International BusinessSEVENTH EDITION

GLOBAL EDITION

Texas A&M University

Texas A&M University

PEARSON

Boston Columbus Indianapolis New York San Francisco Upper Saddle River

Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto

Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Contents

Maps 21 ,Preface 23Acknowledgments 27About the Authors 29

PART 1 The World's Marketplaces 30

Chapter 1 An Overview of International Business 30The Business of the Olympics 31

What Is International Business? 32

Why Study International Business? 33

a BRINGING THE WORLD INTO FOCUS: A Rose by Any Other Name... 34

International Business Activities 34

Exporting and Importing 34

Q BRINGING THE WORLD INTO FOCUS: The Early Era of InternationalBusiness 35

International Investments 36

Other Forms of International Business Activity 36

The Era of Globalization 38

The Contemporary Causes of Globalization 39Strategic Imperatives 39

The Environmental Causes of Globalization 40

• VENTURING ABROAD: Abu Dhabi and British Football 41

Globalization and Emerging Markets 41

An Overview of the Contents of This Book 43

Chapter Review 45 • Summary 45 • Questions for Discussion 45

« Building Global Skills 46

• CLOSING CASE: Demography Is Destiny 46

Endnotes 49

Chapter 2 Global Marketplaces and Business Centers 50Trade Is Blosssoming 51

The Marketplaces of North America 52The United States 52

Canada 55

m EMERGING OPPORTUNITIES: Classifying Countries by Income Levels 55Mexico 56

Central America and the Caribbean 56

The Marketplaces of Western Europe 56

The Marketplaces of Eastern Europe and Central Asia 58

The Marketplaces of Asia 60

Japan 60

Australia and New Zealand 62

The Four Tigers 63

China 65

India 66

Southeast Asian Countries 67

10 CONTENTS

The Marketplaces of Africa and the Middle East 68

Africa 68

Middle East 68

The Marketplaces of South America 70

a VENTURING ABROAD: The New Player in Global Capital Markets: Sovereign

Wealth Funds 72

• VENTURING ABROAD: Connecting Giobal Marketplaces; DHL Express 73Chapter Review 74 • Summary 74 • Questions for Discussion 74o Building Global Skills 75

a CLOSING CASE: China's Quest for Natural Resources 75

Endnotes 77

Chapter 3 Legal, Technological, Accounting, and PoliticalEnvironments 78

Harry Potter Goes to China 79

The Legal Environment 80Differences in Legal Systems 80

D E-WORLD: Law and the Internet 83

Domestically Oriented Laws 84

Laws Directly Affecting International Business Transactions 84

Laws Directed Against Foreign Firms 85

The Impacts of MNCs on Host Countries 86

Dispute Resolution in International Business 87

The Technological Environment 88

Q BRINGING THE WORLD INTO FOCUS: The Real Problem with Counterfeiting 91

The Accounting Environment 91The Roots of National Differences 91Differences in Accounting Practices 93

B BRINGING THE WORLD INTO FOCUS: The Sarbanes-Oxley Act 94

Impact on Capital Markets 96

The Political Environment 96Political Risk 96

• EMERGING OPPORTUNITIES: Piracy on the High Seas 99

Chapter Review 102 ° Summary 102 • Questions for Discussion 102

« Building Global Skills 103

D CLOSING CASE: Risky Business in Venezuela 103

Endnotes 105

Chapter 4 The Role of Culture 108Bollywood Abroad 109Characteristics of Culture 110

D E-WORLD: The Internet, National Competitiveness, and Culture 111

Elements of Culture 111Social Structure 111

B BRINGING THE WORLD INTO FOCUS: The Impact of Japanese Culture on

Business 113

Language 114

Communication 118

Religion 119

a BRINGING THE WORLD INTO FOCUS: Islamic Finance 121

Values and Attitudes 122

Seeing the Forest, Not the Trees 124

Hall's Low-Context-High-Context Approach 124

The Cultural Cluster Approach 125

Hofstede's Five Dimensions 127

CONTENTS 11

Social Orientation 128

Power Orientation 129

Uncertainty Orientation 131

Goal Orientation 133

Time Orientation 134

International Management and Cultural Differences 134Understanding New Cultures 134

Chapter Review 135 » Summary 135 e Questions for Discussion 136<> Building Global Skills 136

a CLOSING CASE: Quacking Up a Storm of Business 137

Endnotes 138

Chapter 5 Ethics and Social Responsibility in InternationalBusiness 140

BP: Safety First or Profits First? 141

The Nature of Ethics and Social Responsibility in International

Business 143

Ethics in Cross-Cultural and International Contexts 144How an Organization Treats Its Employees 145How Employees Treat the Organization 146

How Employees and the Organization Treat Other Economic Agents 147

Managing Ethical Behavior Across Borders 147Guidelines and Codes of Ethics 148

Ethics Training 148

Organizational Practices and the Corporate Culture 148

Social Responsibility in Cross-Cultural and International Contexts 149

• VENTURING ABROAD: Siemen Pays—and Pays and Pays 149

Areas of Social Responsibility 150

Organizational Stakeholders 150

The Natural Environment 150

General Social Welfare 151

Managing Social Responsibility Across Borders 153

Approaches to Social Responsibility 153

• BRINGING THE WORLD INTO FOCUS: Should Firms Practice CorporateSocial Responsibility? 153

Managing Compliance 154

Informal Dimensions of Social Responsibility 155

Evaluating Social Responsibility 157

Difficulties of Managing CSR Across Borders 157The Anglo-Saxon Approach 157

The Asian Approach 158

The Continental European Approach 158

Regulating International Ethics and Social Responsibility 158

a EMERGING OPPORTUNITIES: Conflict Diamonds 159Chapter Review 160 • Summary 160 • Questions for Discussion 160

• • Building Global Skills 161

• CLOSING CASE: A Pipeline of Good Intentions 161

• PART 1: CLOSING CASES: KFC in China 163

Endnotes 168

PART 2 The International Environment 170

Chapter 6 International Trade and Investment 170The Mittelstand Lead the Way 171

International Trade and the World Economy 171

12 CONTENTS

Classical Country-Based Trade Theories 173Mercantilism 173

Absolute Advantage 174

Comparative Advantage 175

Comparative Advantage with Money 176

a BRINGING THE WORLD INTO FOCUS: The Lincoln Fallacy 177

Relative Factor Endowments 179

Modern Firm-Based Trade Theories 180

Product Life Cycle Theory 180

Country Similarity Theory 182

New Trade Theory 183

Porter's Theory of National Competitive Advantage 184

s EMERGING OPPORTUNITIES: Multimedia and Oil Clusters in Malaysia 186

An Overview of International Investment 188

Types of International Investments 188

The Growth of Foreign Direct Investment 188

Foreign Direct Investment and the United States 188

International Investment Theories 189Ownership Advantages 190

Intemalization Theory 191

Dunning's Eclectic Theory 192

Factors Influencing Foreign Direct Investment 192Supply Factors 192

Demand Factors 193

Political Factors 194

• VENTURING ABROAD: How Important Is the Rule of Law? 195

Chapter Review 196 ° Summary 196 « Questions for Discussion 196

° Building Global Skills 197

• CLOSING CASE: Twenty-First Century Pirates 197

Endnotes 198

Chapter 7 The International Monetary System and the Balanceof Payments 200

Will the Stars Shine on Astra Again? 201 '

History of the International Monetary System 202

The Gold Standard 202

The Collapse of the Gold Standard 203

The Bretton Woods Era 205

The End of the Bretton Woods System 209

Performance of the International Monetary System Since 1971 211

• BRINGING THE WORLD INTO FOCUS: Fixed versus FlexibleExchange Rates 212

m BRINGING THE WORLD INTO FOCUS: Should Bretton Woodsbe Restored? 216

The Balance of Payments Accounting System 216

The Major Components of the Balance of Payments Accounting System 217

• BRINGING THE WORLD INTO FOCUS: Ben Franklin, World Traveler 222

The U.S. Balance of Payments in 2010 222

Defining Balance of Payments Surpluses and Deficits 225

Chapter Review 226 ° Summary 226 • Questions for Discussion 227

° Building Global Skills 227

D CLOSING CASE: Recent U.S. BOP Performance: Is the Sky Falling? 228

Endnotes 229

CONTENTS 13

Chapter 8 Foreign Exchange and International Financial Markets 230^ The Loonie Takes Flight 231

The Economics of Foreign Exchange 232

The Structure of the Foreign-Exchange Market 234

• BRINGING THE WORLD INTO FOCUS: A Brief Hint 236The Role Of Banks 236

• E-WORLD: The Biggest Online Market 237

Spot and Forward Markets 238

Arbitrage and the Currency Market 240

• BRINGING THE WORLD INTO FOCUS: The Big Mac Index 242

The International Capital Market 246

D VENTURING ABROAD: The Carry Trade 246

Major International Banks 247

The Eurocurrency Market 248

The International Bond Market 249

Global Equity Markets 249

Offshore Financial Centers 250

Chapter Review 250 ° Summary 250 • Questions for Discussion 251o Building Global Skills 251

• CLOSING CASE: Subprime Meltdown, Globa! Recession 251

Endnotes 253

Chapter 9 Formulation of National Trade Policies 254Jumbo Battle over Jumbo Jets 255

Rationales for Trade Intervention 256

Industry-Level Arguments 256

National Trade Policies 260

Barriers to International Trade 262

Tariffs 262

D VENTURING ABROAD: Emirates Airline Expansion Endeavor: The Case

of the Canadian Market 263

Nontariff Barriers 265

• BRINGING THE WORLD INTO FOCUS: The Fight over Rare Earths 26£

Promotion of International Trade 270 -Subsidies 270Foreign Trade Zones 271

B EMERGING OPPORTUNITIES: Cotton Subsidies and World Poverty 272

Export Financing Programs 273

Controlling Unfair Trade Practices 273

Countervailing Duties 273

Antidumping Regulations 274

Should Countries Enforce Their Unfair Trade Practice Laws? 274

Safeguards 275Chapter Review 275 ° Summary 275 • Questions for Discussion 276• Building Global Skills 276

D CLOSING CASE: Green Energy and Free Trade 277

Endnotes 278

Chapter 10 International Cooperation Among Nations 280Trade and Prosperity: The Case of Mexico 281

The General Agreement on Tariffs and Trade and the World Trade

Organization 282

The Role of the General Agreement on Tariffs and Trade 282

14 CONTENTS

a BRINGING THE WORLD INTO FOCUS: Most Nations Are Favored 283

The World Trade Organization 284

Regional Economic Integration 286

Forms of Economic Integration 287

The Impact of Economic Integration on Firms 288

The European Union 289Governing the European Union 290

Q BRINGING THE WORLD INTO FOCUS: Three Majorities Are BetterThan One 292

The Struggle to Create a Common Market 293

• VENTURING ABROAD: Lobbying the European Union 295

From Common Market to European Union 296

Other Regional Trading Blocs 299The North American Free Trade Agreement 299

Other Free Trade Agreements in the Americas 300

Trade Arrangements in the Asia-Pacific Region 303

African Initiatives 305

Chapter Review 306 • Summary 306 • Questions for Discussion 307

• Building Global Skills 307

• CLOSING CASE: The New Conquistador 307 .

• PART 2: CLOSING CASES: The Second Cultural Revolution 309

Endnotes 312

PART 3 Managing International Business 314

Chapter 11 International Strategic Management 314Global Mickey 315

The Challenges of International Strategic Management 317

• EMERGING OPPORTUNITIES: How Does a Japanese Firm Compete

in China? ... Act More American 320

Strategic Alternatives 321

a BRINGING THE WORLD INTO FOCUS: Master of the Furniture Universe 323

Components of an International Strategy 325

Distinctive Competence 325

Scope of Operations 325

Resource Deployment 326

Synergy 326

Developing International Strategies 326

Mission Statement 327

Environmental Scanning and the SWOT Analysis 328

Strategic Goals 330

Tactics 330D E-WORLD: Nokia: No Longer King of the Hill 330

Control Framework 331

Levels of International Strategy 331Corporate Strategy 331

Business Strategy 333

Functional Strategies 334

Chapter Review 335 • Summary 335 • Questions for Discussion 336

• Building Global Skills 336

a CLOSING CASE: The Global Success of SM Entertainment 337

Endnotes 338

Chapter 12 Strategies for Analyzing and Entering Foreign Markets 340The Business of Luxury 341

Foreign Market Analysis 342

CONTENTS 15

Assessing Alternative Foreign Markets 342

D EMERGING OPPORTUNITIES: The Bottom of the Pyramid 344

Evaluating Costs, Benefits, and Risks 345

Choosing a Mode of Entry 346

Exporting to Foreign Markets 349Forms of Exporting 350

Additional Considerations 352

a VENTURING ABROAD: Dnata: Global Growth Strategy 353

Export Intermediaries 354

International Licensing 355Basic Issues In International Licensing 358

Advantages and Disadvantages of International Licensing 359

International Franchising 359Basic Issues in International Franchising 359

Advantages and Disadvantages of International Franchising 360

Specialized Entry Modes for International Business 361

Contract Manufacturing 361

Management Contract 361

Turnkey Project 362

a EMERGING OPPORTUNITIES: Business Process Outsourcing 362

Foreign Direct Investment 363

The Greenfield Strategy 363

The Acquisition Strategy 363

Joint Ventures 365Chapter Review 365 • Summary 365 • Questions for Discussion 3660 Building Global Skills 366 ° Follow-Up Questions 366

• CLOSING CASE: Middle and Far East investors Target Kazakhstan 367

Endnotes 368

Chapter 13 International Strategic Alliances 370The European Cereal Wars 371

International Corporate Cooperation 372

Benefits of Strategic Alliances 373 . . . • - .Ease of Market Entry 373

Shared Risk 374

Shared Knowledge and Expertise 374

a EMERGING OPPORTUNITIES: The Ups and Downs of Market Entry 375Synergy and Competitive Advantage 376

Scope of Strategic Alliances 376

Comprehensive Alliances 377

Functional Alliances 377

• VENTURING ABROAD: Alliances in the Sky 378

Implementation of Strategic Alliances 379

Selection of Partners 379

Form of Ownership 381

• VENTURING ABROAD: Learning by Doing 381

Joint Management Considerations 383

Pitfalls of Strategic Alliances 384

Incompatibility of Partners 384

• EMERGING OPPORTUNITIES: Hu's in Charge 385

Access to Information 386

Conflicts over Distributing Earnings 386

Loss of Autonomy 386

Changing Circumstances 387

1 6 CONTENTS

Chapter Review 387 • Summary 387 • Questions for Discussion 388

• Building Global Skills 388

a CLOSING CASE: Look Before You Leap 389

Endnotes 390

Chapter 14 International Organization Design and Control 392Lenovo Spreads Its Global Wings 393

The Nature of International Organizational Design 394

Global Organization Designs 395

Global Product Design 396

Global Area Design 397

Global Functional Design 398

m EMERGING OPPORTUNITIES: Flying Solo in China 400

Global Customer Design 400

Global Matrix Design 401

Hybrid Global Designs 402

Related Issues in Global Organization Design 402

Centralization versus Decentralization 404

Role of Subsidiary Boards of Directors 404

Coordination in the Global Organization 405

The Control Function in International Business 405

Strategic Control 406

Organizational Control 408

Operations Control 410

Managing the Control Function in International Business 411

Establishing International Control Systems 411 . N

a BRINGING THE WORLD INTO FOCUS: Ford Aims High 411

Essential Control Techniques 414

Q BRINGING THE WORLD INTO FOCUS: Get t ing Back t o Basics 416

Behavioral Aspects of International Control 416

Chapter Review 418 ° Summary 418 • Questions for Discussion 418

• Building Global Skills 419

a CLOSING CASE: Unilever matches Strategy and Structure 419

Endnotes 420

Chapter 15 Leadership and Employee Behavior in InternationalBusiness 422

Leadership Issues at Toyota 423

Individual Behavior in International Business 424

Personality Differences Across Cultures 424

Attitudes Across Cultures 427

Perception Across Cultures 428

Stress Across Cultures 429

Motivation in International Business 429

a BRINGING THE WORLD INTO FOCUS: Mix ing and Match ing in a Joint

Venture 430

Needs and Values Across Cultures 430

Motivational Processes Across Cultures 430

Need-Based Models Across Cultures 431

Process-Based Models Across Cultures 432

The Reinforcement Model Across Cultures 432

Leadership in International Business 433

Decision Making in International Business 435Models of Decision Making 436

The Normative Model Across Cultures 437

CONTENTS 17

D BRINGING THE WORLD INTO FOCUS: Risky Decisions Leadthe Way for Porsche 437

The Descriptive Model Across Cultures 439

Groups and Teams in International Business 439The Nature of Group Dynamics 439

Managing Cross-Cultural Teams 440

Chapter Review 441 ° Summary 441 » Questions for Discussion 441• Building Global Skills 442

• CLOSING CASE: Ikea's Transformational Leader 442

D PART 3: CLOSING CASES: Reinventing Nissan 443

Endnotes 447

PART 4 Managing International Business Operations 450

Chapter 16 International Marketing 450"Tune in to Budget Inn": Budget Hotel Brands Go Global 451

International Marketing Management 452

International Marketing and Business Strategies 452

B EMERGING OPPORTUNITIES: Pretty Garlic 454

The Marketing Mix 455

Standardization Versus Customization 455

Product Policy 458

Standardized Products or Customized Products? 458

Legal Forces 459

Cultural Influences 459

Economic Factors 460 \

• E-WORLD: E-Translation 461

Brand Names 461

Pricing Issues and Decisions 461Pricing Policies 462

Market Pricing 463

Promotion Issues and Decisions 465Advertising 465

a BRINGING THE WORLD INTO FOCUS: Sailing for Sales 466

Personal Selling 467

Sales Promotion 468

Public Relations 468

Distribution Issues and Decisions 469International Distribution 469

Channels of Distribution 470

Chapter Review 473 • Summary 473 • Questions for Discussion 473o Building Global Skills 474

a CLOSING CASE: A Call for Progress 474

Endnotes 474

Chapter 17 International Operations Management 478Racing to Market 479

The Nature of International Operations Management 480

The Strategic Context of International Operations Management 481

Complexities of International Operations Management 482

Production Management 482Supply Chain Management and Vertical Integration 483

n BRINGING THE WORLD INTO FOCUS: Dealing with the Unexpected 486

Location Decisions 486

International Logistics and Materials Management 490

18 CONTENTS

• BRINGING THE WORLD INTO FOCUS: Cutting Costs to the Bone 491

International Service Operations 492

Characteristics of International Services 492

The Role of Government in International Services Trade 493

Managing Service Operations 494

Managing Productivity in International Business 494

Managing Quality in International Business 495

Managing Information in International Business 497

Chapter Review 499 ° Summary 499 • Questions for Discussion 500

° Building Global Skills 500

• CLOSING CASE: Out Supply-Chaining the King of Supply Chainers 501

Endnotes 502

Chapter 18 International Financial Management 504Singapore Airlines's Worldwide Financial Management 505

Financial Issues in International Trade 505

Choice of Currency 506

Credit Checking 506

Method of Payment 507

Financing Trade 514

Managing Foreign Exchange Risk 514Transaction Exposure 514Translation Exposure 517

Economic Exposure 518

Management of Working Capital 518 ,Minimizing Working Capital Balances 520

Minimizing Currency Conversion Costs 520

Minimizing Foreign-Exchange Risk 522

International Capital Budgeting 522Net Present Value 522

Internal Rate of Return 524

Payback Period 524

Sources of International Investment Capital 524

External Sources of Investment Capital 524 - -

Internal Sources of Investment Capital 525

Strategic Use of Transfer Pricing 526• VENTURING ABROAD: Taxation of Subsidiary Income

by the U.S. Government 528

• EMERGING OPPORTUNITIES: Sun, Sand, and Shells 529Tax Havens 529

Chapter Review 531 ° Summary 531 • Questions for Discussion 532» Building Global Skills 532

• CLOSING CASE: Double Irish and a Dutch Sandwich 533

Endnotes 534

Chapter 19 International Human Resource Managementand Labor Relations 536

An Emerging Voice for Workers 537

The Nature of International Human Resource Management 538

Strategic Significance of HRM 538

International Managerial Staffing Needs 540

Scope of Internationalization 540

Centralization versus Decentralization of Control 541

Staffing Philosophy 541

CONTENTS 19

m EMERGING OPPORTUNITIES: Thinking Globally but Hiring Locally 542

• BRINGING THE WORLD INTO FOCUS: Schlumberger Profitsfrom Geocentric Staffing 543

Recruitment and Selection 543

Recruitment of Managers 544

Selection of Managers 546

Expatriation and Repatriation Issues 547

Training and Development 549Assessing Training Needs 549

Basic Training Methods and Procedures 549

Developing Younger International Managers 550

Performance Appraisal and Compensation 551Assessing Performance in International Business 551

Determining Compensation in International Business 551

a BRINGING THE WORLD INTO FOCUS: Japanese Management Techniquesin China 555

Retention and Turnover 556

Human Resource Issues for Nonmanagerial Employees 557

Recruitment and Selection 557

Training and Development 557

Compensation and Performance Appraisal 558

Labor Relations 559

Comparative Labor Relations 559

Collective Bargaining 559

Union Influence and Codetermination 560Chapter Review 560 ° Summary 560 •. Questions for Discussion 561o Building Global Skills 561

D CLOSING CASE: Chicago Food and Drink Company 562

• PART 4: CLOSING CASES: The Aramco Advantage 563

Endnotes 566

Glossary 568Name Index 582Company Index 586Subject Index 591