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eighth edition

Global Business Today

CharlesW. L Hill
University of Washington

McGraw-Hill Irwin

contents
PREFACE xiii PART ONE Chapter One Introduction 4 What Is Globalization? 6 The Globalization of Markets 6 The Globalization of Production 7 The Emergence of Global Institutions 9 Drivers of Globalization 11 Declining Trade and Investmen t Barriers 11 The Role of Technological Change 14 The Changing Demographics of the Global Economy 16 The Changing World Output and World Trade Picture 16 The Changing Foreign Direct Investment Picture 18 The Changing Nature of the Multinational Enterprise 19 The Changing World Order 22 The Global Economy of the Twenty-First Century 23 The Globalization Debate 24 Antiglobalization Protests 24 Globalization, Jobs, and Income 26 Globalization, Labor Policies, and the Environment 28 Globalization and,National Sovereignty 29 Globalization and the World's Poor 30 Managing in the Global Marketplace 31 Key Terms 33 Chapter Summary 33 Critical Thinking and Discussion Questions 34 Research Task 34 Closing Case: Legal Outsourcing 35 Introduction and Overview 2 Globalization 3 PART TWO Chapter Two Country Differences 36 National Differences in Political Economy 37 Opening Case: Ghana: An African Dynamo 37 Introduction 38 Political Systems 39 Collectivism and Individualism 39 Democracy and Totalitarianism 42 Economic Systems 44 Market Economy 44 Command Economy 45 Mixed Economy 45 Legal Systems 46 Different Legal Systems 46 Differences in Contract Law 47 Property Rights and Corruption 48 The Protection of Intellectual Property 51 Product Safety and Product Liability 53 Focus on Managerial Implications 54 Key Terms 55 Chapter Summary 55 Critical Thinking and Discussion Questions 55 Research Task 56 Closing Case:The Polish Surprise 56 Chapter Three Political Economy and Economic Development 59 b

Opening Case: Who Makes the Apple iPhone? 3

Opening Case: Revolution in Egypt 59 Introduction 60 Differences in Economic Development 61 Broader Conceptions of Development: Amartya Sen 63 Political Economy and Economic Progress 66 Innovation and Entrepreneurship Are the Engines of Growth 66 Innovation and Entrepreneurship Require a Market Economy 68 Innovation and Entrepreneurship Require Strong Property Rights 68

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The Required Political System 69 Economic Progress Begets Democracy 70 Geography, Education, and Economic Development 70 States in Transition 71 The Spread of Democracy 71 The New World Order and Global Terrorism 74 The Spread of Market-Based Systems 75 The Nature of Economic Transformation 77 Deregulation 77 Privatization 77 Legal Systems 79 Implications of Changing Political Economy 79 Implications for Managers: benefits, costs and risks of doing business internationally 80 Key Terms 84 Chapter Summary 84 Critical Thinking and Discussion Questions 85 Research Task 85 ' Closing Case: Japan's Economic Malaise 85 Chapter Four Introduction 90 What Is Culture? 91 Values and Norms 91 Culture, Society, and the Nation-State 93 The Determinants of Culture 93 Social Structure 94 Individuals and Groups 94 Social Stratification 96 Religious and Ethical Systems 99 Christianity 101 Islam 102 Hinduism 105 Buddhism 106 Confucianism 106 Language 108 Spoken Language 108 Unspoken Language 109 Education 110 Culture and the Workplace 111 Cultural Change 113 Focus on Managerial Implications 115 Key Terms 118 Chapter Summary 118 Critical Thinking and Discussion Questions 119 Research Task 119 Closing Case: Culture and Business in Saudi Arabia 119 / Differences-in Culture 89

Chapter Five

Ethics in International Business 123

Opening Case: Exporting Used Batteries to Mexico 123 Introduction 124 Ethical Issues in International Business 125 Em ploymen t Practices 125 Human Rights 125 Environmental Pollution 127 Corruption 128 Moral Obligations 130 Ethical Dilemmas 131 The Roots of Unethical Behavior 132 Personal Ethics 132 Decision-Making Processes 133 Organization Culture 134 Unrealistic Performance Expectations 134 Leadership 134 Societal Culture 134 Philosophical Approaches to Ethics 135 Straw Men 135 Utilitarian and Kantian Ethics 137 Rights Theories 138 Justice Theories 140 Focus on Managerial Implications 141 Key Terms 146 Chapter Summary 146 Critical Thinking and Discussion Questions 147 Research Task 147 Closing Case: Working Conditions in a Chinese Factory 148

Opening Case: Why Did Walmart Fail in Germany? 89

PART THREE ChapterSix

The Global Trade and Investment Environment 150 International Trade Theory 151

Opening Case: The Rise of India's Drug Industry 151 Introduction 152 An Overview of Trade Theory 153 The Benefits of Trade 153 The Pattern of International Trade 154 Trade Theory and Government Policy 155 Mercantilism 155 Absolute Advantage 156 Comparative Advantage 156 The Gains from Trade 160 Qualifications and Assumptions 161 Extensions of the Ricardian Model 162

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Heckscher-Olin Theory 166 The Leontief Paradox 167 The Product Life-Cycle Theory 168 Evaluating the Product Life-Cycle Theory 170 New Trade Theory 170 Increasing Product Variety and Reducing Costs 171 Economies of Scale, First-Mover Advantages, and the Pattern of Trade 171 Implications of New Trade Theory 172 National Competitive Advantage: Porter's Diamond 173 Factor Endowments 174 Demand Conditions 175 Related and Supporting Industries 175 Firm Strategy, Structure, and Rivalry 175 Evaluating Porter's Theory 177 Focus on Managerial Implications 177 Key Terms 180 Chapter Summary 180 Critical Thinking and Discussion Questions 181 Research Task 181 Closing Case: The Rise of Bangladesh's Textile Trade 182 s Appendix A International Trade and the Balance of Payments 183 Chapter Seven The Political Economy of International Trade 189

1947-1979: GATT, Trade Liberalization, and Economic Growth 203 1980-1993: Protectionist Trends 204 The Uruguay Round and the World Trade Organization 205 Experience to Date 206 The Future of the WTO: Unresolved Issues and the Doha Round 207 Focus on Managerial Implications 212 Key Terms 214 Chapter Summary 214 Critical Thinking and Discussion Questions 215 Research Task 215 Closing Case: U.S. Tariffs on Tire Imports from China 215 Chapter Eight Foreign Direct Investment 219

Opening Case: Foreign Retailers in India 219 Introduction 220 Foreign Direct Investment in the World Economy 221 Trends in FDI 221 The Direction of FDI 222 The Source of FDI 223 The Form of FDI: Acquisitions versus Greenfield Investments 224 Theories of Foreign Direct Investment 225 Why Foreign Direct Investment? 225 The Pattern of Foreign Direct Investment 227 The Eclectic Paradigm 228 Political Ideology and Foreign Direct Investment 230 The Radical View 230 The Free Market View 231 Pragmatic Nationalism 232 Shifting Ideology 232 Benefits and Costs of FDI 233 Host-Country Benefits 234 Host-Country Costs 236 Home-Country Benefits 237 Home-Country Costs 238 International Trade Theory and FDI 238 Government Policy Instruments and FDI 239 Home-Country Policies 239 Host-Country Policies 240 International Institutions and the Liberalization ofFDI 241 '

Opening Case: China Limits Exports of Rare Earth Minerals 189 Introduction 190 Instruments of Trade Policy 191 Tariffs 191 Subsidies 192 Import Quotas and Voluntary Export Restraints 193 Local Content Requirements 195 Administration Policies 195 Antidumping Policies 196 The Case for Government Intervention 197 Political Arguments for Intervention 197 Economic Arguments for Intervention 199 The Revised Case for Free Trade 201 Retaliation and Trade War 202 Domestic Politics 202 Development of the World Trading System 202 From Smith to the Great Depression 203

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Focus on Managerial Implications 241 Key Terms 244 Chapter Summary 244 Critical Thinking and Discussion Questions 244 Research Task 245 Closing Case: Walmart in Japan 245 Chapter Nine Regional Economic Integration 249

Insuring against Foreign Exchange Risk 285 The Nature of the Foreign Exchange Market 287 Economic Theories of Exchange Rate Determination 288 Prices and Exchange Rates 289 Interest Rates and Exchange Rates 294 Investor Psychology and Bandwagon Effects 295 Summary of Exchange Rate Theories 296 Exchange Rate Forecasting 296 The Efficient Market School 297 The Inefficient Market School 297 Approaches to Forecasting 297 Currency Convertibility 298 Focus on Managerial Implications 300 Key Terms 303 Chapter Summary 303 Critical Thinking and Discussion Questions 304 Research Task 305 Closing Case: Billabong 305 Chapter Eleven The International Monetary System 307

Opening Case: I Want My GreekTV! 249 Introduction 250 Levels of Economic Integration 251 The Case for Regional Integration 253 The Economic Case for Integration 253 The Political Case for Integration 254 Impediments to Integration 254 The Case Against Regional Integration 255 Regional Economic Integration in Europe 256 Evolution of the European Union 256 Political Structure of the European Union 256 The Single European Act 259 The Establishment of the Euro 260 Enlargement of the European Union 264 Regional Economic Integration in the Americas 265 The North American Free Trade Agreement 265 The Andean Community 268 Mercosur 269 / Central American Common Market, CAFTA, ' andCARICOM 270 Free Trade Area of the Americas 270 Regional Economic Integration Elsewhere 271 Association of Southeast Asian Nations 271 Asia-Pacific Economic Cooperation 272 Regional Trade Blocs in Africa 272 Focus on Managerial Implications 274 Key Terms 276 Chapter Summary 276 Critical Thinking and Discussion Questions 277 Research Task 277 Closing Case: NAFTA and Mexican Trucking 277 PART FOUR Chapter Ten Global Money System 280 The Foreign Exchange Market 281

Opening Case: Currency Trouble in Malawi 307 Introduction 308 The Gold Standard 310 Mechanics of the Gold Standard 310 Strength of the Gold Standard 310 The Period between the Wars, 1918-1939 310 The Bretton Woods System 311
The Role of the IMF 312 The Role of the World Bank 313

The Collapse of the Fixed Exchange Rate System 313 The Floating Exchange Rate Regime 314 The Jamaica Agreement 315 Exchange Rates since 1973 315 Fixed versus Floating Exchange Rates 318 The Case for Floating Exchange Rates 319 The Case for Fixed Exchange Rates 319 Who Is Right? 320 Exchange Rate Regimes in Practice 320 Pegged Exchange Rates 321 Currency Boards 321 Crisis Management by the IMF 322 Financial Crises in the Post-Bretton Woods Era 323 Evaluating the IMF's Policy Prescriptions 324

Opening Case: Curse of the Strong Yen 281 Introduction 282 The Functions of the Foreign Exchange Market 283 Currency Conversion 283

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Focus on Managerial Implications 327 Key Terms 329 Chapter Summary 329 Critical Thinking and Discussion Questions ^330 Research Task 331 Closing Case: Economic Turmoil in Latvia 331 PART FIVE The Strategy of International Business 332 The Strategy of International Business 333

Basic Entry Decisions 369 Which Foreign Markets? 369 Timing of Entry 370 Scale of En try and Strategic Commitments 371 Market Entry Summary 372 Entry Modes 374 Exporting 374 Turnkey Projects 375 Licensing 375 Franchising 377 Joint Ventures 378 Wholly Owned Subsidiaries 379 Selecting an Entry Mode 380 Core Competencies and Entry Mode 380 Pressures for Cost Reductions and Entry Mode 382 Greenfield Venture or Acquisition? 382 Pros and Cons ofAcquisition 382 Pros and Cons of Greenfield Ventures 384 Greenfield Venture or Acquisition? 385 Key Terms 386 Chapter Summary 386 Critical Thinking and Discussion Questions 387 Research Task 387 Closing Case: General Motors in China 387

Chapter Twelve

Opening Case: Ford's Global Strategy 333 Introduction 334 Strategy and the Firm 335 Value Creation 335 Strategic Positioning 337 Operations: The Firm as a Value Chain 338 Global Expansion, Profitability, and Profit Growth 343 Expanding the Market: Leveraging Products and Competencies 343 Location Economies 344 Experience Effects 346 Leveraging Subsidiary Skills 348 Profitability and Profit Growth Summary 348 Cost Pressures and Pressures for Local Responsiveness 349
Pressures for Cost Reductions 350 Pressures for Local Responsiveness 350

PART SIX

International Business Functions 390 Exporting, Importing, and Countertrade 391

Choosing a Strategy 353 Global Standardization Strategy 354 Localization Strategy 354 Transnational Strategy 355 International Strategy 356 The Evolution of Strategy 357 Strategic Alliances 358 The Advantages of Strategic Alliances 358 The Disadvantages of Strategic Alliances 359 Making Alliances Work 359 Key Terms 362 Chapter Summary 363 Critical Thinking and Discussion Questions 363 Research Task 364 Closing Case: Avon Products 364 Chapter Thirteen Introduction 368 Entering Foreign Markets 367

Chapter Fourteen

Opening Case: SteelMaster Buildings 391 Introduction 392 The Promise and Pitfalls of Exporting 393 Improving Export Performance 394 An International Comparison 395 Information Sources 395 Utilizing Export Management Companies 396 Export Strategy 397 Export and Import Financing 399 Lack of Trust 399 Letter of Credit 400 Draft 401 Bill of Lading 402 A Typical International Trade Transaction 402 Export Assistance 403 Export-Import Bank 403 Export Credit Insurance 404

Opening Case: JCB in India 367

Contents

Countertrade 404 The Incidence of Countertrade 404 Types of Countertrade 405 The Pros and Cons of Countertrade 406 Key Terms 407 Chapter Summary 407 Critical Thinking and Discussion Questions 408 Research Task 408 Closing Case: Vellus Products 409 Chapter Fifteen Global Production, Outsourcing, and Logistics 411

Product Attributes 441 Cultural Differences 441 Economic Development 442 Product and Technical Standards 443 Distribution Strategy 443 Differences between Countries 444 Choosing a Distribution Strategy 446 Communication Strategy 447 Barriers to International Communication 447 Push Versus Pull Strategies 449 Global Advertising 451 Pricing Strategy 453 Price Discrimination 453 Strategic Pricing 455 Regulatory Influences on Prices 456 Configuring the Marketing Mix 457 New-Product Development 458 The Location of R&D 459 Integrating R&D, Marketing, and Production 460 Cross-Functional Teams 461 Building Global R&D Capabilities 461 Key Terms 463 Chapter Summary 463 Critical Thinking and Discussion Questions 464 Research Task 464 Closing Case: Domino's Pizza 465 Chapter Seventeen Global Human Resource Management 467

Opening Case: Making the Amazon Kindle 411 Introduction 412 Strategy, Production, and Logistics 412 Where to Produce 415 Country Factors 415 Technological Factors 416 Product Factors 420 Locating Production Facilities 420 The Hidden Costs of Foreign Locations 421 The Strategic Role of a Foreign Production Site 422 Outsourcing Production: Make-or-Buy Decisions 424 The Advantages of Make 425 The Advantages of Buy 427 Trade-offs 428 Strategic Alliances with Suppliers 428 Managing a Global Supply Chain 429 The Role ofJust-in-Time Inventory 430 The Role of Information Technology and the Internet 430 Key Terms 431 Chapter Summary 431 Critical Thinking and Discussion Questions 432 Research Task 433 Closing Case: The Rise of the Indian Automobile Industry 433 Global Marketing and R&D 437 Opening Case: Burberry's Global Brand Strategy 437 Introduction 438 The Globalization of Markets and Brands 439 Market Segmentation 440 Chapter Sixteen

Opening Case: MMC China 467 Introduction 468 The Strategic Role of International HRM 469 Staffing Policy 471 Types of Staffing Policy 471 Expatriate Managers 474 The Global Mind-Set 478 Training and Management Development 478 Training for Expatriate Managers 479 Repatriation of Expatriates 480 Management Development and Strategy 480 Performance Appraisal 482 Performance Appraisal Problems 482 Guidelines for Performance Appraisal 482 Compensation 483 National Differences in Compensation 483 Expatriate Pay 484

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International Labor Relations 486 The Concerns of Organized Labor 486 The Strategy of Organized Labor 487 Approaches to Labor Relations 488 Key Terms 488 Chapter Summary 488 Critical Thinking and Discussion Questions 489 Research Task 490 Closing Case: AstraZeneca 490

PHOTO CREDITS 521 INDEX 522 ACRONYMS COUNTRIES AND THEIR CAPITALS WORLD MAP

GLOSSARY 491 ENDNOTES 499

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