tax

Practices 589

Transparency in Financial Reporting 589

Trends toward Harmonization 590

Consolidating the Financial Statements of Subsidiaries 591

International Taxation 591

B Closing Case: International Financial Operations at Tektronix 5 9 4

• Chapter Essentials: Key Terms 5 9 6 Summary 5 9 6 Test YourComprehension 5 9 7 Apply Your Understanding 5 9 8

O globalEDGE™ Internet Exercises 5 9 9

>.

Glossary 601

Notes 608

Photo Credits 628

Author Index 630

Company Index 635

Subject Index 639

Documents

International Business - GBV · What Are the Key Concepts in International Trade and Investment? 41 ... DHL, FedEx, and UPS: ... Analysis' 147 • Closing Case