:\bbrcviations List of Case Studies List ofinside Business Guided Tour of the Textbook Features Guided Tour of the Online Resource Centre Guided Tour of rhe DVD Resources lIntroducti on to InternationalBusiness Section l: Visions of international business Section II: The internationalbusiness framework 2NationalCultures xiii XV xvi i x-viii XX xxii 2 4 15 28 Section I: Interpretations of culture30 3 4 Section II: Models of national culture and the conduct of international business37 International Corporate Responsibility Section I: The foundations of international corporate responsibility Section II: The practicalities of international corporate responsibility Theories of lnter.nationalBusiness Section I: A brief history of trade and FDI Section II: Theories of international business ActorsinInternational Business: States Section I:State intervention in trade and FDI Section II: The argument that states have lost power to affect international business Section III: The argument that states have retained power to affect international business Actors inInternational Business:Global Governance Section I:Multi-purpose international organizations Section II: The Bretton Woods organizations Section III: Single-purpose lGOs Actors inInternational Business:Companies Section I:Companies crossing borders Section II: How MNEs interact withhost countries 56 58 66 82 84 88 108 110 115 121 134 136 145 152 160 162 171 '-' Detailed Contents 8 9 P_International Strategy Modes of Internationalization Section I: Leaving home: theories, mindsets, and strategies Section II: Entering foreign markets Multinationai Structure and Control Section I: Multinational theories and structures Section II: Managing people across borders 10International Corporate Cultures Section 1: Understanding corporate culture and change Section II: Corporate values and ethos 11InternationalProduction Section I: Knowledge accumulation Section II: Global supply chain management Section III: International manufacturing 12InternationalMarketing Section I: International marketing choices Section II: Issues in international marketing 13ForeignExchange Management Section I: Identifying foreign exchange risk Section II: Managing foreign exchange risk Section III: Currency trading 14MultinationalFinance and Treasury Operati ons Section I: External sources of finance Section II:Internal sources of finance 15Int ernational Human Resource Management Section I: Strategic development of IHRM Section II: Managing international workforces 16Future Trends in lnternationai Business Section I: The shifting geography of international business Section II: T h ~ecological constraint on international business Glossary Index 186 188 195 210 212 224 236 238 244 262 264 268 277 288 290 303 314 316 320 327 338 340 352 362 364 372 388 391 399 413 423 ABBAsea Brown BoveriEUEuropean Union ACPAfrican, Caribbean, PacificFAOFood and Agriculture Organization ADBAsian Development BankFCOForeign and Commonwealth Office ADRAmerican depository receipt FDAFood and Drug Administration AECAfrican Economic Community FDIforeign direct investment AlA Academy of International Business FOBfree on board APECAsian Pacific Economic Cooperation FXforeign exchange ASEANAssociation of Southeast Asian Nations GATSGeneral Agreement on Trade in Services B2Bbusiness-to-business GATTGeneral Agreement on Trade and Tariffs B2C business-to-consumer GDPgross domestic product BABritish Airways GiAGlobal International Assignments BBCBritish Broadcasting Corporation GM.General Motors BEABritish European Airlines GMgenetically modified 315Bank for International Settlements GRIGlobal Reporting Initiative 30ACBritish Overseas Airways Corporation GSPGeneral System of Preferences BRlCsBrazil, Russia, India, and China HCNhost country national oRPBombardier Recreational Products HIPChighly indebted poor country CAPCommon Agricultural Policy HRhuman resource CARl COMCaribbean Community HRMhuman resource management CCTcross-cultural training IADBInter-American Development Bank CEOchief executive officer JBRInternational Business Review Clcompetitive intelligence IBRDInternational Bank for Reconstruction and Development (the World Bank) ClFcost, insurance, and freight ICAInternational Cocoa Association CRcorporate responsibility !CTinformation and communication CSRcorporate social responsibility technology CITcurrency transaction tax lEAInternational Energy Agency =3RDEuropean Bank for Reconstruction and !FFInternational Fisher Effect Development IF!international financial institution -European Commission IHRMinternational human resource =.:owAsEconomic Community of West African management States IJV international joint venture --r =='-European Economic Community ILOInternational Labour Organization - ~ -Electricite de France IMFInternational Monetary Fund ~electronic data interchanges 10international organization -- European Free Trade Association-- -lPCCIntergovernmental Panel on Climate -==-! European International BusinessChange Academy !SOInternational Organization for . Environmental Resources ManagementStandardization -. Abbreviations iTinformation technologyRFIDradio frequency identification technology ITOinternational trade organizationROEreturn on equicy JIBSJournal ofInternational Business Studies SBUstrategic business unit JV joint venture SCMsupply chain management KMknowledge management SITSSingle IT Solution LDCless developed country SMEsmall and medium-sized enterprise LIBORLondon Interbank Offered Rate SOEstate-owned enterprise M&Amergers andacquisitions SWFsovereign wealth fund MAlMultilateral Agreement on Investment TCNthird-country national MFNmost-favoured nation TNCtransnational corporation MNCmultinational corporation TQMTotal Quality Management MNEmultinational enterprise TRIMTrade Related Investment Measure NAFTANorth American Free Trade Agreement TRIPSTrade Related Aspects of Intellectual NGOnon-governmental organization Property Rights UKTIUK Trade and Investment NIBNordic Investment Bank UNUnited Nations NTBnon-tariff barrier UNCACUnited Nations Convention against OECDOrganization for Economic Cooperation Corruption and Development UNCTADUN Conference on Trade and OPECOrganization for Petroleum Exporting Development Countries USDUS dollar OTCover the counter UNESCOUNEducational, Scientific and Cultural P&CPeople and Culture Organization PCpersonal computer USPunique selling proposition PCNparent country national USSRUnion of Soviet Socialist Republics PLCproduct life cycle VARValue-at-Risk ppmparts per million VERvoluntary export restraints PWNProfessional Women's Network vwVolkswagen QRquantitative restriction WBCSDWorld Business Council for Sustainable R&Dresearch and development Development RAregional agreements WoWways of working RATPRegie Auto nome des Transports Parisiens WHOWorld Health Organization (the Paris Transport Authority) WTOWorld Trade Organization Overview The chapter begins with an explanation of the philosophical distinction between 'international' and 'global' approaches tobusiness. This is followed by a justification of the book's core belief thatit ismore usefulfor international managers to develop an ability to respond to varying internationalcircumstancesthantoseeka'one-best-way'solutionapplicableeverywhere andalways.Significantstatisticsareprovided,demonstratingthegrowingimportanceof internationalbusinessinthemodernworld.Thefinalsectionreviewssomeof themany different reasons why companies engage in cross-border transactions, highl ighting the specific difficulties that they will face in international as opposed to domestic dealings. Introduction Section 1:Visions of international business Definitions and philosophy Key statistics Section II: The international business framework Activity drivers ( Challenges and choices Learning Obj ectives After reading this chapter, you will be able to: + compare the concepts of international and global business; + determine the value for international managers of developing a flexible mindset; + understand the mai n termi nology used in i nt ernational business studies; + perceive the link between polit ics, economics, and i nternational busi ness; +analyse the internal and external drivers of international busi ness. .. CaseStudy1. 1 cars ........ c.:.....f : ..*:!!"1.,(*'I I#,' The first foreign producers to gain a significant share of the US automotive market were the Japanese in the 1970s,led by Toyota, Honda, and Nissan (or Datsun, asit wasknown). Offering fuel -efficient models that were better adapted to the high oil prices of the time, the Japanese helped to build a new market niche in a country where low fuel prices had always been taken for granted. The American carmakers, led by the 'Big 3' {General Motors, Ford, and Chrysler), reacted to this competition in their home market by lobbying Washington to place restrictions on Japanese imports. This seemed a cheaper option than redesigning t heir product ranges away from the big gas-guzzlers that American consumers hadtraditionally favoured. The counter-oi l shock of 1986, whi chled to a dramatic fall i n fuel pri ces,appeared to justify the Big 3's strategy. Indeed, with energy i nflati on seemingly under control, the American carmakers decided to invest massively in the light truck segment , promoting household purchases of minivans, 4x4s, pick-ups, and sport uti lity vehicles. These vehi cles were anything but efficient, and, despite a great deal of technologicalprogress, fuel consumption averages actually rosein theUSAbetween the 1980s and the 2000s. At the same ti me, strong light truck sales, which by 2008 accounted for 54 per cent of all new vehicle purchases in the USA versus 22 per cent in the 1980s, helped to restore t he Big 3's profitability temporarily. Thi s strategic decision came with a heavy cost, however, since it lulled US auto executives into believing that they still did not have to incorporate l ong-term global trends into their planning. The energy crisis of 2006- 7 shook up the global economic environment, with oil prices hitting new records and peaking US consumers' interest i n fuel -effi cient cars. This was a great opportunity for Toyota, which had concentrated more on global energy trends and used the years since the 1980s to develop a hybrid model {the Prius) that consumed Jessoil and emitted less carbon dioxide (a key contributor to global warming). This positioning gave the Japanese carmaker a tremendous edge and revealed serious flaws in the Big 3's strategic outlook. The 2008 credit crunch, which causednew model sales to crash worldwide, added to the pressure on the American carmakers. Not only were the Big 3 unable to count on export markets to offset falling demand at home; the recession meant that even in their domestic market it was also harder for them to sell the big The credit crunch affected American pick up trucks more than i t did fuelefficient japaneseiStockphoto). expensive vehicles in which they had specialized. The American carmakers' product range is especially unfortunate given the likelihood thatmuch future growth in t he world automotive markets wi lloccur in emerging economies, where households can afford only modest vehicles, like the small cars that companies such asRomania's Dacia or India's Tata are developing. With hi ndsight, the decision takenby America's Big 3 carmakers during the 1980s and 1990s to remain focused on domestic conditions and consumer preferences undermined their chances of survival in what has become anincreasingly globalized business. Things got so bad that by summer 2009 GeneralMotors had declared bankruptcy and Italiancarmaker Fiat had taken over Chrysler. This could be contrasted with the promising outlook for new producers like China's BYD, a battery specialist that was having great success in applying its technology to new kinds of passenger vehi cles. One of the first rules of international business is that, with very few excepti ons, global trends tend to have a greater impact than domestic ones. l .I +Global ization Process whereby the world becomes increasi ngly interconnected at an economic, political and social level. +Home/host country People/companies originate f rom a ' home country'. When they operate abroad, they are working in a ' host country'. TJi;nking r o i 1 ~ t Which has aJ>igger effect on the business environment, national differences or global similarities? Introduction to International Business Introduction The simplest definition for international business is 'cross-border economic activity'. This has existed in various forms ever since human communities began interacting with one another. When human tribes first started trading beads or minerals like flint more than ten thousand years ago, they were engaging in prehistoric forms of international business (Watson 2005). Of course, trade has become slightly more complicated since then. Nowadays, international businessreferstotheexchangenot only of physical goodsbut alsoof services,capital, technology,and human resources.The firstpoint tomake about this field isthat it covers a very broad spectrum of activities. Just as important is to recognize what makes international business distinct from other areas of study, and where it overlaps with them. Many aspects of domestic business are also found in international business, but they are treated differently because of the latter field's emphasis on cross-border aspects. Similarly, international business covers most if not all of the same topics asinternational management but goesmuchfurther. Where international management focuses mainly on decisions made by individuals operating within a corporate setting,internationalbusinessalsoincorporatesthebroaderpolitical,economic,social, technological, philosophical, and environmental contexts within which firmsoperate. It is a very broad discipline with connections to many if not most of the issues affecting people in their daily lives. The best international business students and practitioners can analyse onmany different levelsandtendnotto recognizeartificialbordersbetweenbusiness, economics,andpolitics(White2001).fndeed,the ability and desireto embrace diversity give this discipline its distinct philosophy and enduring attraction. Section 1: Visions of international business A good starting point forthisbook is to distinguish betweenthe concept of international businessandtheneighbouringnotionof globalization,withwhichitisoftenconfused (Hirst and Thompson 1999). Every discipline hasits own vocabulary, and it will be useful tointroducecertain keytermsearlyon.Subsequentlythere willbeabrief look at the philosophies underlying international business. Lastly, analysis of current statistics will give readers a sense of its characteristics today. Definitions and phi losophy Internationalbusiness,if only becauseofitscross-bordernature,raisesseveralspecific challenges that business practitioners and academics ignore at their peril. It can be a very difficult adjustment for companies or individuals leaving a home country with which they are familiar to operatein a host country where the environment and people are foreign 'to them. There is no doubt that the world has shrunk over human history and that globalization has been a key factor in this process (MacGillivray 2006) . At the same time, it isunrealistic and even dangerous to assume that societies worldwide are convergingto such an extent that there is no longer any need to study their economic, political, and cultural differences. Thisrecognitionthattheworldremainsacomplexanddiverseplaceisbestexpressed through the distinction made between the terms 'global' and 'international'. Theword 'global'isassociatedwiththeidea of asingleworldandthereforestresses similaritiesbetween different communities.The word ' international',on the other hand, starts with an emphasis on the lack of similarity. There is a strong argument that this latter approach is more useful, since it acknowledges the specific obstacles that arise when people from different nations andcultures come together.[t also prepares practitioners to develop Introduction to InternationalBusiness ::::.einsiderization strategies that are necessary to overcome the many barriers that people they cross borders (Ohmae 1999). In an ideal world, no such barriers would exist. ::;Uorrunately, humankind does not live in such a world, if only because of xenophobia and 2feelings of 'animosity' that some populations have towards others (Amine 2008). This :S aot to deny growing similarities between manysocieties atcertain levels,or that some secrors of activity operate along global instead of national lines(see Chapters 5and 6). :=deed, there is little doubt that greater global interconnectedness has had a very deep effect on business and individuals, and some sociologists have identified what should be greeted as apositive trend towards greater cosmopolitanism and tolerance amongst many citizens dthe world (Giddens 2002). By the same token, other observers doubt how long this new :cligionof 'globalism' willlast,preferring to highlighttheenduringandeven resurgent :tature of national awareness (Saul2006). As shown by rising sentiments of protectionism the wake of the 2008 credit crunch, whentimes are hard, manypeople's first concern :S still forthe welfare of their local community. Indeed, as the crisis worsened, fears arose :.b.at the world might 'retreat to narrow nationalism' (Guardian 2009). In our opinion, there :S nothing inevitable about globalization or,indeed,any other socio-economic or cultural =-end. Whatisclearisthatmost peoplehaveanidentitythatreflects,at leastinpart,the specificities of theirculture of origin and/or the paradigmthey use to make sense of t he (see Chapters 2and10). An 'international' approach embodies thisprinciple more completely thana'global'one does,if only becauseit starts withanacknowledgement of individuality.Philosophically,it isnot aneutral choicetostressdiversityasopposed rooneness. It isan attitudethat leadstothe expectationthat the international business strategies and behaviour that apply in one situation may not be appropriate in another-there is no 'one best way' of doing business. This may seem obvious to people whose culture of origin emphasizesthe needtoseekmultiple solutionstoany one problem,but it can beadifficult adjustment for people from aculture where the emphasisison discovering asingle optimal solution to aproblem. A prime example from the early 1990s was when academics, impressed by Toyota's successful industrial methods, published an analysis that some observers took as proof that one particular way of working can be superior to all others at a given moment in time (Womack et al. 1991). This caused a storm in university circles. [t is best to state openly that the present book is based on the idea that international business studentsarebetter servedby anapproachaimedathelpingthemto developaflexible mindset instead of t rying to help t hemfind the 'right answer'. Companiesdoing international business that we have outlined how the term 'international' will be used here, the next task is mdefine what kind of business is actually involved.Itcould be argued that 'international business' is already occurring any time an individual engages in a cross-border transaction. Indeed, private parties play an important rolein the world economy: investors purchasing currencies or shares in foreign companies (see Chapters 13 and 14); or local agents acting as representatives and providing firms with information on countries with which they are unfamiliar (see Chapter 8). Unsurprisingly, however, most international business is done by companies, ranging from huge firms to small and medium-sized enterprises (SMEs) to micro-firms that may or may not be 'born global' from the very outset. It is impossible to generalize why firmsmight want to seek their fortune abroad. In general, the main motivation used robe the acquisition of resources,whereas nowadaysit tendstobe the development of knowledgeandmarkets(AharoniandRamamurti 2008).Paradigms varystrongly over rime, however. As Chapters 4 and 5 demonstrate, history is another discipline t hat has much ro offer the international business student. Thegeneralterminologythat thisbookusestorefer tocompaniesthathaveregular dealings outside their home country is multinational enterprise (MNE). Other international businessbookswilloftenuseotherterms,suchasmultinationalcorporation(MNC), lnsiderization When people or companies are so deeply integrated into a local society that their foreign origins are forgotten. +Xenophobia Fear of things that are foreign. +Protectionism General policy where a national government adopts policies restricting foreign producers' access to its domestic market. +Paradigm A worldview-that is, a vision of how things are and/or should be organized +Small and medium-sized enterprises 'Enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euros, and/or an annual balance sheet total not exceeding 43 million euros' (European Commission 2003). +Multinational enterprises Firms whose regular activities cause them to engage with and/or operate inmore than one country at a time. -+Global f irm Company that is conceived of as serving a unified world market rather than differentiated national markets. +Configuration How a company designs and locates different corporate functions such as research, production, marketing, and finance. +Subsidiary (Foreign} unit belonging to a company's head office. +Foreign direct (FDI ) Where a firm funds a permanent or semi -permanent physical unit abroad. One definition is that this involves a company taking a minimum 10 per cent stake in a foreign entity. +Value chain Succession of acts that successfully add value to an item as it is transformed from a raw material or input stage to a finished product or service. +Upstream Early value chain activities undertaken when processing or transforming a product or service. ..Downstream Later value chain activities relating to the interface between a company and its customers. +Generic Item that is not differentiated for a specific use but has a variety of applications. .. .. i ntroduction to Int ernat ional Business transnational corporation (TNC), and gl obal firm. The problem with these other expressions isthat each designatesaspecifickindofcompany andisthereforenot general enough. Forinstance,talkingabout MNCsneglectsthefactthatnot allactorsplayingarolein international business are corporations or even privately owned enterprises. Similarly, terms such as TNCs and above all global firms donot sufficiently communicate the connections that continue to tie most companies with international interests to their country of origin. MNE is a more neutral term to describe the broad category of firmsthat, according to some statistics, account for more than 70 per cent of world trade (Steger 2003). Thus, for the rest of this book,the term MNE(which can include SMEs engaged in foreign transactions)will be the basic unit of analysis. MNE configurations A firm that owns facilities in a single country but carries out transactions regularly outside its borders may qualify as an MNE, but a far more typical and informative figure is the firm whoseinternationalconfiguration iscomprised of aheadofficeandsubsidiaries located indifferentparts of the world.It has been estimated that MNEs'foreign subsidiaries are responsible for slightly more than 10 per cent of global economic activity (Serfati 2006). The significance of such units' activities can vary widely between countries like France or the UK, where they account for up to 30 per cent of national sales, and others like Japan, where they play almost no role at all in key areas like manufacturing. employment. In general, however, thereisatrendtowardsMNEsexpandingtheirinternational presencethroughforeign subsidiaries. Alongside trade, companies' foreign direct investment (FDI) is the second main pillar of international business and constitutes a key focus in this field The tendency hasbeen for MNEsto try to integrateunits' functional activities.This has often been in application of theoriesthat different locations should specialize in activities wherethey haveacompetitive advantage(seeChapter 4).Oneconsequenceisthat an increasing proportion of international business involves MNE subsidiaries trading with one another and/or with subcontractors (Coleman and Underhill1998). This is one reason why it is so important to understand the different ways in which MNE head offices organize their relational networks (see Chapter 9). International value chains The most useful way of picturing MNEs' work organization is to imagine the production and sale of a good or service as a series of acts adding to the item's value as it is transformed from a raw material into a semi-processed stage before ending up as a finished goodor service (see Figure1.1). This series of acts is called thevalue chain. It isdividedinto production-related upstream activities (see Chapter 11)and marketing-related downstreamactivities (seeChapter 12). One of themain:featuresof international businesstoday isthat many firmsdonotperform bythemselvesallof theactivitiescomprisingthevaluechainin which they are involved.Instead,they might ask external partnerstotakeresponsibility forcertain phases. Assuch,it ismore accurate to represent international value chains as the sum of several intermediary value chains. A good example is provided by blue jeans, which shoi.tld be analysed not just as a finished product but as the sum of many lower-level generic products. One of these isthe zip, which is the culmination of several intermediary businesses, starting with extraction of minerals,the processing of basicmetals,and their subsequent transformation into zips.It is important to understand that the end product of one company's international value chain (for example, zip-makers)is just an intermediate phase in the vaiue chain of another company (the j eans-maker). Thisportrayal of internationalbusiness as aseries of cross-border value chainsraises questionsabouttherateat which valueaccumulateswhileaserviceor goodisbeing transformed into its final form. For presentation's sake, Figure 1.1 shows value accumulating at a linear rate. This is not entirely realistic, since, depending on the sector in question, value Introduction to International Business Finished ' services/goods:) ..../" :: , services/goodsI ::::..(modules) :: :.:: . ../ --i , f , .::,., ..,.............:.? ::Raw inutsf.:-1 ;r,.'"!7- 0:. .. : value chain (b) . Stage of transformation Stage of transformation Finished se':'ice(g