T w e l f t h E d i t i o n

INTERNATIONAL BUSINESSEnvironments and Operations

John D. DanielsUniversity of Miami

Lee H. RadebaughBrigham Young University

Daniel P. SullivanUniversity of Delaware

Pearson Education International

ContentsPreface 29About the Authors 39

PART ONE BACKGROUND FOR INTERNATIONALBUSINESS 44

1 Globalization and International Business 44CASE: The Global Playground 45Introduction 48

What Is International Business7. 49

The Forces Driving Globalization 50Factors in Increased Globalization 51

What's Wrong with Globalization? 56Threats to National Sovereignty 56Economic Growth and Environmental Stress 57Growing Income Inequality 57

| Point ^ J3ffi^S^^3 's Offshoring Good Strategy? 58Why Companies Engage in InternationaLBusiness 60

Expanding Sales 60 ,Acquiring Resources 60Minimizing Risk 60

Modes of Operations in International Business 61Merchandise Exports and Imports 62Service Exports and Imports 62Investments 63Types of International Organizations 63

Why International Business Differs from DomesticBusiness 64

Physical and Social Factors 65The Competitive Environment 67

Looking to the Future: Three Ways of Looking at Globalization 68C A S E : Carnival Cruise Lines: Exploiting a Sea of Global

Opportunity 69SummaryKey TermsEndnotesAn AtlasMap Index

7475

7578

86

Contents

PART TWO COMPARATIVE ENVIRONMENTAL FRAMEWORKS 90

2 The Cultural Environments Facing Business 90C A S E : The Java LoungeAdjusting to Saudi Arabian Culture 91Introduct ion 94

The People Factor 95Cultural Awareness 96

A Little Learning Goes a Long Way 97The Idea of a "Nation": Delineating Cultures 98

The Nation as a Point of Reference 98How Cultures Form and Change 99Language as Both a Diffuser and Stabilizer of Culture 100

Does Geography Matter? Where Birds of a Feather Flock Together 103Religion as a Cultural Stabilizer 104

Behavioral Practices Affecting Business 106Issues in Social Stratification 106Work Motivation 109Relationship Preferences I I IRisk-Taking Behavior I 12Information and Task Processing I 13Communications I 15

Dealing with Cultural Differences 118Accommodation I 18Cultural Distance: Usefulness and Limitations I 19Culture Shock 119Company and Management Orientations 121

[ P o j n t B f f l J H ^ f f l Does International Business Lead to Cultural Imperialism? 123Strategies for Instituting Change 125

Looking to the Future: What Will Happen to National Cultures? 127C A S E : Charles Martin in Uganda: What to Do When a Manager

Goes Native 128Summary 132Key Terms 133Endnotes 133

3 The Political and Legal Environments Facing Business 136CASE: ChinaLegal Growing Pains in a Land of Opportunity 137Introduction 141The Political Environment 142

Individualism Versus Collectivism 143Political Ideology 144Trends in Political Systems 150

Contents JLooking to the Future: What Might Become of Democracy? 153

Political Risk 154| Point | g ^ | ^ ^ ^ j 3 Should Political Risk Management Be an Active Strategy? 156The Legal Environment 157

Legal Systems 158Types of Legal Systems 158The Diffusion of Legal Systems 159Trends in Legal Systems 160Understanding Bases of Rule 161Implications for Managers 162

Legal Issues in International Business 164Operational Concerns 164Strategic Concerns 166Intellectual Property Rights 168

CASE: Crime That Pays (and Pretty Well, Too) 172Summary 177Key Terms 178Endnotes 178

4 The Economic Environments Facing Businesses 180CASE: Economic Conundrums and the Comeback of Emerging Economies 181Introduction 184

International Economic Analysis 186Elements of the Economic Environment 187

Gross National Income 187Features of an Economy 196

Inflation 196Unemployment 197Debt 198Income Distribution 199Poverty 200Labor Costs 201Productivity 202The Balance of Payments 202

| Point |gj@flfl3^^fl Is a Trade Deficit an Advantage? 204Integrating Economic Analysis 206

Types of Economic Systems 206Economic Freedom and Market Transitions 209Making the Transition to a Market Economy 21 I

Looking to the Future: Is There a Move to Push Back EconomicFreedom? 216

CASE: Meet the BRICs 218Summary 222

Contents

Key Terms 223Endnotes 223

5 Globalization and Society 226C A S E : Ecomagination and the Global Greening of GE 227Introduct ion 230Evaluating the Impact of FDI 231

Considering the Logic of FDI 232The Economic Impact of the MNE 234

Balance-of-Payments Effects 234Growth and Employment Effects 236

The Foundations of Ethical Behavior 237Why Do Companies Care About Ethical Behavior? 237The Cultural Foundations of Ethical Behavior 238The Legal Foundations of Ethical Behavior 240

Ethics and Corporate Bribery 241Corruption and Bribery 241

| Point | j E B 5 E ^ f f l Are Top Managers Responsible When CorruptionIs Afoot? 244

Ethics and the Environment 246What Is "Sustainability"? 246Global Warming and the Kyoto Protocol 246

Looking to the Future: How to See the Trees in the Rain Forest 248Ethical Dilemmas and Business Practices 249

Ethical Dilemmas and the Pharmaceutical Industry 249Ethical Dimensions of Labor Conditions 251Corporate Codes of Ethics: How Should a Company Behave? 254

C A S E : Anglo American PLC in South Africa: What Do You Do When Costs ReachEpidemic Proportions? 256

Summary 260Key Terms 261Endnotes 261

PART THREE THEORIES AND INSTITUTIONS:TRADE AND INVESTMENT 264

6 International Trade and Factor-Mobility Theory 264CASE: Costa Rica: Using Foreign Trade to Trade-Up Economically 265Introduct ion 268

Laissez-Faire Versus Interventionist Approaches to Exportsand Imports 269

Theories of Trade Patterns 269

Contents

Interventionist Theories 270Mercantilism 270

Free Trade Theories 271Theory of Absolute Advantage 272Theory of Comparative Advantage 274Theories of Specialization: Some Assumptions and Limitations 276

Trade Patterns Theories 278How Much Does a Country Trade? 278What Types of Products Does a Country Trade? 279With Whom Do Countries Trade? 282

Does Geography Matter? Variety Is the Spice of Life 284The Statics and Dynamics of Trade 285

Product Life Cycle (PLC) Theory 285The Porter Diamond 287

| Point |g^^^J35flfl Should Nations Use Strategic Trade Policies? 289Factor-Mobility Theory 291

Why Production Factors Move 292Effects of Factor Movements 293The Relationship Between Trade and Factor Mobility 295

Looking to the Future: In What Direction Will Trade Winds Blow? 298CASE: LUKOIL: Trade Strategy atja Privatized Exporter 299Summary 302 JKey Terms 304Endnotes 304

7 Governmental Influence on Trade 306C A S E : Making the Emperor's (and Everyone Else's) New Clothes:

Textile and Clothing Trade 307Introduction 310Conflicting Results of Trade Policies 311

The Role of Stakeholders 31 IEconomic Rationales for Governmental Intervention 311

Fighting Unemployment 312Protecting "Infant Industries" 313Developing an Industrial Base 314Economic Relationships with Other Countries 316

Noneconomic Rationales for Government Intervention 319Maintaining Essential Industries 319Preventing Shipments to "Unfriendly" Countries 319

^ j t ^ ^ 3 Should Governments Forgo Trade Sanctions? 320Maintaining or Extending Spheres of Influence 321Preserving National Identity 321

10 Contents

Instruments of Trade Control 321Tariffs 322Nontariff Barriers: Direct Price Influences 323Nontariff Barriers: Quantity Controls 325

Dealing with Governmental Trade Influences 328Tactics for Dealing with Import Competition 329

Looking to the Future: Dynamics and Complexity 330C A S E : U.S.-Cuban Trade: When Does a Cold War Strategy Become

a Cold War Relic? 330Summary 333Key Terms 334Endnotes 334

8 Cross-National Cooperation and Agreements 336C A S E : Toyota's European Drive 337Introduct ion 339The World Trade Organization (WTO) 340

GATT: The Predecessor to the WTO 340What Does the WTO Do? 341

The Rise of Bilateral Agreements 342Regional Economic Integration 343

The Effects of Integration 344Major Regional Trading Groups 345

The European Union 346The NorthAmerican Free Trade Agreement (NAFTA) 351Regional Economic Integration in the Americas 356

| Point U B I I H H B I Is CAFTA-DR a Good Idea? 359Regional Economic Integration in Asia 360Regional Economic Integration in Africa 362

Looking to the Future: Will the WTO Overcome Bilateral and RegionalIntegration Efforts? 363

Other Forms of International Cooperation 364Commodity Agreements 365

Commodities and the World Economy 366Consumers and Producers 366The Organization of Petroleum Exporting Countries (OPEC) 366

C A S E : Wal-Mart Goes South 367Summary 370Key Terms 371Endnotes 371

Contents 11

PART FOUR WORLD FINANCIAL ENVIRONMENT 374

9 Global Foreign-Exchange Markets 374CASE: Going Down to the Wire in the Money-Transfer Market 375Introduction 377

What Is Foreign Exchange? 377Players on the Foreign-Exchange Market 378Some Aspects of the Foreign-Exchange Market 378

Does Geography Matter? Foreign-Exchange Trades 382Major Foreign-Exchange Markets 383

The Spot Market 383The Forward Market 387Options 388Futures 388

The Foreign-Exchange Trading Process 388Banks and Exchanges 390

Looking to the Future: Where Are Foreign-Exchange Markets Headed? 392How Companies Use Foreign Exchange 393

Business Purposes (I): Cash Flow Aspects of Imports and Exports 394Business Purposes (II): Other Financial Flows 395

| Point | { | j f l j ^ ; g f i 3 Is It Ok to Speculate on Currency? 396CASE: Banking on Argentina 398Summary 402Key Terms 403Endnotes 404

10 The Determination of Exchange Rates 406CASE: El Salvador Adopts the U.S. Dollar 407Introduction 409The International Monetary Fund 410

Origin and Objectives 410The IMF Today 410Evolution to Floating Exchange Rates 41 I

Exchange-Rate Arrangements 412Fixed Versus Flexible Currencies 414Exchange Arrangements with No Separate Legal Tender 416Currency Board Arrangements 416Conventional Fixed-Peg Arrangements 416Pegged Exchanges Rates Within Horizontal Bands 416More Flexible Arrangements 417

12 Contents

Exchange Rates: The Bottom Line 417The Euro 419

^^3fflB Should Africa Develop a Common Currency? 421Determining Exchange Rates 423

Nonintervention: Currency in a Floating-Rate World 423Intervention: Currency in a Fixed-Rate or Managed-Floating-Rate World 424The Role of Central Banks 424Black Markets 428Foreign-Exchange Convertibility and Controls 428Exchange Rates and Purchasing Power Parity 429Exchange Rates and Interest Rates 432Other Factors in Exchange-Rate Determination 432

Forecasting Exchange-Rate Movements 433Fundamental and Technical Forecasting 433Factors to Monitor 435

Business Implications of Exchange-Rate Changes 436Marketing Decisions 436Production Decisions 436Financial Decisions 436

Looking to the Future: In Which Direction Is Exchange-Rate FlexibilityHeaded? 437

C A S E : The Chinese Yuan: Be Careful of the Dragon's Tail 438Summary 442Key Terms 443Endnotes 444

PART FIVE GLOBAL STRATEGY, STRUCTURE, A N DIMPLEMENTATION 446

11 The Strategy of International Business 446CASE: Value Creation in the Global Apparel Industry 447Introduction 451Industry, Strategy, and Firm Performance 452

Industry Organization Paradigm Leading Strategy Perspectives 453The Idea of Industry Structure: The Five-Forces Model 454Industry Change 455Strategy and Value 456CreatingValue 457

The Firm as Value Chain 457What Is the Value Chain? 458Using the Value Chain 459Change and the Value Chain 468

Contents 13

Are Value Chains Real? 469Global Integration Versus Local Responsiveness 470

Pressures for Global Integration 470Pressures for Local Responsiveness 472When Pressures Interact 473

Types of Strategy 474International Strategy 474Multidomestic Strategy 475Global Strategy 476Transnational Strategy 477

Looking to the Future: What's New in the World of Strategy Types? 479C A S E : The Globalization of eBay 481Summary 484Key Terms 485Endnotes 485

12 Country Evaluation and Selection 488C A S E : Carrefour: Finding Retail Space in All the Right Places 489Introduction 493How Does Scanning Work? 494

Managing the Alternatives 494Scanning Versus Detailed Analysis 494

What Information Is Important in Scanning? 496Opportunities 496Risks 501

Does Geography Matter? Don't Fool with Mother Nature 504Collecting and Analyzing Data 507

Some Problems with Research Results and Data 508External Sources of Information 509Internally Generated Data 510

| Point | g ^ ^ ^ ^ ^ 3 Should Companies Forgo Investment in Violent Areas? 51 ICountry Comparison Tools 512

Grids 512Matrices 513

Allocating Among Locations 515Alternative Gradual Commitments 515Geographic Diversification Versus Concentration 516Reinvestment Versus Harvesting 518

Noncomparative Decision Making 519Looking to the Future: Will Prime Locations Change? 520CASE: FDI in South Africa 521

14 Contents

Summary 524Key Terms 525Endnotes 525

13 Export and Import Strategies 528C A S E : GrieveA Small-Business Export Strategy 529Introduct ion 532

Exporting and Importing 533Export Strategy 534

Advantages to Consider 534Questions to Ask 535Strategic Advantages of Exporting 535Characteristics of Exporters 536Stages of Export Development 537Pitfalls of Exporting 538Designing an Export Strategy 539

Import Strategy 543Types of Importers 543Strategic Advantages of Imports 543

The Import Process 544Import Brokers 544Customs Agencies 545

Looking to the Future: The Technology of Trade 546Import Documentation 548

The Export Process 548Indirect Selling 548Direct Selling 551

| Point | g ^ ^ f l 8 ^ ^ A Dirty Dilemma: Exporting Hazardous Waste 553Export Documentation 554Sources of Regulatory Assistance 556Foreign Freight Forwarders 558

Countertrade 559C A S E : A Little Electronic Magic atAlibaba.com 561Summary 564Key Terms 565Endnotes 565

14 Direct Investment and Collaborative Strategies 568C A S E : The Fizz Biz: Coca-Cola 569Introduct ion 572Why Exporting May Not Be Feasible 573

When It's Cheaper to Produce Abroad 574

Contents 15

When Transportation Costs Too Much 575When Domestic Capacity Isn't Enough 575When Products and Services Need Altering 575When Trade Restrictions Hinder Imports 576When Country of Origin Becomes an Issue 576

Noncollaborative Foreign Equity Arrangements 576Taking Control: Foreign Direct Investment 577How to Make FDI 578

Why Companies Collaborate 579Alliance Types 579General Motives for Collaborative Arrangements 580

- - International Motives for Collaborative Arrangements 582Types of Collaborative Arrangements 583

Some Considerations in Collaborative Arrangements 583| Point j j f l jm^j^f f l Should Countries Limit Foreign Control of Key Industries? 584

Licensing 586Franchising 587Management Contracts 588Turnkey Operations 589JointVentures 590Equity Alliances 591

Problems wi th Collaborative Arrangements 592Relative Importance 592Divergent Objectives 593Questions of Control 593Comparative Contributions and Appropriations 594

, Culture Clashes 595Managing Foreign Arrangements 595

Dynamics of Collaborative Arrangements 596Finding Compatible Partners 597Negotiating the Arrangement 598Drawing Up the Contract 598Assessing Performance 599

Looking to the Future: Why Innovation Breeds Collaboration 599CASE: Getting Airline Alliances Off the Ground 600Summary 603Key Terms 604Endnotes 605

15 The Organization of International Business 608CASE: Organizing "People.Values, and Environment"

at Johnson & Johnson 609Introduction 614

16 Contents

Change: The Critical Factor 614Organizing Today's International Business 617

Organization Structure 617Vertical Differentiation: Centralization Versus Decentralization 618Horizontal Differentiation: The Design of the Formal Structure 620Contemporary Structures 624 a*

| Point IgEfl^^^Sffl Hierarchies or Hyperarchies? 628Coordination and Control Systems 629

Coordination Systems 629Control Systems 632

Organization Culture 635The Importance of Culture 635Challenges and Pitfalls 637Organization Culture and Strategy 638

Looking to the Future: The Role and Rise of Corporate Universities 639C A S E : Infosys: The Search for the Best and the Brightest 640Summary 644Key Terms 645Endnotes 645

PART SIX MANAGING INTERNATIONAL OPERATIONS 648

16 Marketing Globally 648CASE: Avon Calls on Foreign Markets 649Introduction 654Marketing Strategies 655

Marketing Orientations 655Segmenting and Targeting Markets 657

Product Policies 659Why Firms Alter Products 659

[]PoIrTtJ3BffiHEffl Should Home Governments Regulate Their Companies' Marketingin Developing Countries? 660

Alteration Costs 663The Product Line: Extent and Mix 664

Pricing Strategies 664Potential Obstacles in International Pricing 664

Promotion Strategies 669The Push-Pull Mix 669Some Problems in International Promotion 670

Branding Strategies 672Worldwide Brand Versus Local Brands 673

Contents 17

Distribution Strategies 674Does Geography Matter? Is Necessity the Mother of Invention? 675

Deciding Whether to Standardize 676Choosing Distributors and Channels 676The Challenge of Getting Distribution 677Hidden Costs in Distribution 678E-Commerce and the Internet 679

Managing the Marketing Mix 680Gap Analysis 680

Looking to the Future: Marketing to the "Haves," the "Have-Nots"(and the "Have-Somes") 682

CASE: Tommy Hilfiger: Clothes Make the Man and Vice Versa 683Summary 686Key Terms 687Endnotes 687

17 Global Manufacturing and Supply Chain Management 690CASE: Samsonite's Global Supply Chain 691Introduction 694

What Is Supply Chain Management? 695Global Manufacturing Strategies \ 696

Four Key Factors in Manufacturing Strategy 696Information Technology and Global Supply Chain Management 700

Information Technology 701Quality 703

Zero Defects Versus Acceptable Quality Level 703The Deming Approach to Quality Management 704Total Quality Management (TQM) 704Six Sigma 705Quality Standards 705

Supplier Networks 707Global Sourcing 708Major Sourcing Configurations 709The Make or Buy Decision 710

| Point | g f f l f l 3^ f f l Should Firms Outsource Innovation? 710Supplier Relations 712The Purchasing Function 713

Inventory Management 715Lean Manufacturing and Just-in-Time Systems 715Foreign Trade Zones 716Transportation Networks 717

18 Contents

Looking to the Future: Uncertainty and the Global Supply Chain 717C A S E : Ventus and Business Process Outsourcing 718Summary 724Key Terms 724Endnotes 725

18 International Accounting Issues 728C A S E : Parmalat: Europe's Enron 729Introduct ion 733

The Crossroads of Accounting and Finance 733Accounting for International Differences 736

Accounting Objectives 737Factors in International Accounting Practices 738Cultural Differences in Accounting 739Classifying Accounting Systems 741International Standards and Global Convergence 744

| Point |piffiffJHBfffil Should U.S. Companies Be Allowed to Close the GAAP? 748Transactions in Foreign Currencies 749

Recording Transactions 749Translating Foreign-Currency Financial Statements 750

Translation Methods 750Management Accounting Issues 753

Performance Evaluation and Control 753Transfer Pricing and Performance Evaluation 756The Balanced Scorecard 757

Corporate Governance 758External Control Mechanisms:The Legal System 759Internal Control Mechanisms 759

Looking to the Future: Will IFRS Become the Global AccountingStandard? 760

C A S E : Ericsson: The Challenges of Listing on Global Capital Marketsand the Move to Adopt International Financial Reporting Standards 761

Summary 766Key Terms 767Endnotes 767

19 The Multinational Finance Function 770C A S E : GPS: In the Market for an Effective Hedging Strategy? 771Introduction 774The Finance Function 774

The Role of the CFO 775

Contents 19

Capital Structure 776Leveraging Debt Financing 776Factors Affecting the Choice of Capital Structure 776Debt Markets as Means of Expansion 778

Global Capital Markets 778Eurocurrencies and the Eurocurrency Market 778International Bonds 780Equity Securities and the Euroequity Market 781The Size of Global Stock Markets 782

Offshore Financing and Offshore Financial Centers 784What's an OFC? 784

Counterpoint Should Offshore Financial Centers and Aggressive TaxPractices Be Eliminated? 786

Capital Budgeting in a Global Context 787Methods of Capital Budgeting 788Complications in Capital Budgeting 788

Internal Sources of Funds 789Global Cash Management 790

Foreign-Exchange Risk Management 792Types of Exposure 792Exposure-Management Stratgey, 794

Taxation of Foreign-Source Income 797International Tax Practices 798Taxing Branches and Subsidiaries 800Transfer Prices 803Double Taxation and Tax Credit 803

Looking to the Future: Technology and Cash Flows 804CASE: Dell Mercosur: Getting Real in Brazil 805Summary 809Key Terms 810Endnotes 810

20 Human Resource Management 812CASE: Go Or No Go: Your Career? 813Introduction 817

What Is HRM? 817The Strategic Function of International HRM 818

Strategizing HRM 819Developing Staffing Policies 821

Managing Expatriates 826Selecting Expatriates 827Expatriate Failure 828Training Expatriates 829

20 Contents

Learning a Foreign LanguageStill Useful? 83 ICompensating Expatriates 832Repatriating Expatriates 836

International Labor Relations 839How Labor Looks at the MNE ~840How Labor Responds to the MNE 842The Labor Struggle: Barriers to International Unanimity 843

Looking to the Future: Which Countries Will Have the Jobsof the Future? 845

Trends in MNE-Labor Relations 845C A S E : Tel-Comm-Tek (TCT) 847Summary 851Key Terms 853Endnotes 853Glossary 857Photo Credits 873Company Index and Trademarks 875Name Index 879Subject Index 887