![currency is set by the foreign exchange market based on supply
and demand related to other currencies.
4.2 Hence, a system of floating exchange rate is a coordinated
international monetary system
THE END
A01_BOVE2186_14_SE_FM.indd 1 11/7/17 3:19 PM
MyLabTM Management is an online homework,
tutorial, and assessment program constructed to work
with this text to engage students and improve results.
It was designed to help students develop and assess
the skills and applicable knowledge that they will need
to succeed in their courses and their future careers.
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“[MyLab Management] is great. I can access all of the
information needed for the course under the home
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and tips to help me better understand the course.”
— Sheena Dunio,](https://image.slidesharecdn.com/chapter10internationalmonetarysystemlearningob-220921035301-fc77d92d/85/Chapter-10INTERNATIONALMONETARY-SYSTEMLEARNING-OB-3-320.jpg)
![Student at Southern New Hampshire University
Mini Sims put students in business professional roles and give
them the opportunity to apply course concepts as they develop
decision making skills through real-world business challenges.
The simulations adapt based on each student’s decisions,
creating
various scenario paths that help students understand how
critical thinking can affect their decisions in an organization.
“[MyLab Management] helped to first learn the concepts and
vocab-
ulary. By watching videos and going through simulations it
helped
apply these concepts to real life and making decisions as a
manager.”
— Alyssa Davidson, Student at Bowling Green State University
Engage, Assess, Apply and Develop
Employability Skills with MyLab Management
80%
of students said it
helped them earn
higher grades on
homework, exams,
or the course
*Source: 2016 Student Survey, n 490
CVR_WILD9220_09_SE_IFC.indd 1 27/10/2017 22:47](https://image.slidesharecdn.com/chapter10internationalmonetarysystemlearningob-220921035301-fc77d92d/85/Chapter-10INTERNATIONALMONETARY-SYSTEMLEARNING-OB-4-320.jpg)
![GLOBAL SUSTAINABILITY Three Markets, Three
Strategies
M01_WILD9220_09_SE_C01.indd 9 10/30/17 8:47 PM
http://www.guardian.co.uk/
http://www.ft.com/
http://www.filmroman.com/
http://www.akomkorea.com/
10 PART 1 • GlobAl bUSinESS EnViRonMEnT
director Mark Kirkland. In one middle-of-the-night phone call,
Kirkland was explaining to the
Koreans how to draw a shooting gun. “They don’t allow guns in
Korea; it’s against the law,” says
Kirkland. “So they were calling me [asking]: ‘How does a gun
work?”’ Kirkland and others put
up with such cultural differences and phone calls at odd hours
to tap a highly qualified pool of
South Korean animators.11
ACCESS PRODUCTION INPUTS Globalization of production
allows companies to access](https://image.slidesharecdn.com/chapter10internationalmonetarysystemlearningob-220921035301-fc77d92d/85/Chapter-10INTERNATIONALMONETARY-SYSTEMLEARNING-OB-140-320.jpg)
![to balance its drive for profits with making healthier “guilt-
free” snacks, decreasing its
impact on the environment, and taking care of its workforce. In
fact, healthier foods
comprise as much as 45 percent of PepsiCo’s revenue today.
Born and raised in India,
Nooyi believes it is essential that “we use corporations as a
productive player in address-
ing some of the big issues facing the world.”
Nooyi also helped spark “green” initiatives at PepsiCo. She has
proved that invest-
ments in water- and heat-related conservation projects can be
worthy endeavors. In addi-
tion to their environmental benefits, those projects now save the
company $55 million
annually. Nooyi says, “Companies today are bigger than many
economies. We are little
republics. We are engines of efficiency. If companies don’t do
[responsible] things, who is
going to?” As you read this chapter, consider how companies
adapt to political, economic,
and legal systems worldwide while fulfilling their ethical and
social responsibilities.1](https://image.slidesharecdn.com/chapter10internationalmonetarysystemlearningob-220921035301-fc77d92d/85/Chapter-10INTERNATIONALMONETARY-SYSTEMLEARNING-OB-591-320.jpg)
![ORIGINS OF THE MARKET ECONOMY Market economics is
rooted in the belief that individual
concerns should be placed above group concerns. According to
this view, the entire group benefits
when individuals receive incentives and rewards to act in
certain ways. It is argued that people take
better care of property they own and that individuals have fewer
incentives to care for property
under a system of public ownership.
Laissez-Faire Economics For many centuries, the world’s
dominant economic philosophy
supported government control of a significant portion of a
society’s assets and government
involvement in its international trade. But in the mid-1700s a
new approach to national eco-
nomics called for less government interference in commerce and
greater individual economic
freedom. This approach became known as a laissez-faire system,
loosely translated from French
as “allow them to do [without interference].”
Canada and the United States are examples of contemporary
market economies. It is no acci-
dent that both these countries have individualist cultures](https://image.slidesharecdn.com/chapter10internationalmonetarysystemlearningob-220921035301-fc77d92d/85/Chapter-10INTERNATIONALMONETARY-SYSTEMLEARNING-OB-639-320.jpg)
Chapter 10INTERNATIONALMONETARY SYSTEMLEARNING OB
- 1. Chapter 10 INTERNATIONAL MONETARY SYSTEM LEARNING OBJECTIVES Describe the importance of exchange rates to business activites Outline the factors that help determine exchange rates Explain attempts to construct a system of fixed exchange rate Describe efforts to create a system of floating exchange rates. 1. Importance of Exchange Rates 2. Factors that help determine exchange rates Two important concepts:- Law of Price Purchasing Power Parity. 1.1 Exchanges rates do not guarantee or stabilize the buying power of currency. 1.2 Law of price states that an identical product (i.e. quality and content) must have identical price in countries where currency
- 2. is the same. 2. Factors that help determine exchange rates, Cont’d... 1.3 expected vs. actual exchange rate = opportunity cost - benefit of buying product in one country at lower cost and selling at higher cost in another. 1.4. Law of price is useful in determining whether currency is over/under valued.(Big Mac)/Sales Tax imposed at different levels and varying marketing strategies used. 2.1 PPP is an economic theory that allows the comparison of the purchasing power of various world currencies to one another. It is a theoretical exchange rate that allows you to buy the same amount of good and services in every country. Factors that help determine exchange rates, Cont’d... 3. Constructing a System of fixed exchange rates 4. Efforts to create a System of Floating Exchange Rates 4.1 A floating exchange rate is a regime where the a nation’s
- 3. currency is set by the foreign exchange market based on supply and demand related to other currencies. 4.2 Hence, a system of floating exchange rate is a coordinated international monetary system THE END A01_BOVE2186_14_SE_FM.indd 1 11/7/17 3:19 PM MyLabTM Management is an online homework, tutorial, and assessment program constructed to work with this text to engage students and improve results. It was designed to help students develop and assess the skills and applicable knowledge that they will need to succeed in their courses and their future careers. See what more than 25,000 students had to say about MyLab Management: “[MyLab Management] is great. I can access all of the information needed for the course under the home screen. It’s easy to navigate and includes helpful videos and tips to help me better understand the course.” — Sheena Dunio,
- 4. Student at Southern New Hampshire University Mini Sims put students in business professional roles and give them the opportunity to apply course concepts as they develop decision making skills through real-world business challenges. The simulations adapt based on each student’s decisions, creating various scenario paths that help students understand how critical thinking can affect their decisions in an organization. “[MyLab Management] helped to first learn the concepts and vocab- ulary. By watching videos and going through simulations it helped apply these concepts to real life and making decisions as a manager.” — Alyssa Davidson, Student at Bowling Green State University Engage, Assess, Apply and Develop Employability Skills with MyLab Management 80% of students said it helped them earn higher grades on homework, exams, or the course *Source: 2016 Student Survey, n 490 CVR_WILD9220_09_SE_IFC.indd 1 27/10/2017 22:47
- 5. MediaShare for Business offers a curated collection of business videos that provide customizable, auto-scored assignments. MediaShare for Business helps students understand why they are learning key concepts and how they will apply those in their careers. Pearson eText enhances student learning—both in and outside the classroom. Take notes, highlight, and bookmark important content, or engage with interactive lecture and example videos that bring learning to life (available with select titles). Accessible anytime, anywhere via MyLab or the app. The MyLab Gradebook offers an easy way for students and instructors to view course performance. Item Analysis allows instructors to quickly see trends by analyzing details like the number of students who answered correctly/incorrectly, time on task, and median time spend on a question by question basis. And because it’s correlated with the AACSB Standards, instructors can track students’ progress toward outcomes that the organiza- tion has deemed important in preparing students to be leaders. % of students who found learning tool helpful 92% eText 94%
- 6. Study Plan For additional details visit: www.pearson.com/mylab/management of students would tell their instructor to keep using MyLab Management86% “I was able to find myself actually learning at home rather than memorizing things for a class.” — Katherine Vicente, Student at County College of Morris A01_WILD9220_09_SE_FM.indd 1 11/1/17 11:23 PM This page intentionally left blank A01_THOM6233_05_SE_WALK.indd 9 1/13/17 6:50 PM International Business The Challenges of Globalization Ninth Edition John J. Wild University of Wisconsin, Madison Kenneth L. Wild University of London, England New York NY A01_WILD9220_09_SE_FM.indd 3 11/1/17 11:23 PM
- 7. Microsoft and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind. Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all warranties and conditions of merchantability, whether express, implied or statutory, fitness for a particular purpose, title and non- infringement. In no event shall Microsoft and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from the services. The documents and related graphics contained herein could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time. Partial screen shots may be viewed in full within the software version specified. Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. This book is not sponsored or endorsed by or affiliated with the Microsoft
- 8. Corporation. Copyright © 2019, 2016, 2014 by Pearson Education, Inc. or its affiliates. All Rights Reserved. Manufactured in the United States of America. This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/. Acknowledgments of third-party content appear on the appropriate page within the text which constitutes as an extension of this copyright page. PEARSON, ALWAYS LEARNING, and MYLAB are exclusive trademarks owned by Pearson Education, Inc. or its affil iates in the U.S. and/ or other countries. Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson's products by the owners of
- 9. such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors. Library of Congress Cataloging-in-Publication Data on File Vice President, Business, Economics, and UK Courseware: Donna Battista Director of Portfolio Management: Stephanie Wall Director, Courseware Portfolio Management: Ashley Dodge Senior Sponsoring Editor: Neeraj Bhalla Ediorial Assistant: Linda Albelli Vice President, Product Marketing: Roxanne McCarley Product Marketer: Kaylee McCarley Product Marketing Assistant: Marianela Silvestri Manager of Field Marketing, Business Publishing: Adam Goldstein Field Marketing Manager: Nicole Price Vice President, Production and Digital Studio, Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Melissa Feimer Content Producer: Sugandh Juneja Operations Specialist: Carol Melville Design Lead: Kathryn Foot Manager, Learning Tools: Brian Surette Content Developer, Learning Tools: Lindsey Sloan Managing Producer, Digital Studio and GLP, Media Production and Development: Ashley Santora Managing Producer, Digital Studio: Diane Lombardo Digital Studio Producer: Regina DaSilva
- 10. Digital Studio Producer: Alana Coles Project Managers: Nicole Suddeth and Thomas Murphy, SPi Global Interior Design: Laurie Entringer Cover Design: Laurie Entringer Cover Art: Romolo Tavani/123RF.com Printer/Binder: LSC Communications, Inc./Menasha Cover Printer: Phoenix Color/Hagerstown ISBN 10: 0-13-472922-6 ISBN 13: 978-0-13-472922-0 1 18 A01_WILD9220_09_SE_FM.indd 4 11/1/17 11:23 PM http://www.pearsoned.com/permissions/ v Preface xviii PART 1 Global Business Environment 2 Chapter 1 Globalization 2 PART 2 National Business Environments 40 Chapter 2 Cross-Cultural Business 40 Chapter 3 Political Economy and Ethics 70 Chapter 4 Economic Development of Nations 102 PART 3 International Trade and Investment 128 Chapter 5 International Trade Theory 128 Chapter 6 Political Economy of Trade 152 Chapter 7 Foreign Direct Investment 174 Chapter 8 Regional Economic Integration 196
- 11. PART 4 The International Financial System 220 Chapter 9 International Financial Markets 220 Chapter 10 International Monetary System 244 PART 5 International Business Management 268 Chapter 11 International Strategy and Organization 268 Chapter 12 Analyzing International Opportunities 290 Chapter 13 Selecting and Managing Entry Modes 314 Chapter 14 Developing and Marketing Products 340 Chapter 15 Managing International Operations 360 Chapter 16 Hiring and Managing Employees 380 Endnotes 398 Glossary 403 Name Index 411 Subject Index 413 Brief Contents A01_WILD9220_09_SE_FM.indd 5 11/1/17 11:23 PM vi Contents Preface xviii PART 1 Global Business Environment 2 Chapter 1 Globalization 2 Apple’s Global iMpact 3 1.1 Key Players in International Business 4
- 12. Multinational Corporations 5 Entrepreneurs and Small Businesses 6 • MANAGER’S BRIEFCASE: The Keys to Global Success 6 1.2 What is Globalization? 7 Globalization of Markets 8 • GLOBAL SUSTAINABILITY: Three Markets, Three Strategies 9 Globalization of Production 9 1.3 Forces Driving Globalization 10 Falling Barriers to Trade and Investment 10 Technological Innovation 12 Measuring Globalization 16 1.4 Debate about Jobs and Wages 17 Against Globalization 17 For Globalization 17 Summary of the Jobs and Wages Debate 18 1.5 Debate about Income Inequality 19 Inequality within Nations 19 Inequality between Nations 19 Global Inequality 20 1.6 Debate about Culture, Sovereignty, and the Environment 21 Globalization and Culture 21 • CULTURE MATTERS: The Culture Debate 21 Globalization and National Sovereignty 22
- 13. Globalization and the Environment 22 1.7 Developing Skills for your Career 23 The Global Business Environment 24 The Road Ahead for International Business 25 • BOTTOM LINE FOR BUSINESS 26 Chapter Summary 27 • Key Terms 28 • Talk About It 1 28 • Talk About It 2 28 • Ethical Challenge 29 • Teaming Up 29 • Market Entry Strategy Project 29 • PRACTICING INTERNATIONAL MANAGEMENT CASE 30 Appendix World Atlas 31 A01_WILD9220_09_SE_FM.indd 6 11/1/17 11:23 PM CONTENTS vii PART 2 National Business Environments 40 Chapter 2 Cross-Cultural Business 40 Hold the Pork, Please! 41 2.1 What is Culture? 42 National Culture 42 Subcultures 43 Physical Environment 43
- 14. Need for Cultural Knowledge 44 • CULTURE MATTERS: Creating a Global Mindset 44 2.2 Values and Behavior 45 Values 45 Attitudes 46 Aesthetics 46 Appropriate Behavior 46 • MANAGER’S BRIEFCASE: A Globetrotter’s Guide to Meetings 47 2.3 Social Structure and Education 48 Social Group Associations 48 Social Status 48 Social Mobility 49 Education 50 2.4 Religion 51 Christianity 51 Islam 51 Hinduism 54 Buddhism 54 Confucianism 55 Judaism 55
- 15. Shinto 56 2.5 Personal Communication 56 Spoken and Written Language 56 • GLOBAL SUSTAINABILITY: Speaking in Fewer Tongues 57 Body Language 58 2.6 Culture in the Global Workplace 59 Perception of Time 59 View of Work 60 Material Culture 60 Cultural Change 61 Studying Culture in the Workplace 62 • BOTTOM LINE FOR BUSINESS 65 Chapter Summary 66 • Key Terms 67 • Talk About It 1 67 • Talk About It 2 68 • Ethical Challenge 68 • Teaming Up 68 • Market Entry Strategy Project 68 • PRACTICING INTERNATIONAL MANAGEMENT CASE 69 Chapter 3 Political Economy and Ethics 70 PepsiCo’s Global Challenge 71 3.1 Political Systems 73 Totalitarianism 73 • GLOBAL SUSTAINABILITY: From Civil War to Civil Society 75
- 16. Democracy 75 • MANAGER’S BRIEFCASE: Your Global Security Checklist 77 A01_WILD9220_09_SE_FM.indd 7 11/1/17 11:23 PM viii CONTENTS 3.2 Economic Systems 78 Centrally Planned Economy 78 Mixed Economy 80 Market Economy 81 3.3 Legal Systems 83 • CULTURE MATTERS: Playing by the Rules 83 Common Law 86 Civil Law 86 Theocratic Law 87 3.4 Global Legal Issues 87 Intellectual Property 87 Product Safety and Liability 89 Taxation 89 Antitrust Regulations 90 3.5 Ethics and Social Responsibility 91 Philosophies of Ethics and Social Responsibility 91
- 17. Bribery and Corruption 92 Labor Conditions and Human Rights 92 Fair Trade Practices 93 Environment 93 • BOTTOM LINE FOR BUSINESS 97 Chapter Summary 98 • Key Terms 99 • Talk About It 1 99 • Talk About It 2 99 • Ethical Challenge 99 • Teaming Up 100 • Market Entry Strategy Project 100 • PRACTICING INTERNATIONAL MANAGEMENT CASE 101 Chapter 4 Economic Development of Nations 102 India’s Tech King 103 4.1 Economic Development 104 Classifying Countries 104 National Production 105 Purchasing Power Parity 108 Human Development 109 4.2 Economic Transition 110 Managerial Expertise 110 Shortage of Capital 110
- 18. Cultural Differences 111 Sustainability 111 4.3 Political Risk 111 • GLOBAL SUSTAINABILITY: Public Health Goes Global 114 Conflict and Violence 114 Terrorism and Kidnapping 115 Property Seizure 115 Policy Changes 116 Local Content Requirements 116 4.4 Managing Political Risk 117 Adaptation 117 Information Gathering 117 Political Influence 118 International Relations 118 The United Nations 118 A01_WILD9220_09_SE_FM.indd 8 11/1/17 11:23 PM CONTENTS ix 4.5 Emerging Markets and Economic Transition 119 China’s Profile 119
- 19. Chinese Patience and Guanxi 120 China’s Challenges 121 • CULTURE MATTERS: Guidelines for Good Guanxi 121 Russia’s Profile 122 Russia’s Challenges 122 • MANAGER’S BRIEFCASE: Russian Rules of the Game 123 • BOTTOM LINE FOR BUSINESS 124 Chapter Summary 124 • Key Terms 125 • Talk About It 1 125 • Talk About It 2 126 • Ethical Challenge 126 • Teaming Up 126 • Market Entry Strategy Project 126 • PRACTICING INTERNATIONAL MANAGEMENT CASE 127 PART 3 International Trade and Investment 128 Chapter 5 International Trade Theory 128 From Bentonville to Beijing 129 5.1 Benefits, Volume, and Patterns of International Trade 130 Benefits of International Trade 130 Volume of International Trade 130 International Trade Patterns 131 • CULTURE MATTERS: Business Culture in the Pacific Rim 134 5.2 Mercantilism 135 How Mercantilism Worked 135
- 20. Flaws of Mercantilism 136 5.3 Theories of Absolute and Comparative Advantage 136 Absolute Advantage 137 Comparative Advantage 138 5.4 Factor Proportions Theory 140 Labor Versus Land and Capital Equipment 141 Evidence on Factor Proportions Theory: The Leontief Paradox 141 5.5 International Product Life Cycle 142 Stages of the Product Life Cycle 142 Limitations of the Theory 142 • MANAGER’S BRIEFCASE: Five Fulfillment Mistakes 143 5.6 New Trade Theory 144 First-Mover Advantage 144 5.7 National Competitive Advantage 144 Factor Conditions 145 • GLOBAL SUSTAINABILITY: Foundations of Development 145 Demand Conditions 146 Related and Supporting Industries 146 Firm Strategy, Structure, and Rivalry 146 Government and Chance 146 • BOTTOM LINE FOR BUSINESS 147 Chapter Summary 148 • Key Terms 149 • Talk About It 1 149 •
- 21. Talk About It 2 149 • Ethical Challenge 150 • Teaming Up 150 • Market Entry Strategy Project 150 • PRACTICING INTERNATIONAL MANAGEMENT CASE 151 A01_WILD9220_09_SE_FM.indd 9 11/1/17 11:23 PM x CONTENTS Chapter 6 Political Economy of Trade 152 Lord of the Movies 153 6.1 Why do Governments Intervene in Trade? 154 Political Motives 154 • GLOBAL SUSTAINABILITY: Managing Security in the Age of Globalization 155 Economic Motives 156 Cultural Motives 157 • CULTURE MATTERS: Myths of Small Business Exporting 158 6.2 Instruments of Trade Promotion 159 Subsidies 159 Export Financing 159 Foreign Trade Zones 160 • MANAGER’S BRIEFCASE: Experts in Export Financing 160
- 22. Special Government Agencies 161 6.3 Instruments of Trade Restriction 161 Tariffs 161 Quotas 162 Embargoes 164 Local Content Requirements 164 Administrative Delays 164 Currency Controls 165 6.4 Global Trading System 165 General Agreement on Tariffs and Trade (GATT) 165 World Trade Organization (WTO) 167 • BOTTOM LINE FOR BUSINESS 169 Chapter Summary 170 • Key Terms 171 • Talk About It 1 171 • Talk About It 2 171 • Ethical Challenge 171 • Teaming Up 172 • Market Entry Strategy Project 172 • PRACTICING INTERNATIONAL MANAGEMENT CASE 173 Chapter 7 Foreign Direct Investment 174 Das Auto 175 7.1 Pattern of Foreign Direct Investment 176 Ups and Downs of FDI 176 • CULTURE MATTERS: The Cowboy of Manchuria 178
- 23. Worldwide Flows of FDI 178 7.2 Theories of Foreign Direct Investment 179 International Product Life Cycle 179 Market Imperfections (Internalization) 179 Eclectic Theory 180 Market Power 180 7.3 Management Issues and Foreign Direct Investment 181 Control 181 Purchase-or-Build Decision 182 Production Costs 182 • MANAGER’S BRIEFCASE: Surprises of Investing Abroad 182 Customer Knowledge 184 Following Clients 184 Following Rivals 184 • GLOBAL SUSTAINABILITY: Greening the Supply Chain 184 A01_WILD9220_09_SE_FM.indd 10 11/1/17 11:23 PM CONTENTS xi 7.4 Why Governments Intervene in FDI 185 Balance of Payments 185
- 24. Reasons for Intervention by the Host Country 186 Reasons for Intervention by the Home Country 187 7.5 Government Policy Instruments and FDI 189 Host Countries: Promotion 189 Host Countries: Restriction 190 Home Countries: Promotion 190 Home Countries: Restriction 190 • BOTTOM LINE FOR BUSINESS 191 Chapter Summary 191 • Key Terms 192 • Talk About It 1 193 • Talk About It 2 193 • Ethical Challenge 193 • Teaming Up 193 • Market Entry Strategy Project 194 • PRACTICING INTERNATIONAL MANAGEMENT CASE 195 Chapter 8 Regional Economic Integration 196 Nestlé’s Global Recipe 197 8.1 Levels of Integration and the Debate 198 Free Trade Area 198 Customs Union 199 Common Market 199 Economic Union 199 Political Union 199
- 25. The Case for Regional Integration 199 The Case Against Regional Integration 201 8.2 Integration in Europe 202 European Union 203 • CULTURE MATTERS: Czech List 208 European Free Trade Association (EFTA) 209 8.3 Integration in the Americas 209 North American Free Trade Agreement 209 Central American Free Trade Agreement (CAFTA-DR) 211 Andean Community (CAN) 211 Southern Common Market (MERCOSUR) 212 Central America and the Caribbean 212 Free Trade Area of the Americas (FTAA) 213 8.4 Integration in Asia and Elsewhere 213 Association of Southeast Asian Nations (ASEAN) 213 Asia Pacific Economic Cooperation (APEC) 213 • MANAGER’S BRIEFCASE: The Ins and Outs of ASEAN 214 Closer Economic Relations (CER) Agreement 214 Gulf Cooperation Council (GCC) 214 Economic Community of West African States (ECOWAS) 215 African Union (AU) 215 • BOTTOM LINE FOR BUSINESS 216
- 26. Chapter Summary 216 • Key Terms 217 • Talk About It 1 217 • Talk About It 2 218 • Ethical Challenge 218 • Teaming Up 218 • Market Entry Strategy Project 218 • PRACTICING INTERNATIONAL MANAGEMENT CASE 219 A01_WILD9220_09_SE_FM.indd 11 11/1/17 11:23 PM xii CONTENTS PART 4 The International Financial System 220 Chapter 9 International Financial Markets 220 Wii Is the Champion 221 9.1 Importance of the International Capital Market 222 Purposes of National Capital Markets 223 Purposes of the International Capital Market 223 • GLOBAL SUSTAINABILITY: Big Results from Microfinance 224 Forces Expanding the International Capital Market 224 World Financial Centers 225 9.2 International Capital Market Components 226 International Bond Market 226 International Equity Market 227
- 27. Eurocurrency Market 227 9.3 The Foreign Exchange Market 228 Functions of the Foreign Exchange Market 228 9.4 Currency Quotes and Rates 230 Quoting Currencies 230 Spot Rates 233 Forward Rates 233 Swaps, Options, and Futures 234 9.5 Market Instruments and Institutions 235 Trading Centers 235 Important Currencies 235 Interbank Market 236 Securities Exchanges 236 Over-the-Counter Market 237 • MANAGER’S BRIEFCASE: Managing Foreign Exchange 237 Instruments for Restricting Currencies 238 • BOTTOM LINE FOR BUSINESS 238 Chapter Summary 239 • Key Terms 240 • Talk About It 1 240 • Talk About It 2 241 • Ethical Challenge 241 • Teaming Up 241 • Market Entry Strategy Project 241 • PRACTICING INTERNATIONAL MANAGEMENT CASE
- 28. 242 Appendix Calculating Percent Change in Exchange Rates 243 Chapter 10 International Monetary System 244 Euro Rollercoaster 245 10.1 Importance of Exchange Rates 246 Desire for Predictability and Stability 247 Efficient versus Inefficient Market View 247 Forecasting Techniques 248 Difficulties of Forecasting 248 • CULTURE MATTERS: The Long Arm of the Law 249 10.2 What Factors Determine Exchange Rates? 249 Law of One Price 249 Purchasing Power Parity 250 10.3 Fixed Exchange Rate Systems 254 The Gold Standard 254 Bretton Woods Agreement 255 A01_WILD9220_09_SE_FM.indd 12 11/1/17 11:23 PM CONTENTS xiii 10.4 System of Floating Exchange Rates 257 Today’s Exchange-Rate Arrangements 258 • MANAGER’S BRIEFCASE: Adjusting to Currency Swings
- 29. 259 European Monetary System 259 Recent Financial Crises 260 Future of the International Monetary System 262 • BOTTOM LINE FOR BUSINESS 263 Chapter Summary 264 • Key Terms 265 • Talk About It 1 265 • Talk About It 2 265 • Ethical Challenge 265 • Teaming Up 266 • Market Entry Strategy Project 266 • PRACTICING INTERNATIONAL MANAGEMENT CASE 267 PART 5 International Business Management 268 Chapter 11 International Strategy and Organization 268 Flying High with Low Fares 269 11.1 Company Analysis 270 Company Mission and Goals 270 Core Competency and Value-Creation 271 • MANAGER’S BRIEFCASE: Ask Questions before Going Global 273 11.2 Strategy Formulation 274 Two International Strategies 274 Corporate-Level Strategies 276 Business-Level Strategies 276
- 30. Department-Level Strategies 278 11.3 Issues of Organizational Structure 279 Centralization versus Decentralization 279 Coordination and Flexibility 280 11.4 Types of Organizational Structure 281 International Division Structure 281 International Area Structure 282 Global Product Structure 282 Global Matrix Structure 283 Work Teams 283 A Final Word 285 Chapter Summary 286 • Key Terms 287 • Talk About It 1 287 • Talk About It 2 287 • Ethical Challenge 287 • Teaming Up 288 • PRACTICING INTERNATIONAL MANAGEMENT CASE 289 Chapter 12 Analyzing International Opportunities 290 Starbucks Causes Global Jitters 291 12.1 Basic Appeal and National Factors 292 Step 1: Identify Basic Appeal 292 Step 2: Assess the National Business Environment 294 • MANAGER’S BRIEFCASE: Conducting Global e-Business 298
- 31. 12.2 Measure and Select the Market or Site 298 Step 3: Measure Market or Site Potential 298 Step 4: Select the Market or Site 301 12.3 Secondary Market Research 304 International Organizations 304 Government Agencies 305 A01_WILD9220_09_SE_FM.indd 13 11/1/17 11:23 PM xiv CONTENTS Industry and Trade Associations 306 Service Organizations 306 Internet 306 Problems with Secondary Research 307 12.4 Primary Market Research 308 Trade Shows and Trade Missions 308 • CULTURE MATTERS: Is the World Your Oyster? 309 Interviews and Focus Groups 309 Surveys 309 Environmental Scanning 310 Problems with Primary Research 310 A Final Word 311
- 32. Chapter Summary 311 • Key Terms 312 • Talk About It 1 312 • Talk About It 2 312 • Ethical Challenge 312 • Teaming Up 312 • PRACTICING INTERNATIONAL MANAGEMENT CASE 313 Chapter 13 Selecting and Managing Entry Modes 314 License to Thrill 315 13.1 Exporting, Importing, and Countertrade 316 Why Companies Export 316 Developing an Export Strategy: A Four-Step Model 317 Degree of Export Involvement 318 Avoiding Export and Import Blunders 320 Countertrade 320 13.2 Export/Import Financing 321 Advance Payment 322 Documentary Collection 322 Letter of Credit 323 Open Account 324 • MANAGER’S BRIEFCASE: Collecting International Debts 324 13.3 Contractual Entry Modes 325 Licensing 325 Franchising 326
- 33. Management Contracts 328 Turnkey Projects 328 13.4 Investment Entry Modes 329 Wholly Owned Subsidiaries 329 Joint Ventures 330 Strategic Alliances 332 13.5 Strategic Factors in Selecting an Entry Mode 333 Selecting Partners for Cooperation 333 • CULTURE MATTERS: Negotiating Market Entry 334 Cultural Environment 334 Political and Legal Environments 334 Market Size 334 Production and Shipping Costs 335 International Experience 335 A Final Word 335 Chapter Summary 335 • Key Terms 337 • Talk About It 1 337 • Talk About It 2 337 • Ethical Challenge 337 • Teaming Up 338 • PRACTICING INTERNATIONAL MANAGEMENT CASE 339 A01_WILD9220_09_SE_FM.indd 14 11/1/17 11:23 PM
- 34. CONTENTS xv Chapter 14 Developing and Marketing Products 340 Wings for Life 341 14.1 Developing Product Strategies 342 Laws and Regulations 342 Cultural Differences 343 Brand and Product Names 343 National Image 344 Counterfeit Goods and Black Markets 345 Shortened Product Life Cycles 345 14.2 Creating Promotional Strategies 346 Push and Pull Strategies 346 • MANAGER’S BRIEFCASE: Managing an International Sales Force 347 International Advertising 347 Blending Product and Promotional Strategies 349 • CULTURE MATTERS: Localizing Websites 351 14.3 Designing Distribution Strategies 352 Designing Distribution Channels 352 Influence of Product Characteristics 353 Special Distribution Problems 353 14.4 Developing Pricing Strategies 354
- 35. Worldwide Pricing 354 Dual Pricing 355 Factors That Affect Pricing Decisions 355 A Final Word 356 Chapter Summary 357 • Key Terms 357 • Talk About It 1 358 • Talk About It 2 358 • Ethical Challenge 358 • Teaming Up 358 • PRACTICING INTERNATIONAL MANAGEMENT CASE 359 Chapter 15 Managing International Operations 360 Toyota Races Ahead 361 15.1 Production Strategy 362 Capacity Planning 362 Facilities Location Planning 362 Process Planning 364 Facilities Layout Planning 365 15.2 Acquiring Physical Resources 365 Make-or-Buy Decision 365 Raw Materials 368 Fixed Assets 368 15.3 Key Production Concerns 369 Quality Improvement Efforts 369
- 36. Shipping and Inventory Costs 370 • MANAGER’S BRIEFCASE: World-Class Standards 370 Reinvestment versus Divestment 371 15.4 Financing Business Operations 371 Borrowing 372 Issuing Equity 372 Internal Funding 373 • CULTURE MATTERS: Financing Business from Abroad 374 Capital Structure 374 A Final Word 375 Chapter Summary 376 • Key Terms 377 • Talk About It 1 377 • Talk About It 2 377 • Ethical Challenge 377 • Teaming Up 378 • PRACTICING INTERNATIONAL MANAGEMENT CASE 379 A01_WILD9220_09_SE_FM.indd 15 11/1/17 11:23 PM xvi CONTENTS Chapter 16 Hiring and Managing Employees 380 Leaping Cultures 381 16.1 International Staffing Policies 382 Ethnocentric Staffing 382 Polycentric Staffing 384 Geocentric Staffing 384
- 37. 16.2 Recruiting and Selecting Human Resources 385 Human Resource Planning 385 • MANAGER’S BRIEFCASE: Growing Global 385 Recruiting Human Resources 386 Selecting Human Resources 386 Culture Shock 387 Reverse Culture Shock 387 • CULTURE MATTERS: A Shocking Ordeal 388 16.3 Training and Development 388 Methods of Cultural Training 389 Compiling a Cultural Profile 390 Nonmanagerial Worker Training 391 16.4 Employee Compensation 391 Managerial Employees 391 Nonmanagerial Workers 392 16.5 Labor–Management Relations 393 Importance of Labor Unions 393 A Final Word 394 Chapter Summary 394 • Key Terms 395 • Talk About It 1 395 • Talk About It 2 396 • Ethical Challenge 396 • Teaming Up 396 • PRACTICING INTERNATIONAL MANAGEMENT CASE 397
- 38. Endnotes 398 Glossary 403 Name Index 411 Subject Index 413 A01_WILD9220_09_SE_FM.indd 16 11/1/17 11:23 PM xvii Dear Friends and Colleagues, As we roll out the new edition of International Business: The Challenges of Globalization, we thank each of you who provided suggestions to enrich this textbook. This edition reflects the advice and wisdom of many dedicated review- ers and instructors. Together, we have created the most readable, concise, and innovative international business book available today. As teachers, we know it is important to select the right book for your course. Instructors say this book’s clear and lively writing style helps students learn international business. The book’s streamlined and clutter-free design is a competitive advantage that will never be sacrificed. The accompanying cutting-edge technology package also helps students to better understand international business. MyLab Management is an innova- tive set of course-management tools for delivering all or part of
- 39. your course online, which makes it easy to add meaningful assessment to your course. Whether you’re interested in testing your students on simple recall of concepts and theories or you’d like to gauge how well they can apply their new knowl- edge to real-world scenarios, MyLab Management offers a variety of activi- ties that are applied and personalized with immediate feedback. You and your students will find these and other components of this book’s learning system fun and easy to use. We owe the success of this book to our colleagues and our students who keep us focused on their changing educational needs. In this time of rapid global change, we must continue to instill in our students a passion for international business and to equip them with the skills and knowledge they need to com- pete. Please accept our heartfelt thanks and know that your input is reflected in everything we write. John J. Wild Kenneth L. Wild A01_WILD9220_09_SE_FM.indd 17 11/1/17 11:23 PM xviii
- 40. Preface Welcome to the ninth edition of International Business: The Challenges of Globalization. As in previous editions, this book resulted from extensive market surveys, chapter reviews, and correspondence with scores of instructors and students. We are delighted that an overwhelm- ing number of instructors and students agree with our approach to international business. The reception of this textbook in the United States and across the world has exceeded all expectations. This book is our means of traveling on an exciting tour through the study of international business. It motivates the reader by making international business challenging yet fun. It also embraces the central role of people and their cultures in international business. Each chapter is infused with real-world discussion, while underlying theory appears in the background where it belongs. Terminology is used consistently, and theories are explained in direct and concise terms. This book’s visual style is innovative yet subtle and uses photos, illustrations, and features spar- ingly. The result is an easy-to-read and clutter-free design. New to This Edition • Learning Objectives for each chapter now appear in the margins of the text right next to where the corresponding material begins. This allows the reader to better follow the mate- rial presented in each chapter and increases student
- 41. comprehension. • New material in Chapter 1 includes coverage of highly useful capabilities we call employ- ability skills. Where appropriate, the book presents material that helps students to develop critical thinking skills, refine their sense of business ethics and social responsibility, develop their communication skills, and expand their ability to apply and analyze knowledge. • Chapter 1 topic of the world’s largest companies and its accompanying Figure 1.1 has been updated, as is material on the most globalized nations and the timely and important topic of global inequality. • The Manager’s Briefcase feature in Chapter 1 appears earlier to emphasize the textbook’s applied and managerial treatment of material. • Presentation of national illiteracy rates and its accompanying Table 2.1 are updated to pres- ent the most recent data available. • Figure 3.2 and its discussion reflect recent data on business software piracy rates around the world. • The most recently available Human Development Index is presented in Table 4.1 along with its updated in-text explanation. • Table 5.1 presents most recently available data on the world’s top exporters and importers, by both US dollar value and share of the world total.
- 42. • Chapter 5 discussion of regional merchandise trade has been removed to present the mate- rial in a more streamlined and less complicated fashion. • Chapter 6 contains an update to the discussion of the WTO Doha Round of negotiations. • Figures 7.1 and 7.2 and their explanations update the annual value of foreign direct invest- ment inflows and cross-border mergers and acquisitions, respectively. • Chapter 8 presentation of regional trading blocs contains the latest available information on Britain’s exit (Brexit) from the European Union, Venezuela’s suspension from the Southern Common Market, and other events. • Chapter 10 updates the discussion of exchange rates among major world currencies, value of the US dollar over time, and the addition of China’s currency to the IMF’s special draw- ing right (SDR). • Table 12.1 updates the ranking of the world’s top market research firms. A01_WILD9220_09_SE_FM.indd 18 11/1/17 11:23 PM PREFACE xix • Chapter 13 discussion of letter-of-credit financing and its related Figure 13.4 have been
- 43. revised for precision and a smoother presentation. • All chapter-opening company profiles and chapter-closing mini-cases are updated to reflect the most recent data and facts available at the time of publication. Solving Teaching and Learning Challenges Students who take the international business course can have difficulty seeing the relevance of certain key concepts to their lives and future careers. These topics can include political economy, trade theory, foreign exchange rates, and the international financial system. This can reduce the willingness of a student to prepare for class and be engaged in class. We use the ever-present and salient subject of culture to present real-world examples and engaging features to bring international business to life and pique student interest. We pres- ent complex material in concrete, straightforward terms and illustrate it appropriately to make international business accessible for all students. This approach makes the material interesting and relevant and shows students the importance of these concepts to their future employability and careers. We use the following additional methods and resources to engage students with the content of international business: interactive Approach to international Business Pearson’s MyLab Management is now fully integrated into the text. These features are outlined below. The online assessment activities
- 44. enable you to quiz your students before class so you have more time in class to focus on areas that students find most challenging. Watch It Cases expose students to life in other cultures by asking them to view a video clip on a key topic. Each video corresponds to the chapter material and is accompanied by multiple choice questions that reinforce student comprehension. Try It Simulations ask students to apply what they have learned in a textbook section and provide immediate feedback. Students make choices based on realistic business scenarios, which reinforces student comprehension of key concepts. Quick Study Concept Checks appear at the end of each textbook section to verify that students have learned key terms and concepts before moving on. Students obtain immediate feedback on answers they provide in an online environment. Making international Business Relevant This textbook captures the real-world characteristics of international business today by empha- sizing the importance of cultural inf luences, sustainable business practices, and managerial implications. Culture Matters boxes present the relation between culture and a key chapter topic. For example, Chapter 2 presents the importance of businesspeople developing a global mindset and avoiding cultural bias. Another chapter presents the debate over globalization’s influence on cul-
- 45. ture, and another box shows how entrepreneurs succeed by exploiting their knowledge of local cultures. Global Sustainability boxes present special top- ics related to economic, social, and environmen- tal sustainability. Today, businesses know that f lourishing markets rely on strong economies, thriving societies, and healthy environments. MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 16.1 Explain the three types of staffing policies that companies use. 16.2 Describe the key human resource recruitment and selection issues. 16.3 Summarize the main training and development programs that firms use. 16.4 Explain how companies compensate managers and workers. 16.5 Describe the importance of labor–management relations. Learning Objectives After studying this chapter, you should be able to Hiring and
- 46. Managing Employees Chapter Sixteen A Look Back Chapter 15 examined how compa- nies launch and manage their inter- national production efforts. We also briefly explored how companies finance their various international business operations. A Look at This Chapter This final chapter examines how a company acquires and manages its most important resource—its employees. The topics we explore include international staffing poli- cies, recruitment and selection, training and development, compensa- tion, and labor–management relations. We also learn about culture shock and how employees can deal with its effects. M16_WILD9220_09_SE_C16.indd 380 20/09/2017 22:57 CHAPTER 1 • GlobAlizATion 13 THE INTERNET Companies use the Internet to quickly and inexpensively contact managers in distant locations—for example, to inquire about production
- 47. runs, revise sales strategies, and check on distribution bottlenecks. They also use the Internet to achieve longer-term goals, such as sharpen their forecasting, lower their inventories, and improve communication with suppliers. The lower cost of reaching an international customer base especially benefits small firms, which were among the first to use the Internet as a global marketing tool. Additional gains arise from the ability of the Internet to cut postproduction costs by decreasing the number of intermediaries a product passes through on its way to the customer. Eliminating intermediaries greatly benefits online sellers of all sorts of products, including books, music, travel services, and software. Some innovative companies use online competitions to attract fresh ideas from the brightest minds worldwide. InnoCentive (www.innocentive.com) connects companies and institutions seek- ing solutions to difficult problems by using a global network of 300,000 creative thinkers. These engineers, scientists, inventors, and businesspeople with expertise in life sciences, engineering, chemistry, math, computer science, and entrepreneurship compete to solve some of the world’s toughest problems in return for significant financial awards. InnoCentive is open to anyone, is avail- able in seven languages, and pays cash awards that range from $5,000 to more than $1 million.14 COMPANY INTRANETS AND EXTRANETS Internal company websites and information net- works (intranets) give employees access to company data using personal computers. A particularly effective marketing tool on Volvo Car Corporation’s
- 48. (www.volvocars.com) intranet is a quarter- by-quarter database of marketing and sales information. The cycle begins when headquarters sub- mits its corporate-wide marketing plan to Volvo’s intranet. Marketing managers at each subsidiary worldwide then select those activities that apply to their own market, develop their marketing plan, and submit it to the database. This allows managers in every market to view every other subsidiary’s marketing plan and to adapt relevant aspects to their own plan. In essence, the entire system acts as a tool for the sharing of best practices across all of Volvo’s markets. Extranets give distributors and suppliers access to a company’s database so they can place orders or restock inventories electronically and automatical ly. These networks permit international companies (along with their suppliers and buyers) to respond to internal and external conditions more quickly and more appropriately. ADVANCEMENTS IN TRANSPORTATION TECHNOLOGIES Retailers worldwide rely on imports to stock their storerooms with finished goods and to supply factories with raw materials and intermediate products. Innovation in the shipping industry is helping globalize markets and production by making shipping more efficient and dependable. In the past, a cargo ship would sit in port up to 10 days while it was unloaded one pallet at a time. But because cargo today is loaded onto a ship in 20- and 40-foot containers that are unloaded quickly at the destination onto railcars or truck chassis, a 700-foot cargo ship is routinely unloaded in just 15 hours.
- 49. Operation of cargo ships is now simpler and safer because of computerized charts that pin- point a ship’s movements on the high seas using Global Positioning System (GPS) satellites. Com- bining GPS with radio frequency identification (RFID) technology allows continuous monitoring of individual containers from port of departure to destination. RFID can tell whether a container’s doors are opened and closed on its journey and can send an alert if a container deviates from its planned route. These types of advancements allowed Hewlett-Packard (www.hp.com) to seize the rewards of globalization when it built a new low-cost computer server for businesses. HP dispersed its design and production activities throughout a specialized manufacturing system across five Pacific Rim nations and India. This helped the company minimize labor costs, taxes, and shipping delays yet maximize productivity when designing, building, and distributing its new product. Companies use such innovative production and distribution techniques to squeeze inefficiencies out of their international operations and boost their competitiveness. MyLab Management Watch It Save the Children Social Networking Apply what you have learned about the use of technology in management. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case about how a not-for-profit enterprise uses social media to achieve its goals and answer questions.
- 50. Untitled-2 13 24/10/2017 12:14 CHAPTER 1 • GlobAlizATion 23 Most international firms today support reasonable environmental laws because (if for no other reason) they want to expand future local markets for their goods and services. They recognize that healthy future markets require a sustainable approach to business expansion. Companies today often examine a location for its potential as a future market as well as a production base. MyLab Management Try It Apply what you have learned about the effects of globalization. If your instructor has assigned this, go to www.pearson.com/mylab/management to perform a simulation on the potential positive and negative outcomes of globalization. QUiCK STUDY 6 1. People opposed to globalization say that it does what to national cultures? 2. Regarding national sovereignty, opponents of globalization say that it does what? 3. Regarding the physical environment, what do globalization supporters argue? 1.7 Developing Skills for your Career Some of you taking this course are majoring in international business or a related business area, such as marketing, business administration, or accounting. Others are majoring in political sci- ence, economics, history, psychology, and so forth, and are taking this course to gain insight into
- 51. how businesses operate in the global economy. But as we read at the beginning of this chapter, and regardless of your chosen field of study, international business activities touch all aspects of our lives today. So, although you might not one day become a manager with direct international business responsibilities, this course will help you develop highly useful capabilities we call employability skills, regardless of your chosen career. Critical thinking involves purposeful and goal-directed thinking used to define and solve problems, make decisions, or form judgments related to a set of circumstances. This course will help you to develop this key employability skill. For example, you will use critical thinking skills in this course to study how a country designs its political, economic, and legal systems into a complex arrangement to achieve a specific set of priorities for the nation and its people. Through- out the book, you will be able to put yourself in the position of a business manager and make a decision or solve a dilemma that commonly occurs in business today. A keener sense of business ethics and social responsibility is another employability skill that this course will help you to improve. We define these concepts simply as sets of guiding principles that influence the way individuals and organizations behave within society. You will encounter the issues of personal ethical responsibility and reasoning throughout this course as you read how managers made ethical decisions under specific circumstances and how they fared. You will also read about the social responsibilities that companies face
- 52. regarding topics such as human rights, fair trade, and sustainable development. This course also will help to improve your communication skills, which is another key employability skill. Communication is the use of oral, written, and nonverbal language, and tech- nology to communicate ideas effectively and to listen effectively. International business means doing business across national borders, across languages, and across cultures. Articulating one’s thoughts and ideas in another language and culture must be done in a considerate and mindful way so as to not offend another person’s values and beliefs. You will read about many situations in which appropriate communication resulted in successful dealings, and thoughtless communica- tion meant failure of one kind or another. You will see how managers who are posted abroad for the first time on international assignment must work effectively with others, remain flexible, and make cultural compromises to succeed. 1.7 Identify how this course will help you to develop skills for your career. Untitled-2 23 24/10/2017 12:15 CHAPTER 1 • GlobAlizATion 19 1.5 Debate about Income Inequality Perhaps no controversy swirling around globalization is more complex than the debate about its effect on income inequality. Here, we focus on three main aspects of the debate: inequality within
- 53. nations, inequality between nations, and global inequality. Inequality within Nations The first aspect of the inequality debate is whether globalization increases income inequality among people within nations. Opponents of globalization argue that freer trade and investment allows international companies to close factories in high-wage, developed nations and to move them to low-wage, developing nations. They argue that this increases the wage gap between white- collar and blue-collar occupations in rich nations. Two studies of developed and developing nations find contradictory evidence about this argu- ment. The first study, of 38 countries for almost 30 years, supports the increasing inequality argument. The study found that as a nation increases its openness to trade, income growth among the poorest 40 percent of its population declines, whereas income growth among other groups increases.18 The second study, of 80 countries for 40 years, failed to support the increasing inequality argument. It found that incomes of the poor rise one-for-one with overall economic growth and concluded that the poor benefit from international trade along with the rest of a nation.19 Two studies of developing nations only are more consistent in their findings. One study found that an increase in the ratio of trade to national output of 1 percent raised average income levels by 0.5 to 2 percent. Another study showed that incomes of the poor kept pace with growth in average incomes in economies (and periods) of fast trade integration, but that the poor fell behind during
- 54. periods of declining openness.20 Results of these two studies suggest that, by integrating their economies into the global economy, developing nations (by far the nations with the most to gain) can boost the incomes of their poorest residents. Another approach takes a multidimensional view of poverty and deprivation. Proponents of this approach say that the problem with focusing on income alone is that higher income does not necessarily translate into better health or nutrition. The new approach examines 10 basic factors, including whether the family home has a decent toilet and electricity service; whether children are enrolled in school; and whether family members are malnourished or must walk more than 30 minutes to obtain clean drinking water. A household is considered poor if it is “deprived” on more than 30 percent of the indicators. This new approach reveals important differences among poor regions. For example, whereas material measures contribute more to poverty in sub-Saharan Africa, malnutrition is a bigger factor in South Asia.21 Inequality between Nations The second aspect of the inequality debate is whether globalization widens the gap in average incomes between rich and poor nations. If we compare average incomes in high-income countries with average incomes in middle- and low-income nations, we do find a widening gap. But aver- ages conceal differences between nations. On closer inspection, it appears the gap between rich and poor nations does not occur every- where: One group of poor nations is closing the gap with rich
- 55. economies, while a second group of poor countries is falling further behind. For example, China is narrowing the income gap between itself and the United States as measured by GDP per capita, but the gap between Africa and the United States is widening. China’s progress is no doubt a result of its integration with the world economy and annual economic growth rates of between 7 percent and 9 percent. Another emerging market, India, also is narrowing its income gap with the United States by embracing globalization.22 Developing countries that embrace globalization are increasing personal incomes, extending life expectancies, and improving education systems. In addition, post-communist countries that 1.5 Summarize the debate about income inequality. QUiCK STUDY 4 1. In the debate about jobs and wages, opponents of globalization say that it does what? 2. In the debate about jobs and wages, supporters of globalization say that it does what? M01_WILD9220_09_SE_C01.indd 19 8/31/17 9:17 PM CHAPTER 1 • GlobAlizATion 21 1.6 Debate about Culture, Sovereignty, and the Environment Coverage of the globalization debate would be incomplete without examining several additional topics in the globalization debate. Let’s now look at globalization’s effect on a nation’s culture,
- 56. sovereignty, and physical environment. Globalization and Culture National culture is a strong shaper of a people’s values, attitudes, customs, beliefs, and com- munication. Whether globalization eradicates cultural differences between groups of people or reinforces cultural uniqueness is a hotly debated topic. Globalization’s detractors say that it homogenizes our world and destroys our rich diversity of cultures. They say that in some drab, new world we all will wear the same clothes bought at the same brand-name shops, eat the same foods at the same brand- name restaurants, and watch the same movies made by the same production companies. Blame is usually placed squarely on the largest multinational companies in consumer goods, which typically are based in the United States. Supporters argue that globalization allows us all to profit from our differing circumstances and skills. Trade allows countries to specialize in producing the goods and services they can produce most efficiently. Nations then can trade with each other to obtain goods and services they desire but do not produce. In this way, France still produces many of the world’s finest wines, South Africa yields much of the world’s diamonds, and Japan continues to design some of the world’s finest-engineered automobiles. Other nations then trade their goods and services with these countries to enjoy the wines, diamonds, and automobiles that they do not, or cannot, produce. To learn more about the interplay between culture and globalization, see the Culture Matters feature, titled, “The Culture Debate.”
- 57. 1.6 Outline the debate about culture, sovereignty, and the environment. QUiCK STUDY 5 1. Evidence suggests that globalization can help developing nations boost incomes for their poorest people in what part of the debate about inequality? 2. In the debate about inequality between nations, evidence suggests that developing nations that are open to trade and investment do what? 3. Regarding the debate about global inequality, experts tend to agree about what? The debate about globalization’s influence on culture evokes strong opinions. Here are a few main arguments in this debate: • Material Desire. Critics say globalization fosters the “Coca- Colanization” of nations through advertising campaigns that promote material desire. They also argue that global consumer-goods companies destroy cultural diversity (especially in developing nations) by putting local compa- nies out of business. • Artistic Influence. Evidence suggests, however, that the cultures of developing nations are thriving and that the influence of their music, art, and literature has grown (not shrunk) throughout the past century. African cultures, for example, have influenced the works of artists including Picasso, the beatles, and Sting. • Western Values. international businesses reach far and
- 58. wide through the internet, global media, increased busi- ness travel, and local marketing. Critics say local values and traditions are being replaced by US companies promoting “Western” values. • A Force for Good. on the positive side, globalization tends to foster two important values: tolerance and diversity. Advocates say nations should be more tolerant of oppos- ing viewpoints and should welcome diversity among their peoples. This view interprets globalization as a potent force for good in the world. • Deeper Values. Globalization can cause consumer pur- chases and economic ideologies to converge, but these are rather superficial aspects of culture. Deeper values that embody the essence of cultures might be more resistant to a global consumer culture. • Want to Know More?. Visit the globalization page of the Global Policy Forum (www.globalpolicy.org), Globaliza- tion 101 (www.globalization101.org), or The Globalist (www.theglobalist.com). Sources: “Economic Globalization and Culture: A Discussion with Dr. Francis Fukuyama,” Merrill Lynch Forum website (www.ml.com); “Globalization Issues,” The Globalization website (www.sociology.emory.edu/globalization/index.html); “Cultural Diversity in the Era of Globalization,” UNESCO Culture Sector website (www.unesco.org/culture). CULTURE MATTERS The Culture Debate M01_WILD9220_09_SE_C01.indd 21 8/31/17 9:17 PM
- 59. A01_WILD9220_09_SE_FM.indd 19 11/1/17 11:23 PM http://www.pearson.com/mylab/management http://www.pearson.com/mylab/management http://www.pearson.com/mylab/management http://www.globalpolicy.org http://www.globalization101.org http://www.theglobalist.com xx PREFACE Topics include the factors that contribute to sus- tainable development, and how companies can make their supply chains more environmentally friendly. Manager’s Briefcase boxes address issues facing companies active in international business. Issues presented can be relevant to entrepreneurs and small businesses or to the world’s largest global companies. Topics include obtaining capital to finance international activities, getting paid for exports, and how to be mindful of personal secu- rity while abroad on business. Uniquely integrative International business is not simply a collection of separate business functions and environmental forces. The model shown below (and detailed in Chapter 1) is a unique organizing framework that helps students to understand how the elements of international business are related. It depicts a dynamic, integrated system that weaves together national business environments, the international business environment, and international business management. It also shows that characteristics of
- 60. globalization (new technologies and falling bar- riers to trade and investment) are causing greater competition. Tools for Active Learning Carefully chosen assignment materials span the full range of complexity to test students’ knowledge and ability to apply key principles. Assignment materials are often experiential in nature to help students develop decision-making skills. Talk About It questions raise important issues currently confront- ing entrepreneurs, international managers, policy makers, consum- ers, and others. Ethical Challenge exercises ask students to assume the role of a manager, government official, or someone else and to make a decision based on the facts presented to them. Teaming Up projects go beyond the text and require students to collaborate in teams to conduct interviews, research other coun- tries, or hold in-class debates. Market Entry Strategy Project is an interactive simulation that asks students to research a country as a future market for a new video game system. Working as part of a team, students research and analyze a country, and then recommend a course of action. Practicing International Management cases ask students to analyze the responses of real-world companies to the issues, problems, and opportunities discussed in each chapter. Developing and Marketing Products (ch. 14) Managing
- 61. International Operations (ch. 15) Economic Development of Nations (ch. 4) International Financial Markets (ch. 9) Political Economy of Trade (ch. 6) Cross-Cultural Business (ch. 2) International Monetary System (ch. 10) Globalization (ch. 1) Increasing Competition
- 62. Technological Innovation Falling Trade/FDI Barriers International Trade Theory (ch. 5) Regional Economic Integration (ch. 8) Foreign Direct Investment (ch. 7) Analyzing International Opportunities (ch. 12) Selecting and Managing Entry Modes (ch. 13)
- 63. Hiring and Managing Employees (ch. 16) International Strategy and Organization (ch. 11) National Firm International Political Economy and Ethics (ch. 3) 6 PART 1 • GlobAl bUSinESS EnViRonMEnT Entrepreneurs and Small Businesses International business competition has given rise to a new entity, the born global firm—a company that adopts a global perspective and engages in international business from or near its inception. Many of these companies become international competitors in less than three years. Born global firms tend to have innovative cultures and knowledge-based organizational capabilities. In this age of globalization, companies are exporting earlier and
- 64. growing faster, often with help from technology. Small firms selling traditional products benefit from technology that lowers the costs and difficulties of global communication. Vellus Products (www.vellus.com) of Columbus, Ohio, makes and sells pet-grooming products. Some years ago, a dog breeder in Spain became Vellus’s first distributor after the breeder received a request for mor e information about Vellus’s products from a man in Bahrain. Sharon Kay Doherty, president of Vellus, says she was stunned that she could so easily process a transaction with someone so far away. Today Vellus has distributors in 35 countries. It is a truly born global business in that, soon after going international, Vellus earned more than half its revenues from international sales.5 Electronic distribution for firms that sell digitized products is an effective alternative to traditional distribution channels. Alessandro Naldi’s Weekend in Italy website (en.firenze.waf .it) offers visitors more authentic Florentine products than they’ll find in the scores of over- priced tourist shops in downtown Florence. A Florentine himself, Naldi established his site to sell high-quality, authentic Italian merchandise made only in the small factories of Tuscany. Weekend in Italy averages 200,000 visitors each month from places as far away as Australia, Canada, Japan, Mexico, and the United States.6 For additional insights into how small and large companies alike succeed in international markets, see the Manager’s Briefcase, titled “The Keys to Global Success.”
- 65. born global firm Company that adopts a global perspective and engages in inter- national business from or near its inception. Making everything from 99-cent hamburgers (McDonald’s) to $150 million jumbo jets (boeing), managers of global companies must overcome obstacles when competing in unfamiliar markets. Global managers acknowledge certain commo n threads in their approaches to management and offer the following advice: • Communicate Effectively Cultural differences in business relationships and etiquette are central to global business and require cross-cultural competency. Effective global managers welcome uniqueness and ambiguity while dem- onstrating flexibility, respect, and empathy. • Know the Customer Successful managers understand how a company’s different products serve the needs of inter- national customers. Then, they ensure that the company remains flexible and capable enough to customize products that meet those needs. • Emphasize Global Awareness Good global managers integrate foreign markets into business strategy from the outset. They ensure that products and services are designed and built with global markets in mind, and not used as dumping grounds for the home market’s outdated products. • Market Effectively The world will beat a path to your door to buy your “better mousetrap” only if it knows about it. A poor marketing effort can cause great products to fade into obscurity while an international marketing blunder
- 66. can bring unwanted media attention. Top global managers match quality products with excellent marketing. • Monitor Global Markets Successful managers keep a watchful eye on business environments for shifting political, legal, and socioeconomic conditions. They make obtaining accurate information a top priority. MANAGER’S BRIEFCASE The Keys to Global Success QUiCK STUDY 1 1. What is the value of goods and services that all nations of the world export every year? 2. A business that has direct investments (in the form of marketing or manufacturing subsid- iaries) abroad in multiple countries is called a what? 3. A born global firm engages in international business from or near its inception and does what else? M01_WILD9220_09_SE_C01.indd 6 8/31/17 9:17 PM CHAPTER 1 • GlobAlizATion 9 activities. The rise of social media is partly responsible for this trend. Concerned individuals and nongovernmental organizations will very quickly use Internet media to call out any firm caught harming the environment or society. For years, forward-looking businesses have employed the motto, “reduce, reuse, and recycle.” The idea is to reduce the use of resources and waste, reuse
- 67. resources with more than a single-use lifespan, and recycle what cannot be reduced or reused. The most dedicated managers and firms promote sustainable communities by adding to that motto, “redesign and reimagine.” This means redesigning products and processes for sustainability and reimagining how a product is designed and used to lessen its environmental impact.10 To read more about the call for more sustainable business practices, see the Global Sustainability feature, “Three Markets, Three Strategies.” Globalization of Production Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality- maximization objectives for a good or ser- vice. This includes the sourcing of key production inputs (such as raw materials or products for assembly) as well as the international outsourcing of services. Let’s now explore the benefits that companies obtain from the globalization of production. ACCESS LOWER-COST WORKERS Global production activities allow companies to reduce overall production costs through access to low-cost labor. For decades, companies located their factories in low-wage nations in order to churn out all kinds of goods, including toys, small appli- ances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the produc- tion of services such as accounti ng and research. Although most services must be produced where they are consumed, some services can be performed at remote
- 68. locations where labor costs are lower. Many European and US businesses have moved their customer service and other nones- sential operations to places as far away as India to slash costs by as much as 60 percent. ACCESS TECHNICAL EXPERTISE Companies also produce goods and services abroad to benefit from technical know-how. Film Roman (www.filmroman.com) produces the TV series The Simpsons, but it provides key poses and step-by-step frame directions to AKOM Produc- tion Company (www.akomkorea.com) in Seoul, South Korea. AKOM then fills in the remaining poses and links them into an animated whole. But there are bumps along the way, says animation A company adapts its business strategy to the nuances of the market it enters. The world’s population of 7.5 billion people lives in three different types of markets: • Developed Markets. These include the world’s established con- sumer markets, around one billion people. The population is solidly middle class, and people can consume almost any prod- uct desired. The infrastructure is highly developed and efficient. • Emerging Markets. These markets, around two billion peo- ple, are racing to catch up to developed nations. The popu- lation is migrating to cities for better pay and is overloading cities’ infrastructures. Rising incomes are increasing global demand for resources and basic products. • Traditional Markets. Globalization has bypassed these mar- kets, nearly four billion people. The population is mostly
- 69. rural, the infrastructure is very poor, and there is little credit or collateral. People have almost no legal protections, and corruption prevails. like business strategy, sustainability strategies reflect local conditions. Examples of businesses working toward sustainability in these three markets include the following: • Toyota focused on the environment in its developed mar- kets. After extensively researching gas-electric hybrid tech- nologies, Toyota launched the Prius. As Motor Trend’s Car of the Year, the Prius drove Toyota’s profits to record highs and gave it a “green” image. • Shree Cement faced limited access to low-cost energy in india’s emerging market, so it developed the world’s most energy-efficient process for making its products. The world’s leading cement companies now visit Shree to learn from its innovations in energy usage. • Blommer Chocolate of the United States works closely with cocoa farmers in traditional markets. blommer received the Rainforest Alliance’s “Sustainable Standard-Setter” award for training farmers in safe farming practices, environmen- tal stewardship, and HiV awareness. Sources: Wang Wen, “Emerging Markets are Set to Lead Globalisation,” Financial Times (www.ft.com), April 10, 2017; Jeremy Jurgens and Knut Haanæs, “Companies from Emerg- ing Markets Are the New Sustainability Champions,” The Guardian (www.guardian.co.uk), October 12, 2011; Stuart L. Hart, Capitalism at the Crossroads, Third Edition (Upper Saddle River, NJ: Wharton School Publishing, 2010); Daniel C. Esty
- 70. and Andrew S. Winston, Green to Gold (New Haven, CT: Yale University Press, 2006). GLOBAL SUSTAINABILITY Three Markets, Three Strategies M01_WILD9220_09_SE_C01.indd 9 8/31/17 9:17 PM 28 PART 1 • GlobAl bUSinESS EnViRonMEnT LO1.6 Outline the debate about culture, sovereignty, and the environment. • Evidence suggests that the cultures of developing nations are thriving in an age of glo- balization and that deeper elements of culture are not easily abandoned, as critics say. • In terms of national sovereignty, the case can be made that globalization has not undermined democracy, but has helped it to spread worldwide and has aided progress on many global issues. • Regarding the environment, it seems globalization has not caused a “race to the bot- tom,” but instead has urged firms to embrace sustainability as a precondition to fos- tering healthy future markets. LO1.7 Identify how this course will help you to develop skills for your career. • The employability skills this course can help you develop are critical thinking skills, business ethics and social responsibility, communication, and
- 71. knowledge application and analysis. • The global business environment model in Figure 1.3 will help you to conceptualize international business today and aid in your skills development. • The international business environment influences how firms conduct operations, while globalization further entwines the flows of trade, investment, and capital. • Separate national business environments comprise unique cultural, political, eco- nomic, and legal characteristics that define business activity within every nation. born global firm (p. 6) e-business (e-commerce) (p. 12) exports (p. 4) GDP or GNP per capita (p. 12) General Agreement on Tariffs and Trade (GATT) (p. 10) globalization (p. 7) gross domestic product (GDP) (p. 12) gross national product (GNP) (p. 12) imports (p. 4) international business (p. 4) International Monetary Fund (IMF) (p. 11)
- 72. multinational corporation (MNC) (p. 5) sustainability (p. 8) World Bank (p. 11) World Trade Organization (WTO) (p. 11) Key Terms TALK ABOUT IT 1 Today, international businesspeople must think globally about production and sales op- portunities. Many global managers will eventually find themselves living and working in other cultures, and entrepreneurs might find themselves taking flights to places they had never heard about. 1-1. What can companies do now to prepare their managers for international markets? 1-2. How can entrepreneurs and small businesses with limited resources prepare? TALK ABOUT IT 2 In the past, national governments influenced the pace of globalization through agree- ments to lower barriers to international trade and investment. 1-3. Is rapid change now outpacing the capability of governments to manage the global economy? 1-4. Will national governments grow more or less important to international business in the future? M01_WILD9220_09_SE_C01.indd 28 8/31/17 9:17 PM
- 73. 28 PART 1 • GlobAl bUSinESS EnViRonMEnT LO1.6 Outline the debate about culture, sovereignty, and the environment. • Evidence suggests that the cultures of developing nations are thriving in an age of glo- balization and that deeper elements of culture are not easily abandoned, as critics say. • In terms of national sovereignty, the case can be made that globalization has not undermined democracy, but has helped it to spread worldwide and has aided progress on many global issues. • Regarding the environment, it seems globalization has not caused a “race to the bot- tom,” but instead has urged firms to embrace sustainability as a precondition to fos- tering healthy future markets. LO1.7 Identify how this course will help you to develop skills for your career. • The employability skills this course can help you develop are critical thinking skills, business ethics and social responsibility, communication, and knowledge application and analysis. • The global business environment model in Figure 1.3 will help you to conceptualize international business today and aid in your skills development. • The international business environment influences how firms
- 74. conduct operations, while globalization further entwines the flows of trade, investment, and capital. • Separate national business environments comprise unique cultural, political, eco- nomic, and legal characteristics that define business activity within every nation. born global firm (p. 6) e-business (e-commerce) (p. 12) exports (p. 4) GDP or GNP per capita (p. 12) General Agreement on Tariffs and Trade (GATT) (p. 10) globalization (p. 7) gross domestic product (GDP) (p. 12) gross national product (GNP) (p. 12) imports (p. 4) international business (p. 4) International Monetary Fund (IMF) (p. 11) multinational corporation (MNC) (p. 5) sustainability (p. 8) World Bank (p. 11) World Trade Organization (WTO) (p. 11) Key Terms TALK ABOUT IT 1
- 75. Today, international businesspeople must think globally about production and sales op- portunities. Many global managers will eventually find themselves living and working in other cultures, and entrepreneurs might find themselves taking flights to places they had never heard about. 1-1. What can companies do now to prepare their managers for international markets? 1-2. How can entrepreneurs and small businesses with limited resources prepare? TALK ABOUT IT 2 In the past, national governments influenced the pace of globalization through agree- ments to lower barriers to international trade and investment. 1-3. Is rapid change now outpacing the capability of governments to manage the global economy? 1-4. Will national governments grow more or less important to international business in the future? M01_WILD9220_09_SE_C01.indd 28 8/31/17 9:17 PM A01_WILD9220_09_SE_FM.indd 20 11/1/17 11:23 PM PREFACE xxi MyLab Management Reach every student by pairing this text with
- 76. MyLab Management MyLab is the teaching and learning platform that empowers you to reach every student. By combining trusted author content with digital tools and a flexible platform, MyLab person- alizes the learning experience and improves results for each student. Learn more about MyLab Man- agement at www.pearson.com/mylab/ management. This approach helps you reach students who have little international knowledge and experience. Deliver trusted content You deserve teaching materials that meet your own high standards for your course. That’s why we partner with highly respected authors to develop interactive content and course-specific resources that you can trust— and that keep your students engaged. This mate- rial piques student interest and engages them with abstract topics, such as the global monetary system. Empower each learner Each student learns at a different pace. Personalized learning pinpoints the precise areas where each student needs practice, giving all students the support they need—when and where they need it—to be successful. This strategy helps students master dif- ficult concepts, such as foreign exchange rates. Teach your course your way Your course is unique. So whether you’d like to build your own assignments, teach multiple sections, or set prerequisites, MyLab gives you the flexibility to easily cre- ate your course to fit your needs. You can teach chapters or indi- vidual modules in the order you prefer, for example, by covering global economic topics before teaching culture. Improve student results When you teach with MyLab, stu- dent performance improves. That’s why instructors have
- 77. chosen MyLab for over 15 years, touching the lives of over 50 million students. Developing Employability Skills Some students enrolled in this course are majoring in interna- tional business or a related area. Other students are not busi- ness majors and are taking this course to gain insight into how businesses operate in the global economy today. Regardless of the chosen field of study, this course helps students develop useful capabilities we call employability skills. Critical thinking involves purposeful and goal-directed thinking used to define and solve prob- lems, make decisions, or form judgments related to a set of circumstances. This textbook requires students to use critical thinking skills to, for example, study how a country designs its political, economic, and legal systems into a complex arrangement to achieve a specific set of priorities for the nation and its people. Business ethics and social responsibility are sets of guiding principles that influence the way individuals and organizations behave within society. Throughout the book students encounter the issues of personal ethical responsibility and reasoning as they read how managers made ethical decisions under specific circumstances and how they fared. Communication skills involve the use of oral, written, and nonverbal language, and technology to communicate ideas effectively and to listen effectively. This book teaches that articulating one’s thoughts and ideas in another language and culture must be done to not offend other’s values and beliefs. The reader will encounter many examples of appropriate communication and thoughtless communication.
- 78. 312 PART 5 • inTERnATionAl BusinEss MAnAgEMEnT Teaming Up As a team, select an emerging market that interests you. Start by compiling fundamental coun- try data and then do additional research following the steps in this chapter. Flesh out the nature of the market opportunity offered by this country or its suitability as a manufacturing site. Next, select a company that is pursuing opportunities in the country. Determine whether the company’s activities are consistent with the market or site potential as your team researched it. consumer panel (p. 309) environmental scanning (p. 310) focus group (p. 309) income elasticity (p. 299) logistics (p. 297) market research (p. 292) primary market research (p. 308) secondary market research (p. 304) survey (p. 309) trade mission (p. 308) trade show (p.308) Key Terms TALK ABOUT IT 1 Western companies flooded into China when it opened its doors and allowed them to compete for market share in all sorts of industries. Yet, after several years many of these same companies either scaled back their operations in China or
- 79. left the country entirely. 12-1. Where do you think these companies may have gone wrong in their analyses? Explain. 12-2. What role does the business media play in setting the tone for a nation’s investment climate? TALK ABOUT IT 2 Sony’s MiniDisc recorder/player was enormously successful in Japan but received a luke- warm welcome in the US market. When Sony attempted its third MiniDisc launch in the United States it thought it had the right formula because it had “found out what’s in consumers’ heads.” 12-3. What type of research do you think Sony used to “get inside the heads” of its target market? 12-4. Do you think firms in certain cultures prefer to conduct certain types of market research? Explain. Ethical Challenge You are the executive director of Qualitative Research Consultants Association (QRCA), an organization designed to assist market research practitioners. Every QRCA member must agree to abide by a ten-point code of ethics that forbids practices such as discriminating in respondent recruitment and offering kickbacks or other favors in exchange for business. The code also calls for research to be conducted for legitimate
- 80. research purposes and not as a front for product promotion. 12-5. Why do you think the QRCA and other market research organizations create such codes? 12-6. Do you believe such codes are helpful in reducing unethical research practices? Explain. 12-7. As QRCA director, what other areas of marketing research do you believe should be cov- ered by ethical codes of conduct? M12_WILD9220_09_SE_C12.indd 312 9/15/17 9:56 PM CHAPTER 1 • GlobAlizATion 29 MyLab Management Go to www.mymanagementlab.com for auto-graded writing questions as well as the following assisted-graded writing questions: 1-14. When going international, companies today often research new locations as potential markets as well as potential sites for operations. What specific benefits can companies gain from the globalization of markets and production? Explain. 1-15. Opponents of globalization say that it has many negative consequences for jobs and wages, income inequality, culture, sovereignty, and the environment. What are some positive outcomes of globalization for each of these topics? Ethical Challenge You are the CEO of a major US apparel company that contracts work to garment manufacturers abroad. Employees of one contractor report 20-hour workdays,
- 81. pay below the minimum wage, overcrowded living conditions, physically abusive supervisors, and confiscation of their passports so they cannot quit. Local officials say labor laws are adhered to and enforced, though abuses appear widespread. You send inspectors to the offending factory abroad, but they uncover no labor violations. A labor-advocacy group claims that supervisors coached workers to lie to your inspectors about conditions and threatened workers with time in make- shift jails without food if they talked. 1-5. Should you implement a monitoring system to learn the truth about what is happening? 1-6. Do you help the factory improve conditions, withdraw your business from the country, or simply do nothing? 1-7. How might your actions affect relations with the factory owner and your ability to do business in the country? Teaming Up Imagine that you and several of your classmates own a company that manufactures cheap sunglasses. To lower production costs, you decide to move your factory from your developed country to a more cost-effective location. 1-8. Which elements of the national business environment might influence your decision of where to move production? 1-9. What aspects of the globalization of production and marketing do you expect will benefit
- 82. your company after the move? Market Entry Strategy Project This exercise corresponds to the MESP online simulation. With several classmates, select a country that interests you. For the country your team researches, integrate your answers to the following questions into your completed MESP report. 1-10. Is the nation the home base of any large multinational companies? 1-11. How does globalization influence the country’s jobs and wages, its income inequality, and its culture, sovereignty, and physical environment? 1-12. How does the country rank in terms of its degree of globalization? 1-13. What benefits can the country offer to businesses seeking a new market or production base? M01_WILD9220_09_SE_C01.indd 29 8/31/17 9:17 PM CHAPTER 1 • GlobAlizATion 29 MyLab Management Go to www.mymanagementlab.com for auto-graded writing questions as well as the following assisted-graded writing questions: 1-14. When going international, companies today often research new locations as potential markets as well as potential sites for operations.
- 83. What specific benefits can companies gain from the globalization of markets and production? Explain. 1-15. Opponents of globalization say that it has many negative consequences for jobs and wages, income inequality, culture, sovereignty, and the environment. What are some positive outcomes of globalization for each of these topics? Ethical Challenge You are the CEO of a major US apparel company that contracts work to garment manufacturers abroad. Employees of one contractor report 20-hour workdays, pay below the minimum wage, overcrowded living conditions, physically abusive supervisors, and confiscation of their passports so they cannot quit. Local officials say labor laws are adhered to and enforced, though abuses appear widespread. You send inspectors to the offending factory abroad, but they uncover no labor violations. A labor-advocacy group claims that supervisors coached workers to lie to your inspectors about conditions and threatened workers with time in make- shift jails without food if they talked. 1-5. Should you implement a monitoring system to learn the truth about what is happening? 1-6. Do you help the factory improve conditions, withdraw your business from the country, or simply do nothing? 1-7. How might your actions affect relations with the factory owner and your ability to do business in the country?
- 84. Teaming Up Imagine that you and several of your classmates own a company that manufactures cheap sunglasses. To lower production costs, you decide to move your factory from your developed country to a more cost-effective location. 1-8. Which elements of the national business environment might influence your decision of where to move production? 1-9. What aspects of the globalization of production and marketing do you expect will benefit your company after the move? Market Entry Strategy Project This exercise corresponds to the MESP online simulation. With several classmates, select a country that interests you. For the country your team researches, integrate your answers to the following questions into your completed MESP report. 1-10. Is the nation the home base of any large multinational companies? 1-11. How does globalization influence the country’s jobs and wages, its income inequality, and its culture, sovereignty, and physical environment? 1-12. How does the country rank in terms of its degree of globalization? 1-13. What benefits can the country offer to businesses seeking a new market or production base?
- 85. M01_WILD9220_09_SE_C01.indd 29 8/31/17 9:17 PM CHAPTER 15 • MAnAging inTERnATionAl oPERATions 379 PRACTICING INTERNATIONAL MANAGEMENT CASE Toyota’s Strategy for Production Efficiency Toyota Motor Corporation (www.toyota-global.com) com-monly appears in most rankings of the world’s most respected companies. One reason for Toyota’s strong showing in such rank- ings is that the company always seems to maintain profitability in the face of economic downturns and slack demand. Another reason is that leaders in a wide range of industries have high regard for Toyota’s management and production practices. Toyota first began producing cars in 1937. In the mid-1950s, a machinist named Taiichi Ohno began developing a new concept of automobile production. Today, the approach known as the Toyota Production System (TPS) has been intensely studied and widely copied throughout the automobile industry. Ohno, who is addressed by fellow employees as sensei (“teacher and master”), followed the lead of the family that founded Toyota (spelled Toyoda) by exhibit- ing high regard for company employees. Ohno also believed that mass production of automobiles was obsolete and that a flexible production system that produced cars according to specific cus - tomer requests would be superior.
- 86. It was at Toyota that the well-known just-in-time approach to inventory management was developed and perfected. Implement- ing just-in-time required kanban, a simple system of colored paper cards that accompanied the parts as they progressed down the assembly line. Kanban eliminates inventory buildup by quickly telling the production personnel which parts are being used and which are not. The third pillar of the TPS was quality circles, groups of workers who discussed ways to improve the work process and make better cars. Finally, the entire system was based on j idoka, which literally means “automation.” As used at Toyota, however, the word expresses management’s faith in the worker as a human being and a thinker. A simple example illustrates the benefits of Toyota’s system. Toyota dealerships found that customers kept returning their vehi- cles with leaking radiator hoses. When a team of workers at the US plant where the vehicle was made was asked to help find a solu- tion, they found the problem was the clamp on the radiator hose. In assembly, the clamp is put over the hose, a pin on the side is pulled out, and the hose is secured. But sometimes the operator would forget to pull out the pin. The hose would remain loose and would leak. The team installed a device next to the line that contains a fun- nel and electric eye. If a pin is not tossed into the funnel
- 87. (passing the electric eye) every 60 seconds, the device senses that the operator must have forgotten to pull the pin and stops the line. As a result, a warranty problem at the dealerships was eliminated, customer dis- satisfaction was reduced, and productivity was increased. Nearly 50 years after the groundwork for the TPS was first laid, the results speak for themselves. Toyota’s superior approach to manufacturing has been estimated to yield a cost advantage of $600 to $700 per car due to more efficient production, plus another $300 savings per car because fewer defects mean less warranty repair work. Ohno’s belief in flexible production can also be seen in the fact that Toyota’s Sienna minivan is produced on the same assembly line in Georgetown, Kentucky, as the company’s Camry models. The Sienna and Camry share the same basic chassis and 50 percent of their parts. Out of 300 different stations on the assembly line, Sienna models require different parts at only 26 stations. Toyota expects to build one Sienna for every three Camrys that come off the assembly line. Thinking Globally 15-13. Chrysler engineers helped Toyota develop its Sienna minivan. In return, Toyota provided input on automobile production techniques to Chrysler. Why do you think
- 88. Chrysler was willing to share its minivan know-how with a key competitor? 15-14. Considering financial, marketing, and human resource management issues, what other benefits do you think Toyota obtains from its production system? Sources: Christoph Rauwald, “Toyota Loses Global Sales Crown to VW as US Trade Barriers Loom,” Automotive News (www.autonews.com), January 30, 2017; Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu, “The Contra- dictions That Drive Toyota’s Success,” Harvard Business Review, June 2008, pp. 96–104; David Welch, “What Could Dull Toyota’s Edge,” Bloomberg Businessweek, April 28, 2008, p. 38. M15_WILD9220_09_SE_C15.indd 379 9/15/17 10:01 PM A01_WILD9220_09_SE_FM.indd 21 11/1/17 11:23 PM http://www.pearson.com/mylab/management xxii PREFACE Knowledge application and analysis refers to one’s ability to learn a concept and appro- priately apply that knowledge in another setting to achieve a higher level of understanding. Students will apply analytical reasoning and research skills in numerous assignments, proj- ects, mini-cases, and, perhaps, the market entry strategy project developed for use with this
- 89. textbook. Instructor Teaching Resources This program comes with the following teaching resources. Supplements available to instructors at www.pearsonhighered.com/irc Features of the Supplement Instructor’s Resource Manual authored by John Capela from St. Joseph’s College, New York • Chapter-by-chapter summaries • Examples and activities not in the main book • Learning outlines • Teaching tips • Solution s to all questions and problems in the book Test Bank authored by John Capela from St. Joseph’s College, New York 1600 multiple-choice, true/false, short-answer, and graph- ing questions with these annotations:
- 90. • Difficulty level (1 for straight recall, 2 for some analy- sis, and 3 for complex analysis) • Answer • Skill • Learning outcome • AACSB learning standard (ethical understandi ng and reasoning; analytical thinking; information technology; diverse and multicultural work; reflective thinking; application of knowledge) Computerized TestGen® TestGen allows instructors to: • Customize, save, and generate classroom tests • Edit, add, or delete questions from the Test Item Files • Analyze test results • Organize a database of tests and student results PowerPoints authored by Carol Heeter from Ivy Tech Community College Slides include all the figures, tables, maps, and equations
- 91. in the textbook. PowerPoints meet accessibility standards for students with disabilities. Features include, but not limited to: • Keyboard and screen reader access • Alternative text for images • High color contrast between background and fore- ground colors A01_WILD9220_09_SE_FM.indd 22 11/1/17 11:23 PM http://www.pearsonhighered.com/irc ACKNOWLEDGMENTS xxiii Acknowledgments We are grateful for the encouragement and suggestions provided by many instructors, profes- sionals, and students in preparing this ninth edition of International Business: The Challenges of Globalization. We especially thank the following instructors who provided valuable feedback to
- 92. improve this and previous editions: Rob Abernathy University of North Carolina, Greensboro Hadi S. Alhorr Drake University Gary Anders Arizona State University West Madan Annavarjula Northern Illinois University Ogugua Anunoby Lincoln University Robert Armstrong University of North Alabama Wendell Armstrong Central Virginia Community College Mernoush Banton Florida International University George Barnes University of Texas at Dallas Constance Bates Florida International University Marca Marie Bear University of Tampa Leta Beard University of Washington, Washington
- 93. Tope A. Bello East Carolina University Robert Blanchard Salem State College David Boggs Eastern Illinois University Chuck Bohleke Owens Community College Erin Boyer Central Piedmont Community College Todd Brachman Marquette University, Wisconsin Richard Brisebois Everglades University Bill Brunsen Eastern New Mexico at Portales Thierry Brusselle Chaffey College Mikelle Calhoun Ohio State University Martin Calkins Santa Clara University Lisa Cherivtch Oakton Community College
- 94. Kenichiro Chinen California State University at Sacramento Joy Clark Auburn University–Montgomery Randy Cray University of Wisconsin at Stevens Point Tim Cunha Eastern New Mexico University at Portales Robert Engle Quinnipiac University Herbert B. Epstein University of Texas at Tyler Blair Farr Jarvis Christian College Stanley Flax St. Thomas University Ronelle Genser Devry University Carolina Gomez University of Houston Jorge A. Gonzalez University of Wisconsin at Milwaukee Andre Graves SUNY Buffalo Kenneth R. Gray Florida A&M University
- 95. James Gunn Berkeley College James Halteman Wheaton College Alan Hamlin Southern Utah University A01_WILD9220_09_SE_FM.indd 23 11/1/17 11:23 PM xxiv ACKNOWLEDGMENTS Dale Hartley Laramie County Community College Charles Harvey University of the West of England, UK M. Anaam Hashmi Minnesota State University at Mankato Les Jankovich San Jose State University R. Sitki Karahan Montana State University Bruce Keillor Youngstown State University
- 96. Ken Kim University of Toledo Ki Hee Kim William Paterson University Anthony C. Koh University of Toledo Donald J. Kopka Jr. Towson University James S. Lawson Jr. Mississippi State University Ian Lee Carleton University Tomasz Lenartowicz Florida Atlantic University Joseph W. Leonard Miami University (Ohio) Antoinette Lloyd Virginia Union University Carol Lopilato California State University at Dominguez Hills Jennifer Malarski North Hennepin Community College Donna Weaver McCloskey Widener University James McFillen Bowling Green State University
- 97. Mantha Vlahos Mehallis Florida Atlantic University John L. Moore Oregon Institute of Technology David Mosby University of Texas, Arlington Richard T. Mpoyi Middle Tennessee State University Tim Muth Florida Institute of Technology Christopher “Kit” Nagel Concordia University Irvine Rod Oglesby Southwest Baptist University Sam Okoroafo University of Toledo Patrick O’Leary St. Ambrose University Jaime Ortiz Texas International Education Consortium Yongson Paik Loyola Marymount University Thomas Passero Owens Community College
- 98. Hui Pate Skyline College Clifford Perry Florida International University Susan Peterson Scottsdale Community College Janis Petronis Tarleton State University William Piper William Piedmont College Abe Qastin Lakeland College Krishnan Ramaya Pacific University of Oregon James Reinnoldt University of Washington–Bothell Elva A. Resendez Texas A&M University Nadine Russell Central Piedmont Community College C. Richard Scott Metropolitan State College of Denver Deepak Sethi Old Dominion University Charlie Shi Diablo Valley College
- 99. Coral R. Snodgrass Canisius College A01_WILD9220_09_SE_FM.indd 24 11/1/17 11:23 PM ACKNOWLEDGMENTS xxv Mark J. Snyder University of North Carolina Rajeev Sooreea Penn State—University Park John Stanbury George Mason University William A. Stoever Seton Hall University Kenneth R. Tillery Middle Tennessee State University William Walker University of Houston Paula Weber St. Cloud State University James E. Welch Kentucky Wesleyan College
- 100. Steve Werner University of Houston David C. Wyld Southeastern Louisiana University Robert Yamaguchi Fullerton College Bashar A. Zakaria California State University, Sacramento Man Zhang Bowling Green State University, Kentucky It takes a dedicated group of individuals to take a textbook from first draft to final manuscript. We thank our partners at Pearson for their tireless efforts in bringing the ninth edition of this book to fruition. Special thanks on this project go to Stephanie Wall, Editor-in-Chief; Neeraj Bhalla, Senior Sponsoring Editor; Melissa Feimer, Managing Producer, Business; Sugandh Juneja, Con- tent Producer; Nicole Suddeth and Thomas Murphy, Project Managers, SPi Global; Roxanne McCarley, Vice President, Product Marketing; Becky Brown, Senior Product Marketer; Adam Goldstein, Manager of Field Marketing, Business Publishing; and Nicole Price, Field Marketing Manager.
- 101. A01_WILD9220_09_SE_FM.indd 25 11/1/17 11:23 PM xxvi About the Authors John J. Wild and Kenneth L. Wild provide a blend of skills uniquely suited to writing an interna- tional business textbook. They combine award-winning teaching and research with a global view of business gained through years of living and working in cultures around the world. Their writing makes the topic of international business practical, accessible, and enjoyable. John J. Wild is a distinguished Professor of Business at the University of Wisconsin at Madison. He previously held appointments at the University of Manchester in England and at Michigan State University. He received his BBA, MS, and PhD degrees from the University of Wisconsin at Madison.
- 102. Teaching business courses at both the undergraduate and graduate levels, Professor Wild has received several teaching honors, including the Mabel W. Chipman Excellence-in-Teaching Award, the Teaching Excellence Award from the business graduates of the University of Wiscon- sin, and a departmental Excellence-in-Teaching Award from Michigan State University. He is a prior recipient of national research fellowships from KPMG Peat Marwick and the Ernst and Young Foundation. Professor Wild is also a frequent speaker at universities and at national and international conferences. The author of more than 60 publications, in addition to 5 best- selling textbooks, Profes- sor Wild conducts research on a wide range of topics, including corporate governance, capital markets, and financial analysis and forecasting. He is an active member of several national and international organizations, including the Academy of International Business, and has served as associate editor and editorial board member for several prestigious journals.
- 103. Kenneth L. Wild is affiliated with the University of London, England. He previously taught at Pennsylvania State University. He received his PhD from the University of Manchester (UMIST) in England and his BS and MS degrees from the University of Wisconsin. Dr. Wild also undertook postgraduate work at École des Affairs Internationale in Marseilles, France. Having taught students of international business, marketing, and management at both the undergraduate and graduate levels, Dr. Wild is a dedicated contributor to international business education. An active member of several national and international organizations, including the Academy of International Business, Dr. Wild has spoken at major universities and at national and international conferences. Dr. Wild’s research covers a range of international business topics, including market entry modes, country risk in emerging markets, international growth strategies, and globalization of the world economy.
- 104. A01_WILD9220_09_SE_FM.indd 26 11/1/17 11:23 PM International Business The Challenges of Globalization A01_WILD9220_09_SE_FM.indd 1 11/1/17 11:23 PM 2 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. Globalization Chapter One A Look at This Chapter
- 105. This chapter defines the scope of international business and introduces us to some of its most important topics. We begin by identifying the key players in international business today. We then present globalization, describing its influence on markets and production, and the forces behind its growth. Next, we analyze each main argument in the debate about globalization in detail. This chapter closes by describing how this course can help develop your employability skills and by explaining a model of an integrated global business environment. A Look Ahead Part 2, encompassing Chapters 2, 3, and 4, introduces us to the main features of national business
- 106. environments. Chapter 2 describes important cultural differences among nations. Chapter 3 examines systems of political economy and philosophies of ethics and social responsibility. Chapter 4 presents issues regarding the economic development of nations. 1 Global Business EnvironmentPart 1.1 Identify the types of companies active in international business. 1.2 Explain globalization and how it affects markets and production. 1.3 Detail the forces that drive globalization. 1.4 Outline the debate about globalization’s impact on jobs and wages. 1.5 Summarize the debate about income inequality. 1.6 Outline the debate about culture, sovereignty, and the environment.
- 107. 1.7 Identify how this course will help you to develop skil ls for your career. Learning Objectives After studying this chapter, you should be able to M01_WILD9220_09_SE_C01.indd 2 10/30/17 8:47 PM http://www.pearson.com/mylab/management CHAPTER 1 • GlobAlizATion 3 Apple’s Global iMpact CUPERTINO, California—The Apple (www.apple.com) iPhone literally changed our world. Before the iPhone, people needed to carry cameras to take casual photos and needed a special device for viewing GPS maps. Today the business models of some firms, like transportation company Lyft, are based on the smartphone.
- 108. New applications (or apps) crop up daily, apps that expand the capabilities of the iPhone, iPad, iPod Touch, Apple Watch, and Apple TV. Apple’s App Store boasts more than 2 million diverse offer- ings. A person can download an app for practically any interest they might have. And the iCloud adds convenience and flexibility as files instantly reflect changes that a user makes on any Apple device, be it an iPhone, iPad, or Mac computer. Globalization allows Apple to pro- duce and sell many of its models world- wide with little or no modification. This approach reduces Apple’s production and marketing costs while supporting its global brand strategy. Apple retails its products through more than 495 out- lets in 18 countries and from its online store available in more than 40 countries. Today Apple generates around $800 billion annually and is on track to an astonishing market valuation of $1 trillion!
- 109. Despite the benefits of globalization, Apple still encounters issues in other markets that complicate pricing. For instance, a smartphone that costs $700 in the United States will cost $1,076 in Brazil. The higher price is due to the custo Brasil (Brazil cost), which arises from import tariffs and federal and state sales taxes. Prices of older Apple products that are made in Brazil reflect the higher cost of inputs there, such as labor. A free hosting service called iTunes U, which Apple offers to colleges and universi- ties, provides 24/7 access to educational materials. Students download lectures and other content to their mobile devices and watch or listen on the go. So, if you see a backpack- toting student on campus listening to her iPod, she might be listening to her favorite playlist or to her favorite instructor. As you read this chapter, consider how globalization shapes our lives and alters the activities of international companies everywhere.1 Sergey Causelove/Shutterstock
- 110. M01_WILD9220_09_SE_C01.indd 3 10/30/17 8:47 PM http://www.apple.com/ 4 PART 1 • GlobAl bUSinESS EnViRonMEnT Each of us experiences the results of international business transactions as we go about our daily routines. The General Electric (www.ge.com) alarm clock/radio that woke you this morning was made in China. The breaking news buzzing in your ears was produced by Britain’s BBC radio (www.bbc.co.uk). You slip on your Adidas sandals (www.adidas.com) that were made in Indonesia, an Abercrombie & Fitch T-shirt (www.abercrombie.com) made in the Northern Mariana Islands, and American Eagle jeans (www.ae.com) made in Mexico. As you head out the door, you pull the battery charger off your Apple iPhone (www.apple.com), which was designed in the United States and assembled in China with parts from Japan, South Korea, Taiwan, and several other nations. You hop into your Korean Hyundai
- 111. (www.hmmausa.com) that was made in Alabama, grab your iPod, and play a song by the English band Coldplay (www.coldplay.com). You drive to the local Starbucks (www.starbucks.com) to charge your own batteries with coffee brewed from beans harvested in Colombia and Ethiopia. Your day is just one hour old, but in a way, you’ve already taken a virtual trip around the world. A quick glance at the “Made in” tags on your jacket, backpack, watch, wallet, or other items with you right now will demonstrate the pervasiveness of international business transactions. International business is any commercial transaction that crosses the borders of two or more nations. You don’t have to set foot outside a small town to find evidence of international busi- ness. No matter where you live, you’ll be surrounded by imports—goods and services purchased abroad and brought into a country. Your counterparts around the world will undoubtedly spend some part of their day using your nation’s exports—goods and services sold abroad and sent out of a country. Every year, all the nations of the world export goods worth $16.2 trillion and
- 112. services worth $4.7 trillion. This figure for merchandise exports is around 33 times the annual global revenue of Walmart Stores (www.walmart.com).2 People can view the role of international business in society very differently from each other, and they can approach globalization from very different perspectives. A businessperson might see globalization as an opportunity to source goods and services from lower-cost locations and to pry open new markets. An economist might see it as an opportunity to examine the impact of global- ization on jobs and standards of living. An environmentalist might be concerned with how global- ization affects our ecology. An anthropologist might want to examine the influence of globalization on the culture of a group of people. A political scientist might be concerned with the impact of globalization on the power of governments relative to that of multinational companies. And an employee might view globalization either as an opportunity for new work or as a threat to his or her current job. The different lenses through which we view events around us make globalization a rich and complex topic.
- 113. As technology drives down the cost of global communication and travel, globalization increasingly exposes us to the traits and practices of other cultures. Individuals and businesses on the other side of the world can sell us their products and purchase our own easily online. Globalization forces companies to grow more competitive in the face of greater rivalry, which has been brought about by lower barriers to trade and investment. By knitting the world more tightly together, globalization is altering our private lives and transforming the way companies do business. The process of globalization is continuing despite a recent slowdown in some areas of international business activity.3 We begin this chapter by examining the key players in international business. Then, we describe globalization’s powerful influence on markets and production and explain the forces behind its expansion. Next, we cover each main point in the debate about globalization, including jobs, wages, inequality, culture, and more. Then, we describe employability skills this course can help you develop,
- 114. such as critical thinking, ethics, communication, and knowledge application and analysis. We also explain why international business is special by presenting an integrated model of the global busi- ness environment. Finally, the appendix at the end of this chapter contains a world atlas to be used as a primer for this chapter’s discussion and as a reference throughout the remainder of the book. 1.1 Key Players in International Business Companies of all types and sizes and in all sorts of industries become involved in international business; yet, they vary in the extent of their involvement. A small shop owner might only import supplies from abroad, whereas a large company might have dozens of factories located international business Commercial transaction that crosses the borders of two or more nations. imports Goods and services purchased abroad and brought into a country.
- 115. exports Goods and services sold abroad and sent out of a country. 1.1 Identify the types of com- panies active in international business. M01_WILD9220_09_SE_C01.indd 4 10/30/17 8:47 PM http://www.bbc.co.uk/ http://www.adidas.com/ http://www.abercrombie.com/ http://www.ae.com/ http://www.apple.com/ http://www.hmmausa.com/ http://www.starbucks.com/ http://www.walmart.com/ http://www.ge.com/ http://www.coldplay.com/ CHAPTER 1 • GlobAlizATion 5
- 116. around the world. Large companies from the wealthiest nations still dominate international business. But firms from emerging markets (such as Brazil, China, India, and South Africa) now vigorously compete for global market share. Small and medium-sized companies are also increasingly active in international business, largely because of advances in technology. Multinational Corporations A multinational corporation (MNC) is a business that has direct investments (in the form of marketing or manufacturing subsidiaries) abroad in multiple countries. Multinationals generate significant jobs, investment, and tax revenue for the regions and nations they enter. Likewise, they can leave thousands of people out of work when they close or scale back operations. Mergers and acquisitions between multinationals are commonly worth billions of dollars and increasingly involve companies based in emerging markets. Some companies have more employees than the number of people living in many small
- 117. countries and island nations. Walmart, for example, has 2.3 million employees. We see the enor- mous economic clout of multinational corporations when we compare the revenues of the Global 500 ranking of companies with the value of goods and services that countries generate. Figure 1.1 shows the world’s 10 largest companies (measured in revenue) inserted into a ranking of nations according to their national output (measured in GDP). If Walmart (www.walmart.com) were a country, it would weigh in as a rich nation and rank just one place behind Sweden. Even the $21 billion in revenue generated by the 500th largest firm in the world, Old Mutual (www.oldmutual .com), exceeds the annual output of many countries.4 multinational corporation (MNC) Business that has direct invest- ments abroad in multiple countries. Figure 1.1 Comparing the World’s Largest Companies with Select Countries
- 118. Source: Based on data obtained from “Fortune Global 500: The 500 Largest Corporations in the World,” (www.fortune .com/global500), July 2016; World Bank data set (www.data.worldbank.org). C o u n tr y / C o m p a n y GDP/Revenue (U.S. $ billions)
- 119. 0 100 200 300 400 500 Portugal BP (Britain) Finland Apple (USA) Toyota Motor (Japan) Volkswagen (Germany) Chile Exxon Mobil (USA) Pakistan Royal Dutch Shell (Neth.) Ireland Colombia Philippines Singapore Sinopec Group (China) Denmark
- 120. Malaysia China National Petroleum (China) Israel Hong Kong, China South Africa State Grid (China) Egypt United Arab Emirates Austria Norway Thailand Belgium Poland Nigeria Walmart Stores (USA) Sweden M01_WILD9220_09_SE_C01.indd 5 10/30/17 8:47 PM
- 121. http://www.walmart.com/ http://www.oldmutual.com/ http://www.oldmutual.com/ http://www.data.worldbank.org/ http://www.fortune.com/global500 http://www.fortune.com/global500 6 PART 1 • GlobAl bUSinESS EnViRonMEnT Entrepreneurs and Small Businesses International business competition has given rise to a new entity, the born global firm—a company that adopts a global perspective and engages in international business from or near its inception. Many of these companies become international competitors in less than three years. Born global firms tend to have innovative cultures and knowledge-based organizational capabilities. In this age of globalization, companies are exporting earlier and growing faster, often with help from technology. Small firms selling traditional products benefit from technology
- 122. that lowers the costs and difficulties of global communication. Vellus Products (www.vellus.com) of Columbus, Ohio, makes and sells pet-grooming products. Some years ago, a dog breeder in Spain became Vellus’s first distributor after the breeder received a request for more information about Vellus’s products from a man in Bahrain. Sharon Kay Doherty, president of Vellus, says she was stunned that she could so easily process a transaction with someone so far away. Today Vellus has distributors in 35 countries. It is a truly born global business in that, soon after going international, Vellus earned more than half its revenues from international sales.5 Electronic distribution for firms that sell digitized products is an effective alternative to traditional distribution channels. Alessandro Naldi’s Weekend in Italy website (en.firenze.waf .it) offers visitors more authentic Florentine products than they’ll find in the scores of over- priced tourist shops in downtown Florence. A Florentine himself, Naldi established his site to sell high-quality, authentic Italian merchandise made only in the small factories of Tuscany.
- 123. Weekend in Italy averages 200,000 visitors each month from places as far away as Australia, Canada, Japan, Mexico, and the United States.6 For additional insights into how small and large companies alike succeed in international markets, see the Manager’s Briefcase, titled “The Keys to Global Success.” born global firm Company that adopts a global perspective and engages in inter- national business from or near its inception. Making everything from 99-cent hamburgers (McDonald’s) to $150 million jumbo jets (boeing), managers of global companies must overcome obstacles when competing in unfamiliar markets. Global managers acknowledge certain common threads in their approaches to management and offer the following advice: • Communicate Effectively Cultural differences in business relationships and etiquette are central to global business and require cross-cultural competency. Effective global managers welcome uniqueness and ambiguity while dem-
- 124. onstrating flexibility, respect, and empathy. • Know the Customer Successful managers understand how a company’s different products serve the needs of inter- national customers. Then, they ensure that the company remains flexible and capable enough to customize products that meet those needs. • Emphasize Global Awareness Good global managers integrate foreign markets into business strategy from the outset. They ensure that products and services are designed and built with global markets in mind, and not used as dumping grounds for the home market’s outdated products. • Market Effectively The world will beat a path to your door to buy your “better mousetrap” only if it knows about it. A poor marketing effort can cause great products to fade into obscurity while an international marketing blunder can bring unwanted media attention. Top global managers match quality products with excellent marketing. • Monitor Global Markets Successful managers keep a watchful eye on business environments for shifting political, legal, and socioeconomic conditions. They make obtaining accurate information a top priority.
- 125. MANAGER’S BRIEFCASE The Keys to Global Success QUiCK STUDY 1 1. What is the value of goods and services that all nations of the world export every year? 2. A business that has direct investments (in the form of marketing or manufacturing subsid- iaries) abroad in multiple countries is called a what? 3. A born global firm engages in international business from or near its inception and does what else? M01_WILD9220_09_SE_C01.indd 6 10/30/17 8:47 PM http://www.vellus.com/ http://en.firenze.waf.it/ http://en.firenze.waf.it/ CHAPTER 1 • GlobAlizATion 7
- 126. 1.2 What is Globalization? Nations historically retained absolute control over the products, people, and capital crossing their borders. But today, economies are becoming increasingly intertwined. This greater interdepen- dence means an increasingly freer f low of goods, services, money, people, and ideas across national borders. Globalization is the name we give to this trend toward greater economic, cul- tural, political, and technological interdependence among national institutions and economies. Globalization is characterized by denationalization (national boundaries becoming less relevant) and is different from internationalization (entities cooperating across national boundaries). It is helpful to put today’s globalization into context. The first age of globalization extended from the mid-1800s to the 1920s.7 In those days, labor was highly mobile, with 300,000 people leaving Europe each year in the 1800s and 1 million people leaving each year after 1900.8 Other than in wartime, nations did not even require passports for international travel before 1914. Like today, workers in wealthy nations feared they might lose their
- 127. jobs to workers living in other high- and low-wage countries. Trade and capital flowed more freely than ever during that first age of globalization. Huge companies from wealthy nations built facilities in distant lands to extract raw materials and to produce all sorts of goods. Large cargo ships plied the seas to deliver their manufactures to distant markets. The transatlantic cable (completed in 1866) allowed news between Europe and the United States to travel faster than ever before. The drivers of the first age of globalization included the steamship, telegraph, railroad, and, later, the telephone and airplane. The first age of globalization was halted abruptly by the arrival of the First World War, the Russian Revolution, and the Great Depression. A backlash to fierce competition in trade and to unfettered immigration in the early 1900s helped to usher in high tariffs and barriers to immigra- tion. The great flows of goods, capital, and people common before the First World War became a mere trickle. For 75 years from the start of the First World
- 128. War to the end of the Cold War, the world remained divided. There was a geographic divide between East and West and an ideological divide between communism and capitalism. After the Second World War, the West experienced steady economic gains, but international flows of goods, capital, and people were confined to their respective capitalist and communist systems and geographies. Fast-forward to 1989 and the collapse of the wall separating East and West Berlin. One by one, central and eastern European nations rejected communism and began marching toward democratic institutions and free-market economic systems. Although it took until the 1990s for 1.2 Explain globalization and how it affects markets and production. globalization Trend toward greater economic, cultural, political, and technological interdependence among national
- 129. institutions and economies. We see the result of embracing globalization in this photo of sky- scrapers in the Lujiazui Financial and Trade Zone of the Pudong New Area in Shanghai, China. After years of stunning economic growth and expansion, Shanghai has emerged as a key city for com- panies entering China’s market- place. Pudong was developed to reinvigorate Shanghai as an inter- national trade and financial center, and is now a modern, cosmopoli- tan district. How has globalization changed the economic landscape of your city and state? Amanda Hall/Robertharding/Alamy Stock Photo M01_WILD9220_09_SE_C01.indd 7 10/30/17 8:47 PM
- 130. 8 PART 1 • GlobAl bUSinESS EnViRonMEnT international capital flows, in absolute terms, to recover to levels seen prior to the First World War, the global economy had finally been reborn. The drivers of this second age of globalization include communication satellites, fiber optics, microchips, and the Internet. Let’s explore two areas of business in which globalization is having profound effects: the globalization of markets and production. Globalization of Markets Globalization of markets refers to the convergence in buyer preferences in markets around the world. This trend occurs in many product categories, including consumer goods, industrial prod- ucts, and business services. Clothing retailer L.L. Bean (www.llbean.com), shoe producer Nike (www.nike.com), and electronics maker Vizio (www.vizio.com) are just three companies that sell global products—products marketed in all countries essentially without any changes. For
- 131. example, the iPad qualifies as a global product because of its highly standardized features and because of Apple’s global marketing strategy and globally recognized brand. Global products and global competition characterize many industries and markets, including semiconductors (Intel, Philips), aircraft (Airbus, Boeing), construction equipment (Caterpillar, Mitsubishi), automobiles (Toyota, Volkswagen), financial services (Citicorp, HSBC), air travel (Lufthansa, Singapore Airlines), accounting services (Ernst & Young, KPMG), consumer goods (Procter & Gamble, Unilever), and fast food (KFC, McDonald’s). The globalization of markets is important to international business because of the benefits it offers companies. Let’s now look briefly at each of those benefits. REDUCES MARKETING COSTS Companies that sell global products can reduce costs by standardizing certain marketing activities. A company selling a global consumer good, such as shampoo, can make an identical product for the global market and then simply design different
- 132. packaging to account for the langua ge spoken in each market. Companies can achieve further cost savings by keeping an ad’s visual component the same for all markets but dubbing TV ads and translating print ads into local languages. CREATES NEW MARKET OPPORTUNITIES A company that sells a global product can explore opportunities abroad if its home market is small or becomes saturated. China holds enormous potential for online business with more than 700 million Internet users, which is greater than the population of the entire United States. As time goes on, more and more people in China will go online to research and purchase products. The appeal of reaching such a vast audience drives firms from relatively small countries to explore doing business in the Chinese market. LEVELS UNEVEN INCOME STREAMS A company that sells a product with universal, but seasonal, appeal can use international sales to level its income stream. By supplementing domes- tic sales with international sales, the company can reduce or eliminate wide variations in sales
- 133. between seasons and steady its cash flow. For example, a firm that produces suntan and sunblock lotions can match product distribution with the summer seasons in the northern and southern hemispheres in alternating fashion—thereby steadying its income from these global, yet highly seasonal, products. LOCAL BUYERS’ NEEDS In the pursuit of the potential benefits of global markets, managers must constantly monitor the match between the firm’s products and markets in order to not overlook the needs of buyers. The benefit of serving customers with an adapted product might outweigh the benefit of a standardized one. For instance, soft drinks, fast food, and other consumer goods are global products that continue to penetrate markets around the world. But sometimes these products require small modifications to better suit local tastes. In southern Japan, Coca- Cola (www.cocacola.com) sweetens its traditional formula to compete with the sweeter-tasting Pepsi (www.pepsi.com). In India, where cows are sacred and the consumption of beef is taboo, McDonald’s (www.mcdonalds.com) markets the “Maharaja
- 134. Mac”—two all-mutton patties on a sesame-seed bun with all the usual toppings. GLOBAL SUSTAINABILITY Another need that multinationals must consider is the need among all the world’s people for sustainability—development that meets the needs of the present without compromising the ability of future generations to meet their own needs.9 Most companies today operate in an environment of increased transparenc y and scrutiny regarding their business sustainability Development that meets the needs of the present without com- promising the ability of future gen- erations to meet their own needs. M01_WILD9220_09_SE_C01.indd 8 10/30/17 8:47 PM http://www.llbean.com/ http://www.vizio.com/ http://www.cocacola.com/ http://www.mcdonalds.com/ http://www.nike.com/
- 135. http://www.pepsi.com/ CHAPTER 1 • GlobAlizATion 9 activities. The rise of social media is partly responsible for this trend. Concerned individuals and nongovernmental organizations will very quickly use Internet media to call out any firm caught harming the environment or society. For years, forward-looking businesses have employed the motto, “reduce, reuse, and recycle.” The idea is to reduce the use of resources and waste, reuse resources with more than a single-use lifespan, and recycle what cannot be reduced or reused. The most dedicated managers and firms promote sustainable communities by adding to that motto, “redesign and reimagine.” This means redesigning products and processes for sustainability and reimagining how a product is designed and used to lessen its environmental impact.10 To read more about the call for more sustainable business practices, see the Global Sustainability feature, “Three Markets, Three Strategies.”
- 136. Globalization of Production Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality- maximization objectives for a good or ser- vice. This includes the sourcing of key production inputs (such as raw materials or products for assembly) as well as the international outsourcing of services. Let’s now explore the benefits that companies obtain from the globalization of production. ACCESS LOWER-COST WORKERS Global production activities allow companies to reduce overall production costs through access to low-cost labor. For decades, companies located their factories in low-wage nations in order to churn out all kinds of goods, including toys, small appli- ances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the produc- tion of services such as accounting and research. Although most services must be produced where they are consumed, some services can be performed at remote
- 137. locations where labor costs are lower. Many European and US businesses have moved their customer service and other nones- sential operations to places as far away as India to slash costs by as much as 60 percent. ACCESS TECHNICAL EXPERTISE Companies also produce goods and services abroad to benefit from technical know-how. Film Roman (www.filmroman.com) produces the TV series The Simpsons, but it provides key poses and step-by-step frame directions to AKOM Produc- tion Company (www.akomkorea.com) in Seoul, South Korea. AKOM then fills in the remaining poses and links them into an animated whole. But there are bumps along the way, says animation A company adapts its business strategy to the nuances of the market it enters. The world’s population of 7.5 billion people lives in three different types of markets: • Developed Markets. These include the world’s established con- sumer markets, around one billion people. The population is
- 138. solidly middle class, and people can consume almost any prod- uct desired. The infrastructure is highly developed and efficient. • Emerging Markets. These markets, around two billion peo- ple, are racing to catch up to developed nations. The popu- lation is migrating to cities for better pay and is overloading cities’ infrastructures. Rising incomes are increasing global demand for resources and basic products. • Traditional Markets. Globalization has bypassed these mar- kets, nearly four billion people. The population is mostly rural, the infrastructure is very poor, and there is little credit or collateral. People have almost no legal protections, and corruption prevails. like business strategy, sustainability strategies reflect local conditions. Examples of businesses working toward sustainability in these three markets include the following: • Toyota focused on the environment in its developed mar- kets. After extensively researching gas-electric hybrid tech- nologies, Toyota launched the Prius. As Motor Trend’s Car of the Year, the Prius drove Toyota’s profits to record highs and gave it a “green” image.
- 139. • Shree Cement faced limited access to low-cost energy in india’s emerging market, so it developed the world’s most energy-efficient process for making its products. The world’s leading cement companies now visit Shree to learn from its innovations in energy usage. • Blommer Chocolate of the United States works closely with cocoa farmers in traditional markets. blommer received the Rainforest Alliance’s “Sustainable Standard-Setter” award for training farmers in safe farming practices, environmen- tal stewardship, and HiV awareness. Sources: Wang Wen, “Emerging Markets are Set to Lead Globalisation,” Financial Times (www.ft.com), April 10, 2017; Jeremy Jurgens and Knut Haanæs, “Companies from Emerg- ing Markets Are the New Sustainability Champions,” The Guardian (www.guardian.co.uk), October 12, 2011; Stuart L. Hart, Capitalism at the Crossroads, Third Edition (Upper Saddle River, NJ: Wharton School Publishing, 2010); Daniel C. Esty and Andrew S. Winston, Green to Gold (New Haven, CT: Yale University Press, 2006).
- 140. GLOBAL SUSTAINABILITY Three Markets, Three Strategies M01_WILD9220_09_SE_C01.indd 9 10/30/17 8:47 PM http://www.guardian.co.uk/ http://www.ft.com/ http://www.filmroman.com/ http://www.akomkorea.com/ 10 PART 1 • GlobAl bUSinESS EnViRonMEnT director Mark Kirkland. In one middle-of-the-night phone call, Kirkland was explaining to the Koreans how to draw a shooting gun. “They don’t allow guns in Korea; it’s against the law,” says Kirkland. “So they were calling me [asking]: ‘How does a gun work?”’ Kirkland and others put up with such cultural differences and phone calls at odd hours to tap a highly qualified pool of South Korean animators.11 ACCESS PRODUCTION INPUTS Globalization of production allows companies to access
- 141. resources that are unavailable or costlier at home. The quest for natural resources draws many companies into international markets. Japan, for example, is a small, densely populated island nation with very few natural resources of its own—especially forests. But Japan’s largest paper company, Nippon Seishi, does more than simply import wood pulp. The company owns huge forests and corresponding processing facilities in Australia, Canada, and the United States. This ownership not only gives the firm access to an essential resource but also gives it control over earlier stages in the papermaking process. As a result, the company is guaranteed a steady flow of its key ingredient (wood pulp) that is less subject to the swings in prices and supply associ- ated with buying pulp on the open market. Likewise, to access cheaper energy resources used in manufacturing, a variety of Japanese firms are relocating production to China and Vietnam, where energy costs are lower than in Japan. QUiCK STUDY 2 1. Globalization causes the institutions and economies of
- 142. nations to become what? 2. What benefits might companies obtain from the globalization of markets? 3. Sustainability is development that meets current needs without compromising what? 1.3 Forces Driving Globalization Two main forces underlie the globalization of markets and production: falling barriers to trade and investment and technological innovation. These two features, more than anything else, are increasing competition among nations by leveling the global business playing field. Greater com- petition is driving companies worldwide into more direct confrontation and cooperation. Local industries, once isolated by time and distance, are increasingly accessible to large international companies based many thousands of miles away. Some small - and medium-sized local firms are compelled to cooperate with one another or with larger international firms to remain competitive. Other local businesses revitalize themselves in a bold attempt to survive the competitive onslaught. And on a global scale, consolidation is occurring as former competitors in many industries link
- 143. up to challenge others on a worldwide basis. Let’s now explore the pivotal roles of these two forces driving globalization. Falling Barriers to Trade and Investment In 1947, political leaders of 23 nations (12 devel oped and 11 developing economies) made history when they created the General Agreement on Tariffs and Trade (GATT)—a treaty designed to promote free trade by reducing tariffs and nontariff barriers to international trade. Tariffs are essentially taxes levied on traded goods, and nontariff barriers are limits on the quan- tity of an imported product. The treaty was successful in its early years. After four decades, world merchandise trade had grown 20 times larger, and average tariffs had fallen from 40 percent to 5 percent. Significant progress occurred again with a 1994 revision of the GATT treaty. Nations that had signed on to the treaty further reduced average tariffs on merchandise trade and lowered subsidies (government financial support) for agricultural products. The treaty’s revision also clearly defined
- 144. intellectual property rights. This gave protection to copyrights (including computer programs, databases, sound recordings, and films), trademarks and service marks, and patents (including trade secrets and know-how). A major flaw of the original GATT was that it lacked the power to enforce world trade rules. Thus, the creation of the World Trade Organization was likely the great- est accomplishment of the GATT revision. 1.3 Detail the forces that drive globalization. General Agreement on Tariffs and Trade (GATT) Treaty designed to promote free trade by reducing both tariffs and nontariff barriers to international trade. M01_WILD9220_09_SE_C01.indd 10 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 11
- 145. WORLD TRADE ORGANIZATION The World Trade Organization (WTO) is the international organization that enforces the rules of international trade. The three main goals of the WTO (www .wto.org) are to help the free flow of trade, help negotiate the further opening of markets, and settle trade disputes among its members. It is the power of the WTO to settle trade disputes that sets it apart from its predecessor, the GATT. The various WTO agreements are essentially contracts between member nations that commit them to maintaining fair and open trade policies. Offenders must realign their trade policies according to WTO guidelines or face fines and, perhaps, trade sanctions (penalties). Because of its ability to penalize offending nations, the WTO’s dispute- settlement system truly is the spine of the global trading system. The WTO replaced the institution of GATT but absorbed all of the former GATT agreements. Thus, the GATT institution no longer officially exists. Today, the WTO recognizes 164 members and 21 “observers.” The WTO launched a new round of negotiations in Doha, Qatar,
- 146. in late 2001. The renewed negotiations were designed to lower trade barriers further and to help poor nations, in particular. Agricultural subsidies that rich countries pay to their own farmers are worth $1 billion per day— more than six times the value of their combined aid budgets to poor nations. Because 70 percent of poor nations’ exports are agricultural products and textiles, wealthy nations had intended to further open these and other labor-intensive industries. Poor nations were encouraged to reduce tariffs among themselves and were supposed to receive help in integrating themselves into the global trading system. Although the Doha round was to conclude by the end of 2004, negotiations are proceeding very slowly. By the middle of 2017, members had made limited progress on a late 2013 deal to improve “trade facilitation” by reducing red tape at borders and setting standards for customs and the movement of goods internationally. Although the agreement marked the first significant achievement for the Doha round, no agreement was reached on agricultural trade issues, tariffs,
- 147. or quotas.12 OTHER INTERNATIONAL ORGANIZATIONS Two other institutions play leading roles in fos- tering globalization. The World Bank is an agency created to provide financing for national economic development efforts. The initial purpose of the World Bank (www.worldbank.org) was to finance European reconstruction following the Second World War. The bank later shifted its focus to the general financial needs of developing countries, and today it finances many economic development projects in Africa, South America, and Southeast Asia. The International Monetary Fund (IMF) is an agency created to regulate fixed exchange rates and to enforce the rules of the international monetary system. Among the purposes of the World Trade Organization (WTO) International organization that enforces the rules of international trade.
- 148. World Bank Agency created to provide financ- ing for national economic develop- ment efforts. International Monetary Fund Agency created to regulate fixed exchange rates and to enforce the rules of the international monetary system. Today, companies can go almost anywhere in the world to tap favorable business climates. Here, an employee at an Asian subsid- iary of a global television maker packages TVs headed for global export markets. US businesses use technology to subcontract work to Chinese companies that write computer code and then email their end product to the US clients. Companies use such tactics to lower costs, increase efficiency,
- 149. and grow more competitive. How else might technology and global talent facilitate international busi- ness activity? Albert Karimov/123RF.com M01_WILD9220_09_SE_C01.indd 11 10/30/17 8:47 PM http://www.wto.org/ http://www.wto.org/ http://www.worldbank.org/ 12 PART 1 • GlobAl bUSinESS EnViRonMEnT IMF (www.imf.org) are promoting international monetary cooperation, facilitating the expansion and balanced growth of international trade, avoiding competitive exchange devaluation, and making financial resources temporarily available to members. REGIONAL TRADE AGREEMENTS In addition to the WTO, smaller groups of nations are integrating their economies by fostering trade and boosting
- 150. cross-border investment. For example, the North American Free Trade Agreement (NAFTA) gathers three nations (Canada, Mexico, and the United States) into a free-trade bloc. The more ambitious European Union (EU) combines 28 countries. The Asia Pacific Economic Cooperation (APEC) consists of 21 member economies committed to creating a free-trade zone around the Pacific. The aims of each of these smaller trade pacts are similar to those of the WTO but are regional in nature. Moreover, some nations encourage regional pacts because of recent resistance to worldwide trade agreements. TRADE AND NATIONAL OUTPUT Together the WTO agreements and regional pacts have boosted world trade and cross-border investment significantly. Trade theory tells us that open- ness to trade helps a nation produce a greater amount of output. Map 1.1 illustrates that growth in national output over a recent 10-year period has been significantly positive. Economic growth has been greater in nations that have recently become more open to trade, such as China, India, and Russia, than it has been in many other countries. Much of South
- 151. America is also growing rapidly, whereas Africa’s experience is mixed. Let’s take a moment in our discussion to define a few terms that we will encounter time and again throughout this book. Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy during a one-year period. We can speak in terms of world GDP when we sum all individual nations’ GDP figures. GDP is a somewhat narrower figure than gross national product (GNP)—the value of all goods and services produced by a country’s domestic and international activities during a one-year period. GNP includes a nation’s income generated from exports, imports, and the international operations of its companies. A country’s GDP or GNP per capita is simply its GDP or GNP divided by its population. Technological Innovation Although falling barriers to trade and investment encourage globalization, technology is acceler- ating its pace. Innovations in information technology and transportation methods are making it
- 152. easier, faster, and less costly to move data, goods, and equipment around the world. Consumers use technology to reach out to the world on the Internet— gathering and sending information and purchasing all kinds of goods and services. Companies use technology to acquire materials and products from distant lands and to sell goods and services abroad. When businesses or consumers use technology to conduct transactions, they engage in e- business (e-commerce)—the use of computer networks to purchase, sell, or exchange prod- ucts; to service customers; and to collaborate with partners. E- business is making it easier for companies to make their products abroad, not simply to import and export finished goods. Let’s examine several innovations that have had a considerable impact on globalization. EMAIL AND VIDEOCONFERENCING Operating across borders and time zones complicates the job of coordinating and controlling business activities. But technology can speed the f low of information and ease the tasks of coordination and control.
- 153. Email is an indispensable tool that managers use to stay in contact with international operations and to respond quickly to important matters. Videoconferencing allows managers in different locations to meet in virtual face-to-face meetings. Primary reasons for 25 percent to 30 percent annual growth in videoconferencing include the lower cost of bandwidth (communication channels) used to transmit information, the lower cost of equipment, and the rising cost of travel for businesses. Videoconferencing equipment can cost as little as several thousand dollars and as much as several hundred thousand dollars. A company that does not require ongoing video-conferencing can pay even less by renting the facili- ties and equipment of a local conference center. Those willing to videoconference on a computer, tablet, or smartphone (which includes most people today) can explore iMeet (www.imeet.com), which charges $9 per month for its most basic service.13 And, of course, people with the simplest video conferencing needs can download and use Skype (www.skype.com), Apple’s (www.apple
- 154. .com) FaceTime, or Google’s Hangouts (https://hangouts.google.com) applications free of charge. gross domestic product (GDP) Value of all goods and services produced by a domestic economy during a one-year period. gross national product (GNP) Value of all goods and services produced by a country’s domestic and international activities during a one-year period. GDP or GNP per capita Nation’s GDP or GNP divided by its population. e-business (e-commerce) Use of computer networks to pur- chase, sell, or exchange products; to service customers; and to col- laborate with partners. M01_WILD9220_09_SE_C01.indd 12 10/30/17 8:47 PM
- 155. http://www.imf.org/ http://www.skype.com/ https://hangouts.google.com http://www.imeet.com/ http://www.apple.com/ http://www.apple.com/ CHAPTER 1 • GlobAlizATion 13 THE INTERNET Companies use the Internet to quickly and inexpensively contact managers in distant locations—for example, to inquire about production runs, revise sales strategies, and check on distribution bottlenecks. They also use the Internet to achieve longer-term goals, such as sharpen their forecasting, lower their inventories, and improve communication with suppliers. The lower cost of reaching an international customer base especially benefits small firms, which were among the first to use the Internet as a global marketing tool. Additional gains arise from the ability of the Internet to cut postproduction costs by decreasing the number of intermediaries
- 156. a product passes through on its way to the customer. Eliminating intermediaries greatly benefits online sellers of all sorts of products, including books, music, travel services, and software. Some innovative companies use online competitions to attract fresh ideas from the brightest minds worldwide. InnoCentive (www.innocentive.com) connects companies and institutions seek- ing solutions to difficult problems by using a global network of 300,000 creative thinkers. These engineers, scientists, inventors, and businesspeople with expertise in life sciences, engineering, chemistry, math, computer science, and entrepreneurship compete to solve some of the world’s toughest problems in return for significant financial awards. InnoCentive is open to anyone, is avail- able in seven languages, and pays cash awards that range from $5,000 to more than $1 million.14 COMPANY INTRANETS AND EXTRANETS Internal company websites and information net- works (intranets) give employees access to company data using personal computers. A particularly effective marketing tool on Volvo Car Corporation’s
- 157. (www.volvocars.com) intranet is a quarter- by-quarter database of marketing and sales information. The cycle begins when headquarters sub- mits its corporate-wide marketing plan to Volvo’s intranet. Marketing managers at each subsidiary worldwide then select those activities that apply to their own market, develop their marketing plan, and submit it to the database. This allows managers in every market to view every other subsidiary’s marketing plan and to adapt relevant aspects to their own plan. In essence, the entire system acts as a tool for the sharing of best practices across all of Volvo’s markets. Extranets give distributors and suppliers access to a company’s database so they can place orders or restock inventories electronically and automatically. These networks permit international companies (along with their suppliers and buyers) to respond to internal and external conditions more quickly and more appropriately. ADVANCEMENTS IN TRANSPORTATION TECHNOLOGIES Retailers worldwide rely on imports to stock their storerooms with finished goods and to
- 158. supply factories with raw materials and intermediate products. Innovation in the shipping industry is helping globalize markets and production by making shipping more efficient and dependable. In the past, a cargo ship would sit in port up to 10 days while it was unloaded one pallet at a time. But because cargo today is loaded onto a ship in 20- and 40-foot containers that are unloaded quickly at the destination onto railcars or truck chassis, a 700-foot cargo ship is routinely unloaded in just 15 hours. Operation of cargo ships is now simpler and safer because of computerized charts that pin- point a ship’s movements on the high seas using Global Positioning System (GPS) satellites. Com- bining GPS with radio frequency identification (RFID) technology allows continuous monitoring of individual containers from port of departure to destination. RFID can tell whether a container’s doors are opened and closed on its journey and can send an alert if a container deviates from its planned route. These types of advancements allowed Hewlett-Packard
- 159. (www.hp.com) to seize the rewards of globalization when it built a new low-cost computer server for businesses. HP dispersed its design and production activities throughout a specialized manufacturing system across five Pacific Rim nations and India. This helped the company minimize labor costs, taxes, and shipping delays yet maximize productivity when designing, building, and distributing its new product. Companies use such innovative production and distribution techniques to squeeze inefficiencies out of their international operations and boost their competitiveness. MyLab Management Watch It Save the Children Social Networking Apply what you have learned about the use of technology in management. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case about how a not-for-profit enterprise uses social media to achieve its goals and answer questions. M01_WILD9220_09_SE_C01.indd 13 10/30/17 8:47 PM http://www.volvocars.com/
- 160. http://www.innocentive.com/ http://www.hp.com/ http://www.pearson.com/mylab/management 14 PART 1 • GlobAl bUSinESS EnViRonMEnT Map 1.1 Growth in National Output A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA
- 161. COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO SURINAME FRENCH GUIANA ECUADOR
- 162. B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS ISLANDS GREENLAND ICELAND DENMARKUNITED KINGDOM IRELAND FRANCE
- 163. BELGIUM NETHERLANDS LUXEMBOURG GERMANY SPAIN PORTUGAL SWITZ. LICH MONACO MOROCCO WESTERN SAHARA A L G E R I A
- 164. TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST G H A
- 165. N A T O G O B E N IN NIGERIA N I G E R CAMEROON EQUATORIAL GUINEA GABON ANDORRA
- 166. U N I T E D S TAT E S O F A M E R I C A C H I L E HAWAII A R C T I C O C E A N S O U T H AT L A N T I C O C E A N N O R T H
- 167. AT L A N T I C O C E A N PA C I F I C O C E A N GUYANA GALAPAGOS ISLANDS N O R W A Y S W
- 168. E D E N F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS
- 169. CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA
- 170. T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA
- 171. LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA M01_WILD9220_09_SE_C01.indd 14 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 15 negative less than -2.5 -2.5 to 0 no data available positive 0 to 1 1 to 2 2 to 3
- 172. 3 to 4 4 to 5 over 5 Average annual GDP growth rate, (%) FINLAND DENMARK LUXEMBOURG GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E CZECH
- 174. CYPRUS A L G E R I A L I B Y A TUNISIA NIGERIA N I G E R C H A D E G Y P T ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA GABON CONGO
- 175. REPUBLIC RWANDA BURUNDI UGANDA KENYA SOMALIA ANGOLA NAMIBIA ZAMBIA TANZANIA MALAWI ZIMBABWE BOTSWANA
- 177. I R A N SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN
- 178. SRI LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW
- 179. GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A
- 180. LATVIA ESTONIA BOSNIA- HERZEGOVINA ALBANIA MACEDONIA KUWAIT DJBOUTI SLOVENIA SINGAPORE A R C T I C O C E A N I N D I A N O C E A N
- 181. PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA CONGO DEMOCRATIC REPUBLIC (ZAIRE) MYANMAR (BURMA) N O R W
- 182. A Y S W E D E N S U D A N S O U T H S U D A N M01_WILD9220_09_SE_C01.indd 15 10/30/17 8:47 PM 16 PART 1 • GlobAl bUSinESS EnViRonMEnT Measuring Globalization Although we intuitively feel that our world is becoming smaller,
- 183. researchers have created ways to measure the extent of globalization scientifically. One index of globalization is that created by the KOF Swiss Economic Institute (www.kof.ethz.ch). This index ranks nations on 23 variables within three dimensions: economic globalization (trade and investment volumes, trade and capital restrictions), social globalization (dissemination of information and ideas), and political globaliza- tion (political cooperation with other countries).15 By incorporating a wide variety of variables, the globali zation index attempts to cut through cycles occurring in any single category and to capture the broad nature of globalization. Table 1.1 shows the 10 highest-ranking nations according to the KOF Index of Globalization. European nations occupy all top 10 positions, with smaller nations clearly dominating the rankings. The United States appears in 27th place overall, and ranks 54th in economic globalization, 30th in social globalization, and 19th in political globalization. Large nations often do not make it into the higher ranks of globalization indices because a large home market means they tend to depend
- 184. less on external trade and investment. The world’s least-globalized nations account for about half the world’s population and are found in Africa, East Asia, South Asia, Latin America, and the Middle East. Some of the least- globalized nations are characterized by never-ending political unrest and corruption (Bangladesh, Indonesia, and Venezuela). Other nations with large agricultural sectors face trade barriers in developed countries and are subject to highly volatile prices on commodity markets (Brazil, China, and India). Still others are heavily dependent on oil exports but are plagued by erratic prices in energy markets (Iran and Venezuela). Kenya has suffered from recurring droughts, terrorism, and burdensome visa regulations that hurt tourism. Finally, Turkey and Egypt, along with the entire Middle East, suffer from continued concerns about violence and social unrest, high barriers to trade and investment, and heavy government involvement in the economy. To deepen their global links, these nations will need to make great strides forward in their economic, social, and political environments.
- 185. Rank Country overall Economic Social Political Netherlands 1 4 4 5 Ireland 2 2 3 25 Belgium 3 6 6 3 Austria 4 16 5 7 Switzerland 5 22 2 10 Denmark 6 15 9 11 Sweden 7 17 16 4 United Kingdom 8 20 13 6 France 9 30 11 1 Hungary 10 7 23 23
- 186. Source: Based on the 2017 KOF Index of Globalization (www.globalization.kof.ethz.ch), April 20, 2017. TABLE 1.1 Globalization’s Top 10 QUiCK STUDY 3 1. What global organizations have helped expand globalization? 2. What technological innovations are helping to propel globalization? 3. What nation ranks high in terms of globalization? M01_WILD9220_09_SE_C01.indd 16 10/30/17 8:47 PM http://www.kof.ethz.ch/ http://www.globalization.kof.ethz.ch/ CHAPTER 1 • GlobAlizATion 17 1.4 Debate about Jobs and Wages So far, we have read how globalization benefits companies and nations. But not everyone views glo- balization as having only positive effects. The following pages
- 187. explain the main debates about global- ization. Opposing sides in each debate tend to hold up results of social and economic studies that support their arguments. But many organizations that publish studies about globalization have political agendas, which can make objective consideration of their findings difficult. A group’s aims can influ- ence the selection of the data to analyze, the time period to study, the nations to examine, and so forth. Be that as it may, we open our coverage of the globalization debate with an important topic for both developed and developing countries—the effect of globalization on jobs and wages. We begin with the arguments of those against globalization and then turn our attention to how sup- porters of globalization respond. Against Globalization Groups opposed to globalization blame it for eroding standards of living and ruining ways of life. Specifically, they say globalization eliminates jobs and lowers wages in developed nations and exploits workers in developing countries. Let’s explore each of these arguments.
- 188. ELIMINATES JOBS IN DEVELOPED NATIONS Some groups claim that globalization elimi- nates manufacturing jobs in developed nations. They criticize the practice of sending good-paying manufacturing jobs abroad to developing countries where wages are a fraction of the cost for international firms. They argue that a label reading “Made in China” translates to “Not Made Here.” Critics admit that importing products from China (or another low-wage nation) lowers consumer prices for televisions, sporting goods, and so on, but say this is little consolation for workers who lose their jobs. To illustrate their argument, globalization critics point to the activities of large retailers such as Amazon (www.amazon.com) and Walmart (www.walmart.com). It is difficult to overstate the power of these retail giants and symbols of globalization. Some say that by relentlessly pursuing low-cost goods, these retailers force their suppliers to move to China and other low-wage nations. LOWERS WAGES IN DEVELOPED NATIONS Opposition
- 189. groups say globalization causes worker dislocation that gradually lowers wages. They allege that when a manufacturing job is lost in a wealthy nation, the new job (assuming new work is found) pays less than the previous one. Those opposed to globalization say this decreases employee loyalty, employee morale, and job secu- rity. They say this causes people to fear globalization and any additional lowering of trade barriers. Large retailers also come under fire in this discussion. Globalization critics say powerful retailers continually force manufacturers in low-wage nations to accept lower profits so that the retailers can slash prices to consumers. Critics charge that these business practices force down wages and working conditions worldwide. EXPLOITS WORKERS IN DEVELOPING NATIONS Critics charge that globalization and inter- national outsourcing exploit workers in low-wage nations. One notable critic of globalization, Naomi Klein, vehemently opposes the outsourced call center jobs of Western companies. Klein says these jobs force young Asians to disguise their nationality,
- 190. adopt fake Midwestern accents, and work nights when their US customers are awake halfway around the world.16 Figure 1.2 illustrates that Western firms can outsource such work to emerging markets for a fraction of what they pay at home. As long as such economic disparities exist, international out- sourcing will continue to be popular. The salary of a programmer in the United States is nearly four times that of one in some eastern European nations, including Lithuania. Globalization critics also say companies locate operations to developing nations where labor regulations are least restrictive and, therefore, least costly. They argue that this diminishes labor’s bargaining power and labor laws in all countries as nations compete to attract international firms. For Globalization Supporters of globalization credit it with improving standards of living and making possible new ways of life. They argue that globalization increases wealth and efficiency in all nations, generates
- 191. labor market flexibility in developed nations, and advances the economies of developing nations. Let’s examine each of these arguments. 1.4 Outline the debate about globalization’s impact on jobs and wages. M01_WILD9220_09_SE_C01.indd 17 10/30/17 8:47 PM http://www.amazon.com/ http://www.walmart.com/ 18 PART 1 • GlobAl bUSinESS EnViRonMEnT INCREASES WEALTH AND EFFICIENCY IN ALL NATIONS Globalization supporters believe globalization increases wealth and efficiency in both developed and developing nations. They argue that openness to international trade increases national production (by increasing efficiency) and raises per capita income (by passing savings on to consumers). For instance, by squeezing inefficiencies out of the retail supply chain, powerful global
- 192. retailers help restrain inflation and boost productivity. Some economists predict that removing all remaining barriers to free trade would significantly boost worldwide income and greatly benefit developing nations. GENERATES LABOR MARKET FLEXIBILITY IN DEVELOPED NATIONS Globalization sup- porters believe globalization creates positive benefits by generating labor market flexibility in devel- oped nations. Some claim that there are benefits from worker dislocation, or “churning” as it is called when there is widespread job turnover throughout an economy. Flexible labor markets allow workers to be redeployed rapidly to sectors of the economy where they are highly valued and in demand. This also allows employees, particularly young workers, to change jobs easily with few negative effects. For instance, a young person can gain experience and skills with an initial employer and then move to a different job that provides a better match between employee and employer. ADVANCES THE ECONOMIES OF DEVELOPING NATIONS Those in favor of globaliza-
- 193. tion argue that globalization and international outsourcing help to advance developing nations’ economies. India initially became attractive as a location for software-writing operations because of its low-cost, well-trained, English-speaking technicians. Later, young graduates who would not become doctors and lawyers found bright futures in telephone call centers that provide all sorts of customer services. More recently, jobs in business-process outsourcing (including financial, accounting, payroll, and benefits services) is elevating living standards in India. Today, the relentless march of globalization is bringing call center jobs to the Philippines. Young Filipinos possess an excellent education, a solid grasp of the English language and US culture, and a neutral accent. In fact, top Indian firms, such as Wipro (www.wipro.com), have substantial operations in the Philippines and happily pay as much or more than what they would pay workers in India. The work is not considered low-paying by any means, and instead represents a solid, middle-class job. The International Labor Organization (www.ilo.org) found no
- 194. evidence that nations with a strong union presence suffered any loss of investment in their export-processing zones (EPZs)— special regions that allow tariff-free importing and exporting. And the World Bank found that the higher occupational safety and health conditions an EPZ had in place, the greater the amount of foreign investment it attracted.17 The evidence suggests that economic openness and foreign investment advances the economies of developing nations. Summary of the Jobs and Wages Debate All parties appear to agree that globalization eliminates some jobs in a nation but creates jobs in other sectors of the nation’s economy. Yet, although some people lose their jobs and find new employment, it can be very difficult for others to find new work. The real point of difference between the two sides in the debate, it seems, is whether overall gains that (might or might not) accrue to national economies are worth the lost livelihoods that individuals (might or might not) suffer. Those in favor of globalization say individual pain is worth the collective gain, whereas those against globalization say it is not.
- 195. Figure 1.2 Comparing Salaries of Information Technology Workers Source: Based on data obtained from the International Average Salary Income Data- base (www.worldsalaries.org). 0 $10,000 $20,000 $30,000 $40,000 $50,000 Average annual net income of an Information Technology worker living in: China $12,900 Lithuania $12,852 Brazil $37,056 United States $49,692 Singapore $18,192
- 196. Germany $27,840 M01_WILD9220_09_SE_C01.indd 18 10/30/17 8:47 PM http://www.wipro.com/ http://www.ilo.org/ http://www.worldsalaries.org/ CHAPTER 1 • GlobAlizATion 19 1.5 Debate about Income Inequality Perhaps no controversy swirling around globalization is more complex than the debate about its effect on income inequality. Here, we focus on three main aspects of the debate: inequality within nations, inequality between nations, and global inequality. Inequality within Nations The first aspect of the inequality debate is whether globalization increases income inequality among people within nations. Opponents of globalization argue that freer trade and investment allows international companies to close factories in high-wage, developed nations and to move
- 197. them to low-wage, developing nations. They argue that this increases the wage gap between white- collar and blue-collar occupations in rich nations. Two studies of developed and developing nations find contradictory evidence about this argu- ment. The first study, of 38 countries for almost 30 years, supports the increasing inequality argument. The study found that as a nation increases its openness to trade, income growth among the poorest 40 percent of its population declines, whereas income growth among other groups increases.18 The second study, of 80 countries for 40 years, failed to support the increasing inequality argument. It found that incomes of the poor rise one-for-one with overall economic growth and concluded that the poor benefit from international trade along with the rest of a nation.19 Two studies of developing nations only are more consistent in their findings. One study found that an increase in the ratio of trade to national output of 1 percent raised average income levels by 0.5 to 2 percent. Another study showed that incomes of the poor kept pace with growth in average
- 198. incomes in economies (and periods) of fast trade integration, but that the poor fell behind during periods of declining openness.20 Results of these two studies suggest that, by integrating their economies into the global economy, developing nations (by far the nations with the most to gain) can boost the incomes of their poorest residents. Another approach takes a multidimensional view of poverty and deprivation. Proponents of this approach say that the problem with focusing on income alone is that higher income does not necessarily translate into better health or nutrition. The new approach examines 10 basic factors, including whether the family home has a decent toilet and electricity service; whether children are enrolled in school; and whether family members are malnourished or must walk more than 30 minutes to obtain clean drinking water. A household is considered poor if it is “deprived” on more than 30 percent of the indicators. This new approach reveals important differences among poor regions. For example, whereas material measures contribute more to poverty in sub-Saharan Africa, malnutrition is a bigger factor in South Asia.21
- 199. Inequality between Nations The second aspect of the inequality debate is whether globalization widens the gap in average incomes between rich and poor nations. If we compare average incomes in high-income countries with average incomes in middle- and low-income nations, we do find a widening gap. But aver- ages conceal differences between nations. On closer inspection, it appears the gap between rich and poor nations does not occur every- where: One group of poor nations is closing the gap with rich economies, while a second group of poor countries is falling further behind. For example, China is narrowing the income gap between itself and the United States as measured by GDP per capita, but the gap between Africa and the United States is widening. China’s progress is no doubt a result of its integration with the world economy and annual economic growth rates of between 7 percent and 9 percent. Another emerging market, India, also is narrowing its income gap with the United States by embracing globalization.22
- 200. Developing countries that embrace globalization are increasing personal incomes, extending life expectancies, and improving education systems. In addition, post-communist countries that 1.5 Summarize the debate about income inequality. QUiCK STUDY 4 1. In the debate about jobs and wages, opponents of globalization say that it does what? 2. In the debate about jobs and wages, supporters of globalization say that it does what? M01_WILD9220_09_SE_C01.indd 19 10/30/17 8:47 PM 20 PART 1 • GlobAl bUSinESS EnViRonMEnT welcomed world trade and investment experienced high growth rates in GDP per capita. But nations that remain closed off from the world economy have performed far worse.
- 201. Global Inequality The third aspect of the inequality debate is whether globalization increases global inequality— widening income inequality between all people of the world, no matter where they live. Recent studies paint a promising picture of declining poverty worldwide. The World Bank estimates the percentage of the world’s population living on less than $1.90 per day day (a common poverty gauge revised upward from one dollar per day) fell from 42 percent to just below 11 percent between 1981 and 2013. In population figures, whereas 1.9 billion people were extremely poor in 1981, just 767 million people were poor in 2013, taking population growth into account.23 Much of the decline in global poverty is the direct result of economic progress in China. Today there is little debate about this topic. Most experts agree that global inequality has fallen and might disagree only on the extent of the fall. The continent of Africa presents the most pressing problem. Africa accounts for just 3 percent of world GDP, but is home to 13 percent of the world’s population and more than half the world’s
- 202. extremely poor. What it is like to live on less than $1.90 per day in sub-Saharan Africa, South Asia, or elsewhere is too difficult for most of us to comprehend. Rich nations realize they cannot sit idly by while so many of the world’s people live in such conditions. Still, the United Nations’ Sustain- able Development Goal of reducing global poverty to 3 percent by 2030 will be difficult to meet. What can be done to help the world’s poor? First, rich nations could increase the amount of foreign aid they give to poor nations—foreign aid as a share of donor country GDP is at histori- cally low levels. Second, rich nations can accelerate the process of forgiving some of the debt burdens of the most heavily indebted poor countries (HIPCs). The HIPC initiative is committed to reducing the debt burdens of the world’s poorest countries. This initiative would enable these countries to spend money on social services and greater integration with the global economy instead of on interest payments on debt. SUMMARY OF THE INCOME INEQUALITY DEBATE For the debate about inequality within
- 203. nations, studies suggest that developing nations can boost incomes of their poorest people by embracing globalization and integrating themselves into the global economy. In the debate about inequality between nations, nations open to world trade and investment appear to grow faster than rich nations do. Meanwhile, economies that remain sheltered from the global economy tend to be worse off. Finally, regarding the debate about global inequality, although experts agree inequality has fallen in recent decades, they might disagree only on the extent of the drop. Here we see a home along a dirt road in Cambodia where 11 mem- bers of a family live. Cambodia is a “traditional” market that has not benefited as much from globaliza- tion as have other nations. Living conditions like the plight of the family that lives here incites calls for a wider distribution of the ben- efits of economic progress. What, if anything, do you think busi- nesses and governments can do to
- 204. improve the lives of people endur- ing such harsh living conditions? Ozgur Yusuf Cagdas/123RF.com M01_WILD9220_09_SE_C01.indd 20 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 21 1.6 Debate about Culture, Sovereignty, and the Environment Coverage of the globalization debate would be incomplete without examining several additional topics in the globalization debate. Let’s now look at globalization’s effect on a nation’s culture, sovereignty, and physical environment. Globalization and Culture National culture is a strong shaper of a people’s values, attitudes, customs, beliefs, and com- munication. Whether globalization eradicates cultural differences between groups of people or reinforces cultural uniqueness is a hotly debated topic.
- 205. Globalization’s detractors say that it homogenizes our world and destroys our rich diversity of cultures. They say that in some drab, new world we all will wear the same clothes bought at the same brand-name shops, eat the same foods at the same brand- name restaurants, and watch the same movies made by the same production companies. Blame is usually placed squarely on the largest multinational companies in consumer goods, which typically are based in the United States. Supporters argue that globalization allows us all to profit from our differing circumstances and skills. Trade allows countries to specialize in producing the goods and services they can produce most efficiently. Nations then can trade with each other to obtain goods and services they desire but do not produce. In this way, France still produces many of the world’s finest wines, South Africa yields much of the world’s diamonds, and Japan continues to design some of the world’s finest-engineered automobiles. Other nations then trade their goods and services with these countries to enjoy the wines, diamonds, and automobiles that they do not, or cannot, produce. To learn more about the interplay
- 206. between culture and globalization, see the Culture Matters feature, titled, “The Culture Debate.” 1.6 Outline the debate about culture, sovereignty, and the environment. QUiCK STUDY 5 1. Evidence suggests that globalization can help developing nations boost incomes for their poorest people in what part of the debate about inequality? 2. In the debate about inequality between nations, evidence suggests that developing nations that are open to trade and investment do what? 3. Regarding the debate about global inequality, experts tend to agree about what? The debate about globalization’s influence on culture evokes strong opinions. Here are a few main arguments in this debate: • Material Desire. Critics say globalization fosters the “Coca - Colanization” of nations through advertising campaigns
- 207. that promote material desire. They also argue that global consumer-goods companies destroy cultural diversity (especially in developing nations) by putting local compa- nies out of business. • Artistic Influence. Evidence suggests, however, that the cultures of developing nations are thriving and that the influence of their music, art, and literature has grown (not shrunk) throughout the past century. African cultures, for example, have influenced the works of artists including Picasso, the beatles, and Sting. • Western Values. international businesses reach far and wide through the internet, global media, increased busi- ness travel, and local marketing. Critics say local values and traditions are being replaced by US companies promoting “Western” values. • A Force for Good. on the positive side, globalization tends to foster two important values: tolerance and diversity. Advocates say nations should be more tolerant of oppos- ing viewpoints and should welcome diversity among their peoples. This view interprets globalization as a potent force for good in the world.
- 208. • Deeper Values. Globalization can cause consumer pur- chases and economic ideologies to converge, but these are rather superficial aspects of culture. Deeper values that embody the essence of cultures might be more resistant to a global consumer culture. • Want to Know More? Visit the globalization page of the Global Policy Forum (www.globalpolicy.org), Globaliza- tion 101 (www.globalization101.org), or The Globalist (www.theglobalist.com). Sources: “Economic Globalization and Culture: A Discussion with Dr. Francis Fukuyama,” Merrill Lynch Forum website (www.ml.com); “Globalization Issues,” The Globalization website (www.sociology.emory.edu/globalization/index.html); “Cultural Diversity in the Era of Globalization,” UNESCO Culture Sector website (www.unesco.org/culture). CULTURE MATTERS The Culture Debate M01_WILD9220_09_SE_C01.indd 21 10/30/17 8:47 PM http://www.unesco.org/culture
- 209. http://www.sociology.emory.edu/globalization/index.html http://www.ml.com/ http://www.theglobalist.com/ http://www.globalization101.org/ http://www.globalpolicy.org/ 22 PART 1 • GlobAl bUSinESS EnViRonMEnT Globalization and National Sovereignty National sovereignty generally involves the idea that a nation- state (1) is autonomous, (2) can freely select its government, (3) cannot intervene in the affairs of other nations, (4) can control movements across its borders, and (5) can enter into binding international agreements. Opposition groups allege that globalization erodes national sovereignty and encroaches on the authority of local and state governments. Supporters disagree, saying that globalization spreads democracy worldwide and that national sovereignty must be viewed from a long-term perspective. GLOBALIZATION: MENACE TO DEMOCRACY? A main argument leveled against globaliza-
- 210. tion is that it empowers supranational institutions at the expense of national governments. It is not in dispute that the WTO, the IMF, and the United Nations are led by appointed, not democratically elected, representatives. What is debatable, however, is whether these organizations unduly impose their will on the citizens of sovereign nations. Critics argue that such organizations undercut democracy and individual liberty by undermining the political and legal authority of national, regional, and local governments. Opponents of globalization also take issue with the right of national political authorities to enter binding international agreements on behalf of citizens. Critics charge that such agreements violate the rights of local and state governments. For example, state and local governments in the United States had no role in creating the NAFTA. Yet, WTO rules require the US federal government to take all available actions (including enacting preemptive legislation or withdrawing funding) to force local and state compliance with WTO terms. Protesters say that such requirements directly attack the rights and authority of local and state
- 211. governments.24 GLOBALIZATION: GUARDIAN OF DEMOCRACY? Globalization supporters argue that an amazing consequence of globalization has been the spread of democracy worldwide. In recent decades, the people of many nations have become better educated, better informed, and more empowered. Supporters say globalization has not sent democracy spiraling into decline but instead has been instrumental in spreading democracy to the world. Backers of globalization also contend that it is instructive to take a long-term view on the issue of national sovereignty. Witnessing a sovereign state’s scope of authority altered is nothing new, as governments have long given up trying to control issues they could not resolve. In the mid-1600s, governments in Europe surrendered their authority over religion because attempts to control it undermined overall political stability. Also, Greece in 1832, Albania in 1913, and the former Yugoslavian states in the 1990s had to protect minorities in exchange for international recognition. And during the past 50 years, the United Nations
- 212. has made significant progress on worthy issues such as genocide, torture, slavery, refugees, women’s rights, children’s rights, forced labor, and racial discrimination. Like the loss of sovereignty over these issues, globalization sup- porters say lost sovereignty over some economic issues actually might enhance the greater good.25 Globalization and the Environment Some environmental groups say globalization causes a “race to the bottom” in environmental conditions and regulations. Yet studies show that pollution- intensive US firms tend to invest in countries with stricter environmental standards. Many developing nations, including Argentina, Brazil, Malaysia, and Thailand, liberalized their foreign investment environment while simultane- ously enacting stricter environmental legislation. If large international companies were eager to relocate to nations having poor environmental protection laws, they would not have invested in these countries for decades. Additional evidence that closed, protectionist economies are worse than open ones at protecting the environment includes Mexico before NAFTA, Brazil under mili-
- 213. tary rule, and the former Warsaw Pact of communist nations— all of which had extremely poor environmental records. Again, the evidence refutes claims that economic openness and globaliza- tion lessen environmental standards. Globalization opponents claim that Western firms exploit lax environmental laws abroad to produce goods that are then exported back to the home countries. These claims have no factual basis and might only perpetuate a false image of corporations. In fact, less than 5 percent of US firms invest in developing countries to obtain low -cost resources and then export finished products back to the United States. M01_WILD9220_09_SE_C01.indd 22 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 23 Most international firms today support reasonable environmental laws because (if for no other reason) they want to expand future local markets for their goods
- 214. and services. They recognize that healthy future markets require a sustainable approach to business expansion. Companies today often examine a location for its potential as a future market as well as a production base. MyLab Management Try It Apply what you have learned about the effects of globalization. If your instructor has assigned this, go to www.pearson.com/mylab/management to perform a simulation on the potential positive and negative outcomes of globalization. QUiCK STUDY 6 1. People opposed to globalization say that it does what to national cultures? 2. Regarding national sovereignty, opponents of globalization say that it does what? 3. Regarding the physical environment, what do globalization supporters argue? 1.7 Developing Skills for your Career Some of you taking this course are majoring in international business or a related business area,
- 215. such as marketing, business administration, or accounting. Others are majoring in political sci- ence, economics, history, psychology, and so forth, and are taking this course to gain insight into how businesses operate in the global economy. But as we read at the beginning of this chapter, and regardless of your chosen field of study, international business activities touch all aspects of our lives today. So, although you might not one day become a manager with direct international business responsibilities, this course will help you develop highly useful capabilities we call employability skills, regardless of your chosen career. Critical thinking involves purposeful and goal-directed thinking used to define and solve problems, make decisions, or form judgments related to a set of circumstances. This course will help you to develop this key employability skill. For example, you will use critical thinking skills in this course to study how a country designs its political, economic, and legal systems into a complex arrangement to achieve a specific set of priorities for the nation and its people. Through- out the book, you will be able to put yourself in the position of
- 216. a business manager and make a decision or solve a dilemma that commonly occurs in business today. A keener sense of business ethics and social responsibility is another employability skill that this course will help you to improve. We define these concepts simply as sets of guiding principles that influence the way individuals and organizations behave within society. You will encounter the issues of personal ethical responsibility and reasoning throughout this course as you read how managers made ethical decisions under specific circumstances and how they fared. You will also read about the social responsibilities that companies face regarding topics such as human rights, fair trade, and sustainable development. This course also will help to improve your communication skills, which is another key employability skill. Communication is the use of oral, written, and nonverbal language, and tech- nology to communicate ideas effectively and to listen effectively. International business means doing business across national borders, across languages, and
- 217. across cultures. Articulating one’s thoughts and ideas in another language and culture must be done in a considerate and mindful way so as to not offend another person’s values and beliefs. You will read about many situations in which appropriate communication resulted in successful dealings, and thoughtless communica- tion meant failure of one kind or another. You will see how managers who are posted abroad for the first time on international assignment must work effectively with others, remain flexible, and make cultural compromises to succeed. 1.7 Identify how this course will help you to develop skills for your career. M01_WILD9220_09_SE_C01.indd 23 10/30/17 8:47 PM http://www.pearson.com/mylab/management 24 PART 1 • GlobAl bUSinESS EnViRonMEnT One other employability skill this course will help you to
- 218. develop is that of knowledge applica- tion and analysis. This refers to your ability to learn a concept and appropriately apply that knowledge in another setting to achieve a higher level of understanding. You will be asked to apply your ana- lytical reasoning and research skills in numerous assignments, projects, mini-cases, and, perhaps, the market entry strategy project developed for use with this textbook. You will learn that at the core of global business success is innovation, which we view as a process of experimenting, learning, applying knowledge, and assessing success or failure. For example, throughout the course you will have ample opportunities to explain why a company succeeded or failed because of the actions it did or did not take. To assist you in developing these and other career skills as you study this course, we created a unique organizing framework to help you conceptualize international business. We call this the global business environment. The Global Business Environment As we’ve already seen in this chapter, international business differs greatly from business in a
- 219. purely domestic context. The most obvious contrast is that different nations can have entirely dif- ferent societies and commercial environments. The best way to explain what makes international business special is to introduce a model unique to this book—a model we call the global business environment. This model weaves together four distinct elements: 1. The forces of globalization 2. The international business environment 3. Many national business environments 4. International firm management. The model in Figure 1.3 identifies each of these elements and their subparts that together comprise the global business environment. Thinking about international business as occurring within this global system helps us to understand the complexities of international business and Figure 1.3 The Global Business Environment
- 220. Developing and Marketing Products (ch. 14) Managing International Operations (ch. 15) Economic Development of Nations (ch. 4) International Financial Markets (ch. 9) Political Economy
- 221. of Trade (ch. 6) Cross-Cultural Business (ch. 2) International Monetary System (ch. 10) Globalization (ch. 1) Increasing Competition Technological Innovation Falling Trade/FDI Barriers
- 222. International Trade Theory (ch. 5) Regional Economic Integration (ch. 8) Foreign Direct Investment (ch. 7) Analyzing International Opportunities (ch. 12) Selecting and Managing
- 223. Entry Modes (ch. 13) Hiring and Managing Employees (ch. 16) International Strategy and Organization (ch. 11) National Firm International Political Economy and
- 224. Ethics (ch. 3) M01_WILD9220_09_SE_C01.indd 24 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 25 the interrelations between its distinct elements. Let’s preview each of the four main components in the global business environment. Globalization is a potent force transforming our societies and commercial activities in countless ways. Globalization, and the pressures it creates, forces its way into each element shown in Figure 1.3. In this way, the drivers of globalization (technological innovation and falling trade and investment barriers) inf luence every aspect of the global business environ- ment. The dynamic nature of globalization also creates increasing competition for all firms everywhere, as managers begin to see the entire world as an opportunity. At home and abroad,
- 225. firms must remain vigilant to the fundamental societal and commercial changes that globaliza- tion causes. The international business environment influences how firms conduct their operations in both subtle and not-so-subtle ways. No business is entirely immune to events in the international business environment, as evidenced by the long-term trend toward more porous national borders. The drivers of globalization are causing the flows of trade, investment, and capital to grow and to become more entwined—often causing firms to search simultaneously for production bases and new markets. Companies today must keep their fingers on the pulse of the international business environment to see how it might affect their business activities. Each national business environment is composed of unique cultural, political, economic, and legal characteristics that define business activity within that nation’s borders. This set of national characteristics can differ greatly from country to country. But as nations open up and embrace globalization, their business environments are being
- 226. transformed. Globalization can cause powerful synergies and enormous tensions to arise within and across various elements of a society. Company managers must be attentive to such nuances, adapting their products and practices as needed. International firm management is vastly different from the management of a purely domes- tic business. Companies must abide by the rules in every market in which they choose to operate. Therefore, the context of international business management is defined by the char- acteristics of national business environments. Because of widely dispersed production and marketing activities today, firms commonly interact with people in distant locations within the international business environment. Finally, managers and their firms are compelled to be knowledgeable about the nations in which they operate because of the integrating power of globalization. Businesses should try to anticipate events and forces that can affect their opera- tions by closely monitoring globalization, national business environments, and the international
- 227. business environment. The Road Ahead for International Business The coverage of international business in this book follows the model of the global business envi- ronment displayed in Figure 1.3. In this chapter, we learned how globalization is transforming our world and how elements of the global business environment are becoming increasingly inter- twined. As globalization penetrates deeper into the national context, every aspect of international business management is being affected. In Part 2 (Chapters 2 through 4), we explore how national business environments differ from one nation to another. We examine how people’s attitudes, values, beliefs, and institutions differ from one culture to another and how this affects business. This part also covers how nations differ in their political, economic, and legal systems. This material is placed early in the text because such differences between countries help frame subsequent topics and discussions, such as how companies modify business practices and strategies abroad.
- 228. We describe major components of the international business environment in Part 3 (Chapters 5 through 8) and Part 4 (Chapters 9 and 10). Our coverage begins with an examination of trade and investment theories and a discussion of why governments encourage or discourage these two forms of international business. We explore the process of regional economic integration around the world and outline its implications for international business. Finally, we discuss how events in global financial markets affect international business and how the global monetary system functions. In Part 5 (Chapters 11 through 16), we cover ways in which international business manage- ment differs from management of a purely domestic firm. We explain how a company creates an international strategy, organizes itself for international business, and analyzes and selects the M01_WILD9220_09_SE_C01.indd 25 10/30/17 8:47 PM
- 229. 26 PART 1 • GlobAl bUSinESS EnViRonMEnT markets it will pursue. We explore different potential entry modes and then discuss how a firm develops and markets products for specific nations, regions, or the entire world. We then cover how international companies manage their sometimes-far-f lung international operations. The book closes by discussing how international firms manage their human resources in the global business environment. This chapter has only introduced you to the study of international business—we hope you enjoy the rest of your journey! QUiCK STUDY 7 1. What employability skills will this course help you to develop? 2. It helps to think about international business as four elements that occur within a what? 3. How does managing an international firm differ from managing a purely domestic
- 230. business? The main theme of this chapter is that the world’s national economies are becoming increasingly intertwined through the process of globalization. Cultural, political, economic, and le- gal events in one country increasingly affect the lives of people in other countries. Companies must pay attention to how changes in nations where they do business can affect operations. in this section, we briefly examine several important business implica- tions of globalization. Harnessing Globalization’s Benefits People opposed to globalization say it negatively affects wages and environmental protection, reduces political freedom, in- creases corruption, and inequitably rewards various groups. Yet there is evidence that the most globalized nations have the strongest records on equality, the most robust protection of natural resources, the most inclusive political systems, and the lowest levels of corruption. People in the most globalized nations also live the healthiest and longest lives, and women there have achieved the most social, educational, and economic progress.
- 231. one thing the debate over globalization has achieved is a dialogue about the merits and demerits of globalization. What has emerged is a more sober, less naïve notion of globalization. Those on each side of the debate understand that globalization can have positive effects on people’s lives, but that globalization cannot, by itself, alleviate the misery of the world’s poor. both sides in the debate now often work together to harness the ben- efits of globalization while minimizing its costs. Intensified Competition The two driving forces of globalization (lower trade and invest- ment barriers and increased technological innovation) are taking companies into previously isolated markets and increasing com- petitive pressures worldwide. And innovation is unlikely to slow any time soon. As the cost of computing power continues to fall and new technologies are developed, companies will find it easier and less costly to manage widely dispersed marketing activities and production facilities. Technological developments might even strengthen the case for outsourcing more professional jobs to low-cost locations. As competition intensifies, international
- 232. com- panies are increasing their cooperation with suppliers and cus - tomers. Wages and Jobs Some labor groups in wealthy nations contend that globaliza- tion forces companies to join the “race to the bottom” in terms of wages and benefits. but to attract investment, a location must offer low-cost, adequately skilled workers in an environ- ment with acceptable levels of social, political, and economic stability. Rapid globalization of markets and production is making product delivery a complex engineering task. As companies cut costs by outsourcing activities, supply and distribution channels grow longer and more complex. Corporate logistics departments and logistics specialist firms are helping interna- tional companies untangle lengthy supply chains, monitor ship- ping lanes, and forecast weather patterns. High-wage logistics jobs represent the kind of high-value-added employment that results from the “churning” in labor markets caused by globali - zation. The Policy Agenda Countless actions could be taken by developed and develop-
- 233. ing nations to lessen the negative effects of globalization. The World bank calls on rich countries to (1) open their markets to exports from developing countries, (2) slash their agricultural subsidies that hurt poor-country exports, and (3) increase de- velopment aid, particularly in education and health. it calls on poor countries to improve their investment climates and im- prove social protection for poor people in a changing economic environment. The Peterson institute for international Economics (www.iie .com) proposed a policy agenda for rich nations on two fronts. on the domestic front, it proposes (1) establishing on-the-job training to help workers cope with globalization, (2) offering BOTTOM LINE FOR BUSINESS M01_WILD9220_09_SE_C01.indd 26 10/30/17 8:47 PM http://www.iie.com/ http://www.iie.com/ CHAPTER 1 • GlobAlizATion 27 MyLab Management
- 234. Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO1.1 Identify the types of companies active in international business. • Most international business is conducted by large multinational corporations (MNCs), which have great economic muscle and do deals often worth billions of dollars. • Born global firms adopt a global perspective and conduct international business nearly from the start. They tend to have innovative cultures, knowledge-based capa- bilities, and become international competitors in less than three years. • Entrepreneurs and small firms benefit from the Internet and other technologies that help them overcome the hurdles of high advertising and distribution costs. LO1.2 Explain globalization and how it affects markets and
- 235. production. • Globalization is the trend toward greater economic, cultural, political, and techno- logical interdependence among national institutions and economies. • The globalization of markets helps a company to (1) reduce costs by standardizing marketing activities, (2) explore international markets if the home market is small or saturated, and (3) level income streams. • The globalization of production helps a company to (1) access low-cost labor and become more price competitive, (2) access technical know -how, and (3) access natu- ral resources nonexistent or too expensive at home. LO1.3 Detail the forces that drive globalization. • One major force behind globalization is falling barriers to trade and investment. • Those helping to reduce such barriers include the World Trade Organization, the
- 236. World Bank, the International Monetary Fund, and regional trading groups. • Another force behind globalization is technological innovation. Specific innovations include email, videoconferencing, firm intranets and extranets, and advancements in transportation technologies such as RFID and GPS. LO1.4 Outline the debate about globalization’s impact on jobs and wages. • Globalization opponents say it (1) destroys developed-country jobs that are moved to developing countries, (2) lowers wages, job security, and employee morale and loyalty in developed nations, (3) exploits developing-nation workers in outsourced service jobs, and (4) reduces the bargaining power of labor. • Globalization supporters say it (1) fuels efficiency and greater production that raises consumer income, (2) promotes labor market flexibility that quickly shifts workers to where they are needed, (3) outsources sorely needed jobs to
- 237. developing nations that elevate living standards, and (4) actually might strengthen labor rights. LO1.5 Summarize the debate about income inequality. • Regarding inequality within nations, evidence suggests that a developing nation can boost incomes for its poorest residents by integrating itself into the global economy. • In the debate about inequality between nations, studies find that a nation embracing world trade and investment can grow faster than rich nations, whereas a sheltered economy becomes worse off. • Regarding global inequality, groups tend to agree that inequality has fallen in recent decades although they differ about the extent of the drop. “wage insurance” to workers forced by globalization to take a lower-paying job, (3) subsidizing health insurance costs in case of lost work, and (4) improving education and lifetime learning. on the international front, it proposes (1) better enforcing labor
- 238. standards, (2) clarifying the relation between international trade and environmental agreements, and (3) reviewing the environ- mental implications of trade agreements. M01_WILD9220_09_SE_C01.indd 27 10/30/17 8:47 PM http://www.pearson.com/mylab/management 28 PART 1 • GlobAl bUSinESS EnViRonMEnT LO1.6 Outline the debate about culture, sovereignty, and the environment. • Evidence suggests that the cultures of developing nations are thriving in an age of glo- balization and that deeper elements of culture are not easily abandoned, as critics say. • In terms of national sovereignty, the case can be made that globalization has not undermined democracy, but has helped it to spread worldwide and has aided progress on many global issues.
- 239. • Regarding the environment, it seems globalization has not caused a “race to the bot- tom,” but instead has urged firms to embrace sustainability as a precondition to fos- tering healthy future markets. LO1.7 Identify how this course will help you to develop skills for your career. • The employability skills this course can help you develop are critical thinking skills, business ethics and social responsibility, communication, and knowledge application and analysis. • The global business environment model in Figure 1.3 will help you to conceptualize international business today and aid in your skills development. • The international business environment influences how firms conduct operations, while globalization further entwines the flows of trade, investment, and capital.
- 240. • Separate national business environments comprise unique cultural, political, eco- nomic, and legal characteristics that define business activity within every nation. born global firm (p. 6) e-business (e-commerce) (p. 12) exports (p. 4) GDP or GNP per capita (p. 12) General Agreement on Tariffs and Trade (GATT) (p. 10) globalization (p. 7) gross domestic product (GDP) (p. 12) gross national product (GNP) (p. 12) imports (p. 4) international business (p. 4) International Monetary Fund (IMF) (p. 11) multinational corporation (MNC) (p. 5)
- 241. sustainability (p. 8) World Bank (p. 11) World Trade Organization (WTO) (p. 11) Key Terms TALK ABOUT IT 1 Today, international businesspeople must think globally about production and sales op- portunities. Many global managers will eventually find themselves living and working in other cultures, and entrepreneurs might find themselves taking flights to places they had never heard about. 1-1. What can companies do now to prepare their managers for international markets? 1-2. How can entrepreneurs and small businesses with limited resources prepare? TALK ABOUT IT 2 In the past, national governments influenced the pace of globalization through agree- ments to lower barriers to international trade and investment.
- 242. 1-3. Is rapid change now outpacing the capability of governments to manage the global economy? 1-4. Will national governments grow more or less important to international business in the future? M01_WILD9220_09_SE_C01.indd 28 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 29 MyLab Management Go to www.pearson.com/mylab/management for auto-graded writing questions as well as the following assisted-graded writing questions: 1-14. When going international, companies today often research new locations as potential markets as well as potential sites for operations. What specific benefits can companies gain from the globalization of markets and production? Explain.
- 243. 1-15. Opponents of globalization say that it has many negative consequences for jobs and wages, income inequality, culture, sovereignty, and the environment. What are some positive outcomes of globalization for each of these topics? Ethical Challenge You are the CEO of a major US apparel company that contracts work to garment manufacturers abroad. Employees of one contractor report 20-hour workdays, pay below the minimum wage, overcrowded living conditions, physically abusive supervisors, and confiscation of their passports so they cannot quit. Local officials say labor laws are adhered to and enforced, though abuses appear widespread. You send inspectors to the offending factory abroad, but they uncover no labor violations. A labor-advocacy group claims that supervisors coached workers to lie to your inspectors about conditions and threatened workers with time in make- shift jails without food if they talked. 1-5. Should you implement a monitoring system to learn the truth about what is happening? 1-6. Do you help the factory improve conditions, withdraw
- 244. your business from the country, or simply do nothing? 1-7. How might your actions affect relations with the factory owner and your ability to do business in the country? Teaming Up Imagine that you and several of your classmates own a company that manufactures cheap sunglasses. To lower production costs, you decide to move your factory from your developed country to a more cost-effective location. 1-8. Which elements of the national business environment might influence your decision of where to move production? 1-9. What aspects of the globalization of production and marketing do you expect will benefit your company after the move? Market Entry Strategy Project
- 245. This exercise corresponds to the MESP online simulation. With several classmates, select a country that interests you. For the country your team researches, integrate your answers to the following questions into your completed MESP report. 1-10. Is the nation the home base of any large multinational companies? 1-11. How does globalization influence the country’s jobs and wages, its income inequality, and its culture, sovereignty, and physical environment? 1-12. How does the country rank in terms of its degree of globalization? 1-13. What benefits can the country offer to businesses seeking a new market or production base? M01_WILD9220_09_SE_C01.indd 29 10/30/17 8:47 PM http://www.pearson.com/mylab/management 30 PART 1 • GlobAl bUSinESS EnViRonMEnT
- 246. PRACTICING INTERNATIONAL MANAGEMENT CASE MTV Goes Global with a Local Beat As the song by the Buggles asks, did “video kill the radio star”? Well, perhaps not, but no company has been more successful at getting teenagers around the world to tune in to music televi - sion than MTV Networks (www.mtv.com). Applying the maxim “Think globally, act locally,” the company beams its irreverent mix of music, news, and entertainment to 640 million homes in more than 162 countries in 34 languages. Although style and format are largely driven by the youth culture in the United States, content is tailored to suit local markets. MTV has never grown old with its audience and has remained true to young people between the ages of 18 and 24. Initially launched in 1981, MTV commanded an audience of 61 million in the United States six years later. But to counteract slowing demand, the company took the music revolution global by starting MTV Europe (www.mtv.tv) and MTV Australia
- 247. (www .mtv.com.au). Through its experiences in Europe, MTV refined its mix of programming to become a “global national brand with local variations.” At first, it took a pan-European approach, marketing the same product to all European countries. MTV broadcast primarily British and US music (both of which were topping the charts throughout Europe) and used European “veejays” who spoke Eng- lish. The European network was a huge overnight success. Seven years later, however, MTV had become the victim of its own success. It suddenly had to compete with a new crop of upstart rivals that tailored content to language, culture, and cur - rent events in specific countries. One successful competitor was Germany’s VIVA (www.viva.tv), launched in 1993 and featuring German veejays and more German artists than MTV Europe. Man- agers at MTV Networks were not overly concerned because MTV was still extremely popular, but they did realize they were
- 248. losing their edge (and some customers) to the new national networks. So, the company’s top managers had to reassess the company’s strategy. MTV executives initially rejected the idea of splitting MTV into national stations because they had just spent almost two decades building a global brand identity. But the company gradually decided to go ahead with a national strategy because a new technology made it possible for MTV to think globally and act locally at little cost. The breakthrough was digital compression technology, which allows multiple services to be offered on a single satellite feed. Where the company had been offering three or four services, the new technology meant it could now broadcast six or eight. Today, young adults all over the world can have their MTV cake and eat it too. German teens see German-language programs that are created and produced in Germany and shown on MTV Germany (www.mtv.de)—along with the usual generous helpings
- 249. of US, British, and international music and comedy. European nations that still share an MTV channel are those that share cultural similarities—such as the Nordic nations (www.mtve.com). Like- wise, whereas much of Latin America receives MTV Latin America (www.mtvla.com), Brazilian teens see Portuguese-language pro- grams that are created in Brazil and shown on MTV Brazil (www .mtv.uol.com.br). National advertisers who shunned MTV during its pan-European days can now beam their targeted ads to teenage consumers. Technology has helped lesser-known musicians reach their fan base in a way they never thought possible. At the same time, it has disrupted the traditional means by which artists sell their music and grow famous. To help struggling artists, MTV launched a new website (www.artists.mtv.com) in 2012. Both famous and not- so-
- 250. famous musicians can sell music and merchandise on their own pages and even book a gig. Fans can also “tip” performers using virtual tip jars. The beat goes on for the MTV generation three-and-one-half decades after MTV planted its flag on the pop-culture moon. That a generation is named after a television station is evidence of its worldwide cultural influence. Today, MTV appears to be remaking itself once again as its US station adds programming typical of tra- ditional television networks, including scripted and reality shows. MTV’s US lineup now includes shows such as “Faking It,” “Finding Carter,” and “Teen Mom.” Tune in next time to find out if MTV can continue to attract the younger generation! Thinking Globally 1-16. Some people say teens in developing countries who are exposed to large doses of US culture on MTV will come to identify less and less with their own societies, whereas oth-
- 251. ers say that it’s just fun television. Do you think there are negative aspects of broadcasting US–style programs and ads to developing countries? 1-17. Digital compression technology made it possible for MTV to program across a global network. What other technologi - cal innovations have helped companies to think globally and act locally? Sources: Julia Greenberg, “MTV Wants You to Want Your MTV News All Over Again,” Wired (www.wired.com), February 11, 2016; David Bauder, “Pro- gramming Vet Guiding Changes at MTV,” The Fayetteville Observer (www .fayobserver.com), May 6, 2014; Sabrina Ford, “MTV Unveils New Website for Fans to Reach Artists,” Reuters (www.reuters.com), March 15, 2012; Marcus Dowl- ing, “The Day the ‘Music’ Died,” The Couch Sessions (www.thecouchsessions .com), February 12, 2010. M01_WILD9220_09_SE_C01.indd 30 10/30/17 8:47 PM
- 252. http://www.mtvla.com/ http://www.mtv.de/ http://www.viva.tv/ http://www.mtv.com.au/ http://www.mtv.com.au/ http://www.mtv.tv/ http://www.thecouchsessions.com/ http://www.thecouchsessions.com/ http://www.reuters.com/ http://www.fayobserver.com/ http://www.fayobserver.com/ http://www.wired.com/ http://www.artists.mtv.com/ http://www.mtv.uol.com.br/ http://www.mtv.uol.com.br/ http://www.mtve.com/ http://www.mtv.com/ CHAPTER 1 • GlobAlizATion 31 World Atlas As globalization marches across the world, international business
- 253. managers can make more-informed decisions if they know the loca- tions of countries and the distances between them. This atlas pres- ents the world in a series of maps and is designed to assi st you in understanding the global landscape of business. We encourage you to return to this atlas frequently to refresh your memory, especially when you encounter the name of an unfamiliar city or country. Familiarize yourself with each of the maps in this appendix, and then try to answer the following 20 questions. For each question, select all answers that apply. Map Exercises 1. Which of the following countries border the Atlantic Ocean? a. Bolivia b. Australia c. South Africa d. Japan
- 254. e. United States 2. Which of the following countries are found in Africa? a. Guyana b. Morocco c. Egypt d. Pakistan e. Niger 3. Which one of the following countries does not border the Pacific Ocean? a. Australia b. Venezuela c. Japan d. Mexico e. Peru 4. Prague is the capital city of: a. Uruguay b. Czech Republic c. Portugal d. Tunisia
- 255. e. Hungary 5. If transportation costs for getting your product from your market to Japan are high, which of the following countries might be good places to locate a manufacturing facility? a. Thailand b. Philippines c. South Africa d. Indonesia e. Portugal 6. Seoul is the capital city of (capitals are designated with red dots): a. Vietnam b. Cambodia c. Malaysia d. China e. South Korea 7. Turkey, Romania, Ukraine, and Russia border the body of water called the ________________________ Sea.
- 256. 8. Thailand shares borders with: a. Cambodia b. Pakistan c. Singapore d. Malaysia e. Indonesia 9. Which of the following countries border no major ocean or sea? a. Austria b. Paraguay c. Switzerland d. Niger e. all of the above 10. Oslo is the capital city of: a. Germany b. Canada c. Brazil d. Australia e. Norway
- 257. 11. Chile is located in: a. Africa b. Asia c. the Northern Hemisphere d. South America e. Central Europe 12. Saudi Arabia shares borders with: a. Jordan b. Kuwait c. Iraq d. United Arab Emirates e. all of the above 13. The body of water located between Sweden and Estonia is the ________________________ Sea. 14. Which of the following countries are located on the Medi- terranean Sea? a. Italy b. Croatia
- 258. c. Turkey d. France e. Portugal 15. The distance between Sydney (Australia) and Tokyo (Japan) is shorter than that between: a. Tokyo and Cape Town (South Africa) b. Sydney and Hong Kong (China, SAR) c. Tokyo and London (England) d. Sydney and Jakarta (Indonesia) e. all of the above 16. Madrid is the capital city of: a. Madagascar b. Italy c. Mexico d. Spain e. United States Appendix M01_WILD9220_09_SE_C01.indd 31 10/30/17 8:47 PM
- 259. 32 PART 1 • GlobAl bUSinESS EnViRonMEnT 17. Which of the following countries is not located in central Asia? a. Afghanistan b. Uzbekistan c. Turkmenistan d. Kazakhstan e. Suriname 18. If you were shipping your products from your produc- tion facility in Pakistan to market in Australia, they would likely cross the ________________________ Ocean. 19. Papua New Guinea, Guinea-Bissau, and Guinea are alter- native names for the same country. a. true b. false 20. Which of the following countries are island nations? a. New Zealand b. Madagascar
- 260. c. Japan d. Australia e. all of the above Answers (1) c. South Africa, e. United States; (2) b. Morocco, c. Egypt, e. Niger; (3) b. Venezuela; (4) b. Czech Republic; (5) a. Thailand, b. Philippines, d. Indonesia; (6) e. South Korea; (7) Black; (8) a. Cambodia, d. Malaysia; (9) e. all of the above; (10) e. Norway; (11) d. South America; (12) e. all of the above; (13) Baltic; (14) a. Italy, c. Turkey, d. France; (15) a. Tokyo and Cape Town (South Africa), c. Tokyo and London (England); (16) d. Spain; (17) e. Suriname; (18) Indian; (19) b. false; (20) e. all of the above. Self-Assessment If you scored 15 correct answers or more, well done! You seem well prepared for your international business journey. If you scored fewer than 8 correct answers, you might wish to review this atlas before moving on to Chapter 2. M01_WILD9220_09_SE_C01.indd 32 10/30/17 8:47 PM
- 261. CHAPTER 1 • GlobAlizATion 33 M a p A .1 T h e W o rl d N O
- 338. T H S U D A N M01_WILD9220_09_SE_C01.indd 33 10/30/17 8:47 PM 34 PART 1 • GlobAl bUSinESS EnViRonMEnT Map A.2 North America Edmonton Anchorage Vancouver
- 339. Fairbanks Seattle Los Angeles San Francisco San Diego Tijuana Denver Phoenix Tucson Boston New York Ciudad Juárez Albuquerque
- 342. San José Managua El Salvador Panama St. Louis Las Vegas Acapulco Portland Tacoma Helena Spokane OmahaSalt Lake City Carson CitySacramento Oklahoma City
- 343. Austin Juneau Kansas City Wichita Tulsa Memphis Bismarck Jackson Richmond Cleveland Pittsburgh Norfolk Charlotte Columbia Augusta
- 345. Prince Rupert Hermosillo Chihuahua Torreón Leon Mexico City Tampico Mérida San Antonio Fort Worth Tampa Mobile Orlando Savannah
- 346. El Paso Saskatoon Calgary Regina Winnipeg Thunder Bay Moosonee Churchill Goose Bay St. John’s Halifax C A N A D A UNITED STATES MEXICO GUATEMALA
- 348. BERMUDA ALASKA GREENLAND ICELAND AT L A N T I C O C E A N P A C I F I C O C E A N A R C T I C O C E A N C a r i b b e a n S e a B e a u f o r t S e a L a b r a d o r S e a
- 349. Baffin Bay Hudson Bay B e r i n g S e a G u l f o f M e x i c o G u l f o f A l a s k a Ponce Port-Au-Prince Santo Domingo Port of Spain TURKS &
- 350. CAICOS ISLANDS HAITI DOMINICAN REPUBLIC PUERTO RICO BarbudaAnguilla Antigua Guadeloupe (Fr.) St. Kitts & Nevis Virgin Islands (U.S. & Br.) Montserrat (Br.)
- 351. Domínica Martinique (Fr.) St. Lucia BarbadosSt. Vincent & the Grenadines Grenada Trinidad TobagoBonaire (Neth.) Curaçao (Neth.) Aruba (Neth.) ATLANTIC OCEAN
- 352. C a r i b b e a n S e a M01_WILD9220_09_SE_C01.indd 34 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 35 Map A.3 South America COLOMBIA VENEZUELA TRINIDAD & TOBAGO SURINAME FRENCH GUIANA ECUADOR B R A Z I LP E R U
- 353. B O L I V I A PARAGUAY A R G E N T I N A URUGUAY CHILE FALKLAND/MALVINAS ISLANDS (UK) GUYANA S O U T H AT L A N T I C O C E A N N O R T H AT L A N T I C
- 354. O C E A N PA C I F I C O C E A N C a r i b b e a n S e a Corrientes Posadas Santiago del Estero San Miguel de Tucumán Salta San Juan Santiago Córdoba
- 355. Río Cuarto Santa Fe Paraná Rosario Buenos Aires La Plata Bahia Blanca Montevideo Mendoza Rancagua Valdivia Temuco Concepción Talcahuano
- 356. Valparaíso Viña del Mar Asunción Antofagasta Iquique Sucre La Paz Santa Cruz Potosi Arequipa Cuzco Callao Lima Trujillo
- 358. Bucaramanga Cartagena Barranquilla Cúcuta San Cristóbal Maracaibo Barquisimeto Valencia Caracas Ciudad Bolívar Cumaná Maturín Ciudad Guayana Mackenzie Manaus
- 359. Belém Teresina São Luís Fortaleza Campina Grande Caruaru Recife Natal Salvador Itabuna Brasilia Goiânia Uberlândia Campo Grande Uberaba Belo Horizonte Juiz dé Fora
- 360. Niterói Bauru Araraquara Campinas São Paulo Ponta Grossa Curitiba Santos Rio de Janeiro Pôrto Alegre Rio Grande Pelotas Santa Maria Georgetown
- 361. Paramaribo Cayenne Port of Spain Port Stanley Tierra del Fuego CURAÇAO (Neth.) M01_WILD9220_09_SE_C01.indd 35 10/30/17 8:47 PM 36 PART 1 • GlobAl bUSinESS EnViRonMEnT Map A.4 Europe WALES
- 362. ENGLAND F R A N C E BELGIUM NETHERLANDS GERMANY LUX. RUSSIA LITHUANIA LATVIA BELARUS CZECH REPUBLIC SLOVAKIA AUSTRIA
- 363. SWITZERLAND LIECH. SLOVENIA HUNGARY CROATIA BOSNIA- HERZEGOVINA SERBIA ROMANIA BULGARIA MACEDONIA MONTENEGRO U K R A I N E MOLDOVA
- 364. GREECE ALBANIA CYPRUS MALTA PORTUGAL S P A I N ANDORRA I T A L Y SAN- MARINO MONACO DENMARK SWEDEN POLAND
- 365. SCOTLAND NORTHERN IRELAND ICELAND R U S S I A NORWAY FINLAND ESTONIA IRELAND UNITED KINGDOM AT L A N T I C O C E A N A R C T I C O C E A N
- 366. Ba lt ic S e a N o r t h S e a B a y o f B i s c a y Tyrrhenian Sea Ionian Sea Black Sea
- 367. N o r w e g i a n S e a M e d i t e r r a n e a n S e a A driatic Sea English Channel Crete BALEARIC IS. Corsica Sicily FAEROE IS. (Denmark)
- 371. Zurich Bern Bratislava Bologna Florence Venice Genoa Paris Bordeaux Lyon Nice Bilbao Toulouse London
- 373. Copenhagen Prague Riga Helsinki Bergen Oslo Göteborg Malmo Stockholm St. Petersburg Tallinn Kiev Kharkov Kursk
- 376. La Coruña Sarajevo M01_WILD9220_09_SE_C01.indd 36 10/30/17 8:47 PM CHAPTER 1 • GlobAlizATion 37 Map A.5 Asia A R C T I C O C E A N P A C I F I C O C E A N I N D I A N O C E A N Sea of
- 379. M A L A Y S I A C H I N A I N D I A SRI LANKA PAKISTAN NEPAL BURMA PHILIPPINES JAPAN M O N G O L I A R U S S I A E U R O P E A N R U S S I A KAZAKHSTAN
- 380. I R A N TURKEY GEORGIA ARMENIA IRAQ AFGHANISTAN TURKMENISTAN AZERBAIJAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN BHUTAN BANGLADESH
- 382. SAUDI ARABIA OMAN YEMEN QATAR BAHRAIN UAE SINGAPORE EAST TIMOR I N D O N E S I A Moscow
- 385. Ho Chi Minh City (Saigon) Novosibirsk Ulaanbaatar Yekaterinburg Lahore IslamabadPeshawar Dushanbe Tashkent Kabul Omsk Tokyo Khabarovsk
- 387. George Town Jakarta T’ai-pei Colombo Calcutta Katmandu Thimphu Dhaka Karachi Hyderabad Mumbai (Bombay) Chennai (Madras) Hyderabad Yangon Hanoi
- 389. Nordvik Lensk Irkutsk Osaka M01_WILD9220_09_SE_C01.indd 37 10/30/17 8:47 PM 38 PART 1 • GlobAl bUSinESS EnViRonMEnT Map A.6 Africa S O U T H S U D A N Madeira Canary Is. São Tomé &
- 394. Marrakesh Tangier Meknès Benghazi Tripoli Tunis Marzuq Annaba In Salah Aswan Alexandria Asyut Suez
- 395. El Faiyum Kassala Port Sudan Cairo Ndjamena Addis Ababa Djibouti Asmera El Obeid Atbarah Berbera Dar-es-Salaam
- 398. MADAGASCAR SOUTH AFRICA LESOTHO NAMIBIA BOTSWANA A N G O L A ZIMBABWE MOZAMBIQUE ZAMBIA DEMOCRATIC REPUBLIC OF THE CONGO TANZANIA SWAZILAND
- 399. KENYA UGANDA E T H I O P I A S U D A N C H A D CENTRAL AFRICAN REPUBLIC NIGERIA CAMEROON EQUATORIAL GUINEA GABON CONGO IVORY COAST
- 400. GHANA TOGO BENIN BURKINO FASO M A L I MAURITANIA SENEGAL GAMBIA GUINEA BISSAU GUINEA SIERRA LEONE LIBERIA
- 401. WESTERN SAHARA MOROCCO A L G E R I A L I B Y A TUNISIA N I G E R E G Y P T SOMALIA ERITREA DJIBOUTI RWANDA BURUNDI
- 402. MALAWI AT L A N T I C O C E A N G u l f o f G u i n e a I N D I A N O C E A N M e d i t e r r a n e a n S e a R e d S e a M01_WILD9220_09_SE_C01.indd 38 10/30/17 8:47 PM
- 403. CHAPTER 1 • GlobAlizATion 39 Map A.7 Oceania VANUATU SOLOMAN ISLANDS EAST TIMOR I N D O N E S I A A U S T R A L I A NEW ZEALAND PAPUA NEW
- 404. GUINEA I N D I A N O C E A N B a y o f B i s c a y P A C I F I C O C E A N C o r a l S e a T a s m a n S e a G re a t A u s t r a l i a n
- 405. B i g h t Arafura Sea Timor Sea SULAWESI BORNEO NEW BRITAIN NEW CALEDONIA (France) TASMANIA Melbourne Hobart Adelaide
- 407. Rockhampton Honiara Port-Vila Nouméa Brisbane Lismore Coff’s Harbour Port Macquarie Port Headland Tennant Creek Wyndham Derby Alice Springs
- 409. Kalgoorlie Jayapura Launceston Fremantle Elizabeth Port Augusta Broken Hill Geelong Ballarat Wollongong M01_WILD9220_09_SE_C01.indd 39 10/30/17 8:47 PM 40 MyLab Management IMPROVE YOUR GRADE!
- 410. When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 2.1 Explain culture and the need for cultural knowledge. 2.2 Summarize the cultural importance of values and behavior. 2.3 Describe the roles of social structure and education in culture. 2.4 Outline how the major world religions can influence business. 2.5 Explain the importance of personal communication to international business. 2.6 Describe how firms and culture interact in the global workplace. Learning Objectives After studying this chapter, you should be able to
- 411. Cross-Cultural Business Chapter Two A Look Back Chapter 1 introduced us to international business. We examined the impact of globalization on markets and production, the forces behind globalization’s expansion, and each main argument in the debate over globalization. We also profiled the kinds of companies engaged in international business. A Look at This Chapter This chapter introduces the important role of culture in international business. We explore the main elements of culture and how they affect business policies and practices. We learn about
- 412. different frameworks for studying cultures and how they apply to international business. A Look Ahead Chapter 3 describes the political economy of nations. We will learn how different political, economic, and legal systems affect the policies and activities of international companies. We also discover how ethics and social responsibility affect international business. 2 National Business EnvironmentsPart M02_WILD9220_09_SE_C02.indd 40 10/30/17 8:47 PM http://www.pearson.com/mylab/management CHAPTER 2 • CRoss-CulTuRAl BusinEss 41 Hold the Pork, Please!
- 413. BONN, Germany—“Kids and grownups love it so, the happy world of Haribo!” So goes the phrase that drives sales of Haribo gummi candies worldwide. Germany-based Haribo (www.haribo.com) gets its name from that of the company’s founder, Hans Riegel Bonn. Haribo CEO Hans Riegel Bonn, Jr. and his brother, Paul, built a global brand out of the tiny candy busi- ness started by their father in 1920. Shown here, Haribo puts on a small pub- licity parade during Le Tour de France. Haribo candies, with names such as Gold Bears and Horror Mix, are avail- able in 46 shapes, including soda bottles and glowworms. They are often the first export from Germany that children in other countries purchase. Haribo sup- plies 105 countries from its 15 factories at home and abroad, producing more than 100 million gummi candies a day. But despite its success, Haribo was not meeting the needs of a globally dispersed subculture potentially worth $2 billion
- 414. annually. The culprit: The pork-based substance that gives the candy its sticky, rubbery feel makes the candy off-limits to Muslims and Jews who adhere to a strict religious diet. So the company embarked on a four-year mission to create a gummi candy free of the pork-based gelatin. “The first time we made it, we got a marmalade you could spread on bread,” reported Neville Finlay, the British exporter who ships the new product under his own brand. “And at the other extreme was something you could fill a swimming pool with and drive a truck across,” he added. Haribo found success eventually with a bacteria- based compound commonly used in salad dressings and sauces. Later, a local supplier committed a language blunder—a common occurrence in inter- national business. The printing on the first packages of candies destined for Hebrew com- munities was backward—Hebrew is read from right to left, not left to right like English. But today production is going smoothly. Haribo even has a Jewish rabbi (for kosher candies)
- 415. or a Muslim cleric (for halal candies) inspect ingredients and oversee production to ensure that it adheres to religious customs. As you read this chapter, consider all the ways culture affects international business and how companies affect cultures around the world.1 Radu Razvan/Shutterstock M02_WILD9220_09_SE_C02.indd 41 10/30/17 8:47 PM http://www.haribo.com/ 42 PART 2 • nATionAl BusinEss EnViRonMEnTs This chapter is the first of three that describes the links between international business activity and a nation’s business environment. We discuss these topics early because they help determine how commerce is conducted in a country. Success in international business can often be traced directly to a deep understanding of some aspect of a people’s commercial environment. This chap- ter explores the influence of culture on international business
- 416. activity. Chapter 3 presents the role of political economy and ethics and Chapter 4 explores the economic development of nations. Assessment of a nation’s overall business climate is typically the first step in analyzing its potential as a host for international commercial activity. This means addressing some important questions, such as the following: What language(s) do the people speak? What is the climate like? Are the local people open to new ideas and new ways of doing business? Do government officials and the people want our business? Is the political situation stable enough so that our assets and employees are not placed at unacceptable levels of risk? Answers to these kinds of questions—plus statistical data on items such as income level and labor costs—allow companies to evaluate the attractiveness of a location as a place for doing business. We address culture first in our discussion of national business environments because of its pivotal role in all international commercial activity. Whether we are discussing an entrepreneur running a small import/export business or a huge global firm directly involved in more than
- 417. 100 countries, people are at the center of all business activity. When people from around the world come together to conduct business, they bring with them different backgrounds, assumptions, expectations, and ways of communicating—each of which is a key part of culture. We begin this chapter by defining culture and understanding the need for cultural knowledge. Next, we learn the importance of values, attitudes, manners, and customs in any given culture. We then examine the key components of culture, including social institutions, education, religion, and language. We close this chapter with a look at how the richness of culture plays out in the global workplace. 2.1 What is Culture? When traveling in other countries, we often perceive differences in the way people live and work. In the United States, dinner is commonly eaten around 6 p.m.; in Spain, it’s not served until 8 or 9 p.m. In the United States, most people shop in large supermarkets once or twice a week; Italians tend to shop in smaller local grocery stores nearly every day.
- 418. These are just a few visible mani- festations of culture—the set of values, beliefs, rules, and institutions held by a specific group of people. Culture is a highly complex portrait of a people. It includes everything from high tea in England to the tropical climate of Barbados to Mardi Gras in Brazil. Rightly or wrongly, we tend to invoke the concept of the nation–state when speaking of culture. In other words, we usually refer to British and Indonesian cultures as if all Britons and all Indonesians are culturally identical. We do this because we are conditioned to think in terms of national culture. But this is at best a generalization. For example, the British population consists of the English as well as the Scottish and Welsh peoples. And people in remote parts of Indonesia build homes in treetops even as people in the nation’s developed regions pursue ambitious economic development projects. Let’s take a closer look at the diversity that lies within national cultures. National Culture Nation-states support and promote the concept of national
- 419. culture by building museums and erecting monuments to preserve the legacies of important events and people. Nation-states also intervene in business to preserve treasures of national culture. Most nations, for example, regulate culturally sensitive sectors of the economy, such as filmmaking and broadcasting. France continues to voice fears that its language is being tainted with English and its media with US programming. To stem the English invasion, French law limits the use of English in product packaging and storefront signs. At peak listening times, at least 40 percent of all radio station programming is reserved for French artists. Similar laws apply to television broadcasting. The French government even fined the local branch of a US university for failing to provide a French translation on its English-language website. Cities, too, get involved in enhancing national cultural attractions, often for economic reasons. Lifestyle enhancements can help a city attract companies, which then benefit by having an easier task retaining top employees. The Guggenheim Museum in Bilbao, Spain (www.guggenheim- bilbao.es), designed by Frank Gehry, revived that old Basque
- 420. industrial city. And Hong Kong’s 2.1 Explain culture and the need for cultural knowledge. culture Set of values, beliefs, rules, and institutions held by a specific group of people. M02_WILD9220_09_SE_C02.indd 42 10/30/17 8:47 PM http://www.guggenheimbilbao.es/ http://www.guggenheimbilbao.es/ CHAPTER 2 • CRoss-CulTuRAl BusinEss 43 government enhanced its cultural attractions by building a Hong Kong Disney to lure businesses that might otherwise locate elsewhere in Asia. Subcultures A group of people who share a unique way of life within a larger, dominant culture is called a
- 421. subculture. A subculture can differ from the dominant culture in language, race, lifestyle, values, attitudes, or other characteristics. Although subcultures exist in all nations, they are often glossed over by our impressions of national cultures. For example, the customary portrait of Chinese culture often ignores the fact that China’s population includes more than 50 distinct ethnic groups. Decisions regarding product design, packaging, and advertising should consider each group’s distinct culture. Marketing cam- paigns also need to recognize that Chinese dialects spoken in the Shanghai and Canton regions differ from the official Mandarin dialect spoken in the country’s interior. A multitude of subcultures also exists within the United States. Initially, Frito Lay (www .fritolay.com) had trouble convincing 46 million US Latinos to try its Latin-flavored versions of Lay’s and Doritos chips. But then Frito Lay brought four popular brands into the US market from its Mexican subsidiary, Sabritas. The gamble paid off and sales of the Sabritas brand doubled to
- 422. more than $100 million during a two-year period. Cultural boundaries do not always correspond to political boundaries. In other words, subcul- tures sometimes exist across national borders. People who live in different nations but who share the same subculture can have more in common with one another than with their fellow nationals. These subcultures can share purchasing behaviors rooted in lifestyle or values that allow marketers to address them with a single worldwide campaign. Physical Environment Land features affect personal communication in a culture. Surface features such as navigable rivers and flat plains facilitate travel and contact with others. By contrast, treacherous mountain ranges and large bodies of water that are difficult to navigate discourage contact. Mountain ranges and the formidable Gobi Desert consume two-thirds of China’s land surface. Groups living in the valleys of these mountain ranges hold on to their own ways of life and speak their own languages, despite the Mandarin dialect having been decreed the national language many years ago.
- 423. The physical environment of a region affects consumers’ product needs. For example, there is little market for Honda scooters (www.honda.com) in most mountainous regions because a scooter’s engine is too small to climb the steep grades. Such regions are better markets for the company’s more rugged, maneuverable, on–off road motorcycles that have more powerful engines. subculture A group of people who share a unique way of life within a larger, dominant culture. Subculture members define them- selves by their style (such as cloth- ing, hair, tattoos) and might rebel against mass consumerism. Here, a young woman poses in “steam- punk attire” in front of an old-time steam locomotive. Steampunk is a subculture rooted in science fic- tion and inspired by mechanical inventions of the late 1800s and
- 424. early 1900s including, of course, steam-powered machines of all sorts. Businesses such as YouTube and Facebook can help subcultures to spread quickly worldwide. Can you think of a company that targets an international subculture with its products? Petrenco Natalia/Shutterstock M02_WILD9220_09_SE_C02.indd 43 10/30/17 8:47 PM http://www.honda.com/ http://www.fritolay.com/ http://www.fritolay.com/ 44 PART 2 • nATionAl BusinEss EnViRonMEnTs local tastes and preferences. The culturally literate manager who compensates for local needs and desires brings the company closer to customers and improves its competitiveness.
- 425. Globalization is causing cultures to converge to some extent. The successful Idol TV series, in which aspiring singers compete for a chance to become a celebrity, is one example of global pop culture. The original British show, Pop Idol, spawned 39 clones around the world, including American Idol in the United States. The same company helped develop and market The Apprentice, another globally successful TV platform. It is unlikely that the world will ever homogenize into one global culture in which all people share similar lifestyles, values, and attitudes. It seems that just as often as we see signs of an emerging global culture, we discover some new habit that is unique to a single culture. We are then reminded of the pivotal roles of history and tradition in defining any culture. Although cultural traditions are under continually greater pressure from globalization, their transformation will be gradual rather than abrupt because they are so deeply ingrained in society. As you read through the concepts and examples in this chapter, try to avoid reacting with
- 426. ethnocentricity while developing your own cultural literacy. Because cultural literacy is central to the discussion about many international business topics, you will encounter them throughout this book. In the book’s final chapter (Chapter 16), we explore specific types of cultural training that companies use to develop their employees’ cultural literacy. cultural literacy Detailed knowledge about a culture that enables a person to work happily and effectively within it. Climate affects where people settle and the distribution systems they create. In Australia, intensely hot and dry conditions in two large deserts and jungle conditions in the northeast pushed settlement to coastal areas. These conditions, together with the higher cost of land transport, means coastal waters are still used to distribute products between distant cities. Climate can also play a role in determining work habits. The heat of the summer sun grows intense in the early afternoon hours in the countries of southern Europe, northern Africa, and
- 427. the Middle East. For this reason, people often take afternoon breaks of one or two hours in July and August. They use this time to perform errands or to take short naps before returning to work until about 7 or 8 p.m. Companies operating in these regions must adapt to this local tradition. Need for Cultural Knowledge A visual depiction of culture would resemble an iceberg. Cultural features that we can see com- prise a very small portion of all that comprises it—it is just the “tip of the iceberg.” The vast majority of a people’s cultural makeup remains hidden from view and below the surface. It takes knowledge, effort, understanding, and experience to uncover the essence of a culture and to develop a deep appreciation for it. AVOIDING ETHNOCENTRICITY Our thoughts can harbor subconscious, unintentional, and inaccurate perceptions of other cultures. Ethnocentricity is the belief that one’s own ethnic group or culture is superior to that of others. Ethnocentricity can seriously undermine international busi- ness projects. It can cause people to disregard the beneficial
- 428. characteristics of other cultures. Ethnocentricity played a role in many stories, some retold in this chapter, of companies that failed when they tried to implement a new business practice in a subsidiary abroad. Failure can occur when managers ignore a fundamental aspect of the local culture. This can provoke a backlash from the local population, its government, or nongovernmental groups. As suppliers and buyers increas- ingly treat the world as a single, interconnected marketplace, managers should eliminate the biases inherent in ethnocentric thinking. To read about how companies can foster a nonethnocentric perspective, see this chapter’s Culture Matters feature, titled “Creating a Global Mindset.” DEVELOPING CULTURAL LITERACY As globalization continues, people directly involved in international business increasingly benefit from a certain degree of cultural literacy—detailed knowledge about a culture that enables a person to work happily and effectively within it. Cultural literacy improves people’s ability to manage employees, market products, and conduct negotia- tions in other countries. Procter & Gamble (www.pg.com) and
- 429. Apple (www.apple.com) might have a competitive advantage because consumers know and respect these highly recognizable brand names. Yet, cultural differences often dictate alterations in some aspect of a business to suit ethnocentricity Belief that one’s own ethnic group or culture is superior to that of others. in this era of globalization, companies need employees who func- tion without the blinders of ethnocentricity. Here are some ways managers can develop a global mindset: • Cultural Adaptability. Managers need the ability to alter their behavior when working with people from other cul- tures. The first step in doing this is to develop one’s knowl - edge about unfamiliar cultures. The second step is to act on that knowledge to alter behavior to suit cultural expecta- tions. The manager with a global mindset can evaluate oth- ers in a culturally unbiased way and can motivate and lead multicultural teams.
- 430. • Bridging the Gap. A large gap can emerge between theory and practice when Western manageme nt ideas are applied in Eastern cultures. Whereas us management principles are often accepted at face value in businesses throughout the world, us business customs are not. in Asia, for example, Western managers might try implementing “collective lead- ership” practices more in line with Asian management styles. • Building Global Mentality. Companies can apply personality- testing techniques to measure the global aptitude of managers. A global-mindset test evaluates an individual’s openness and flexibility, understanding of global principles, and strategic implementation abilities. it also can identify areas in which training is needed and generate a list of rec- ommended programs. • Flexibility Is Key. The more behavioral the issues, the greater the influence of local cultures. Japanese and Korean managers are more likely than us managers to wait for directions and consult peers about decisions. Western man- agers posted in the Middle East must learn to work within a rigid hierarchy in order to be successful. And although showing respect for others is universally valued, respect is defined differently from country to country.
- 431. • Want to Know More? Visit the Center for Creative leadership (www.ccl.org), The Globalist (www.theglobalist.com), and Transnational Management Associated (www. tmaworld.com). CULTURE MATTERS Creating a Global Mindset M02_WILD9220_09_SE_C02.indd 44 10/30/17 8:47 PM http://www.pg.com/ http://www.apple.com/ http://www.tmaworld.com/ http://www.theglobalist.com/ http://www.ccl.org/ CHAPTER 2 • CRoss-CulTuRAl BusinEss 45 local tastes and preferences. The culturally literate manager who compensates for local needs and desires brings the company closer to customers and improves its competitiveness. Globalization is causing cultures to converge to some extent. The successful Idol TV series, in which aspiring singers compete for a chance to become a
- 432. celebrity, is one example of global pop culture. The original British show, Pop Idol, spawned 39 clones around the world, including American Idol in the United States. The same company helped develop and market The Apprentice, another globally successful TV platform. It is unlikely that the world will ever homogenize into one global culture in which all people share similar lifestyles, values, and attitudes. It seems that just as often as we see signs of an emerging global culture, we discover some new habit that is unique to a single culture. We are then reminded of the pivotal roles of history and traditi on in defining any culture. Although cultural traditions are under continually greater pressure from globalization, their transformation will be gradual rather than abrupt because they are so deeply ingrained in society. As you read through the concepts and examples in this chapter, try to avoid reacting with ethnocentricity while developing your own cultural literacy. Because cultural literacy is central to the discussion about many international business topics, you
- 433. will encounter them throughout this book. In the book’s final chapter (Chapter 16), we explore specific types of cultural training that companies use to develop their employees’ cultural literacy. cultural literacy Detailed knowledge about a culture that enables a person to work happily and effectively within it. QuiCK sTuDY 1 1. How might a subculture differ from the dominant culture? 2. What do we call the belief that one’s own culture is superior to that of others? 3. What do we call detailed knowledge about a culture that enables a person to work happily and effectively within it? 2.2 Values and Behavior So far, our definition of culture is one that most people intuitively understand. We are familiar with the idea that people in different nations behave differently
- 434. and that every culture has segments of people with distinct values and behaviors. But culture includes what people consider beautiful and tasteful, their underlying beliefs, their traditional habits, and the ways in which they relate to one another and their surroundings. Let’s now go beneath the surface of the “iceberg” for a fuller understanding of the building blocks of society (see Figure 2.1). Values Ideas, beliefs, and customs to which people are emotionally attached are called values. Values include concepts such as honesty, freedom, and responsibility. Values are important to business because they affect a people’s work ethic and desire for material possessions. For example, whereas people in Singapore value hard work and material success, people in Greece value leisure 2.2 Summarize the cultural importance of values and behavior. values Ideas, beliefs, and customs to
- 435. which people are emotionally attached. Figure 2.1 Components of Culture Physical & Material Environments Education Personal Communication Religion Social Structure Manners & Customs
- 436. Values & Attitudes Aesthetics C u l t u r e M02_WILD9220_09_SE_C02.indd 45 10/30/17 8:47 PM 46 PART 2 • nATionAl BusinEss EnViRonMEnTs and a modest lifestyle. The United Kingdom and the United States value individual freedom; Japan and South Korea value group consensus. The inf lux of values from other cultures can be fiercely resisted. Many Muslims believe drugs, alcohol, and certain kinds of music and literature will undermine conservative values. In Bahrain, the local version of the reality TV program, Big
- 437. Brother, was canceled after people objected to the program’s format in which young unmarried adults of both sexes lived under the same roof. The Lebanon-based program Hawa Sawa (On Air Together) was shut down because its “elimidate” format (a young man gradually eliminates women to finally select a date) was perceived as too Western. Indonesia’s National Police denied Lady Gaga a permit to perform there after conservative Muslim groups accused her of corrupting the morals of the country’s youth. Attitudes Attitudes reflect a people’s underlying values. Attitudes are positive or negative evaluations, feel- ings, and tendencies that individuals harbor toward objects or concepts. For example, a Westerner would be expressing an attitude if he or she were to say, “I do not like the Japanese purification ritual because it involves being naked in a communal bath.” The Westerner quoted here might value modesty and hold conservative beliefs regarding exposure of the body. Similar to values, attitudes are learned from role models,
- 438. including parents, teachers, and religious leaders. Attitudes also differ from one country to another because they are formed within a cultural context. But unlike values (which generally concern only important matters), people hold attitudes toward both important and unimportant aspects of life. And whereas values remain quite rigid over time, attitudes are more flexible. Aesthetics What a culture considers “good taste” in the arts (including music, painting, dance, drama, and architecture), the imagery evoked by certain expressions, and the symbolism of certain colors is called aesthetics. In other words, it includes the art, images, symbols, colors, and so on that a culture values. Aesthetics are important when a company does business in another culture. The selection of appropriate colors for advertising, product packaging, and even work uniforms can improve the odds of success. For example, companies take advantage of a positive emotional attachment to the color green across the Middle East by incorporating it into a product,
- 439. its packaging, or its promotion. Across much of Asia, on the other hand, green is associated with sickness. In Europe, Mexico, and the United States, the color of death and mourning is black; in Japan and most of Asia, it’s white. Music is deeply embedded in culture and, when used correctly, can be a clever and creative addition to a promotion; if used incorrectly, it can offend the local population. The architecture of buildings and other structures also should be researched to avoid making cultural blunders attributable to the symbolism of certain shapes and forms. The importance of aesthetics is just as great when going international using the Internet. When a company decides to globalize its Internet presence, it must consider adapting websites to account for cultural preferences such as color scheme, imagery, and slogans. Entrepreneurs and small businesses can seek advice from specialist firms if they do not have in-house employees who are well versed in other cultures. Appropriate Behavior
- 440. When doing business in another culture, it is important to understand what is considered appro- priate behavior. At a minimum, understanding manners and customs helps managers avoid making embarrassing mistakes or offending people. In-depth knowledge, meanwhile, improves the ability to negotiate in other cultures, market products effectively, and manage international operations. Let’s explore some important differences in manners and customs around the world. MANNERS Appropriate ways of behaving, speaking, and dressing in a culture are called manners. Jack Ma founded Alibaba (www.alibaba.com) as a way for suppliers and buyers to increase effi- ciency by cutting through layers of intermediaries and trading companies. But he realized early that his Chinese clients needed training in business etiquette to cross the cultural divide and do business with people from Western cultures. So Alibaba offers seminars about business manners that instruct clients to spend more time chitchatting with clients and conversing more casually.2 attitudes
- 441. Positive or negative evaluations, feelings, and tendencies that indi- viduals harbor toward objects or concepts. aesthetics What a culture considers “good taste” in the arts, the imagery evoked by certain expressions, and the symbolism of certain colors. manners Appropriate ways of behaving, speaking, and dressing in a culture. M02_WILD9220_09_SE_C02.indd 46 10/30/17 8:47 PM http://www.alibaba.com/ CHAPTER 2 • CRoss-CulTuRAl BusinEss 47 Conducting business during meals is common practice in the United States. In Mexico, how- ever, it is poor manners to bring up business at mealtime unless
- 442. the host does so first. Business discussions in Mexico typically begin when coffee and brandy arrive. Likewise, toasts in the United States tend to be casual and sprinkled with lighthearted humor. In Mexico, a toast should be philosophical and full of passion. CUSTOMS When habits or ways of behaving in specific circumstances are passed down through generations, they become customs. Customs differ from manners in that they define appropriate habits or behaviors in specific situations. For example, the Japanese tradition of throwing special parties for young women and men who turn age 20 is a custom. Folk and Popular Customs A folk custom is behavior, often dating back several generations, that is practiced by a homogeneous group of people. Celebrating the Dragon Boat Festival in China and the art of belly dancing in Turkey are both folk customs. A popular custom is behavior shared by a heterogeneous group or by several groups. Wearing blue jeans and playing golf are both popular customs across the globe. Folk customs that spread to other regions develop into
- 443. popular customs. Despite their appeal, popular customs can be seen as a threat by conservative or xenophobic members of a culture. We can also distinguish between folk and popular food. Popular Western-style fast food, for instance, is rapidly replacing folk food around the world. Widespread acceptance of “burgers ’n’ fries” (born in the United States) and “fish ’n’ chips” (born in Britain) is altering deep-seated dietary traditions in many Asian countries, especially among young people. In Asia today, these popular foods are even becoming a part of home-cooked meals. Gift Giving Customs Although giving token gifts to business and government associates is customary in many countries, the proper type of gift varies. A knife, for example, should not be offered to associates in Russia, France, or Germany, where it signals the severing of a relationship. In Japan, gifts must be wrapped in such a delicate way that it is wise to ask someone trained in the practice to do the honors. It is also Japanese custom for the giver to protest that the gift is small and unworthy of the recipient and for the recipient to not open
- 444. the gift in front of the giver. This tradition does not endorse trivial gifts but is simply a custom. Cultures differ in their legal and ethical rules against giving or accepting bribes. Large gifts to business associates are particularly suspicious. The US Foreign Corrupt Practices Act, which prohibits companies from giving large gifts to government officials in order to win business favors, applies to US firms operating at home and abroad. Yet in many cultures, bribery is woven into a social fabric that has worn well for centuries. In some cultures, large gifts remain an effective way to obtain contracts, enter markets, and secure protection from competitors. See the Manager’s Briefcase, titled “A Globetrotter’s Guide to Meetings,” for additional pointers on manners and customs when abroad on business. customs Habits or ways of behaving in spe- cific circumstances that are passed down through generations in a culture.
- 445. folk custom Behavior, often dating back several generations, that is practiced by a homogeneous group of people. popular custom Behavior shared by a heteroge- neous group or by several groups. large multinationals need top managers who are comfortable living, working, and traveling worldwide. Here are a few guide- lines for a manager to follow when meeting colleagues from other cultures: • Familiarity Avoid the temptation to get too familiar too quickly. use titles such as “doctor” and “mister.” switch to a first-name basis only when invited to do so, and do not shorten people’s names from, say, Catherine to Cathy. • Personal Space Culture dictates what is considered the appropriate distance between two people. in latin America, people close the gap significantly and a man-to-man embrace is common in business.
- 446. • Religious Values Be cautious so that your manners do not offend people. Former secretary of state Madeline Albright acquired the nickname “The Kissing Ambassador” for kissing the israeli and Palestinian leaders of those two reli - gious peoples. • Business Cards in Asia, business cards are considered an extension of the individual. Business cards in Japan are typically exchanged after a bow, with two hands extended, and the wording facing the recipient. leave the card on the table for the entire meeting—don’t quickly stuff it in your wallet or toss it into your briefcase. • Comedy use humor cautiously because it often does not translate well. Avoid jokes that rely on wordplay and puns or events in your country, about which local people might have little or no knowledge. • Body Language Do not “spread out” by hanging your arms over the backs of chairs, but don’t be too stiff either. look people in the eye lest they deem you untrustworthy, but don’t stare too intently in a challenging manner. MANAGER’S BRIEFCASE A Globetrotter’s Guide to
- 447. Meetings M02_WILD9220_09_SE_C02.indd 47 10/30/17 8:47 PM 48 PART 2 • nATionAl BusinEss EnViRonMEnTs 2.3 Social Structure and Education Social structure embodies a culture’s fundamental organization, including its groups and institu- tions, its system of social positions and their relationships, and the process by which its resources are distributed. Social structure plays a role in many aspects of business, including production-site selection, advertising methods, and the costs of doing business in a country. Three important ele- ments of social structure that differ across cultures are social group associations, social status, and social mobility. Social Group Associations People in all cultures associate themselves with a variety of social groups collections of two or more people who identify and interact with each other. Social
- 448. groups contribute to each individ- ual’s identity and self-image. Two groups that play especially important roles in affecting business activity everywhere are family and gender. FAMILY There are two different types of family groups. The nuclear family consists of a person’s immediate relatives, including parents, brothers, and sisters. This concept of family prevails in Australia, Canada, the United States, and much of Europe. The extended family broadens the nuclear family and adds grandparents, aunts and uncles, cousins, and relatives through marriage. It is an important social group in much of Asia, the Middle East, North Africa, and Latin America. Extended families can present some interesting situations for businesspeople unfamiliar with the concept. In some cultures, owners and managers obtain supplies and materials from another company at which someone from the extended family works. Gaining entry into such family arrangements can be difficult because quality and price are not sufficient motives to ignore fam-
- 449. ily ties. In extended-family cultures, managers and other employees often try to find jobs for rela- tives inside their own companies. This practice (called nepotism) can present a challenge to the human resource operations of a Western company, which typically must establish explicit policies on the practice. GENDER Gender refers to socially learned habits associated with, and expected of, men or women. It includes behaviors and attitudes such as styles of dress and activity preferences. It is not the same thing as sex, which refers to the biological fact that a person is either male or female. Strictly speaking, gender is a category—people know they share a particular status with others but tend to remain strangers to one another. Though many countries have made great strides toward gender equality in the workplace, others have not. In countries where women are denied equal opportunity in the workplace, their unemployment rate can easily be double that of men and their
- 450. pay half that of men in the same occupation. Caring for children and performing household duties are also likely considered women’s work in such countries and not the responsibility of the entire family. Social Status Another important aspect of social structure is the way a culture divides its population according to status—that is, according to positions within the structure. Although some cultures have only a few categories, others have many. The process of ranking people into social layers or classes is called social stratification. 2.3 Describe the roles of social structure and education in culture. social structure A culture’s fundamental organi- zation, including its groups and institutions, its system of social positions and their relationships, and the process by which its
- 451. resources are distributed. social group Collection of two or more people who identify and interact with each other. social stratification Process of ranking people into social layers or classes. QuiCK sTuDY 2 1. What are examples of values? 2. What type of custom might a conservative group oppose in a culture? 3. The law that restricts the gift giving by US firms at home and abroad is called what? M02_WILD9220_09_SE_C02.indd 48 10/30/17 8:47 PM CHAPTER 2 • CRoss-CulTuRAl BusinEss 49
- 452. Three factors that normally determine social status are family heritage, income, and occupation. In most industrialized countries, royalty, government officials, and top business leaders occupy the highest social layer. Scientists, medical doctors, and others with a uni- versity education occupy the middle layer. Next are those with vocational training or a secondary-school education, people who dominate the manual and clerical occupations. Although rankings are fairly stable, they can and do change over time. For example, because Confucianism (a major Chinese religion) stresses a life of learning, not commerce, Chinese culture frowned on businesspeople for centuries. In modern China, however, people who obtain wealth and power through business are considered important role models for younger generations. MyLab Management Watch It Impact of Culture on Business a Spotlight on China Apply what you have learned so far about the fundamental aspects of culture. If your instructor has
- 453. assigned this, go to www.pearson.com/mylab/management to watch a video case about doing business in Chinese culture and answer questions. Social Mobility Moving to a higher social class is easy in some cultures but difficult or impossible in others. Social mobility is the ease with which individuals can move up or down a culture’s “social ladder.” For much of the world’s population today, one of two systems regulates social mobility: a caste system or a class system. CASTE SYSTEM A caste system is a system of social stratification in which people are born into a social ranking, or caste, with no opportunity for social mobility. India is the classic exam- ple of a caste culture. Although the Indian constitution officially bans discrimination by caste, its influence persists. Little social interaction occurs between castes, and marrying out of one’s caste is taboo. Opportunities for work and advancement are defined within the system, and cer- tain occupations are reserved for the members of each caste. For example, a member of a lower
- 454. caste cannot supervise someone of a higher caste because personal clashes would be inevitable. The caste system forces Western companies to make some difficult decisions when entering the Indian marketplace. They must decide whether to adapt to local human resource policies in India or to import their own from the home country. As globalization penetrates deeper into Indian culture, both the nation’s social system and international companies will face challenges. CLASS SYSTEM A class system is a system of social stratification in which personal ability and actions determine social status and mobility. It is the most common form of social stratification in the world today. But class systems vary in the amount of mobility they allow. Highly class-conscious cultures offer less mobility and, not surprisingly, experience greater class conf lict. Across Western Europe, for example, wealthy families have retained power for generations by restricting social mobility. Companies doing
- 455. business there must sometimes deal with class conf lict in the form of labor–management disputes that can increase the cost of doing business. Conversely, lower levels of class-consciousness encourage mobility and lessen conflict. A more cooperative atmosphere in the workplace tends to prevail when people feel that a higher social standing is within their reach. For example, most US citizens share the belief that hard work can improve their standard of living and social status, with relatively less regard for family background. social mobility Ease with which individuals can move up or down a culture’s “social ladder.” caste system System of social stratification in which people are born into a social ranking, or caste, with no opportu- nity for social mobility.
- 456. class system System of social stratification in which personal ability and actions determine social status and mobility. M02_WILD9220_09_SE_C02.indd 49 10/30/17 8:47 PM http://www.pearson.com/mylab/management 50 PART 2 • nATionAl BusinEss EnViRonMEnTs Education Education is crucial for passing on traditions, customs, and values. Each culture educates its young people through schooling, parenting, religious teachings, and group memberships. Families and other groups provide informal instruction about customs and how to socialize with others. In most cultures, intellectual skills such as reading and mathematics are taught in formal educational settings.
- 457. Data that a government provides about its people’s education level must be taken with a grain of salt. Comparisons from country to country can be difficult because many nations rely on literacy tests of their own design. Although some countries administer standardized tests, others require only a signature as proof of literacy. Yet searching for untapped markets or new factory locations can force managers to rely on such undependable benchmarks. As you can see from Table 2.1, some countries have further to go than others to increase national literacy rates. Around 800 mil- lion adults remain illiterate globally. Countries with poorly educated populations attract the lowest- paying manufacturing jobs. Nations with excellent programs for basic education tend to attract relatively good-paying indus- tries. Those that invest in worker training are usually repaid in productivity increases and rising incomes. Meanwhile, countries with highly educated workforces can attract the highest-paying jobs. Emerging economies in Asia owe much of their rapid economic development to solid educa-
- 458. tion systems. They focus on rigorous mathematical training in primary and secondary schooling. University education concentrates on the hard sciences and aims to train engineers, scientists, and managers. THE “BRAIN DRAIN” PHENOMENON The quality of a nation’s education system is related to its level of economic development. Brain drain is the departure of highly educated people from one profession, geographic region, or nation to another. Over the years, political unrest and economic hardship has forced many Indonesians to flee their homeland for other nations, particularly Hong Kong, Singapore, and the United States. Most of Indonesia’s brain drain has occurred among Western-educated professionals in finance and technology—exactly the people needed for economic development. Many countries in Eastern Europe experienced high levels of brain drain early in their transi- tion to market economies. Economists, engineers, scientists, and researchers in all fields fled westward to escape poverty. But as these nations continue their
- 459. long transition from communism, some of them are luring professionals back to their homelands — a process known as reverse brain drain. brain drain Departure of highly educated people from one profession, geo- graphic region, or nation to another. Country Adult Illiteracy Rate (% of People Age 15 and up) Burkina Faso 64 Pakistan 42 Nigeria 40 Morocco 31 Cambodia 23
- 460. Zimbabwe 13 Brazil 7 Peru 5 Colombia 5 Mexico 5 Portugal 4 Philippines 4 Source: Based on The World Factbook dataset, Washington, DC: Central Intelligence Agency, (https://www.cia.gov/library/publications/ the-world-factbook/index.html). TABLE 2.1 Illiteracy Rates of Selected Countries M02_WILD9220_09_SE_C02.indd 50 10/30/17 8:47 PM https://www.cia.gov/library/publications/the%E2%80%90world %E2%80%90factbook/index.html
- 461. https://www.cia.gov/library/publications/the%E2%8 0%90world %E2%80%90factbook/index.html CHAPTER 2 • CRoss-CulTuRAl BusinEss 51 2.4 Religion Human values often originate from religious beliefs. Different religions take different views of work, savings, and material goods. Identifying why they do so can help us understand business practices in other cultures. Knowing how religion affects business is especially important in countries with religious governments. Map 2.1 (on pages 52–53) shows where the world’s major religions are practiced. Religion is not confined to national political boundaries but can exist in different regions of the world simultaneously. It is also common for several or more religions to be practiced within a single nation. In the following sections, we explore Christianity, Islam, Hinduism, Buddhism, Confu- cianism, Judaism, and Shinto. We examine their potential effects, both positive and negative, on
- 462. international business activity. Christianity Christianity was born in Palestine around 2,000 years ago among Jews who believed that God sent Jesus of Nazareth to be their savior. Although Christianity boasts more than 300 denominations, most Christians belong to the Roman Catholic, Protestant, or Eastern Ortho- dox churches. With 2 billion followers, Christianity is the world’s single largest religion. The Roman Catholic faith asks its followers to refrain from placing material possessions above God and others. Protestants believe that salvation comes from faith in God and that hard work gives glory to God—a tenet known widely as the “Protestant work ethic.” Many historians believe this conviction was a main factor in the development of capitalism and free enterprise in nineteenth-century Europe. Christian organizations sometimes get involved in social causes that affect business policy. For example, some conservative Christian groups have boycotted the Walt Disney Company
- 463. (www.disney.com), charging that, in portraying young people as rejecting parental guidance, Disney films impede the moral development of young viewers worldwide. The Catholic Church itself has been involved in some highly publicized controversies. Ireland-based Ryanair (www.ryanair.com), Europe’s leading low-fare airline, ruffled the feathers of the Roman Catholic Church with an ad campaign. The ad depicted the pope (the head of the Catholic Church) claiming that the fourth secret of Fatima was Ryanair’s low fares. The Church sent out a worldwide press release accusing the airline of blaspheming the pope. But much to the Church’s dismay, the press release generated an enormous amount of free publicity for Ryanair. Hyundai (www.hyundai.com) offended the Catholic Church when it ran a TV commercial during World Cup soccer matches. The spot showed a “church” in Argentina with a stained-glass window of a soccer ball, a soccer ball topped with a crown of thorns, and parishioners receiving slices of pizza instead of communion hosts. The Catholic
- 464. Church took offense at the images of people worshipping soccer and at the mocking of its practice of receiving Holy Communion. Hyundai put a stop to the ad two days after it began airing. Islam With 1.3 billion adherents, Islam is the world’s second-largest religion. The prophet Muhammad founded Islam around AD 600 in Mecca, the holy city of Islam located in Saudi Arabia. Islam thrives in North Africa, the Middle East, Central Asia, Pakistan, and some Southeast Asian nations, including Indonesia. Muslim concentrations are also found in most European and US cities. Islam means “submission to Allah,” and Muslim means “one who submits to Allah.” Islam revolves around the “five pillars”: (1) reciting the Shahada (profession of faith), (2) giving to the poor, (3) 2.4 Outline how the major world religions can influence business. QuiCK sTuDY 3
- 465. 1. Social structure embodies a culture’s fundamental organization, including what? 2. A person and his or her immediate relatives including parents and siblings, is called a what? 3. The departure of highly educated people from one profession, region, or nation to another is called what? M02_WILD9220_09_SE_C02.indd 51 10/30/17 8:47 PM http://www.disney.com/ http://www.ryanair.com/ http://www.hyundai.com/ 52 PART 2 • nATionAl BusinEss EnViRonMEnTs Map 2.1 World Religions F R A N C E
- 466. BELGIUM NETHER- LANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND
- 467. SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y G R E E C E ALBANIA
- 468. CYPRUS L I B Y A TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN
- 469. B l a c k S e aBOSNIA- HERZEGOVINA Christianity Hinduism Judaism Buddhism Nature religion Chinese religion Islam Other groups A L A S K A C A N A D A MEXICO CUBA JAMAICA
- 470. BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA SURINAME ECUADOR
- 471. B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS ISLANDS GREENLAND ICELAND FINLAND DENMARKUNITED KINGDOM IRELAND
- 472. FRANCE BELGIUM LUXEMBOURG GERMANY LITHUANIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL CZECH- REP. AUSTRIA SWITZ.
- 474. SAHARA A L G E R I A L I B YA TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST
- 475. NIGERIA N I G E R C H A D E G Y P T S U D A N S O U T H S U D A N ERITREA E T H I O P I A CAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC CONGO
- 476. DEMOCRATIC REPUBLIC (ZAIRE) RWANDA BURUNDI UGANDA K E N YA SOMALIA A N G O L A N A M I B I A Z A M B I A TA N Z A N I A MALAWI Z I M B A B W E
- 477. B O T S WA N A MOZAMBIQUE MADAGASCAR SWAZILAND LESOTHO MAURITIUS RÉUNION GEORGIA ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN
- 478. IRAQ I R A N SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN
- 479. KAZAKHSTAN SRI LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN
- 480. I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJI VANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH
- 481. KOREA JAPAN C H I N A ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E N O R W
- 483. DJBOUTI HAWAII GALAPAGOS ISLANDS SLOVENIA SINGAPORE A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N O C E A N PA C I F I C
- 484. O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA NETHER- LANDS LATVIA RUSSIA LICHT.
- 486. IN GUYANA FRENCH GUIANA TRINIDAD & TOBAGO MYANMAR (BURMA) M02_WILD9220_09_SE_C02.indd 52 10/30/17 8:47 PM CHAPTER 2 • CRoss-CulTuRAl BusinEss 53 F R A N C E BELGIUM NETHER- LANDS
- 487. GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY
- 488. CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y G R E E C E ALBANIA CYPRUS L I B Y A
- 489. TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA Christianity
- 490. Hinduism Judaism Buddhism Nature religion Chinese religion Islam Other groups A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC
- 491. HAITI PUERTO RICOGUATEMALA COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA SURINAME ECUADOR B R A Z I L PERU
- 493. LUXEMBOURG GERMANY LITHUANIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL CZECH- REP. AUSTRIA SWITZ. MONACO ITALY
- 494. SLOVAKIA HUNGARY SERBIA AND MONTENEGRO BULGARIA ROMANIA MOLDOVA GREECE TURKEY CYPRUS MOROCCO WESTERN SAHARA A L G E R I A L I B YA
- 495. TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST NIGERIA N I G E R C H A D
- 496. E G Y P T S U D A N S O U T H S U D A N ERITREA E T H I O P I A CAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC CONGO DEMOCRATIC REPUBLIC (ZAIRE)
- 497. RWANDA BURUNDI UGANDA K E N YA SOMALIA A N G O L A N A M I B I A Z A M B I A TA N Z A N I A MALAWI Z I M B A B W E B O T S WA N A MOZAMBIQUE
- 499. SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI
- 500. LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW
- 501. GUINEA SOLOMON ISLANDS FIJI VANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPAN C H I N A
- 502. ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E N O R W A Y
- 504. GALAPAGOS ISLANDS SLOVENIA SINGAPORE A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N N O R T H
- 505. AT L A N T I C O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA NETHER- LANDS LATVIA RUSSIA LICHT. CENTRAL AFRICAN REPUBLIC
- 507. FRENCH GUIANA TRINIDAD & TOBAGO MYANMAR (BURMA) M02_WILD9220_09_SE_C02.indd 53 10/30/17 8:47 PM 54 PART 2 • nATionAl BusinEss EnViRonMEnTs praying five times daily, (4) fasting during the holy month of Ramadan, and (5) making the Hajj (pilgrimage) to the Saudi Arabian city of Mecca at least once in a person’s lifetime. Religion strongly affects the kinds of goods and services acceptable to Muslim consumers. Islam, for example, prohibits the consumption of alcohol and pork. Popular alcohol substitutes are soft drinks, coffee, and tea. Substitutes for pork include
- 508. lamb, beef, and poultry (all of which must be slaughtered in a prescribed way so as to meet halal requirements). Markets for hot coffee and tea are quite large in Muslim culture because they often play ceremonial roles. And because usury (charging interest for money lent) violates the laws of Islam, credit card companies collect management fees rather than interest, and each cardholder’s credit line is limited to an amount held on deposit. Nations governed by Islamic law (see Chapter 3) sometimes segregate the sexes at certain activities and in locations such as schools. In Saudi Arabia, women cannot drive cars on public streets. In orthodox Islamic nations, men cannot conduct market research surveys with women at their homes unless they are family members. Women visiting Islamic cultures need to be espe- cially sensitive to Islamic beliefs and customs. Although the issue of hejab (Islamic dress) is hotly debated, both Muslim and non-Muslim women are officially expected to wear body-concealing garments and scarves over their hair.
- 509. Hinduism Hinduism formed around 4,000 years ago in present-day India, where more than 90 percent of Hinduism’s 900 million adherents live. It is also the majority religion of Nepal and a secondary religion in Bangladesh, Bhutan, and Sri Lanka. Considered by some to be a way of life rather than a religion, Hinduism recalls no founder and recognizes no central authority or spiritual leader. Integral to the Hindu faith is the caste system described earlier in this chapter. Hindus believe in reincarnation—the rebirth of the human soul at the time of death. For many Hindus, the highest goal of life is moksha —escaping from the cycle of reincarnation and entering a state of eternal happiness called nirvana. Hindus tend to disdain materialism. Strict Hindus do not eat or willfully harm any living creature because it might be a reincarnated human soul. Because Hindus consider cows to be sacred animals, they do not eat beef. Yet, consuming cow’s milk is considered a means of religious purification. Firms such as McDonald’s (www.mcdonalds .com) must work closely with government and religious
- 510. officials in India in order to respect Hindu beliefs. In many regions, McDonald’s has removed all beef products from its menu and prepares vegetable and fish products in separate kitchen areas. And for those Indians who do eat red meat (but not cows because of their sacred status), the company sells the Maharaja Mac, made of lamb, in place of the Big Mac. In India, there have been attacks on Western consumer-goods companies in the name of pre- serving Indian culture and Hindu beliefs. Some companies such as Pepsi-Cola (www.pepsi.com) have been vandalized, and local officials even shut down a KFC restaurant (www.kfc.com) for a time. Although it currently operates in India, Coca-Cola (www.cocacola.com) once left the market completely rather than succumb to demands that it reveal its secret formula to authorities. India’s investment environment has improved greatly in recent years. Yet labor–management relations sometimes deteriorate to such a degree that strikes cut deeply into productivity. Buddhism
- 511. Buddhism was founded about 2,600 years ago in India by a Hindu prince named Siddhartha Gautama, who later became the Buddha. Today, Buddhism has around 380 million followers, mostly in China, Tibet, Korea, Japan, Vietnam, and Thailand, with pockets of Buddhists in Europe and the Americas. Although founded in India, Buddhism has relatively few adherents there. Unlike Hinduism, Buddhism rejects the caste system of Indian society. But like Hinduism, Buddhism promotes a life centered on spiritual rather than worldly matters. Buddhism also teaches that seeking pleasure for the human senses causes suffering. In a formal ceremony, Buddhists take refuge in the “three jewels”: the Buddha, the dharma (his teachings), and the sangha (community of enlightened beings). They seek nirvana (escape from reincarnation) through charity, modesty, compassion for others, restraint from violence, and general self- control. Although monks at many temples are devoted to lives of solitary meditation and discipline, many other Buddhist priests are dedicated to lessening the burden of human suffering. They finance
- 512. schools and hospitals across Asia and are active in worldwide peace movements. In Tibet, most people M02_WILD9220_09_SE_C02.indd 54 10/30/17 8:47 PM http://www.mcdonalds.com/ http://www.mcdonalds.com/ http://www.pepsi.com/ http://www.kfc.com/ http://www.cocacola.com/ CHAPTER 2 • CRoss-CulTuRAl BusinEss 55 still acknowledge the exiled Dalai Lama as the spiritual and political head of the Buddhist culture. In the United States, a coalition of religious groups and human rights advocates continue to press the US Congress to apply economic sanctions against countries that are seen as practicing religious persecution. Confucianism An exiled politician and philosopher named Kung-fu-dz (pronounced “Confucius” in English)
- 513. began teaching his ideas in China nearly 2,500 years ago. Today, China is home to most of Confucianism’s 225 million followers. Confucian thought is also ingrained in the cultures of Japan, South Korea, and nations with large numbers of ethnic Chinese, such as Singapore. South Korean business practice reflects Confucian thought in its rigid organizational structure and unswerving reverence for authority. Korean employees do not question strict chains of com- mand. Yet, efforts to apply Korean-style management in overseas subsidiaries have caused some high-profile disputes with US executives and confrontations with factory workers in Vietnam. Some observers contend that the Confucian work ethic and a commitment to education helped spur East Asia’s phenomenal economic growth, but others respond that the link between culture and economic growth is weak. They argue that economic, historical, and international factors are at least as important as culture. They say that Chinese leaders had distrusted Confucianism for centuries because they believed that it stunted economic growth.
- 514. Many ordinary Chinese, however, despised merchants and traders because their main objective (earning money) violated Confucian beliefs. As a result, many Chinese businesspeople moved to Indonesia, Malaysia, Singapore, and Thailand, where they launched successful businesses. Judaism More than 3,000 years old, Judaism was the first religion to preach belief in a single God. Nowa- days, Judaism has roughly 18 million followers worldwide. In Israel, Orthodox (“fully observant”) Jews make up 12 percent of the population and constitute an increasingly important economic segment. In Jerusalem, there is even a modeling agency that specializes in casting Orthodox Jews in ads aimed both inside and outside the Orthodox community. Models include scholars and one rabbi. Targeting specific groups, however, must be done carefully. The Israeli branch of Swedish furniture retailer, IKEA, targeted ultra-Orthodox Jews with an advertising catalog purposely con- taining no images of women. IKEA pulled the catalog and headquarters in Sweden issued an apology, saying “ . . . we have been very clear that this is not
- 515. what the IKEA brand stands for.”3 Buddhism instructs its followers to live a simple life void of material- istic ambitions. But as globaliza- tion pries open Asia’s markets, the products of Western multinational corporations are streaming in. Here, a Buddhist monk takes a selfie with a group of Italian chil- dren. Do you think Asian cultures can modernize while retaining their traditional values and beliefs? Gari Wyn Williams/Alamy Stock Photo M02_WILD9220_09_SE_C02.indd 55 10/30/17 8:47 PM 56 PART 2 • nATionAl BusinEss EnViRonMEnTs Employers and human resource managers must be aware of important days in the Jewish faith. Because the Sabbath lasts from sundown on Friday to sundown
- 516. on Saturday, work schedules might need adjustment. Devout Jews want to be home before sundown on Fridays. On the Sabbath itself, they do not work, travel, or carry money. Several other important observances are Rosh Ha-Shanah (the two-day Jewish New Year, in September or October), Yom Kippur (the Day of Atonement, 10 days after New Year), Passover (which celebrates the Exodus from Egypt, in March or April each year), and Hanukkah (which celebrates an ancient victory over the Syrians, usually in December). Marketers must take into account foods that are banned among strict Jews. Pork and shellfish (such as lobster and crab) are prohibited. Meat is stored and served separately from milk. Other meats must be slaughtered according to a practice called shehitah. Meals prepared according to Jewish dietary traditions are called kosher. Most airlines offer kosher meals for Jewish passengers on their flights. Shinto Shinto (meaning “way of the gods”) arose as the native religion of the Japanese. But today,
- 517. Shinto can claim only about 4 million strict adherents in Japan. Because modern Shinto preaches patriotism, it is sometimes said that the religion of Japan is nationalism. Shinto teaches sincere and ethical behavior, loyalty and respect toward others, and enjoyment of life. Shinto beliefs are ref lected in the workplace through the traditional practice of lifetime employment (although this is waning today) and through the traditional trust extended between firms and customers. Japanese competitiveness in world markets has benefited from loyal work- forces, low employee turnover, and good labor–management cooperation. The phenomenal suc- cess of many Japanese companies in recent decades gave rise to the concept of a Shinto work ethic, certain aspects of which have been emulated by Western managers. QuiCK sTuDY 4 1. Which denomination of Christianity has a “work ethic” named after it? 2. India is home to more than 90 percent of the adherents of
- 518. which religion? 3. The Dalai Lama is the spiritual and political head of which religion? 2.5 Personal Communication People in every culture have a communication system to convey thoughts, feelings, knowledge, and information through speech, writing, and actions. Understanding a culture’s spoken language gives us great insight into why people think and act the way they do. Understanding a culture’s body language helps us avoid sending unintended or embarrassing messages. Let’s examine each of these forms of communication more closely. Spoken and Written Language Spoken and written language is the most obvious difference we notice when traveling in another country. We overhear and engage in many conversations and read many signs and documents to find our way. Knowledge about a people’s language is the key to deeply understanding a culture. Linguistically different segments of a population are often culturally, socially, and politi-
- 519. cally distinct. Malaysia’s population is composed of Malay (60 percent), Chinese (30 percent), and Indian (10 percent) peoples. Although Malay is the official national language, each ethnic group speaks its own language and continues its traditions. The United Kingdom includes Eng- land, Northern Ireland, Scotland, and Wales. The native languages of Ireland and Scotland are dialects of Gaelic, and the speaking of Welsh in Wales predates the use of English in Britain. After decades of decline, Gaelic and Welsh are staging comebacks on radio and television and in school curricula. The global reach of media today, increased travel for tourism and business, and aging popula- tions mean that some cultures face the possibility of losing their native languages. Read the Global Sustainability feature, titled “Speaking in Fewer Tongues,” to see how a lack of social sustain- ability can endanger languages around the world. 2.5 Explain the importance of personal communication to international business.
- 520. communication System of conveying thoughts, feelings, knowledge, and informa- tion through speech, writing, and actions. M02_WILD9220_09_SE_C02.indd 56 10/30/17 8:47 PM CHAPTER 2 • CRoss-CulTuRAl BusinEss 57 IMPLICATIONS FOR MANAGERS The importance of understanding local languages is be- coming increasingly apparent on the Internet. Roughly one-half to two-thirds of all web pages are in English, but about three-fourths of all Internet users are nonnative English speakers. Software- solutions providers assist companies from English-speaking countries to adapt their websites for global e-business. Consumers across the globe bring their tastes, preferences, and buying habits online with them in search of an enjoyable buying experience.
- 521. Language proficiency is crucial in production facilities where nonnative managers supervise local employees. One US manager in Mexico was confused when his seemingly relaxed and untroubled workers went on strike. The problem lay in different cultural perspectives. Mexican workers generally do not take the initiative in problem solving and workplace complaints. Workers concluded that the plant manager knew, but did not care, about their concerns because he did not question employees about working conditions. Likewise, employees in the west often question their bosses or seek additional explanation if something doesn’t seem quite right. But western managers working in China must work hard at ascertaining what local workers think because they might not be accustomed to speaking up and questioning authority figures. Marketers prize insights into the interests, values, attitudes, and habits of teenagers to better target their promotions. Habbo (www.habbo.com), the world’s largest virtual hangout for teens, says teens worldwide communicate with friends primarily through Facebook (www.facebook
- 522. .com), its Messenger app, and other instant messaging apps. They tend to reserve email for non- personal needs such as school, work, and correspondence with family members. LANGUAGE BLUNDERS Advertising slogans and company documents must be translated care- fully so that messages are received precisely as intended. If they are not carefully translated, a company can make a language blunder in its international business dealings. In Sweden, Kellogg (www.kellogg.com) had to rename its Bran Buds cereal because the Swedish translation came out roughly as “burned farmer.” And then there’s the entrepreneur in Miami who tried to make the most of a visit to the United States by the Pope of the Roman Catholic Church. He quickly printed T-shirts for Spanish-speaking Catholics that should have read, “I saw the Pope (el Papa).” But a gender error on the noun resulted in T-shirts proclaiming, “I saw the Potato (la Papa)”! Other translation blunders include: • An English-language sign in a Moscow hotel read, “You are welcome to visit the cemetery
- 523. where famous Russian composers, artists, and writers are buried daily except Thursday.” one day this year, somewhere in the world, an old man or woman will die and his or her language will die, too. Dozens of languages have just one native speaker still living. Here are the facts, the consequences, and what can be done. • Some Are Losing. of the world’s roughly 6,000 languages, about 90 percent have fewer than 100,000 speakers. By the end of this century, more than half of the world’s languages might be lost; perhaps fewer than 1,000 will survive. one endangered language is Aramaic, a 2,500-year-old semitic language that was once the major language in the Middle East. • Some Are Gaining. Even as minority languages die out, three languages continue to grow in popularity: Mandarin, spanish, and English. English has emerged as the univer- sal language of business, higher education, diplomacy, science, popular music, entertainment, and international travel. More than 70 nations give special status to English, and roughly one-quarter of the world’s population is fluent
- 524. or competent in it. • The Consequences. The loss of a language can diminish the richness of a people’s cultural, spiritual, and intellectual life. What is lost includes prayers, myths, humor, poetry, ceremonies, conversational styles, and terms for emotions, behaviors, and habits. When a language dies, all these must be expressed in a new language with different words, sounds, and grammar. • What Can Be Done? linguists are concerned that such a valuable part of human culture could vanish, so they are busily creating videotapes, audiotapes, and written records of endangered tongues before they disappear. Communi- ties are also taking action. in new Zealand, Maori com- munities set up nursery schools called kohanga reo, or “language nests,” that are staffed by elders and conducted entirely in Maori. • Want to Know More? Visit Enduring Voices (http://travel .nationalgeographic.com/travel/enduring-voices), living Tongues (www.livingtongues.org), and the Foundation For Endangered languages (www.ogmios.org). GLOBAL SUSTAINABILITY Speaking in Fewer Tongues
- 525. M02_WILD9220_09_SE_C02.indd 57 10/30/17 8:47 PM http://www.habbo.com/ http://www.kellogg.com/ http://www.ogmios.org/ http://www.livingtongues.org/ http://travel.nationalgeographic.com/travel/enduring%E2%80%9 0voices http://travel.nationalgeographic.com/travel/enduring%E2%80%9 0voices http://www.facebook.com/ http://www.facebook.com/ 58 PART 2 • nATionAl BusinEss EnViRonMEnTs • A sign for English-speaking guests in a Tokyo hotel read, “You are respectfully requested to take advantage of the chambermaids.” • An airline ticket office in Copenhagen read in English, “We take your bags and send them in all directions.”
- 526. • A Japanese knife manufacturer labeled its exports to the United States with “Caution: Blade extremely sharp! Keep out of children.” • Braniff Airlines’ English-language slogan “Fly in Leather” was translated into “Fly Naked” in Spanish. Such blunders are not the exclusive domain of humans. The use of machine translation— computer software used to translate one language into another — is booming along with the explo- sion in the number of nonnative English speakers using the Internet. One search engine allows its users to search the Internet in English and Asian languages, translate web pages, and compose an email in one language and send it in another. The computers attempted a translation of the fol- lowing: “The Chinese Communist Party is debating whether to drop its ban on private-enterprise owners being allowed to join the party.” And it came up with this in Chinese: “The Chinese Communist Party is debating whether to deny its ban in join the Party is allowed soldier enter- prise owners on.” Various other machine translators turned the
- 527. French version of “I don’t care” (“Je m’en fou”) into “I myself in crazy,” “I of insane,” and “Me me in madman.” LINGUA FRANCA A lingua franca is a third or “link” language understood by two parties who speak different native languages. The original lingua franca arose to support ancient trading activities and contained a mixture of Italian and French, along with Arabic, Greek, and Turkish. Although only 5 percent of the world’s population speaks English as a first language, it is the most common lingua franca used in international business, followed closely by French and Spanish. The Cantonese dialect of Chinese spoken in Hong Kong and the Mandarin dialect spoken in Taiwan and on the Chinese mainland are so different that a lingua franca is often preferred. And, although India’s official language is Hindi, its lingua franca among the multitude of dialects is English because it was once a British colony. Many young people speak what is referred to as “Hinglish”—a combination of Hindi, Tamil, and English words mixed within a single sentence.
- 528. Multinational corporations also sometimes choose a lingua franca for official internal com- munications because they operate in many nations, each with its own language. Companies that use English for internal correspondence include Philips (www.philips.com; a Dutch electronics firm), Asea Brown Boveri (www.abb.com; a Swiss industrial giant), Alcatel-Lucent (www.alcatel- lucent.com; a French telecommunications firm), and Rakuten (www.rakuten.co.jp; a Japanese Internet shopping site). English plays a prominent role in international business because just five countries (Australia, Canada, New Zealand, the United Kingdom, and the United States) account for one-quarter of global economic output, despite having just 6 percent of the world’s population. These five nations also boast some of the highest standards of living in the world.4 Body Language Body language communicates through unspoken cues, including hand gestures, facial expres- sions, physical greetings, eye contact, and the manipulation of personal space. Similar to spoken
- 529. language, body language communicates both information and feelings and differs greatly from one culture to another. Italians, French, Arabs, and Venezuelans, for example, tend to animate conversations with lively hand gestures and other body motions. Japanese and Koreans, although more reserved, can communicate just as much information through their own body languages; a look of the eye can carry as much or more meaning as two flailing arms. Most body language is subtle and takes time to recognize and interpret. For example, navi- gating the all-important handshake in international business can be tricky. In the United States, a firm grip and several pumps of the arm is usually the standard. But in the Middle East and Latin America, a softer clasp of the hand with little or no arm pump is the custom. And in some coun- tries, such as Japan, people do not shake hands at all but bow to one another. Bows of respect carry different meanings, usually depending on the recipient. Associates of equal standing bow about 15 degrees toward one another. But proper respect for an elder requires a bow of about
- 530. 30 degrees. Bows of remorse or apology should be about 45 degrees. Proximity is an extremely important element of body language to consider when meet- ing someone from another culture. If you stand or sit too close to your counterpart (from their lingua franca Third or “link” language under- stood by two parties who speak different native languages. body language Language communicated through unspoken cues, including hand gestures, facial expressions, physi- cal greetings, eye contact, and the manipulation of personal space. M02_WILD9220_09_SE_C02.indd 58 10/30/17 8:47 PM http://www.abb.com/ http://www.rakuten.co.jp/ http://www.philips.com/
- 531. http://www.alcatellucent.com/ http://www.alcatellucent.com/ CHAPTER 2 • CRoss-CulTuRAl BusinEss 59 perspective), you might invade their personal space and appear aggressive. If you remain too far away, you risk appearing untrustworthy. For North Americans, a distance of about 19 inches is about right between two speakers. For Western Europeans, 14 to 16 inches seems appropriate, but someone from the United Kingdom might prefer about 24 inches. Koreans and Chinese are likely to be comfortable about 36 inches apart; people from the Middle East will close the distance to about 8 to 12 inches. Physical gestures often cause the most misunderstanding between people of different cultures because they can convey very different meanings. For example, the thumbs-up sign is vulgar in Italy and Greece but means “all right” or even “great” in the United States.
- 532. QuiCK sTuDY 5 1. Every culture has a communication system that it uses to convey what? 2. A special language understood by two parties who speak different native languages is called what? 3. An interesting fact about body language is what? Forming the thumb-and-index fin- ger circle in most of Europe and in the United States means “okay”; in Germany, it’s a rude gesture. Tapping one’s nose in England and Scotland means “You and I are in on the secret”; in Wales, it means “You’re very nosy.” Tapping one’s temple in much of Western Europe means “You’re crazy”; in the Netherlands, it means “You’re very clever.” leungchopan/Shutterstock; Lorenz Timm/ Shutterstock; Borjaika/Shutterstock
- 533. 2.6 Culture in the Global Workplace So far in this chapter, we learned about the key components of culture and read examples from around the world about how each one influences international business. Likewise, the workplace holds a prominent position in a culture. In addition to providing a way to earn a living, work sup- plies people with an avenue to give their lives meaning, structure, and identity.5 Let’s now take a closer look at how specific aspects of a people’s beliefs and behaviors affect activities in the global workplace. Perception of Time People in many Latin American and Mediterranean cultures are casual about their use of time. They maintain f lexible schedules and would rather enjoy their time than sacrifice it to unbending efficiency. Businesspeople, for example, might arrive after the scheduled meeting time and prefer to build personal trust before discussing business. Not surprisingly, it usu- ally takes longer to conduct business in these parts of the world than in the United States or
- 534. northern Europe. By contrast, people in Japan and the United States typically arrive promptly for meetings, keep tight schedules, and work long hours. The emphasis on using time efficiently ref lects the underlying value of hard work in both these countries. Yet, people in Japan and the United States sometimes differ in how they use their time at work. For example, US employees strive toward workplace efficiency and might leave work early if the day’s tasks are done, ref lecting the value placed on producing individual results. But in Japan, although efficiency is prized, it is equally important to look busy in the eyes of others even when business is slow. A Japanese employee would not leave work early even if he or she finished the day’s task ahead of schedule. Japanese workers want to demonstrate their dedication to superiors and coworkers—an attitude grounded in values such as the concern for group cohesion, loyalty, and harmony. 2.6 Describe how firms and
- 535. culture interact in the global workplace. M02_WILD9220_09_SE_C02.indd 59 10/30/17 8:47 PM 60 PART 2 • nATionAl BusinEss EnViRonMEnTs Cultural Change A cultural trait is anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts. Such traits include bowing to show respect in Japan (gesture), a Buddhist temple in Thailand (material object), celebrating the Day of the Dead in Mexico (tradi- tion), and practicing democracy in the United States (concept). The process whereby cultural traits spread from one culture to another is called cultural dif- fusion. As new traits are accepted and absorbed into a culture, cultural change occurs naturally and, as a rule, gradually. Globalization and technological advances are increasing the pace of both cultural diffusion and cultural change. The global spread of
- 536. media today, along with the expanding reach of the Internet and services such as YouTube and Facebook, plays a role in cultural diffusion. These forces expose people, some of whom are extremely isolated, to the traits and ideas of other cultures. WHEN COMPANIES CHANGE CULTURES International companies are often agents of cultural change. As trade and investment barriers fall, for example, US consumer-goods and entertainment companies are moving into untapped markets. Critics sometimes charge that, in exporting the products of such firms, the United States is practicing cultural imperialism—the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another. Fears of cultural imperialism still drive some French to oppose the products of the Walt Disney Company (www.disney.com) and its Disneyland Paris theme park. They fear “Mickey and Friends” could replace traditional characters rooted in French culture. McDonald’s (www.mcdonalds.com) is also sometimes charged with cultural imperialism. It is
- 537. reported that the average Japanese child thinks McDonald’s was invented in Japan and exported to the United States. Chinese children consider “Uncle” McDonald to be “funny, gentle, kind, and understanding.” Meanwhile, politi- cians in Russia decry the “Snickerization” of their culture—a snide term that refers to the popu- larity of the Snickers candy bar made by Mars Incorporated (www.mars.com). And when the Miss World Pageant was held in India, conservative groups criticized Western corporate sponsors for spreading the message of consumerism and portraying women as sex objects. Sensitivity to the cultures in which they operate can help companies avoid charges of cultural imperialism. Firms must focus not only on meeting people’s product needs but also on how their activities and products affect people’s traditional ways and habits. Rather than view their influence on culture as the inevitable consequence of doing business, companies can take several steps to soften those effects. For example, policies and practices that are at odds with deeply held beliefs can be introduced gradually. Managers could also seek the
- 538. advice of highly respected local indi- viduals such as elders, who fulfill key societal roles in many emerging markets. And businesses should always make clear to local workers the benefits of any proposed changes that are closely linked to cultural traits. An area in which US companies might be changing the workplace in other cultures is how workers are treated. As US companies outsource jobs to other nations, they are being held account- able for how these subcontractors treat their employees. In the process, US companies are exporting the values of the US workplace. WHEN CULTURES CHANGE COMPANIES Culture often forces companies to adjust business policies and practices. Managers from the United States, for example, often encounter cultural differences that force changes in how they motivate employees in other countries. Managers sometimes use situational management—a system in which a supervisor walks an employee through every step of an assignment or task and monitors the results at each stage. This technique
- 539. helps employees fully understand the scope of their jobs and clarifies the boundaries of their responsibilities. Cultural differences can force other changes to suit local culture. In Vietnam, individual criticism should be delivered privately to save employees from “losing face” among coworkers. Individual praise for good performance can be delivered either in private or in public, if done care- fully. The Vietnamese place great value on group harmony, so an individual can be embarrassed if singled out publicly as being superior to the rest of the work unit. And Vietnam’s traditional, agriculture-based economy means that people’s concept of time revolves around the seasons. The local “timepiece” is the monsoon, not the clock. Western managers need to take a patient, long- term view of business activity there. material culture All the technology used in a culture to manufacture goods and provide services.
- 540. cultural trait Anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts. cultural diffusion Process whereby cultural traits spread from one culture to another. cultural imperialism Replacement of one culture’s tradi- tions, folk heroes, and artifacts with substitutes from another. View of Work Some cultures display a strong work ethic; others stress a more balanced pace in juggling work and leisure. People in southern France like to say they work to live, whereas people in the United States live to work. The French say work is a means to an end for them, whereas work is an end in itself in the United States. Not surprisingly, the lifestyle in southern France is slower-paced. People tend to concentrate on earning enough money to enjoy a
- 541. relaxed, quality lifestyle. Busi- nesses practically close down during August, when many workers take month-long paid holidays, often outside the country. In European countries, start-ups are considered quite risky, and capital for entrepreneurial ventures can be scarce. Moreover, if an entrepreneur’s venture goes bust, he or she can find it very difficult to obtain financing for future projects because of the stigma of failure. This remains true despite some recent progress. By contrast, in the United States, a prior bankruptcy is sometimes considered a valuable learning experience (assuming lessons were learned) when referenced in a business plan. As long as US bankers or venture capitalists see promising business plans, they are generally willing to loan money. Today, many European nations are trying to encourage entre- preneurial activity. Material Culture All the technology used in a culture to manufacture goods and provide services is called its mate- rial culture. Material culture is often used to measure the
- 542. technological advancement of a nation’s markets or industries. Generally, a firm enters a new market only if demand for its products has developed or the infrastructure can support production operations. Some nations lack the most basic elements of a modern society’s material culture. Yet, technology is helping countries at the bottom of the global economic pyramid break down barriers that keep their people mired in poverty. Material culture often displays uneven development across a nation’s geography, markets, and industries. For example, Shanghai has long played an important role in China’s international trade because of its strategic location and its superb harbor on the East China Sea. Although it is home to only 1 percent of the total population, Shanghai accounts for about 5 percent of China’s total output—including about 12 percent of both its industrial production and its financial-services output. Likewise, Bangkok, the capital city of Thailand, houses only 10 percent of the nation’s population but accounts for about 40 percent of its economic output. Meanwhile, the northern
- 543. parts of the country remain rural, consisting mostly of farms, forests, and mountains. Cultural diffusion is a powerful force of cultural change. Traditional cultures can be espe- cially susceptible to change when they are introduced to the lifestyles of people in wealthy, industrial- ized nations. Satellite TV and the Internet are highly effective at exposing people to the cultural traits of other societies. Do you think the family living in this tra- ditional thatch hut in India view the world any differently since they acquired satellite television? Mikhail Vorobiev/123RF.com M02_WILD9220_09_SE_C02.indd 60 10/30/17 8:47 PM CHAPTER 2 • CRoss-CulTuRAl BusinEss 61
- 544. Cultural Change A cultural trait is anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts. Such traits include bowing to show respect in Japan (gesture), a Buddhist temple in Thailand (material object), celebrating the Day of the Dead in Mexico (tradi- tion), and practicing democracy in the United States (concept). The process whereby cultural traits spread from one culture to another is called cultural dif- fusion. As new traits are accepted and absorbed into a culture, cultural change occurs naturally and, as a rule, gradually. Globalization and technological advances are increasing the pace of both cultural diffusion and cultural change. The global spread of media today, along with the expanding reach of the Internet and services such as YouTube and Facebook, plays a role in cultural diffusion. These forces expose people, some of whom are extremely isolated, to the traits and ideas of other cultures. WHEN COMPANIES CHANGE CULTURES International
- 545. companies are often agents of cultural change. As trade and investment barriers fall, for example, US consumer-goods and entertainment companies are moving into untapped markets. Critics sometimes charge that, in exporting the products of such firms, the United States is practicing cultural imperialism—the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another. Fears of cultural imperialism still drive some French to oppose the products of the Walt Disney Company (www.disney.com) and its Disneyland Paris theme park. They fear “Mickey and Friends” could replace traditional characters rooted in French culture. McDonald’s (www.mcdonalds.com) is also sometimes charged with cultural imperialism. It is reported that the average Japanese child thinks McDonald’s was invented in Japan and exported to the United States. Chinese children consider “Uncle” McDonald to be “funny, gentle, kind, and understanding.” Meanwhile, politi- cians in Russia decry the “Snickerization” of their culture—a snide term that refers to the popu- larity of the Snickers candy bar made by Mars Incorporated
- 546. (www.mars.com). And when the Miss World Pageant was held in India, conservative groups criticized Western corporate sponsors for spreading the message of consumerism and portraying women as sex objects. Sensitivity to the cultures in which they operate can help companies avoid charges of cultural imperialism. Firms must focus not only on meeting people’s product needs but also on how their activities and products affect people’s traditional ways and habits. Rather than view their influence on culture as the inevitable consequence of doing business, companies can take several steps to soften those effects. For example, policies and practices that are at odds with deeply held beliefs can be introduced gradually. Managers could also seek the advice of highly respected local indi- viduals such as elders, who fulfill key societal roles in many emerging markets. And businesses should always make clear to local workers the benefits of any proposed changes that are closely linked to cultural traits. An area in which US companies might be changing the
- 547. workplace in other cultures is how workers are treated. As US companies outsource jobs to other nations, they are being held account- able for how these subcontractors treat their employees. In the process, US companies are exporting the values of the US workplace. WHEN CULTURES CHANGE COMPANIES Culture often forces companies to adjust business policies and practices. Managers from the United States, for example, often encounter cultural differences that force changes in how they motivate employees in other countries. Managers sometimes use situational management—a system in which a supervisor walks an employee through every step of an assignment or task and monitors the results at each stage. This technique helps employees fully understand the scope of their jobs and clarifies the boundaries of their responsibilities. Cultural differences can force other changes to suit local culture. In Vietnam, individual criticism should be delivered privately to save employees from “losing face” among coworkers.
- 548. Individual praise for good performance can be delivered either in private or in public, if done care- fully. The Vietnamese place great value on group harmony, so an individual can be embarrassed if singled out publicly as being superior to the rest of the work unit. And Vietnam’s traditional, agriculture-based economy means that people’s concept of time revolves around the seasons. The local “timepiece” is the monsoon, not the clock. Western managers need to take a patient, long- term view of business activity there. material culture All the technology used in a culture to manufacture goods and provide services. cultural trait Anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts. cultural diffusion Process whereby cultural traits
- 549. spread from one culture to another. cultural imperialism Replacement of one culture’s tradi- tions, folk heroes, and artifacts with substitutes from another. M02_WILD9220_09_SE_C02.indd 61 10/30/17 8:47 PM http://www.disney.com/ http://www.mcdonalds.com/ http://www.mars.com/ 62 PART 2 • nATionAl BusinEss EnViRonMEnTs Studying Culture in the Workplace When discussing culture’s role in the global workplace, we need to discuss two frameworks developed to differentiate between cultures. These frameworks examine characteristics such as values, attitudes, social structures, and so on. Let’s now take a detailed look at each of these tools. KLUCKHOHN-STRODTBECK FRAMEWORK Two researchers
- 550. by the names of Florence Kluck- hohn and Fred Strodtbeck compared cultures and believed they differ along six dimensions. The Kluckhohn-Strodtbeck framework studies a given culture by asking each of the following questions:6 • Do people believe that their environment controls them, that they control the environment, or that they are part of nature? • Do people focus on past events, on the present, or on the future implications of their actions? • Are people easily controlled and not to be trusted, or can they be trusted to act freely and responsibly? • Do people desire accomplishments in life, carefree lives, or spiritual and contemplative lives? • Do people believe that individuals or groups are responsible for each person’s welfare? • Do people prefer to conduct most activities in private or in public? Case: Japanese Culture By providing answers to each of these
- 551. six questions, we can apply the Kluckhohn–Strodtbeck framework to Japanese culture: 1. Japanese believe in a delicate balance between people and environment that must be maintained. Suppose an undetected flaw in a company’s product harms customers using it. In many countries, a high-stakes class-action lawsuit would be filed against the manu- facturer on behalf of the victims’ families. This scenario rarely plays out in Japan. Japanese culture does not hold that individuals can possibly control every situation but that accidents happen. Japanese victims would receive heartfelt apologies, a promise it won’t happen again, and a relatively small damage award. 2. Japanese culture emphasizes the future. Because Japanese culture emphasizes strong ties between people and groups, including companies, forming long-term relationships with people is essential when doing business there. Throughout the business relationship, Japanese companies remain in close, continuous contact with buyers to ensure that their
- 552. needs are being met. This relationship also forms the basis of a communication channel by Kluckhohn–Strodtbeck framework Framework for studying cultural differences along six dimensions, such as focus on past or future events and belief in individual or group responsibility for personal well-being. Overseas Chinese youth learn to perform Tai Chi during the “Chinese Root-Seeking Tour” summer camp in Beijing, the capital of China. The camp attracts more than 6,000 overseas Chinese youths from 54 countries and regions each year. It is designed to educate young people in the cultural traditions of their Chinese ancestors. Organizers hope that by gaining a better understanding about Chinese history and cul-
- 553. ture, these youths will grow up to become good cross-cultural com- municators between China and other nations. Xinhua/Alamy Stock Photo M02_WILD9220_09_SE_C02.indd 62 10/30/17 8:47 PM CHAPTER 2 • CRoss-CulTuRAl BusinEss 63 which suppliers learn about the types of products and services buyers would like to see in the future. 3. Japanese culture treats people as quite trustworthy. Business dealings among Japanese companies are based heavily on trust. After an agreement to conduct business is made, it is difficult to break unless there are extreme, uncontrollable factors at work. This is because of the fear of “losing face” if one cannot keep a business commitment. In addition to busi-
- 554. ness applications, society at large reflects the Japanese concern for trustworthiness. Crime rates are quite low, and the streets of Japan’s largest cities are very safe to walk at night. 4. Japanese are accomplishment-oriented—not necessarily for themselves, but for their employers and work units. Japanese children learn the importance of groups early by contributing to the upkeep of their schools. They share duties such as mopping floors, washing windows, cleaning chalkboards, and arranging desks and chairs. They carry such habits learned in school into the adult workplace, where management and labor tend to work together toward company goals. Japanese managers make decisions only after con- sidering input from subordinates. Also, materials buyers, engineers, designers, factory floor supervisors, and marketers cooperate closely throughout each stage of a product’s development. 5. Japanese culture emphasizes individual responsibility to the group and group respon-
- 555. sibility to the individual. This trait has long been a hallmark of Japanese corporations. Traditionally, subordinates promise hard work and loyalty, and top managers provide job security. But to remain competitive internationally, Japanese companies have eliminated jobs and moved production to China and Vietnam and other low-wage nations. As the tradi- tion of job security falls by the wayside, more Japanese workers now consider working for non-Japanese companies, whereas others find work as temporary employees. Although this trait of loyalty is diminishing somewhat in business, it remains a very prominent feature in other aspects of Japanese society, especially family. 6. The culture of Japan tends to be public. You will often find top Japanese managers located in the center of a large, open-space office surrounded by the desks of many employees. In comparison, Western executives are often secluded in walled offices located on the perimeter of workspaces. This characteristic reaches deep into Japanese society— consider, for example, Japan’s tradition of bathing in public
- 556. bathhouses. HOFSTEDE FRAMEWORK Psychologist and researcher, Geert Hofstede, created another way to differentiate cultures.7 He initially developed the Hofstede framework from a study of more than 110,000 people working in IBM subsidiaries (www.ibm.com) in 40 countries. Later research expanded the framework so that it now contains a total of six dimensions:8 1. Individualism versus collectivism. This dimension identifies the extent to which a cul- ture emphasizes the individual versus the group. Individualist cultures (those scoring high on this dimension) value hard work and promote entrepreneurial risk-taking, thereby fos- tering invention and innovation. Although people are given freedom to focus on personal goals, they are held responsible for their actions. That is why responsibility for poor busi- ness decisions is placed squarely on the shoulders of the individual in charge. At the same time, higher individualism might be responsible for higher rates of employee turnover. You
- 557. can see how a sample of nations scored on this and the remaining Hofstede dimensions in Table 2.2. People in collectivist cultures (those scoring low on this dimension) feel a strong asso- ciation to groups, including family and work units. The goal of maintaining group harmony is probably most evident in the family structure. People in collectivist cultures tend to work toward collective rather than personal goals and are responsible to the group for their actions. In turn, the group shares responsibility for the well - being of each of its members. Thus, in collectivist cultures, success or failure tends to be shared among the people in the work unit, rather than any individual receiving all the praise or blame. All social, political, economic, and legal institutions reflect the group’s critical role. 2. Power distance. This dimension conveys the degree to which a culture accepts social inequality among its people. A culture with large power distance tends to be characterized by much inequality between superiors and subordinates.
- 558. Organizations tend also to be Hofstede framework Framework for studying cultural differences along five dimensions, such as individualism versus col- lectivism and equality versus inequality. M02_WILD9220_09_SE_C02.indd 63 10/30/17 8:47 PM http://www.ibm.com/ 64 PART 2 • nATionAl BusinEss EnViRonMEnTs more hierarchical, with power deriving from prestige, force, and inheritance. Executives and upper management in cultures with large power distance often enjoy special recogni- tion and privileges. On the other hand, cultures with small power distance display a greater degree of equality, with prestige and rewards more equally shared between superiors and subordinates. Power in these cultures is seen to derive more
- 559. from hard work and entrepre- neurial drive and is therefore often considered more legitimate. 3. Uncertainty avoidance. This dimension identifies the extent to which a culture avoids uncertainty and ambiguity. A culture with large uncertainty avoidance values security and places its faith in strong systems of rules and procedures in society. Not surprisingly, per- haps, cultures with large uncertainty avoidance normally have lower employee turnover, more formal rules for regulating employee behavior, and more difficulty implementing change. Cultures scoring low on uncertainty avoidance tend to be more open to change and new ideas. This helps explain why individuals in this type of culture tend to be entrepre- neurial and organizations tend to welcome the best business practices from other cultures. Because people tend to be less fearful of change, however, these cultures can also suffer from higher levels of employee turnover. 4. Masculinity versus femininity. This dimension captures the extent to which a culture
- 560. emphasizes masculinity versus femininity. According to Hofstede, cultures scoring high on masculinity tend to be characterized more by personal assertiveness and the accumula- tion of wealth, typically translating into an entrepreneurial drive. Cultures scoring low on this dimension (greater tendency toward femininity) generally have more relaxed lifestyles, wherein people are more concerned about caring for others as opposed to material gain. 5. Long-term orientation. This dimension indicates a society’s perception of time and its attitudes about overcoming obstacles with time, if not with will and strength. It attempts to capture the differences between Eastern and Western cultures. A high-scoring culture (strong long-term orientation) values respect for tradition, thrift, perseverance, and a sense Country individualism Power Distance uncertainty
- 561. Avoidance Masculinity long-Term orientation indulgence Argentina 46 49 86 56 20 62 Australia 90 36 51 61 21 71 Brazil 38 69 76 49 44 59 Canada 80 39 48 52 36 68 Chile 23 63 86 28 31 68 China 20 80 30 66 87 24 France 71 68 86 43 63 48 Germany 67 35 65 66 83 40 Great Britain 89 35 35 66 51 69 Hong Kong 25 68 29 57 61 17
- 562. India 48 77 40 56 51 26 Japan 46 54 92 95 88 42 South Korea 18 60 85 39 100 29 Mexico 30 81 82 69 24 97 Netherlands 80 38 53 14 67 68 Norway 69 31 50 8 35 55 Russia 39 93 95 36 81 20 Spain 51 57 86 42 48 44 Sweden 71 31 29 5 53 78 United States 91 40 46 62 26 68 Source: Based on the dataset at (http://geerthofstede.com/dimension-data-matrix). TABLE 2.2 National Scores on the Hofstede Dimensions
- 563. M02_WILD9220_09_SE_C02.indd 64 10/30/17 8:47 PM http://geerthofstede.com/dimension%E2%80%90data%E2%80% 90matrix CHAPTER 2 • CRoss-CulTuRAl BusinEss 65 of personal shame. These cultures tend to have a strong work ethic because people expect long-term rewards from today’s hard work. A low-scoring culture is characterized by indi- vidual stability and reputation, fulfillment of social obligations, and reciprocation of greet- ings and gifts. These cultures can change more rapidly because tradition and commitment are not insurmountable impediments to change. 6. Indulgence versus restraint. This dimension captures the extent to which a society allows free expression. An indulgent society (one scoring high on this dimension) allows people to rather freely satisfy human needs related to enjoying life and having fun. By con- trast, a restrained society uses varying degrees of social norms
- 564. to suppress the free satisfac- tion of such needs. Indulgent societies tend to value individual happiness, leisure, freedom, and personal control. Restrained societies are less concerned with each of these and tend to believe that certain aspects of life are predestined. Employees in an indulgent society might be more forthcoming with frank opinions and more likely to quit an unsatisfying job. And whereas service workers in indulgent societies are expected to offer customers a genuine smile and friendly demeanor, such overt expressions could appear artificial in a restrained society.9 MyLab Management Try It Apply what you have learned about culture in the global workplace. If your instructor has assigned this, go to www.pearson.com/mylab/management to perform a simulation on the practical difficulties that international managers often face. QuiCK sTuDY 6 1. People living in different cultures often have different views
- 565. regarding their what? 2. What is an example of cultural imperialism? 3. The Kluckhohn-Strodtbeck framework does not directly investigate whether people do what? 4. In the Hofstede framework the term “power distance” refers to what? As globalization continues to draw companies into the international arena, understanding local culture can give a company an advantage over rivals. By avoiding ethnocentric thinking, managers can avoid mistakenly disregarding the ben- eficial aspects of other cultures. Culturally literate managers who understand local needs and desires bring their companies closer to customers and, therefore, increase their competitiveness. They can become more-effective marketers, negotiators, and produc- tion managers. let’s explore several areas in which culture has a direct impact on international business activity. Marketing and Cultural Literacy Many international companies operating in local markets abroad take advantage of the public relations value of supporting
- 566. national culture. Companies are helping india’s government to maintain some of the nation’s most precious historical monu- ments and sites and, in the process, are earning the goodwill of the people. This chapter introduced the Kluckhohn–strodtbeck and Hofstede frameworks for classifying cultures. local culture is important for a company exploring international markets for its products. We can see the significance of power distance in the export of luxury items. A nation with a large power distance accepts greater inequality among its people and tends to have a wealthy upper class that can afford luxury goods. Thus, compa- nies marketing products such as expensive jewelry, high-priced cars, and even yachts could find wealthy market segments within relatively poor nations. Work Attitudes and Cultural Literacy national differences in work attitudes are complex and involve other factors in addition to culture. Perceived opportunity for financial reward is no doubt a strong element in attitudes toward work in any culture. Research suggests both us and German employees work longer hours when there is a greater likelihood
- 567. that good performance will lead to promotion and increased pay. Yet this appears relatively less true in Germany, where wages are less variable and job security and jobless benefits (such as free national health care) are greater. Thus, other aspects of German society are at least as important as culture in determining work BOTTOM LINE FOR BUSINESS M02_WILD9220_09_SE_C02.indd 65 10/30/17 8:47 PM http://www.pearson.com/mylab/management 66 PART 2 • nATionAl BusinEss EnViRonMEnTs MyLab Management Go to www.pearson.com/mylab/management to complete the problem marked with this icon . Chapter Summary LO2.1 Explain culture and the need for cultural knowledge. • Culture is the set of values, beliefs, rules, and institutions held by a specific group
- 568. of people. Work habits and product preferences can be influenced by the physical environment. • We tend to equate a nation–state and its people with a single culture. But most nations are home to numerous subcultures—groups of people who share a unique way of life within a larger, dominant culture. • Managers try to avoid ethnocentricity (the tendency to view one’s own culture as superior to others) and to develop cultural literacy (detailed knowledge necessary to function happily and effectively in another culture). LO2.2 Summarize the cultural importance of values and behavior. • A culture’s values and attitudes are important because they affect work ethic and material desires. Understanding the aesthetics that a people value can help improve effectiveness and avoid blunders.
- 569. • Manners are appropriate behaviors, speech, and dress in a culture, whereas customs are appropriate behaviors in specific circumstances. Knowing these can improve per- formance and help avoid sending unintended messages. LO2.3 Describe the roles of social structure and education in culture. • Social structure embodies a culture’s fundamental organization. It affects the cost of doing business and business decisions such as site selection and which advertising methods to use. • Social status and mobility in a culture guide people’s desire for material things and their emphasis on work. Firms also consider the influence of family and gender on people’s purchase and work decisions. • Education level affects the quality of the workforce and a people’s standard of liv- ing. Wages in a society are determined to a large extent by a people’s educational
- 570. attainment. attitudes. The culturally literate manager understands the com- plexity of national workplace attitudes and incorporates this knowledge into reward systems. Expatriates and Cultural Literacy As stated in our discussion of classifying cultures, people living in broadly different cultures tend to respond differently in similar business situations. This is why companies that send personnel abroad to unfamiliar cultures are concerned with cultural differ- ences. For example, a norwegian manager working in Japan for a European car manufacturer, but whose colleagues were mostly Japanese, soon became frustrated with the time needed to make decisions and take action. The main cause for his frustration was that the uncertainty avoidance index for Japan is much larger than in his native norway (see Table 2.2). in Japan, a greater aversion to uncertainty led to the need for a greater number of consultations than would have been needed in the home mar- ket. The frustrated manager eventually left Japan and returned to norway.
- 571. Gender and Cultural Literacy in Japan, men have traditionally held nearly all positions of responsibility. Women have generally served as office clerks and administrative assistants until their mid- to late 20s, when they were expected to marry and then focus on tending to family needs. Although this is still largely true today, progress is being made in expanding the role of women in Japan’s business commu- nity. Women own nearly a quarter of all businesses in Japan, but many of these businesses are very small and have little economic influence. Greater gender equality prevails in Australia, Canada, Germany, and the united states, but women in these countries still tend to earn less money than men in similar positions. M02_WILD9220_09_SE_C02.indd 66 10/30/17 8:47 PM http://www.pearson.com/mylab/management CHAPTER 2 • CRoss-CulTuRAl BusinEss 67
- 572. LO2.4 Outline how the major world religions can influence business. • Different religions view work, savings, and material goods differently. Protestants believe that hard work glorifies God, which is known as the “Protestant work ethic.” • Strict Hindus disdain materialism and believe in the caste system, which constrains consumer markets and can affect work ethic. Western restaurants must adapt to the fact that many Hindus are vegetarians or don’t eat beef. • Islamic governments often ban alcohol consumption so coffee, tea, and soft drinks are popular substitutes. Judaism’s religious holidays are often crucial to observe and food must often be kosher for believers. LO2.5 Explain the importance of personal communication to international business. • Personal communication conveys thoughts, feelings, knowledge, and information
- 573. through speech, writings, and actions. Understanding a people’s system of communi- cation provides insight into their values and behavior. • Language proficiency can help avoid misunderstandings when nonnative managers supervise local employees. It can also help avoid translation blunders in marketing and advertising efforts. • Most body language (including personal space, hand gestures, and handshakes) is subtle and takes time to interpret. English is a commo n lingua franca in this era of globalization. LO2.6 Describe how firms and culture interact in the global workplace. • Attributes such as a culture’s perception of time, view of work, and material culture affect many aspects of business, including management styles, work scheduling, and reward systems.
- 574. • Cultural change occurs when people integrate the gestures, material objects, tradi- tions, or concepts of another culture through cultural diffusion. Companies might change culture when they import new products, policies, and practices into a country. • The two main frameworks used to compare cultures are the Kluckhohn–Strodtbeck framework and the Hofstede framework. These frameworks help firms understand many aspects of a culture, including risk taking, innovation, job mobility, team coop- eration, pay levels, and hiring practices. aesthetics (p. 46) attitudes (p. 46) body language (p. 58) brain drain (p. 50) caste system (p. 49) class system (p. 49) communication (p. 56) cultural diffusion (p. 61) cultural imperialism (p. 61)
- 575. cultural literacy (p. 44) cultural trait (p. 61) culture (p. 42) customs (p. 47) ethnocentricity (p. 44) folk custom (p. 47) Hofstede framework (p. 63) Kluckhohn–Strodtbeck framework (p. 62) lingua franca (p. 58) manners (p. 46) material culture (p. 60) popular custom (p. 47) social group (p. 48) social mobility (p. 49) social stratification (p. 48) social structure (p. 48) subculture (p. 43) values (p. 45) Key Terms TALK ABOUT IT 1 Two students are discussing why they are not studying international business. “Interna-
- 576. tional business doesn’t affect me,” declares the first student. “I’m going to stay here, not work in some foreign country.” “Yeah, me neither,” agrees the second. “Besides, some cultures are really strange. The sooner other countries start doing business our way, the better.” 2-1. What arguments can you present to counter these students’ perceptions? M02_WILD9220_09_SE_C02.indd 67 10/30/17 8:47 PM 68 PART 2 • nATionAl BusinEss EnViRonMEnTs MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following assisted-graded writing questions: 2-12. Iran’s religious government banned access to the WhatsApp messaging site because, officials said, it is owned by Jewish “American Zion-
- 577. ist” Mark Zuckerberg. Might the ban have more to do with the government’s fear of social media’s power to spread information and ideas quickly? Explain. 2-13. The first time Swedish furniture company, IKEA, searched outside Scandinavia for new design inspiration, it looked to China. The resulting product line, called Trendig, was a cultural collaboration between Swedish and Chinese artisans. What cultural and global business factors may have inspired IKEA to seek design aesthetics in China? TALK ABOUT IT 2 Imagine that you and several classmates are the top managers of a company seeking new international markets. Select your company’s industry and product line, and then choose a country to enter. 2-2. Is it important for the company to balance the need for global efficiency through large-scale production with the need for cultural responsiveness through local prod- uct adaption?
- 578. 2-3. Will cultural differences between the home and host countries require alterations in personnel or corporate practices? Ethical Challenge You are vice president of operations for a US–based software firm that is exploring building a software-design operation in India. Typically when international firms enter the Indian mar- ket, they quickly learn how a caste system can affect business activities. Although officially banned, the caste system still dictates everyday life for many people in India. You are confi- dent regarding the likelihood of business success there, but you have strong misgivings about the caste system. 2-4. Do you think it will be possible to import and uphold a US management style in India despite lingering effects of the caste system? 2-5. How do you think your company’s stakeholders would feel about your company simply adjusting to local management practices?
- 579. Teaming Up Two groups of four students each will debate the benefits and drawbacks of individualist ver- sus collectivist cultures. After the first student from each side has spoken, the second student will question the opponent’s arguments, looking for holes and inconsistencies. The third stu- dent will attempt to answer these arguments. The fourth student will present a summary of each side’s arguments. Finally, the class will vote on which team has offered the more compel- ling argument. Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is researching, integrate your answers to the following questions into your completed MESP report. 2-6. What are the various ethnicities that reside in the nation? 2-7. List several of the values that people hold dear. 2-8. What are several of the culture’s identifiable manners and customs?
- 580. 2-9. Describe in broad terms the nation’s social structure. 2-10. How would you describe people’s perception of time and work? 2-11. Is the culture relatively open or closed to cultural change? M02_WILD9220_09_SE_C02.indd 68 10/30/17 8:47 PM http://www.pearson.com/mylab/management CHAPTER 2 • CRoss-CulTuRAl BusinEss 69 PRACTICING INTERNATIONAL MANAGEMENT CASE A Tale of Two Cultures Many cultures in Asia are in the midst of an identity crisis. In effect, they are being torn between two worlds. Pulling in one direction is a traditional value system derived from agriculture- based communities and extended families—that is, elements of a culture in which relatives take care of one another and state-run wel-
- 581. fare systems are unnecessary. Pulling from the opposite direction is a new set of values emerging from manufacturing- and finance- based economies—elements of a culture in which workers must often move to faraway cities to find work, sometimes leaving family members to fend for themselves. For decades, Western multinational corporations set up facto- ries across Southeast Asia to take advantage of relatively low - cost labor. Later, local companies sprang up and became competitive global players in their own right. Spectacular rates of economic growth in a few short decades elevated living standards beyond what was thought possible. Young people in Malaysia and Thai - land felt the lure of “Western” brands. Gucci handbags (www.gucci .com), Harley-Davidson motorcycles (www.harley- davidson.com), and other global brands became common symbols of success. Many parents felt that brand-consciousness among their teenage children signaled familywide success.
- 582. Despite the growing consumer society, polls of young people show them holding steadfast to traditional values such as respect for family and group harmony. Youth in Hong Kong, for example, overwhelmingly believe that parents should have a say in how hard they study, in how they treat family members and elders, and in their choice of friends. The practice of outsourcing non-essential tasks helped create an Indian IT industry worth $140 billion. As outsourcing continues to wash over India, a social revolution is occurring among India’s graduates of technical colleges and universities. Unlike in India’s traditional high-tech service jobs, young call-center staffers are in direct contact with Western consumers, answering inquiries on items such as tummy crunchers and diet pills. For these young, mostly female staffers, the work means money, independence, and freedom—sometimes far away from home in big cities such as
- 583. Bangalore and Mumbai. But in addition to the training in American accents and geography, these workers are learning new ideas about family, materialism, and relationships. Parents are suspicious of call-center work because it must typi- cally be performed at night in India, when consumers are awake in Canada, Europe, or the United States. When her parents objected, Binitha Venugopal quit her call-center job in favor of a “regu- lar” daytime job. Binitha says her former coworkers’ values are changing and that dating and live-in relationships among them are common. Indian tradition dictates that young adults live with their parents at least until they get married (typically to someone their parents choose). Perhaps facilitating shifting values in India is an inf lux of Western professionals, such as lawyers, who accepted good-paying jobs there that could not be found back home during
- 584. the global recession. Roopa Murthy works for an Indian company that offers cal l- center and back-office services. Roopa moved to Bangalore from her native Mysore armed with an accounting degree. She now earns $400 per month, which is several times what her father earned before he retired from his government job. Roopa cut her hai r short and tossed aside her salwar kameez, the traditional loose-fitting clothing she wore back home, in favor of designer-labeled Western attire. Although she once shunned drinking and her curfew at home was 9 p.m., Roopa now frequents a pub called Geoffrey’s, where she enjoys dry martinis and rum, and The Club, a suburban disco. Roopa confesses that she is “seeing someone” but that her parents would disapprove, adding, “It is difficult to talk to Indian parents
- 585. about things like boyfriends.” She said she sometimes envies her callers’ lives but that she hopes her job will help her succeed. “I may be a small-town girl, but there is no way I’m going back to Mysore after this,” she said. Many observers wonder whether Asia can embrace modernization and yet retain traditional values. Thinking Globally 2-14. If you worked for an international firm doing business in Asia, is there anything you would suggest to ease the ten- sions these cultures are experiencing? Be specific. 2-15. Social ills in any country are normally born from a multi- tude of factors. What role, if any, do you think globalization is having in higher reported rates of divorce, crime, and drug abuse in Asia? 2-16. Broadly defined, Asia comprises more than 60 percent of the world’s population—a population that practices Bud- dhism, Confucianism, Hinduism, Islam, and numerous other religions. Do you think it is possible to carry on a valid discussion of “Asian” values? Explain.
- 586. Sources: “Reboot: Indian Outsourcing Specialists Must Reboot Their Strate- gies,” The Economist, January 21, 2017, pp. 56–57; Stephanie Overby, “Cloud Services Now Account for a Third of IT Outsourcing Market,” CIO magazine (www.cio.com), July 22, 2016; Heather Timmons, “Outsourcing to India Draws Western Lawyers,” New York Times (www.nytimes.com), August 4, 2010; Lisa Tsering, “NBC Picks up Series ‘Outsourced’ for Fall 2010,” Indiawest.com web- site (www.indiawest.com), May 27, 2010. M02_WILD9220_09_SE_C02.indd 69 10/30/17 8:47 PM http://www.harleydavidson.com/ http://www.gucci.com/ http://www.gucci.com/ http://www.indiawest.com/ http://indiawest.com/ http://www.nytimes.com/ http://www.cio.com/
- 587. 7070 3.1 Describe the key features of each form of political system. 3.2 Explain how the three types of economic systems differ. 3.3 Summarize the main elements of each type of legal system. 3.4 Outline the global legal issues facing international firms. 3.5 Describe the main issues of global ethics and social responsibility. A Look Ahead Chapter 4 presents the economic development of nations. We feature several large emerging markets and explore key challenges facing countries that are transforming their economies into free market systems. A Look at This Chapter This chapter first explores the
- 588. political economy of nations. We examine the main types of political, economic, and legal systems in practice around the world. We then examine key legal issues for international firms and explore the importance of ethical behavior and social responsibility. A Look Back Chapter 2 explored the main components of culture and showed how they relate to business practices. We learned about different methods used to study cultures and how these methods are applied in business. MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback.
- 589. Learning Objectives After studying this chapter, you should be able to Political Economy and Ethics Chapter Three M03_WILD9220_09_SE_C03.indd 70 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 71 PepsiCo’s Global Challenge PURCHASE, New York—Entrepreneurial despite its enormity, PepsiCo’s (www.pepsico .com) sales have grown an amazing 13 percent annually for nearly half a century. To keep profits bubbling, PepsiCo is targeting international sales, which comprise 40 percent of
- 590. total revenue, and is investing aggressively in India, which ranks among PepsiCo’s top 10 markets and its three fastest-growing countries. Shown here is an Iranian consumer holding a can of Pepsi Cola written in Persian script. Like all companies operating internationally, PepsiCo must carefully navigate political, economic, and legal systems in other countries. For example, the company needed to obtain the approval of India’s government before it could increase its investment there by nearly one-third. PepsiCo also showed its respect for the importance of local politics and law in China. Rather than trying to force China to accept wholly owned subsidiaries, executives formed stra- tegic alliances with local Chinese business partners. PepsiCo knows that companies are expected to be model citizens wherever they operate and that their conduct directly affects their bottom line. PepsiCo’s CEO, Indra Nooyi, is moving the company’s product line in healthier directions. She introduced the motto “Performance with Purpose” to reflect how the company is transforming its global businesses. She wants the company
- 591. to balance its drive for profits with making healthier “guilt- free” snacks, decreasing its impact on the environment, and taking care of its workforce. In fact, healthier foods comprise as much as 45 percent of PepsiCo’s revenue today. Born and raised in India, Nooyi believes it is essential that “we use corporations as a productive player in address- ing some of the big issues facing the world.” Nooyi also helped spark “green” initiatives at PepsiCo. She has proved that invest- ments in water- and heat-related conservation projects can be worthy endeavors. In addi- tion to their environmental benefits, those projects now save the company $55 million annually. Nooyi says, “Companies today are bigger than many economies. We are little republics. We are engines of efficiency. If companies don’t do [responsible] things, who is going to?” As you read this chapter, consider how companies adapt to political, economic, and legal systems worldwide while fulfilling their ethical and social responsibilities.1
- 592. Bertrand Gardel/Hemis/Alamy Stock Photo M03_WILD9220_09_SE_C03.indd 71 10/30/17 8:48 PM http://www.pepsico.com/ http://www.pepsico.com/ 72 PART 2 • nATionAl BUsinEss EnViRonmEnTs As business men and women venture abroad, they can encounter social and economic environments that are unlike anything they’ve ever experienced. In Chapter 2 we learned how important it is for employees of a company to have cultural knowledge when doing business with people from other countries. Another crucial element of international business success is an understanding of other countries’ political, economic, and legal systems. Political economy is the study of how a country manages its affairs by using its political, economic, and legal systems. Any nation’s political economy reflects how its people put their
- 593. preferred political, economic, and legal theories into practice and the institutions they create. Political economy forms within a cultural context, which is why they vary from nation to nation in their degree of openness, individualism, equality, transparency, flexibility, and so on. Individualism is a belief that the concerns of individuals should be placed above the group’s welfare. Collectivism, on the other hand, stresses the primacy of the group over individual needs. As we learned in Chapter 2, no nation is either completely individualist or completely col- lectivist in its cultural orientation. Likewise, the political economy of every nation displays a unique blend of individual and group values. In other words, no political economy is entirely focused on individual needs at the expense of social well -being, and vice versa. Firms involved in international business should understand how different systems of political economy operate. This applies not only to companies with traditional, brick-and-mortar subsidiar- ies abroad, but also to Internet-based companies and many types
- 594. of service firms. Rupert Mur- doch’s News Corp. (www.newscorp.com) removed BBC news (www.bbc.co.uk) from its Asian lineup of television stations after it criticized China. Barnes & Noble (www.barnesandnoble.com) and Amazon (www.amazon.com) stopped selling the English- language version of Adolf Hitler’s Mein Kampf to Germans when the German government complained (although it’s illegal only to sell the German-language version). A statement by Barnes & Noble read, “Our policy with regard to censorship remains unchanged. But as responsible corporate citizens, we respect the laws of the countries where we do business.”2 Google (www.google.com) had to skillfully handle protests by German politicians and citi- zens who decried its plan to introduce its Street View mapping service in that country. Memories of secret police prying into personal lives under past dictatorial regimes make Germans fearful of allowing the entire world to see photos of their homes and gardens on the Internet.3 Knowing how different political economies function can help compani es avoid trouble and be more effec-
- 595. tive in their operations. In this chapter, we present the basic differences among the main types of political, economic, and legal systems around the world. We also discuss several legal topics that hold special impor- tance for international business activities. We close this chapter with a look at key issues of ethical behavior and social responsibility. political economy Study of how a country manages its affairs by using its political, eco- nomic, and legal systems. Google’s Street View project in Germany had already censored car number license plates and people’s faces by blurring them, but that wasn’t enough. Google modified its policies in Germany, and offers people who do not wish to have their property’s photos published online the option to request blur- ring of an image. Part of the prob-
- 596. lem is that Google’s cameras snap photos from atop cars and so peer over top privacy hedges and walls. What is your personal view on this matter? Randy Miramontez/Alamy Stock Photo M03_WILD9220_09_SE_C03.indd 72 10/30/17 8:48 PM http://www.amazon.com/ http://www.newscorp.com/ http://www.bbc.co.uk/ http://www.barnesandnoble.com/ http://www.google.com/ CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 73 3.1 Political Systems Understanding the nature of political systems in other countries can reduce the risks of conducting international business there. A political system includes the structures, processes, and activities by which a nation governs itself. Japan’s political system, for
- 597. instance, features a Diet (Parliament) that chooses a prime minister to carry out the operations of government with the help of Cabinet ministers. The Diet consists of two houses of elected representatives who enact the nation’s laws. These laws affect the personal lives of people living in and visiting Japan, as well as the activities of companies doing business there. A country’s political system is rooted in the history and culture of its people. Factors such as population, age and race composition, and per capita income inf luence a country’s political system. In Switzerland, the political system actively encourages all eligible members of society to vote. By means of public referendums, Swiss citizens vote directly on many national issues. The Swiss system works because Switzerland consists of a relatively small population living in a small geographic area. Contrast this practice with that of most other democracies, in which representatives of the people, not the people themselves, vote on national issues.
- 598. We can arrange the world’s three political ideologies on a horizontal scale, with one on either end and one in the middle. At the one extreme lies anarchism— the belief that only individuals and private groups should control a nation’s political activities. An anarchist views public government as unnecessary and unwanted because it tramples personal liberties. At the other extreme lies totalitarianism—the belief that every aspect of people’s lives must be controlled for a nation’s political system to be effective. Totalitarianism disregards individual liberties and treats people as slaves of the political system. The state reigns supreme over institu- tions such as family, religion, business, and labor. Totalitarian political systems include authori- tarian regimes such as communism and fascism. Between those two extremes lies pluralism—the belief that both private and public groups play important roles in a nation’s political activities. Each group (consisting of people with dif- ferent ethnic, racial, class, and lifestyle backgrounds) serves to balance the power that can be
- 599. gained by the others. Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies. To better understand how elements of politics influence international business, let’s take a detailed look at the different forms of the two most common political systems: totalitarianism and democracy. Totalitarianism In a totalitarian system, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints. Nazi Germany under Adolf Hitler and the former Soviet Union under Joseph Stalin are historical examples of totali- tarian governments. Today, North Korea is the most prominent example of a totalitarian government. Totalitarian leaders attempt to silence those with opposing political views and, therefore, require the near-total centralization of political power. But a “pure” form of totalitarianism is not possible because no totalitarian government is capable of entirely
- 600. silencing all its critics. Totalitarian governments tend to share three features: • Imposed Authority An individual or group forms the political system without the explicit or implicit approval of the people. Leaders often acquire and retain power through military force or fraudulent elections. In some cases, they come to power through legitimate means but then remain in office after their terms expire. • Lack of Constitutional Guarantees Totalitarian systems deny citizens the constitutional guarantees woven into the fabric of democratic practice. They limit, abuse, or reject con- cepts such as freedom of expression, periodically held elections, guaranteed civil and prop- erty rights, and minority rights. • Restricted Participation Political representation is limited to parties sympathetic to the government or to those who pose no credible threat. In most cases, political opposition is completely banned, and political dissidents are severely
- 601. punished. 3.1 Describe the key fea- tures of each form of political system. political system Structures, processes, and activi- ties by which a nation governs itself. totalitarian system Political system in which individu- als govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints. M03_WILD9220_09_SE_C03.indd 73 10/30/17 8:48 PM 74 PART 2 • nATionAl BUsinEss EnViRonmEnTs THEOCRATIC TOTALITARIANISM A political system in
- 602. which a country’s religious leaders are also its political leaders is called a theocracy. The religious leaders enforce a set of laws and regulations based on religious beliefs. A political system under the control of totalitarian religious leaders is called theocratic totalitarianism. Iran is a prominent example of a theocratic totalitarian state. Iran has been an Islamic state since the 1979 revolution in which the reigning monarch was overthrown. Today, many young Iranians appear disenchanted with the strict code imposed on many aspects of their public and private lives, including stringent laws against products and ideas deemed too “Western.” They may not question their religious beliefs, but they do yearn for a more open society. SECULAR TOTALITARIANISM A political system in which political leaders rely on military and bureaucratic power is called secular totalitarianism. It takes three forms: communist, tribal, and right-wing. Under communist totalitarianism (referred to here simply as
- 603. communism), the govern- ment maintains sweeping political and economic powers. The Communist Party controls all aspects of the political system, and opposition parties are given little or no voice. In general, each party member holding office is required to support all government policies, and dissen- sion is rarely permitted. Communism is the belief that social and economic equality can be obtained only by establishing an all-powerful Communist Party and by instituting socialism— a system in which the government owns and controls all types of economic activity. This includes granting the government ownership of the means of production (such as capital, land, and factories) and the power to decide what the economy produces and the prices at which goods are sold. However, important distinctions separate communism from socialism. Communists follow the teachings of Karl Marx and Vladimir Lenin, believe that a violent revolution is needed to seize control over resources, and wish to eliminate political opposition. Socialists believe in none of
- 604. these. Thus, communists are socialists, but socialists are not necessarily communist. Under tribal totalitarianism, one tribe (or ethnic group) imposes its will on others with whom it shares a national identity. Tribal totalitarianism characterizes the governments of several African nations, including Burundi and Rwanda. When the European colonial powers departed Africa, many national boundaries were created with little regard to ethnic differences among the people. People of different ethnicities found themselves living in the same nation, whereas members of the same ethnicity found themselves living in different nations. In time, certain ethnic groups gained political and military power over other groups. Animosity among them often erupted in bloody conflict. Nations mired in military conf lict pay a hefty price in terms of sustainability. Over the decades, civil war has inflicted enormous human, social, and environmental costs on many Afri- can nations. To explore the costs of civil wars (particularly in Africa) and how developed nations
- 605. can help put an end to them, see the Global Sustainability feature, titled “From Civil War to Civil Society.” Under right-wing totalitarianism, the government endorses private ownership of property and a market-based economy but grants few (if any) political freedoms. Leaders generally strive for economic growth while opposing left-wing totalitarianism (communism). Argentina, Brazil, Chile, and Paraguay all had right-wing totalitarian governments in the 1980s. Despite the inherent contradictions between communism and right-wing totalitarianism, China’s current political system is a mix of the two ideologies. China’s leaders are engineering high economic growth by implementing certain characteristics of a capitalist economy while retaining a hard line in the political sphere. The Chinese government is selling off money- losing, state-run companies and encouraging the investment needed to modernize its factories. But China’s government still has little patience for dissidents who demand greater political freedom,
- 606. and it does not allow a completely free press. DOING BUSINESS IN TOTALITARIAN COUNTRIES What are the costs and benefits of doing business in a totalitarian nation? On the plus side, international companies can be relatively less concerned with local political opposition to their activities. On the negative side, they might need to pay bribes and kickbacks to government officials. Refusal to pay could result in loss of market access or even forfeiture of investments in the country. theocracy Political system in which a coun- try’s religious leaders are also its political leaders. theocratic totalitarianism Political system under the control of totalitarian religious leaders. secular totalitarianism Political system in which leaders rely on military and bureaucratic power.
- 607. communism Belief that social and economic equality can be obtained only by establishing an all-powerful Com- munist Party and by granting the government ownership and control over all types of economic activity. socialism Belief that social and economic equality is obtained through gov- ernment ownership and regulation of the means of production. M03_WILD9220_09_SE_C03.indd 74 10/30/17 8:48 PM CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 75 Today, most wars occur within nations that were once controlled and stabilized by colonial powers. if these nations are to prosper
- 608. from globalization, they must break the vicious cycle whereby conflict causes poverty and poverty causes conflict. • War’s Root Causes. Although tribal or ethnic rivalry is typically blamed for starting civil wars, the most common causes are poverty, low economic growth, and dependency on natural resource exports. in fact, the poorest one-sixth of humanity endures four-fifths of the world’s civil wars. still, religious differences increasingly underlie civil conflicts. • What’s at Stake. it appeared that ethnic conflict was the root of pitched battles in Bunia, in the eastern part of demo- cratic Republic of the Congo. yet the Hema and the lendu tribes began fighting each other only when neighboring Uganda, which wanted to control mineral-rich Bunia, started arming rival militias in 1999. in the darfur region of sudan, Arab muslims battled black non-muslims. depend- ing on whom you ask, the conflict began as a fight over pastures and livestock or over the oil beneath them. mean- while, foreign investors remain wary. • What Is Lost. on average, a civil conflict lasts eight years. And apart from the terrible human cost in lives and health, there is also a financial cost. Health costs are $5 billion per conflict because of collapsed health systems and forced
- 609. migrations (which worsen and spread disease). Gross domestic product (GdP) falls by 2.2 percent, and another 18 percent of income is spent on arms and militias. Full eco- nomic recovery takes a decade, which reduces output by about 105 percent of the nation’s prewar GdP. • What to Do. Because the risk of civil war is cut in half when income per person doubles, conflicts might be prevented by funneling more aid to poor nations. Also, war might be limited by restricting a nation in conflict from spending the proceeds from its exports on munitions or by lowering the world market price of those exports. Finally, to halt nations from slipping back into civil war, health and education aid could be increased after war ends, or a foreign power could intervene to keep the peace. • Want to Know More? Visit the Centre for the study of Afri - can Economies (www.csae.ox.ac.uk), Copenhagen Consen- sus Center (www.copenhagenconsensus.com), and World Bank Conflict Prevention and Reconstruction unit (www .worldbank.org). Sources: Patrick Kanyangara, “Conflict in the Great Lakes Region: Root Causes, Dynamics
- 610. and Effects,” ETH Zurich Center for Security Studies (www.css.ethz.ch), May 26, 2016; “A New Depth of Horror,” The Economist (www.economist.com), April 26, 2014; Paul Collier and Anke Hoeffler, The Challenge of Reducing the Global Incidence of Civil War (Oxford: Copenhagen Consensus, March 2004); Copenhagen Consensus Center website (www.copenhagenconsensus.com). GLOBAL SUSTAINABILITY From Civil War to Civil Society In any case, doing business in a totalitarian country can be a risky proposition. In a country such as the United States, laws regarding the resolution of contractual disputes are quite specific. In totalitarian nations, the law can be either vague or nonexistent, and people in powerful govern- ment positions can interpret laws largely as they please. In China, for instance, it may not matter so much what the law states but rather how individual bureaucrats interpret the law. The arbitrary nature of totalitarian governments makes it hard for companies to know how laws will be inter-
- 611. preted and applied to their particular business dealings. Companies that operate in totalitarian nations are sometimes criticized for lacking compas- sion for people hurt by the oppressive policies of their hosts. Executives must decide whether to refrain from investing in totalitarian countries—and miss potentially profitable opportunities—or invest and bear the brunt of potentially damaging publicity. There are no simple answers to this controversial issue, which amounts to an ethical dilemma (we cover ethics later in this chapter). Democracy A democracy is a political system in which government leaders are elected directly by the wide participation of the people or by their representatives. Democracy differs from totalitarianism in nearly every respect. The foundations of modern democracy go back at least as far as the ancient Greeks. The Greeks tried to practice a pure democracy, one in which all citizens participate freely and actively in the political process. But a pure democracy is more
- 612. an ideal than a workable system for several reasons. Some people have neither the time nor the desire to get involved in the political process. Also, citizens are less able to participate completely and actively as a population grows and as the barriers of distance and time increase. Finally, leaders in a pure democracy may find it difficult or impossible to form cohesive policies because direct voting can lead to conflicting popular opinion. REPRESENTATIVE DEMOCRACY For practical reasons, most nations resort to a representa- tive democracy, in which citizens elect individuals from their groups to represent their political democracy Political system in which govern- ment leaders are elected directly by the wide participation of the people or by their representatives. representative democracy Democracy in which citizens elect individuals from their groups to
- 613. represent their political views. M03_WILD9220_09_SE_C03.indd 75 10/30/17 8:48 PM http://www.copenhagenconsensus.com/ http://www.economist.com/ http://www.worldbank.org/ http://www.worldbank.org/ http://www.copenhagenconsensus.com/ http://www.csae.ox.ac.uk/ http://www.css.ethz.ch 76 PART 2 • nATionAl BUsinEss EnViRonmEnTs views. These representatives then help govern the people and pass laws. The people reelect representatives of whom they approve and replace those they no longer want representing them. Representative democracies strive to provide some or all of the following: • Freedom of Expression A constitutional right in most democracies, freedom of expres-
- 614. sion ideally grants the right to voice opinions freely and without fear of punishment. • Periodic Elections Each elected representative serves for a period of time, after which the people (or electorate) decide whether to retain that representative. Two examples of periodic elections include the US presidential elections (held every four years) and the French presidential elections (held every five years). • Full Civil and Property Rights Civil rights include freedom of speech, freedom to organize political parties, and the right to a fair trial. Property rights are the privileges and responsibilities of owners of property (homes, cars, businesses, and so forth). • Minority Rights In theory, democracies try to preserve peaceful coexistence among groups of people with diverse cultural, ethnic, and racial backgrounds. Ideally, the same rights and privileges extend legally to each group, no matter how few its members.
- 615. • Nonpolitical Bureaucracies The bureaucracy is the part of government that imple- ments the rules and laws passed by elected representatives. In politicized bureaucracies, bureaucrats tend to implement decisions according to their ow n political views rather than those of the people’s representatives. This clearly contradicts the purpose of the democratic process. Despite such shared principles, countries vary greatly in the practice of representative democ- racy. Britain, for example, practices parliamentary democracy. The nation divides itself into geographical districts, and people in each district vote for competing parties rather than individual candidates. But the party that wins the greatest number of legislative seats in an election does not automatically win the right to run the country. Rather, a party must gain an absolute majority—that is, the number of representatives that a party gets elected must exceed the number of representa- tives elected among all other parties. If the party with the largest number of representatives lacks an
- 616. absolute majority, it can join with one or more other parties to form a coalition government. In a coalition government, the strongest political parties share power by dividing government responsibilities among themselves. Coalition governments are often formed in Italy, Israel, and the Netherlands, where a large number of political parties make it difficult for any single party to gain an absolute majority. Nations also differ in the relative power that each political party commands. In some demo- cratic countries, a single political party has effectively controlled the system for decades. In Freedom of expression and politi- cal participation are rights that democracies strive to uphold. Sup- porters of the opposition party in Cambodia’s capital, Phnom Penh, defied road blocks and a jail threat to hold a march in a last-gasp push for an independent probe into an election they say was fixed to favor the ruling party. In what
- 617. ways do you think upholding free- dom of expression and having a politically engaged populace can benefit a society? REUTERS/Alamy Stock Photo M03_WILD9220_09_SE_C03.indd 76 10/30/17 8:48 PM CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 77 Japan, for example, the Liberal Democratic Party (which is actually conservative) has enjoyed nearly uninterrupted control of the government since the 1950s. In Mexico, the Institutional Revolutionary Party (PRI) ran the country for 71 years until 2001 when the conservative National Action Party (PAN) won the presidency. The PRI returned to power in the presidential election of 2012. DOING BUSINESS IN DEMOCRACIES Democracies maintain stable business environments
- 618. primarily through laws that protect individual property rights. In theory, commerce prospers when the private sector includes independently owned firms that seek to earn profits. Capitalism is the belief that ownership of the means of production belongs in the hands of individuals and private businesses. Capitalism is also frequently referred to as the free market. Although participative democracy, property rights, and free markets tend to encourage eco- nomic growth, they do not always do so. For instance, although India is the world’s largest democ- racy, it experienced slow economic growth for decades until recently. Meanwhile, some countries achieved rapid economic growth under political systems that were not truly democratic. The four tigers of Asia—Hong Kong, Singapore, South Korea, and Taiwan—built strong market economies in the absence of truly democratic practices. Wherever in the world a business man or woman goes, whether to a democracy or to a totalitarian nation, it is essential that he or she be mindful of personal safety. Certainly,
- 619. advancements in technology and transportation make it easier to do business globally. But because globalization also can increase efficiency for people with ulterior motives, trouble can arise spontaneously almost anywhere. For ways to keep a low profile and stay safe while on business abroad, see this chapter’s Manager’s Briefcase feature, titled “Your Global Security Checklist.” private sector Segment of the economic environ- ment comprising independently owned firms that seek to earn profits. capitalism Belief that ownership of the means of production belongs in the hands of individuals and private businesses. • Getting There Take nonstop flights when possible, as acci - dents are more likely during takeoffs and landings. move quickly from an airport’s public and check-in areas to more
- 620. secure areas beyond passport control. Report abandoned packages to airport security. • Getting Around Kidnappers watch for daily routines. Vary the exits you use to leave your house, office, and hotel, and vary the times that you depart and arrive. drive with your windows up and doors locked. swap cars with others occasionally, or take a cab one day and ride the tram/ subway the next. Be discreet regarding your itinerary. • Keep a Low Profile don’t draw attention by pulling out a large wad of currency or paying with large denominations. Avoid public demonstrations. dress like the locals when possible and leave expensive jewelry at home. Avoid loud conversation and being overheard. if you rent an auto- mobile, avoid the flashy car and choose a local, common model. • Guard Personal Data Be friendly but cautious when answering questions about you, your family, and your employment. Keep answers short and vague when pos- sible. Give out your work number only—all family members should do the same. do not list your home or mobile phone numbers in directories. do not carry items in your purse or
- 621. wallet that contain your home address. • Use Caution Be cautious if a local asks directions or the time—it could be a mugging ploy. When possible, travel with others and avoid walking alone after dark. Avoid nar- row, dimly lit streets. if you get lost, act as if you know where you are, and ask directions from a place of business, not passersby. Beware of offers by drivers of unmarked or poorly marked cabs. • Know Emergency Procedures Be familiar with the local emergency procedures before trouble strikes. Keep the phone numbers of police, fire, your hotel, your nation’s embassy, and a reputable taxi service in your home and with you at all times. MANAGER’S BRIEFCASE Your Global Security Checklist QUiCK sTUdy 1 1. What features characterize the political ideology called pluralism? 2. Communists believe that a violent revolution is needed to seize control over resources,
- 622. wish to eliminate political opposition, and do what else? 3. What does a representative democracy strive to provide for its people? 4. By what other name is capitalism often referred? M03_WILD9220_09_SE_C03.indd 77 10/30/17 8:48 PM 78 PART 2 • nATionAl BUsinEss EnViRonmEnTs 3.2 Economic Systems A country’s economic system consists of the structure and processes that it uses to allocate its resources and conduct its commercial activities. Every economy displays a tendency toward indi- vidualist or collectivist economic values that reflects the nation’s culture. For example, one culture might prefer theories grounded in individual freedom and responsibility and create a capitalist economic system. Meanwhile, another culture might value collectivist ideas and build a socialist, or even communist, system. We can arrange national economies on a horizontal scale that is
- 623. anchored by two extremes. At one end of the scale is a theoretical pure centrally planned economy, at the other end is a theo- retical pure market economy, and in between is a mixed economy (see Figure 3.1). Centrally Planned Economy A centrally planned economy is a system in which the government owns the nation’s land, factories, and other economic resources. The government makes nearly all economy-related decisions—including who produces what and the prices of products, labor, and capital. Central planning agencies specify production goals for factories and other production units, and they even decide prices. In the former Soviet Union, for example, communist officials set prices for milk, bread, eggs, and other essential goods. The ultimate goal of central planning is to achieve a wide range of political, social, and economic objectives by taking complete control over the production and distribution of a nation’s resources. ORIGINS OF THE CENTRALLY PLANNED ECONOMY Central planning is rooted in the ide-
- 624. ology of collectivism. Just as collectivist cultures emphasize group goals over individual ones, a centrally planned economy strives to achieve economic and social equality for the sake of the collective, not the individual. German philosopher Karl Marx popularized the idea of central economic planning in the nineteenth century. Marx formulated his ideas while witnessing the hardship endured by working- class people in Europe during and after the Industrial Revolution. Marx argued that the economy could not be reformed, but that it must be overthrown and replaced with a more equitable “com- munist” system. Different versions of Marx’s ideas were implemented in the twentieth century by means of violent upheaval. Revolutions installed totalitarian economic and political systems in Russia in 1917, in China and North Korea in the late 1940s, and in Cuba in 1959. By the 1970s, central planning was the economic law in lands stretching across Central and Eastern Europe (Alba- nia, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland,
- 625. Romania, and Yugoslavia), Asia (Cambodia, China, North Korea, and Vietnam), Africa (Angola and Mozambique), and Latin America (Cuba and Nicaragua). DECLINE OF CENTRAL PLANNING In the late 1980s, nation after nation began to dismantle communist central planning in favor of market-based economies. Shortly after the former Soviet Union implemented its twin policies of glasnost (political openness) and perestroika (economic reform), its totalitarian government crumbled. Communist governments in Central and Eastern Europe fell soon after, and today countries such as the Czech Republic, Hungary, Poland, Roma- nia, and Ukraine have republican governments. There are far fewer communist nations than there were two decades ago, although Cuba and North Korea remain hardline communist nations. Let’s now examine several factors that economists, historians, and political scientists say contributed to the decline of centrally planned economies. 3.2 Explain how the three types of economic systems
- 626. differ. economic system Structure and processes that a country uses to allocate its resources and conduct its commercial activities. centrally planned economy Economic system in which a nation’s land, factories, and other economic resources are owned by the government, which plans nearly all economic activity. Figure 3.1 Range of Economic Systems Pure Centrally Planned Economy Cuba N. Korea
- 627. China India Brazil France United Kingdom Canada United States Pure Market Economy M03_WILD9220_09_SE_C03.indd 78 10/30/17 8:48 PM CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 79 Failure to Create Economic Value Central planners paid little attention to the task of
- 628. producing quality goods and services at the lowest possible cost. In other words, they failed to see that commercial activities succeed when they create economic value for customers. Along the way, scarce resources were wasted in the pursuit of commercial activities that were not self-sustaining. Failure to Provide Incentives Government ownership of economic resources drastically reduced incentives for businesses to maximize the output obtained from those resources. Except for aerospace, nuclear power, and other sciences (in which government scientists excelled), there were few incentives to create new technologies, new products, and new production methods. The result was little or no economic growth and consistently low standards of living. As the world’s most closed economy, North Korea has earned its nickname, “The Hermit Kingdom.” For the most part, North Korea’s policy of juche (self-reliance) is causing extreme hardship for its citizens. The combination of recurring floods and droughts, a shortage of fer-
- 629. tilizers, and a lack of farm machinery keep the nation from reaching its peak food-production potential. As a result, North Korea often must rely on aid from abroad to feed its people. Failure to Achieve Rapid Growth Leaders in communist nations took note of the high rates of economic growth in countries such as Hong Kong, Singapore, South Korea, and Taiwan—called Asia’s four tigers. That a once-poor region of the world had so rapidly achieved such astounding growth awakened central planners to the possibilities. They realized that an economic system based on private ownership fosters growth much better than one hampered by central planning. North Korea, once again, provides us with a good example. Each year for a decade until 1999, the North Korean economy contracted. Out of desperation, the country’s leaders quietly allowed limited free market reforms, and small bazaars soon dotted the countryside. Street-corner currency exchanges sprang up to help facilitate a tiny but growing trade with bordering Chinese merchants. Impoverished North Koreans could buy mobile phones and
- 630. found hope for a better life in DVDs of South Korean soap operas. But a disastrous attempt to reform its currency dealt a serious setback to North Korea’s experiment with the free market. Failure to Satisfy Consumer Needs People in centrally planned economies were tired of a standard of living that had slipped far below that found in market economies. Ironically, although central planning was conceived to create a more equitable system of distributing wealth, too many central planners failed to provide even basic necessities such as adequate food, housing, and medi- cal care. Underground (shadow) economies for all kinds of goods and services flourished and, in some cases, even outgrew “official” economies. Prices of goods on the black market were much higher than the official (and artificial) prices set by governments. Although farming is a high-tech endeavor in the world’s most advanced nations today, it is labor intensive and inefficient in North Korea. The government’s failed
- 631. communist economic policies hamper development and are at the root of its inability to afford fertilizers and modern machinery that could boost food production. Seemingly endless famines and economic collapse have cut North Korea’s life expectancy to 67 years for men and 75 years for women. Prevost Vincent/Hemis/Alamy Stock Photo M03_WILD9220_09_SE_C03.indd 79 10/30/17 8:48 PM 80 PART 2 • nATionAl BUsinEss EnViRonmEnTs Mixed Economy A mixed economy is a system in which land, factories, and other economic resources are rather equally split between private and government ownership. In a mixed economy, the government owns fewer economic resources than does the government in a centrally planned economy. Yet
- 632. in a mixed economy, the government tends to control the economic sectors that it considers important to national security and long-term stability. Such sectors usually include iron and steel manufacturing (for building military equipment), oil and gas production (to guarantee continued manufacturing and availability), and automobile manufacturing (to guarantee employment for a large portion of the workforce). Many mixed economies also maintain generous welfare systems to support the unemployed and to provide health care for the general population. Mixed economies are found all around the world: Denmark, France, Norway, Spain, and Sweden in Western Europe; India, Indonesia, Malaysia, Pakistan, and South Korea in Asia; Argen- tina in South America; and South Africa. Although all the governments of these nations do not centrally plan their economies, they all influence economic activity by means of special incen- tives, including hefty subsidies to key industries, and through significant government involvement in the economy.
- 633. ORIGINS OF THE MIXED ECONOMY Advocates of mixed economies contend that a successful economic system not only must be efficient and innovative but also should protect society from the excesses of unchecked individualism and organizational greed. The goal is to achieve low unemployment, low poverty, steady economic growth, and an equitable distribution of wealth by means of the most effective policies. Proponents of mixed economies point out that European and US rates of productivity and growth were almost identical for decades after the Second World War. Although the United States has created more jobs, it has done so at the cost of widening social inequality, proponents say. They argue that nations with mixed economies should not dismantle their social-welfare institutions but should modernize them so that they contribute to national com- petitiveness. Austria, the Netherlands, and Sweden are taking this route. In the Netherlands, labor unions and the government agreed to an epic deal involving wage restraint, shorter working hours, budget discipline, new tolerance for part-time
- 634. and temporary work, and the trimming of social benefits. As a result, unemployment in the Netherlands hovers around 6 percent. By comparison, the average jobless rate for all nations in the Euro currency area is around 10 percent.4 DECLINE OF MIXED ECONOMIES Many mixed economies are remaking themselves to more closely resemble free markets. When assets are owned by the government, there seems to be less incentive to eliminate waste or to practice innovation. Extensive government ownership on a national level tends to result in a lack of accountability, rising costs, and slow economic mixed economy Economic system in which land, factories, and other economic resources are rather equally split between private and government ownership. Unlike communist North Korea, South Korea’s economy is
- 635. grounded in capitalist principles. The quality of life in South Korea is so notably better versus North Korea that life expectancy is 10 years longer (77) for men and nine years longer (84) for women. By 2030 South Korea may lead the world in life expectancy and achieve 84 years for men and 91 for women. Contrast this with expectations in North Korea of just 70 for men and 78 for women. Noppasin Wongchum/Alamy Stock Photo M03_WILD9220_09_SE_C03.indd 80 10/30/17 8:48 PM CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 81 growth. Many government-owned businesses in mixed economies need large infusions of tax- payer money to survive as world-class competitors, which raises taxes and prices for goods and
- 636. services. Underpinning the move toward market-based systems is the sale of government-owned businesses. Move toward Privatization As discussed earlier, citizens of many European nations prefer a combination of rich benefits and higher unemployment to the low jobless rates and smaller social safety net of the United States. In France, for instance, the electorate continues to hold fast to a deeply embedded tradition of social welfare and job security in government-owned firms. Many French believe the social security and cohesion benefits of a more collectivist economy outweigh the efficiency advantages of an individualist one. Yet such attitudes are costly in terms of economic efficiency. The selling of government-owned economic resources to private operators is called privatization. Privatization helps eliminate subsidized materials, labor, and capital formerly pro- vided to government-owned companies. It also curtails the practice of appointing managers for political reasons rather than for their professional expertise. To
- 637. survive, newly privatized compa- nies must produce competitive products at fair prices because they are subject to the forces of the free market. The overall aim of privatization is to increase economic efficiency, boost productivity, and raise living standards. Market Economy In a market economy, most of a nation’s land, factories, and other economic resources are pri- vately owned, either by individuals or businesses. This means that who produces what and the prices of products, labor, and capital in a market economy are determined by the interplay of two forces: • Supply: the quantity of a good or service that producers are willing to provide at a specific selling price • Demand: the quantity of a good or service that buyers are willing to purchase at a specific selling price. As supply and demand change for a good or service, so does its
- 638. selling price. The lower a product’s price, the greater demand will be; the higher its price, the lower demand will be. Like- wise, the lower a product’s price, the smaller the quantity that producers will supply; the higher the price, the greater the quantity they will supply. In this respect, what is called the “price mecha- nism” (or “market mechanism”) dictates supply and demand. Market forces and uncontrollable natural forces also inf luence product prices. Chocolate lovers, for example, should consider how the interplay of several forces affects the price of cocoa, the principal ingredient in chocolate. Suppose cocoa consumption suddenly rises in large cocoa- consuming nations such as Britain, Japan, and the United States. Suppose further that disease and pests plague crops in cocoa-producing countries such as Brazil, Ghana, and the Ivory Coast. As worldwide consumption of cocoa begins to outstrip production, market pressure is felt on both the demand side (consumers) and the supply side (producers). Falling worldwide reserves of cocoa then force the price of cocoa higher.
- 639. ORIGINS OF THE MARKET ECONOMY Market economics is rooted in the belief that individual concerns should be placed above group concerns. According to this view, the entire group benefits when individuals receive incentives and rewards to act in certain ways. It is argued that people take better care of property they own and that individuals have fewer incentives to care for property under a system of public ownership. Laissez-Faire Economics For many centuries, the world’s dominant economic philosophy supported government control of a significant portion of a society’s assets and government involvement in its international trade. But in the mid-1700s a new approach to national eco- nomics called for less government interference in commerce and greater individual economic freedom. This approach became known as a laissez-faire system, loosely translated from French as “allow them to do [without interference].” Canada and the United States are examples of contemporary market economies. It is no acci- dent that both these countries have individualist cultures
- 640. (although Canada to a somewhat lesser privatization Policy of selling government-owned economic resources to private operators. market economy Economic system in which most of a nation’s land, factories, and other economic resources are privately owned, either by individuals or businesses. supply Quantity of a good or service that producers are willing to provide at a specific selling price demand Quantity of a good or service that buyers are willing to purchase at a specific selling price. M03_WILD9220_09_SE_C03.indd 81 10/30/17 8:48 PM
- 641. 82 PART 2 • nATionAl BUsinEss EnViRonmEnTs extent than the United States). Just as an emphasis on individualism fosters a democratic form of government, it also supports a market economy. FEATURES OF A MARKET ECONOMY To function smoothly and properly, a market economy requires three things: free choice, free enterprise, and price flexibility. • Free choice gives individuals access to alternative purchase options. In a market economy, few restrictions are placed on consumers’ ability to make their own decisions and exercise free choice. For example, a consumer shopping for a new car is guaranteed a variety from which to choose. The consumer can choose among dealers, models, sizes, styles, colors, and mechanical specifications such as engine size and transmission type.
- 642. • Free enterprise gives companies the ability to decide which goods and services to produce and the markets in which to compete. Companies are free to enter new and different lines of business, select geographic markets and customer segments to pursue, hire workers, and advertise their products. They are, therefore, guaranteed the right to pursue interests profit- able to them. • Price flexibility allows most prices to rise and fall to reflect the forces of supply and demand. By contrast, nonmarket economies often set and maintain prices at stipulated levels. Interfering with the price mechanism violates a fundamental principle of the market economy. GOVERNMENT’S ROLE IN A MARKET ECONOMY In a market economy, the government has far less direct involvement in business than it does in centrally planned or mixed economies. Even so, government in a market economy plays four important roles. Enforcing Antitrust Laws When one company is able to control
- 643. a product’s supply—and, therefore, its price—it is considered a monopoly. Antitrust (antimonopoly) laws prevent com- panies from fixing prices, sharing markets, and gaining unfair monopoly advantages. They are designed to encourage the development of industries with as many competing businesses as the market will sustain. In competitive industries, the forces of competition keep prices low. By enforcing antitrust laws, governments prevent trade-restraining monopolies and business combi- nations that exploit consumers and constrain the growth of commerce. The Federal Trade Commission (FTC) of the US government seeks to ensure the competitive and efficient functioning of the nation’s markets. But the FTC (www.ftc.gov) can also evaluate proposed deals outside the United States when the US market is likely to be affected. In fact, if the FTC fears potential anticompetitive effects, it can force companies to sell parts of a proposed combined business to third parties in return for agency approval.
- 644. Preserving Property Rights A smoothly functioning market economy rests on a legal sys- tem that safeguards individual property rights. By preserving and protecting individual property rights, governments encourage individuals and companies to take risks such as investing in technology, inventing new products, and starting new businesses. Strong protection of property rights ensures entrepreneurs that their claims to assets and future earnings are legally safe- guarded. This protection also supports a healthy business climate in which a market economy can f lourish. Providing a Stable Fiscal and Monetary Environment Unstable economies are often characterized by high inflation and unemployment. These forces create general uncertainty about a nation’s suitability as a place to do business. Governments can help control inflation through effective fiscal policies (policies regarding taxation and government spending) and monetary poli- cies (policies controlling money supply and interest rates). A stable economic environment helps companies make better forecasts of costs, revenues, and the
- 645. future of the business in general. Such conditions reduce the risks associated with future investments, such as new product development and business expansion. Preserving Political Stability A market economy depends on a stable government for its smooth operation and, indeed, for its future existence. Political stability helps businesses engage in activities without worrying about terrorism, kidnappings, and other political threats to their operations. (See Chapter 4 for extensive coverage of political risk and stability.) antitrust (antimonopoly) laws Laws designed to prevent com- panies from fixing prices, sharing markets, and gaining unfair monop- oly advantages. M03_WILD9220_09_SE_C03.indd 82 10/30/17 8:48 PM http://www.ftc.gov/
- 646. CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 83 ECONOMIC FREEDOM So far, we have discussed the essence of market economies as being grounded in freedom: free choice, free enterprise, free prices, and freedom from direct interven- tion by government. Map 3.1 (on pages 84–85) classifies countries according to their levels of economic freedom. Factors making up each country’s rating include trade policy, government intervention in the economy, property rights, black markets, and wage and price controls. Most developed economies are completely or mostly free, but most emerging markets and developing nations are far less free. Earlier, we learned that the connection between political freedom and economic growth is not at all certain. Likewise, we can say only that countries with the greatest economic freedom tend to have the highest standards of living, whereas those with the lowest freedom tend to have the lowest standards of living. But greater economic freedom does not guarantee a high per capita
- 647. income. A country can rank very low on economic freedom yet have a higher per capita income than a country with far greater freedom. QUiCK sTUdy 2 1. What factors contributed to the decline of centrally planned economies? 2. Which economic system strives toward low unemployment, low poverty, steady economic growth, and an equitable distribution of wealth? 3. Laissez-faire economics calls for less government interference in commerce and what else? 4. Countries with the greatest amount of economic freedom tend to have what? 3.3 Legal Systems A country’s legal system is its set of laws and regulations, including the processes by which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions. Many cultural factors—including ideas about social mobility, religion, and individualism— influence a nation’s legal system. Likewise, many laws and
- 648. regulations are enacted to safeguard cultural values and beliefs. For several examples of how legal systems differ from nation to nation, see this chapter’s Culture Matters feature, titled “Playing by the Rules.” A country’s political system also influences its legal system. Totalitarian governments tend to favor public ownership of economic resources and enact laws limiting entrepreneurial behavior. 3.3 Summarize the main elements of each type of legal system. legal system Set of laws and regulations, includ- ing the processes by which a coun- try’s laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions. Understanding legal systems in other countries begins with an awareness about cultural differences. Here are snapshots of sev-
- 649. eral nations’ legal environments: • Japan. Japan’s harmony-based, consensus-driven culture considers court battles to be a last resort. But with growing patent disputes and a rise in cross-border mergers, Japan is discovering the value of lawyers. Japan has just 22,000 licensed attorneys compared with more than one million in the United states. so Japan is minting thousands of new lawyers every year. Japanese businesses now litigate dis- putes that once might have been settled between parties. • Saudi Arabia. islam permeates every aspect of life in saudi Arabia and affects its laws, politics, economics, and social development. islamic law is grounded in religious teachings contained in the Koran and governs both criminal and civil cases. The Koran, in fact, is considered saudi Arabia’s constitu- tion. The king and the council of ministers exercise all executive and legislative authority within the framework of islamic law. • China. Factory workers in China must sometimes endure military-style drills, verbal abuse, and mockery. But labor groups are winning higher wages, better working condi- tions, and better housing from a flock of lawyers and law students who hold free seminars and argue labor cases in
- 650. China’s courts. inadequate protection of workers’ rights is giving way to better conditions for China’s 169 million fac- tory workers. • Want to Know More? Visit the law library of Congress (www.loc.gov/law/help/guide/nations/japan.php), the Royal Embassy of saudi Arabia (www.saudiembassy.net), and China Gate (en.chinagate.cn). Sources: “Stability v. Rights: Balancing Act,” The Economist (www.economist.com), Janu- ary 18, 2014; David Barboza, “After Suicides, Scrutiny of China’s Grim Factories,” New York Times (www.nytimes.com), June 6, 2010; “Saudi Arabia: Our Women Must Be Pro- tected,” The Economist, April 24, 2008, pp. 64–65; “Japan: Lawyers Wanted. No, Really,” Bloomberg Businessweek (www.businessweek.com), April 2, 2006. CULTURE MATTERS Playing by the Rules M03_WILD9220_09_SE_C03.indd 83 10/30/17 8:48 PM http://www.nytimes.com/
- 651. http://en.chinagate.cn/ http://www.loc.gov/law/help/guide/nations/japan.php http://www.businessweek.com/ http://www.economist.com/ http://www.saudiembassy.net/ 84 PART 2 • nATionAl BUsinEss EnViRonmEnTs BAHAMAS JAMAICA HAITI CUBA BARBADOS TRINIDAD & TOBAGO DOMINICAN REPUBLIC NICARAGUA
- 652. COSTA RICA PANAMA HONDURAS VENEZUELA COLOMBIA DUTCH ANTILLES PUERTO RICO A L A S K A C A N A D A M E X I C O CUBA JAMAICA BELIZE DOMINICAN
- 653. REPUBLIC HAITI PUERTO RICO GUATEMALA COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO SURINAME
- 654. FRENCH GUIANA ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS ISLANDS G R E E N L A N D ICELAND NETHERLANDS
- 655. UNITED KINGDOM IRELAND FRANCE BELGIUM LUXEMBOURG SPAIN PORTUGAL MONACO MOROCCO WESTERN SAHARA A L G E R I A MAURITANIA
- 656. SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST G H A N A T
- 657. O G O B E N IN CAMEROON EQUATORIAL GUINEA GABON ANDORRAU N I T E D S TAT E S O F A M E R I C A C H I
- 658. L E GALAPAGOS ISLANDS A R C T I C O C E A N S O U T H AT L A N T I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N
- 659. GUYANA F R A N C E BELGIUM NETHER- LANDS G E R M A N Y LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP.
- 660. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA
- 661. CYPRUS L I B YA TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK SWEDEN ALGERIA LICHTENSTEIN
- 662. B l a c k S e aBOSNIA- HERZEGOVINA BAHRAIN CAPE VERDE Map 3.1 Countries Ranked by Level of Economic Freedom M03_WILD9220_09_SE_C03.indd 84 10/30/17 8:48 PM CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 85 Level of economic freedom 80-100% free 70-79.9% free 60-69.9% free
- 663. 50-59.9% free 0-49.9% free Not ranked FINLAND DENMARK NETHERLANDS UNITED KINGDOM FRANCE LUXEMBOURG GERMANY POLAND BELARUS RUSSIA U K R A I N ECZECH
- 665. TURKEY CYPRUS A L G E R I A L I B YA TUNISIA M A L I BURKINA FASO B E N IN NIGERIA N I G E R C H A D E G Y P T S U D A N ERITREA
- 666. E T H I O P I A CENTRAL AFRICAN REPUBLICCAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC RWANDA BURUNDI UGANDA KENYA SOMALIA ANGOLA
- 668. GEORGIA ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN IRAQ IRAN SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN
- 670. VIETNAM M A L AY S I A BRUNEI P H I L I P P I N E S TAIWAN HONG KONG I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJI VANUATU NEW CALEDONIAA U S T R A L I A
- 671. NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPAN C H I N A ANDORRA N O R W A
- 673. DEMOCRATIC REPUBLIC (ZAIRE) DJBOUTI SLOVENIA SINGAPORE A R C T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES
- 674. CROATIA MYANMAR (BURMA) LATVIA LITHUANIA CAPE VERDE MALTA MAURITIUS S O U T H S U D A N M03_WILD9220_09_SE_C03.indd 85 10/30/17 8:48 PM 86 PART 2 • nATionAl BUsinEss EnViRonmEnTs By contrast, democracies tend to encourage entrepreneurial activity and protect business with strong property-rights laws. The rights and responsibilities of parties to business transactions also differ from nation to nation. Political systems and legal
- 675. systems, therefore, are naturally inter- locked. A country’s political system inspires and endorses its legal system, and its legal system legitimizes and supports its political system. Legal systems are frequently influenced by political moods and upsurges of nationalism— the devotion of a people to their nation’s interests and advancement. Nationalism typically involves intense national loyalty and cultural pride and is often associated with drives toward national independence. In India, for example, most business laws originated when the country was strug- gling for “self-sufficiency.” As a result, the legal system tended to protect local businesses from international competition. Although years ago India had nationalized many industries and closely scrutinized business applications, today its government is embracing globalization by enacting pro-business laws. With that brief introduction, let’s now examine the key characteristics of com- mon law, civil law, and theocratic law. nationalism Devotion of a people to
- 676. their nation’s interests and advancement. Common Law The practice of common law originated in eleventh-century England and was adopted in that nation’s territories worldwide. The US legal system, therefore, is based largely on the common law tradition (although it integrates some aspects of civil law). A common law legal system reflects three elements: • Tradition A country’s legal history • Precedent Past cases that have come before the courts • Usage How laws are applied in specific situations. The justice system decides cases by interpreting the law based on tradition, precedent, and usage. Yet each law may be interpreted somewhat differently in each case to which it is applied. In turn, each new interpretation sets a precedent that may be followed in later cases. As new precedents arise, laws are altered to clarify vague wording or to accommodate situations not previously considered.
- 677. Business contracts tend to be lengthy in common-law nations (especially the United States) because they must consider many possible contingencies and many possible interpretations of the law in case of a dispute. Companies devote considerable time to devising clear contracts and spend large sums of money on legal advice. On the positive side, common-law systems are flex- ible. Instead of applying uniformly to all situations, laws take into account particular situations and circumstances. The common-law tradition prevails in Australia, Britain, Canada, Ireland, New Zealand, the United States, and some nations of Asia and Africa. Civil Law The origins of the civil law tradition can be traced to Rome in the fifth century b.c. It is the world’s oldest and most common legal tradition. A civil law system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are
- 678. codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters. But civil law systems can ignore the unique circumstances of particular cases. Civil law is practiced in Cuba, Puerto Rico, Quebec, all of Central and South America, most of Western Europe, and many nations in Asia and Africa. common law Legal system based on a coun- try’s legal history (tradition), past cases that have come before its courts (precedent), and how laws are applied in specific situations (usage). Theocratic Law A legal tradition based on religious teachings is called theocratic law. Three prominent theocratic legal systems are Islamic, Hindu, and Jewish law. Although Hindu law was restricted by India’s
- 679. 1950 constitution, in which the state appropriated most legal functions, it does persist as a cul- tural and spiritual force. Likewise, although Jewish law remains a strong religious force, it has served few legal functions since the eighteenth century, when most Jewish communities lost their judicial autonomy. Islamic law is the most widely practiced theocratic legal system today. Islamic law was initially a code governing moral and ethical behavior and was later extended to commercial transactions. It restricts the types of investments companies can make and sets guidelines for business transactions. According to Islamic law, for example, banks cannot charge interest on loans or pay interest on deposits. Instead, banks receive a portion of the profits earned by investors who borrow funds and pay depositors from these earnings. Likewise, because the products of alcohol- and tobacco-related businesses violate Islamic beliefs, firms abiding by Islamic law cannot invest in such companies. civil law Legal system based on a detailed
- 680. set of written rules and statutes that constitute a legal code. theocratic law Legal system based on religious teachings. MyLab Management Watch It Olympic Athletes’ Outfits Made in China Apply what you have learned so far about political economy and nationalism. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case about the out- fits of US Olympic athletes being made in China and answer questions. M03_WILD9220_09_SE_C03.indd 86 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 87 Theocratic Law
- 681. A legal tradition based on religious teachings is called theocratic law. Three prominent theocratic legal systems are Islamic, Hindu, and Jewish law. Although Hindu law was restricted by India’s 1950 constitution, in which the state appropriated most legal functions, it does persist as a cul- tural and spiritual force. Likewise, although Jewish law remains a strong religious force, it has served few legal functions since the eighteenth century, when most Jewish communities lost their judicial autonomy. Islamic law is the most widely practiced theocratic legal system today. Islamic law was initially a code governing moral and ethical behavior and was later extended to commercial transactions. It restricts the types of investments companies can make and sets guidelines for business transactions. According to Islamic law, for example, banks cannot charge interest on loans or pay interest on deposits. Instead, banks receive a portion of the profits earned by investors who borrow funds and pay depositors from these earnings. Likewise, because the products of alcohol- and tobacco-related businesses violate Islamic beliefs, firms abiding by Islamic law
- 682. cannot invest in such companies. civil law Legal system based on a detailed set of written rules and statutes that constitute a legal code. theocratic law Legal system based on religious teachings. QUiCK sTUdy 3 1. Which legal system decides cases by interpreting the law based on tradition, precedent, and usage? 2. Which legal system is based on a detailed set of written rules and statutes that constitute a legal code? 3. A legal tradition based on faithless teaching is called what? 3.4 Global Legal Issues Earlier in this chapter, we saw how international companies
- 683. work to overcome obstacles that an unfamiliar political system presents. Firms must adapt to dissimilar legal systems in global mar- kets because there is no clearly defined body of international law that all nations accept. There is a movement toward standardizing the interpretation and application of laws in more than one country, but this does not involve standardizing entire legal systems. Enduring differences in legal systems, therefore, can force companies to continue the costly practice of hiring legal experts in each country where they operate. Still, international treaties and agreements exist in intellectual property rights, antitrust regu- lation, taxation, contract arbitration, and general matters of trade. International organizations that promote standardization include the United Nations (UN; www.un.org), the Organization for Economic Cooperation and Development (OECD; www.oecd.org), and the International Institute for the Unification of Private Law (www.unidroit.org). The European Union is standardizing parts of its members’ legal systems to facilitate commerce in Western Europe. Let’s now examine the
- 684. key legal issues facing companies that are active in international business. Intellectual Property Property that results from people’s intellectual talent and abilities is called intellectual property. It includes graphic designs, novels, computer software, machine-tool designs, and secret formulas, such as that for making Coca-Cola. Most national legal systems protect property rights—the legal rights to resources and any income they generate. Similar to other types of property, intellectual property can be traded, sold, and licensed in return for fees and/or royalty payments. Intellectual property laws are designed to compensate people whose property rights are violated. Intellectual property laws differ greatly from nation to nation. Business Software Alliance (BSA; www.bsa.org), the trade body for business software makers, conducts an annual study of software piracy rates around the globe. Where illegal copies of business software recently made up 17 percent of the US domestic market (the lowest in the
- 685. world), pirated software made up 90 percent of the market in both Libya and Zimbabwe (the highest worldwide). Globally, business software piracy averages around 39 percent and costs business software makers nearly $52 billion annually.5 Figure 3.2 shows piracy rates for some of the nations included in the BSA study. 3.4 Outline the global legal issues facing international firms. United Nations (UN) International organization formed after World War II to provide leader- ship in fostering peace and stability around the world. intellectual property Property that results from people’s intellectual talent and abilities. property rights Legal rights to resources and any income they generate.
- 686. M03_WILD9220_09_SE_C03.indd 87 10/30/17 8:48 PM http://www.un.org/ http://www.oecd.org/ http://www.unidroit.org/ http://www.bsa.org/ 88 PART 2 • nATionAl BUsinEss EnViRonmEnTs 0 10 20 30 40 50 60
- 692. Figure 3.2 Business Software Piracy Source: Based on the BSA Global Software Survey (Washington, D.C.; Business Software Alliance, May 2016), pp. 8–9, available at www.bsa.org/globalstudy. As these figures suggest, the laws (or the enforcement of such laws) of some countries are softer on piracy than the laws of some other nations. Although peddlers of pirated CDs and DVDs operate openly from sidewalk kiosks in China, China’s government is doing more to tackle piracy recently. Software companies in the United States and the European Union continually lobby their governments to pressure other nations to adopt stronger laws. Technically, intellectual property results in industrial property (in the form of either a patent or a trademark) or copyright and confers a limited monopoly on its holder. INDUSTRIAL PROPERTY Industrial property includes patents and trademarks, which are often
- 693. a firm’s most valuable assets. Laws protecting industrial property are designed to reward inven- tive and creative activity. Industrial property is protected internationally under the Paris Conven- tion for the Protection of Industrial Property (www.wipo.int), to which nearly 100 countries are signatories. A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. Current US patent law went into effect on June 8, 1995, and is in line with the systems of most developed nations. Its provisions are those of the World Trade Organization (WTO), the international organization that regulates trade between nations. The WTO (www.wto.org) typically grants patents for a period of 20 years. The 20-year term begins when a patent application is filed with a country’s patent office, not when it is finally granted. Patents can be sought for any invention that is new, useful, and not obvious to any indi- vidual of ordinary skill in the relevant technical field. Patents motivate companies to pursue inventions and make them available to consumers because they
- 694. protect investments that companies make in research and development. Trademarks are words or symbols that distinguish a product and its manufacturer. The Nike (www.nike.com) “swoosh” is a trademark, as is the name “Lexus” (www.lexus.com). Trademark law creates incentives for manufacturers to invest in developing new products. It also benefits consumers because they know what to expect when they buy a particular brand. In other words, you would not expect a canned drink labeled “Monster” to taste like one labeled “Sprite.” Trademark protection typically lasts indefinitely, provided the word or symbol continues to be distinctive. Ironically, this stipulation presents a problem for companies such as Coca-Cola (www.coca-cola.com) and Xerox (www.xerox.com), whose trademarks “Coke” and “Xerox” have evolved into generic terms for all products in their respective categories. Trademark laws differ from country to country, though some progress toward standardization is occurring. The European Union, for example, opened a trademark-protection office to
- 695. police trademark infringement against firms that operate in any European Union country. industrial property Patents and trademarks. patent Property right granted to the inven- tor of a product or process that excludes others from making, using, or selling the invention. trademark Property right in the form of words or symbols that distinguish a prod- uct and its manufacturer. M03_WILD9220_09_SE_C03.indd 88 10/30/17 8:48 PM http://www.lexus.com/ http://www.cocacola.com/ http://www.xerox.com/ http://www.wipo.int/ http://www.wto.org/ http://www.nike.com/
- 696. http://www.bsa.org/globalstudy CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 89 Designers who own trademarks, such as Chanel (www.chanel.com), Christian Dior (www .dior.com), and Gucci (www.gucci.com), have long been plagued by shoddily made counterfeit handbags, shoes, shirts, and other products. But recently, pirated products of equal or nearly equal quality are turning up, especially in Italy. Most Italian owners of luxury, brand-name leather goods and jewelry, for example, outsource production to small manufacturers. It is not hard for these same artisans to counterfeit extra copies of a high-quality product. Bootleg copies of a Prada (www.prada.com) backpack that costs $500 in New York can be bought for less than $100 in Rome. Jewelry shops in Milan can buy fake watches labeled Bulgari (www.bulgari.com) and Rolex (www.rolex.com) for $300 and sell them retail for $2,500. COPYRIGHTS Copyrights give creators of original works the
- 697. freedom to publish or dispose of them as they choose. A copyright is typically denoted by the well-known symbol ©, a date, and the copyright holder’s name. A copyright holder has the legal rights to: • Reproduce the copyrighted work. • Derive new works from the copyrighted work. • Sell or distribute copies of the copyrighted work. • Perform the copyrighted work. • Display the copyrighted work publicly. Copyright holders include artists, photographers, painters, literary authors, publishers, musi- cal composers, and software developers. Works created after January 1, 1978, are automatically copyrighted for the creator’s lifetime plus 50 years. Publishing houses receive copyrights for either 75 years from the date of publication or 100 years after creation, whichever comes first. Copyrights are protected under the Berne Convention (www.wipo.int), which is an international copyright treaty to which the United States is a member, and the 1954 Universal Copyright Con- vention. More than 50 countries abide by one or both of these
- 698. treaties. A copyright is granted for the tangible expression of an idea, not for the idea itself. For example, no one can copyright the idea for a movie about the sinking of the Titanic. But once a film is made that expresses its creator’s treatment of the subject, that film can be copyrighted. Perhaps the most well-known song around the world, “Happy Birthday to You,” is actu- ally protected by US copyright law. The song was composed in 1859 and copyrighted in 1935. Although the copyright was set to expire in 2010 on the song’s 75th copyright birthday, the US Congress extended it until 2030. Time Warner owns the copyright and stands to gain as much as $20 million from the extension. Product Safety and Liability Product safety laws in most countries set standards that manufactured products must meet. Product liability holds manufacturers, sellers, individuals, and others responsible for damage, injury, or death caused by defective products. Injured parties
- 699. can sue for monetary compensation through civil lawsuits and for fines or imprisonment through criminal lawsuits. Developed nations have the toughest product liability laws, whereas developing and emerging countries have the weakest laws. Business insurance costs and legal expenses are greater in nations with strong product liability laws, where damage awards can be large. Likewise, enforcement of product liability laws differs from nation to nation. In the most developed nations, for example, tobacco companies are regularly under attack for the negative health effects of tobacco and nico- tine. Critics say that the tobacco industry markets aggressively to women and children in devel- oping countries where regulations are weak and many people do not know that smoking is dangerous.6 Taxation National governments use income and sales taxes for many purposes. They use tax revenue to pay government salaries, build military capabilities, and shift earnings from people with high incomes
- 700. to the poor. Nations may also tax imports in order to make them more expensive and give locally made products an advantage among price-sensitive consumers. Nations pass indirect taxes, called “consumption taxes,” which help pay for the consequences of using particular products. Consumption taxes on products such as alcohol and tobacco help pay the health-care costs of treating illnesses that result from using these products. Similarly, copyright Property right giving creators of original works the freedom to publish or dispose of them as they choose. Berne Convention International treaty that protects copyrights. product liability Responsibility of manufacturers, sellers, individuals, and others for damage, injury, or death caused by
- 701. defective products. M03_WILD9220_09_SE_C03.indd 89 10/30/17 8:48 PM http://www.gucci.com/ http://www.chanel.com/ http://www.dior.com/ http://www.dior.com/ http://www.prada.com/ http://www.bulgari.com/ http://www.rolex.com/ http://www.wipo.int/ 90 PART 2 • nATionAl BUsinEss EnViRonmEnTs gasoline taxes help pay for the road and bridge repairs needed to counteract the effects of traffic and weathering. Many countries impose a value added tax (VAT)—a tax levied on each party that adds value to a product throughout its production and distribution. The United States has not previ- ously implemented a VAT tax, but the nation’s considerable
- 702. debt level is causing speculation that it may impose one. Supporters of the VAT system contend that it distributes taxes on retail sales more evenly between producers and consumers. Suppose, for example, that a shrimper sells the day’s catch of shrimp for $1 per pound and that the country’s VAT is 10 percent (see Table 3.1). The shrimper, processor, wholesaler, and retailer pay taxes of $0.10, $0.07, $0.11, and $0.10, respectively, for the value that each adds to the product as it makes its way to consumers. Con- sumers pay no additional tax at the point of sale because the government has already collected taxes from each party in the value chain. Still, consumers end up paying the tax because producers and distributors must increase prices to compensate for their tax burdens. So that the poor are not overly burdened, many countries exclude the VAT on certain items such as children’s clothing. Antitrust Regulations Antitrust laws try to provide consumers with a wide variety of products at fair prices. The United States and the European Union are the world’s strictest antitrust
- 703. regulators. In Japan, the Fair Trade Commission enforces antitrust laws but is often ineffective because absolute proof of wrongdoing is needed to bring charges. Companies based in strict antitrust countries often argue that they are at a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated segments of a certain market. That is why firms in strict antitrust countries often lobby for exemptions in certain international transactions. Small businesses also argue that they could better compete against large international companies if they could join forces without fear of violating antitrust laws. In the absence of a global antitrust enforcement agency, international companies must concern themselves with the antitrust laws of each nation where they do business. In fact, a nation (or group of nations) can block a merger or acquisition between two nondomestic companies if those companies do a good deal of business there. This happened to the proposed $43 billion merger
- 704. between General Electric (GE; www.ge.com) and Honeywell (www.honeywell.com). GE wanted to marry its manufacture of airplane engines to Honeywell’s production of advanced electronics for the aviation industry. Although both companies are based in the United States, together they employed 100,000 Europeans. GE alone earned $25 billion in Europe the year before the proposed merger. The European Union blocked the merger because it believed the result would be higher prices for customers, particularly airlines. value added tax (VAT) Tax levied on each party that adds value to a product throughout its production and distribution. Production stage selling Price Value Added 10% VAT Total VAT Shrimper $1.00 $1.00 $0.10 $0.10 Processor 1.70 0.70 0.07 0.17 Wholesaler 2.80 1.10 0.11 0.28
- 705. Retailer 3.80 1.00 1.10 0.38 TABLE 3.1 Effect of Value Added Taxes (VAT) QUiCK sTUdy 4 1. What are some examples of intellectual property? 2. What are the different types of industrial property? 3. Laws that hold manufacturers, sellers, individuals, and others responsible for damage, injury, or death caused by defective products are called what? M03_WILD9220_09_SE_C03.indd 90 10/30/17 8:48 PM http://www.ge.com/ http://www.honeywell.com/ CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 91 3.5 Ethics and Social Responsibility We learned in Chapter 2 that when a company goes global its managers encounter many
- 706. unfamiliar cultural rules that govern human behavior. Although legal systems set clearly defined boundaries for lawful individual and corporate behavior, they are inadequate for dilemmas of ethics and social responsibility. Ethical issues and social responsibility are related to, but are not the same as, legal issues. When laws are silent about a particular mat- ter, international businesspeople step into a gray area of personal ethics and business responsibility. Ethical behavior is personal behavior in accordance with guidelines for good conduct or morality. Ethical dilemmas are not legal questions. When a law exists to guide a manager toward a legally correct action, that path must be followed. In an ethical dilemma, there is no right or wrong decision. There are alternatives, however, that may be equally valid in ethical terms depending on one’s perspective. In addition to the need for individual managers to behave ethically, businesses are expected to exercise corporate social responsibility—the practice of
- 707. going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities. Corporate social responsibility (or CSR, as it is known) includes a wide variety of activities, including giving to the poor, building schools in developing countries, and protecting the global environment. Most conscientious business leaders realize that the futures of their companies rest on healthy workforces and environments worldwide. For example, soft drink makers sup- port all sorts of environmental initiatives because they understand that their futures depend on an ample supply of clean drinking water. But firms should not produce public relations cam- paigns that present a business as socially responsible if it does not truly embrace CSR principles. We can think of CSR as consisting of three layers of activity. The first layer is traditional philanthropy, whereby a corporation donates money and, perhaps, employee time toward a spe- cific social cause. The second layer is related to risk management, whereby a company develops
- 708. a code of conduct that it will follow in its global operations and agrees to operate with greater transparency. The third layer is strategic CSR, in which a business builds social responsibility into its core operations to create value and build competitive advantage.7 Philosophies of Ethics and Social Responsibility Business ethics and social responsibility have four commonly cited philosophies. The Friedman view—named for its main supporter, the late economist Milton Friedman—says that a company’s sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law.8 Imagine a company that moves its pollution- generating operations from a country having strict and expensive environmental-protection laws to a country having no such laws. Managers subscribing to the Friedman philosophy would applaud this decision. They would argue that the company is doing its duty to increase profits for its owners and is operating within the law in the foreign country. Many people disagree with this argument and say the discussion is not whether a company has CSR obligations but how it will fulfill them.
- 709. The cultural relativist view says that a company should adopt local ethics wherever it operates because all belief systems are determined within a cultural context. Cultural relativism sees truth, itself, as relative and argues that right and wrong are determined within a specific situation. The expression “When in Rome, do as the Romans do” captures the essence of cultural relativism. Consider a company that opens a factory in a developing market and, following local customs, employs child laborers. The cultural relativist manager would argue that this company is acting appropriately and in accordance with local standards of conduct. Many people strongly oppose this line of ethical reasoning. The righteous moralist view says that a company should maintain its home-country ethics wherever it operates because the home-country’s view of ethics and responsibility is supe- rior to others’ views. Imagine a company that expands from its developed-country base to an emerging market where local managers commonly bribe officials. Suppose headquarters
- 710. detests the act of bribery and instructs its subsidiary managers to refrain from bribing any local officials. In this situation, headquarters is imposing its righteous moralist view on local managers. 3.5 Describe the main issues of global ethics and social responsibility. ethical behavior Personal behavior in accordance with guidelines for good conduct or morality. corporate social responsibility Practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities. M03_WILD9220_09_SE_C03.indd 91 10/30/17 8:48 PM
- 711. 92 PART 2 • nATionAl BUsinEss EnViRonmEnTs The utilitarian view says that a company should behave in a way that maximizes “good” outcomes and minimizes “bad” outcomes wherever it operates. The utilitarian manager asks the question, “What outcome should I aim for?” and answers, “That which produces the best out- come for all affected parties.” In other words, utilitarian thinkers say the right behavior is that which produces the greatest good for the greatest number. Consider, again, the righteous moralist company above that instructs its employees not to bribe local officials in the emerging market. Now suppose a manager learns that, by bribing a local official, the company will finally obtain permission to expand its factory and create 100 well -paying jobs for the local community. If the manager pays the bribe based on his or her calculations that more people will benefit than will be harmed by the outcome, he or she is practicing utilitarian ethics. Although businesses can create policies regarding ethics and
- 712. social responsibility, issues arise daily that can cause dilemmas for international managers. Let’s now learn more about several of these key issues. Bribery and Corruption Similar to other cultural and political elements, the prevalence of corruption varies from nation to nation. In certain countries, bribes are routinely paid to distributors and retailers in order to push a firm’s products through distribution channels. Bribes can mean the difference between obtaining an important contract and being completely shut out of a market. But corruption is detrimental to society and business. Among other things, corruption can send resources toward inefficient uses, hurt economic development, distort public policy, and damage national integrity. Map 3.2 on pages 94–95 shows how countries rate on their perceived levels of corruption. The higher a country’s score on the corruption perceptions index (CPI), the less corrupt it is perceived to be by international managers. What stands out immediately
- 713. on this map is that the poorer and least developed nations tend to be perceived as being most corrupt (such as Russia, much of Africa, and areas in the Middle East). This reflects the hesitancy on the part of international companies about investing in corrupt economies. Enron Corporation made history when it acknowledged in a federal filing that it had over- stated its earnings. Investors fled in droves as Enron stock became worthless and the company went bankrupt. Although executives had earned millions over the years in salaries and bonuses, Enron’s rank-and-file employees saw their retirement savings disappear as the firm disintegrated. European banks lost around $2 billion that they had lent to Enron and its subsidiaries. Chairman of the board Kenneth Lay (now deceased) and CEO Jeffrey Skilling were convicted on criminal charges. Then a criminal indictment was filed against accounting firm Arthur Andersen, Enron’s auditor, for shredding documents related to its work for Enron. With its reputation irreparably damaged, Andersen also collapsed.
- 714. The financial losses and diminished confidence in business that resulted from Enron’s col- lapse prompted the US Congress to pass the Sarbanes–Oxley Act (Sarbox) on corporate gover- nance. The law established new, stringent accounting standards and reporting practices for firms. Around the world, governments, accounting standards boards, other regulators, and interest groups won the fight for higher standards and more transparent financial reporting by companies. Busi- nesses worldwide received the message that fudging the accounting numbers, misrepresenting the firm’s financial health, and running a company in that gray area between right and wrong is unethical and, now, illegal. Some people believe Sarbox needs to be reformed because of the financial burden that com- panies face in conforming to the act’s requirements. Regulators , securities experts, and scholars (who largely praise Sarbox) are pitted against chief financial officers—many of whom say that the act should be reformed or repealed because its costs outweigh its benefits.
- 715. Labor Conditions and Human Rights To fulfill their responsibilities to society, companies are monitoring the actions of their own employees and the employees of companies with which they conduct business. Pressure from human rights activists drove conscientious apparel companies to introduce codes of conduct and monitoring mechanisms for their international suppliers. Levi - Strauss (www.levistrauss.com) pioneered the use of practical codes to control working conditions at contractors’ facilities. The M03_WILD9220_09_SE_C03.indd 92 10/30/17 8:48 PM http://www.levistrauss.com/ CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 93 company does business only with partners who meet its “Terms of Engagement,” which sets minimal guidelines regarding ethical behavior, environmental and legal requirements, employment standards, and community involvement.9
- 716. Consider one case publicized by human rights and labor groups investigating charges of worker abuse at the factory of one of Nike’s Vietnamese suppliers. Twelve of 56 female employees reportedly fainted when a supervisor forced them to run around the factory as punishment for not wearing regulation shoes. Nike confirmed the report and, in suspending the supervisor, took steps to implement practices more in keeping with the company’s home-country ethics. International law says that only nations can be held liable for human rights abuses. But activist groups can file a lawsuit against a US business for an alleged human rights violation under the Alien Tort Claims Act by alleging a company’s complicity in the abuse. Yahoo (www.yahoo.com) felt the power of this law when two Chinese dissidents were jailed after the company gave data it had on them to Chinese authorities. Yahoo reached an out-of- court settlement with the families of the jailed men. And despite denials of any responsibility in the matter, US oil company Unocal, now part of Chevron (www.chevron.com), settled out of court over allegations of complicity in
- 717. government soldiers’ abuse of villagers during construction of an oil pipeline in Myanmar in the 1990s.10 MyLab Management Try It Apply what you have learned about ethics and social responsibility as they relate to labor conditions. If your instructor has assigned this, go to www.pearson.com/mylab/management to perform a simulation on the ethical issues that a human resource manager can encounter abroad. Fair Trade Practices Starbucks (www.starbucks.com) works hard to operate in a socially responsible manner by trying to ease the plight of citizens in poor coffee-producing countries. Starbucks does this by building schools, health clinics, and coffee-processing facilities to improve the well-being of families in coffee-farming communities. The company also sells what it calls “fair trade coffee.” Fair trade products are those that involve companies working with suppliers in more equitable, meaningful, and sustainable ways. For Starbucks, this means ensuring that coffee farmers earn a fair price for
- 718. their coffee crop and helping them farm in environmentally friendly ways.11 Fair Trade USA (www.fairtradeusa.org) is the nonprofit organization that independently cer- tifies fair trade products such as Starbucks coffee. The Fair Trade model of international trade benefits more than one million farmers and farm laborers in 58 developing countries across Africa, Asia, and Latin America. Fair Trade products now include coffee, tea, herbs, cocoa, chocolate, fruit, rice, sugar, flowers, honey, and spices. Fair Trade USA certifies that a product meets the following criteria:12 • Fair Prices Producer groups receive a guaranteed minimum floor price. • Fair Labor Conditions Farms do not employ children, and workers are given freedom of association, safe working conditions, and a living wage. • Direct Trade Whenever possible, importers purchase from producer groups to eliminate intermediaries.
- 719. • Democratic Community Development Farmers and workers decide how to spend their Fair Trade premiums in social and business development projects. • Environmental Sustainability Farming methods protect the health of farmers and pre- serve ecosystems. Environment Concern for the environment and ecosystem is no longer left to government agencies and non- governmental organizations. Today companies pursue “green” initiatives to reduce their toll on the environment and to reduce operating costs and boost profit margins. Carbon footprint is the carbon footprint Environmental impact of green- house gases (measured in units of carbon dioxide) that results from human activity. M03_WILD9220_09_SE_C03.indd 93 10/30/17 8:48 PM
- 720. http://www.starbucks.com/ http://www.fairtradeusa.org/ http://www.yahoo.com/ http://www.chevron.com/ http://www.pearson.com/mylab/management 94 PART 2 • nATionAl BUsinEss EnViRonmEnTs A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA
- 721. COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA
- 722. ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS ISLANDS GREENLAND ICELAND DENMARKUNITED KINGDOM IRELAND
- 724. A L G E R I A TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST G H
- 725. A N A T O G O B E N IN NIGERIA N I G E R CAMEROON EQUATORIAL GUINEA GABON
- 726. ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E N O HAWAII GALAPAGOS ISLANDS A R C T I C O C E A N
- 727. S O U T H AT L A N T I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG
- 728. P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO
- 729. R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA MONACO SAN
- 730. MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA Map 3.2 Corruption Perception Index M03_WILD9220_09_SE_C03.indd 94 10/30/17 8:48 PM CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 95
- 731. 9.0 to 10.0 8.0 to 8.9 7.0 to 7.9 6.0 to 6.9 5.0 to 5.9 4.0 to 4.9 3.0 to 3.9 2.0 to 2.9 1.0 to 1.9 no data available CPI Score FINLAND DENMARK
- 732. LUXEMBOURG GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E CZECH REP. AUSTRIA SWITZ. LICHT. ITALY SLOVAKIA
- 733. HUNGARY SERBIA AND MONTENEGRO BULGARIA ROMANIA MOLDOVA GREECE TURKEY CYPRUS A L G E R I A L I B Y A TUNISIA NIGERIA N I G E R C H A D E G Y P T
- 734. S U D A N ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC RWANDA BURUNDI UGANDA KENYA SOMALIA
- 736. RÉUNION GEORGIA ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN IRAQ I R A N SAUDI ARABIA QATAR OMAN
- 737. YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA NEPAL BHUTAN BANGLADESH LAOS
- 738. THAILAND CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW
- 739. ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A N O R W A Y
- 741. REPUBLIC (ZAIRE) DJBOUTI SLOVENIA MYANMAR (BURMA) SINGAPORE A R C T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES
- 742. CROATIA S O U T H S U D A N M03_WILD9220_09_SE_C03.indd 95 10/30/17 8:48 PM 96 PART 2 • nATionAl BUsinEss EnViRonmEnTs environmental impact of greenhouse gases (measured in units of carbon dioxide) that result from human activity. It consists of two components:13 • Primary Footprint Direct carbon dioxide emissions from the burning of fossil fuels, including domestic energy consumption and transportation (such as electricity and gasoline). • Secondary Footprint Indirect carbon dioxide emissions from the whole life cycle of products (from their manufacture to eventual breakdown).
- 743. Companies at the leading edge of the green movement are printing a number on their prod- ucts that represents the grams of carbon dioxide emitted from producing and shipping them to retailers. The number signifies the environmental impact of all the materials, chemicals, and so on, used in producing and distributing a good. For example, the United Kingdom’s No. 1 selling snack food brand, Walker (www.walkers-crisps.co.uk), stamps “75g” on its packets of cheese- and onion-f lavored potato chips, or crisps—meaning 75 grams of carbon dioxide were emitted in producing and shipping each packet. Footwear and clothing maker Timberland (www .timberland.com) labels its products with a score ranging from 0 to 10. A score of “0” means producing and shipping a product emitted less than 2.5 kilograms of carbon dioxide; a product with a score of “10” emitted 100 kilograms of carbon dioxide— roughly equivalent to driving a car 240 miles.14 Another trendsetter in reducing its carbon footprint is Marriott International (www.marriott
- 744. .com). The hotel company’s employee cafeteria replaced paper and plastic containers with real plates and biodegradable potato-based containers called Spudware. Marriott gives employees reusable plastic water bottles and lets them exchange burned- out regular light bulbs, from work or home, for the latest energy-saving bulbs. And the company has “green ambassadors” who remind employees to print documents double-sided and to turn off lights and electronic devices not in use.15 Boisset Family Estates (www.boisset.com), France’s third- largest winery, initiated an eco-smart alternative to the glass bottle. Boisset uses aluminum-coated paperboard similar to containers commonly used for juices and milk. Besides protecting the product from oxidation and making it easier to chill, the new packaging helps the environment and improves company profits. It used to take 28 trucks to haul enough empty glass bottles to the winery to package the same volume of wine that today takes just one truck of empty cartons. After the cartons are filled, one
- 745. Many people believe that global- ization and economic development take a toll on the environment. Here, an electric Tesla Roadster charges up near London, England. Some Tesla chargers can provide half a charge in as little as 20 min- utes. All sorts of companies are working to create “green” prod- ucts to reduce the human impact on our ecosystem. Besides car manufacturers, what other com- panies are growing more environ- mentally responsible? Gavin Rodgers/Alamy Stock Photo M03_WILD9220_09_SE_C03.indd 96 10/30/17 8:48 PM http://www.walkerscrisps.co.uk/ http://www.timberland.com/ http://www.timberland.com/ http://www.marriott.com/ http://www.marriott.com/ http://www.boisset.com/
- 746. CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 97 QUiCK sTUdy 5 1. The essence of which philosophy is captured by the expression, “When in Rome, do as the Romans do”? 2. Possible consequences of corruption include what? 3. What are some criteria a product must meet in order to be Fair Trade certified? 4. The environmental impact of greenhouse gases that result from human activity is called what? truck now hauls away what used to take three trucks. The savings in materials, fuel, and equipment are significant.16 On a national level, the German government has gone greener than most others. Germany’s energy law guarantees operators of windmills and solar generators prices that are above the market rate for as long as 20 years. That law, combined with German
- 747. expertise in aerodynamics, is making the country a global leader in renewable energy. Today, 60 companies in Germany specialize in wind systems. The former East Germany is nicknamed Solar Valley because of the large number of companies that manufacture solar cells there. Germany’s green- energy sector employs more than 235,000 people and generates $33 billion in sales annually.17 differences in political economy among nations present both opportunities and risks for international companies. Gaining complete control over events in even the most stable national business environment is extremely difficult because of the intri - cate connections among politics, economics, law, and culture. still, understanding these connections is the first step in manag- ing the risks of doing business in unfamiliar environments. Implications for Business in Totalitarian Nations Political opposition to business from nongovernmental organi - zations is extremely unlikely if a totalitarian nation sanctions a particular commercial activity. Bribery and kickbacks to govern- ment officials will likely prevail, and refusal to pay is generally not an option. As such, business activities in totalitarian nations are inherently risky. Business law in totalitarian nations is
- 748. either vague or nonexistent, and interpretation of the law is highly sub- jective. Finally, certain groups criticize companies for doing busi- ness in or with totalitarian nations, saying they are helping sustain oppressive political regimes. Implications for Business in Democracies democracies tend to provide stable business environments through laws that protect individual property rights. Commerce should prosper when the private sector comprises independently owned firms that exist to make profits. Although participative democracy, property rights, and free markets tend to encourage economic growth, they do not always do so. india is the world’s largest democracy, yet its economy grew very slowly for decades. meanwhile, some countries achieved rapid economic growth under political systems that were not genuinely democratic. Which Type of Government Is Best for Business? Although democracies pass laws to protect individual civil liber- ties and property rights, totalitarian governments could also
- 749. grant such rights. The difference is that, whereas democracies strive to guarantee such rights, totalitarian governments retain the power to repeal them whenever they choose. As for a nation’s rate of economic growth, a democracy does not guarantee high rates of economic growth, and totalitarianism does not doom a nation to slow economic growth. An economy’s growth rate is influenced by many additional factors. Implications of Legal Issues for Companies A nation’s political economy is naturally intertwined with its legal system. its political economy inspires and endorses its legal system, which legitimizes and supports the political economy. Flexible business strategies help companies operate within the political economy frameworks of nations. managers will benefit if they have a solid grasp of how such frameworks affect company operations and strategy. Implications of Ethical Issues for Companies Probably every international company of at least moderate size has a policy for corporate social responsibility (CsR). Traditionally,
- 750. companies practiced CsR through old-fashioned philanthropy. indeed, donating money and time toward solving social problems helped society and bolstered a company’s public image. Compa- nies later developed codes of conduct for their global operations to ensure they were good citizens wherever they operated. Today, companies search for ways to use CsR to create value and build competitive advantage. BOTTOM LINE FOR BUSINESS M03_WILD9220_09_SE_C03.indd 97 10/30/17 8:48 PM 98 PART 2 • nATionAl BUsinEss EnViRonmEnTs MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO3.1 Describe the key features of each form of political system.
- 751. • In a totalitarian system individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints. • Theocratic totalitarianism means that order is kept with laws based on religious and totalitarian beliefs. In secular totalitarianism political leaders rely on military and bureaucratic power for control. • In a democratic system leaders are elected by the people or by their representatives. Representative democracies strive to provide freedom of expression, periodic elec- tions, civil and property rights, minority rights, and nonpolitical bureaucracies. LO3.2 Explain how the three types of economic systems differ. • In a centrally planned economy, the government owns land, factories, and other economic resources and plans nearly all economic activities. Economic and social equality are paramount and the needs of the group are above
- 752. those of the individual. • In a mixed economy, land, factories, and other economic resources are split between private and government ownership. Efficiency is strived for but society is protected from unchecked greed. • In a market economy, private individuals or businesses own most of the land, facto- ries, and other economic resources. The entire group is thought to benefit when indi- viduals receive incentives and rewards. Government is subdued and prices are set by supply and demand. LO3.3 Summarize the main elements of each type of legal system. • A legal system is a country’s set of laws and regulations, including the processes by which its laws are enacted and enforced and how its courts hold parties accountable. • Common law is a legal system based on a country’s legal history (tradition), past
- 753. cases tried in the courts (precedent), and how laws are applied in specific situations (usage). • Civil law is a system based on a detailed set of written rules and statutes that consti- tute a legal code, from which flows all obligations, responsibilities, and privileges. • Theocratic law is a system based on religious teachings. LO3.4 Outline the global legal issues facing international firms. • Firms must work hard to protect their property rights (legal rights to resources and income generated) and intellectual property (that w hich results from intellectual talent and abilities) against violations of patents, trademarks, and copyrights. • Companies must know product liability laws (responsibility for damage, injury, or death caused by defective products) and taxation requirements wherever they
- 754. operate. • Businesses need to know how antitrust laws (designed to stop companies from fixing prices, sharing markets, and gaining unfair monopoly advantages) influence operations. LO3.5 Describe the main issues of global ethics and social responsibility. • Managers often encounter different views toward bribery and corruption in a host country, and must abide by stringent accounting standards and reporting practices. • Firms can guarantee good working conditions and protect human rights by moni- toring the actions of their own employees and those of companies with whom they do business. • Companies active in developing countries can foster social responsibility in those markets by encouraging fair-trade practices.
- 755. • Businesses can pursue “green” initiatives that reduce operating costs and boost profits while protecting the environment. M03_WILD9220_09_SE_C03.indd 98 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 99 antitrust (antimonopoly) laws (p. 82) Berne Convention (p. 89) capitalism (p. 77) carbon footprint (p. 93) centrally planned economy (p. 78) civil law (p. 86) common law (p. 86) communism (p. 74) copyright (p. 89) corporate social responsibility (p. 91) demand (p. 81) democracy (p. 75) economic system (p. 78)
- 756. ethical behavior (p. 91) industrial property (p. 88) intellectual property (p. 87) legal system (p. 83) market economy (p. 81) mixed economy (p. 80) nationalism (p. 86) patent (p. 88) political economy (p. 72) political system (p. 73) private sector (p. 77) privatization (p. 81) product liability (p. 89) property rights (p. 87) representative democracy (p. 75) secular totalitarianism (p. 74) socialism (p. 74) supply (p. 81) theocracy (p. 74) theocratic law (p. 87) theocratic totalitarianism (p. 74) totalitarian system (p. 73) trademark (p. 88)
- 757. United Nations (p. 87) value added tax (VAT) (p. 90) Key Terms TALK ABOUT IT 1 The Internet and the greater access to information it provides are disrupting traditional ways of doing things in almost every sphere of life. Unsurprisingly, perhaps, government seems to be among the slowest economic sectors to undergo change. 3-1. How might the Internet change, if at all, totalitarian governments such as North Korea? 3-2. Can you think of ways that technology might change the way democracies function? Explain. TALK ABOUT IT 2 Under a totalitarian government, the Indonesian economy grew strongly for 30 years. Meanwhile, the economy of the largest functioning democracy,
- 758. India, performed poorly for decades until recently. 3-3. Do you think the Indonesian economy grew despite or because of a totalitarian regime? 3-4. What might explain India’s relatively poor performance under a democratic political system? Ethical Challenge You are the proprietor of a fledging computer graphics company in Shanghai, China. The sophisticated business application software you need for your business normally sells for 2,900 renminbi (around $350) at computer stores in Shanghai and online. But with an income of just a little more than $5,000 a year, you cannot afford to buy the original graphics soft- ware for your business. An associate has told you she can get you all the software you need, and more, for only $30. Yet, you have financially strapped friends who code software for the global software companies that make the very programs you need.
- 759. 3-5. Do your personal circumstances make it ethical for you to purchase the pirated software? 3-6. What would you do if you were told about a new government effort to actively punish users of pirated software? 3-7. Does a software company bear any responsibility for subcontracting work to low-wage markets where its finished product is unaffordable for the same coders who worked on it? M03_WILD9220_09_SE_C03.indd 99 10/30/17 8:48 PM 100 PART 2 • nATionAl BUsinEss EnViRonmEnTs Teaming Up Two groups of four students each will debate the ethics of doing business in countries with totalitarian governments. After the first student from each side has spoken, the second student will question the opponent’s arguments, looking for holes and inconsistencies. The third stu-
- 760. dent will attempt to answer these arguments. The fourth student will present a summary of each side’s arguments. Finally, the class will vote on which team has offered the more compel- ling argument. Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is re- searching, integrate your answers to the following questions into your completed MESP report. 3-8. How would you classify the nation’s political, economic, and legal systems? 3-9. Is government heavily involved in the nation’s economy? 3-10. Is the legal system effective and impartial? 3-11. Does its political economy suggest that the country could be a potential market? 3-12. What is the level of corruption throughout the political economy? 3-13. Is legislation pending that might be relevant to international companies?
- 761. MyLab Management Go to www.pearson.com/mylab/management for auto-graded writing questions as well as the following assisted-graded writing questions: 3-14. Consider the following statement: “Democratic political systems, as opposed to totalitarian ones, provide international companies with more stable environments in which to do business.” Do you agree or disagree with this statement, and why? 3-15. Many companies get involved in environmental, or “green,” issues to demonstrate their social responsibility. How might a company align its social responsibility efforts with its strategy? Provide specific examples. M03_WILD9220_09_SE_C03.indd 100 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 3 • PoliTiCAl EConomy And ETHiCs 101
- 762. PRACTICING INTERNATIONAL MANAGEMENT CASE Pirates of Globalization it pays to remember that old Latin phrase, caveat emptor (“let the buyer beware”), when tackling the production of counter- feit products on a global scale. Sophisticated pirates routinely violate patents, trademarks, and copyrights to churn out high- quality fakes of the best-known brands. Trademark counterfeit- ing amounts to between 5 percent and 7 percent of world trade, or around $500 billion a year. Phony products appear in many industries, including computer software, films, books, music CDs. Fake computer chips, broadband routers, and computers cost the electronics industry alone up to $100 billion annually. And the global market for fake pharmaceutical drugs is now a multibillion- dollar industry that poses a direct threat to the good health of folks everywhere. Traditionally peddled by sidewalk vendors and in back-street markets, counterfeiters now employ the latest technology. Just as honest businesses do, they use the Internet to slash the cost of
- 763. dis- tributing their fake goods. All merchandise on some Internet sites is counterfeit, and even legitimate website operators, such as eBay (www.ebay.com), have difficulty rooting out pirates. New York retailer Tiffany & Company (www.tiffany.com) sued eBay when counterfeits of its products appeared on eBay’s website. In the complaint, Tiffany said that, of the 186 jewelry pieces bearing the Tiffany name that it randomly purchased on eBay, 73 percent were phony. Tiffany argued that eBay should bear responsibility for the sale of counterfeit merchandise on its site because it profits significantly from the sale of fake merchandise, provides a forum for such sales, and promotes it. Others disagree, saying it is imprac- tical to require online auctioneers to verify the authenticity of every product sold on its site.
- 764. Pirates have not ignored the market for automotive parts, which loses around $12 billion annually to phony goods. Car manufactur- ers list harmful fakes such as brake linings made of compressed sawdust and transmission fluid that is nothing more than cheap oil with added dye. Boxes bearing legitimate-looking labels make it difficult for consumers to tell the difference between a fake and the real deal. The problem is causing fears of lawsuits because of mal- functioning counterfeits and concerns of lost revenue for producers of the genuine articles. For example, if someone is in an accident because of a counterfeit product, legitimate manufacturers need to prove the product is not their own. Lax antipiracy regulations and booming economies in emerging markets mean potential intellectual-property traps await companies doing business there. For example, Indian law gives international pharmaceutical firms five- to seven-year patents on processes
- 765. used to manufacture drugs—but not on the drugs themselves. This lets Indian companies modify the patented production processes of international pharmaceutical companies to create drugs that are only slightly different. In China, political protection for pirates of intellectual prop- erty remains fairly common. Government officials, people work- ing for the government, and even the People’s Liberation Army (China’s national army) operate factories that churn out pirated goods. An international company has difficulty fighting piracy in China because filing a lawsuit can severely damage its business relations there. Yet, opinion is divided on the root causes of intellectual prop- erty violations in China. Some argue that Chinese legislation is vaguely worded and difficult to enforce. Others say China’s intel- lectual property laws and regulations are fine, but poor enforcement is to blame for high rates of piracy. Amazingly, China’s
- 766. regulatory body sometimes allows a counterfeiter to remove an infringing trademark and still sell the substandard good. Technology compa- nies said to have been harmed by China’s weak intellectual property laws include Microsoft (www.microsoft.com), which claims that its software is widely pirated, and Cisco Systems (www.cisco.com), which sued a Chinese hardware maker for allegedly copying and using Cisco networking software. Thinking Globally 3-16. What more do you think the international business community could do to protect its intellectual property rights? 3-17. Are international companies simply afraid to speak out against counterfeiting in potentially lucrative emerging markets for fear of being denied access to them? 3-18. By using the latest technologies, people can often create perfect clones of original works. How are the Internet and
- 767. the latest digital technologies influencing intellectual prop- erty laws? 3-19. Locate information about the Tiffany versus eBay lawsuit and identify each side’s arguments and who prevailed. What are the implications of that lawsuit for the sale of counter - feits in online auctions? Sources: Tom Espiner, “The Slimming Pills that Put Me In Hospital,” BBC News (www. bbc.com), May 10, 2017; Sarah E. Needleman and Kathy Chu, “Entrepreneurs Bemoan Counterfeit Goods,” Wall Street Journal (www.wsj.com), April 28, 2014; “Counterfeit Drugs: Fake Pharma,” The Economist (www.economist.com), February 15, 2012; Rachel Metz, “eBay Beats Tiffany in Court Case over Trademarks,” USA Today (www.usatoday. com) July 14, 2008. M03_WILD9220_09_SE_C03.indd 101 10/30/17 8:48 PM http://www.bbc.com/ http://www.bbc.com/ http://www.usatoday.com/
- 768. http://www.usatoday.com/ http://www.microsoft.com/ http://www.wsj.com/ http://www.economist.com/ http://www.cisco.com/ http://www.tiffany.com/ http://www.ebay.com/ 102102 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 4.1 Explain economic development and how it is measured. 4.2 Describe economic transition and its main obstacles. 4.3 Outline the various sources of political risk. 4.4 Explain how companies can manage political risk.
- 769. 4.5 Describe China’s and Russia’s experiences with economic transition. Learning Objectives After studying this chapter, you should be able to Economic Development of Nations Chapter Four A Look Back Chapter 3 explored the political economy of nations and the main types of political, economic, and legal systems around the world. We also examined key legal issues for international firms and the importance of ethical behavior and social responsibility.
- 770. A Look at This Chapter This chapter presents the economic development of nations and the main ways to measure development. We then explore economic transition, political risk and how it can be managed, and China’s and Russia’s experiences with economic transition. A Look Ahead Chapter 5 introduces us to a major form of international business activity—international trade. We examine the patterns of international trade and outline several theories that attempt to explain why nations conduct trade. M04_WILD9220_09_SE_C04.indd 102 10/30/17 8:48 PM http://www.pearson.com/mylab/management
- 771. CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 103 India’s Tech King BANGALORE, India—Infosys (www.infosys.com) was founded in 1981 with an ini- tial capital outlay of only $250. Today, the company is one of India’s top providers of information technology services, with more than 200,000 employees and $10.2 billion in revenue. Infosys provides high-quality software and consulting services to global compa- nies and continues to create jobs in the United States and around the world. Shown here is the Infosys campus in Kerala, India, built in the shape of a ship. Just as China drove down prices worldwide in manufacturing, India is doing the same in services. But China and India are following two distinct paths to development. Whereas China developed its economy by throwing open its doors to investment, India’s commitment to free markets was ambiguous and made international companies wary. So, India
- 772. underwent organic growth and spawned home- grown firms in knowledge-based industries, such as Infosys. Despite its reputation for high taxes and bur- densome regulations, India long had some of the most basic foundations of a market economy— including private enterprise, democratic gov- ernment, and Western accounting practices. Its capital markets are also more efficient and trans- parent than China’s, and its legal system is more advanced. The fact that China is following a top- down approach to development while India pursues a bottom-up approach ref lects their opposing political systems: India is a democracy, and China is not. India appears to be the first developing nation to advance economically by relying on the brainpower of its people instead of a manufacturing base. China, by contrast, is relying on its natural resources and inexpensive factory labor to develop its economy by manufacturing all sorts of products. The best growth strategy— the organic-led path of
- 773. India versus the investment-led path of China—depends on a nation’s circumstances. As you read this chapter, consider the importance of economic development and how companies can help to improve a nation’s standard of living.1 Ajay Tvm/Shutterstock M04_WILD9220_09_SE_C04.indd 103 10/30/17 8:48 PM http://www.infosys.com/ 104 PART 2 • nATionAl BUsinEss EnviRonmEnTs In Chapter 2, we saw that one defining element of a culture is its tendency toward individualism or collectivism. In Chapter 3, we saw how this tendency and a society’s history influence the formation of its political economy. In this chapter, we investigate the linkages between political economy and economic development—an increase in the economic well-being, quality of life, and general welfare of a nation’s people. Similar to how systems of political economy differ from
- 774. country to country, so too do levels of economic development. National culture can have a strong impact on a nation’s economic development. In turn, the development of a country’s economy can dramatically inf luence many aspects of its culture. Economic systems in individualist cultures tend to provide incentives and rewards for individual business initiative. Collectivist cultures tend to offer fewer such incentives and rewards. For exam- ple, in individualist cultures, entrepreneurs —businesspeople who accept the risks and opportuni- ties involved in creating and operating new business ventures — tend to be rewarded with relatively low tax rates that encourage their activities. We begin this chapter by introducing categories in which we place countries depending on their level of economic development. We then examine several indicators of national economic development. Next, we look at how countries in transition are implementing market-based reforms to encourage economic development and learn about the obstacles they face. We then cover the nature of political risk because of its potential impact on
- 775. economic development and see how firms manage this type of risk. We conclude this chapter with a look at how two emerging markets are faring in their economic development efforts. 4.1 Economic Development Economic development includes economic improvements in people’s lives as well as progress on physical health, safety, life expectancy, education and literacy, poverty, critical infrastructure, environmental sustainability, and so forth. As such, the concept incorporates both quantitative and qualitative features. Yet, economic development requires economic growth, which is a quantifiable increase in the goods and services that a society produces. Economic growth, in turn, depends on gains in productivity, which is simply the ratio of outputs (what is created) to inputs (resources used to create output). We can speak about the productivity of a business, an industry, or an entire economy. For a business to boost its productivity it must increase the value of its outputs using the same amount of inputs, create the same value of outputs
- 776. with fewer inputs, or do both at the same time. Businesses increase their productivity through entrepreneurial activities and innova- tion, in all their forms. Classifying Countries Differences in political economy among nations can cause great differences in economic devel- opment. Development is an increasingly important topic as international companies pursue business opportunities in emerging markets. Although much of the population in these coun- tries is poor, there is often a thriving middle class and ambitious programs toward economic development. Nations are commonly classified as being developed, newl y industrialized, or developing based on a quantifiable economic measure. Such measures include figures on national production, the portion of the economy devoted to agriculture, the amount of exports in the form of industrial goods, and overall economic structure. There is no single, agreed-on list of countries in each category, however, and borderline countries are often classified
- 777. differently in different listings. DEVELOPED COUNTRIES Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life, are developed countries. People in developed countries usually receive the finest health care and benefit from the best educational systems in the world. Most developed nations also support aid programs for helping poorer nations to improve their economies and standards of living. Countries in this category include Australia, Canada, Japan, New Zealand, the United States, and all western European nations. NEWLY INDUSTRIALIZED COUNTRIES Countries that have recently increased the portion of their national production and exports derived from industrial operations are economic development Increase in the economic well- being, quality of life, and general welfare of a nation’s people.
- 778. 4.1 Explain economic development and how it is measured. developed country Country that is highly industrialized and highly efficient, and whose people enjoy a high quality of life. M04_WILD9220_09_SE_C04.indd 104 10/30/17 8:48 PM CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 105 newly industrialized countries (NICs). The NICs are located primarily in Asia and Latin America. Most listings of NICs include Asia’s “four tigers” (Hong Kong, South Korea, Singapore, and Taiwan), Brazil, China, India, Malaysia, Mexico, South Africa, and Thailand. Depending on the pivotal criteria used for classification, a number of other countries could be placed in this category, including Argentina, Brunei, Chile, the Czech Republic, Hungary, Indonesia, the Philip-
- 779. pines, Poland, Russia, Slovakia, Turkey, and Vietnam. When we combine newly industrialized countries with countries that have the potential to become newly industrialized, we arrive at a category often called emerging markets. Generally, emerging markets have developed some (but not all) of the operations and export capabilities associated with NICs. Debate continues, however, over the defining characteristics of such clas- sifications as newly industrialized country and emerging market. DEVELOPING COUNTRIES Nations with the poorest infrastructures and lowest personal incomes are called developing countries (also called less - developed countries). These countries often rely heavily on one or a few sectors of production, such as agriculture, mineral mining, or oil drilling. They might show potential for becoming newly industrialized countries, but typically lack the necessary resources and skills to do so. Most lists of developing countries include many nations in Africa, the Middle East, and the poorest formerl y communist nations in Eastern Europe
- 780. and Asia. Developing countries (and NICs as well) are sometimes characterized by a high degree of technological dualism—use of the latest technologies in some sectors of the economy coupled with the use of outdated technologies in others. By contrast, developed countries typically incor- porate the latest technological advancements in all manufacturing sectors. When exploring potential markets, managers can use a variety of measures to estimate a country’s level of economic development. But it is wise to examine a combination of measures because each one has advantages and disadvantages. Let’s now look at the main gauges of eco- nomic development. National Production Recall from Chapter 1 that gross domestic product (GDP) is the value of all goods and ser- vices produced by a domestic economy over a one-year period. GDP is a narrower figure than gross national product (GNP) in that it excludes a nation’s
- 781. income generated from exports, imports, and the international operations of its companies. A country’s GDP per capita is simply its GDP divided by its population to measure a nation’s income per person. Map 4.1 on pages 106–107 shows how the World Bank (www.worldbank.org) classifies countries according to gross national income (GNI) per capita— a measure that is similar to GNP per capita. Marketers often use GDP or GNP per capita figures to determine whether a country’s popula- tion is wealthy enough to begin purchasing its products. For example, the Asian nation of Myan- mar, with a GDP per capita of about $1,500 per year, is very poor. You won’t find many computer companies marketing laptops or designer-apparel firms selling expensive clothing there. Yet sev- eral large makers of personal-care products are staking out territory in Myanmar. Companies like Colgate-Palmolive (www.colgate.com) and Unilever (www.unilever.com) are traditional explorers of uncertain but promising markets in which they can offer relatively inexpensive, everyday items
- 782. such as soap and shampoo. As multinational companies enter such markets, they often try to sat- isfy the needs of people who live at the bottom of the pyramid— the world’s poorest populations with the least purchasing power. Although GDP and GNP are the most popular indicators of economic development, they have several important drawbacks. UNCOUNTED TRANSACTIONS For a variety of reasons, many of a nation’s transactions do not get counted in either GDP or GNP. Some activities not included are: • Volunteer work • Unpaid household work • Illegal activities such as gambling and black market (underground) transactions • Unreported transactions conducted in cash newly industrialized country (NIC) Country that has recently increased the portion of its national produc-
- 783. tion and exports derived from industrial operations. emerging markets Newly industrialized countries plus those with the potential to become newly industrialized. developing country Nation that has a poor infrastruc- ture and extremely low personal incomes. Also called less-devel- oped countries. technological dualism Use of the latest technologies in some sectors of the economy coupled with the use of outdated technologies in other sectors. M04_WILD9220_09_SE_C04.indd 105 10/30/17 8:48 PM http://www.colgate.com/ http://www.unilever.com/ http://www.worldbank.org/
- 784. 106 PART 2 • nATionAl BUsinEss EnviRonmEnTs 7,490 or more 2,350 − 7,490 1,110 − 2,350 430 − 1,110 less than 430 no data available GNI in US dollars A L A S K A C A N A D A MEXICO CUBA
- 785. JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA HAWAII COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA
- 786. TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS
- 788. POLAND BELARUS U K R A I N E SPAIN PORTUGAL CZECH REP. AUSTRIA SWITZ. LICHT. MONACO ITALY SLOVAKIA HUNGARY
- 789. SERBIA AND MONTENEGRO BULGARIA ROMANIA MOLDOVA GREECE TURKEY CYPRUS MOROCCO WESTERN SAHARA A L G E R I A L I B Y A TUNISIA MAURITANIA
- 790. SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST G H A N A T
- 791. O G O B E N IN NIGERIA N I G E R C H A D E G Y P T S U D A N ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL
- 794. ISRAEL JORDAN IRAQ I R A N SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN
- 795. UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES
- 796. TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA
- 797. SOUTH KOREA JAPANC H I N A ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E N O R W
- 799. KUWAIT DJBOUTI SLOVENIA SINGAPORE A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N N O R T H
- 800. AT L A N T I C O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA GALAPAGOS ISLANDS MYANMAR (BURMA) CONGO DEMOCRATIC REPUBLIC (ZAIRE)
- 801. F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA
- 802. AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS
- 803. L I B Y A TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA
- 804. S O U T H S U D A N Map 4.1 Gross National Income M04_WILD9220_09_SE_C04.indd 106 10/30/17 8:48 PM CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 107 7,490 or more 2,350 − 7,490 1,110 − 2,350 430 − 1,110 less than 430 no data available GNI in US dollars
- 805. A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA HAWAII COSTA RICA NICARAGUA HONDURAS
- 806. EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA ECUADOR B R A Z I L PERU BOLIVIA
- 808. NETHERLANDS LUXEMBOURG GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL CZECH REP. AUSTRIA SWITZ. LICHT.
- 810. SAHARA A L G E R I A L I B Y A TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST
- 811. G H A N A T O G O B E N IN NIGERIA N I G E R C H A D E G Y P T S U D A N
- 812. ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC RWANDA BURUNDI UGANDA KENYA SOMALIA ANGOLA
- 814. GEORGIA ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN IRAQ I R A N SAUDI ARABIA QATAR OMAN YEMEN
- 815. I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND
- 816. CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND
- 817. R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E
- 819. ESTONIA BOSNIA- HERZEGOVINA ALBANIA MACEDONIA KUWAIT DJBOUTI SLOVENIA SINGAPORE A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N
- 820. O C E A N PA C I F I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA GALAPAGOS ISLANDS
- 821. MYANMAR (BURMA) CONGO DEMOCRATIC REPUBLIC (ZAIRE) F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA
- 822. BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E
- 823. MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N
- 824. ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA S O U T H S U D A N M04_WILD9220_09_SE_C04.indd 107 10/30/17 8:48 PM 108 PART 2 • nATionAl BUsinEss EnviRonmEnTs In some cases, the unreported (shadow) economy is so large and prosperous that official sta- tistics such as GDP per capita are almost meaningless. Government statistics can mask a thriving shadow economy driven by differences between official and black-market currency exchange rates. In many wealthy nations, the shadow economy is from one-tenth to one-fifth as large as the
- 825. official economy. But in more than 50 countries, the shadow economy is at least 40 percent the size of the documented GDP. In the Eurasian country of Georgia, for example, unreported transac- tions are estimated to equal as much as 73 percent of reported transactions. So, whereas Georgia’s official GDP is around $15 billion, its shadow economy could be worth nearly $11 billion. One way in which goods and services flow through shadow economies is through barter— the exchange of goods and services for other goods and services instead of money. In one clas- sic incident, Pepsi-Cola (www.pepsi.com) traded soft drinks in the former Soviet Union for 17 submarines, a cruiser, a frigate, and a destroyer. Pepsi then converted its payment into cash by selling the military goods as scrap metal.2 Russians still use barter extensively because of a lack of currency. In another classic, and bizarre, case, the Russian government paid 8,000 teachers in the Altai republic (1,850 miles east of Moscow) their monthly salaries with 15 bottles of vodka each. Teachers had previously refused an offer to receive part of their salaries in toilet paper and
- 826. funeral accessories.3 QUESTION OF GROWTH Gross product figures do not tell us whether a nation’s economy is growing or shrinking—they are simply a snapshot of one year’s economic output. Managers will want to supplement this data with information on expected future economic performance. A nation with moderate GDP or GNP figures attracts more investment if its expected growth rate is high. PROBLEM OF AVERAGES Recall that per capita numbers give an average figure for an entire country. These numbers are helpful in estimating national quality of life, but averages do not give us a very detailed picture of development. Urban areas in most countries are more developed and have higher per capita income than rural areas. In less advanced nations, regions near good har- bors or other transportation facilities are usually more developed than interior regions. Likewise, an industrial park that boasts companies with advanced technology in production or design can generate a disproportionate share of a country’s earnings.
- 827. For example, GDP or GNP per capita figures for China are misleading because Shanghai and coastal regions of China are far more developed than the country’s interior. Although luxury cars are sold in many of China’s large cities and coastal regions, bicycles and simple vehicles are still the transportation of choice in China’s interior. PITFALLS OF COMPARISON Country comparisons using gross product figures can be mis- leading. When comparing gross product per capita, the currency of each nation being compared must be translated into another currency unit (usually the dollar) at official exchange rates. But offi- cial exchange rates only tell us how many units of one currency it takes to buy one unit of another. They do not tell us what that currency can buy in its home country. Therefore, to understand the true value of a currency in its home country, we apply the concept of purchasing power parity. Purchasing Power Parity Using gross product figures to compare production across countries does not account for the dif- ferent cost of living in each country. Purchasing power is the
- 828. value of goods and services that can be purchased with one unit of a country’s currency. Purchasing power parity (PPP) is the relative ability of two countries’ currencies to buy the same “basket” of goods in those two coun- tries. This basket of goods is representative of ordinary, daily- use items such as apples, rice, soap, toothpaste, and so forth. Estimates of gross product per capita at PPP allow us to see what a cur- rency can actually buy in real terms. Let’s see what happens when we compare the wealth of several countries to that of the United States by adjusting GDP per capita to reflect PPP. If we convert Swiss francs to dollars at official exchange rates, we estimate Switzerland’s GDP per capita at $47,900. This is higher than the official GDP per capita of the United States ($39,700). But adjusting Switzerland’s GDP per capita for PPP gives us a revised figure of $34,700, which is lower than the US GDP figure of $39,700. Why the difference? GDP per capita at PPP is lower in Switzerland because of that nation’s higher cost of living. It simply costs more to buy the same basket of goods in Switzerland than it does in
- 829. the United States. The opposite phenomenon occurs in the case of the Czech Republic. Because purchasing power Value of goods and services that can be purchased with one unit of a country’s currency. purchasing power parity (PPP) Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries. M04_WILD9220_09_SE_C04.indd 108 10/30/17 8:48 PM http://www.pepsi.com/ CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 109 the cost of living there is lower than in the United States, the Czech Republic’s GDP per capita rises from $10,600 to $18,600 when PPP is considered.4 We
- 830. discuss PPP in greater detail in Chapter 10. Human Development So far we see that adjusting figures on national production for purchasing power provide numeri- cal measures for comparing nations. But we also see that they do not capture development’s qualitative aspects. Also, the PPP concept does a fairly decent job of revealing different levels of economic development, but is a poor indicator of a people’s total well-being. Table 4.1 shows how selected countries rank according to the United Nations’ human development index (HDI)— the measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living. Table 4.1 also illustrates the disparity that can be present between a nation’s wealth and the HDI. For example, we see that Germany ranks 17th in terms of gross national income (GNI) per capita yet ranks 4th (a disparity of plus 13) in providing health care, education, and a decent standard of living. The disparity is negative 30 for South
- 831. Africa; the country ranks 89th in terms of GNI per capita but ranks 119th in terms of HDI. Perhaps most striking is the column showing each nation’s life expectancy at birth. We see that the people of first-ranked Norway have a life expectancy that is 30 years longer than the people of last-ranked Central African Republic. Unlike other measures we have discussed, the HDI looks beyond financial wealth. By stressing the human aspects of economic development, it demonstrates that high national income alone does not guarantee human progress. However, the importance of national income should human development index (HDI) Measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent stan- dard of living. HDi Rank Country HDi value Gni per Capita
- 832. Rank life Expectancy at Birth (Years) Very High Human Development 1 Norway 0.949 6 81.7 2 Switzerland 0.939 9 83.1 4 Germany 0.926 17 81.1 10 Canada 0.920 22 82.2 10 United States 0.920 11 79.2 16 United Kingdom 0.909 26 80.8 21 France 0.897 25 82.4 27 Spain 0.884 34 82.8 45 Argentina 0.827 57 76.5
- 833. High Human Development 49 Russia 0.804 50 70.3 77 Mexico 0.762 68 77.0 90 China 0.738 83 76.0 Medium Human Development 111 Egypt 0.691 104 71.3 119 South Africa 0.666 89 57.7 139 Bangladesh 0.579 147 72.0 Low Human Development 152 Nigeria 0.527 129 53.1 188 Central African Rep. 0.352 192 51.5 Source: Based on data obtained from Human Development Report 2016 (New York: United Nations Development
- 834. Programme, 2016), Table 1, pp. 198–201, available at www.undp.org. TABLE 4.1 Human Development Index (HDI) M04_WILD9220_09_SE_C04.indd 109 10/30/17 8:48 PM http://www.undp.org/ 110 PART 2 • nATionAl BUsinEss EnviRonmEnTs not be underestimated. Countries need money to build good schools, provide quality health care, support environmentally friendly industries, and underwrite other programs designed to improve the quality of life. QUiCK sTUDY 1 1. An increase in the economic well-being, quality of life, and general welfare of a nation’s people is called what? 2. What are the drawbacks of using national production to
- 835. measure economic development? 3. The human development index measures what aspects of a nation’s development? 4.2 Economic Transition Over the past two decades, countries with centrally planned economies have been remaking themselves in the image of stronger market economies. This process, called economic transition, involves changing a nation’s fundamental economic organization and creating entirely new free- market institutions. Some nations take transition further than others do, but the process typically involves several key reform measures to promote economic development: • Stabilizing the economy, reducing budget deficits, and expanding credit availability • Allowing prices to reflect supply and demand • Legalizing private business, selling state-owned companies, and supporting property rights • Reducing barriers to trade and investment and allowing currency convertibility Transition from central planning to free-market economies
- 836. generates tremendous interna- tional business opportunities. Yet, difficulties arising from years of socialist economic principles hamper development efforts from the start, and some countries still endure high unemployment rates. Governments of former centrally planned economies in Eastern Europe continue to sell state-owned companies in order to boost productivity and competitiveness and to raise living standards. Let’s examine the key obstacles for countries in transition. Managerial Expertise In central planning, there was little need for production, distribution, and marketing strategies or for trained individuals to devise them. Central planners decided all aspects of the nation’s commer- cial activities. There was no need to investigate consumer wants and no need for market research. Little thought was given to product pricing or to the need for experts in operations, inventory, distribution, or logistics. Factory managers at government- owned firms had only to meet produc- tion requirements set by central planners. In fact, some products rolled off assembly lines merely
- 837. to be stacked outside the factory because knowing where they were to go after production—and who took them there—was not the factory manager’s job. Recent years, however, are seeing higher-quality management in transition countries. Reasons for this trend include improved education, opportunities to study and work abroad, and changes in work habits caused by foreign companies investing locally. Some managers from former com- munist nations are even finding managerial opportunities in Western Europe and the United States with large multinational corporations. Shortage of Capital Not surprisingly, economic transition and development are expensive undertakings. To facilitate the process and ease the pain, governments usually spend a great deal of money to: • Develop a telecommunications and infrastructure system, including highways, bridges, rail networks, and sometimes subways. • Create financial institutions, including stock markets and a
- 838. banking system. • Educate people in the ways of market economics. The governments of many countries in transition cannot afford all the investments required of them. Outside sources of capital are available, however, including national and international 4.2 Describe economic transi- tion and its main obstacles. economic transition Process by which a nation changes its fundamental economic organiza- tion and creates new free-market institutions. M04_WILD9220_09_SE_C04.indd 110 10/30/17 8:48 PM CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 111 companies, other governments, and international financial institutions, such as the World Bank, the
- 839. International Monetary Fund (IMF), and the Asian Development Bank. Some transition countries owe substantial amounts of money to international lenders, but this is becoming less of a problem today than it was earlier in the era of transition economies. Cultural Differences Economic transition and development reforms make deep cultural impressions on a nation’s peo- ple. As we saw in Chapter 2, some cultures are more open to change than others. Likewise, certain cultures welcome economic change more easily than others do. Transition replaces dependence on the government with greater emphasis on individual responsibility, incentives, and rights. But sudden deep cuts in welfare payments, unemployment benefits, and guaranteed government jobs can present a major shock to a nation’s people. Importing modern management practices into the culture of a transition country can be difficult. South Korea’s Daewoo Motors (www.daewoo.com) faced a culture clash when it entered Central Europe. Korea’s management system is based on a rigid hierarchical structure
- 840. and an intense work ethic. Managers at Daewoo’s car plants in South Korea arrived early for work to stand and greet workers at the company gates. But problems arose when Daewoo’s managers did not fully comprehend the culture at its factories in Central Europe. Daewoo bridged the cultural and workplace gaps by sending central European workers to staff assem- bly lines in Korea and sent Korean managers and technicians to work in Central and Eastern Europe. Sustainability The economic and social policies of former communist governments in Central and Eastern Europe were disastrous for the natural environment. The direct effects of environmental destruc- tion were evident in high levels of sickness and disease, including asthma, blood deficiencies, and cancer—which lowered productivity in the workplace. Countries in transition often suffer periods during which the negative effects of a market economy seem to outweigh its benefits. But as transition and development efforts continue, the wider population begins to enjoy the benefits
- 841. of a market economy. Nations that lived under central planning have had to overcome one of central planning’s lasting legacies—lack of a topnotch healthcare system. The spread of communicable diseases in the world’s poorest nations is especially worrying. Diseases such as HIV/AIDS, tuberculosis, and malaria still infect many people in Southeast Asia, Eastern Europe, and elsewhere. These diseases cause human and economic loss, social disintegration, and political instability. The health care costs required to combat such diseases can significantly impair efforts toward sustainable devel- opment. To read about the costs of three particularly lethal diseases, see the Global Sustainability feature, titled “Public Health Goes Global” on page 114. QUiCK sTUDY 2 1. What does the economic transition process involve? 2. What are the key obstacles for countries in transition? 3. Transition replaces dependence on the government with greater emphasis on what?
- 842. 4.3 Political Risk All companies doing business domestically or internationally confront political risk—the likeli- hood that a society will undergo political change that negatively affects local business activity. Political risk abroad affects different types of companies in different ways. It can threaten the market of an exporter, the production facilities owned by a foreign manufacturer, or the ability of a firm to extract a profit from a country in which it was earned. A solid grasp of local values, customs, and traditions can help reduce a company’s exposure to political risk. Map 4.2 (on pages 112–113) shows that political risk levels vary from nation to nation. Some of the factors included in the assessment of political risk levels include government stability, 4.3 Outline the various sources of political risk. political risk Likelihood that a society will undergo political change that nega-
- 843. tively affects local business activity. M04_WILD9220_09_SE_C04.indd 111 10/30/17 8:48 PM http://www.daewoo.com/ 112 PART 2 • nATionAl BUsinEss EnviRonmEnTs very high high moderate low very low no data available Level of risk A L A S K A
- 844. C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA HAWAII COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA
- 845. COLOMBIA VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY
- 847. GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL CZECH REP. AUSTRIA SWITZ. LICHT. MONACO
- 848. ITALY SLOVAKIA HUNGARY SERBIA AND MONTENEGRO BULGARIA ROMANIA MOLDOVA GREECE TURKEY CYPRUS MOROCCO WESTERN SAHARA A L G E R I A L I B Y A
- 849. TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST G H
- 850. A N A T O G O B E N IN NIGERIA N I G E R C H A D E G Y P T S U D A N ERITREA E T H I O P I ACENTRAL AFRICAN
- 853. ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN IRAQ I R A N SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN
- 855. VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND
- 856. R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E
- 858. BOSNIA- HERZEGOVINA ALBANIA MACEDONIA KUWAIT DJBOUTI SLOVENIA SINGAPORE A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N
- 859. O C E A N PA C I F I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA GALAPAGOS ISLANDS MYANMAR
- 860. (BURMA) CONGO DEMOCRATIC REPUBLIC (ZAIRE) F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA
- 861. BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E
- 862. MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N
- 863. ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA S O U T H S U D A N Map 4.2 Political Risk around the World M04_WILD9220_09_SE_C04.indd 112 10/30/17 8:48 PM CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 113 very high high moderate
- 864. low very low no data available Level of risk A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA
- 865. HAWAII COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA
- 866. ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS ISLANDS GREENLAND ICELAND FINLAND DENMARKUNITED
- 867. KINGDOM IRELAND FRANCE BELGIUM NETHERLANDS LUXEMBOURG GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL
- 869. GREECE TURKEY CYPRUS MOROCCO WESTERN SAHARA A L G E R I A L I B Y A TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA
- 870. M A L I BURKINA FASO IVORY COAST G H A N A T O G O B E N
- 871. IN NIGERIA N I G E R C H A D E G Y P T S U D A N ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC RWANDA BURUNDI
- 872. UGANDA KENYA SOMALIA ANGOLA NAMIBIA ZAMBIA TANZANIA MALAWI ZIMBABWE BOTSWANA MOZAMBIQUE MADAGASCAR
- 873. SWAZILAND LESOTHOSOUTH AFRICA MAURITIUS RÉUNION GEORGIA ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN IRAQ I R A N SAUDI
- 874. ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA
- 875. NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA HONG KONG VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON
- 876. ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A ANDORRA U N I T E D S TAT E S
- 877. O F A M E R I C A C H I L E N O R W A Y S W
- 879. A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C
- 880. O C E A N UNITED ARAB EMIRATES CROATIA GALAPAGOS ISLANDS MYANMAR (BURMA) CONGO DEMOCRATIC REPUBLIC (ZAIRE) F R A N C E BELGIUM NETHERLANDS
- 881. GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA
- 882. SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA
- 883. MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA S O U T H S U D A N M04_WILD9220_09_SE_C04.indd 113 10/30/17 8:48 PM
- 884. 114 PART 2 • nATionAl BUsinEss EnviRonmEnTs internal and external conflict, military and religious involvement in politics, corruption, law and order, and the quality of a government’s bureaucracy. Two broad categories of political risk reflect the range of companies each affects. Macro risk threatens the activities of all domestic and international companies in every industry. Examples include an ongoing threat of violence against corporate assets in a nation and a rising level of government corruption. Micro risk threatens companies only within a particular industry (or more narrowly defined group). For example, an international trade war in steel affects the operations of steel producers and companies that require steel as an input to their business activities. The main sources of political risk include: • Conflict and violence • Terrorism and kidnapping • Property seizure • Policy changes
- 885. • Local content requirements Conflict and Violence Local conflict can discourage international companies from investing in a nation and set back economic development significantly. Violent disturbances impair a company’s ability to manu- facture and distribute products, obtain materials and equipment, and recruit talented personnel. Open conflict threatens a company’s physical assets (such as offices and factories) and the lives of its employees. Conflict also harms the economic development of nations. There are at least three main origins of conflict. First, it may arise from people’s resentment toward their own government. When peaceful resolution of disputes between people (or factions) and the government fails, violent attempts to change political leadership can ensue. ExxonMobil (www.exxonmobil.com) suspended production of liquid natural gas at its facility in Indonesia’s Aceh province when separatist rebels targeted the complex with violence.
- 886. Second, conflict can arise over territorial disputes between countries. For example, a dispute over the Kashmir territory between India and Pakistan resulted in major armed conflict between their two peoples several times. And a border dispute between Ecuador and Peru caused these South American nations to go to war three times. Third, disputes among ethnic, racial, and religious groups may erupt in violent conf lict. Indonesia comprises 13,000 islands, more than 300 ethnic groups, and some 450 languages. Years Beyond the human suffering, three communicable diseases put a drag on economic development and social sustainability. • HIV/AIDS. This disease killed nearly as many people as the plague that struck fourteenth-century Europe. AiDs has already killed at least 22 million worldwide, and at least 40 million are infected with Hiv. in Africa alone, 20 million have died and 30 million are infected. The disease cut GDP growth by 2.6 percent in some African countries and could decrease south Africa’s average household income by 8 percent. • Tuberculosis. Each year, tuberculosis (TB) kills 1.7 million
- 887. people and sickens another 8 million. more than 90 per- cent of TB cases occur in low- and lower-middle-income countries across southeast Asia, Eastern Europe, and sub-saharan Africa. TB is on the rise because of economic hardship, broken health systems, and the emergence of drug-resistant TB. This disease depletes the incomes of the poorest nations by about $12 billion. • Malaria. Each year, malaria kills one million people and indirectly causes the deaths of up to three million. malaria is prevalent in vietnam’s mekong Delta, central Africa, and Brazil’s Amazon Basin. Central and sub-saharan Africa account for 90 percent of all malaria deaths (mostly children and pregnant women) and is where around 20 percent of all children die of malaria before age five. in the worst-affected African nations, malaria costs about 1.3 percent of GDP. • The Challenge. To combat HIV/AIDS, rich nations could donate money to train doctors and nurses in poor nations and could invest more in research. To battle tuberculosis, more aid money could purchase drugs that cost just $10 per person for the full six-to-eight-month treatment. To fight malaria, better distribution of insecticide-treated bed nets could reach the 98 percent of Africa’s children who do not
- 888. sleep under such nets. • Want to Know More? visit the Global Business Coalition (www.gbchealth.org); the Global fund to fight AiDs, Tuber- culosis, and malaria (www.theglobalfund.org); the malaria foundation international (www.malaria.org); and the World Health organization TB site (www.who.int/gtb). Sources: “Altogether Now,” The Economist (www.economist.com), June 3, 2010; Tom Randall, “J&J, Sanofi, Pfizer Speed Testing for New Tuberculosis Drug,” Bloomberg Businessweek (www.businessweek.com), March 18, 2010; “Twenty-Five Years of AIDS,” The Economist, June 3, 2006, pp. 24–25; Malaria Foundation International (www.malaria.org), various reports. GLOBAL SUSTAINABILITY Public Health Goes Global M04_WILD9220_09_SE_C04.indd 114 10/30/17 8:48 PM http://www.exxonmobil.com/ http://www.who.int/gtb http://www.gbchealth.org/
- 889. http://www.malaria.org/ http://www.theglobalfund.org/ http://www.economist.com http://www.malaria.org http://www.businessweek.com CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 115 ago, Indonesia’s government relocated people from crowded, central islands to less populated, remote ones without regard to ethnicity and religion. Violence among them later displaced more than one million people. Terrorism and Kidnapping Terrorist activities are a means of making political statements. Groups dissatisfied with the current political or social situation sometimes resort to terrorist tactics in order to force change through fear and destruction. On September 11, 2001, the world witnessed terrorism on a scale like never before. Two passenger planes were f lown into the twin towers of the World Trade Center in New York City, one plane was crashed into the Pentagon in
- 890. Washington, DC, and one plane crashed in a Pennsylvania field. The terrorist group Al -Qaida claimed responsibility for those US attacks and for more recent attacks around the world. The terror organization’s stated goals are to drive Western influence out of Muslim nations and to implement Islamic law. The destructive power of those terrorist acts and the expensive wars that followed in Afghanistan and Iraq exacted a heavy economic toll on many nations. Kidnapping and the taking of hostages for ransom may be used to fund a terrorist group’s activities. Executives of large international companies are often prime targets for kidnappers because their employers have “deep pockets” to pay large ransoms. Latin American countries have some of the world’s highest kidnapping rates, and Mexico City is at or near the top of the list of cities with the highest kidnapping rates. Annual security costs for a company with a sales office in Bogotá, Colombia, can be $125,000 and up to $1 million for a company with operations in rebel-controlled areas. Top executives are forced to spend about a third of their time coordi-
- 891. nating their company’s security in Colombia. Although some policies can cost as little as $500, a medium-sized firm that has 5 to 10 employees traveling to Latin America for a week at a time could expect to pay around $5,000 a year for $10 million of kidnap and ransom insurance. When high-ranking executives are required to enter countries with high kidnapping rates, they should enter unannounced, meet with only a few key people in secure locations, and leave just as quickly and quietly. Some companies purchase kidnap, ransom, and extortion insurance, but security experts say that training people to avoid trouble in the first place is a far better investment. Property Seizure Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization. The forced transfer of assets from a company to the government without compensation is called confiscation. The former owners typically have no legal
- 892. basis for requesting compensa- tion or the return of assets. The 1996 Helms–Burton Law allows US businesses to sue companies from other nations that use their property confiscated by Cuba in its 1959 communist revolution. For example, the Cuban government faces nearly 6,000 company claims valued at $20 billion. But US presidents repeatedly waive the law so as not to harm its relations with other countries. The forced transfer of assets from a company to the government with compensation is called expropriation. The expropriating government normally determines the amount of compensation. There is no framework for legal appeal, and compensation is typically far below market value. Today, governments rarely resort to confiscation or expropriation because these acts can jeopar- dize investment in the country. Still, it does happen. Argentina expropriated 51 percent of that country’s largest energy firm, named Yacimientos Petroliferos Fiscales (YPF). The move isolated Argentina internationally and caused even greater uncertainty for international investors. Buenos Aires Waterworks and Aerolineas Argentinas are two other
- 893. entities in Argentina that saw increasing losses after they were nationalized a second time.5 Whereas expropriation involves one or several companies in an industry, nationalization means government takeover of an entire industry. Nationalization is more common than confisca- tion and expropriation. Likely candidates for nationalization include industries important to a nation’s security and those that generate large revenues. Venezuela’s late President Hugo Chavez nationalized that country’s telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela. In general, a government may nationalize an industry to: • Use subsidies to protect an industry for ideological reasons. • Save local jobs in an ailing industry to gain political clout. confiscation Forced transfer of assets from a company to the government with- out compensation.
- 894. expropriation Forced transfer of assets from a company to the government with compensation. nationalization Government takeover of an entire industry. M04_WILD9220_09_SE_C04.indd 115 10/30/17 8:48 PM 116 PART 2 • nATionAl BUsinEss EnviRonmEnTs • Control industry profits so they cannot be transferred to low tax-rate countries. • Invest in sectors, such as public utilities, that private companies cannot afford. Confiscation, expropriation, and nationalization can have the short term effect of saving jobs, boosting currency reserves, or helping the government or the economy in other ways. But the long-term result of this form of political risk is usually slower
- 895. economic development because foreign investors are more reluctant to invest in the country. Policy Changes Government policy changes are the result of a variety of influences, including the ideals of newly empowered political parties, political pressure from special interests, and civil or social unrest. One common policy tool restricts ownership to domestic companies or limits ownership by non- domestic firms to a minority stake. This type of policy restricted PepsiCo’s (www.pepsico.com) ownership of local companies to 49 percent when it first entered India. If a company decides to withhold investment from a nation because of such policies, they can be seen as impairing eco- nomic development. Other policy changes can reduce political risk, such as those related to cross-border invest- ments. Facing a slowdown in the technology sector, Taiwan’s businesses and politicians called for a scrapping of the nation’s “go slow, be patient” policy with China. That policy capped investments in mainland China at $50 million and banned investments in
- 896. infrastructure and industries sensitive for national security reasons. Taiwan’s government created a new policy called “active opening, effective management,” which reduced restrictions on cross- border investment. These actions improved ties between China and Taiwan and promoted economic development. Local Content Requirements Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market are called local content requirements. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers. They ensure that international companies foster local business activity and help ease regional or national unemployment. They also help governments maintain some degree of control over international companies without resorting to extreme measures such as confiscation and expropriation. These efforts can help the economic development of a nation when used skillfully, or slow development if used carelessly.
- 897. We must also acknowledge that local content requirements can jeopardize an international firm’s long-term survival. First, a company required to hire local personnel might be forced to take on an inadequately trained workforce or take on excess workers. Second, a company made to obtain raw materials or parts locally can find its production costs rise or its product quality decline. local content requirements Laws stipulating that a speci- fied amount of a good or service be supplied by producers in the domestic market. People rally in the streets of Bue- nos Aires, Argentina. The Argen- tinian government nationalized 51 percent of its biggest oil company, YPF, with the overwhelming sup- port of its people and lawmakers. The move rattled foreign investors and trade partners. The Spanish firm, Repsol, accepted $5 billion in compensation for its stake in
- 898. YPF, which was far below the $10.5 billion it was demanding. Corina Cohen/Alamy Stock Photo M04_WILD9220_09_SE_C04.indd 116 10/30/17 8:48 PM http://www.pepsico.com/ CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 117 QUiCK sTUDY 3 1. How does political risk abroad affect companies? 2. Companies fear open violence and conflict abroad because it can threaten the ability to do what? 3. What is the name given to the forced transfer of assets from a company to the government with compensation? 4.4 Managing Political Risk
- 899. International companies benefit from monitoring and attempting to predict political changes that can negatively affect their activities. When an international business opportunity arises in an environment plagued by extremely high risk, simply not investing in the location may be the wisest course of action. Yet when risk levels are moderate and the local market is attractive, international companies can find ways to manage political risk. In this way, private sector investment from foreign companies helps advance a nation’s economic development. The three main methods of managing political risk are adaptation, information gathering, and political influence. Adaptation Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk in four ways. First, partnerships help companies leverage expansion plans. They can be informal arrange- ments or include joint ventures, strategic alliances, and cross - holdings of company stock. Part- nering helps a company to share the risk of loss, which is
- 900. especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from inter- rupting operations include firms, trade unions, financial institutions, and government agencies. Second, localization entails modifying operations, the product mix, or some other business element—even the company name—to suit local tastes and culture. Consider how MTV (www .mtv.com) demonstrates its sensitivity to local cultural and political issues by localizing its pro- gramming to suit regional and national tastes. Third, development assistance allows an international business to assist the host country or region in improving the quality of life for locals. For example, by developing distribution and com- munications networks, both a company and a nation benefit. Royal Dutch/Shell (www.shell.com), the oil company, is working in Kenya to increase the incomes of poor villagers and to triple the average period of food security.6 Canon (www.canon.com), the Japanese
- 901. copier and printer maker, practices kyosei (“spirit of cooperation”) to press local governments into making social and political reforms. Fourth, insurance against political risk can be essential to companies entering risky busi- ness environments. The Overseas Private Investment Corporation (www.opic.gov) insures US companies that invest abroad against loss and can provide project financing. Some policies pro- tect companies when local governments restrict the convertibility of local money into home- country currency, whereas others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association (www.fcia.com) also insures US exporters against loss due to a variety of causes. Information Gathering International firms attempt to gather information that will help them predict and manage politi- cal risk. There are two sources that companies use to conduct accurate political risk forecasting. Current employees who have worked in a country long enough to gain insight into local culture
- 902. and politics are often good sources of information. Individuals who formerly had decision-making authority while on international assignment probably had contact with local politicians and other officials. Yet it is important that an employee’s international experience be recent because political power in a nation can shift rapidly and dramatically. Second, agencies specialized in providing political -risk services include banks, political con- sultants, news publications, and risk-assessment services. Many of these agencies publish reports 4.4 Explain how companies can manage political risk. M04_WILD9220_09_SE_C04.indd 117 10/30/17 8:48 PM http://www.mtv.com/ http://www.mtv.com/ http://www.fcia.com/ http://www.shell.com/ http://www.canon.com/ http://www.opic.gov/
- 903. 118 PART 2 • nATionAl BUsinEss EnviRonmEnTs detailing national levels and sources of political risk. Small companies that cannot afford to pay for these services can consider the many free sources of information available, notably from their federal governments. Government intelligence agencies are excellent and inexpensive sources to consult. Political Influence Managers must work within the established rules and regulations of each national business environ- ment. Business law in most nations undergoes frequent change, with new laws being enacted and existing ones modified. Influencing local politics means dealing with local lawmakers and politi- cians directly or through lobbyists. Lobbying is the policy of hiring people to represent a company’s views on political matters. Lobbyists meet with a local public official to influence his or her position on issues relevant to the company. The ultimate goal of the lobbyists is to get favorable legislation enacted and unfavorable legislation rejected. Lobbyists also work to convince local officials that a
- 904. company benefits economic development, sustainability efforts, workforce skills, and so on. Bribes often represent attempts to gain political influence. Years ago, the president of US- based Lockheed Corp., now Lockheed Martin (www.lockheedmartin.com), bribed Japanese offi- cials in order to obtain large sales contracts. Public disclosure of the incident resulted in passage of the Foreign Corrupt Practices Act, which forbids US companies from bribing government officials or political candidates in other nations (except when a person’s life is in danger). A bribe constitutes “anything of value”—money, gifts, and so forth— and cannot be given to any “foreign government official” empowered to make a “discretionary decision” that may be to the payer’s benefit. The law also requires firms to keep accounting records that reflect their international activities and assets. lobbying Policy of hiring people to represent a company’s views on political matters.
- 905. Foreign Corrupt Practices Act Law that forbids US companies from bribing government officials or political candidates in other nations. MyLab Management Try It Apply what you have learned about how companies adapt to business practices in other countries. If your instructor has assigned this, go to www.pearson.com/mylab/management to perform a simulation on how to enter a market with a different political economy and level of development than at home. International Relations Our coverage shows that relations between countries can inf luence the political economy of nations and the pace of economic development. Although governments, not companies, are directly responsible for managing international relations, the actions of business can cause rela- tions to improve or worsen. So, in this sense, managers do have a role to play in helping to manage
- 906. international relations. Favorable and strong political relationships foster stable business environments. Stability then enhances international cooperation in sectors such as the development of international com- munications and distribution infrastructures. Strong legal systems through which disputes are resolved quickly and fairly further promote stability and cooperation. Simply put, favorable politi- cal relations among countries expand business opportunities, lower risk, and promote economic development. To generate stable business environments, some countries have turned to multilateral agreements—treaties concluded among several nations, each of whom agrees to abide by treaty terms even if tensions develop. According to the European Union’s founding treaty, goods, ser- vices, and citizens of member nations are free to move across members’ borders. Every nation must continue to abide by such terms even if it has a conflict with another member. For instance, although Germany and France may disagree on many issues,
- 907. neither can treat goods, services, and citizens coming and going between their two nations any differently than it treats any other member nation’s goods, services, and citizens. See Chapter 8 for a detailed presentation of the European Union. The United Nations Although individual nations sometimes have the power to influence the course of events in certain parts of the world, they cannot monitor political activities everywhere at once. The United Nations (UN; www.un.org) was formed after the Second World War to provide leadership in fostering M04_WILD9220_09_SE_C04.indd 118 10/30/17 8:48 PM http://www.lockheedmartin.com/ http://www.un.org/ http://www.pearson.com/mylab/management CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 119 peace and stability around the world. The UN and its many
- 908. agencies provide food and medical supplies, educational supplies and training, and financial resources to poorer member nations. The UN receives its funding from member contributions based primarily on gross national product (GNP). Practically all nations in the world are UN members— except for several small countries and territories that have observer status. The UN is headed by a secretary general who is elected by all members and who serves for a five-year term. The UN system consists of six main bodies: • All members have an equal vote in the General Assembly, which discusses and recom- mends action on any matter that falls within the UN Charter. It approves the UN budget and the makeup of the other bodies. • The Security Council consists of 15 members. Five (China, France, the United Kingdom, Russia, and the United States) are permanent. Ten others are elected by the General Assem- bly for two-year terms. The council is responsible for ensuring international peace and
- 909. security, and all UN members are supposed to be bound by its decisions. • The Economic and Social Council, which is responsible for economics, human rights, and social matters, administers a host of smaller organizations and specialized agencies. • The Trusteeship Council consists of the five permanent members of the Security Council and administers all trustee territories under UN custody. • The International Court of Justice consists of 15 judges elected by the General Assembly and Security Council. It can hear disputes only between nations, not cases brought against individuals or corporations. It has no compulsory jurisdiction, and its decisions can be, and have been, disregarded by specific nations. • Headed by the secretary general, the Secretariat administers the operations of the UN. An important body within the UN Economic and Social Council is the United Nations Con-
- 910. ference on Trade and Development (UNCTAD; unctad.org). The organization has a broad mandate in the areas of international trade and economic development. It hosts conferences on pressing development issues including entrepreneurship, poverty, and national debt. Certain conferences are designed to develop the business management skills of individuals in developing nations. QUiCK sTUDY 4 1. How can a company incorporate political risk into its business strategies? 2. What is a good source of information to help conduct accurate political risk forecasting? 3. What might result from unfavorable political relati ons among countries? 4.5 Emerging Markets and Economic Transition In this section, we learn more about the experiences of two emerging markets that are transforming their political economies. Both China and Russia continue to undergo economic transition away from central planning and toward more market-based economies. We first explore the history of
- 911. transition for China and the main issues it confronts today. We then explore Russia’s experience with transition and the challenges it faces. China’s Profile China began its experiment with central planning in 1949, after the communists defeated nation- alists in a long and bloody civil war. Following the war, China imprisoned or exiled most of its capitalists. From 1949 until reforms were initiated in the late 1970s, China had a unique economic system. Agricultural production was organized into groups of people who formed production “brigades” and production “units.” Communes were larger entities responsible for planning agri- cultural production quotas and industrial production schedules. Rural families owned their homes and parcels of land on which to produce particular crops. Production surpluses could be consumed by the family or sold at a profit on the open market. In 1979, China initiated agricultural reforms that strengthened work incentives in this sector. Family units could then grow whatever crops they chose and could sell the produce at market
- 912. 4.5 Describe China’s and Russia’s experiences with eco- nomic transition. M04_WILD9220_09_SE_C04.indd 119 10/30/17 8:48 PM 120 PART 2 • nATionAl BUsinEss EnviRonmEnTs prices. At about the same time, township and village enterprises (TVEs) began to appear. Each TVE relied on the open market for materials, labor, and capital and used a nongovernmental distribution system. Each TVE employed managers who were directly responsible for profits and losses. The government initially regarded TVEs as illegal and unrelated to the officially sanctioned communes. But they were legalized in 1984 and helped lay additional groundwork for a market economy. Today, private businesspeople can even join China’s Communist Party, and workers can elect local representatives to the official trade union.
- 913. China has done more for its people economically over the past two decades than perhaps any other nation on earth. Today, China’s leaders describe its economic philosophy as “socialism with Chinese characteristics,” and glistening skyscrapers dominate the Shanghai and Beijing cityscapes. The country’s immense population, rising incomes, and expanding opportunities attract huge sums of investment. More recently, China has relaxed government control over private property. China began selling “land-use rights” for residential use (up to 70 years), commercial use (up to 40 years), and other uses (50 years) in 1988 to raise capital and formalized the practice into law in 1994. Buyers paid an upfront fee for the right to use the land for specific period of time. But the holders of these land-use rights wanted clarity on whether they could renew their rights for another 70 years upon expiration. To assuage these concerns, China’s 2007 Property Law clarified that renewal of any leases would be “automatic” but said nothing about if a fee would be involved. In 2017, Chinese Premier, Li Keqiang, stated that the government will permit
- 914. perpetual and free renewals. In other words, a 70-year land-use right whose renewal is automatic and free implies a perpetual right to use the land. In a capitalist economy this is called private land ownership.7 Chinese Patience and Guanxi If there is one trait that is needed by all private companies in China, it is patience. Despite obvious ideological differences between itself and the private sector, China’s Communist Party is trying very hard to appear well suited to running the country. Karl Marx once summed up communism as the “abolition of private property,” and the name of China’s Communist Party (in Chinese charac- ters) literally means “common property party.” But today, private property is an accepted concept and encourages Chinese companies to invest in innovation. Leading Chinese multinationals, such as Huawei (www.huawei.com), now rank among the world’s largest applicants for patents. An interesting facet of doing business in China is guanxi—the Chinese term for “personal relationships.” We can see how this works by exploring the role
- 915. of guanxi in China’s approach to innovation. First, flexible networks fueled by guanxi help companies to reduce costs and increase Chinese migrants work at a con- struction site in Beijing, China. The government is luring 90 mil- lion rural residents to higher-paid jobs in cities and boost urbaniza- tion of its 1.4 billion-strong popu- lation. The current migration wave brings more than 43,000 people a day to China’s cities. The govern- ment hopes to increase domestic consumption to make up for slower growth in China’s export markets. View Stock/Alamy Stock Photo M04_WILD9220_09_SE_C04.indd 120 10/30/17 8:48 PM http://www.huawei.com/
- 916. CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 121 f lexibility. Chinese companies spread their production contracts over a large number of parts suppliers and can then increase or decrease orders as demand dictates. Second, some companies exploit China’s lax enforcement of property rights to quickly copy new, pricey global products and make cheaper versions available to Chinese consumers. These companies employ bandit or guerilla innovation to continually learn innovative ways to produce goods at lower cost, though they are clearly violating the original producer’s property rights.8 A personal touch is a necessary ingredient for foreign companies to achieve success in China. Initially, and in line with communist ideology, non-Chinese companies were restricted from par- ticipating in China’s economy. But today, outsiders enjoy ever - greater opportunities to create joint ventures with local partners. To learn more about the need for personal relationships, or guanxi, in China, see this chapter’s Culture Matters feature, titled “Guidelines for Good Guanxi.”
- 917. China’s Challenges China’s economy continued to grow throughout the global recession and is expanding at rates of between 7 and 9 percent today. But China’s leadership must deal with increasingly rapid eco- nomic and social change and carefully manage political and social problems that threaten China’s future economic performance. In general, the nation’s leadership has poor relations with ethnic minorities and skirmishes between secular and Muslim Chinese in western provinces still occur. Meanwhile, political leaders restrict advanced democratic reforms for the most part. Protests arise sporadically whenever ordinary Chinese citizens grow impatient with political progress. Another potential problem is unemployment, largely the result of the collapse of state-owned industry, intensified competition, and the entry of international companies into China. These forces are placing greater emphasis on efficiency and cutting payrolls in some industries. China’s social safety net struggles to cope with the needs of millions of unemployed people.
- 918. The biggest contributor to the unemployed sector seems to be migrant workers. Hundreds of thousands of workers have left their farms and now go from city to city searching for better-paying factory work or construction jobs. Unhappiness with economic progress in the countryside and the difficulties migrant workers face are potential sources of social unrest for the Chinese government. Another key issue is reunification of “greater China.” China regained control of Hong Kong in 1997 after 99 years under British rule. For the most part, China has kept its promise of “one coun- try, two systems.” Although the economic (and, to a lesser extent, political) freedoms of people in • Importance of Contacts, Not Contracts. in China, face-to- face communication and personal relationships take priority over written contracts. mu Dan Ping of Ernst & Young (www .ey.com) offers this diagram to show the different priorities: United states: Reason → law → Relationship China: Relationship → Reason → law
- 919. managers from the United states look for rationale or rea- son first, wondering if there is a market with profit potential. if so, they want a legal contract before spending time on a business relationship. But the Chinese need to establish a trust relationship first and then look for common goals as a reason for doing business. for them, legal contracts are just a formality, serving to ensure mutual understanding. • Pleasure before Business. Experts advise managers to leave the sales pitch on the back burner and to follow the lead of their Chinese hosts. if seeking partnerships in China, one cannot overlook the importance of personal relationshi ps. Companies that send their top performers to wow Chinese businesspeople with savvy sales pitches can return empty- handed—friendship comes before business in China. • Business Partners Are Family Members, Too. The impor- tance of family means that visiting managers should never turn down invitations to partake in a Chinese executive’s family life. lauren Hsu, market analyst for Kohler Company (www.kohler.com), was responsible for researching and identifying potential joint venture partners in China. she once went bowling with the partner’s daughter and then to a piano concert with the entire family. Two years of meet-
- 920. ings and visits to get acquainted eventually resulted in a joint venture deal. • Cultural Sensitivity. China is not a single market but many different regional markets with different cultures and even different languages. Bob Wilner, of mcDonald’s Corpora- tion (www.mcdonalds.com), went to China to learn how Chinese people are managed. He explained that although mcDonald’s cooks its hamburgers exactly the same way worldwide, it is sensitive to local culture in how it manages, motivates, rewards, and disciplines employees. Wilner and other mcDonald’s managers developed that sensitivity only through repeated visits to China. Source: “The Panda Has Two Faces,” The Economist, April 3, 2010, p. 70 Paul Maidment, “China’s Legal Catch-22,” Forbes (www.forbes.com), February 17, 2010; Frederik Balfour, “You Say Guanxi, I Say Schmoozing,” Bloomberg Businessweek (www.businessweek.com), November 18, 2007. CULTURE MATTERS Guidelines for Good Guanxi M04_WILD9220_09_SE_C04.indd 121 10/30/17 8:48 PM
- 921. http://www.forbes.com/ http://www.mcdonalds.com/ http://www.kohler.com/ http://www.ey.com/ http://www.ey.com/ http://www.businessweek.com/ 122 PART 2 • nATionAl BUsinEss EnviRonmEnTs Hong Kong would remain largely intact, the rest of China would continue along lines drawn by the communist leadership. In addition, China regained control of its southern coastal territory of Macao in 1999. Only a one-hour ferry ride from Hong Kong, Macao had been under Portuguese administration since it was founded in 1557. Although Macao’s main function used to be that of trading post, today it serves mainly as a gambling outpost and is referred to as “Asia’s Vegas.” Any chance of Taiwan’s eventual reunification with the Chinese mainland depends on how China manages Hong Kong and Macao. For now, reunification
- 922. seems more likely as economic ties between China and Taiwan grow steadily. Taiwan scrapped a 50-year ban that capped the size of investments in China and eased restrictions on direct financial flows between Taiwan businesses and the mainland. Also, the entry of both China and Taiwan into the World Trade Organization (www.wto.org) is encouraging further integration of their two economies. MyLab Management Watch It Yongshua USA, LLC the Value of Yuan in China Apply what you have learned so far about China and its economic development. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case about how manufacturing is propelling China’s economy and answer questions. Russia’s Profile Russia’s experience with communism began in 1917. For the next 75 years, factories, distribution, and all other facets of operations, including the prices of labor,
- 923. capital, and products, were con- trolled by Russia’s government. While China was experimenting with private farm ownership and a limited market-price system, Russia and other nations in the Soviet Union remained staunchly communist under a system of complete government ownership. In the 1980s, the former Soviet Union entered a new era of freedom of thought, freedom of expression, and economic restructuring. For the first time since 1917, people could speak freely about their lives under economic socialism, and speak freely they did. People vented their frustrations over a general lack of consumer goods, poor-quality products, and long lines at banks and grocery stores. Transition away from government ownership and central planning was challenging. Except for politicians, bureaucrats, and wealthy businesspeople (called the “oligarchs”), ordinary people had difficulty maintaining their standard of living and affording many basic items. Some Russians are now doing well financially because they were factory managers under the old system and retained their jobs in the new system. Others have turned to the
- 924. black market to amass personal wealth. Still others are working hard to build legitimate companies but find themselves forced into making “protection” payments to organized crime. Today, Russia is far more stable as it has made progress on corruption although a good deal undoubtedly remains. A somewhat opaque legal system, a fair amount of corruption, and shifting business laws make Russia a place where non-Russian businesspeople must still operate cautiously. Yet some ambitious managers and foreign entrepreneurs are not put off by such obstacles. For some insights on how to do business in today’s Russia, see the Manager’s Briefcase feature, titled “Russian Rules of the Game.” Russia’s Challenges As in so many other transitional economies, Russia must continue to foster managerial talent. Years of central planning delayed the development of managerial skills needed in a market-based economy. Russian managers could do well to advance their skills in every facet of management practice, including financial control, research and development,
- 925. human resource management, and marketing strategy. Political instability, especially in the form of intensified nationalist sentiment, is another potential threat to progress. Strong ethnic and nationalist sentiments in the region can cause misunderstandings to spiral out of control quickly. Russia and Georgia had a military confronta- tion in the summer of 2008 over two of Georgia’s restive republics that wanted to draw closer to Russia. Then, in 2014, Russia annexed the Ukraine’s peninsula of Crimea, arguing that the M04_WILD9220_09_SE_C04.indd 122 10/30/17 8:48 PM http://www.wto.org/ http://www.pearson.com/mylab/management CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 123 Although business in Russia can be brutal at times, some go- get- ting entrepreneurs and brave managers are venturing into this
- 926. rugged land. if you are one of them, or just an interested observer, here are a few pointers on doing business in Russia: • Getting Started A visit to your country’s local chamber of commerce in Russia should be high on your list. The best organized and managed of these hold regularly scheduled luncheons at which you can make contacts with Russians and others wanting to do business. They might also offer programs on getting acquainted with the business cli- mate in Russia. many businesses get started in moscow, st. Petersburg, or vladivostok, depending in part on their line of business. • Be Adventurous The kind of person who will succeed in Russia thrives on adventure and enjoys a challenge. He or she also should not demand predictability in day-to-day activities—Russia is anything but predictable. initially, knowledge of Russian is helpful, though not essential, but eventual proficiency will be necessary. Prior experience working and living in Eastern Europe would be a big plus. • Office Space Doing business in Russia demands a personal touch. locating an office in Russia is crucial if you eventu-
- 927. ally want to receive income from your operations. Your office does not need to be a suite off Red square. Almost any local address will do, and a nice flat can double as an office at the start. for business services, upscale hotels com- monly have business centers in them. Eventually, renting an average Russian-style office would be more than adequate. • Making Deals Business in Russia takes time and patience. The Russian negotiating style, like the country itself, is tough and ever changing. During negotiations, emotional out- bursts, walkouts, or threats to walk out from your Russian counterparts should not be unexpected. finally, signed con- tracts in Russia are not always followed to the letter, as your Russian associate may view new circumstances as a chance to renegotiate terms. All in all, the personalities of individu- als involved in business deals count for much in Russia. MANAGER’S BRIEFCASE Russian Rules of the Game ethnically Russian people in Crimea voted to break away from Ukraine and to become part of Russia. Many nations swiftly rebuked Russia’s actions and some, including the United States, imposed political and economic sanctions. Russia remains undeterred, however, and is strength-
- 928. ening its presence in Crimea, other neighboring countries, and as far away as the Middle East. Russia’s unstable investment climate is another concern among international businesses. Tense uneasiness between Russia’s government and its business community stems from the gov- ernment’s attacks on business owners who disagree with official policy and on firms that it wants to control. The root of many of Russia’s problems appears to be corrupt law enforcement. Offi- cials of the government, such as the Russian Interior Ministry, are accused of raiding the offices of companies for documents and computers. Records are then falsified and signatures forged to make it appear that another company—one controlled by government officials—has massively overpaid taxes and is due a government refund. Meanwhile, the owners and managers of the raided businesses often find themselves in prison. The Russian government has little patience or sympathy for reformers inside the country. Ordi- nary Russians never cared much for the wealthy “oligarchs, as they were called, and saw them as
- 929. corrupt businesspeople who gained wealth at the expense of the people. Some wealthy individuals tried to create a better Russia by encouraging formation of a new class of people who would one day push for political reforms. They financed boarding schools for orphans, computer classes for village schools, and civil-society programs for journalists and politicians. But such actions made them a threat to the state and they often found themselves imprisoned on charges of tax evasion, fraud, and so forth. If Russia truly wishes to become a location of choice for international companies, it will need to respect the sovereignty of other nations, meddle less in business, and better safeguard property rights. QUiCK sTUDY 5 1. During what time period did China undergo its most rigorous experience with central planning? 2. What challenges might pose a threat to China’s future economic performance? 3. Over what aspects of Russia’s centrally-planned economy did planners exercise control?
- 930. 4. What might challenge Russia’s future economic prospects? M04_WILD9220_09_SE_C04.indd 123 10/30/17 8:48 PM 124 PART 2 • nATionAl BUsinEss EnviRonmEnTs This completes our three-chapter coverage of national business environments. nations are removing unnecessary regula- tions and government interference in the hope of advancing their economic development. formerly centrally planned economies continue free-market reforms in order to drive domestic entrepre- neurial activity and attract international investors. These trends are changing the face of global capitalism. Two topics are likely to dominate conversations on development—the race between China and india and the productivity gap between the United states and Europe. Economic Development in China versus India Both China and india have immense potential for growth, and it is only a matter of time before each has a middle class larger than
- 931. the entire Us population. Whether the organic-led path of india or the investment-led path of China is best for a particular nation depends on that nation’s circumstances. Every nation on earth has so far followed a path to devel op- ment that relied on its natural resources and/or its relatively cheap labor—the model China is following. China’s top-down approach to development and india’s bottom-up approach reflect their polit- ical systems: india is a democracy, whereas China is not. Although China is growing rapidly, it needs homegrown entrepreneurs and advanced managerial skills to take it to the next level of global competitiveness. if india can achieve sustained economic growth, it will become the first developing nation to advance economically by relying on the brainpower of its people. india’s growth came largely from native competitive firms in cutting-edge, knowledge-based industries. Although india has a long reputation for high taxes
- 932. and burdensome regulations, it also has had the foundations of a market economy, such as private enterprise, democratic govern- ment, and Western accounting practices. india also has a relatively advanced legal system, fairly efficient capital markets, and many talented entrepreneurs. Productivity in the United States versus Europe Productivity growth is a key driver of living standards in any nation. Although productivity growth in Europe kept pace with that in the United states for decades, it has fallen behind in recent years. But why is there a productivity gap at all? several explanations have been proposed. first, despite its benefits, information technology (iT) spending in Europe lags behind that in the United states. Europeans may be discouraged from spending on iT for reasons related to European business law. second, stronger labor laws in Europe relative to the United states make it more difficult and costly to shed workers. Thus, even if European companies invest in iT to increase labor produc- tivity, overall productivity gains may be hampered by their
- 933. inabil- ity to rid themselves of excess workers. Third, whereas the Us tech sector is a big driver behind higher Us productivity growth, the tech sector in Europe is far smaller by comparison. fourth, Europe spends far less overall on research and development, even though such spending is a big boost to productivity growth. strong productivity growth will translate to a higher level of economic development. many European officials are calling for a greater shift toward free-market reform to boost productivity. European officials understand that robust productivity growth is the only way for their citizens to close the gap with their Us counterparts. BOTTOM LINE FOR BUSINESS MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO4.1 Explain economic development and how it is measured. • Economic development refers to an increase in the economic
- 934. well-being, quality of life, and general welfare of a nation’s people. • One measure of economic development is national production, including gross national product and gross domestic product. • Another method is purchasing power parity, the relative ability of two countries’ cur- rencies to buy the same “basket” of goods in those two countries. • A third method is the human development index, or the extent to which a people’s needs are satisfied and addressed equally across the population. LO4.2 Describe economic transition and its main obstacles. • Economic transition is the process whereby a nation changes its fundamental eco- nomic organization to create free-market institutions. • One obstacle is a lack of managerial expertise because central planners made nearly all business decisions.
- 935. M04_WILD9220_09_SE_C04.indd 124 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 125 • There is a shortage of capital to pay for communications, infrastructure, financial institutions, and education. • Cultural differences between transition economies and western nations can make it difficult to introduce modern management practices. • And unsustainable practices lowered productivity due to lax environmental standards and poor healthcare. LO4.3 Outline the various sources of political risk. • Political risk is the likelihood that a society will undergo political change that negatively affects local business activity. Macro risk threatens
- 936. all companies alike whereas micro risk threatens one industry or group of companies. • The five main sources of political risk are conflict and violence, terrorism and kid- napping, property seizure, policy changes, and local content requirements. • Property seizure can take the form of confiscation (without compensation), expro- priation (with compensation), or nationalization (takeover of an entire industry). LO4.4 Explain how companies can manage political risk. • Managers can reduce the effects of political risk through adaptation (incorporating risk into business strategies), information gathering (monitoring local political events), and political influence (such as by lobbying local political leaders). • Firms can also manage political risk to some extent by ensuring that their actions do
- 937. not harm international relations. • Supporting economic development efforts of international organizations, such as the United Nations, can also help mitigate political risk. LO4.5 Describe China’s and Russia’s experiences with economic transition. • China has had tremendous economic success for over two decades with its economic philosophy called, “socialism with Chinese characteristics.” The country’s immense population, rising incomes, and expanding opportunities attract huge sums of invest- ment. Potential threats to China’s pace of development are political and social prob- lems, high migrant unemployment, and a rocky reunification with Taiwan. • Russia’s experience with communism extended from 1917 until it began its economic restructuring in the 1980s. Transition away from central planning was challenging for common Russians and corruption became the norm. Challenges
- 938. facing Russia are the need to foster managerial talent suited to a market-based economy, political insta- bility in the form of intense nationalism, and an unstable investment climate. confiscation (p. 115) developed country (p. 104) developing country (also called less- developed country) (p. 105) economic development (p. 104) economic transition (p. 110) emerging markets (p. 105) expropriation (p. 115) Foreign Corrupt Practices Act (p. 118) human development index (HDI) (p. 109) lobbying (p. 118) local content requirements (p. 116) nationalization (p. 115) newly industrialized country (NIC)
- 939. (p. 105) political risk (p. 111) purchasing power (p. 108) purchasing power parity (PPP) (p. 108) technological dualism (p. 105) Key Terms TALK ABOUT IT 1 The Internet and mobile technologies have penetrated nearly all aspects of life in devel- oped countries, unlike many developing countries. This leads some people to say that technology widens the development gap between rich and poor countries. 4-1. Do you agree that technology is widening the economic development gap between rich and poor nations? Explain. 4-2. In what ways might the poorest of countries use technology as a tool for economic
- 940. development? M04_WILD9220_09_SE_C04.indd 125 10/30/17 8:48 PM 126 PART 2 • nATionAl BUsinEss EnviRonmEnTs TALK ABOUT IT 2 Imagine that you are the new director of a major international lending institution that gets its funding from member countries. You are evaluating your organization’s lending poli- cies and priorities. 4-3. What one aspect of people’s lives would you prioritize for receiving aid in develop- ing economies? 4-4. Might the funding of certain aspects of society cause a backlash from any groups or member nation(s)? Explain. Ethical Challenge You are the managing director of your US firm’s subsidiary in southern France. The social-
- 941. welfare states of Western Europe were founded after the Second World War with specific ethi- cal considerations in mind: reduce social and economic inequality, improve living standards for the poor, and provide nearly free health care for all. Many countries in Western Europe have trimmed social-welfare provisions, privatized businesses, and increased their reliance on market forces. 4-5. Do you think that the cultures of Western Europe have changed over the years and that such ethical concerns are a remnant of the past? 4-6. Do you think that free-market reforms will simply re- create the conditions that gave rise to the welfare state in the first place? 4-7. What can governments do for workers who become displaced, or perhaps obsolete, in a more open and competitive economy? Teaming Up Two groups of four students each will debate the ethics of political lobbying activities in a foreign country where a company does business. After the first
- 942. student from each side has spoken, the second student will question the opponent’s arguments, looking for holes and in- consistencies. The third student will attempt to answer these arguments. The fourth student will present a summary of each side’s arguments. Finally, the class will vote on which team has offered the more compelling argument. Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is re- searching, integrate your answers to the following questions into your completed MESP report. 4-8. Is it a developed, newly industrializing, emerging, or developing country? 4-9. What is its GDP, GDP per capita, and GDP at PPP? 4-10. How does the country rank in the human development index? 4-11. Has it undergone economic transition within the past 20 years?
- 943. 4-12. Does any form of political risk pose a threat to the nation’s economic development? 4-13. How would you describe the country’s international relations? MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 4-14. Two students are discussing the pros and cons of different measures of economic development. “The productivity of a nation’s workforce,” declares the first, “is the only true measure of how developed a country’s economy is.” The second student counters, “I disagree. The only true measure of development is GDP per capita.” What information can you provide each of these students so they can refine their posi- tions? 4-15. Political risk affects different countries and companies in countless ways. Imagine that your firm’s CEO says to you, “The reason we went global by entering Safeland first is because our firm is immune
- 944. to all political risk there.” What would you say to your CEO? M04_WILD9220_09_SE_C04.indd 126 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 4 • EConomiC DEvEloPmEnT of nATions 127 PRACTICING INTERNATIONAL MANAGEMENT CASE Cuba Comes Off Its Sugar High When the Soviet Union still existed, Cuba would barter sugar with its communist allies in return for oil and other goods. But when the Soviet Union crumbled in 1989, Cuba had to say good-bye to its preferential barter rates and Soviet subsidies. The only option left for Cuba was to sell the nation’s sugar on the open market. But whereas sugar exports earned Cuba $5 billion in 1990, they earned just $400 million by 2016. Production fell from a peak of more than eight million tons in 1989 to around three million
- 945. tons in 2016. With decreasing revenues on world markets, falling pro- duction, and inefficient sugar mills that guzzle expensive oil, Cuba had no choice but to shut down about half its mills. Today, Cuba remains a net sugar importer. With the remaining state-owned industrial dinosaurs wheezing away and the economy under immense strain, the government opened up key state industries to non-Cuban investment. As a result, joint ventures became a key plank in the effort to prop up Cuba through limited economic reforms. The money came chiefly from Canada, Mexico, and Europe—all of whom benefited from the absence of Cuba’s neighbor and nemesis, the United States, which has maintained a trade embargo against Cuba since 1960. Although Cuba and the United States normalized relations in 2015, progress on the economic front remains sluggish. One difficulty of doing business in Cuba is a poor quality infrastructure including
- 946. dreadful roads, a crumbling electric grid, and an imperfect digital network. Another problem includes Cuba’s uncertain regulatory framework facing US firms doing business in Cuba and the associated height- ened financial risks. An area in which a good deal of investment has occurred is another commodity that Cuba has to offer the world—nickel. Cuba holds 30 percent of the world’s reserves of nickel, which is used in stainless steel and other alloys, and it exports 75 percent of its nickel to Europe. One of the biggest mining firms active in Cuba today is Canada’s Sherritt International Corporation (www.sherritt.com). Sherritt’s f lag f lies outside the island’s biggest nickel mine and Sherritt rigs are reviving output from old oil fields. After turning around the ailing nickel mine at Moa, Sherritt received government
- 947. approval to develop beach resorts and beef up communications and transport networks. The firm is one of the island’s largest foreign investors. Although international concerns like Sherritt are free to invest in Cuba, they face some harsh realities and restrictions. Cuba is burdened with complex and contradictory rules and regulations. And once foreigners begin to figure out the rules, the govern- ment changes them. One European businessman said it some- times feels as though the Cuban side goes out of their way to create obstacles. Ricardo Elizondo came to Cuba from Mexico to help manage his company’s stake in ETECSA, Cuba’s national telecommunica- tions firm. Elizondo reports that anyone who wants to do business in Cuba must accept the reality of partnership with a socialist state. Cuba lacks a legal system to enforce commercial contracts, it lacks a banking system to offer credit, and there are no private-
- 948. property rights. One thing the government doesn’t lack is plenty of labor laws—and those are onerous. Non-Cuban partners cannot hire, fire, or even pay workers directly. They must pay the government to provide laborers who, in turn, are paid only a fraction of these pay- ments. Human rights group Freedom House (www.freedomhouse .org) says one company paid the Cuban government $9,500 per year per worker, but the workers received only $120 to $144 per year. As of 2017, foreign companies were still forced to hire labor through the state’s hiring agency. Some companies invest in Cuba and put up with such restric- tions because they are getting a great return on their investment. Toronto’s Altamira Management (www.altamira.com), which holds 11 percent of Sherritt, is one of those firms. Analysts say that Cuba is offering outsiders deals with rates of return up to 80 percent a year. Moreover, there is a consensus among many international investors that the communist regime cannot last forever. And if,
- 949. in a post-Castro and post-communist era the United States ends its embargo completely, property prices would soar. Companies that stepped in first, such as Sherritt and ETECSA, will have gained a valuable toehold in what could be a vibrant market economy. Ordi- nary Cubans do anticipate more reform after President Raul Castro is expected to hand the reigns over to a younger, more pro- business leader. Thinking Globally 4-16. Why does the Cuban government require non-Cuban businesses to hire and pay workers only through the government? 4-17. Suppose Cuba’s government collapses and the nation embarks on a path of economic transition. How might Cuba’s experience differ from that of Russia and China? 4-18. A US law permits US companies to sue firms from other
- 950. nations that traffic in US property nationalized by Cuba. The law also empowers the US government to deny entry visas to the executives of such firms as well as their fami - lies. Why does the United States maintain such a hard line against doing business with Cuba? Sources: “Sun, Sand, And Socialism: What The Tourist Industry Reveals About Cuba,” The Economist (www.economist.com), April 1, 2017; Daniel Workman, “Cuba’s Top 10 Exports,” World’s Top Exports (www.worldstopexports.com), April 1, 2017; William M. LeoGrande, “Let’s Make A Deal: Doing Business in Cuba,” Huffington Post (www.huffingtonpost.com), December 21, 2016; Archibald Ritter, “Cuba in the 2010s: Creative Reform or Geriatric Paralysis?” Focal Point, April 2010, pp. 12–13; Cuba Blog, Foreign Policy Association, (cuba.foreignpolicyblogs.com), various reports and data. M04_WILD9220_09_SE_C04.indd 127 10/30/17 8:48 PM http://www.economist.com/
- 951. http://www.huffingtonpost.com/ http://cuba.foreignpolicyblogs.com/ http://www.worldstopexports.com/ http://www.altamira.com/ http://www.freedomhouse.org/ http://www.freedomhouse.org/ http://www.sherritt.com/ 128 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 5.1 Describe the benefits, volume, and patterns of international trade. 5.2 Explain how mercantilism worked and identify its inherent flaws. 5.3 Detail the theories of absolute advantage and comparative
- 952. advantage. 5.4 Summarize the factor proportions theory of trade. 5.5 Explain the international product life cycle theory. 5.6 Outline the new trade theory and the first-mover advantage. 5.7 Describe the national competitive advantage theory and the Porter diamond. Learning Objectives After studying this chapter, you should be able to International Trade Theory Chapter Five A Look Back Chapters 2, 3, and 4 examined cultural, political, legal, and
- 953. economic differences among countries. We covered these differences early in the book because of their important influence on international business activities. A Look at This Chapter This chapter begins our study of the international trade and investment environment. We explore the oldest form of international business activity—international trade. We discuss the benefits, volume, and patterns of international trade and explore the major theories that attempt to explain why trade occurs. A Look Ahead Chapter 6 explains the political economy of international trade. We explore both the motives and methods of government intervention in trade and how the global trading
- 954. system works to promote free trade. 3 International Trade and InvestmentPart M05_WILD9220_09_SE_C05.indd 128 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 129 From Bentonville to Beijing BENTONVILLE, Arkansas—Walmart (www.walmart.com) first became an international company in 1991 when it built a new store near Mexico City, Mexico. Today, Walmart has around 5,300 stores in the United States and approximatel y 6,200 stores in 27 other countries. With nearly $486 billion in sales globally, Walmart is one of the world’s largest companies—yet it is based in a state in which chickens outnumber people. Ambitious global expansion by Walmart (and similar firms) is helping
- 955. boost international trade. To fulfill its promise to deliver the lowest priced goods around the world, Walmart sources inexpensive merchandise from low-cost production locations such as China. The discount retailer has played a big part in increasing Chinese imports to the United States in recent years. In fact, if Walmart were a country, it would be China’s sixth-largest trading partner. The actions of Walmart and other global firms have propelled world exports of goods and services to record levels. Growth in international trade is increasing interdependence between China and other nations. Chinese companies and businesses around the world quickly transformed China into the world’s factory. China’s international trade is expanding at a rate that is about two to three times faster than trade growth for the rest of the world. Around 18 percent of Japan’s imports come from China, and about 12 percent of all
- 956. goods imported by the United States are Chinese-made. China’s imports are also growing. From the United States, China imports everything from steel that feeds its booming construction industry to x-ray machines and other devices to improve its people’s health. China is also becom- ing a larger market for Walmart and other Western consumer- goods businesses. As you read this chapter, consider why nations trade and how the ambitions of firms such as Walmart are driving growth in world trade.1 Testing/Shutterstock M05_WILD9220_09_SE_C05.indd 129 10/30/17 8:48 PM http://www.walmart.com/ 130 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT People around the world are accustomed to purchasing goods and services produced in other countries. In fact, many consumers get their first taste of
- 957. another country’s culture through merchan- dise purchased from that country. Chanel No. 5 perfume (www.chanel.com) evokes the romanticism of France. The fine artwork on Imari porcelain conveys the Japanese attention to detail and quality. And American Eagle jeans (www.ae.com) portray the casual lifestyle of people in the United States. In this chapter, we explore international trade in goods and services. We begin by examining the benefits, volume, and patterns of international trade. We then explore a number of important theories that attempt to explain why nations trade with one another. 5.1 Benefits, Volume, and Patterns of International Trade The purchase, sale, or exchange of goods and services across national borders is called interna- tional trade. This is in contrast to domestic trade, which occurs between different states, regions, or cities within a country. In recent years, nations that embrace globalization are seeing trade grow in importance for their economies. One way to measure the importance of trade to
- 958. a nation is to examine the volume of an economy’s trade relative to its total output. Map 5.1 on pages (on pages 132–133) shows each nation’s trade volume as a share of its gross domestic product (GDP). Trade as a share of GDP is defined as the sum of exports and imports (of goods and services) divided by GDP. Recall that GDP is the value of all goods and services produced by a domestic economy over a one-year period. Map 5.1 demonstrates that the value of trade passing through some nations’ borders actu- ally exceeds the amount of goods and services they produce (the “over 100%” category). Benefits of International Trade International trade provides a country’s people with a greater choice of goods and services. For example, because Finland has a cool climate, it cannot be expected to grow cotton. But it can sell paper and other products made from lumber (which it has in abundance) to the United States. Finland can then use the proceeds from the sale of products derived from lumber to buy US-grown Pima cotton. Thus, people in Finland get cotton they otherwise would not have. Likewise, although
- 959. the United States has vast forests, the wood-based products from Finland might be of a certain quality that fills a gap in the US marketplace. International trade is also an important engine for job creation in many countries. The US Department of Commerce (www.commerce.gov) calculates that for every $1 billion increase in exports, 22,800 jobs are created in the United States. It is also estimated that 12 million US jobs depend on exports and that these jobs pay on average from 13 to 18 percent more than those not related to international trade.2 Expanded trade benefits other countries similarly. Volume of International Trade The value and volume of international trade continues to increase. Today, world merchandise exports are valued at $16.5 trillion, and service exports are worth $4.8 trillion.3 Table 5.1 shows the world’s largest exporters of merchandise and services. Perhaps not surprisingly, the United States ranks first in commercial services exports and ranks second in merchandise exports (behind China).
- 960. Most of world merchandise trade is composed of trade in manufactured goods. The domi- nance of manufactured goods in the trade of merchandise has persisted over time and will likely continue to do so. The reason is its growth is much faster than trade in the two other classifica- tions of merchandise—mining and agricultural products. Trade in services accounts for around 22 percent of total world trade. Although the importance of trade in services is growing for many nations, it tends to be relatively more important for the world’s richest countries. The level of world output in any given year influences the level of international trade in that year. Slower world economic output slows the volume of international trade, and higher output propels greater trade. Trade slows in times of economic recession because when people are less certain about their own financial futures they buy fewer domestic and imported products. Another reason output and trade move together is that a country in recession also often has a currency that is weak relative to other nations. This makes imports more expensive relative to domestic prod-
- 961. ucts. (We discuss the relationship between currency values and trade at length in Chapter 10.) In addition to international trade and world output moving in lockstep fashion, trade has consistently grown faster than output. 5.1 Describe the benefits, volume, and patterns of inter- national trade. international trade Purchase, sale, or exchange of goods and services across national borders. M05_WILD9220_09_SE_C05.indd 130 10/30/17 8:48 PM http://www.commerce.gov/ http://www.ae.com/ http://www.chanel.com/ CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 131 International Trade Patterns
- 962. Exploring the volume of international trade and world output provides useful insights into the international trade environment, but it does not tell us who trades with whom. It does not reveal whether trade occurs primarily between the world’s richest nations or whether there is significant trade activity involving poorer nations. Customs agencies in most countries record the destination of exports, the source of imports, and the physical quantities and values of goods crossing their borders. Customs data ref lects overall trade patterns among nations, but this type of data is sometimes misleading. For example, governments sometimes deliberately distort the reporting of trade in military equipment or other sensitive goods. In other cases, extensive trade in unofficial (underground) economies can distort the real picture of trade between nations. Large ocean-going cargo vessels are needed to support these patterns in international trade and deliver merchandise from one shore to another. In fact, Greek and Japanese merchant ships own more than 30 percent of the world’s total capacity
- 963. (measured in tons shipped, or tonnage) of merchant ships. Yet, global merchant-shipping companies are feeling the pinch of higher oil prices. And as importers must absorb a portion of higher shipping costs, they may begin producing goods closer to home and reduce the need for additional merchant-ship capacity.4 There has been a persistent pattern of merchandise trade among nations. Trade between the world’s high-income economies accounts for roughly 60 percent of total world merchandise trade. Two-way trade between high-income countries and low- and middle-income nations accounts for about 34 percent of world merchandise trade. Meanwhile, merchandise trade between low- and middle-income nations accounts for only about 6 percent of total world trade. These figures reveal the low purchasing power of the world’s poorest nations and indicate their general lack of economic development. Asia’s role in merchandise trade is increasing as the region’s economies continue to expand. Some economists call this century the “Pacific century,”
- 964. referring to the expected growth of Asian economies and the resulting shift in the majority of trade flows from the Atlantic Ocean to the Pacific. It will be increasingly important for managers to understand the varying and rich cultures in Asia. For some pointers on doing business in Pacific Rim nations, see this chapter’s Culture Matters feature, titled “Business Culture in the Pacific Rim.” TRADE INTERDEPENDENCE Trade between most nations is characterized by a degree of inter- dependency. Companies in developed nations trade a great deal with companies in other developed nations. The level of interdependency between pairs of countries often reflects the amount of trade that occurs between a company’s subsidiaries in the two nations. Emerging markets that share borders with developed countries are often dependent on their wealthier neighbors. World’s Top Merchandise Exporters World’s Top Service Exporters Rank Exporter Value
- 965. (US $ billions) Share of World Total (%) Rank Exporter Value (US $ billions) Share of World Total (%) 1 China 2,275 13.8 1 United States 690 14.5 2 United States 1,505 9.1 2 United Kingdom 345 7.3 3 Germany 1,329 8.1 3 China 285 6.0 4 Japan 625 3.8 4 Germany 247 5.2 5 Netherlands 567 3.4 5 France 240 5.0 6 South Korea 527 3.2 6 Netherlands 178 3.7 7 Hong Kong 511 3.1 7 Japan 158 3.3
- 966. 8 France 506 3.1 8 India 155 3.3 9 United Kingdom 460 2.8 9 Singapore 139 2.9 10 Italy 459 2.8 10 Ireland 128 2.7 Source: Based on World Trade Statistical Review 2016 (Geneva, Switzerland: World Trade Organization, October 2016), Tables A.6 and A.8, available at www.wto.org. TABLE 5.1 World’s Top Exporters M05_WILD9220_09_SE_C05.indd 131 10/30/17 8:48 PM http://www.wto.org/ 132 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT over 100% 75%–100% 50%–74%
- 967. 25%–49% less than 25% no data available Trade as a percent of GDP A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA
- 968. HAWAII COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA
- 969. ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA URUGUAY FALKLAND/MALVINAS ISLANDS GREENLAND ICELAND FINLAND DENMARKUNITED
- 970. KINGDOM IRELAND FRANCE BELGIUM NETHERLANDS LUXEMBOURG GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL
- 972. GREECE TURKEY CYPRUS MOROCCO WESTERN SAHARA A L G E R I A L I B Y A TUNISIA MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA
- 973. M A L I BURKINA FASO IVORY COAST G H A N A T O G O B E N
- 974. IN NIGERIA N I G E R C H A D E G Y P T S U D A N ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA GABON CONGO REPUBLIC RWANDA BURUNDI
- 975. UGANDA KENYA SOMALIA ANGOLA NAMIBIA ZAMBIA TANZANIA MALAWI ZIMBABWE BOTSWANA MOZAMBIQUE MADAGASCAR
- 976. SWAZILAND LESOTHOSOUTH AFRICA MAURITIUS RÉUNION GEORGIA ARMENIA AZERBAIJAN SYRIA LEBANON ISRAEL JORDAN IRAQ I R A N SAUDI
- 977. ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA
- 978. NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA HONG KONG VIETNAM M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON
- 979. ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A ANDORRA U N I T E D S TAT E S
- 980. O F A M E R I C A C H I L E N O R W A Y S W
- 982. A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C
- 983. O C E A N UNITED ARAB EMIRATES CROATIA GALAPAGOS ISLANDS MYANMAR (BURMA) CONGO DEMOCRATIC REPUBLIC (ZAIRE) SUDAN SOUTH SUDAN F R A N C E
- 984. BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND
- 985. SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A
- 986. TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA Map 5.1 Importance of Trade
- 987. M05_WILD9220_09_SE_C05.indd 132 10/30/17 8:48 PM CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 133 over 100% 75%–100% 50%–74% 25%–49% less than 25% no data available Trade as a percent of GDP A L A S K A C A N A D A
- 988. MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA HAWAII COSTA RICA NICARAGUA HONDURAS EL SALVADOR PANAMA COLOMBIA
- 989. VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA ECUADOR B R A Z I L PERU BOLIVIA PARAGUAY ARGENTINA
- 991. LITHUANIA RUSSIA POLAND BELARUS U K R A I N E SPAIN PORTUGAL CZECH REP. AUSTRIA SWITZ. LICHT. MONACO ITALY
- 992. SLOVAKIA HUNGARY SERBIA AND MONTENEGRO BULGARIA ROMANIA MOLDOVA GREECE TURKEY CYPRUS MOROCCO WESTERN SAHARA A L G E R I A L I B Y A TUNISIA
- 993. MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE LIBERIA M A L I BURKINA FASO IVORY COAST G H A N
- 994. A T O G O B E N IN NIGERIA N I G E R C H A D E G Y P T S U D A N ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC
- 997. SYRIA LEBANON ISRAEL JORDAN IRAQ I R A N SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN
- 998. TURKMENISTAN UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA HONG KONG VIETNAM
- 999. M A L AY S I A BRUNEI PHILIPPINES TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A
- 1000. MONGOLIA NORTH KOREA SOUTH KOREA JAPANC H I N A ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E N
- 1002. HERZEGOVINA ALBANIA MACEDONIA KUWAIT DJBOUTI SLOVENIA SINGAPORE A R C T I C O C E A N S O U T H AT L A N T I C O C E A N I N D I A N O C E A N
- 1003. PA C I F I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA GALAPAGOS ISLANDS MYANMAR (BURMA)
- 1004. CONGO DEMOCRATIC REPUBLIC (ZAIRE) SUDAN SOUTH SUDAN F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA
- 1005. LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA
- 1006. U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA MONACO SAN MARINO I TA LY DENMARK
- 1007. S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA M05_WILD9220_09_SE_C05.indd 133 10/30/17 8:48 PM 134 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT Trade dependency has been a blessing for many Central and Eastern European nations. Ger- many recently had more than 6,000 joint ventures in Hungary alone. And Germany is the single most important trading partner of many Central and Eastern European nations that belong to the European Union (www.europa.eu). To gain an advantage over competitors, German firms combine homegrown technology with relatively low-cost labor
- 1008. in Central and Eastern Europe. For example, Opel (www.opel.com), the German division of General Motors Corporation (www .gm.com), built a $440 million plant in Szentgotthard, Hungary, to make parts for and assemble its Astra hatchbacks destined for export markets. TRADE DEPENDENCE The dangers of trade dependency become apparent when a nation expe- riences economic recession or political turmoil, which then harms dependent nations. For many years, Mexico was a favorite location for the production and assembly operations of US companies making all sorts of products, including refrigerators, mobile phones, and textiles. But then some companies abandoned Mexico for cheaper production locations in Asia, which left empty factories and unemployed workers behind. But today, as labor costs continue to climb in China, some US companies are relocating their factories back to Mexico. The best way for Mexico to deal with its dependency on the United States is to boost its competitiveness and make itself a top choice among emerging markets.
- 1009. Asian customers are as diverse as their cultures and aggressive sales tactics do not work. Before visiting these countries, it is help- ful for managers to review some general rules: • Make Use of Contacts. Asians prefer to do business with people they know. Cold calls and other direct-contact meth- ods seldom work. Meeting the right people in an Asian company often depends on having the right introduction. If the person with whom you hope to do business respects your intermediary, chances are that he or she will respect you. • Carry Bilingual Business Cards. To make a good first impression, have bilingual cards printed, even though many Asians speak English. It shows both respect for the language and a commitment to doing business in a country. It also translates your title into the local language. Asians generally are not comfortable until they know what your position is and whom you represent. • Respect, Harmony, and Consensus. Asian cultures com- mand respect for their achievements in music, art, science, philosophy, business, and more. Asian businesspeople are tough negotiators, but they dislike argumentative
- 1010. exchanges. Harmony and consensus are the bywords in Asia, so be patient but firm. • Drop the Legal Language. legal documents are subordinate to personal relationships. Asians tend to dislike detailed con- tracts. Agreements are often left flexible so that adjustments can be made easily in order to fit changing circumstances. It’s important to foster good relations based on mutual trust and benefit. The importance of a contract in many Asian societies is not what it stipulates but rather who signed it. • Build Personal Rapport. Social ease and friendship are prerequisites to doing business across much of Asia. As much business is transacted at informal dinners as it is in corporate settings, so accept invitations, and be sure to reciprocate. CULTURE MATTERS Business Culture in the Pacific Rim QUICK STUdy 1 1. List several benefits of international trade. 2. World merchandise exports are valued at how many times the value of worldwide service
- 1011. exports? 3. What portion of total world merchandise trade is accounted for by two-way trade between high-income economies? 4. What term often describes the nature of trade between a developing nation and a neighboring wealthy one? MyLab Management Watch It Made in America: America and Mexico Apply what you have learned about international trade basics. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case about trade between the United States and Mexico and answer questions. M05_WILD9220_09_SE_C05.indd 134 10/30/17 8:48 PM http://www.gm.com/ http://www.gm.com/ http://www.opel.com/ http://www.europa.eu/
- 1012. http://www.pearson.com/mylab/management CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 135 5.2 Mercantilism Trade between different groups of people has occurred for many thousands of years. But it was not until the fifteenth century that people began trying to explain why trade occurs and how trade can benefit both parties to an exchange. Figure 5.1 shows a timeline of when the main theories of international trade were proposed. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. It states that other measures of a nation’s well-being, such as living standards or human development, are irrelevant. Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s. The most prominent mercantilist nations included Britain, France, the Netherlands, Portugal, and Spain.
- 1013. How Mercantilism Worked When navigation was a fairly new science, Europeans explored the world by sea and claimed the lands they encountered in the name of the European monarchy that financed their voyage. Early explorers landed in Africa, Asia, and the Americas, where they established colonies. Colonial trade was conducted for the benefit of mother countries, and the appeal of the colonies was their abundant resources. In recent times, former colonies have struggled to diminish their reliance on the former colonial powers. For example, in an effort to decrease their dependence on their former colonial powers, African nations are welcoming trade relationships with partners from Asia and North America. But because of geographic proximity, the European Union is still often preferred as a trading partner. Just how did countries implement mercantilism? The practice of mercantilism rested on three essential pillars: trade surpluses, government intervention, and colonialism.
- 1014. TRADE SURPLUSES Nations believed they could increase their wealth by maintaining a trade surplus—the condition that results when the value of a nation’s exports is greater than the value of its imports. In mercantilism, a trade surplus means that a country takes in more gold on the sale of its exports than it pays out for its imports. A trade deficit is the opposite condition— one that results when the value of a country’s imports is greater than the value of its exports. In mercantilism, trade deficits are to be avoided at all costs. (We discuss the importance of national trade balance at length in Chapter 7.) GOVERNMENT INTERVENTION Governments actively intervened in international trade in order to maintain a trade surplus. According to mercantilism, the accumulation of wealth depends on increasing a nation’s trade surplus, not necessarily expanding its total value or volume of trade. The governments of mercantilist nations did this by either banning certain imports or imposing various restrictions on them, such as tariffs or quotas. At the same time, the nations subsidized
- 1015. industries based in the home country in order to expand exports. Governments also typically outlawed the removal of their gold and silver to other nations. COLONIALISM Mercantilist nations acquired territories (colonies) around the world to serve as sources of inexpensive raw materials and as markets for higher - priced finished goods. These colo- nies were the source of essential raw materials, including tea, sugar, tobacco, rubber, and cotton. 5.2 Explain how mercantilism worked and identify its inherent flaws. mercantilism Trade theory that nations should accumulate financial wealth, usu- ally in the form of gold, by encour- aging exports and discouraging imports. trade surplus Condition that results when the value of a nation’s exports
- 1016. is greater than the value of its imports. trade deficit Condition that results when the value of a country’s imports is greater than the value of its exports. Figure 5.1 Trade Theory Timeline Year Mercantilism Absolute Advantage Comparative Advantage Factor Proportions Theory International Product Life Cycle New Trade Theory National Competitive Advantage 1500 1600 1700 1800 1900 2000
- 1017. M05_WILD9220_09_SE_C05.indd 135 10/30/17 8:48 PM 136 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT These resources would be shipped to the mercantilist nation, where they were incorporated into finished goods such as clothing, cigars, and other products. These finished goods would then be sold to the colonies. Trade between mercantilist countries and their colonies were a huge source of profits for the mercantilist powers. The colonies received lo w prices for basic raw materials but paid high prices for finished goods. The mercantilist and colonial policies greatly expanded the wealth of nations that imple- mented them. This wealth allowed nations to build armies and navies to control their far-flung colonial empires and to protect their shipping lanes from attack by other nations. It was a source of a nation’s economic power that in turn increased its political power relative to other countries. Today, countries seen by others as trying to maintain a trade
- 1018. surplus and expand their national treasuries at the expense of other nations are accused of practicing neomercantilism or economic nationalism. Flaws of Mercantilism Despite its seemingly positive benefits for any nation implementing it, mercantilism is inherently flawed. Mercantilist nations believed that the world’s wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbors—a situation called a zero-sum game. The main problem with mercantilism is that, if all nations were to barricade their markets from imports and push their exports onto others, international trade would be severely restricted. In fact, trade in all nonessential goods would likely cease altogether. In addition, paying colonies little for their exports but charging them high prices for their imports impaired their economic development. Thus, their appeal as markets for goods was less than it would have been if they had been allowed to accumulate greater wealth.
- 1019. Mexico churns out all sorts of products that are then shipped to ports all around the United States in shipping containers like those shown here. For decades, trade with the United States has brought well-paying jobs to ordi- nary Mexicans, who build cars, stoves, refrigerators, and all sorts of equipment. Yet, when multina- tionals in Mexico move to cheaper locations, such as China and Vietnam, Mexico experiences the negative effects of its dependence on US trade. John C Panella jr/123RF.com QUICK STUdy 2 1. What did the successful implementation of mercantilism require? 2. Mercantilist nations acquired colonies around the world to serve as sources of what?
- 1020. 3. What name is given to the belief that a nation can increase its wealth only at the expense of other nations? 5.3 Theories of Absolute and Comparative Advantage The negative aspects of mercantilism were made apparent by a trade theory developed in the late 1700s called absolute advantage. Several decades later, this theory was built upon and extended into what is called comparative advantage. Let’s now examine these two theories in detail. 5.3 Detail the theories of absolute advantage and com- parative advantage. M05_WILD9220_09_SE_C05.indd 136 10/30/17 8:48 PM CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 137 Absolute Advantage Scottish economist Adam Smith first put forth the trade theory
- 1021. of absolute advantage in 1776.5 The ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage. In other words, a nation with an absolute advantage can produce a greater output of a good or service than other nations using the same amount of, or fewer, resources. Among other things, Smith reasoned that international trade should not be banned or restricted by tariffs and quotas but allowed to flow as dictated by market forces. If people in different coun- tries were able to trade as they saw fit, no country would need to produce all the goods it con- sumed. Instead, a country could concentrate on producing the goods in which it holds an absolute advantage. It could then trade with other nations to obtain the goods it needs but does not produce. Suppose a talented CEO wants to install a hot tub in her home. Should she do the job herself or hire a professional installer to do it for her? Suppose the CEO (who has never installed a hot tub before) would have to take one month off from work and forgo $80,000 in salary in order to
- 1022. complete the job. On the other hand, the professional installer (who is not a talented CEO) can complete the job for $5,000 and do it in two weeks. Whereas the CEO has an absolute advantage in running a company, the installer has an absolute advantage in installing hot tubs. It takes the CEO one month to do the job the installer can do in two weeks. Thus, the CEO should hire the professional to install the hot tub to save both time and money resources. Let’s now apply the absolute advantage concept to an example of two trading countries to see how trade can increase production and consumption in both nations. CASE: RICELAND AND TEALAND Suppose that we live in a world of just two countries (Rice- land and Tealand), with two products (rice and tea), and that transporting goods between these two countries costs nothing. Riceland and Tealand currently produce and consume their own rice and tea. The following table shows the number of units of resources (labor) each country expends in creating rice and tea. In Riceland, just one resource unit is
- 1023. needed to produce a ton of rice, but five units of resources are needed to produce a ton of tea. In Tealand, six units of resources are needed to produce a ton of rice, whereas three units are needed to produce a ton of tea. absolute advantage Ability of a nation to produce a good more efficiently than any other nation. Units Required for Production Rice Tea Riceland 1 5 Tealand 6 3 Another way of stating each nation’s efficiency in the production of rice and tea is: • In Riceland, 1 unit of resources = 1 ton of rice or 1/5 ton of tea • In Tealand, 1 unit of resources = 1/6 ton of rice or 1/3 ton of
- 1024. tea These numbers also tell us one other thing about rice and tea production in these two coun- tries. Because one unit of resources produces one ton of rice in Riceland compared with Tealand’s output of only 1/6 ton of rice, Riceland has an absolute advantage in rice production—it is the more efficient rice producer. However, because one resource unit produces 1/3 ton of tea in Tealand compared with Riceland’s output of just 1/5 ton, Tealand has an absolute advantage in tea production. GAINS FROM SPECIALIZATION AND TRADE Suppose now that Riceland specializes in rice production to maximize the output of rice in our two-country world. Likewise, Tealand specializes in tea production to maximize the world output of tea. Although each country now specializes and world output increases, both countries face a problem. Riceland can consume only its rice production, and Tealand can consume only its tea production. The problem can be solved if the two countries trade with each other to obtain the good that it
- 1025. needs but does not produce. Suppose that Riceland and Tealand agree to trade rice and tea on a one-to-one basis—a ton of rice costs a ton of tea, and vice versa. Thus, Riceland can produce one extra ton of rice with an additional resource unit and can trade with Tealand to get one ton of tea. This is much better than the 1/5 ton of tea that Riceland would have gotten by investing that additional resource unit in making tea for itself. Thus, Riceland definitely benefits from the trade. Likewise, Tealand can M05_WILD9220_09_SE_C05.indd 137 10/30/17 8:48 PM 138 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT produce 1/3 extra ton of tea with an additional resource unit and trade with Riceland to get 1/3 ton of rice. This is twice as much as the 1/6 ton of rice it could have produced using that additional resource unit to make its own rice. Thus, Tealand also benefits from the trade. The gains resulting
- 1026. from this simple trade are shown in Figure 5.2. Although Tealand does not gain as much as Riceland does from the trade, it does get more rice than it would without trade. The gains from trade for actual countries would depend on the total number of resources each country has at its disposal and the demand for each good in each country. As this example shows, the theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. Instead, because there are gains to be had by both countries party to an exchange, international trade is a positive-sum game. The theory also calls into ques- tion the objective of national governments to acquire wealth through restrictive trade policies. It argues that nations should instead open their doors to trade so that their people can obtain a greater quantity of goods more cheaply. The theory does not measure a nation’s wealth by how much gold and silver it has on reserve but by the living standards of its people.
- 1027. Despite the power of the theory of absolute advantage in showing the gains from trade, there is one potential problem. What happens if a country does not hold an absolute advantage in the production of any product? Are there still benefits to trade, and will trade even occur? To answer these questions, let’s take a look at an extension of absolute advantage: the theory of comparative advantage. Comparative Advantage An English economist named David Ricardo developed the theory of comparative advantage in 1817.6 He proposed that if one country (in our example of a two-country world) held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good. In other words, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods.
- 1028. Let’s return to our hot tub example. Now suppose that the talented CEO has previously installed many hot tubs and can do the job in one week—twice as fast as the hot tub installer. Thus, the CEO now holds absolute advantages in both running a company and hot tub installation. Although the professional installer is at an absolute disadvantage in both hot tub installation and comparative advantage Inability of a nation to produce a good more efficiently than other nations but an ability to produce that good more efficiently than it does any other good. Figure 5.2 Gains from Specialization and Trade: Absolute Advantage 4 5
- 1029. Riceland Tealand Gain from trade 1 ton tea Gain from trade ton rice 1 5 1 3 1 6 1 6
- 1030. M05_WILD9220_09_SE_C05.indd 138 10/30/17 8:48 PM CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 139 running a company, he is less inefficient in hot tub installation. Despite her absolute advantage in both areas, however, the CEO would still have to give up $20,000 (one week’s pay) to take time off from running the company to complete the work. Is this a wise decision? No. The CEO should hire the professional installer to do the work for $5,000. The installer earns money he would not earn if the CEO did the job herself. And the CEO earns more money by focusing on running the company than she would save by installing the hot tub herself. GAINS FROM SPECIALIZATION AND TRADE To see how the theory of comparative advan- tage works with international trade, let’s return to our example of Riceland and Tealand. In our earlier discussion, Riceland had an absolute advantage in rice production, and Tealand had an
- 1031. absolute advantage in tea production. Suppose that Riceland now holds absolute advantages in the production of both rice and tea. The following table shows the number of units of resources each country now expends in creating rice and tea. Riceland still needs to expend just one resource unit to produce a ton of rice, but now it needs to invest only two units of resources (instead of five) to produce one ton of tea. Tealand still needs six units of resources to produce a ton of rice and three units to produce a ton of tea. Units Required for Production Rice Tea Riceland 1 2 Tealand 6 3 Another way of stating each nation’s efficiency in the production of rice and tea is: • In Riceland, 1 unit of resources = 1 ton of rice or 1/2 ton of tea
- 1032. • In Tealand, 1 unit of resources = 1/6 ton of rice or 1/3 ton of tea Thus, for every unit of resource used, Riceland can produce more rice and tea than Tealand can. Riceland has absolute advantages in the production of both goods. But Riceland can still gain from trading with a less-efficient producer. Although Tealand has absolute disadvantages in both rice and tea production, it has a comparative advantage in tea. In other words, although Tealand is unable to produce either rice or tea more efficiently than Riceland, it produces tea more efficiently than it produces rice. Assume once again that Riceland and Tealand decide to trade rice and tea on a one-to-one basis. Tealand could use one unit of resources to produce 1/6 ton of rice. But it would do better to produce 1/3 ton of tea with this unit of resources and trade with Riceland to get 1/3 ton of rice. By specializing and trading, Tealand gets twice as much rice as it could get if it were to produce the rice itself. There are also gains from trade for Riceland despite its dual absolute advantages.
- 1033. Riceland could invest one unit of resources in the production of 1/2 ton of tea. It would do better, however, to produce one ton of rice with the one unit of resources and trade that rice to Tealand in exchange for one ton of tea. Thus, Riceland gets twice as much tea through trade than if it were to produce the tea itself. This is in spite of the fact that it is a more efficient producer of tea than Tealand. The benefits for each country from this simple trade are shown in Figure 5.3. Again, the benefits actual countries obtain from trade depend on the amount of resources at their disposal and each market’s desired level of consumption of each product. ASSUMPTIONS AND LIMITATIONS Throughout the discussion of absolute and compara- tive advantage, we made several important assumptions that limit real-world application of the theories. First, we assumed that countries are driven only by the maximization of production and consumption. This is often not the case. Governments often get involved in international trade out of a concern for workers or consumers. (We discuss the role
- 1034. of government in international trade in Chapter 6.) Second, the theories assume that there are only two countries engaged in the production and consumption of just two goods. This is obviously not the situation that exists in the real world. There currently are more than 180 countries and a countless number of products being produced, traded, and consumed worldwide. M05_WILD9220_09_SE_C05.indd 139 10/30/17 8:48 PM 140 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT Third, it is assumed that there are no costs for transporting traded goods from one country to another. In reality, transportation costs are a major expense of international trade for some prod- ucts. If transportation costs for a good are higher than the savings generated through specialization, trade will not occur.
- 1035. Fourth, the theories consider labor to be the only resource used in the production process because labor accounted for a large portion of the total production cost of goods at the time the theories were developed. Moreover, it is assumed that resources are mobile within each nation but cannot be transferred between nations. But labor and natural resources can be transferred between nations, although doing so can be difficult and costly. Finally, it is assumed that specialization in the production of one particular good does not result in gains in efficiency. But we know that specialization results in increased knowledge of a task and perhaps even future improvements in how that task is performed. Thus, the amount of resources needed to produce a specific amount of a good should decrease over time. Despite the assumptions made in the theory of comparative advantage, research reveals that it appears to be supported by a substantial body of evidence. Nevertheless, economic researchers continue to develop and test new theories to explain international trade.
- 1036. Figure 5.3 Gains from Specialization and Trade: Comparative Advantage Riceland Tealand Gain from trade 1 ton tea Gain from trade ton rice 1 2 1 2
- 1037. 1 3 1 6 1 6 QUICK STUdy 3 1. A nation that is able to produce a good more efficiently than other nations is said to have what? 2. What does a nation have when it is unable to produce a good more efficiently than other nations but it can produce the good more efficiently than it can any other good? 3. The theories of absolute advantage and comparative advantage say that nations benefit from trading because of the gains from what?
- 1038. 5.4 Factor Proportions Theory In the early 1900s, an international trade theory emerged that focused attention on the proportion (supply) of resources in a nation. The cost of any resource is simply the result of supply and demand: Factors in great supply relative to demand will be less costly than factors in short supply 5.4 Summarize the factor pro- portions theory of trade. M05_WILD9220_09_SE_C05.indd 140 10/30/17 8:48 PM CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 141 relative to demand. Factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.7 The theory resulted from the research of two economists, Eli Heckscher and Bertil Ohlin, and is therefore sometimes called the Heckscher–Ohlin theory.
- 1039. Factor proportions theory differs considerably from the theory of comparative advantage. Recall that the theory of comparative advantage states that a country specializes in producing the good that it can produce more efficiently than any other good. Thus, the focus of the theory (and absolute advantage, as well) is on the productivity of the production process for a particular good. By contrast, factor proportions theory says that a country specializes in producing and exporting goods using the factors of production that are most abundant and thus cheapest—not the goods in which it is most productive. Labor Versus Land and Capital Equipment Factor proportions theory breaks a nation’s resources into tw o categories: labor on the one hand, land and capital equipment on the other. It predicts that a country will specialize in products that require labor if the cost of labor is low relative to the cost of land and capital. Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labor.
- 1040. Factor proportions theory is conceptually appealing. For example, Australia has a great deal of land (nearly 60 percent of which is meadows and pastures) and a small population relative to its size. Australia’s exports consist largely of mined minerals, grain, beef, lamb, and dairy products—products that require a great deal of land and natural resources. Australia’s imports, on the other hand, consist mostly of manufactured raw materials, capital equipment, and con- sumer goods—things needed in capital-intensive mining and modern agriculture. But instead of looking only at anecdotal evidence, let’s see how well factor proportions theory stands up to scientific testing. Evidence on Factor Proportions Theory: The Leontief Paradox Despite its conceptual appeal, factor proportions theory is not supported by studies that examine the trade flows of nations. The first large-scale study to document such evidence was performed by a researcher named Wassily Leontief in the early 1950s.8 Leontief tested whether the United States, which uses an abundance of capital equipment, exports goods requiring capital-intensive
- 1041. production and imports goods requiring labor-intensive production. Contrary to the predictions of the factor proportions theory, his research found that US exports require more labor-intensive production than its imports. This apparent paradox between the predictions using the theory and the actual trade flows is called the Leontief paradox. Leontief’s findings are supported by more- recent research on the trade data of a large number of countries. What might account for the paradox? One possible explanation is that factor proportions theory considers a country’s production factors to be homogeneous—particularly labor. But we know that labor skills vary greatly within a country—more highly skilled workers emerge from training and development programs. When expenditures on improving the skills of labor are taken into account, the theory seems to be supported by actual trade data. Further studies examining international trade data will help us better understand what reasons actually account for the Leontief paradox. Because of the drawbacks of each of the international trade
- 1042. theories mentioned so far, researchers continue to propose new ones. Let’s now examine a theory that attempts to explain international trade based on the life cycle of products. factor proportions theory Trade theory stating that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. QUICK STUdy 4 1. What is the name of the theory that says countries produce and export goods that require resources that are abundant and import goods that require resources in short supply? 2. Factor proportions theory divides a nation’s resources into what two categories? M05_WILD9220_09_SE_C05.indd 141 10/30/17 8:48 PM
- 1043. 142 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT 5.5 International Product Life Cycle Raymond Vernon put forth an international trade theory for manufactured goods in the mid-1960s. His international product life cycle theory says that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle. The theory also says that, for a number of reasons, a country’s export eventually becomes its import.9 Although Vernon developed his model around the United States, we can generalize it to apply to any developed and innovative market such as Australia, the European Union, and Japan. Let’s examine how this theory attempts to explain international trade flows. Stages of the Product Life Cycle The international product life cycle theory follows the path of a good through its life cycle (from new to maturing to standardized product) in order to determine
- 1044. where it will be produced (see Figure 5.4). In Stage 1, the new product stage, the high purchasing power and demand of buyers in an industrialized country drive a company to design and introduce a new product concept. Because the exact level of demand in the domestic market is highly uncertain at this point, the company keeps its production volume low and based in the home country. Keeping production where initial research and development occurred and staying in contact with customers allow the company to monitor buyer preferences and to modify the product as needed. Although initially there is virtu- ally no export market, exports do begin to pick up late in the new product stage. In Stage 2, the maturing product stage, the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. As exports begin to account for an increasingly greater share of total product sales, the innovating company introduces production facilities in the countries with the highest demand. Near the end of the maturity
- 1045. stage, the product begins generating sales in developing nations, and perhaps some manufacturing presence is estab- lished there. In Stage 3, the standardized product stage, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels. As the market becomes more price sensitive, the company begins searching aggressively for low-cost produc- tion bases in developing nations to supply a growing worldwide market. Furthermore, as most production now takes place outside the innovating country, demand in the innovating country is supplied with imports from developing countries and other industrialized nations. Late in this stage, domestic production might even cease altogether. Limitations of the Theory Vernon developed his theory at a time when most new products were being developed and sold first in the United States. One reason US companies were strong globally in the 1960s was that their domestic production bases were not destroyed during the
- 1046. Second World War, as was the case in Europe (and to some extent Japan). In addition, during the war, the production of many durable goods in the United States, including automobiles, was shifted to the production of military trans- portation and weaponry. This laid the foundation for enormous postwar demand for new capital- intensive consumer goods, such as automobiles and home appliances. Furthermore, advances in 5.5 Explain the international product life cycle theory. international product life cycle Theory stating that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle. Figure 5.4 International Product Life Cycle
- 1047. Source: Adapted from Raymond Vernon and Louis T. Wells Jr., The Economic Envi- ronment of International Business, 5th ed. (Upper Saddle River, NJ: Prentice Hall, 1991), p. 85. Stage 1 New product Maturing product Standardized product Stage 2 Stage 3Stage 1 New product Maturing product Standardized product
- 1048. Stage 2 Stage 3Stage 1 New product Maturing product Standardized product Stage 2 Stage 3 U n it s p ro d u ce
- 1051. d u ce d150 120 90 60 30 0 Less-Developed Countries Exports Imports Innovating Firm’s Country Imports
- 1052. Production Consumption M05_WILD9220_09_SE_C05.indd 142 10/30/17 8:48 PM CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 143 technology that were originally developed with military purposes in mind were integrated into consumer goods. A wide range of new and innovative products like TVs, photocopiers, and com- puters met the seemingly insatiable appetite of consumers in the United States. The theory seemed to explain world trade patterns quite well when the United States domi- nated world trade. But today, the theory’s ability to accurately depict the trade flows of nations is weak. The United States is no longer the sole innovator of products in the world. New prod- ucts spring up everywhere as companies continue to globalize their research-and-development
- 1053. activities. Furthermore, companies today design new products and make product modifications at a very quick pace. The result is quicker product obsolescence and a situation in which companies replace their existing products with new product introductions. This is forcing companies to introduce products in many markets simultaneously in order to recoup a product’s research-and-development costs before sales decline and the product is dropped. The theory has a difficult time explaining the resulting trade patterns. In fact, older theories might better explain today’s global trade patterns. Much production in the world today more closely resembles what is predicted by the theory of comparative advantage. Boeing’s (www.boeing.com) assembly plant in Everett, Washington, assembles its 787 Dreamliner wide-body aircraft. But companies around the world build the parts used in the 787. Cargo doors arrive stamped “Made in Sweden” and are supplied by Saab Aerostructures. The plane’s lavatories are made by Jamco in Japan, its flight deck seats are supplied
- 1054. by Ipeco of the United Kingdom, its landing gear is made by Messier-Bugatti-Dowty of France, and so forth.10 Components are later assembled in a chosen location. This pattern resembles the theory of comparative advantage in that a product’s components are made in the country that can produce them at a high level of productivity. Finally, the theory is challenged by the fact that more companies are operating in international markets from their inception. Many small companies are teaming up with companies in other markets to develop new products or production technologies. This strategy is particularly effective for small companies that would otherwise be unable to participate in international production or sales. French company Ingenico (www.ingenico.com) is a leading global supplier of secure trans- action systems, including terminals and their associated software. The company began small and worked with a global network of entrepreneurs who acted as Ingenico’s local agents and helped it to conquer local markets. The cultural knowledge embedded in Ingenico’s global network helped it to design and sell products appropriate for each market.11
- 1055. The Internet also makes it easier for companies of all sizes to reach a global audience. For a discussion of several pitfalls companies can avoid in fulfilling their international orders taken on the Internet, see the Manager’s Briefcase, titled “Five Fulfillment Mistakes.” Although there’s no way to completely foolproof logistics when selling online, a company should enjoy greater customer satisfac- tion if it can avoid these five key mistakes: • Mistake 1: Misunderstanding the Supply Chain How many orders can fulfillment centers fill in an hour, a day, and a week? How long does it take a package to reach a customer from the fulfillment center using standard, non-expedited delivery? And how much inventory can the centers receive on any given day? If a company doesn’t know the answers, it could be in serious danger of making delivery promises it can’t keep. • Mistake 2: Overpromising on Delivery The entrepreneur owner/manager should not advertise aggressive delivery times without a qualifier for uncontrollable factors, such as the weather. Care must also be taken to ensure that a
- 1056. customer is not promised an unrealistically quick order- turnaround time. Flexibility must be built into fulfillment operations. • Mistake 3: Not Planning for Returns Handling customer returns well can increase repeat business. The internal returns process needs to be organized, and returns should not wait to go out until products start coming back to fulfill - ment centers. Prompt credit to customers can reward the entrepreneurial firm with a reputation as standing behind its products. • Mistake 4: Misunderstanding Customer Needs Many Internet shoppers are willing to sacrifice shipping speed in exchange for lower shipping costs. Balancing this cost– service differential is an opportunity for online marketers to cut order-fulfillment costs. • Mistake 5: Poor Internal Communication Marketing depart- ments must communicate with logistics people. A public relations nightmare can result if logistics professionals are not told and the big planned marketing push crashes the company website. MANAGER’S BRIEFCASE Five Fulfillment Mistakes
- 1057. M05_WILD9220_09_SE_C05.indd 143 10/30/17 8:48 PM http://www.ingenico.com/ http://www.boeing.com/ 144 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT 5.6 New Trade Theory During the 1970s and 1980s, another theory emerged to explain trade patterns.12 The new trade theory states that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies. Because the theory emphasizes productivity rather than a nation’s resources, it is in line with the theory of comparative advantage but at odds with factor proportions theory. First-Mover Advantage According to the new trade theory, as a company increases the extent to which it specializes in
- 1058. the production of a particular good, output rises because of gains in efficiency. Regardless of the amount of a company’s output, it has fixed production costs such as the cost of research and development and the plant and equipment needed to produce the product. The theory states that, as specialization and output increase, companies can realize economies of scale, thereby pushing the unit costs of production lower. That is why as many companies expand, they lower prices to buyers and force potential new competitors to produce at a similar level of output if they want to be competitive in their pricing. Thus, the presence of large economies of scale can create an industry that supports only a few large firms. A first-mover advantage is the economic and strategic advantage gained by being the first company to enter an industry. This first-mover advantage can create a formidable barrier to entry for potential rivals. The new trade theory also states that a country may dominate in the export of a certain product because it has a home-based firm that has acquired a first-mover advantage.13
- 1059. Because of the potential benefits of being the first company to enter an industry, some busi- nesspeople and researchers make a case for government assistance to companies. They say that by working together to target potential new industries, a government and its home companies can take advantage of the benefits of being the first mover in an industry. Government involvement has always been widely accepted in undertakings such as space exploration for national security reasons, but has been less so in purely commercial ventures. But the fear that governments of other countries might participate with industry to gain first-mover advantages drives many governments into action. 5.6 Outline the new trade theory and the first-mover advantage. new trade theory Trade theory stating that (1) there are gains to be made from special- ization and increasing economies of scale, (2) the companies first to market can create barriers to entry,
- 1060. and (3) government may play a role in assisting its home companies. first-mover advantage Economic and strategic advantage gained by being the first company to enter an industry. QUICK STUdy 5 1. The international product life cycle theory says that a company will begin by exporting its product and later undertake what as the product moves through its life cycle? 2. List the three stages that a product goes through according to the international product life cycle theory. 3. Whenever optimizing productivity determines where a product’s components are manufac- tured and where it is assembled, the resulting pattern of activities resembles that predicted by which theory?
- 1061. QUICK STUdy 6 1. What is the main thrust of the new trade theory? 2. The economic and strategic advantage gained by being the first company to enter an indus- try is called what? 5.7 National Competitive Advantage What aspects of a nation’s economic development can supply it with a national competitive advan- tage? The poorest nations tend to invest in the fundamental drivers of productivity growth (such as basic infrastructure). The richest nations typically exploit the latest technological advancements in order to boost productivity. Research into how nations achieve sustainable economic development has examined the potential roles of (1) culture, (2) geography, and (3) innovation. 5.7 Describe the national competitive advantage theory and the Porter diamond. M05_WILD9220_09_SE_C05.indd 144 10/30/17 8:48 PM
- 1062. CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 145 To read more about whether these factors drive economic growth, see this chapter’s Global Sustainability feature, titled “Foundations of Development.” A related question researchers have tried to answer is, How do firms in certain nations develop competitive advantage in specific industries? Michael Porter put forth a theory in 1990 to explain why certain countries are leaders in the production of certain products.14 His national competitive advantage theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. Porter’s work incorporates certain elements of previous international trade theories but also makes some important new discoveries. Porter is not preoccupied with explaining the export and import patterns of nations but rather with explaining why some nations are more competitive in
- 1063. certain industries. He identifies four elements that are present to varying degrees in every nation and that form the basis of national competitiveness. The Porter diamond consists of (1) factor conditions, (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, structure, and rivalry. Let’s look at these elements and see how they interact to support national competitiveness. Factor Conditions Factor proportions theory considers a nation’s resources, such as a large labor force, natural resources, climate, or surface features, as paramount factors in what products a country will pro- duce and export. Porter acknowledges the value of such resources, which he terms basic factors, but he also discusses the significance of what he calls advanced factors. ADVANCED FACTORS Advanced factors include the skill levels of different segments of the workforce and the quality of the technological infrastructure in a nation. Advanced factors are the result of investments in education and innovation, including
- 1064. worker training and technological research and development. Whereas basic factors can be the initial spark for why an economy begins producing a certain product, advanced factors account for the sustained competitive advan- tage a country enjoys in that product. Today, for example, Japan has an advantage in automobile production and the United States in the manufacture of airplanes. In the manufacture of computer components, Taiwan reigns supreme, although China is an increasingly important competitor. These countries did not attain their status in their respective areas because of basic factors. For example, Japan did not acquire its advantage in automobiles because of its natural resources of iron ore—it has virtually none and must import most of the iron it needs. These countries developed their productivity and advantages in producing these products through deliberate efforts. national competitive advan- tage theory Trade theory stating that a nation’s competitiveness in an industry
- 1065. depends on the capacity of the industry to innovate and upgrade. Which aspects of a nation influence its path toward sustainable economic development? Researchers point to a host of different factors, including the following: • Culture. Some researchers believe cultural differences among nations can explain differences in development, material well-being, and socioeconomic equity. They argue that any culture can attain high productivity and economic growth if it values the benefits that development brings. Critics say that this perspective unfairly judges other cul- tures. They argue that each culture defines its own values, practices, goals, and ethics, and that Western nations should not impose their concept of “progress” on other cultures. • Geography. other researchers claim geography is central to productivity and economic development. Factors thought to hinder development include being a landlocked nation far from the coast, having poor access to markets, possessing few natural resources, and having a tropical climate. But Hong Kong, Singapore, South Korea, and Taiwan built com- petitive market economies despite their small size and lack
- 1066. of vast natural resources. Each of these nations also threw off dependence on a colonial power. • Innovation. nations that want to join the European Union must satisfy strict and innovative requirements. This is pull - ing Eastern Europe’s culture closer to Western Europe’s, along with shifting habits, attitudes, and values. In emerging markets today, innovation is being driven by ambition to improve one’s lot in life and the fear of being replaced by an even cheaper production location. Homegrown businesses in emerging markets have developed very inexpensive yet highly functional automobiles, computers, and mobile phones that appeal to consumers at home and abroad. • Want to Know More? Visit the Culturelink network (www .culturelink.org), the observatory of Cultural Policies in Africa (ocpa.irmo.hr), and the north-South Institute (www .nsi-ins.ca). Sources: Mark Johnson, “Innovation in Emerging Markets,” Bloomberg Businessweek (www.businessweek.com), May 28, 2010; “The World Turned Upside Down,” The Economist, April 17, 2010, pp. 3–6; William Fischer, “Dealing with Innovation from Emerging Markets,”
- 1067. IMD website (www.imd.org), November 2008. GLOBAL SUSTAINABILITY Foundations of Development M05_WILD9220_09_SE_C05.indd 145 10/30/17 8:48 PM http://www.nsiins.ca/ http://www.nsiins.ca/ http://www.culturelink.org/ http://www.culturelink.org/ http://www.businessweek.com http://www.imd.org 146 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT Demand Conditions Sophisticated buyers in the home market are also important to national competitive advantage in a product area. A sophisticated domestic market drives companies to add new design features to products and to develop entirely new products and technologies. Companies in markets with sophisticated buyers should see the competitiveness of the entire group improve. For example, the
- 1068. sophisticated US market for computer software has helped give companies based in the United States an edge in developing new software products. Related and Supporting Industries Companies that belong to a nation’s internationally competitive industries do not exist in isolation. Rather, supporting industries spring up to provide the inputs required by the industry. This happens because companies that can benefit from the product or process technologies of an internationally competitive industry begin to form clusters of related economic activities in the same geographic area. Each industry in the cluster serves to reinforce the productivity and, therefore, competitive- ness of every other industry within the cluster. For example, Italy is home to a successful cluster in the footwear industry that greatly benefits from the country’s closely related leather-tanning and fashion-design industries. And within the United States, Phoenix, Arizona, is home to com- panies that specialize in semiconductors, optics, and electronic testing—all heavily incorporated into the activities of Boeing (www.boeing.com) and Motorola (www.motorola.com), which have
- 1069. a significant presence there. A relatively small number of clusters usually account for a major share of regional economic activity. They also often account for an overwhelming share of the economic activity that is “exported” to other locations. Exporting clusters—those that export products or make invest- ments to compete outside the local area—are the primary source of an area’s long-term prosperity. Although demand for a local industry is inherently limited by the size of the local market, an exporting cluster can grow far beyond that limit.15 Firm Strategy, Structure, and Rivalry The strategies of firms and the actions of their managers have lasting effects on future competi- tiveness. Essential to successful companies are managers who are committed to producing quality products valued by buyers while maximizing the firm’s market share and/or financial returns. Equally as important is the industry structure and rivalry between a nation’s companies. The more intense the struggle to survive between a nation’s domestic companies, the greater will be their
- 1070. competitiveness. This heightened competitiveness helps them to compete against imports and against companies that might develop a production presence in the home market. Government and Chance Apart from the four factors identified as part of the diamond, Porter identifies the roles of govern- ment and chance in fostering the national competitiveness of industries. An architecture student completes a project using a 3D printer. Advanced factors in Porter’s theory of national competitive advantage result from investments in education and innovation, such as worker training and research and development. We do not know the full impact of 3D printing, but it is likely to reduce distribu- tion costs for some products that can be made entirely at a home or business or made in local shops and then picked up by a customer.
- 1071. luchschen/123RF.com M05_WILD9220_09_SE_C05.indd 146 10/30/17 8:48 PM http://www.motorola.com/ http://www.boeing.com/ CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 147 First, governments, by their actions, can often increase the competitiveness of firms and per- haps even entire industries. Governments of emerging markets could increase economic growth by increasing the pace of privatization of state-owned companies, for example. Privatization forces those companies to grow more competitive in world markets if they are to survive. Second, although chance events can help the competitiveness of a firm or an industry, it can also threaten it. McDonald’s (www.mcdonalds.com) holds a clear competitive advantage world- wide in the fast-food industry. But its overwhelming dominance
- 1072. was threatened by the discovery of mad cow disease several years ago. To keep customers from flocking to the nonbeef substitute products of competitors, McDonald’s introduced the McPork sandwich and other nonbeef products. There are important implications for companies and governments if Porter’s theory accurately identifies the important drivers of national competitiveness. For instance, government policies should not be designed to protect national industries that are not internationally competitive but should develop the components of the diamond that contribute to increased competitiveness. QUICK STUdy 7 1. The national competitive advantage theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to do what? 2. The four main components of the Porter diamond are: (1) factor conditions, (2) demand conditions, (3) firm strategy, structure, and rivalry, and what else?
- 1073. 3. A group of related industries that spring up in a geographic area to support a nation’s inter- nationally competitive industry is called a what? Trade can liberate the entrepreneurial spirit and bring economic development to a nation and its people. As the value and vol - ume of trade continue to expand worldwide, new theories will likely emerge to explain why countries trade and why nations have advantages in producing certain products. Globalization and Trade An underlying theme of this book is how companies are adapting to globalization. Globalization and the increased competition it causes are forcing companies to locate particular operations to where they can be performed most efficiently. Firms are doing this either by relocating their own production facilities to other nations or by outsourcing certain activities to companies abroad. Com- panies undertake such action in order to boost competitiveness. The relocation and outsourcing of business activities are altering international trade in both goods and services. In this
- 1074. chapter’s opening company profile, we saw that Walmart relies on the sourcing of products from low-cost production locations such as China to deliver low-priced goods. Hewlett-Packard also makes use of globalization and international trade to minimize costs while maximizing output. The company dispersed the design and production of a new computer server throughout an increasingly specialized electronics-manufacturing system. HP conceptualized and designed the computer in Singapore, engineered and manufactured many parts for it in Taiwan, and assembled it in Australia, China, India, and Singapore. Compa- nies are using such production and distribution techniques to maximize efficiency. not only is the production of goods being sent to distant loca- tions, but so too is the delivery of business services, including financial accounting, data processing, and the handling of credit card and insurance inquiries. Even jobs requiring higher-level skills such as engineering, computer programming, and scien- tific research are migrating to distant locations. The motivation for companies is the same as when they send manufacturing jobs to more cost-effective locations—remaining viable in the face of increasing competitive pressure.
- 1075. Supporting Free Trade International trade theory is fundamentally no different when it comes to the relocation of services production as compared with the production of goods. As we’ve seen in this chapter, trade theory tells us that if a refrigerator bound for a Western market can be made more cheaply in China, it should be. The same rea- soned logic tells us that if a credit card inquiry from a Western market can be more cheaply (but adequately) processed in India, it should be. In both cases, the importing country benefits from a less-expensive product, and the exporting country benefits from inward-flowing investment and more numerous and better- paying jobs. Finally, there are policy implications for governments. Although employment in developed countries should not be negatively affected in the aggregate, job dislocation is a concern. Many governments are encouraging lifelong education among workers to guard against the possibility that an individual may become “obsolete” in terms of lacking marketable skills relative to workers in other nations. And no matter how loud the calls
- 1076. for protectionism grow in the service sector, governments will do well to resist such temptations. Experience tells us that erecting barri- ers to competition results in less competitive firms and industries, greater job losses, and lower standards of living than would be the case under free trade. BOTTOM LINE FOR BUSINESS M05_WILD9220_09_SE_C05.indd 147 10/30/17 8:48 PM http://www.mcdonalds.com/ 148 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT Chapter Summary LO5.1 Describe the benefits, volume, and patterns of international trade. • Trade provides a country’s people with a greater choice of goods and services and is
- 1077. an important engine for job creation in many countries. • Nations export $16.5 trillion of merchandise and $4.8 trillion of services each year, with trade flows following the pace of world economic output. • Wealthy nations account for around 60 percent of world merchandise trade. Trade between wealthy nations on the one hand and middle- and low- income countries on the other accounts for around 34 percent. Trade between low - income and middle- income nations accounts for around 6 percent. LO5.2 Explain how mercantilism worked and identify its inherent flaws. • Mercantilism says that nations should accumulate financial wealth in the form of gold by encouraging exports and discouraging imports. • Governments believed that they should intervene actively in international trade in order to maintain a trade surplus, mainly by acquiring colonies to serve as sources of
- 1078. inexpensive raw materials and as markets for higher-priced finished goods. • Mercantilism is flawed because it assumes that a nation increases its wealth only at the expense of other nations (a zero-sum game), and it restricts the economic devel- opment of colonies—thus, limiting the amount of goods they could purchase from the wealthy nation. LO5.3 Detail the theories of absolute advantage and comparative advantage. • The ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage, which advocates letting market forces dictate trade flows. • Absolute advantage allows a country to produce goods in which it holds an absolute advantage and trade with other nations to obtain goods it needs but does not produce (a positive-sum game).
- 1079. • A nation holds a comparative advantage in production of a good when it is unable to produce the good more efficiently than other nations but can produce it more effi- ciently than it can any other good. • Thus, trade is still beneficial if one country is less efficient in the production of two goods, so long as it is less inefficient in the production of one of the goods. LO5.4 Summarize the factor proportions theory of trade. • The factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources that are in short supply. • Factor proportions theory predicts that a country will specialize in products that require labor if its cost is low relative to the cost of land and capital, and vice versa.
- 1080. • The apparent paradox between predictions of the theory and actual trade flows is called the Leontief paradox. LO5.5 Explain the international product life cycle theory. • The international product life cycle theory says that a company will begin exporting its product and later undertake foreign direct investment as the product moves through its life cycle. MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . M05_WILD9220_09_SE_C05.indd 148 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 149 • In the new product stage, production remains based in the home country; in the
- 1081. maturing product stage, production begins in countries with the highest demand; and in the standardized product stage, production moves to low -cost locations to supply a global market. LO5.6 Outline the new trade theory and the first-mover advantage. • The new trade theory argues that, as specialization and output increase, companies realize economies of scale that push the unit costs of production lower. • This forces potential new entrants to an industry to produce a similar level of output if they want to be competitive in their pricing. • The economies of scale in production help a firm to gain a first-mover advantage— the economic and strategic advantage gained by being the first company to enter an industry. LO5.7 Describe the national competitive advantage theory and
- 1082. the Porter diamond. • National competitive advantage theory states that a nation’s competitiveness in an industry (and, therefore, trade flows) depends on the capacity of the industry to inno- vate and upgrade. • The Porter diamond identifies four elements that form the basis of national com- petitiveness: (1) factor conditions (basic and advanced), (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, structure, and rivalry. • The actions of governments and the occurrence of chance events can also affect the competitiveness of a nation’s companies. absolute advantage (p. 137) comparative advantage (p. 138) factor proportions theory (p. 141) first-mover advantage (p. 144)
- 1083. international product life cycle theory (p. 142) international trade (p. 130) mercantilism (p. 135) national competitive advantage theory (p. 145) new trade theory (p. 144) trade deficit (p. 135) trade surplus (p. 135) Key Terms TALK ABOUT IT 1 Imagine that the nations of the world were to suddenly cut off all trade with one an- other and the people in each nation were able to consume only products their own nation produced. 5-1. What products previously imported would no longer be available in your country?
- 1084. 5-2. What products would people in a country other than your own need to do without? TALK ABOUT IT 2 Companies shift physical resources and capital among national markets with relative ease. They can move production operations to where labor is cheaper, but laborers gener- ally cannot move to markets where wages are higher. 5-3. Why does labor remain the most restricted component of production in terms of its international mobility? Explain. 5-4. Do you agree with those who say this locks poor people to their poor geographies and gives them little hope for advancement? Explain. M05_WILD9220_09_SE_C05.indd 149 10/30/17 8:48 PM 150 PART 3 • InTERnATIonAl TRAdE And InVESTMEnT Ethical Challenge You are a member of a World Trade
- 1085. Organization task force that is reviewing the nine-year banana conflict between the United States and the European Union. The European Union was giving preferential treatment to banana exporters from Africa, the Caribbean, and the Pacific island nations. But the United States challenged what it saw as unfair trading practices and the World Trade Organization agreed. The US action gained support from global fruit companies Dole, Chiquita, and Del Monte, which account for nearly two- thirds of the fruit traded world- wide. The European Union argued it was supporting struggling economies for which bananas make up a large portion of their income. 5-5. Should international trade be left to private enterprise only, or should governments openly manage it to benefit poorer nations? 5-6. Would you have argued on behalf of the United States or the European Union? Explain. 5-7. What are the pros and cons of each side’s arguments? Teaming Up Two groups of four students each will debate the advantages and disadvantages of completely
- 1086. free international trade. After the first student from each side has spoken, the second student will question the opponent’s arguments, looking for holes and inconsistencies. The third stu- dent will attempt to answer these arguments. The fourth student will present a summary of each side’s arguments. Finally, the class will vote on which team has offered the more compel- ling argument. Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is re- searching, integrate your answers to the following questions into your completed MESP report. 5-8. How important is trade to the nation (trade as a share of GDP)? 5-9. What products and services does it export and import? 5-10. Is there a concerted effort to stimulate the economy by promoting exports? 5-11. With whom does the nation trade?
- 1087. 5-12. Is it dependent on any particular nation for trade, or does another nation depend on it? 5-13. Does the nation trade only with high-income countries or also with low- and middle- income countries? MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 5-14. Many economists believe that China will soon achieve “superpower” status because of its economic reforms, along with the work ethic and high education of its population. How is the rise of China affecting trade patterns among Asia, Europe, and North America? 5-15. Despite its abundance of natural resources, Brazil was once considered an economic “basket case.” Yet in recent years, Brazil’s economy has performed well. Employing the national competitive advantage theory, what factors might be behind Brazil’s economic progress?
- 1088. M05_WILD9220_09_SE_C05.indd 150 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 5 • InTERnATIonAl TRAdE THEoRy 151 Thinking Globally 5-16. As the first to set up an international air express business in 1969, DHL had the first-mover advantage over other com- panies. Is being a first mover as advantageous for a service company such as DHL as it is for a manufacturing company such as Boeing? Explain. 5-17. What elements are necessary for a service company to achieve global success? 5-18. Instead of relying on local agents, DHL prides itself on having its own staff of around 350,000 people across the globe. What are the merits and drawbacks of this interna- tional staffing approach?
- 1089. 5-19. What do you think are the dangers, if any, of being a first mover? Sources: “DHL Chief Puts Case for Global Trade Growth,” Logistics Manager (www.logisticsmanager.com), April 28, 2017; Deutsche Welle, “Online Business Boom Boosts Profit at Deutsche Post DHL,” (http://dw.de/p/1BNlm), March 12, 2014; Ellie Duncan, “DHL Receives Five Awards at AFSCA 2010,” Sup- ply Chain Digital (www.supplychaindigital.com), June 14, 2010; DHL website (www.dhl.com), select reports and press releases. PRACTICING INTERNATIONAL MANAGEMENT CASE First in Asia and the World What company is the leading international express carrier? If you answered Federal Express (www.fedex.com) or UPS (www.ups.com), guess again. Try DHL International (www.dhl .com). This company, founded in San Francisco by three entrepre- neurs, carved out the niche for combined land-sea express
- 1090. services in 1969 when it began shipping bills of lading and other documents from San Francisco to Honolulu. Soon the company got requests to deliver and pick up in Japan and other Asian countries, and the business of international express delivery was born. Today, logistics is the backbone of global trade and DHL ser - vices 120,000 destinations in more than 220 countries and terri - tories from its base in Leipzig, Germany. Annual net profit was recently an astounding $3.8 billion. DHL employs around 350,000 people worldwide, many of them based in Asia, the company’s first and most important international market. DHL prides itself on its customer service and reliability. The company hires personnel in the countries where it operates and sees this practice as key to forging relationships with customers in its overseas markets. One DHL executive explained that unlike many of its competitors, DHL ensures that the company’s own employees, not outside agents,
- 1091. make deliveries and pick-ups and that these individuals often are local people who know local customs. Relationships are the name of the game in service businesses. DHL cultivates relationships with customs agents because the archaic clearance procedures in many countries are the biggest obstacle to speedy international deliveries. Express air delivery is now a huge business in Asia, and DHL has several formidable competitors snapping at its heels. These include Federal Express, which offers competitive rates, and local players like Hong Kong Delivery, whose small size makes it highly f lexible. DHL cannot simply rest on its number-one position or boast of its long years of experience to stay ahead. The dangers of complacency were brought home to the company when its DHL Japan office faced customer resistance to a price hike. DHL employ- ees had simply assumed that the firm would always be number one and had grown lax on service. In fact, an objective
- 1092. “shipment test” revealed that DHL Japan provided the worst service at what were already the highest prices. Japanese customers had simply continued to use DHL because it was the first in the business and because loyalty was important. Yet the proposed price hike might have been the decisive factor in convincing formerly compliant cus- tomers to defect. Fortunately, DHL Japan was able to get back on track through aggressive initiatives. Today, DHL’s customer service record is winning repeated kudos in Asia and around the world. For example, a division called DHL Logistics earned a second consecutive gold medal for excel- lence in the eighteenth annual Quest for Quality survey conducted by the industry’s Logistics Management and Distribution Report. It is also often voted the “Best Express Service” at the annual
- 1093. Asian Freight Industry Awards. These days, competition in the express delivery industry is increasingly intense. Slow global economic growth in recent years has served to strengthen this intensity as DHL and other industry players compete for business. DHL will need to continue listening to its customers, working hard to deliver higher-level services, and fulfilling their advanced logistics needs. DHL purchased Airborne Express in 2003 for around $1 billion. The merger, designed to restructure the business and slash overhead expenses, integrated the two companies’ ground and courier net- works and offered customers a seamless global network. The idea was that DHL could then offer its US customers the best of both worlds: the world-class international services of DHL combined with the strong domestic service offerings of Airborne. DHL has been losing money in the United States, but it will not pull out of the US market altogether. Instead, its US arm closed about a third of its stations, cut its ground-hauling network by 18 percent, and
- 1094. reduced its pickup and delivery routes by 17 percent. M05_WILD9220_09_SE_C05.indd 151 10/30/17 8:48 PM http://www.dhl.com/ http://www.supplychaindigital.com/ http://dw.de/p/1BNlm http://www.logisticsmanager.com/ http://www.dhl.com/ http://www.dhl.com/ http://www.ups.com/ http://www.fedex.com/ 152 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 6.1 Explain why governments sometimes intervene in trade.
- 1095. 6.2 Outline the instruments that governments use to promote trade. 6.3 Describe the instruments that governments use to restrict trade. 6.4 Summarize the main features of the global trading system. Learning Objectives After studying this chapter, you should be able to Political Economy of Trade Chapter Six A Look Back Chapter 5 explored theories that have been developed to explain the pattern international trade should take. We examined the important concept of comparative advantage
- 1096. and the conceptual basis for how international trade benefits nations. A Look at This Chapter This chapter discusses the active role of national governments in international trade. We examine the motives for government interven- tion and the tools that nations use to accomplish their goals. We then explore the global trading system and show how it promotes free trade. A Look Ahead Chapter 7 continues our discussion of the international business environ- ment. We explore recent patterns of foreign direct investment, theories that try to explain why it occurs, and how governments influence invest- ment flows.
- 1097. M06_WILD9220_09_SE_C06.indd 152 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 6 • PoliTiCAl EConomy of TRAdE 153 Lord of the Movies HOLLYWOOD, California—Time Warner (www.timewarner.com) is a global leader in the media and entertainment industry. Its businesses include television networks (HBO, Turner Broadcasting), publishing (Time, Sports Illustrated), and film entertainment (New Line Cinema, Warner Bros.). Peo- ple in almost every nation on the planet view Time Warner’s media creations as the firm marches across the globe. New Line Cinema’s The Lord of the Rings trilogy, based on the books by J.R.R. Tolkien and directed by film- maker Peter Jackson, is the most suc- cessful film franchise in history. The final installment in the trilogy, The Lord
- 1098. of the Rings: The Return of the King, earned more than $1 billion at the worldwide box office. The entire trilogy earned nearly $3 billion worldwide and won 17 Academy Awards. New Line Cinema also found enormous success in The Hobbit trilogy, also directed by Peter Jackson. Shown here is character Samwise Gamgee’s hobbit hole (or smial) in Hobbiton, New Zealand. Warner Bros.’s series of Harry Potter films, based on the novels of former British schoolteacher J.K. Rowling, have been magically successful. Kids worldwide poured into cinemas to watch young Harry on the silver screen and snatched up Harry Potter books in every major language. Warner Bros. also hit it big with the Batman film The Dark Knight—one of the highest-grossing films ever—and Wonder Woman. Warner Bros. also produces mini-movies and games exclusively for its website. Yet, Time Warner must tread carefully as it expands its reach. Some governments
- 1099. fear that their own nations’ writers, actors, directors, and producers will be drowned out by big-budget Hollywood productions such as The Lord of the Rings, Harry Potter, and Batman. Others fear the replacement of their traditional values with those depicted in imported entertainment. Time Warner’s global reach is evidenced by the fact that AT&T offered to buy it for $85 billion. If it obtains regulatory approval, AT&T hopes the deal will help grow and diversify its revenues. As you read this chapter, consider all the cultural, political, and economic reasons why governments regulate international trade.1 Jean Mauduit/Alamy Stock Photo M06_WILD9220_09_SE_C06.indd 153 10/30/17 8:48 PM http://www.timewarner.com/ 154 PART 3 • inTERnATionAl TRAdE And inVESTmEnT Chapter 5 presented theories that describe what the patterns of
- 1100. international trade should look like. The theory of comparative advantage says that the country that has a comparative advantage in the production of a certain good will produce that good when barriers to trade do not exist. But this ideal does not accurately characterize trade in today’s global marketplace. Despite efforts by organizations such as the World Trade Organization (www.wto.org) and smaller groups of countries, nations still retain many barriers to trade. In this chapter, we investigate the political economy of trade. We first explain why nations erect barriers to trade by exploring their cultural, political, and economic motives. We then examine the instruments countries use to restrict imports and exports. Efforts to promote trade by reducing barriers within the context of the global trading system are then presented. In Chapter 8 we discuss how smaller groups of countries are eliminating barriers to both trade and investment. 6.1 Why do Governments Intervene in Trade? The pattern of imports and exports that occurs in the absence of trade barriers is called free trade.
- 1101. Despite the advantages of open and free trade among nations, governments have long intervened in the trade of goods and services. Governments impose restrictions on free trade for political, economic, or cultural reasons. For example, countries often intervene in trade by strongly sup- porting their domestic companies’ exporting activities. But the more emotionally charged interven- tion occurs when a nation’s economy is underperforming. In tough economic times, businesses and workers often lobby their governments for protection from imports that are eliminating jobs in the domestic market. Let’s take a closer look at the political, economic, and cultural motives for intervention. Political Motives Government officials often make trade-related decisions based on political motives because a politician’s career can depend on pleasing voters and getting reelected. Yet, a trade policy based purely on political motives is seldom wise in the long run. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding
- 1102. to other nations’ unfair trade practices, and gaining influence over other nations. PROTECT JOBS Short of an unpopular war, nothing will oust a government faster than high rates of unemployment. Thus, practically all governments become involved when free trade cre- ates job losses at home. For example, Ohio lost around 215,000 manufacturing jobs over a recent 14-year period. Most of those jobs went to China and the nations of Central and Eastern Europe. The despair of unemployed workers and the pivotal role of Ohio in presidential elections lured politicians to the state, who promised Ohio lower income taxes, expanded worker retraining, and greater investment in the state’s infrastructure. But political efforts to protect jobs can draw attention away from free trade’s real benefits. General Electric (GE) certainly sent many jobs from the United States to Mexico over the years. GE now employs 30,000 Mexicans at 35 factories that manufacture all sorts of its appliances and other goods. But less known is that GE also sold Mexican companies $350 million worth of its
- 1103. turbines made in Texas, 100 of its locomotives made in Pennsylvania, and dozens of its US-made aircraft engines. Mexico specializes in making products that require less-expensive labor, and the United States specializes in producing goods that require advanced technology and a large investment of capital.2 PRESERVE NATIONAL SECURITY Human, economic, and environmental security are closely related to national security. The globalization of markets and production creates new security risks for companies. To read about these risks, see this chapter’s Global Sustainability feature, titled “Managing Security in the Age of Globalization.” National Security and Imports Certain imports can be restricted in the name of preserving national security. In the event of war, governments must have access to a domestic supply of certain items such as weapons, fuel, and air, land, and sea transportation in case their availability is restricted. Many nations continue to search for oil within their borders in case war disrupts its flow from outside sources. Legitimate national security reasons
- 1104. for intervention can be difficult to argue against, particularly when they have the support of most of a country’s people. 6.1 Explain why governments sometimes intervene in trade. free trade Pattern of imports and exports that occurs in the absence of trade barriers. M06_WILD9220_09_SE_C06.indd 154 10/30/17 8:48 PM http://www.wto.org/ CHAPTER 6 • PoliTiCAl EConomy of TRAdE 155 Some countries claim that national security is the reason for fierce protection of their agri- cultural sector, since food security is essential at a time of war. France was criticized by many nations for ardently protecting its agricultural sector. French agricultural subsidies are intended
- 1105. to provide a fair financial return for French farmers, who traditionally operate on a small scale and therefore have high production costs and low profit margins. But many developed nations are exposing agribusiness to market forces and prompting their farmers to discover new ways to manage risk and increase efficiency. Innovative farmers are experimenting with more intensive land management, high-tech precision farming, and greater use of biotechnology. Yet, protection from import competition does have its drawbacks. Perhaps the main one is the added cost of continuing to produce a good or provide a service domestically that could be supplied more efficiently from abroad. Also, a policy of protection may remain in place much longer than necessary once it is adopted. Thus, policy makers should consider whether an issue truly is a matter of national security before intervening in trade. National Security and Exports Governments also have national security motives for ban- ning certain defense-related goods from export to other nations. Most industrialized nations have
- 1106. agencies that review requests to export technologies or products that are said to have dual uses— meaning they have both industrial and military applications. Products designated as dual use are classified as such and require special governmental approval before export can take place. Products on the dual-use lists of most nations include nuclear materials, technological equipment, certain chemicals and toxins, some sensors and lasers, and specific devices related to weapons, navigation, aerospace, and propulsion. Bans on the export of dual-use products were strictly enforced during the Cold War years between the West and the former Soviet Union. Whereas many countries relaxed enforcement of these controls in recent years, the continued threat of terrorism and fears of weapons of mass destruction are renewing support for such bans. Nations also place certain companies and organizations in other countries on a list of enti- ties that are restricted from receiving their exports. For example, the owner of an electronics firm pleaded guilty to charges of conspiracy to illegally export
- 1107. dual-use items from the United States to India for possible use in ballistic missiles, space launch vehicles, and fighter jets. The individual admitted that he provided the components to government entities in India, including two companies on the US Department of Commerce’s “Entity List” and received a 35-month jail sentence and was fined $60,000. As well as the need to secure lengthy supply chains and distribu- tion channels, companies must secure their facilities, information systems, and reputations. • Facilities Risk. large companies with top-notch property risk- management programs produce more stable earnings. Com- panies practicing weak risk management experience 55 times greater risk of property loss due to fire and 29 times greater risk of property loss caused by natural hazards. Planning and facilities assessment (around $12,000 for a midsize company, $1 million for a large firm) can be well worth the cost. • Information Risk. Computer viruses, software worms, mali - cious code, and cyber criminals cost companies around
- 1108. the world many billions of dollars each year. disgruntled employees, dishonest competitors, and hackers who steal customers’ personal and financial data can then sell it to the highest bidder. Upon termination, employees some- times leave with digital devices containing confidential memos, competitive data, and private e-mails. • Reputational Risk. news today travels worldwide quickly. Reputational risk is anything that can harm a firm’s image, including product recalls, workers’ rights violations, and lawsuits. The damaged reputation of Goldman Sachs fol- lowing a $550 million settlement with the Securities and Exchange Commission for its actions before and during recent financial crises cost the firm 40 percent ($6 billion) of its brand value in one year. • What to Do. like the risks themselves, the challenges are varied. Companies should identify all potential risks to their facilities and then develop a best-practice property risk program. it sounds simple, but employees must change passwords frequently, safeguard their computers and mobile devices from attack, and return company-owned digital devices when leaving the firm. finally, ever-increasing scrutiny means that companies
- 1109. should act ethically and within the law to protect their reputations. • Want to Know More? Visit Sustainable Security (susta inablesecurity.org), the foundation for Environmental Security and Sustainability (www.fess-global.org), Kroll (www. krollworldwide.com), and Check Point Software Technologies (www.checkpoint.com). GLOBAL SUSTAINABILITY Managing Security in the Age of Globalization M06_WILD9220_09_SE_C06.indd 155 10/30/17 8:48 PM http://www.fessglobal.org/ http://www.checkpoint.com/ http://www.krollworldwide.com/ 156 PART 3 • inTERnATionAl TRAdE And inVESTmEnT RESPOND TO “UNFAIR” TRADE Many observers argue that it makes no sense for one nation to allow free trade if other nations actively protect their own industries. Governments often threaten
- 1110. to close their ports to another nation’s ships or to impose extremely high tariffs on its goods if the other nation does not concede on some trade issue that is seen as being unfair. In other words, if one government thinks another nation is not “playing fair,” it will often threaten to retaliate unless certain concessions are made. GAIN INFLUENCE Governments of the world’s largest nations may become involved in trade to gain influence over smaller nations. The United States goes to great lengths to gain and maintain control over events in all of Central, North, and South America, and the Caribbean basin. In 1962, the United States banned all trade and investment with Cuba in the hope of exerting political influence against its communist leaders. Designed to pressure Cuba’s government to change, the policy unintentionally caused suffering among Cuba’s citizens. But change is occur- ring in Cuba, albeit slowly. Even the concept of performance- related pay was introduced. These seemingly trivial freedoms represent monumental change to ordinary Cubans, who now hope for
- 1111. continually greater freedom. Economic Motives Although governments intervene in trade for highly charged cultural and political reasons, they also have economic motives for their intervention. The most common economic reasons for nations’ attempts to inf luence international trade are the protection of young industries from competition and the promotion of a strategic trade policy. PROTECT INFANT INDUSTRIES According to the infant industry argument, a country’s emerging industries need protection from international competition during their development phase until they become sufficiently competitive internationally. This argument is based on the idea that infant industries need protection because of a steep learning curve. In other words, only as an industry grows and matures does it gain the knowledge it needs to become more innovative, efficient, and competitive. Although this argument is conceptually appealing, it does have several problems. First, it
- 1112. requires governments to distinguish between industries that are worth protecting and those that are not. This is difficult, if not impossible, to do. For years, Japan targeted infant industries for protection, low interest loans, and other benefits. Its performance on assisting these industries was very good through the early 1980s but was less successful since then. Until the government All types of crops today, includ- ing corn, soybeans, and wheat, are grown with genetically enhanced seed technology to resist insects and disease. Genetically modified plants like those shown here have had their DNA genetically altered in laboratories. Many people in Europe fiercely resist efforts by the United States to export genetically modified crops to their markets. Do you believe Euro- peans are right to be wary of the importation of genetically modi- fied crops?
- 1113. Hero Images Inc./Alamy Stock Photo M06_WILD9220_09_SE_C06.indd 156 10/30/17 8:48 PM CHAPTER 6 • PoliTiCAl EConomy of TRAdE 157 achieves future success in identifying and targeting industries, supporting this type of policy remains questionable. Second, protection from international competition can cause domestic companies to become complacent toward innovation. This can limit a company’s incentives to obtain the knowledge it needs to become more competitive. The most extreme examples of complacency are industries within formerly communist nations. When their communist protections collapsed, nearly all com- panies that were run by the state were decades behind their competitors from capitalist nations. To survive, many government-owned businesses required financial assistance in the form of infusions of capital or outright purchase.
- 1114. Third, protection can do more economic harm than good. Consumers often end up paying more for products because a lack of competition typically creates fewer incentives to cut produc- tion costs or improve quality. Meanwhile, companies become less competitive and more reliant on protection. Protection in Japan created a two-tier economy where, in one tier, highly competitive multinational corporations faced rivals in overseas markets and learned to become strong competi- tors. In the other tier, domestic industries were made noncompetitive through protected markets, high wages, and barriers to imports. Fourth, the infant industry argument also says that it is not always possible for small, prom- ising companies to obtain funding in capital markets, and thus they need financial support from their government. However, international capital markets today are far more sophisticated than in the past, and promising business ventures can normally obtain funding from private sources. PURSUE STRATEGIC TRADE POLICY Recall from our
- 1115. discussion in Chapter 5 that new trade theorists believe government intervention can help companies take advantage of economies of scale and become the first movers in their industries. First- mover advantages arise because econo- mies of scale in production limit the number of companies that an industry can sustain. Benefits of Strategic Trade Policy Supporters of strategic trade policy argue that it results in increased national income. Companies should earn a good profit if they obtain first-mover advan- tages and solidify positions in their markets around the world. Advocates claim that strategic trade policies helped South Korea build global conglomerates (called chaebol) that dwarf competitors. For years, South Korean shipbuilders received a variety of government subsidies, including low-cost financing. The chaebol helped South Korea to emerge strongly from the recent global economic cri- sis because of their market power and the wide range of industries in which they compete. Such poli- cies had spin-off effects on related industries, and local suppliers to the chaebol are now thriving.3
- 1116. Drawbacks of Strategic Trade Policy Although it sounds as if strategic trade policy only has benefits, there can be drawbacks as well. Lavish government assistance to domestic companies in the past caused inefficiency and high costs for both South Korean and Japanese companies. Large government concessions to local labor unions hiked wages and forced Korea’s chaebol to accept low profit margins. Yet, over time, the chaebol overcame these difficulties. In addition, when governments decide to support specific industries, their choice is often subject to political lobbying by the groups seeking government assistance. It is possible that special interest groups could capture all the gains from assistance with no benefit for consumers. If this were to occur, consumers could end up paying more for goods of lower-quality than they could otherwise obtain. Cultural Motives Nations often restrict trade in goods and services to achieve cultural objectives, the most com- mon being protection of national identity. Culture and trade are
- 1117. intertwined and greatly affect one another. The cultures of countries are slowly altered by exposure to the people and products of other cultures. Unwanted cultural influence in a nation can cause great distress and force a government to block imports that it believes are harmful (recall our discussion of cultural impe- rialism in Chapter 2). French law bans foreign-language words from virtually all business and government com- munications, radio and TV broadcasts, public announcements, and advertising messages—at least whenever a suitable French alternative is available. You can’t advertise a best seller; it has to be a succès de librairie. You can’t sell popcorn at le cinéma; French moviegoers must snack on maïs soufflé. The Higher Council on French Language works against the inclusion of so-called M06_WILD9220_09_SE_C06.indd 157 10/30/17 8:48 PM 158 PART 3 • inTERnATionAl TRAdE And inVESTmEnT
- 1118. Franglais phrases such as le marketing, le cash flow, and le brainstorming into commerce and other areas of French culture. Not to be outdone by neighboring France, German bureaucrats exchanged governmental use of English words with German ones, for example, replacing brain- storming with ideensammlung and meeting points with treffpukte.4 Canada also tries to mitigate the cultural influence of entertainment products imported from the United States. Canada requires at least 35 percent of music played over Canadian radio to be by Canadian artists. In fact, many countries are considering laws to protect their media programming for cultural reasons. The downside of such restrictions is they reduce the selection of products available to consumers. CULTURAL INFLUENCE OF THE UNITED STATES International trade is the vehicle by which the English language swiftly infiltrates the cultures of other nations. International trade in all sorts of goods and services is exposing people around the world
- 1119. to new words, ideas, products, and ways of life. Still, as international trade continues to expand, many governments try to limit potential adverse effects on their cultures and economies. The United States, more than any other nation, is seen by many around the world as a threat to local culture. The reason is the global strength of the United States in entertainment and media (such as movies, magazines, and music) and consumer goods. These products are highly visible to all consumers and cause groups of various kinds to lobby government officials for protection from their cultural influence. Domestic producers find it easy to join in the calls for protection because the rhetoric of protectionism often receives widespread public support. Oddly, many small businesses capable of exporting have not yet begun to do so. By some estimates, only 10 percent of US companies with fewer than 100 employees export. Encouraging greater export activity may require US companies to undergo a cultural shift in mindset. Although a lack of investment capital can be a real obstacle to exporting
- 1120. for small businesses, some com- mon myths in the business culture create artificial obstacles. To explore some of these myths and the facts that dispute them, see this chapter’s Culture Matters feature, titled “Myths of Small Business Exporting.” QUiCK STUdy 1 1. Free trade is the pattern of imports and exports that occurs in the what? 2. For what political reasons does a government intervene in trade? 3. What are some economic reasons why a government intervenes in trade? 4. Some people see the products of what country as the greatest threat to local cultures around the world? • Myth 1: only large companies can export successfully. Fact: most exporters are small and medium-sized enter- prises with fewer than 50 employees. Exporting can reduce the dependency of small firms on domestic mar- kets and can help them avoid seasonal sales fluctuations.
- 1121. A product popular domestically, or perhaps even unsuc- cessful at home, may be wanted elsewhere in the global market. • Myth 2: Small businesses can find little export advice. Fact: novice and experienced exporters alike can receive comprehensive export assistance from federal agencies (www.export.gov). international trade specialists can help small businesses locate and use federal, state, local, and private-sector programs. They are also an excellent source of market research, trade leads, financing, and trade events. • Myth 3: licensing requirements needed to export are too complicated. Fact: most products do not need export licenses. Exporters need only to write “nlR” for “no license required” on their Shipper’s Export declaration. A license is generally needed only for high-tech or defense-related goods or when the receiving country is under a US embargo or other restriction. • Myth 4: Small businesses cannot obtain export financing. Fact: The Small Business Administration (www.sba.gov) and the Export-import Bank (www.exim.gov) work together in lending money to small businesses. Whereas the SBA is
- 1122. responsible for loan requests below $750,000, the Export- import Bank handles transactions more than $750,000. The Trade and development Agency (www.ustda.gov) also helps small and medium-sized firms obtain financing for international projects. CULTURE MATTERS Myths of Small Business Exporting M06_WILD9220_09_SE_C06.indd 158 10/30/17 8:48 PM http://www.exim.gov/ http://www.ustda.gov/ http://www.sba.gov/ http://www.export.gov/ CHAPTER 6 • PoliTiCAl EConomy of TRAdE 159 6.2 Instruments of Trade Promotion The previous discussion alluded to the types of instruments governments use to promote or restrict trade with other nations. The most common instruments that governments use are shown in Table 6.1. In this section, we examine methods of trade promotion. We cover methods of trade
- 1123. restriction in the next section. Subsidies Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a sub- sidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports. It is extremely difficul t to calculate the amount of subsidies a country offers its producers because of the many forms that subsidies take. This makes the work of the World Trade Organization difficult when it is called on to settle arguments over subsidies (the World Trade Organization is discussed later in this chapter). DRAWBACKS OF SUBSIDIES Critics say that subsidies encourage inefficiency and compla- cency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that
- 1124. receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation’s citizens in the long term is questionable. Some observers say that far more devastating is the effect of subsidies on farmers in devel- oping and emerging markets. We’ve already seen that many wealthy nations award subsidies to their farmers to ensure an adequate food supply for their people. It is said that these subsidies, worth billions of dollars, make it difficult if not impossible for farmers from poor countries to sell their unsubsidized (i.e., more expensive) food on world markets. Compounding the plight of these farmers is the fact that their nations are being forced to eliminate trade barriers by international organizations. The economic consequences for poor farmers in Africa, Asia, and Latin America are higher unemployment and poverty. Subsidies can lead to an overuse of resources, negative environmental effects, and higher costs
- 1125. for commodities. Subsidies tend to drive fuel prices higher and eliminate incentives to conserve fuel. A period of rising fuel prices gave researches to examine the effects of subsidies on fuel usage. Research supported the notion that whereas countries without fuel subsidies saw steady or falling demand, subsidizing countries saw rising demand that threatened to outstrip growth in global fuel supplies. Export Financing Governments often promote exports by helping companies finance their export activities. They can offer loans that a company could otherwise not obtain or can charge them an interest rate that is lower than the market rate. Another option is for a government to guarantee that it will repay the loan of a company if the company should default on repayment; this is called a loan guarantee. 6.2 Outline the instruments that governments use to pro- mote trade.
- 1126. subsidy Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms. TABLE 6.1 Instruments of Trade Policy Trade Promotion Trade Restriction Subsidies Tariffs Export financing Quotas Foreign trade zones Embargoes Special government agencies Local content requirements Administrative delays Currency controls M06_WILD9220_09_SE_C06.indd 159 10/30/17 8:48 PM
- 1127. 160 PART 3 • inTERnATionAl TRAdE And inVESTmEnT Many nations have special agencies dedicated to helping their domestic companies obtain export financing. For example, a very well-known institution is called the Export-Import Bank of the United States—or Ex-Im Bank for short. The Ex-Im Bank (www.exim.gov) finances the export activities of companies in the United States and offers insurance on foreign accounts receivable. Another US government agency, the Overseas Private Investment Corporation (OPIC), also pro- vides insurance services but for investors. Through OPIC (www.opic.gov), companies that invest abroad can insure against losses due to (1) expropriation, (2) currency inconvertibility, and (3) war, revolution, and insurrection. Receiving financing from government agencies is often crucial to the success of small busi- nesses that are just beginning to export. Taken together, small businesses account for more than 80 percent of all transactions handled by the Ex-Im Bank. For instance, the Ex-Im Bank guaran-
- 1128. teed to cover a loan of nearly $4 million to help fund development of an amusement park in Accra, Ghana. The investment in Africa is in response to rising demand for world-class amusement parks across West Africa. The park will employ at least 175 local Ghanaians under the supervision of US expatriate managers. For more on how the Ex-Im Bank helps businesses gain export financing, see the Manager’s Briefcase, titled “Experts in Export Financing.” Foreign Trade Zones Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of FTZs, with a by-product being increased trade. A good example of a foreign trade zone is Turkey’s Aegean Free Zone, in which the Turkish government allows companies to conduct manufacturing operations free from taxes. Customs duties increase the total amount of a good’s production
- 1129. cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside an FTZ. A common purpose of many companies’ facilities in such zones is final product assembly. The US Department of Commerce (www.commerce.gov) administers dozens of FTZs within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the US market with no further duties charged. State governments welcome such zones in order to obtain the jobs that the assembly operations create. China established a number of large FTZs in order to reap the employment advantages they offer. Goods imported into these zones do not require import licenses or other documents, nor are foreign trade zone (FTZ) Designated geographic region through which merchandise is allowed to pass with lower cus- toms duties (taxes) and/or fewer
- 1130. customs procedures. Several Ex-im Bank (www.exim.gov) programs can help US busi- nesses expand abroad: • City/State Program This program brings financing services to small and medium-sized US companies that are ready to export. This program currently exists with 38 state and local government offices and private sector organizations. • Working Capital Guarantee Program This program encour- ages commercial banks to loan money to companies with export potential. The guarantee covers 90 percent of the loan’s principal and accrued interest. The guaranteed financ- ing can help purchase finished products for export or pay for raw materials, for example. • Credit Information Services The Ex-im Bank supplies credit information to US exporters and commercial lenders. it pro- vides information on a country or specific company abroad. But the bank does not divulge either confidential financial data on non-US buyers to whom it has extended credit or confi- dential information on specific conditions in other countries.
- 1131. • Credit Insurance This program helps US exporters by pro- tecting them against loss should a non-US buyer or debtor default for political or commercial reasons. The proceeds of the policy can be used as collateral and therefore can make obtaining export financing easier. • Guarantee Program This program provides repayment protection for private sector loans made to creditworthy buyers of US capital equipment, projects, and services. The bank guarantees the principal and interest on the loan if the borrower defaults. most guarantees provide comprehensive coverage against political and commercial risks. • Loan Program The bank makes loans directly to non-US buyers of US exports and intermediary loans to creditwor- thy parties that provide loans to non-US buyers. The pro- gram provides fixed-interest-rate financing for export sales of US-made capital equipment and related services. Source: Export-Import Bank of the United States website (www.exim.gov). MANAGER’S BRIEFCASE Experts in Export Financing
- 1132. M06_WILD9220_09_SE_C06.indd 160 10/30/17 8:48 PM http://www.exim.gov/ http://www.exim.gov/ http://www.exim.gov/ http://www.opic.gov/ http://www.commerce.gov/ CHAPTER 6 • PoliTiCAl EConomy of TRAdE 161 they subject to import duties. International companies can also store goods in these zones before shipping them to other countries without incurring taxes in China. Moreover, five of these zones are located within specially designated economic zones in which local governments can offer additional opportunities and tax breaks to international investors. Another country that enjoys the beneficial effects of FTZs is Mexico. Decades ago, Mexico established such a zone along its northern border with the United States. Creation of the zone caused development of companies called maquiladoras along the
- 1133. border inside Mexico. The maquiladoras import materials or parts from the United States duty free, process them to some extent, and export them back to the United States, which charges duties only on the value added to the product in Mexico. The program expanded rapidly over the five decades since its inception, employing hundreds of thousands of people from all across Mexico who move north looking for work. Special Government Agencies Learning the government regulations of other countries can be a daunting task. A company must know whether its product is subject to a tariff or quota, for example. Governments of most nations, therefore, have special agencies responsible for promoting exports. Such agencies can be particu- larly helpful to small and medium-sized businesses that have limited financial resources. Government trade-promotion agencies often organize trips for trade officials and business- people to visit other countries in order to meet potential business partners and generate contacts for
- 1134. new business. They also typically open trade offices in other countries. These offices are designed to promote the home country’s exports and introduce businesses to potential partners in the host nation. Government trade-promotion agencies typically do a great deal of advertising in other countries promoting the nation’s exports. For example, Chile’s Trade Commission, ProChile, has commercial offices in 40 countries and a website (www.chileinfo.com). Governments not only promote trade by encouraging exports but also encourage imports that the nation does not or cannot produce. For example, the Japan External Trade Organization (JETRO; www.jetro.go.jp) is a trade-promotion agency of the Japanese government. The agency coaches small and medium-sized overseas businesses on the protocols of Japanese deal making, arranges meetings with suitable Japanese distributors and partners, and even assists in finding temporary office spaces. QUiCK STUdy 2
- 1135. 1. Financial assistance from a government to domestic producers is called a what? 2. What are the hoped-for outcomes of a foreign trade zone? 3. What are some of the ways that governments provide export financing? 6.3 Instruments of Trade Restriction Earlier in this chapter, we read about the political, economic, and cultural reasons for governmen- tal intervention in trade. In this section, we discuss the methods governments can use to restrict unwanted trade. There are two general categories of trade barriers available to governments: tariffs and nontariff barriers. A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers. A nontariff barrier limits the availability of an imported product, which increases its price indirectly and, therefore, reduces its appeal to buyers. Let’s take a closer look at tariffs and the various types of nontariff barriers. Tariffs We can classify a tariff into one of three categories. An export
- 1136. tariff is levied by the government of a country that is exporting a product. Countries can use export tariffs when they believe an export’s price is lower than it should be. Developing nations whose exports consist mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the government of a country that a product is passing through on its way to its final destination. Transit tariffs have been almost 6.3 Describe the instruments that governments use to restrict trade. tariff Government tax levied on a prod- uct as it enters or leaves a country. M06_WILD9220_09_SE_C06.indd 161 10/30/17 8:48 PM http://www.chileinfo.com/ http://www.jetro.go.jp/ 162 PART 3 • inTERnATionAl TRAdE And inVESTmEnT
- 1137. entirely eliminated worldwide through international trade agreements. An import tariff is levied by the government of a country that is importing a product. The import tariff is by far the most common tariff used by governments today. We can further break down the import tariff into three subcategories based on the manner in which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an imported product. A specific tariff is levied as a specific fee for each unit (measured by number, weight, etc.) of an imported product. A compound tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit. Let’s now discuss the two main reasons why countries levy tariffs. PROTECT DOMESTIC PRODUCERS Nations can use tariffs to protect domestic producers. For example, an import tariff raises the cost of an imported good and increases the appeal of domesti- cally produced goods. In this way, domestic producers gain a protective barrier against imports.
- 1138. Although producers that receive tariff protection can gain a price advantage, in the long run pro- tection can keep them from increasing efficiency. A protected industry can be devastated if protec- tion encourages complacency and inefficienc y and it is later thrown into the lion’s den of international competition. Mexico began reducing tariff protection in the mid-1980s as a prelude to NAFTA negotiations, and many Mexican producers went bankrupt despite attempts to grow more efficient. GENERATE REVENUE Tariffs are also a source of government revenue, but mostly among devel- oping nations. The main reason is that less-developed nations tend to have less-formal domestic economies that lack the capability to record domestic transactions accurately. The lack of accurate record keeping makes collection of sales taxes within the country extremely difficult. Nations solve the problem by simply raising their needed revenue through import and export tariffs. As countries develop, however, they tend to generate a greater portion of their revenues from taxes on income, capital gains, and other economic activity.
- 1139. The discussion so far leads us to question who benefits from tariffs. We’ve already learned the two principal reasons for tariff barriers—protecting domestic producers and raising government revenue. On the surface, it appears that governments and domestic producers benefit. We also saw that tariffs raise the price of a product because importers typically charge a higher price to recover the cost of this additional tax. Thus, it appears on the surface that consumers do not benefit. As we also mentioned earlier, there is the danger that tariffs will create inefficient domestic producers that may go out of business once protective import tariffs are removed. Analysis of the total cost to a country is far more complicated and goes beyond the scope of our discussion. Suffice it to say that tariffs tend to exact a cost on countries as a whole because they lessen the gains that a nation’s people obtain from trade. Quotas A restriction on the amount (measured in units or weight) of a good that can enter or leave a country during a certain period of time is called a quota. After
- 1140. tariffs, quotas are the second most common type of trade barrier. Governments typically administer their quota systems by granting quota licenses to the companies or governments of other nations (in the case of import quotas) and domestic producers (in the case of export quotas). Governments normally grant such licenses on a year-by-year basis. REASON FOR IMPORT QUOTAS A government may impose an import quota to protect its domestic producers by placing a limit on the amount of goods allowed to enter the country. This helps domestic producers maintain their market shares and prices because competitive forces are restrained. In this case, domestic producers win because their market is protected. Consumers lose because of higher prices and limited selection attributable to lower competition. Other losers include domestic producers whose own production requires the import subjected to a quota. Companies relying on the importation of so-called intermediate goods will find the final cost of their own products increase.
- 1141. Historically, countries placed import quotas on the textile and apparel products of other countries under the Multi-Fiber Arrangement. This arrangement at one time affected countries accounting for more than 80 percent of world trade in textiles and clothing. When that arrange- ment expired in 2005, many textile producers in poor nations feared the loss of jobs to China. ad valorem tariff Tariff levied as a percentage of the stated price of an imported product. specific tariff Tariff levied as a specific fee for each unit (measured by num- ber, weight, etc.) of an imported product. compound tariff Tariff levied on an imported product and calculated partly as a percent- age of its stated price and partly as a specific fee for each unit.
- 1142. quota Restriction on the amount (mea- sured in units or weight) of a good that can enter or leave a country during a certain period of time. M06_WILD9220_09_SE_C06.indd 162 10/30/17 8:48 PM CHAPTER 6 • PoliTiCAl EConomy of TRAdE 163 But some countries with a large textile industry, such as Bangladesh, are benefiting from cheap labor and the reluctance among purchasers to rely exclusively on China for all supplies. REASONS FOR EXPORT QUOTAS There are at least two reasons why a country imposes export quotas on its domestic producers. First, it may wish to maintain adequate supplies of a product in the home market. This motive is most common among countries that export natural resources that are essential to domestic business or the long-term survival
- 1143. of a nation. Second, a country may limit the export of a good in order to restrict its supply on world mar- kets, thereby increasing the international price of the good. This is the motive behind the formation and activities of the Organization of Petroleum Exporting Countries (OPEC; www.opec.org). This group of nations from the Middle East and Latin America attempts to restrict the world’s supply of crude oil in order to earn greater profits. VOLUNTARY EXPORT RESTRAINTS A unique version of the export quota is called a voluntary export restraint (VER)—a quota that a nation imposes on its own exports, usually at the request of another nation. Countries normally self-impose a voluntary export restraint in response to the threat of an import quota or a total ban on the product by an importing nation. The classic example of the use of a voluntary export restraint is from the 1980s when Japanese carmakers were making significant market-share gains in the United States. The closing of US carmakers’ production facilities in the United States was creating a volatile anti-Japan
- 1144. sentiment among the population and the US Congress. Fearing punitive legislation if Japan did not limit its automobile exports to the United States, the Japanese government and its carmakers self-imposed a voluntary export restraint on cars headed for the United States. Consumers in the country that imposes an export quota benefit from lower-priced products (due to their greater supply) as long as domestic producers do not curtail production. Producers in an importing country benefit because the goods of producers from the exporting country are restrained, which may allow them to increase prices. Export quotas hurt consumers in the importing nation because of reduced selection and perhaps higher prices. Yet export quotas might allow these same consumers to retain their jobs if imports were threatening to put domestic producers out of business. Again, detailed economic studies are needed to determine the winners and losers in any particular export quota case. TARIFF-QUOTAS A hybrid form of trade restriction is called a tariff-quota—a lower tariff rate
- 1145. for a certain quantity of imports and a higher rate for quantities that exceed the quota. Imports entering a nation under a quota limit of, say, 1,000 tons are charged a 10-percent tariff. But voluntary export restraint (VER) Unique version of export quota that a nation imposes on its exports, usually at the request of an import- ing nation. tariff-quota Lower tariff rate for a certain quan- tity of imports and a higher rate for quantities that exceed the quota. A young woman works in a gar- ment factory in Phnom Penh, Cambodia. Across Cambodia and much of the rest of Southeast Asia, small clothing factories have thrived following removal of a worldwide system allowed under the Multi-Fiber Agreement. Under
- 1146. this agreement, wealthy nations guaranteed imports of textiles and garments from poor countries under a quota system. Under what conditions do you think nations should be allowed to impose import quotas? Dennis Drenner/Alamy Stock Photo M06_WILD9220_09_SE_C06.indd 163 10/30/17 8:48 PM http://www.opec.org/ 164 PART 3 • inTERnATionAl TRAdE And inVESTmEnT subsequent imports that do not make it under the quota limit of 1,000 tons are charged a tariff of 80 percent. Figure 6.1 shows how a tariff-quota actually works. Tariff-quotas are used extensively in the trade of agricultural products. Many countries implemented tariff-quotas in 1995 after their use was permitted by the World Trade Organization, the agency that regulates trade among nations.
- 1147. Embargoes A complete ban on trade (imports and exports) in one or more products with a particular country is called an embargo. An embargo may be placed on one or a few goods, or it may completely ban trade in all goods. It is the most restrictive nontariff trade barrier available, and it is typi- cally applied to accomplish political goals. Embargoes can be decreed by individual nations or by supranational organizations such as the United Nations. Because they can be very difficult to enforce, embargoes are used less today than they have been in the past. One example of a total ban on trade with another country is the US embargo on trade with Cuba. After a military coup ousted elected President Aristide of Haiti in the early 1990s, restraints were applied to force the military junta either to reinstate Aristide or to hold new elections. One restraint was an embargo by the Organization of American States. Because of difficulties in enforcing the embargo and after two years of fruitless United Nations diplomacy, the embargo
- 1148. failed. The United Nations then stepped in with a ban on trade in oil and weapons. Despite some smuggling through the Dominican Republic, which shares the island of Hispaniola with Haiti, the embargo was generally effective and Aristide was eventually reinstated. Local Content Requirements Recall from Chapter 4 that local content requirements are laws stipulating that producers in the domestic market must supply a specified amount of a good or service. These requirements can state that a certain portion of the end product must consist of domestically produced goods or that a certain portion of the final cost of a product must come from domestic sources. The purpose of local content requirements is to force companies from other nations to use local resources in their production processes—particularly labor. Similar to other restraints on imports, such requirements help protect domestic producers from the price advantage of com- panies based in other, low-wage countries. Today, many developing countries use local content
- 1149. requirements as a strategy to boost industrialization. Companies often respond to local content requirements by locating production facilities inside the nation that stipulates such restrictions. For example, although many people consider music to be the universal language, not all cultures are equally open to the world’s diverse musical influences. To prevent Anglo-Saxon music from invading French culture, French law requires radio programs to include at least 40-percent French content. Such local content requirements are intended to protect both the French cultural identity and the jobs of French artists against other nations’ pop culture that may wash up on French shores. Administrative Delays Regulatory controls or bureaucratic rules designed to impair the flow of imports into a country are called administrative delays. This nontariff barrier includes a wide range of government embargo Complete ban on trade (imports and exports) in one or more prod-
- 1150. ucts with a particular country. administrative delays Regulatory controls or bureaucratic rules designed to impair the flow of imports into a country. Figure 6.1 How a Tariff-Quota Works Source: World Trade Organization Website (www.wto.org). 80% 10% T a ri ff r a
- 1151. te In-quota Quota limit Out-of-quota Import quantity (Charged 10%) (Charged 80%) 1,000 tons M06_WILD9220_09_SE_C06.indd 164 10/30/17 8:48 PM http://www.wto.org/ CHAPTER 6 • PoliTiCAl EConomy of TRAdE 165 actions, such as requiring international air carriers to land at inconvenient airports, requiring product inspections that damage the product itself, purposely
- 1152. understaffing customs offices to cause unusual time delays, and requiring special licenses that take a long time to obtain. The objec- tive of all such administrative delays for a country is to discriminate against imported products—it is, in a word, protectionism. Currency Controls Restrictions on the convertibility of a currency into other currencies are called currency controls. A company that wishes to import goods generally must pay for those goods in a common, interna- tionally acceptable currency such as the US dollar, European Union euro, or Japanese yen. Gener- ally, it must also obtain the currency from its nation’s domestic banking system. Governments can require companies that desire such a currency to apply for a license to obtain it. Thus, a country’s government can discourage imports by restricting who is allowed to convert the nation’s currency into the internationally acceptable currency. Another way governments apply currency controls to reduce imports is by stipulating an exchange rate that is unfavorable to potential importers.
- 1153. Because the unfavorable exchange rate can force the cost of imported goods to an impractical level, many potential importers simply give up on the idea. Meanwhile, the country will often allow exporters to exchange the home currency for an international currency at favorable rates to encourage exports. currency controls Restrictions on the convertibility of a currency into other currencies. QUiCK STUdy 3 1. Why might a government impose a tariff on a product? 2. Why might a government impose a quota on a product? 3. A stipulation that a portion of a product be sourced domestically is called a what? MyLab Management Watch It Government Intervention a Spotlight on China and Germany Apply what you have learned so far about government intervention in trade. If your instructor has assigned this, go to www.pearson.com/mylab/management to
- 1154. watch a video case to learn how China and Germany intervened in world trade to advance their economies and answer questions. 6.4 Global Trading System The global trading system certainly has seen its ups and downs. World trade volume reached a peak in the late 1800s, only to be devastated when the United States passed the Smoot–Hawley Act in 1930. The act represented a major shift in US trade policy from one of free trade to one of protectionism. The act set off round after round of competitive tariff increases among the major trading nations. Other nations felt that, if the United States was going to restrict its imports, they were not going to give exports from the United States free access to their domestic markets. The Smoot–Hawley Act, and the global trade wars that it helped to usher in, crippled the economies of the industrialized nations and helped spark the Great Depression. Living standards around the world were devastated throughout most of the 1930s. We begin this section by looking at early attempts to develop a global trading system—
- 1155. the General Agreement on Tariffs and Trade—and then examine its successor, the World Trade Organization. General Agreement on Tariffs and Trade (GATT) Attitudes toward free trade changed markedly in the late 1940s. For the previous 50 years, extreme economic competition among nations and national quests to increase their resources for produc- tion helped create two world wars and the worst global economic recession ever. As a result, economists and policy makers proposed that the world band together and agree on a trading system that would help to avoid similar calamities in the future. A system of multilateral agreements was 6.4 Summarize the main features of the global trading system. M06_WILD9220_09_SE_C06.indd 165 10/30/17 8:48 PM http://www.pearson.com/mylab/management
- 1156. 166 PART 3 • inTERnATionAl TRAdE And inVESTmEnT developed that became known as the General Agreement on Tariffs and Trade (GATT)—a treaty designed to promote free trade by reducing both tariff and nontariff barriers to international trade. The GATT was formed in 1947 by 23 nations—12 developed and 11 developing economies—and came into force in January 1948.5 The GATT was highly successful throughout its early years. Between 1947 and 1988, it helped to reduce average tariffs from 40 percent to 5 percent and to multiply the volume of inter- national trade by a factor of 20. But by the middle to late 1980s, rising nationalism worldwide and trade conflicts led to a nearly 50 percent increase in nontariff barriers to trade. Also, services (not covered by the original GATT) had become increasingly important and had grown to account for a much greater share of total world trade. It was clear that a revision of the treaty was necessary, and in 1986 a new round of trade talks began. URUGUAY ROUND OF NEGOTIATIONS The ground rules of
- 1157. the GATT resulted from periodic “rounds” of negotiations among its members. Though relatively short and straightforward in the early years, negotiations later became protracted as issues grew more complex. Table 6.2 shows the eight completed negotiating rounds that occurred under the auspices of the GATT. Note that whereas tariffs were the only topic of the first five rounds of negotiations, other topics were added in subsequent rounds. The Uruguay Round of GATT negotiations, begun in 1986 in Punta del Este, Uruguay (hence its name), was the largest trade negotiation in history. It was the eighth round of GATT talks within a span of 40 years and took more than 7 years to complete. The Uruguay Round made significant progress in reducing trade barriers by revising and updating the 1947 GATT. In addition to devel- oping plans to further reduce barriers to merchandise trade, the negotiations modified the original GATT treaty in several important ways. AGREEMENT ON SERVICES Because of the ever-increasing importance of services to the
- 1158. total volume of world trade, nations wanted to include GATT provisions for trade in services. The General Agreement on Trade in Services (GATS) extended the principle of nondiscrimina- tion to cover international trade in all services, although talks regarding some sectors were more successful than were others. The problem is that, although trade in goods is a straightforward concept—goods are exported from one country and imported to another—defining exactly what a service is can be difficult. Nevertheless, the GATS created during the Uruguay Round identifies four different forms that international trade in services can take: 1. Cross-border supply: Services supplied from one country to another (for example, interna- tional telephone calls). 2. Consumption abroad: Consumers or companies using a service while in another country (for example, tourism). TABLE 6.2 Completed Rounds of GATT year Site
- 1159. number of Countries involved Topics Covered 1947 Geneva, Switzerland 23 Tariffs 1949 Annecy, France 13 Tariffs 1951 Torquay, England 38 Tariffs 1956 Geneva 26 Tariffs 1960–1961 Geneva (Dillon Round) 26 Tariffs 1964–1967 Geneva (Kennedy Round) 62 Tariffs, antidumping measures 1973–1979 Geneva (Tokyo Round) 102 Tariffs, nontariff measures, “framework agreements” 1986–1994 Geneva (Uruguay Round) 123 Tariffs, nontariff measures, rules, services, intellectual property, dispute settlement, investment measures, agriculture, textiles and clothing, natural resources, creation of the World Trade Organization
- 1160. Source: Based on About the WTO, World Trade Organization website (www.wto.org). M06_WILD9220_09_SE_C06.indd 166 10/30/17 8:48 PM http://www.wto.org/ CHAPTER 6 • PoliTiCAl EConomy of TRAdE 167 3. Commercial presence: A company establishing a subsidiary in another country in order to provide a service (for example, banking operations). 4. Presence of natural persons: Individuals traveling to another country in order to supply a service (for example, business consultants). Agreement on Intellectual Property Like services, products consisting entirely or largely of intellectual property are accounting for an increasing portion of international trade. Recall from Chapter 3 that intellectual property refers to property resulting from people’s intellectual talent
- 1161. and abilities. Products classified as intellectual property are supposed to be legally protected by copyrights, patents, and trademarks. Although international piracy continues, the Uruguay Round took an important step toward getting it under control. It created the Agreement on Trade- Related Aspects of Intellectual Property (TRIPS) to help standardize intellectual property rules around the world. The TRIPS Agreement acknowledges that protection of intellectual property rights benefits society because it encourages the development of new technologies and other creations. It supports the articles of both the Paris Convention and the Berne Convention (see Chapter 3) and in certain instances takes a stronger stand on intellectual property protection. Agreement on Agricultural Subsidies Trade in agricultural products was a bone of con- tention for most of the world’s trading partners at one time or another. Some of the more popular barriers that countries use to protect their agricultural sector s include import quotas and subsidies paid directly to farmers. The Uruguay Round addressed the
- 1162. main issues of agricultural tariffs and nontariff barriers in its Agreement on Agriculture. The result is increased exposure of national agricultural sectors to market forces and increased predictability in international agricultural trade. The agreement forces countries to convert all nontariff barriers to tariffs—a process called “tarif- fication.” It then calls on developed and developing nations to cut agricultural tariffs significantly, but it places no requirements on the least-developed economies. World Trade Organization (WTO) Perhaps the greatest achievement of the Uruguay Round was the creation of the World Trade Organization (WTO)—the international organization that regulates trade among nations. The three main goals of the WTO (www.wto.org) are to help the free flow of trade, to help negoti- ate further opening of markets, and to settle trade disputes among its members. One key com- ponent of the WTO that was carried over from the GATT is the principle of nondiscrimination called normal trade relations (formerly called “most favored nation status”)—a requirement that WTO members extend the same favorable terms of trade to all
- 1163. members that they extend to any single member. For example, if Japan were to reduce its import tariff on German automobiles to 5 percent, it must reduce the tariff it levies against automobile imports from all other WTO nations to 5 percent. The WTO replaced the institution of the GATT but absorbed the GATT agreements (such as on services, intellectual property, and agriculture) into its own agreements. Thus, the GATT insti- tution no longer officially exists. The WTO recognizes 164 members and 21 observers. DISPUTE SETTLEMENT IN THE WTO The power of the WTO to settle trade disputes is what really sets it apart from the GATT. Under the GATT, nations could file a complaint against another member and a committee would investigate the matter. If appropriate, the GATT would identify the unfair trade practices, and member countries would pressure the offender to change its ways. In reality, most nations simply ignored GATT rulings, which were usually made only after very long investigative phases that sometimes lasted years.
- 1164. By contrast, the various WTO agreements are essentially contracts between member nations that commit them to maintaining fair and open trade policies. When one WTO member files a complaint against another, the Dispute Settlement Body of the WTO moves into action. Decisions are to be rendered in less than one year—although within nine months if the case is urgent and 15 months if the case is appealed. The WTO dispute settlement system is not only faster and automatic, but its rulings cannot be ignored or blocked by members. Offenders must realign their trade policies according to WTO guidelines or suffer financial penalties and perhaps trade sanc- tions. Because of its ability to penalize offending member nations, the WTO’s dispute settlement system is the spine of the global trading system. normal trade relations (for- merly “most favored nation status”) Requirement that WTO members extend the same favorable terms of trade to all members that they
- 1165. extend to any single member. M06_WILD9220_09_SE_C06.indd 167 10/30/17 8:48 PM http://www.wto.org/ 168 PART 3 • inTERnATionAl TRAdE And inVESTmEnT DUMPING AND THE WTO The WTO also gets involved in settling disputes that involve “dumping” and the granting of subsidies. When a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production, it is said to be dumping. Charges of dumping are made (fairly or otherwise) against companies from almost every nation at one time or another and can occur in any type of industry. For example, Western European plastic producers considered retaliating against Asian competitors whose prices were substantially lower in European markets than at home. More recently, US steel producers and their powerful union charged that steelmakers in Brazil, Japan, and Russia were
- 1166. dumping steel on the US market at low prices. The problem arose as those nations tried to improve their economies through increased exporting of all products, including steel. The WTO cannot punish the country in which the company accused of dumping is based because dumping is an act by a company, not a country. The WTO can respond only to the actions of a country that retaliates against a company that is dumping. The WTO allows a nation to retaliate against dumping if it can show that dumping is actually occurring, can calculate the damage to its own companies, and can show that the damage is significant. The normal way a country retaliates is to charge an antidumping duty—an additional tariff placed on an imported product that a nation believes is being dumped on its market. But such measures must expire within five years of the time they are initiated unless a country can show that circumstances warrant their continuation. A large number of antidumping cases have been brought before the WTO in recent years.
- 1167. SUBSIDIES AND THE WTO Governments often retaliate when the competitiveness of their companies is threatened by a subsidy that another country pays its own domestic producers. Like antidumping measures, nations can retaliate against product(s) that receive an unfair subsidy by charging a countervailing duty—an additional tariff placed on an imported product that a nation believes is receiving an unfair subsidy. Unlike dumping, because payment of a subsidy is an action by a country, the WTO regulates the actions of the government that reacts to the subsidy as well as those of the government that originally paid the subsidy. DOHA ROUND OF NEGOTIATIONS The WTO launched a new round of negotiations in Doha, Qatar, in late 2001. The renewed negotiations were designed to lower trade barriers further and to help poor nations in particular. Agricultural subsidies that rich countries pay to their own farmers are worth $1 billion per day—more than six times the value of their combined aid budgets to poor nations. Because 70 percent of the exports of poor nations are agricultural products and textiles, wealthy nations had intended to open these and other
- 1168. labor-intensive industries further. Poor nations were encouraged to reduce tariffs among themselves and were to receive help from rich nations in integrating themselves into the global trading system. The Doha round was to conclude by the end of 2004 but negotiations are proceeding very slowly. By the middle of 2017 members had made limited progress on a late 2013 deal to improve “trade facilitation” by reducing red tape at borders and setting standards for customs and the move- ment of goods internationally. Although the agreement marked the first significant achievement for the Doha round, no agreement was reached on agricultural trade issues, tariffs, or quotas.6 WTO AND THE ENVIRONMENT Steady gains in global trade and rapid industrialization in many developing and emerging economies have generated environmental concerns among both governments and special interest groups. Of concern to many people are levels of carbon dioxide emissions—the principal greenhouse gas believed to contribute to global warming. Most carbon
- 1169. dioxide emissions are created from the burning of fossil fuels and the manufacture of cement. The WTO has no separate agreement that deals with environmental issues. The WTO explic- itly states that it is not to become a global environmental agency responsible for setting environ- mental standards. It leaves such tasks to national governments and the many intergovernmental organizations that already exist for such purposes. The WTO works alongside existing inter- national agreements on the environment, including the Montreal Protocol for protection of the ozone layer, the Basel Convention on international trade or transport of hazardous waste, and the Convention on International Trade in Endangered Species. Nevertheless, the preamble to the agreement that established the WTO does mention the objectives of environmental protection and sustainable development. The WTO also has an inter- nal committee called the Committee on Trade and Environment. The committee’s responsibility is dumping
- 1170. Exporting a product at a price either lower than the price that the product normally commands in its domestic market or lower than the cost of production. antidumping duty Additional tariff placed on an imported product that a nation believes is being dumped on its market. countervailing duty Additional tariff placed on an imported product that a nation believes is receiving an unfair subsidy. M06_WILD9220_09_SE_C06.indd 168 10/30/17 8:48 PM CHAPTER 6 • PoliTiCAl EConomy of TRAdE 169 to study the relationship between trade and the environment and
- 1171. to recommend possible changes in the WTO trade agreements. In addition, the WTO does take explicit positions on some environmental issues related to trade. Although the WTO supports national efforts at labeling “environmentally friendly” products as such, it states that labeling requirements or policies cannot discriminate against the products of other WTO members. Also, the WTO supports policies of the least developed countries that require full disclosure of potentially hazardous products entering their markets for reasons of public health and environmental damage. MyLab Management Try It Apply what you have learned about the instruments of trade policy. If your instructor has assigned this, go to www.pearson.com/mylab/management to perform a simulation on the complexity of decisions regarding the use of tariffs, subsidies, and quotas. QUiCK STUdy 4 1. The first system of multilateral agreements to promote free
- 1172. trade was called what? 2. What are the main goals of the World Trade Organization (WTO)? 3. Exporting a product at a price that is lower than that normally charged domestically or one that is lower than production costs can expose a firm to charges of what? despite the theoretical benefits of free trade, nations do not simply throw open their doors to trade and force their domes- tic businesses to sink or swim. This chapter explained why govern- ments protect their industries and how they go about it. The WTo tries to strike a balance between national desires for protection and international desires for free trade. Implications of Trade Protection free trade allows firms to move production to locations that maxi- mize efficiency. yet, government interference in the free flow of trade has implications for production efficiency and firm strategy. Subsidies often encourage complacency on the part of
- 1173. companies receiving them because they discourage competition. Subsidies can be thought of as a redistribution of wealth in society whereby international firms not receiving subsidies are at a disadvantage. Unsubsidized firms either must cut production and distribution costs or must differentiate in some way to justify a higher selling price. Import tariffs raise the cost of an imported good and make domestically produced goods more attractive to consumers. But because a tariff can create inefficient domestic producers, dete - riorating competitiveness may offset the benefits of import tariffs. Companies trying to enter markets having high import tariffs often produce within that market. Import quotas help domestic produc- ers maintain market share and prices by restraining competitive forces. domestic producers protected by the quota win because the market is protected. other producers that require the import subjected to a quota lose because they will need to pay more for their intermediate products or locate production outside the market imposing the quota.
- 1174. Local content requirements protect domestic producers from producers based in low-cost countries. A firm trying to sell to a market imposing local content requirements may have no alterna- tive but to produce locally. The objective of administrative delays is to discriminate against imported products, but it can discour- age efficiency. Currency controls can require firms to apply for a license to obtain an internationally accepted currency. The nation thus discourages imports by restricting who is allowed to obtain such a currency to pay for imports. A government may also block imports by stipulating an exchange rate that is unfavorable to potential importers. The unfavorable exchange rate forces the cost of imported goods to an impractical level. The same country then often stipulates an exchange rate that is favorable for exporters. Government subsidies are typically paid for by levying taxes across the economy. Whether subsidies help a nation’s people
- 1175. long term is questionable, and they may actually harm a nation. import tariffs also hurt consumers because they raise the price of imports and protect domestic firms that may raise prices. import quotas hurt consumers because they lessen competition, boost prices, and decrease selection. Protection tends to lessen the long- term gains a people can obtain from free trade. Implications of the Global Trading System development of the global trading system benefits international companies by promoting free trade through the reduction of both tariffs and nontariff barriers to international trade. The GATT treaty was successful in its early years, and its revision significantly improved the climate for trade. Average tariffs on merchandise trade were reduced and subsidies for agricultural products were lowered. firms also benefited from an agreement that extended the principle of nondiscrimination to cover trade in services. The revision of the GATT also clearly defined intellectual property rights—giving
- 1176. pro- tection to copyrights, trademarks and service marks, and patents. BOTTOM LINE FOR BUSINESS (continued) M06_WILD9220_09_SE_C06.indd 169 10/30/17 8:48 PM http://www.pearson.com/mylab/management 170 PART 3 • inTERnATionAl TRAdE And inVESTmEnT MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO6.1 Explain why governments sometimes intervene in trade. • Political reasons for trade intervention include to: (a) protect jobs, (b) preserve national security, (c) respond to other nations’ unfair trade
- 1177. practices, and (d) gain influence over other nations. • Economic reasons include to: (a) protect infant industries from global competition until they are sufficiently competitive, and (b) promote a strategic trade policy in which companies are assisted in taking advantage of economies of scale and being first movers in their industries. • The most common cultural reason for trade intervention is protection of national identity. Unwanted cultural influence in a nation can cause great distress and force a government to block imports that it believes are harmful. LO6.2 Outline the instruments that governments use to promote trade. • A subsidy is financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, and other forms. Subsidies can fend off international competitors, although critics say they
- 1178. amount to corporate welfare. • Export financing includes loans at below-market interest rates, loans that are other- wise unavailable, and loan guarantees that a government will repay a loan if a firm defaults. • A foreign trade zone (FTZ) allows merchandise to pass through a geographic region with lower customs duties (taxes) and/or fewer customs procedures. • Special government agencies organize international trips for trade officials and busi- nesspeople and create offices abroad to promote home country exports. LO6.3 Describe the instruments that governments use to restrict trade. • A tariff is a government tax levied on a product that enters, transits across, or leaves a country. An import tariff can be an ad valorem tariff, a specific
- 1179. tariff, or a compound tariff. • Quotas restrict the amount of a good that can enter or leave a country during a cer- tain period of time. Import quotas protect domestic producers. Export quotas main- tain adequate supplies domestically or raise the global price of a product. • An embargo completely bans trade with a country. Local content requirements stipu- late that a good or service be supplied by domestic producers. Imports can also be discouraged with administrative delays or currency controls (restrictions on currency convertibility). LO6.4 Summarize the main features of the global trading system. • The General Agreement on Tariffs and Trade (GATT) treaty promoted free trade by reducing tariff and nontariff barriers. The Uruguay Round of GATT negotiations
- 1180. (a) covered trade in services, (b) defined intellectual property rights, (c) reduced trade barriers in agriculture, and (d) created the World Trade Organization (WTO). • The three goals of the WTO are to help the free flow of trade, to help negotiate fur- ther opening of markets, and to settle trade disputes among its members. This encourages firms to develop new products and processes because they know their rights to the property will be protected. Creation of the WTo is also good for international firms because the various WTo agreements commit member nations to maintaining fair and open trade policies. Both domestic and international firms based in relatively poor nations should benefit most from future rounds of trade negotiations. firms from poor nations that export agricultural products and textiles will benefit if wealthy nations reduce barriers to imports in these sectors. Companies based in poor countries should also benefit from bet-
- 1181. ter cooperation among poor countries and their further integration into the global trading system. M06_WILD9220_09_SE_C06.indd 170 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 6 • PoliTiCAl EConomy of TRAdE 171 • A key component of the WTO is the principle of nondiscrimination, called normal trade relations, which requires WTO members to treat all members equally. • Dumping is said to occur if a company exports a product at a price either lower than the price it normally charges in its domestic market or lower than the cost of production. administrative delays (p. 164) ad valorem tariff (p. 162) antidumping duty (p. 168)
- 1182. compound tariff (p. 162) countervailing duty (p. 168) currency controls (p. 165) dumping (p. 168) embargo (p. 164) foreign trade zone (FTZ) (p. 160) free trade (p. 154) normal trade relations (p. 167) quota (p. 162) specific tariff (p. 162) subsidy (p. 159) tariff (p. 161) tariff-quota (p. 163) voluntary export restraint (VER) (p. 163) Key Terms TALK ABOUT IT 1 Most countries create a list of “hostile” countries that require exporters to obtain special permission before the export is allowed to proceed. 6-1. Which countries and products would you place on such a
- 1183. list for your nation? Explain. 6-2. On which countries’ lists do you think your nation would appear? Explain. TALK ABOUT IT 2 Two students are discussing environmentalists’ claims that trade harms the environment. One student says, “Sure, there may be pollution effects, but they’re a small price to pay for a higher standard of living.” The other student agrees, saying, “Yeah, those ‘tree- huggers’ are always exaggerating those effects anyway. Who cares if a toad in the Ama- zon goes extinct?” 6-3. What arguments can you offer to counter these students’ opinions? 6-4. What specific actions could firms take to ensure that trade does not harm the environment? Ethical Challenge The National Foreign Trade Council (NFTC),
- 1184. a nonprofit trade and industry group based in Washington, DC, won a court battle against the state of Massachusetts. In a unanimous deci- sion, the US Supreme Court sided with the NFTC and struck down a Massachusetts law that was designed to deny state contracts to any company doing business in Myanmar. The Court ruled that the Massachusetts law intruded on the federal government’s authority and was preempted by federal law regarding Myanmar. In fact, the US Constitution states that “for- eign policy is exclusively reserved for the federal government.” The NFTC said that it shared concern over human rights abuses in Myanmar but believed that a coordinated, multinational effort would be most effective at instilling change in the nation. 6-5. Do you think that companies should be penalized domestically based on where they do business abroad? Explain. 6-6. Do you foresee potential problems when the WTO gets involved in such political matters? 6-7. How might domestic firms react if each state were to punish firms based on its own for-
- 1185. eign policy ideals? M06_WILD9220_09_SE_C06.indd 171 10/30/17 8:48 PM 172 PART 3 • inTERnATionAl TRAdE And inVESTmEnT MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 6-17. Suppose you are the president of a sugar company based in southern Florida. Poor sugar harvests in the Caribbean Islands means your firm is struggling to meet demand and prices are rising. Cuba is having a bumper sugar harvest but you cannot import from Cuba because of the Helms–Burton Act and the US embargo on Cuba. A powerful US senator from Florida serves on a committee in Washington, DC, that is reviewing the embargo. What arguments do you make to your senator to eliminate the embargo?
- 1186. 6-18. Imagine that a majority of people in your country believe international trade harms their wages and jobs, and that your task is to change their minds. How would you go about educating people about the benefits of trade? Teaming Up Imagine that the United States slapped an antidumping duty of 30 percent on aircraft parts imported from China that it believed were being dumped in the US market. Imagine that China then slapped a 35 percent countervailing duty on US auto imports, saying that a recent federal bailout is tantamount to an unfair subsidy for US automakers. 6-8. What political, economic, or cultural motives do you think are behind the US antidump- ing duty against China’s aircraft parts? 6-9. What motives do you think are behind China’s countervailing duty against US autos? 6-10. Should countries experiencing economic difficulties be allowed to erect temporary tariff
- 1187. and nontariff barriers? Explain. Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is researching, integrate your answers to the following questions into your completed MESP report. 6-11. To what extent does the national government intervene in trade? 6-12. What are some of its political, economic, or cultural motives for intervention? 6-13. What instruments does the country use to promote exports? 6-14. What instruments does it use to restrict imports? 6-15. Does the nation maintain a free trade zone within its borders? 6-16. Has the country filed a complaint with the WTO against another nation? M06_WILD9220_09_SE_C06.indd 172 10/30/17 8:48 PM
- 1188. http://www.pearson.com/mylab/management CHAPTER 6 • PoliTiCAl EConomy of TRAdE 173 Thinking Globally 6-19. People love finding a bargain on their favorite items while shopping. But few people would likely want those items made in the home market (which would create jobs) if it meant paying a higher price for them. Do you agree with this sentiment? Explain. 6-20. Do you think that people from different cultures would respond differently to the above question? If so, explain. 6-21. The WTO cannot punish individual companies, but can only direct its actions toward governments of countries. Why do you think the WTO was not given authority to charge individual companies with dumping? Sources: “Turkey Cries Foul to U.S. Antidumping Charges,” Aleya Begum, Global Trade Review (www.gtreview.com) May 24, 2017;
- 1189. “Vietnam’s Shrimp Exports Remain Stable In Q1,” Fish Information & Services (www.fis.com), May 20, 2017; Annie Lowrey and Keith Bradsher, “U.S. Gains in a Spat With China Over Tariffs,” New York Times (www.nytimes.com), May 23, 2014; Jennifer M. Freedman, “WTO Agrees to Probe EU Duties on Chinese Footwear,” Bloomberg Businessweek (www.businessweek.com), May 18, 2010; “Settling Trade Disputes: When Partners Attack,” The Economist (www.economist.com), February 11, 2010. PRACTICING INTERNATIONAL MANAGEMENT CASE Down with Dumping “WTO Agrees to Probe EU Duties on Chinese Foot-wear” . . . “Canada Launches WTO Challenge to US” . . . “Mexico Widens Anti-dumping Measure” . . . “Rough Road Ahead for US–China Trade” are just a sampling of headlines from
- 1190. around the world. International trade theories argue that nations should open their doors to trade. Conventional free-trade wisdom says that, by trad- ing with others, a country can offer its citizens a greater quantity and selection of goods at cheaper prices than it could in the absence of trade. Nevertheless, truly free trade still does not exist because national governments intervene. On average, 234 antidumping cases are initiated each year with the WTO. For example, in 2017, the US Department of Commerce charged Japan with dumping steel rebar in the US at nearly 209 percent below fair market value. That same year the United States imposed an antidumping duty on imports of shrimp from Vietnam. Earlier, the US government slapped around 100 percent tariffs on shrimp imported from China and Vietnam when
- 1191. it believed those nations were dumping crustaceans on US markets. Whereas the United States and the European Union initiated half of all WTO cases in prior years, they now initiate only about a quarter of all cases—more than half are now brought by emerg- ing markets. China launched an inquiry to determine whether synthetic rubber imports (used in tires and footwear) from Japan, South Korea, and Russia are being dumped in the country. Mex- ico expanded the use of its system that requires exporters (from a select list of countries) to notify Mexican officials of the amount and price of a shipment 10 days prior to its expected arrival in Mexico. The 10-day notice gives domestic producers advanced warning of low-priced products so they can report dumping before the products clear customs and enter the marketplace. Argentina, India, Indonesia, South Africa, South Korea, and Thailand are also using this increasingly popular tool of protectionism.
- 1192. Why is dumping so popular? Oddly enough, the WTO allows it. The WTO made major inroads on the use of tariffs, slashing them across almost every product category in recent years. But it has authority to punish only governments, not companies. So, the WTO cannot make judgments against individual companies that are dumping products in other markets. It can only pass rulings against the government of the country that imposes an antidumping duty. But the WTO allows countries to retaliate against nations whose producers are suspected of dumping when it can be shown that: (1) alleged offenders are significantly hurting domestic producers, and (2) the export price is lower than the cost of production or lower than the home market price. Alternatives to bringing antidumping cases before the WTO do exist. The United States relied on a Section 201, or “global safe- guard,” investigation under US trade law to slap tariffs of up to
- 1193. 30 percent on steel imports. The US steel industry had been suffer- ing under an onslaught of steel imports from Brazil, the European Union, Japan, and South Korea. Yet nations brought complaints about the Section 201 action before the WTO. Supporters of antidumping tariffs claim that they prevent dumpers from undercutting the prices charged by producers in a target market and driving them out of business. Another claim in support of antidumping is that it is an excellent way of retaining some protection against the potential dangers of totally free trade. Detractors of antidumping tariffs charge that once such tariffs are imposed they are rarely removed. They also claim that it costs companies and governments a great deal of time and money to file and argue their cases. It is also argued that the fear of being charged with dumping causes international competitors to keep their prices higher in a target market than would otherwise be the case. This would allow domestic companies to charge higher prices and not lose market share—forcing consumers to pay more for
- 1194. their goods. M06_WILD9220_09_SE_C06.indd 173 10/30/17 8:48 PM http://www.gtreview.com/ http://www.gtreview.com http://www.fis.com http://www.businessweek.com http://www.economist.com 174 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 7.1 Describe the worldwide pattern of foreign direct investment (FDI). 7.2 Summarize each theory that attempts to explain why FDI occurs.
- 1195. 7.3 Outline the important management issues in the FDI decision. 7.4 Explain why governments intervene in FDI. 7.5 Describe the policy instruments governments use to promote and restrict FDI. Learning Objectives After studying this chapter, you should be able to: Foreign Direct Investment Chapter Seven A Look Back Chapter 6 explained the political economy of trade in goods and services. We explored the motives and instruments of government
- 1196. intervention. We also examined the global trading system and how it promotes free trade. A Look at This Chapter This chapter examines another significant form of international busi- ness: foreign direct investment (FDI). We explore the patterns of FDI and the theories on which it is based. We also learn why and how govern- ments intervene in FDI activity. A Look Ahead Chapter 8 explores the trend toward greater regional integration of national economies. We explore the benefits of closer economic cooperation and examine prominent regional trading blocs around the world. M07_WILD9220_09_SE_C07.indd 174 10/30/17 8:48 PM
- 1197. http://www.pearson.com/mylab/management CHAPTER 7 • FoREign DiRECT invEsTmEnT 175 Das Auto FRANKFURT, Germany—The Volkswagen Group (www.vw.com) owns 10 of the most prestigious and best-known automotive brands in the world, including Audi, Bent- ley, Bugatti, Lamborghini, Porsche, and Volkswagen. From its 48 production facilities worldwide, the company produces and sells around 8 million cars annually to more than 150 countries. Volkswagen is the top-selling manufacturer in South America and China and has been active in China since 1985. In fact, around 30 percent of VW’s total sales come from China. Shown here a young couple enjoys their classic VW bus. Volkswagen also has ambitious goals for its US expansion. It is adapting designs to domestic tastes,
- 1198. cutting prices, and adding inexpensive production capacity. VW uses a modular strategy in production that lets it use the same key components in 16 different vehicles and seven million units across its brands. The strategy cuts product development and parts costs by 20 percent and reduces production time by 30 percent. And as part of its punishment for falsifying the mileage its diesel cars get, VW will invest $2 billion in the United States by the year 2028 in electric vehicle charging stations and in promoting the use of electric vehicles. Volkswagen, like companies everywhere, received plenty of help in getting where it is today. Until recently, Volkswagen received special protection from its own legislation known as the VW Law. The law gave the German state of Lower Saxony, which owns 20.1 percent of Volkswagen, the power to block any takeover attempt that threatened local jobs and the economy. Volkswagen’s special treatment lies
- 1199. in the close ties between government and management in Germany and its importance to the nation’s economy, where it employs tens of thousands of people. As you read this chapter, consider all the issues that affect the foreign investment decisions of companies.1 Dmytro Sobokar/123RF.com M07_WILD9220_09_SE_C07.indd 175 10/30/17 8:48 PM http://www.vw.com/ 176 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT Many early trade theories were created at a time when most production factors (such as labor, financial capital, capital equipment, and land or natural resources) either could not be moved or could not be moved easily across national borders. But today, all those production factors except land are internationally mobile and flow across borders to wherever they are needed. Financial
- 1200. capital is readily available from international financial institutions to finance corporate expansion, and whole factories can be picked up and moved to another country. Even labor is more mobile than in years past, although many barriers restrict the complete mobility of labor. International flows of capital are at the core of foreign direct investment (FDI)—the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country in order to gain a measure of management control. But there is wide disagreement on what exactly constitutes FDI. Nations set different thresholds at which they classify an international capital flow as FDI. The US Commerce Department sets the threshold at 10 percent of stock ownership in a company abroad, but most other governments set it at anywhere from 10 to 25 percent. By contrast, an investment that does not involve obtaining a degree of control in a company is called a portfolio investment. In this chapter, we examine the importance of FDI to the operations of international compa-
- 1201. nies. We begin by exploring the growth of FDI in recent years and investigating its sources and destinations. We then look at several theories that attempt to explain FDI flows. Next, we turn our attention to several important management issues that arise in most decisions about whether a company should undertake FDI. This chapter closes by discussing the reasons why governments encourage or restrict FDI and the methods they use to accomplish these goals. 7.1 Pattern of Foreign Direct Investment Just as international trade displays a distinct pattern (see Chapter 5), so too does FDI. In this section, we first look at the factors that have propelled growth in FDI over the past decade. We then turn our attention to the destinations and sources of FDI. Ups and Downs of FDI FDI inflows grew around 20 percent per year in the first half of the 1990s and expanded about 40 percent per year in the second half of the decade. As shown in Figure 7.1, global FDI inflows averaged $548 billion annually between 1994 and 1999. FDI inflows peaked at around $1.4 trillion
- 1202. in 2000 and then slowed. FDI inflows benefitted from strong economic performance and high corporate profits in many countries between 2004 and 2007, at which point it reached an all-time record of more than $1.9 trillion. Global recession meant declining FDI inf lows in 2008 and 2009. FDI inf lows climbed higher in 2010 and 2011; then dipped in 2012, 2013, and 2014; and then rose to nearly $1.8 trillion in 2015 as the world emerged from recession. Significant uncertainty surrounds foreign direct investment (FDI) Purchase of physical assets or a significant amount of the ownership (stock) of a company in an-other country to gain a measure of management control. portfolio investment Investment that does not involve obtaining a degree of control in a company.
- 1203. 7.1 Describe the worldwide pattern of foreign direct invest- ment (FDI). Figure 7.1 Yearly Foreign Direct Investment Inflows Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years. 0 500 1000 1500 2000 '94–'99 (ave.)
- 1204. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year $ billions M07_WILD9220_09_SE_C07.indd 176 10/30/17 8:48 PM CHAPTER 7 • FoREign DiRECT invEsTmEnT 177 medium-term FDI f lows, but the long-term trend points toward greater FDI inf lows world- wide. The two main drivers of FDI f lows are globalization and international mergers and acquisitions. GLOBALIZATION Recall from Chapter 6 that barriers to trade were not being reduced years ago, and new, creative barriers seemed to be popping up in many nations. This presented a problem for companies that were trying to export their products to markets around the world. A wave of FDI began as many companies entered promising
- 1205. markets to get around growing trade barriers. Then the Uruguay Round of GATT negotiations created renewed determination to further reduce barriers to trade. As countries lowered their trade barriers, companies realized that they could now produce in the most efficient and productive locations and simply export to their markets worldwide. This set off another wave of FDI f lows into low-cost emerging markets. The forces behind globalization are, therefore, part of the reason for long-term growth in FDI. Increasing globalization is also causing a growing number of international companies from emerging markets to undertake FDI. For example, companies from Taiwan began investing heavily in other nations two decades ago. Acer (www.acer.com), headquartered in Singapore but founded in Taiwan, manufactures personal computers and computer components. Just 20 years after it opened for business, Acer had spawned 10 subsidiaries worldwide and had become an industry player in many emerging markets.
- 1206. MERGERS AND ACQUISITIONS The number of mergers and acquisitions (M&As) and their rising values over time also underlie long-term growth in FDI. In fact, cross-border M&As are the main vehicle through which companies undertake FDI. Companies based in developed nations have historically been the main participants behind cross-border M&As. Yet, firms from emerging markets are accounting for an ever greater share of global M&A activity. The value of cross-border M&As peaked in 2000 at around $1.2 trillion (see Figure 7.2), accounting for about 3.7 percent of the market capitalization of all stock exchanges worldwide. Reasons previously mentioned for the ups and downs of FDI inflows also cause the pattern we see in cross-border M&A deals. After three years of falling FDI, the value of cross-border M&As rose to around $1 trillion by 2007. M&A activity then cooled in 2008 and then fell significantly in 2009 due to the global recession. The value of cross-border M&A activity then fluctuated for several years before climbing back to $721 billion by 2015. Many cross-border M&A deals are driven by the desire of
- 1207. companies to: • Get a foothold in a new geographic market. • Increase a firm’s global competitiveness. • Fill gaps in companies’ product lines in a global industry. • Reduce costs of research and development, production, distribution, and so forth. Entrepreneurs and small businesses also play a role in the expansion of FDI inflows. There is no data on the portion of FDI contributed by small businesses, but we know from anecdotal evi- dence that these companies are engaged in FDI. Unhindered by many of the constraints of a large company, entrepreneurs investing in other markets often demonstrate an inspiring can-do spirit mixed with ingenuity and bravado. Another advantage individuals can possess is an understanding Figure 7.2 Value of Cross-Border Mergers and Acquisitions Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various
- 1208. years. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 400 600 800 1200 200 1000 $ billion M07_WILD9220_09_SE_C07.indd 177 10/30/17 8:48 PM http://www.acer.com/
- 1209. 178 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT of the local language and culture of the market being entered. For a day-in-the-life look at a young entrepreneur who is realizing his dreams in China, see the Culture Matters feature, titled “The Cowboy of Manchuria.” Worldwide Flows of FDI Driving FDI growth are more than 100,000 multinational companies with more than 900,000 affiliates abroad, roughly half of which are in developing countries.2 In 2014, for the first time ever, developing countries attracted greater FDI inflows than did developed countries. In 2014, FDI inflows to developing countries were around 55 percent ($699 billion) of total world FDI inflows ($1.28 trillion). By comparison, developed countries accounted for 41 percent ($522 billion) of total global FDI inflows. The remaining roughly four percent of global FDI went into countries across Southeast Europe in various stages of transition from communism to capitalism. FDI inflows reverted back to their traditional pattern in 2015 whereby developing economies attracted
- 1210. less FDI (44 percent of the world total) than developed nations did (55 percent). Among developed countries, European Union (EU) nations, the United States, and Japan account for the majority of world FDI inflows. Behind the large FDI figure for the EU is consoli- dation among large national competitors and further efforts at EU regional integration. Developing nations had varying experiences with FDI in 2015. Inflows to developing nations in Asia were $541 billion, with China attracting $136 billion of that total. India, the largest recipient on the Asian subcontinent, had inflows of nearly $44 billion. Elsewhere, all of Africa drew in $54 billion of FDI in 2015, or about 2 percent of the world’s total. FDI flows into Latin America and the Caribbean were $168 billion, or nearly 10 percent of the total world FDI. It is important to note that FDI outflows from developing Asian nations is also rising, coinciding with the rise of these nations’ own global competitors. QUiCK sTUDY 1
- 1211. 1. The purchase of physical assets or significant ownership of a company abroad to gain a measure of management control is called a what? 2. What are the main drivers of foreign direct investment flows? 3. Why might a company engage in a cross-border merger or acquisition? Tom Kirkwood turned his dream of introducing his grandfather’s taffy to China into a fast-growing business. Kirkwood’s story— his hassles and hustling—provides some lessons on the purest form of global investing. The basics that small investors in China can follow are as rudimentary as they get. Find a product that’s easy to make, widely popular, and cheap to sell, and then choose the least expensive, investor-friendliest place to make it. Kirkwood, whose family runs the shawnee inn, a ski and golf resort in shawnee-on-Delaware, Pennsylvania, decided to make candy in manchuria—China’s gritty, heavily populated, industrial northeast. Chinese people often give individually wrapped can-
- 1212. dies as a gift, and Kirkwood reckoned that China’s rising, increas- ingly prosperous urbanites would have a lucrative sweet tooth. Kirkwood realized that he could not beat m&ms or Reese’s Pieces at their own game. But he did not want to produce no-name candy to be sold in bulk bins at the grocery store, either. He wanted to find a niche and own it, because a niche in China can be worth an entire market in another country. Kirkwood concluded early on that he wanted to do business in China. in the mid-1980s after prep school, he spent a year in Taiwan and China learning Chinese and working in a shanghai engineering company. The experience gave him a taste for adventure capitalism on the frontier of China’s economic development. Using $400,000 of Kirkwood’s family money, Kirkwood and his friend Peter moustak- erski bought equipment and rented a factory in shenyang, a city of
- 1213. six million people in the heart of manchuria. Roads and rail trans- port were convenient, and wages were low. The local government seemed amenable to a 100 percent foreign-owned factory, and the shenyang shawnee Cowboy Food Company was born. Although it’s a small operation, it now has 89 employees and is growing. Kirkwood is determined to succeed selling his candies with names such as Longhorn Bars. As he boarded a flight to Bei- jing for a meeting with a distributor recently, Kirkwood realized he had a bag full of candy. He offered one to a flight attendant. When lunch is over, he vowed, “Everybody on this plane will know Cowboy Candy.” CULTURE MATTERS The Cowboy of Manchuria M07_WILD9220_09_SE_C07.indd 178 10/30/17 8:48 PM
- 1214. CHAPTER 7 • FoREign DiRECT invEsTmEnT 179 7.2 Theories of Foreign Direct Investment So far, we have examined the flows of FDI, but we have not investigated explanations for why FDI occurs. Let’s now investigate the four main theories that attempt to explain why companies engage in FDI. International Product Life Cycle Although we introduced it in Chapter 5 in the context of international trade, the international product life cycle is also used to explain FDI.3 The international product life cycle theory states that a company begins by exporting its product and then later undertakes FDI as a product moves through its life cycle. In the new product stage, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities. In the final standardized product stage, increased competition creates
- 1215. pressures to reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world. Despite its conceptual appeal, the international product life cycle theory is limited in its power to explain why companies choose FDI over other forms of market entry. A local firm in the target market could pay for (license) the right to use the special assets needed to manufacture a particular product. In this way, a company could avoid the additional risks associated with direct investments in the market. The theory also fails to explain why firms choose FDI over exporting activities. It might be less expensive to serve a market abroad by increasing output at the home country factory rather than by building additional capacity within the target market. The theory explains why the FDI of some firms follows the international product life cycle of their products. But it does not explain why other market entry modes are inferior or less advanta- geous options.
- 1216. Market Imperfections (Internalization) A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry—called market imperfections. Market imperfections theory states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby remove the imperfection. There are two market imperfections that are relevant to this discussion—trade barriers and specialized knowledge. TRADE BARRIERS Tariffs are a common form of market imperfection in international business. For example, the North American Free Trade Agreement stipulates that a sufficient portion of a product’s content must originate within Canada, Mexico, or the United States for the product to avoid tariff charges when it is imported to any of these three
- 1217. markets. That is why a large number of Korean manufacturers invested in production facilities in Tijuana, Mexico, just south of Mex- ico’s border with the state of California. By investing in production facilities in Mexico, Korean companies were able to skirt the North American tariffs that would have been imposed if they were to export goods from Korean factories. The presence of a market imperfection (tariffs) caused those companies to undertake FDI. SPECIALIZED KNOWLEDGE The unique competitive advantage of a company sometimes con- sists of specialized knowledge. This knowledge could be the technical expertise of engineers or the special marketing abilities of managers. When the knowledge is technical expertise, companies can charge a fee to companies in other countries for use of the knowledge in producing the same or a similar product. But when a company’s specialized knowledge is embodied in its employees, the only way to exploit a market opportunity in another nation may be to undertake FDI. The possibility that a company will create a future competitor
- 1218. by charging others a fee for access to its knowledge is another market imperfection that encourages FDI. Rather than trade a short-term gain (the fee charged another company) for a long- term loss (lost competitiveness), 7.2 Summarize each theory that attempts to explain why FDI occurs. international product life cycle Theory stating that a company begins by exporting its product and then later undertakes foreign direct investment as the product moves through its life cycle. market imperfections Theory stating that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to inter- nalize the transaction and thereby
- 1219. remove the imperfection. M07_WILD9220_09_SE_C07.indd 179 10/30/17 8:48 PM 180 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT a company will prefer to undertake investment. For example, as Japan rebuilt its industries fol- lowing the Second World War, many Japanese companies paid Western firms for access to the special technical knowledge embodied in their products. Those Japanese companies became adept at revising and improving many of these technologies and became leaders in their industries, including electronics and automobiles. Eclectic Theory The eclectic theory states that firms undertake FDI when the features of a particular location combine with ownership and internaliza tion advantages to make a location appealing for investment.4 A location advantage is the advantage of locating a particular economic activity in a specific
- 1220. location because of the characteristics (natural or acquired) of that location.5 These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one, such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that when all of these advantages are present, a company will undertake FDI. Market Power Firms often seek the greatest amount of power possible relative to rivals in their industries. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking FDI. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.
- 1221. One way a company can achieve market power (or dominance) is through vertical integration—the extension of company activities into stages of production that provide a firm’s inputs (backward integration) or that absorb its output (forward integration). Sometimes a com- pany can effectively control the world supply of an input needed by its industry if it has the resources or ability to integrate backward into supplying that input. Companies may also be able to achieve a great deal of market power if they can integrate forward to increase control over output. For example, they could perhaps make investments in distribution to leapfrog channels of distribution that are tightly controlled by competitors. eclectic theory Theory stating that firms undertake foreign direct investment when the features of a particular location combine with ownership and inter- nalization advantages to make a location appealing for investment. market power
- 1222. Theory stating that a firm tries to establish a dominant market pres- ence in an industry by undertaking foreign direct investment. vertical integration Extension of company activities into stages of production that pro- vide a firm’s inputs (backward inte- gration) or that absorb its output (forward integration). At one time, Boeing aircraft were made entirely in the United States. Today, Boeing can source its land- ing gear doors from Northern Ire- land, wings from Japan, outboard wing flaps from Italy, wing tip assemblies from Korea, and rud- ders from Australia. The parts are all shipped to Everett, Washington, in the United States for assembly. Shutterbas/123RF.com
- 1223. M07_WILD9220_09_SE_C07.indd 180 10/30/17 8:48 PM CHAPTER 7 • FoREign DiRECT invEsTmEnT 181 7.3 Management Issues and Foreign Direct Investment Decisions about whether to engage in FDI involve several important issues regarding management of the company and its market. Some of these issues are grounded in the inner workings of firms that undertake FDI, such as the control desired over operations abroad or the firm’s cost of produc- tion. Others are related to the market and the industry in which a firm competes, such as the preferences of customers or the actions of rivals. Let’s now examine each of these important issues. Control Many companies investing abroad are greatly concerned with controlling the activities that occur in the local market. Perhaps the company wants to be certain that its product is being marketed in the same way in the local market as it is at home. Or maybe it
- 1224. wants to ensure that the selling price remains the same in both markets. Some companies try to maintain ownership of a large portion of the local operation, say, even up to 100 percent, in the belief that greater ownership gives them greater control. Yet for a variety of reasons, even complete ownership does not guarantee control. For example, the local government might intervene and require a company to hire some local managers rather than bringing them all in from the home office. Companies may need to prove a scarcity of skilled local managerial talent before the government will let them bring managers in from the home country. Governments might also require that all goods produced in the local facility be exported so that they do not compete with products of the country’s domestic firms. PARTNERSHIP REQUIREMENTS Many companies have strict policies regarding how much ownership they take in firms abroad because of the importance of maintaining control. In the past, IBM (www.ibm.com) strictly required that the home office own
- 1225. 100 percent of all international subsidiaries. But companies must sometimes abandon such policies if a country demands shared ownership in return for market access. Some governments saw shared ownership requirements as a way to shield their workers from exploitation and their industries from domination by large international firms. Companies would sometimes sacrifice control in order to pursue a market opportunity, but frequently they did not. Most countries today do not take such a hard-line stance and have opened their doors to invest- ment by multinational companies. Mexico used to make decisions on investment by multinational corporations on a case-by-case basis. IBM was negotiating with the Mexican government for 100 percent ownership of a facility in Guadalajara and got the go-ahead only after the company made numerous concessions in other areas. BENEFITS OF COOPERATION Many nations have grown more cooperative toward international companies in recent years. Governments of developing and emerging markets realize the ben-
- 1226. efits of investment by multinational corporations, including decreased unemployment, increased tax revenues, training to create a more highly skilled workforce, and the transfer of technology. A country known for overly restricting the operations of multinational enterprises can see its inward investment flow dry up. Indeed, the restrictive policies of India’s government hampered FDI inflows for many years. Cooperation also frequently opens important communication channels that help firms to main- tain positive relationships in the host country. Both parties tend to walk a fine line— cooperating most of the time, but holding fast on occasions when the stakes are especially high. A Belgian brewery benefited from its cooperation with a local partner and respect for national pride in Central Europe when it acquired a local brewery in Hungary formerly owned by the government. From the start, the Belgian company wisely insisted that it would move ahead with 7.3 Outline the important
- 1227. management issues in the FDI decision. QUiCK sTUDY 2 1. What imperfections are relevant to the discussion of market imperfections theory? 2. Location, ownership, and internalization advantages combine in which FDI theory? 3. Which FDI theory depicts a firm establishing a dominant market presence in an industry? M07_WILD9220_09_SE_C07.indd 181 10/30/17 8:48 PM http://www.ibm.com/ 182 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT its purchase only if local management would remain in charge. The company also assisted local management with technical, marketing, sales, distribution, and general management training. Purchase-or-Build Decision
- 1228. Another important matter for managers is whether to purchase an existing business or to build a subsidiary abroad from the ground up—called a greenfield investment. An acquisition generally provides the investor with an existing plant, equipment, and personnel. The acquiring firm may also benefit from the goodwill the existing company has built up over the years and, perhaps, the existing firm’s brand recognition. The purchase of an existing business can also allow for alternative methods of financing the purchase, such as an exchange of stock ownership between the companies. Factors that reduce the appeal of purchasing existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location. For insight into several issues managers consider when deciding to build or purchase operations, see the Manager’s Briefcase, titled “Surprises of Investing Abroad.” Mexico’s Cemex, S.A. (www.cemex.com), is a multinational company that made a fortune buying struggling, inefficient plants around the world and turning them around. Chairman Lorenzo Zambrano has long figured that the overriding principle is “Buy
- 1229. big globally, or be bought.” The success of Cemex in using FDI confounded, even rankled, its competitors in developed nations. For example, Cemex shocked global markets when it carried out a $1.8 billion purchase of Spain’s two largest cement companies, Valenciana and Sanson. But adequate facilities in the local market are sometimes unavailable, and a company must go ahead with a greenfield investment. For example, because Poland is a source of skilled and inex- pensive labor, it is an appealing location for automobile manufacturers. But the country had little in the way of advanced automobile-production facilities when General Motors (www.gm.com) considered investing there. So, GM built a facility in Poland’s Silesian region. The factory has the potential to produce 200,000 units annually—some of which are destined for export to profitable markets in Western Europe. However, greenfield investments can have their share of headaches. Obtaining the necessary permits, financing, and hiring local personnel can be a real problem in some markets.
- 1230. Production Costs Many factors contribute to production costs in every national market. Labor regulations can add significantly to the overall cost of production. Companies may be required to provide benefits The decision of whether to build facilities in a market abroad or to purchase existing operations in the local market can be a difficult one. managers can minimize risk by preparing their companies for a number of surprises they might face: • Human Resource Policies Companies cannot always import home country policies without violating local laws or offending local customs. Countries have differing require- ments for plant operations and have their own regulations regarding business operations. • Mandated Benefits These include company-supplied clothing and meals, required profit sharing, guaranteed employment contracts, and generous dismissal policies. These costs can exceed an employee’s wages and are typically not negotiable. • Labor Costs France has a minimum wage of about $12 an
- 1231. hour, whereas mexico has a minimum wage of nearly $5 a day. But mexico’s real minimum wage is nearly double that due to government-mandated benefits and employment practices. such differences are not always obvious. • Labor Unions in some countries, organized labor is found in nearly every industry and at almost every company. Rather than dealing with a single union, managers may need to negotiate with five or six different unions, each of which represents a distinct skill or profession. • Information sometimes there simply is no reliable data on factors such as labor availability, cost of energy, and national inflation rates. These data are generally high quality in developed countries but suspect in emerging and devel- oping ones. • Personal and Political Contacts These contacts can be extremely important in developing and emerging markets and can be the only way to establish operations. But com- plying with locally accepted practices can cause ethical dilemmas for managers. MANAGER’S BRIEFCASE Surprises of Investing Abroad
- 1232. M07_WILD9220_09_SE_C07.indd 182 10/30/17 8:48 PM http://www.cemex.com/ http://www.gm.com/ CHAPTER 7 • FoREign DiRECT invEsTmEnT 183 packages for their employees that are over and above hourly wages. More time than was planned for might be required to train workers adequately in order to bring productivity up to an acceptable standard. Although the cost of land and the tax rate on profits can be lower in the local market (or purposely lowered to attract multinational corporations), the fact that they will remain constant cannot be assumed. Companies from around the world using China as a production base have witnessed rising wages erode their profits as the nation continues to industrialize. Some companies are therefore finding that Vietnam is now their low -cost location of choice. RATIONALIZED PRODUCTION One approach companies use
- 1233. to contain production costs is called rationalized production—a system of production in which each of a product’s components is produced where the cost of producing that component is lowest. All the components are then brought together at one central location for assembly into the final product. Consider the typical stuffed animal made in China whose components are all imported to China (with the exception of the polycore thread with which it’s sewn). The stuffed animal’s eyes are molded in Japan. Its outfit is imported from France. The polyester-fiber stuffing comes from either Germany or the United States, and the pile-fabric fur is produced in Korea. Only final assembly of these compo- nents occurs in China. Although this production model is highly efficient, a potential problem is that a work stoppage in one country can bring the entire production process to a standstill. For example, the production of automobiles is highly rationalized, with parts coming in from a multitude of countries for assembly. When the United Auto Workers (www.uaw.org) union held a strike for weeks against
- 1234. GM (www.gm.com), many of GM’s international assembly plants were threatened. The UAW strategically launched their strike at GM’s plant that supplied brake pads to virtually all of its assembly plants throughout North America. MEXICO’S MAQUILADORA Stretching 2,000 miles from the Pacific Ocean to the Gulf of Mexico lies a 130-mile-wide strip along the US–Mexican border that comprises a special eco- nomic region. The region’s economy encompasses 11 million people and $150 billion in output. The combination of a low-wage economy nestled next to a prosperous giant is now becoming a model for other regions that are split by wage or technology gaps. Some analysts compare the US–Mexican border region with that between Hong Kong and its manufacturing realm, China’s Guangdong province. Officials from cities along the border between Germany and Poland studied the US–Mexican experience to see what lessons could be applied to their unique situation. COST OF RESEARCH AND DEVELOPMENT As technology becomes an increasingly powerful
- 1235. competitive factor, the soaring cost of developing subsequent stages of technology has led multinational corporations to engage in cross-border alliances and acquisitions. For instance, huge multinational pharmaceutical companies are intensely interested in the pioneering biotechnology work done by smaller, entrepreneurial start-ups. Cadus Pharmaceutical Corporation of New York discovered the function of 400 genes related to what are called receptor molecules. Many disorders are associated with the improper functioning of these receptors—making them good targets for drug development. Britain’s SmithKline Beecham (www.gsk.com) then invested around $68 million in Cadus in return for access to its research knowledge. One indicator of technology’s significance in FDI is the amount of research and development (R&D) conducted by company affiliates in other countries. The globalization of innovation and the phenomenon of foreign investment in R&D are not necessarily motivated by demand factors such as the size of local markets. They instead appear to be encouraged by supply factors, including
- 1236. gaining access to high-quality scientific and technical human capital. rationalized production System of production in which each of a product’s components is produced where the cost of pro- ducing that component is lowest. MyLab Management Watch It Bringing Jobs Back to the United States Apply what you have learned so far about foreign direct investment. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case to learn more about why companies decide to make products in a particular country and its effects on people’s livelihoods. M07_WILD9220_09_SE_C07.indd 183 10/30/17 8:48 PM http://www.uaw.org/ http://www.gm.com/
- 1237. http://www.gsk.com/ http://www.pearson.com/mylab/management http://www.pearson.com/mylab/management 184 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT Customer Knowledge The behavior of buyers is frequently an important issue in the decision of whether to undertake FDI. A local presence can help companies gain valuable knowledge about customers that could not be obtained from the home market. For example, when customer preferences for a product differ a great deal from country to country, a local presence might help companies better understand such preferences and tailor their products accordingly. Some countries have quality reputations in certain product categories. German automotive engineering, Italian shoes, French perfume, and Swiss watches impress customers as being of superior quality. Because of these perceptions, it can be profitable for a firm to produce its product in the country with the quality reputation, even if the company
- 1238. is based in another country. For example, a cologne or perfume producer might want to bottle its fragrance in France and give it a French name. This type of image appeal can be strong enough to encourage FDI. Following Clients Firms commonly engage in FDI when the firms they supply have already invested abroad. This practice of “following clients” is common in industries in which producers source component parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply each other’s inputs (see Chapter 5). When Mercedes (www.mercedes.com) opened its first international car plant in Tuscaloosa County, Alabama, automobile-parts suppliers also moved to the area from Germany—bringing with them additional investment in the millions of dollars. With firms working closely together to deliver a product on a global basis, they get to know one another rather well. And the movement toward making
- 1239. business activities more environ- mentally, economically, and socially sustainable means that companies sometimes pressure their suppliers and their clients to “green” their activities. For several examples of how businesses have done this, read this chapter’s Global Sustainability feature, titled “Greening the Supply Chain.” Following Rivals FDI decisions frequently resemble a “follow the leader” scenario in industries that have a limited number of large firms. In other words, many of these firms believe that choosing not to make a move parallel to that of the “first mover” might result in being shut out of a potentially lucrative market. When firms based in industrial countries moved back into South Africa after the end of apartheid, their competitors followed. Of course, each market can sustain only a certain number • The Rainforest Action network (RAn) wanted to get paper and wood products manufacturer Boise Cascade (www.bc.com) to protect endangered forests. instead of approaching Boise Cascade directly, RAn contacted 400 of its customers, including Home Depot. RAn convinced Home
- 1240. Depot (www.homedepot.com) to phase out wood products not certified as originating from well-managed forests. it also convinced FedEx office (www.fedex.com/us/office) to drop Boise Cascade as a supplier. The strategy encouraged Boise Cascade to adopt an environmental policy, part of which involved no longer harvesting Us virgin forests. • When furniture manufacturer Herman miller (www . hermanmiller.com) started creating its environmentally friendly chair the mirra, it asked potential suppliers to pro- vide a list of ingredients that went into the part it would supply. Every material and chemical inside each compo- nent was assigned a color code of green (environmentally friendly), yellow (neutral), or red (like PvC plastic). The goal was to avoid red-coded materials, minimize yellows, and maximize the greens. Herman miller bought components only from companies that (1) supplied its list of ingredients, and (2) had “greener” components than competitors had. • When Apple (www.apple.com) decided to pull its products from the Electronic Product Environmental Assessment Tool (EPEAT) environmental registry, it expected no one would notice. But some major Apple customers, like edu- cational institutions and governments, must make most
- 1241. or all of their technology purchases from products on the EPEAT-certified list, comprising $65 billion worth of goods annually. The backlash from consumers, corporations, and government agencies forced Apple to backtrack. Apple said its products would again be submitted for certification and that its relationship with EPEAT “has become stronger as a result of this experience.” Sources: Jon Fortt, “EPEAT CEO: Apple’s Exit Spurred a Customer Backlash,” CNBC web- site (www.cnbc.com), July 13, 2012; Peter Senge, The Necessary Revolution (New York: Broadway Books, 2010), pp. 107–108; Daniel C. Esty and Andrew S. Winston, Green to Gold (New Haven, CT: Yale University Press, 2006), pp. 84–85, 176–177. GLOBAL SUSTAINABILITY Greening the Supply Chain M07_WILD9220_09_SE_C07.indd 184 10/30/17 8:48 PM http://www.mercedes.com/ http://www.cnbc.com/ http://www.apple.com/ http://www.hermanmiller.com/
- 1242. http://www.hermanmiller.com/ http://www.fedex.com/us/office http://www.homedepot.com/ http://www.bc.com/ CHAPTER 7 • FoREign DiRECT invEsTmEnT 185 of rivals and firms that cannot compete often choose to exit the market. This seems to have been the case for Pepsi (www.pepsi.com), which went back into South Africa in the 1990s but withdrew three years later after being crushed there by Coke (www.cocacola.com). In this section, we have presented several key issues managers consider when investing abroad. We will have more to say on this topic in Chapter 15, when we learn how companies take on this ambitious goal. 7.4 Why Governments Intervene in FDI Nations often intervene in the flow of FDI in order to protect their cultural heritages, domestic companies, and jobs. They can enact laws, create regulations, or
- 1243. construct administrative hurdles that companies from other nations must overcome if they want to invest in the nation. Yet, rising competitive pressure is forcing nations to compete against each other to attract multinational companies. The increased national competition for investment is causing governments to enact regulatory changes that encourage investment. In a general sense, a bias toward protectionism or openness is rooted in a nation’s culture, history, and politics. Values, attitudes, and beliefs form the basis for much of a government’s position regarding FDI. For example, South American nations with strong cultural ties to a European heritage (such as Argentina) are generally enthusiastic about investment received from European nations. South American nations with stronger indigenous influences (such as Ecuador) are generally less enthusiastic. Opinions vary widely on the appropriate amount of FDI a country should encourage. At one extreme are those who favor complete economic self-sufficiency and who oppose any form of FDI.
- 1244. At the other extreme are those who favor no governmental intervention and who favor booming FDI inflows. Between these two extremes lie most countries, which believe a certain amount of FDI is desirable to raise national output and enhance the standard of living for their people. Besides philosophical ideals, countries intervene in FDI for a host of very practical reasons. But to fully appreciate those reasons, we must first understand what is meant by a country’s balance of payments. Balance of Payments A country’s balance of payments is a national accounting system that records all receipts coming into the nation and all payments to entities in other countries. International transactions that result in inflows from other nations add to the balance of payments accounts. International transactions that result in outflows to other nations reduce the balance of payments accounts. Table 7.1 shows the balance of payments accounts for the United States, which has two major components—the current account and the capital account. The balances of the
- 1245. current and capital accounts should be equal. CURRENT ACCOUNT The current account is a national account that records transactions involving the export and import of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country. The merchandise account in Table 7.1 covers tangible goods such as computer software, electronic components, and apparel. An “Export” of merchandise is assigned a positive value in the balance of payments because income is received. An “Import” is assigned a negative value because money is paid to a firm abroad. The services account involves tourism, business consulting, banking, and other services. Suppose a business in the United States receives payment for consulting services provided to a company in another country. The receipt is recorded as an “Export” of services and is assigned a 7.4 Explain why governments intervene in FDI.
- 1246. balance of payments National accounting system that records all receipts coming into the nation and all payments to entities in other countries. current account National account that records transactions involving the export and import of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country. QUiCK sTUDY 3 1. When adequate facilities are not present in a market, a firm may decide to undertake a what? 2. A system in which a product’s components are made where the cost of producing a compo- nent is lowest is called what? 3. What do we call the situation in which a company engages in FDI because the firms it sup-
- 1247. plies have already invested abroad? M07_WILD9220_09_SE_C07.indd 185 10/30/17 8:48 PM http://www.pepsi.com/ http://www.cocacola.com/ 186 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT positive value. An “Import” of services requires money to be sent out of a nation and therefore receives a negative value. The income receipts account is income earned on US assets held abroad. When a US com- pany’s subsidiary abroad remits profits back to the parent in the United States, it is recorded as an “Income receipt” and is assigned a positive value. Finally, the income payments account is money paid to entities in other nations that was earned on assets held in the United States. For example, when a French company’s US subsidiary
- 1248. sends its profits back to the parent company in France, the transaction is recorded as an “Income payment” and is assigned a negative value. A current account surplus occurs when a country exports more goods and services and receives more income from abroad than it imports and pays abroad. Conversely, a current account deficit occurs when a country imports more goods and services and pays more abroad than it exports and receives from abroad. CAPITAL ACCOUNT The capital account is a national account that records transactions involving the purchase and sale of assets. Suppose a US citizen buys shares of stock in a Mexican company on Mexico’s stock market. The transaction is recorded as an “Increase in US assets abroad (capital outflow)” and is assigned a negative value. If a Mexican investor buys real estate in the United States, the transaction increases “Foreign assets in the United States (capital inflow)” and is assigned a positive value. Reasons for Intervention by the Host Country
- 1249. There are a number of reasons why governments intervene in FDI. Let’s look at the two main reasons—to control the balance of payments and to obtain resources and benefits. current account surplus When a country exports more goods and services and receives more income from abroad than it imports and pays abroad. current account deficit When a country imports more goods and services and pays more abroad than it exports and receives from abroad. capital account National account that records transactions involving the purchase and sale of assets. CURREnT ACCoUnT Exports of goods and services and income receipts +
- 1250. Merchandise + Services + Income receipts on US assets abroad + Imports of goods and services and income payments – Merchandise – Services – Income payments on foreign assets in United States – Unilateral transfers – Current account balance +∕– CAPITAL ACCOUNT Increase in US assets abroad (capital outflow) – US official reserve assets – Other US government assets – US private assets – Foreign assets in the United States (capital inflow) + Foreign official assets + Other foreign assets + Capital account balance +∕– TABLE 7.1 US Balance of Payments Accounts M07_WILD9220_09_SE_C07.indd 186 10/30/17 8:48 PM
- 1251. CHAPTER 7 • FoREign DiRECT invEsTmEnT 187 CONTROL BALANCE OF PAYMENTS Many governme nts see intervention as the only way to keep their balance of payments under control. First, because FDI inflows are recorded as addi- tions to the balance of payments, a nation gets a balance-of- payments boost from an initial FDI inflow. Second, countries can impose local content requirements on investors from other nations for the purpose of local production. This gives local companies the chance to become suppliers to the production operation, which can help the nation to reduce imports and improve its balance of payments. Third, exports (if any) generated by the new production operation can have a favorable impact on the host country’s balance of payments. When companies repatriate profits back to their home countries, however, they deplete the foreign exchange reserves of their host countries. These capital outflows decrease the balance of
- 1252. payments of the host country. To shore up its balance of payments, the host nation may prohibit or restrict the nondomestic company from removing profits to its home country. Alternatively, host countries conserve their foreign exchange reserves when international companies reinvest their earnings. Reinvesting in local manufacturing facilities can also improve the competitiveness of local producers and boost a host nation’s exports—thus improving its balance-of-payments position. OBTAIN RESOURCES AND BENEFITS Beyond balance-of- payments reasons, governments might intervene in FDI flows to acquire resources and benefits such as technology, management skills, and employment. ACCESS TO TECHNOLOGY Investment in technology, whether in products or processes, tends to increase the productivity and the competitiveness of a nation. That is why host nations have a strong incentive to encourage the importation of technology. For years, developing countries
- 1253. in Asia were introduced to expertise in industrial processes as multinational corporations set up factories within their borders. But today, some of them are trying to acquire and develop their own technological expertise. When German industrial giant Siemens (www.siemens.com) chose Singapore as the site for an Asia-Pacific microelectronics design center, Singapore gained access to valuable technology. Singapore also accessed valuable semiconductor technology by joining with US-based Texas Instruments (www.ti.com) and others to set up the country’s first semiconductor-production facility. MANAGEMENT SKILLS AND EMPLOYMENT As we saw in Chapter 4, former communist nations lack some of the management skills needed to succeed in the global economy. By encour- aging FDI, these nations can attract talented managers to come in and train locals and thereby improve the international competitiveness of their domestic companies. Furthermore, locals who are trained in modern management techniques may eventually start their own local businesses— further expanding employment opportunities. Yet, detractors
- 1254. argue that although FDI can create jobs it can also destroy jobs if less-competitive local firms are forced out of business. Reasons for Intervention by the Home Country Home nations (those from which international companies launch their investments) may also seek to encourage or discourage outflows of FDI for a variety of reasons. But home nations tend to have fewer concerns because they are often prosperous, industrialized nations. For these countries, an outward investment seldom has a national impact—unlike the impact on developing or emerging nations that receive the FDI. Nevertheless, the following are among the most common reasons for discouraging outward FDI: • Investing in other nations sends resources out of the home country. As a result, fewer resources are used for development and economic growth at home. On the other hand, profits earned on assets abroad that are returned home increase both a home country’s balance of payments and its available resources.
- 1255. • Outgoing FDI may ultimately damage a nation’s balance of payments by taking the place of its exports. This can occur when a company creates a production facility in a market abroad, the output of which replaces exports that used to be sent there from the home coun- try. For example, if a Volkswagen (www.vw.com) plant in the United States fills a demand that US buyers would otherwise satisfy with purchases of German-made automobiles, M07_WILD9220_09_SE_C07.indd 187 10/30/17 8:48 PM http://www.siemens.com/ http://www.ti.com/ http://www.vw.com/ 188 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT Germany’s balance of payments is correspondingly decreased. Still, Germany’s balance of payments would be positively affected when Volkswagen repatriates US profits, which helps negate the investment’s initial negative balance-of-
- 1256. payments effect. Thus, an interna- tional investment might make a positive contribution to the balance-of-payments position of the country in the long term and offset an initial negative impact. • Jobs resulting from outgoing investments may replace jobs at home. This is often the most contentious issue for home countries. The relocation of production to a low-wage nation can have a strong impact on a locale or region. However, the impact is rarely national, and its effects are often muted by other job opportunities in the economy. In addition, there may be an offsetting improvement in home country employment if additional exports are needed to support the activity represented by the outgoing FDI. For example, if Hyundai (www.hyundai-motor.com) of South Korea builds an automobile manufacturing plant in Brazil, Korean employment may increase in order to supply the Brazilian plant with parts. FDI is not always a negative influence on home nations. In fact,
- 1257. countries promote outgoing FDI for the following reasons: • Outward FDI can increase long-term competitiveness. Businesses today frequently compete on a global scale. The most competitive firms tend to be those that conduct business in the most favorable locations anywhere in the world, continuously improve their performance relative to competitors, and derive technological advantages from alliances formed with other companies. Japanese companies have become masterful at benefiting from FDI and cooperative arrangements with companies from other nations. The key to their success is that Japanese companies see every cooperative venture as a learning opportunity. • Nations may encourage FDI in industries identified as “sunset” industries. Sunset industries are those that use outdated and obsolete technologies or those that employ low-wage workers with few skills. These jobs are not greatly appealing to countries
- 1258. having industries that pay skilled workers high wages. By allowing some of these jobs to go abroad and by retraining workers in higher-paying skilled work, they can upgrade their economies toward “sunrise” industries. This represents a trade-off for governments between a short-term loss of jobs and the long- term benefit of developing workers’ skills. Club Med’s resort in Guilin, China, was its first culture-focused resort in Asia for the French resort operator. The resort boasts 116 acres of private grounds and two stylish hotels. China’s liberal economic policies have caused its inward FDI to surge. The invest- ments of multinational corpora- tions bring badly needed jobs to China’s 130 million migrant workers. How might foreign direct investments, such as vacation resorts, impact China’s balance of payments?
- 1259. View Stock/Alamy Stock Photo M07_WILD9220_09_SE_C07.indd 188 10/30/17 8:48 PM http://www.hyundaimotor.com/ CHAPTER 7 • FoREign DiRECT invEsTmEnT 189 7.5 Government Policy Instruments and FDI Over time, both host and home nations have developed a range of methods either to promote or to restrict FDI (see Table 7.2). Governments use these tools for many reasons, including improving balance-of-payments positions, acquiring resources, and, in the case of outward investment, keeping jobs at home. Let’s take a look at these methods. Host Countries: Promotion Host countries offer a variety of incentives to encourage FDI inflows. These take two general forms—financial incentives and infrastructure improvements. FINANCIAL INCENTIVES Host governments of all nations
- 1260. grant companies financial incentives to invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time—extending as far out as five years or more. A country may also offer low-interest loans to investors. The downside of these types of incentives is that they can allow multinational corporations to create bidding wars between locations that are vying for the investment. In such cases, the com- pany typically invests in the most appealing region after the locations endure rounds of escalating incentives. Companies have even been accused of engaging other governments in negotiations to force concessions from locations already selected for investment. The cost to taxpayers of attracting FDI can be several times what the actual jobs themselves pay—especially when nations try to one-up each other to win investment. INFRASTRUCTURE IMPROVEMENTS Because of the problems associated with financial incentives, some governments are taking an alternative route to luring investment. Lasting
- 1261. benefits for communities surrounding the investment location can result from making local infrastructure improvements—better seaports suitable for containerized shipping, improved roads, and advanced telecommunications systems. For instance, Malaysia is carving an enormous Multimedia Super Corridor (MSC) into a region’s forested surroundings. The MSC promises a paperless government, an intelligent city called Cyberjaya, two telesuburbs, a technology park, a multimedia university, and an intellectual property–protection park. The MSC is dedicated to creating the most advanced technologies in telecommunications, medicine, distance learning, and remote manufacturing. 7.5 Describe the policy instru- ments governments use to promote and restrict FDI. FDi Promotion FDi Restriction Host Countries Tax incentives Ownership restrictions Low-interest loans Performance demands
- 1262. Infrastructure improvements Home Countries Insurance Differential tax rates Loans Sanctions Tax breaks Political pressure TABLE 7.2 Instruments of FDI Policy QUiCK sTUDY 4 1. The national accounting system that records all receipts coming into a nation and all payments to entities in other countries is called what? 2. Why might a host country intervene in foreign direct investment? 3. Why might a home country intervene in foreign direct investment? M07_WILD9220_09_SE_C07.indd 189 10/30/17 8:48 PM
- 1263. 190 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT Host Countries: Restriction Host countries also have a variety of methods to restrict incoming FDI. Again, these take two general forms—ownership restrictions and performance demands. OWNERSHIP RESTRICTIONS Governments can impose ownership restrictions that prohibit nondomestic companies from investing in certain industries or from owning certain types of businesses. Such prohibitions typically apply to businesses in cultural industries and companies vital to national security. For example, as some cultures try to protect traditional values, accepting investment by multinational companies can create controversy among conservatives, moderates, and liberals. Also, most nations do not allow FDI in their domestic weapons or national defense firms. Another ownership restriction is a requirement that nondomestic investors hold less than a
- 1264. 50 percent stake in local firms when they undertake FDI. But nations sometimes eliminate such restrictions when a firm can choose another location that has no such restriction in place. When GM was deciding whether to invest in an aging automobile plant in Jakarta, Indonesia, the Indonesian government scrapped its demand of an eventual forced sale to Indonesians because China and Vietnam were also courting GM for the same financial investment. PERFORMANCE DEMANDS More common than ownership requirements are performance demands that influence how international companies operate in the host nation. Although typically viewed as intrusive, most international companies allow for them in the same way they allow for home-country regulations. Performance demands include ensuring that a portion of the product’s content originates locally, stipulating that a portion of the output must be exported, or requiring that certain technologies be transferred to local businesses. Home Countries: Promotion
- 1265. To encourage outbound FDI, home-country governments can do any of the following: • Offer insurance to cover the risks of investments abroad, including, among others, insurance against expropriation of assets and losses from armed conflict, kidnappings, and terrorist attacks. • Grant loans to firms wishing to increase their investments abroad. A home-country govern- ment may also guarantee the loans that a company takes from financial institutions. • Offer tax breaks on profits earned abroad or negotiate special tax treaties. For example, several multinational agreements reduce or eliminate the practice of double taxation— profits earned abroad being taxed both in the home and host countries. • Apply political pressure on other nations to get them to relax their restrictions on inbound investments. Non-Japanese companies often find it very difficult to invest inside Japan. The United States, for one, repeatedly pressures the Japanese
- 1266. government to open its market further to FDI. But because such pressure has achieved little success, many US companies cooperate with local Japanese businesses when entering Japan’s markets. Home Countries: Restriction On the other hand, to limit the effects of outbound FDI on the national economy, home govern- ments may exercise either of the following two options: • Impose differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings; • Impose outright sanctions that prohibit domestic firms from making investments in certain nations. QUiCK sTUDY 5 1. What policy instruments can host countries use to promote FDI? 2. What policy instruments can home countries use to promote FDI?
- 1267. 3. Ownership restrictions and performance demands are policy instruments used by whom to do what? 4. Differential tax rates and sanctions are policy instruments used by whom to do what? M07_WILD9220_09_SE_C07.indd 190 10/30/17 8:48 PM CHAPTER 7 • FoREign DiRECT invEsTmEnT 191 MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO7.1 Describe the worldwide pattern of foreign direct investment (FDI). • In 2014, for the first time, developing countries attracted a greater share of global FDI inflows (about 55 percent) than developed countries attracted (41 percent).
- 1268. • Among developed countries, the EU, the United States, and Japan account for the majority of FDI inflows. • FDI to developing Asian nations was nearly $541 billion in 2015, with China attracting more than $136 billion and India attracting nearly $44 billion. FDI to Latin America and the Caribbean accounted for about 10 percent of the world total. • Globalization and mergers and acquisitions are the two main drivers of global FDI. Companies ranging from massive global corporations to adven- turous entrepreneurs all contribute to FDi flows, and the long- term trend in FDi is upward. Here we briefly discuss the influence of national governments on FDi flows and the flow of FDi in Asia and Europe. National Governments and Foreign Direct Investment
- 1269. The actions of national governments have important implications for business. Companies can either be thwarted in their efforts or be encouraged to invest in a nation, depending on the philosophies of home and host governments. The balance-of- payments positions of both home and host countries are also important because FDi flows affect the economic health of nations. To attract investment, a nation must provide a climate conducive to business operations, including pro-growth economic policies, a stable regulatory environment, and a sound infrastructure, to name just a few. increased competition for investment by multinational cor- porations has caused nations to make regulatory changes more favorable to FDi. moreover, just as nations around the world are creating free trade agreements (covered in Chapter 8), they are also embracing bilateral investment treaties. These bilateral investment treaties are becoming prominent tools used to attract investment. investment provisions within free trade agreements are also receiving greater attention than in the past. These efforts to attract investment have direct implications for the strategies of multinational companies, particularly when it comes to
- 1270. decid- ing where to locate production, logistics, and back-office service activities. Foreign Direct Investment in Europe FDi inflows into the developing (transition) nations of southeast Europe and the Commonwealth of independent states hit an all - time high in 2008. Countries that recently entered the European Union did particularly well. They saw less investment in areas supporting low-wage, unskilled occupations and greater invest- ment in higher value-added activities that take advantage of a well-educated workforce. The main reason for the fast pace at which FDi is occurring in Western Europe is regional economic integration. some of the foreign investment reported by the European Union certainly went to the relatively less-developed markets of the new Central and Eastern European members. But much of the activity occurring among Western European companies is industry consolidation brought on by the opening of markets and the tearing down of barriers to free trade and investment. Change in the economic landscape across Europe is creating a more competitive business
- 1271. climate there. Foreign Direct Investment in Asia China attracts the majority of Asia’s FDi, luring companies with a lower-wage workforce and access to an enormous domestic market. many companies already active in China are upping their investment further, and companies not yet there are developing strategies for how to include China in their future plans. The “off- shoring” of services will likely propel continued FDi in the coming years, for which india is the primary destination. india’s attraction is its well-educated, low-cost, and English-speaking workforce. An aspect of national business environments that has implications for future business activity is the natural environment. By their actions, businesses lay the foundation for people’s attitudes in developing nations toward FDi by multinational corporations. For example, some early cases of FDi in China were characterized by a
- 1272. lack of control over people’s actions due to greater decentralization in China’s politics and increased power in the hands of local Communist Party bosses and bureaucrats. These individuals were often more motivated by their personal financial gain than they were concerned with the wider impact on society. But China’s government is increasing its spending on the environment, and multinational corporations are helping in cleaning up the environment. BOTTOM LINE FOR BUSINESS M07_WILD9220_09_SE_C07.indd 191 10/30/17 8:48 PM http://www.pearson.com/mylab/management 192 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT LO7.2 Summarize each theory that attempts to explain why FDI occurs. • The international product life cycle theory says that a company begins by exporting
- 1273. its product and then later undertakes FDI as the product moves through its life cycle. • Market imperfections theory says that a company undertakes FDI to internal- ize a transaction and remove an imperfection in the marketplace that is causing inefficiencies. • The eclectic theory says that firms undertake FDI when the features of a location combine with ownership and internalization advantages to make for an appealing investment. • The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking FDI. LO7.3 Outline the important management issues in the FDI decision. • Companies investing abroad often wish to control activities in the local market, but even 100 percent ownership may not guarantee control.
- 1274. • Acquisition of an existing business is preferred when it has updated equipment, good relations with workers, and a suitable location. • A company might need to undertake a greenfield investment when adequate facilities are unavailable in the local market. • Firms often engage in FDI when it gives them valuable knowledge of local buyer behavior, or when it locates them close to client firms and rival firms. LO7.4 Explain why governments intervene in FDI. • Host nations receive a balance-of-payments boost from initial FDI and from any exports the FDI generates, but they see a decrease in balance of payments when a company sends profits to the home country. • FDI in technology brings in people with management skills who can train locals and increase a nation’s productivity and competitiveness.
- 1275. • Home countries can restrict a FDI outflow because it lowers the balance of payments, but profits earned on assets abroad and sent home increase the balance of payments. • FDI outflows may replace jobs at home that were based on exports to the host country, and may damage a home nation’s balance of payments if they reduce prior exports. LO7.5 Describe the policy instruments governments use to promote and restrict FDI. • Host countries promote FDI inflows by offering companies tax incentives, extending low interest loans, and making local infrastructure improvements. • Host countries restrict FDI inflows by imposing ownership restrictions, and by creat- ing performance demands that influence how a company operates. • Home countries promote FDI outflows by offering insurance to cover investment
- 1276. risk, granting loans to firms investing abroad, guaranteeing company loans, offering tax breaks on profits earned abroad, negotiating special tax treaties, and applying political pressure on other nations to accept FDI. • Home countries restrict FDI outflows by imposing differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings and by imposing sanctions that prohibit domestic firms from making investments in certain nations. balance of payments (p. 185) capital account (p. 186) current account (p. 185) current account deficit (p. 186) current account surplus (p. 186) eclectic theory (p. 180) foreign direct investment (FDI) (p. 176) international product life cycle (p. 179) market imperfections (p. 179) market power (p. 180)
- 1277. portfolio investment (p. 176) rationalized production (p. 183) vertical integration (p. 180) Key Terms M07_WILD9220_09_SE_C07.indd 192 10/30/17 8:48 PM CHAPTER 7 • FoREign DiRECT invEsTmEnT 193 TALK ABOUT IT 1 You overhear your supervisor tell another manager in the company, “I’m fed up with our nation’s companies sending jobs abroad to lower-wage nations. Don’t they have any national pride?” The other manager responds, “I disagree. It’s every company’s duty to make as much profit as possible for its owners. If that means going abroad to reduce costs, so be it.” 7-1. Do you agree with either of these managers? Explain.
- 1278. 7-2. Which FDI policy instruments might each manager support? Be specific. TALK ABOUT IT 2 The global automaker you work for has decided to invest in building a greenfield automo- bile assembly facility in Costa Rica with a local partner. 7-3. Which FDI theory presented in this chapter might explain your company’s decision? 7-4. In what areas might your company want to exercise control, and in what areas might it cede control to the partner? Be specific. Ethical Challenge You are a US senator deciding whether to vote yes or no on new legislation. The potential new law places restrictions on the practice of outsourcing work to low-wage countries and is designed to protect US workers’ jobs. These days it is increasingly common for companies to promise manufacturing contracts to overseas suppliers in exchange for access to that country’s market. Labor union representatives at home argue that these kinds of deals cost jobs as facto-
- 1279. ries close and parts are made in lower-cost China. They also say that the transfer of technology will breed strong competitors in other nations and thereby threaten even more jobs at home in the future. Yet, others argue that market access will translate to increased sales of products made at home and, therefore, create new jobs at home. 7-5. Do you think companies bear an ethical burden when they contract production to facto- ries abroad and reduce jobs at home? 7-6. As senator, do you vote yes or no on the pending legislation? Explain. 7-7. Depending on how you voted, what policy instruments might you suggest that your gov- ernment introduce? Teaming Up Companies undertake FDI for many reasons and evaluate a host of factors in any FDI deci- sion. Imagine that you work for a car manufacturer and your team is charged with evaluating the viability of a greenfield auto assembly plant in Mexico.
- 1280. 7-8. What management issues should your team consider in making its evaluation? Explain. 7-9. For each FDI theory in this chapter, briefly describe a scenario in which the theory explains why the company invested in Mexico. 7-10. What policy instruments can Mexico use to attract additional FDI inflows? M07_WILD9220_09_SE_C07.indd 193 10/30/17 8:48 PM 194 PART 3 • inTERnATionAL TRADE AnD invEsTmEnT MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 7-17. Sometimes a company has a reputation for quality that is inextricably linked to the home country where it is made. What can a company do to reduce the risk of tarnishing its reputation for quality if it begins making its products abroad?
- 1281. 7-18. Developing nations and emerging markets are increasingly important to the global economy, not only as markets for goods but also as sources of FDI. How is the rise of developing and emerging markets changing the pattern of worldwide FDI flows? Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is researching, integrate your answers to the following questions into your completed MESP report. 7-11. Does the country attract a large amount of FDI? 7-12. Is the country a major source of FDI for other nations? 7-13. Have any of the nation’s large firms merged with, or acquired, a firm in another country? 7-14. Do labor unions have a weak, moderate, or strong presence in the nation? 7-15. Does the nation have healthy balance-of-payments accounts? 7-16. What policy instruments, if any, does the government use
- 1282. to promote or restrict FDI? M07_WILD9220_09_SE_C07.indd 194 10/30/17 8:48 PM http://www.pearson.com/mylab/management CHAPTER 7 • FoREign DiRECT invEsTmEnT 195 PRACTICING INTERNATIONAL MANAGEMENT CASE World Class in the Deep South “Aloof.” “Serious.” “Not youthful.” “Definitely, not fun.” These were the unfortunate epithets applied to Mercedes-Benz by a market research firm that assesses product personalities. Research among dealers in the United States also revealed that consumers felt so intimidated by Mercedes that they wouldn’t sit in the cars at the showroom. To boost sales and broaden the market to a more youthful and value-conscious consumer, Mercedes-Benz US International (www.mbusi.com) came up with a series of inventive, free- spirited
- 1283. ads featuring stampeding rhinos and bobbing aliens. Although the new ads boosted sales, the company needed more than a new mar- keting message to ensure its future growth. What it needed was an all-new Mercedes. Enter the Mercedes M-Class, a sports utility vehicle (SUV). Mercedes placed its M-Class to compete squarely against the Ford Explorer and Jeep Grand Cherokee. Not only was the M-Class Mercedes’ first SUV, it was also the first car that Mercedes had manufactured outside Germany. The rough-hewn town of Vance, Alabama (population 400), in Tuscaloosa County is where people hang out at the local barbe- cue joint. And it is the last place you’d expect to find button- down engineers from Stuttgart, Germany. But this small town appealed to Mercedes for several reasons. Labor costs in the US deep south are 50 percent lower than in Germany. Also, Alabama offered an attractive $250 million in tax refunds and other incentives to win
- 1284. the much-needed Mercedes jobs. Mercedes also wanted to be closer to the crucial US market and to create a plant from the ground up, one that would be a model for its future international operations. When Japanese automakers entered the US market, they repro- duced their automobile-building philosophies, cultures, production practices, and management styles. By contrast, Mercedes started with the proverbial blank sheet of paper at Tuscaloosa. To appeal to US workers, Mercedes knew it had to abandon the rigid hierarchy of its typical production line and create a more egalitarian shop floor. Administrative offices in the gleaming, E-shaped Mercedes plant run through the middle of the manufacturing area, and administra- tors are accessible to team members on the shop floor. Also, the plant’s design lets workers unilaterally stop the assembly line to correct manufacturing problems.
- 1285. So far, the system has been a catalyst to communication among the Tuscaloosa plant’s US workers, German trainers, and a diverse management team that includes executives from Detroit and Japan. Even so, an enormous amount of time and effort was invested in training the US workforce. Explains Sven Schoolman, a 31- year-old trainer from Sindelfingen, “In Germany, we don’t say we build a car. We say we build a Mercedes. We had to teach that.” The inno- vative production system is a combination of German, Japanese, and US automotive best practices within a young corporate culture. The Tuscaloosa plant uses a “just-in-time” manufacturing method that requires only about two hours of inventory on line and about three hours of inventory in the body shop. French com- pany Faurecia opened a brand new facility to make fully assembled automotive seats for Mercedes-Benz’s vehicles made in Tuscaloosa.
- 1286. Mercedes’ experience is so successful that Honda, Toyota, and Hyundai followed it to Alabama, and Volkswagen may soon, as well. Mercedes has expanded its Tuscaloosa operations to nearly triple the size of its original factory. The plant now uses flexible manufacturing technology to accommodate the M-Class, R- Class, and GL-Class. Around 65 percent of each vehicle’s content comes from Canada, Mexico, and the United States, and engines and trans- missions are imported from Germany. Every vehicle built at the Tuscaloosa plant is for an order from one of Mercedes’ 135 markets worldwide. The company is gaining valuable experience in how to set up and operate a plant in another country. “It was once sacrosanct to talk about our cars being ‘Made in Germany,”’ said Jürgen E. Schrempp, then CEO of Mercedes’ parent company. “We have to change that to ‘Made by Mercedes,’ and never mind where they are
- 1287. assembled.” Thinking Globally 7-19. What are the pros and cons of Mercedes’ decision to aban- don the culture and some of its home-country practices? 7-20. What do you think were the chief factors involved in Mercedes’ decision to undertake FDI in the United States rather than build the M-Class in Germany? 7-21. Why do you think Mercedes decided to build the plant from the ground up in Alabama rather than buy an existing plant in, say, Detroit? Explain. Sources: Patrick Rupinski, “Riley Joins Officials to Welcome Auto Plant,” Tuscaloosa News (www.tuscaloosanews.com), April 8, 2010; “Love Me, Love Me Not,” The Economist (www.economist.com), July 10, 2008; Mercedes-Benz US International website (www.mbusi.com), select reports.
- 1288. M07_WILD9220_09_SE_C07.indd 195 10/30/17 8:48 PM http://www.mbusi.com/ http://www.tuscaloosanews.com http://www.economist.com http://www.mbusi.com 196 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 8.1 Outline the levels of economic integration and its debate. 8.2 Describe integration in Europe and its enlargement. 8.3 Describe integration in the Americas and its prospects. 8.4 Summarize integration in Asia and elsewhere.
- 1289. Regional Economic Integration Chapter Eight A Look Back Chapter 7 examined recent patterns of foreign direct investment. We explored the theories that try to explain why foreign direct investment occurs and discussed how governments influence investment flows. A Look at This Chapter This chapter explores the trend toward greater integration of national economies. We first examine the reasons why nations are making significant efforts at regional integration. We then study the most prominent regional trading blocs in place around the world today.
- 1290. A Look Ahead Chapter 9 begins our inquiry into the international financial system. We describe the structure of the international capital market and explain how the foreign exchange market operates. Learning Objectives After studying this chapter, you should be able to M08_WILD9220_09_SE_C08.indd 196 10/30/17 8:49 PM http://www.pearson.com/mylab/management CHAPTER 8 • REgionAl EConomiC inTEgRATion 197 Nestlé’s Global Recipe VEVEY, Switzerland—Nestlé (www.nestle.com) is the largest food company in the
- 1291. world and is active in nearly every country on the planet. It earns just 2 percent of its sales at home in Switzerland, and it operates across cultural borders 24 hours a day. Nestlé has a knack for turning humdrum products like bottled water and pet food into well-known global brands. It also takes regional products to the global market when the opportunity arises. For example, Nestlé launched a cereal bar for diabetics first in Asia under the brand name Nutren Balance and then introduced it to other markets worldwide. Food is integral to every culture’s social fabric. Nestlé must carefully navigate the cultural landscape in other countries in order to remain sensi- tive to local dietary traditions. Nestlé learned from past mistakes and now tries to ensure that mothers in develop- ing nations use purified water to mix its baby milk formulas, for example. As Nestlé expands into emerging markets,
- 1292. it watches for changes in consumer attitudes that result from greater cross- cultural contact caused by regional integration. Nestlé also needs to tread carefully when it comes to global sustainability. Green- peace charged that Nestlé (and others) source palm oil for their products from delicate Indonesian rainforests and peatlands. Nestlé stopped purchasing such palm oil and now ensures that all its palm oil is certified sustainable. The company also recently announced that it will be reducing the sugar content in its snack foods by 40 percent or more in order to make them more nutritious. When Nestlé and Coca-Cola announced a joint venture to develop coffee and tea drinks, they first had to show the European Union (EU) Commission that they would not stifle competition across the region. Firms operating within the EU must also abide by EU environmental protection laws. Nestlé works with governments to minimize
- 1293. packaging waste that results from the use of its products by developing and managing waste-recovery programs. As you read this chapter, consider all the business implications of nations banding together in regional trading blocs.1 Tofino/Alamy Stock Photo M08_WILD9220_09_SE_C08.indd 197 10/30/17 8:49 PM http://www.nestle.com/ 198 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT Regional trade agreements are changing the landscape of the global marketplace. Compa- nies like Nestlé of Switzerland are finding that these agreements lower trade barriers and open new markets for goods and services. Markets otherwise off- limits because tariffs made imported products too expensive can become quite attractive once tariffs are lifted. But trade agreements can be double-edged swords for countries, companies, and consumers. Not only do regional trade
- 1294. agreements allow domestic companies to seek new markets abroad, but they also let competitors from other nations enter the domestic market. Such mobility increases competition in all markets that participate in an agreement. We began Part 3 of this book by discussing the gains resulting from specialization and trade. We now close this part of the book by showing how groups of countries are cooperating to dis- mantle barriers that threaten these potential gains. In this chapter, we focus on regional efforts to encourage freer trade and investment. We begin by defining regional economic integration and describing each of its five levels. We then examine the case for and against regional economic integration. In the remainder of the chapter, we explore several long-established trade agreements and several agreements in the early stages of development. 8.1 Levels of Integration and the Debate The process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital is called regional economic integration
- 1295. (regionalism). A group of nations in a geographic region undergoing economic integration is called a regional trading bloc. Nations have banded together to reap the potential gains of international trade in a variety of ways. Figure 8.1 shows five potential levels (or degrees) of economic and political integration for regional trading blocs. A free trade area is the lowest extent of national integration; political union is the greatest. Each level of integration incorporates the properties of those levels that precede it. Free Trade Area Economic integration whereby countries seek to remove all barriers to trade among themselves but where each country determines its own barriers against nonmembers is called a free trade area. A free trade area is the lowest level of economic integration that is possible between two or more countries. Countries belonging to the free trade area strive to remove all tariffs and nontariff 8.1 Outline the levels of economic integration and its
- 1296. debate. regional economic integration (regionalism) Process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital. free trade area Economic integration whereby countries seek to remove all barri- ers to trade among themselves but where each country determines its own barriers against nonmembers. Figure 8.1 Levels of Regional Integration Free Trade Area Customs Union
- 1297. Common Market Economic Union Political Union MERCOSUR NAFTA EU Andean Com. Greater integration M08_WILD9220_09_SE_C08.indd 198 10/30/17 8:49 PM CHAPTER 8 • REgionAl EConomiC inTEgRATion 199 barriers, such as quotas and subsidies, on international trade in
- 1298. goods and services. However, each country is able to maintain whatever policy it sees fit against nonmember countries. These policies can differ widely from country to country. Countries belonging to a free trade area also typically establish a process by which trade disputes can be resolved. Customs Union Economic integration whereby countries remove all barriers to trade among themselves and set a common trade policy against nonmembers is called a customs union. Thus, the main difference between a free trade area and a customs union is that the members of a customs union agree to treat trade with all nonmember nations in a similar manner. Countries belonging to a customs union might also negotiate as a single entity with other supranational organizations, such as the World Trade Organization (WTO). Common Market Economic integration whereby countries remove all barriers to trade and to the movement of labor and capital among themselves and set a common trade policy against nonmembers is
- 1299. called a common market. Thus, a common market integrates the elements of free trade areas and customs unions and adds the free movement of important factors of production—people and cross-border investment. This level of integration is very difficult to attain because it requires members to cooperate to at least some extent on economic and labor policies. Fur- thermore, the benefits to individual countries can be uneven because skilled labor may move to countries where wages are higher, and investment capital may f low to areas where returns are greater. Economic Union Economic integration whereby countries remove barriers to trade and the movement of labor and capital among members, set a common trade policy against nonmembers, and coordinate their economic policies is called an economic union. An economic union goes beyond the demands of a common market by requiring member nations to harmonize their tax, monetary, and fiscal poli- cies and to create a common currency. Economic unions require that member countries concede
- 1300. a certain amount of their national autonomy (or sovereignty) to the supranational union of which they are a part. Political Union Economic and political integration whereby countries coordinate aspects of their economic and political systems is called a political union. A political union requires member nations to accept a common stance on economic and political matters regarding nonmember nations. However, nations are allowed a degree of freedom in setting certain political and economic policies within their territories. Individually, Canada and the United States provide examples of political unions early in their histories. In both these nations, smaller states and provinces combined to form larger entities. A group of nations currently taking steps in this direction is the European Union— discussed later in this chapter. Table 8.1 identifies the members of every regional trading bloc presented in this chapter. As you work through this chapter, refer back to this table for a quick summary of each bloc’s
- 1301. members. The Case for Regional Integration Few topics in international business are as hotly contested and involve as many groups as the effects of regional trade agreements on people, jobs, companies, cultures, and living standards. On one side of the debate are people who see the positive effects that regional trade agreements cause; on the other side, those who see the negative effects. The goals of nations pursuing economic integration are not only to increase cross-border trade and investment but also to raise living standards for their people. We saw in Chapter 5, for example, how specialization and trade create real gains in terms of greater choice, lower prices, and increased productivity. Regional trade agreements are designed to help nations accomplish these objectives. Regional economic integration sometimes has additional goals, such as protec- tion of intellectual property rights or the environment, or even eventual political union. customs union
- 1302. Economic integration whereby countries remove all barriers to trade among themselves and set a common trade policy against nonmembers. common market Economic integration whereby countries remove all barriers to trade and to the movement of labor and capital among themselves and set a common trade policy against nonmembers. economic union Economic integration whereby countries remove barriers to trade and the movement of labor and capital among members, set a common trade policy against non- members, and coordinate their economic policies. political union Economic and political integration
- 1303. whereby countries coordinate aspects of their economic and political systems. M08_WILD9220_09_SE_C08.indd 199 10/30/17 8:49 PM 200 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT EU European Union Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Greek Cyprus (southern portion), Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom (until it exits) EFTA European Free Trade Association Iceland, Liechtenstein, Norway, and Switzerland NAFTA North American Free Trade Agreement
- 1304. Canada, Mexico, and United States CAFTA-DR Central American Free Trade Agreement Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Dominican Republic, and United States CAN Andean Community Bolivia, Colombia, Ecuador, and Peru MERCOSUR Southern Common Market Argentina, Brazil, Paraguay, Uruguay, and Venezuela (suspended in 2016). Associate members are Bolivia, Chile, Colombia, Ecuador, Peru, and Suriname. CARICOM Caribbean Community and Common Market Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago CACM Central American Common Market
- 1305. Costa Rica, Guatemala, Honduras, Nicaragua, and El Salvador FTAA Free Trade Area of the Americas 34 nations from Central, North, and South America and the Caribbean ASEAN Association of Southeast Asian Nations Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam APEC Asia Pacific Economic Cooperation Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, Thailand, United States, and Vietnam CER Closer Economic Relations Agreement Australia and New Zealand GCC Gulf Cooperation Council
- 1306. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates ECOWAS Economic Community of West African States Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo AU African Union Total of 55 nations on the continent of Africa TABLE 8.1 The World's Main Regional Trading Blocs TRADE CREATION Economic integration removes barriers to trade and/or investment for nations belonging to a trading bloc. The increase in the level of trade between nations that results from regional economic integration is called trade creation. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available. For example, the United
- 1307. States has many popular brands of bottled water, including Coke’s Dasani (www.dasani.com) and Pepsi’s Aquafina (www.pepsi.com). But grocery and convenience stores inside the United States stock a wide variety of lesser-known imported brands of bottled water, such as Stonepoint from Canada. Certainly, the free trade agreement between Canada, Mexico, and the United States (discussed later in this chapter) created export opportunities for this and other Canadian brands. trade creation Increase in the level of trade between nations that results from regional economic integration. M08_WILD9220_09_SE_C08.indd 200 10/30/17 8:49 PM http://www.dasani.com/ http://www.pepsi.com/ CHAPTER 8 • REgionAl EConomiC inTEgRATion 201 Trade creation can also increase aggregate demand in an
- 1308. economy. The wider selection of products that results from trade creation can lower prices. Lower product prices then increase purchasing power, which in turn tend to increase demand for goods and services. GREATER CONSENSUS In Chapter 6, we saw how the WTO works to lower barriers on a global scale. Efforts at regional economic integration differ in that they comprise smaller groups of nations—ranging from several countries to as many as 30 or more. The benefit of trying to eliminate trade barriers in smaller groups of countries is that it can be easier to gain consensus from fewer members as opposed to, say, the 164 countries that comprise the WTO. POLITICAL COOPERATION There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can
- 1309. also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts. EMPLOYMENT OPPORTUNITIES Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage. Regional integration opened doors for young people in Europe. Forward-looking young people have abandoned extreme nationalism and have taken on what can only be described as a “European” attitude that embraces a shared history. Those with language skills and a willingness to pick up and move to another EU country get to explore a new culture’s way of life while earning a living. As companies seek their future leaders in Europe, they will hire people who can think across borders and across cultures. CORPORATE SAVINGS Trade agreements can allow
- 1310. companies to alter their strategies, sometimes radically. For example, nations in the Americas may eventually create a free trade area that runs from the northern tip of Alaska to the southern tip of South America. Com- panies that do business throughout this region could save millions of dollars annually from the removal of import tariffs under an eventual agreement. Multinational corporations could also save money by supplying entire regions from just a few regional factories, rather than having a factory in each nation. Savings can then be passed on to consumers in the form of lower prices. The Case Against Regional Integration Opposite those who argue the case for regional economic integration are those who see the companies who have packed up and moved abroad, leaving unemployed workers in their wake. Let’s now look at the main arguments of those pushing the case against regional economic integration. TRADE DIVERSION The flip side of trade creation is trade
- 1311. diversion—the diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can result in increased trade with a less-efficient producer within the trading bloc and in reduced trade with a more efficient, nonmember producer. So, economic integration can unin- tentionally reward a less efficient producer within the trading bloc. Unless there is other internal competition for the producer’s good or service, buyers will likely pay more after trade diversion because of the inefficient production methods of the producer. A World Bank report caused a stir over the results of the free trade bloc among Latin America’s largest countries, MERCOSUR (discussed later in this chapter). The report suggested that the bloc’s formation only encouraged free trade in the lowest-value products of local origin, while deterring competition for more sophisticated goods manufactured outside the market. Closer analysis showed that, while imports from one member state to another tripled during the
- 1312. period studied, imports from the rest of the world also tripled. Thus, the net effect of the agree- ment was trade creation, not trade diversion, as critics had charged. Also, the Australian Depart- ment of Foreign Affairs and Trade released the results of a study that examined the impact of the trade diversion Diversion of trade away from nations not belonging to a trading bloc and toward member nations. M08_WILD9220_09_SE_C08.indd 201 10/30/17 8:49 PM 202 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT North American Free Trade Agreement (NAFTA) on Australia’s trade with and investment in North America. The study found no evidence of trade diversion following the agreement’s formation.2 SHIFTS IN EMPLOYMENT Perhaps the most controversial
- 1313. aspect of regional economic inte- gration is its effect on people’s jobs. The formation of a trading bloc promotes efficiency by sig- nificantly reducing or eliminating barriers to trade among its members. The surviving producer of a particular good or service, then, is likely to be the bloc’s most efficient producer. Industries requiring mostly unskilled labor, for example, tend to respond to the formation of a trading bloc by shifting production to a low-wage nation within the bloc. Yet, figures on jobs lost or gained as a result of trading bloc formation vary depending on the source. The US government contends that rising US exports to Mexico and Canada create jobs overall. But the AFL-CIO (www.aflcio.org), the federation of US unions, disputes these figures and claims a loss of jobs due to NAFTA. Trade agreements do cause dislocations in labor markets; some jobs are lost while others are gained. It is likely that once trade and investment barriers are removed, countries protecting low-wage domestic industries from competition will see these jobs move to the country where wages are
- 1314. lower. This can be an opportunity for workers who lose their jobs to upgrade their skills and gain more advanced job training. This can help nations increase their competitiveness because a more educated and skilled workforce attracts higher-paying jobs than does a less skilled workforce. LOSS OF NATIONAL SOVEREIGNTY There is also a cultural element of such agreements. Some people argue that they will lose their unique national identity if their nation cooperates too much with others. As we saw in this chapter’s opening company profile, Nestlé tries to be sensitive to cultural differences across markets. But such large global companies are often lightning rods for nationalist forces and those warning of cultural homogenization. Successive levels of integration require that nations surrender more of their national sov- ereignty. The least amount of sovereignty that must be surrendered to the trading bloc occurs in a free trade area. By contrast, a political union requires nations to give up a high degree of sovereignty in foreign policy. This is why a political union is so
- 1315. hard to achieve. Long histories of cooperation or animosity between nations do not become irrelevant when a group of countries forms a union. Because one member nation may have very delicate ties with a nonmember nation with which another member may have very strong ties, the setting of a common foreign policy can be extremely tricky. Economic integration is taking place throughout the world because of the benefits and despite the drawbacks of regional trade agreements. Europe, the Americas, Asia, the Middle East, and Africa are all undergoing integration to varying degrees (see Map 8.1 on pages 204–205). Let’s now begin our coverage of specific efforts toward economic integration by exploring Europe, which has the longest history and highest level of integration to date. QUiCK STUDY 1 1. What is it called when countries in a region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital?
- 1316. 2. What are the names of the lowest and highest levels of regional economic integration? 3. An increase in trade between nations as a result of regional economic integration is called what? 4. Trade shifting away from nations not belonging to a trading bloc and toward member nations is called what? 8.2 Integration in Europe The most sophisticated and advanced example of regional integration that we can point to today is occurring in Europe. European efforts at integration began shortly after the Second World War as a cooperative endeavor among a small group of countries and involved a few select industries. Regional integration now encompasses practically all of Western Europe and all industries. 8.2 Describe integration in Europe and its enlargement.
- 1317. M08_WILD9220_09_SE_C08.indd 202 10/30/17 8:49 PM http://www.aflcio.org/ CHAPTER 8 • REgionAl EConomiC inTEgRATion 203 European Union In the middle of the twentieth century, many would have scoffed at the idea that European nations, which had spent so many years at war with one another, could present a relatively unified whole more than 50 years later. Let’s investigate how Europe came so far in such a relatively brief time. EARLY YEARS A war-torn Europe emerged from the Second World War in 1945 facing two chal- lenges: (1) It needed to rebuild itself and avoid further armed conflict, and (2) it needed to increase its industrial strength to stay competitive with an increasingly powerful United States. Coopera- tion seemed to be the only way of facing these challenges. Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands signed the Treaty of Paris in 1951, creating the European Coal
- 1318. and Steel Community. These nations were determined to remove barriers to trade in coal, iron, steel, and scrap metal in order to coordinate coal and steel production among themselves, thereby controlling the postwar arms industry. The members of the European Coal and Steel Community signed the Treaty of Rome in 1957, creating the European Economic Community. The Treaty of Rome outlined a future com- mon market for these nations. It also aimed to establish common transportation and agricultural policies among members. In 1967, the community’s scope was broadened to include additional industries, notably atomic energy, and it changed its name to the European Community. As the goals of integration continued to expand, so too did the bloc’s membership. Waves of enlargement occurred in 1973, 1981, 1986, 1995, 2004, and 2007. In 1994, the bloc once again changed its name to the European Union (EU). Today, the 28-member EU (www.europa.eu) has a popula- tion of more than 500 million people and a gross domestic product (GDP) of around $16 trillion (see Map 8.2 on page 206). After the United Kingdom
- 1319. completes its planned exit there will be 27 members. In recent years, two important milestones contributed to the continued progress of the EU: the Single European Act and the Maastricht Treaty. Single European Act By the mid-1980s, EU member nations were frustrated by remaining trade barriers and a lack of progress on several important matters, including taxation, law, and regulations. The important objective of harmonizing laws and policies was beginning to appear unachievable. A commission that was formed to analyze the potential for a common market by the end of 1992 put forth several proposals. The goal was to remove remaining barriers, increase harmonization, and thereby enhance the competitiveness of European companies. The proposals became the Single European Act (SEA), which went into effect in 1987. A wave of mergers and acquisitions swept across Europe as companies took advantage of the opportunities that the SEA offered. Large firms combined their
- 1320. special understanding of European needs, capabilities, and cultures with their advantage of economies of scale. Small and medium- sized companies networked with one another to increase their competitiveness. Maastricht Treaty Some members of the EU wanted to take European integration further still. A 1991 summit meeting of EU member nations took place in Maastricht, the Netherlands. The meeting resulted in the Maastricht Treaty, which went into effect in 1993. The Maastricht Treaty had three aims. First, it called for banking in a single, common currency after January 1, 1999, and circulation of coins and paper currency on January 1, 2002. Second, the treaty set up monetary and fiscal targets for countries that wished to take part in monetary union. Third, the treaty called for political union of the member nations—including development of a common foreign and defense policy and common citizenship. Member countries will hold off further political integration until they gauge the success of the final stages of economic and
- 1321. monetary union. Let’s take a closer look at monetary union in Europe. EUROPEAN MONETARY UNION As stated previously, EU leaders were determined to create a single, common currency. European monetary union is the EU plan that established its own central bank and currency in January 1999. The Maastricht Treaty stated the economic criteria with which member nations must comply in order to partake in the single currency, the euro. First, consumer price inflation must be below 3.2 percent and must not exceed that of the three best- performing countries by more than 1.5 percent. Second, the debt of government must be no higher than 60 percent of GDP. An exception is made if the ratio is diminishing and approaching the 60 percent mark. European monetary union European Union plan that estab- lished its own central bank and currency. M08_WILD9220_09_SE_C08.indd 203 10/30/17 8:49 PM
- 1322. http://www.europa.eu/ 204 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT A L A S K A C A N A D A MEXICO CUBA JAMAICA BELIZE DOMINICAN REPUBLIC HAITI PUERTO RICOGUATEMALA COSTA RICA NICARAGUA
- 1323. HONDURAS EL SALVADOR PANAMA COLOMBIA VENEZUELA TRINIDAD & TOBAGO GUYANA SURINAME FRENCH GUIANA ECUADOR B R A Z I L
- 1325. NETHERLANDS LUXEMBOURG SPAIN PORTUGAL MONACO MOROCCO WESTERN SAHARA A L G E R I A MAURITANIA SENEGAL GAMBIA GUINEA-BISSAU GUINEA SIERRA LEONE
- 1326. LIBERIA M A L I BURKINA FASO IVORY COAST G H A N A T O G O B
- 1327. E N IN EQUATORIAL GUINEA ANDORRA U N I T E D S TAT E S O F A M E R I C A C H I L E HAWAII GALAPAGOS
- 1328. ISLANDS A R C T I C O C E A N S O U T H AT L A N T I C O C E A N N O R T H AT L A N T I C O C E A N PA C I F I C O C E A N F R A N C E BELGIUM NETHERLANDS
- 1329. GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA LATVIA BELARUS CZECH REP. SLOVAKIA AUSTRIA SWITZERLAND SLOVENIA HUNGARY
- 1330. CROATIA SERBIA AND MONTENEGRO R O M A N I A BULGARIA MACEDONIA U K R A I N E MOLDOVA T U R K E Y GREECE ALBANIA CYPRUS L I B Y A TUNISIA MALTA ANDORRA
- 1331. MONACO SAN MARINO I TA LY DENMARK S W E D E N ALGERIA LICHTENSTEIN B l a c k S e aBOSNIA- HERZEGOVINA Map 8.1 Most Active Economic Blocs M08_WILD9220_09_SE_C08.indd 204 10/30/17 8:49 PM
- 1332. CHAPTER 8 • REgionAl EConomiC inTEgRATion 205 EU EFTA NAFTA MERCOSUR CARICOM CAN ASEAN APEC CER The most active economic blocs FINLAND
- 1333. DENMARK KINGDOM FRANCE BELGIUM NETHERLANDS LUXEMBOURG GERMANY LITHUANIA RUSSIA POLAND BELARUS U K R A I N E CZECH REP. AUSTRIA
- 1335. A L G E R I A L I B Y A TUNISIA M A L I B E N IN NIGERIA N I G E R C H A D E G Y P T ERITREA E T H I O P I ACENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL
- 1338. ISRAEL JORDAN IRAQ I R A N SAUDI ARABIA QATAR OMAN YEMEN I N D I A AFGHANISTAN PAKISTAN TURKMENISTAN
- 1339. UZBEKISTAN KYRGYZSTAN TAJIKISTAN KAZAKHSTAN SRI LANKA NEPAL BHUTAN BANGLADESH LAOS THAILAND CAMBODIA VIETNAM M A L AY S I A BRUNEI PHILIPPINES
- 1340. TAIWAN I N D O N E S I A PAPUA NEW GUINEA SOLOMON ISLANDS FIJIVANUATU NEW CALEDONIAA U S T R A L I A NEW ZEALAND R U S S I A MONGOLIA NORTH KOREA
- 1341. SOUTH KOREA JAPANC H I N A ANDORRA N O R W A Y S W E D E
- 1343. MYANMAR (BURMA) SINGAPORE A R C T I C O C E A N I N D I A N O C E A N PA C I F I C O C E A N UNITED ARAB EMIRATES CROATIA S U D A N S O U T H S U D A N
- 1344. M08_WILD9220_09_SE_C08.indd 205 10/30/17 8:49 PM 206 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT Map 8.2 Economic Integration In Europe F R A N C E BELGIUM NETHERLANDS GERMANY LUXEMBOURG P O L A N D RUSSIA LITHUANIA
- 1346. MACEDONIA U K R A I N E MOLDOVA GEORGIA R U S S I A T U R K E Y GREECE ALBANIA SYRIA LEBANON CYPRUS TUNISIA MALTA MOROCCO
- 1347. PORTUGAL S P A I N ANDORRA MONACO SAN MARINO ITALY DENMARK SWEDEN ALGERIA ESTONIA NORWAY FINLAND ICELAND
- 1348. IRAQ ARMENIA IRELAND N O R T H AT L A N T I C O C E A N UNITED KINGDOM LICHTENSTEIN B l a c k S e a SERBIA AND MONTENEGRO European Free
- 1349. Trade Association member countries European Union member countries European Union member countries European Union member countries M08_WILD9220_09_SE_C08.indd 206 10/30/17 8:49 PM CHAPTER 8 • REgionAl EConomiC inTEgRATion 207 Third, the general government deficit must be no higher than 3.0 percent of GDP. An excep- tion is made if the deficit is close to 3.0 percent or if the deviation is temporary and unusual. Fourth, interest rates on long-term government securities must not exceed, by more than 2.0 percent, those of the three countries with the lowest inflation rates. Meeting these criteria bet- ter aligned countries’ economies and paved the way for
- 1350. smoother policy making under a single European Central Bank. The 19 EU member nations that adopted the single currency are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Members of the EU were not immune to the recent global financial crisis and reces- sion. The countries that had amassed the largest debts relative to their GDPs included Greece, Ireland, Italy, Portugal, and Spain. In 2012, the EU supported the economies of Greece and Spain with emergency funding when they began to buckle due to a lack of confidence in their banking and finance sectors. The EU later announced that it would act as a lender of last resort for troubled countries and pledged to create a banking union in order to support the financial institutions of the weakest economies. These moves halted the spread of Europe’s financial crisis. The newly pledged banking union may, in fact, serve as a stepping stone to a future fis- cal union in the EU.3
- 1351. Management Implications of the Euro The move to a single currency influences the activi- ties of companies within the EU. First, the euro removes financial obstacles created by the use of multiple currencies. It completely eliminates exchange-rate risk for business deals between member nations using the euro. The euro also reduces transaction costs by eliminating the cost of converting from one currency to another. In fact, the EU leadership estimates the financial gains to Europe could eventually be 0.5 percent of GDP. The efficiency of trade between participating members resembles that of interstate trade in the United States because only a single currency is involved. Second, the euro makes prices between markets more transparent, making it difficult to charge different prices in adjoining markets. As a result, shoppers feel less of a need to travel to other countries to save money on high-ticket items. For example, shortly before monetary union, a Mercedes-Benz S320 (www.mercedes.com) cost $72,614 in Germany but only $66,920 in Italy. A
- 1352. Renault Twingo (www.renault.com) that sold for $13,265 in France cost $11,120 in Spain. Auto- mobile brokers and shopping agencies even sprang up specifically to help European consumers reap such savings. The euro greatly reduced or eliminated this type of situation. ENLARGEMENT OF THE EUROPEAN UNION One of the most historic events across Europe in recent memory was the EU enlargement that added 12 new members in 2007. Croatia was the most recent country to join the EU in 2013. Albania, Montenegro, Serbia, the Former Yugoslav Republic of Macedonia, and Turkey remain candidates for EU membership and are to become members after they meet certain demands laid down by the EU. These so-called Copenhagen Criteria require each country to demonstrate that it: • Has stable institutions, which guarantee democracy, the rule of law, human rights, and respect for and protection of minorities. • Has a functioning market economy, capable of coping with competitive pressures and mar-
- 1353. ket forces within the EU. • Is able to assume the obligations of membership, including adherence to the aims of eco- nomic, monetary, and political union. • Has the ability to adopt the rules and regulations of the community, the rulings of the European Court of Justice, and the treaties. Although it has applied for membership, negotiations for Turkey are expected to be dif- ficult. One reason for Turkey’s lack of support in the EU is charges (fair or not) of human rights abuses with regard to its Kurdish minority. Another reason is intense opposition by Greece, Turkey’s longtime foe. Turkey does have a customs union with the EU, however, and trade between them is growing. Despite disappointment among some EU hopefuls and despite intermittent setbacks in the enlargement process, integration is progressing. To read about how culture affects business activities in one EU country, see the Culture Matters feature, titled “Czech List.”
- 1354. M08_WILD9220_09_SE_C08.indd 207 10/30/17 8:49 PM http://www.mercedes.com/ http://www.renault.com/ 208 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT STRUCTURE OF THE EU Five EU institutions play particularly important roles in monitoring and enforcing economic and political integration. Other EU institutions that fulfill secondary and support roles are not discussed here. European Parliament Every five years each member nation votes into office its representa- tives to the European Parliament. As such, they are expected to voice their constituency’s political views on EU matters. The European Parliament fulfills its role of adopting EU law by debating and amending legislation proposed by the European Commission. It exercises political supervi- sion over all EU institutions —giving it the power to supervise commissioner appointments and
- 1355. to censure the commission. It also has veto power over some laws (including the annual budget of the EU). There is a call for increased democratization within the EU, and some believe this could be achieved by strengthening the powers of the Parliament. The Parliament conducts its activities in Belgium (in the city of Brussels), France (in the city of Strasbourg), and Luxembourg. Council of the EU The council is the legislative body of the EU. When it meets, it brings together representatives of member states at the ministerial level. The configuration of the council changes depending on which topic is under discussion. For example, when the topic is agriculture, the council is composed of the ministers of agriculture from each member nation. No proposed legislation becomes EU law unless the council votes it into law. Although passage into law for sensitive issues such as immigration and taxation still requires a unanimous vote, some legislation today requires only a simple majority to win approval. The council also concludes, on behalf of the EU, international agreements with other nations or international organizations. The council is
- 1356. headquartered in Brussels, Belgium. European Commission The commission is the executive body of the EU. It is comprised of one commissioner from each member country. Member nations appoint the president and commissioners after being approved by the European Parliament. The commission has the right to draft legislation, is responsible for managing and implementing policy, and monitors member nations’ implementa- tion of, and compliance with, EU law. Each commissioner is assigned a specific policy area, such as competitive policy or agricultural policy. Although commissioners are appointed by their national governments, they are expected to behave in the best interest of the EU as a whole, not in the interest of their own country. The European Commission is headquartered in Brussels, Belgium. Court of Justice The Court of Justice is the court of appeals of the EU and is composed of one judge from each member nation and a smaller number of advocates general who hold renewable six-year terms. One type of case that the Court of Justice hears is one in which a member nation
- 1357. is accused of not meeting its treaty obligations. Another type is one in which the commission or council is charged with failing to live up to its responsibilities under the terms of a treaty. Like the commissioners, justices are required to act in the interest of the EU as a whole, not in the interest of their own countries. The Court of Justice is located in Luxembourg. The countries of Central and Eastern Europe that belong to the EU represent a land of opportunity. But like doing business anywhere, understanding local culture can be a big advantage. Successful businesspeople in the Czech Republic offer the following advice: • Formalities. Czech society is rather formal, and it is best to tend toward the more formal unless you know your col- league well. This includes using titles like “Doctor” and “mister.” it’s rarely appropriate to use first names unless you’re close friends. • Business Relationships. making money is obviously impor- tant and is the ultimate goal for any business. Still, building
- 1358. personal relationships, establishing good references, and doing favors for others can smooth the way for newcomers. • Czech Partners. Being communist for 40 years before it became a capitalist democracy left its mark on the Czech people and their culture. Finding a local partner who can handle the inevitable cultural difficulties that arise is crucial. • Local Professionals. it is a good idea to hire a Czech accoun- tant or someone familiar with Czech laws, taxes, and red tape. An attorney who is bilingual can also interpret differ - ences between Czech and US laws. • The Jednatel. Companies need a “responsible person” (or jednatel in Czech) who is in charge of all aspects of the business. Some Czechs still feel more comfortable working with this jednatel rather than with foreign and unfamiliar company reps. CULTURE MATTERS Czech List M08_WILD9220_09_SE_C08.indd 208 10/30/17 8:49 PM
- 1359. CHAPTER 8 • REgionAl EConomiC inTEgRATion 209 Court of Auditors The Court of Auditors is made up of one individual per each member nation appointed for renewable six-year terms. The court is assigned the duty of auditing the EU accounts and implementing its budget. It also aims to improve financial management in the EU and to report to member nations’ citizens on the use of public funds. As such, it issues annual reports and statements on the implementation of the EU budget. The court employs a large number of subordinate auditors and staff to assist it in carrying out its functions. The Court of Auditors is based in Luxembourg. European Free Trade Association (EFTA) Certain nations in Europe were reluctant to join in the ambitious goals of the EU, fearing destruc- tive rivalries and a loss of national sovereignty. Some of these nations did not want to be part of a common market but instead wanted the benefits of a free trade area. In 1960, several countries banded together and formed the European Free Trade
- 1360. Association (EFTA) to focus on trade in industrial, not consumer, goods. Because some of the original members joined the EU and some new members joined EFTA (www.efta.int), today the group consists of only Iceland, Liechten- stein, Norway, and Switzerland (see Map 8.2). The population of EFTA is around 13.5 million, and it has a combined GDP of around $800 billion. Despite its relatively small size, members remain committed to free trade principles and raising standards of living for their people. The EFTA and the EU created the European Economic Area (EEA) to cooperate on matters such as the free movement of goods, persons, services, and capital among member nations. The two groups also cooperate in other areas, including the envi- ronment, social policy, and education. QUiCK STUDY 2 1. What is the name of the official single currency of the European Union? 2. A country may receive membership in the European Union once it meets what are called
- 1361. the what? 3. Why did nations belonging to the European Free Trade Association not want to join the European Union? 8.3 Integration in the Americas Europe’s success at economic integration caused other nations to consider the benefits of forming their own regional trading blocs. Latin American countries began forming regional trading arrangements in the early 1960s, but they made substantial progress only in the 1980s and 1990s. North America was about three decades behind Europe in taking major steps toward economic integration. Let’s now explore the major efforts toward economic integration in North, South, and Central America, beginning with North America. North American Free Trade Agreement There has always been a good deal of trade between Canada and the United States. Canada and the United States had in the past established trade agreements in several industrial sectors of their
- 1362. economies, including automotive products. In January 1989, the US–Canada Free Trade Agree- ment went into effect. The goal was to eliminate all tariffs on bilateral trade between Canada and the United States by 1998. 8.3 Describe integration in the Americas and its prospects. MyLab Management Watch It Regional Economic Integration Outlook for the European Union Apply what you have learned so far about regional economic integration. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case to learn more about the the European Union and answer questions. M08_WILD9220_09_SE_C08.indd 209 10/30/17 8:49 PM http://www.efta.int/ http://www.pearson.com/mylab/management 210 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT
- 1363. Accelerating integration in Europe caused new urgency in the task of creating a North American trading bloc that included Mexico. Mexico joined what is now the World Trade Organization in 1987 and began privatizing state-owned enterprises in 1988. Talks among Canada, Mexico, and the United States in 1991 eventually resulted in the formation of the North American Free Trade Agreement (NAFTA). NAFTA (www.nafta-sec- alena.org) became effective in January 1994 and superseded the US–Canada Free Trade Agreement. Today NAFTA comprises a market with 480 million consumers and a GDP of around $21 trillion (see Map 8.1). As a free trade agreement, NAFTA has eliminated all tariffs and nontariff trade barriers on goods originating within North America. The agreement also calls for liberalized rules regarding government procurement practices, the granting of subsidies, and the imposition of countervail- ing duties (see Chapter 6). Other provisions deal with issues such as trade in services, intellectual property rights, and standards of health, safety, and the
- 1364. environment. LOCAL CONTENT REQUIREMENTS AND RULES OF ORIGIN While NAFTA encourages free trade among Canada, Mexico, and the United States, manufacturers and distributors must abide by local content requirements and rules of origin. Although producers and distributors rarely know the precise origin of every part or component in a piece of industrial equipment, they are responsible for determining whether a product has sufficient North American content to qualify for tariff-free status. The producer or distributor must also provide a NAFTA “certificate of origin” to an importer to claim an exemption from tariffs. Four criteria determine whether a good meets NAFTA rules of origin: • Goods wholly produced or obtained in the NAFTA region • Goods containing nonoriginating inputs but meeting Annex 401 origin rules (which covers regional input) • Goods produced in the NAFTA region wholly from originating materials • Unassembled goods and goods classified in the same
- 1365. harmonized system category as their parts that do not meet Annex 401 rules but that have sufficient North American regional value content EFFECTS OF NAFTA Since NAFTA came into effect, trade among the three participating nations has increased markedly, with the greatest gains occurring between Mexico and the United States. Today, the United States exports more to Mexico than it does to Britain, France, Germany, and Italy combined. In fact, Mexico is the third largest source of US imports (behind China and Canada) and is the second largest market for US exports (behind Canada). Overall, NAFTA has helped trade among the three countries to grow from $297 billion in 1993 to around $1.6 trillion. Since the start of NAFTA, Mexico’s exports to the United States have jumped to around $280 billion, and US exports to Mexico have grown to more than $226 billion.4 Over the same period, Canada’s exports to the United States more than doubled to nearly $332
- 1366. billion, and US exports to Canada grew to $300 billion. As these numbers suggest, the United States has developed a trade deficit with Canada and Mexico. Canada and Mexico traded very little with each other before NAFTA. But within a few years, Canada’s exports to Mexico grew to $3.9 billion and Mexico’s exports to Canada grew from $1.5 billion to $5.2 billion.5 The agreement’s effect on employment and wages is not as easy to determine. The US Trade Representative Office claims that exports to Mexico and Canada support 2.9 million US jobs (900,000 more than in 1993), which pay 13 to 18 percent more than national averages for pro- duction workers.6 But the AFL-CIO group of unions disputes this claim; it argues that, since its formation, NAFTA has cost the United States more than one million jobs and job opportunities.7 In addition to claims of job losses, opponents claim that NAFTA has damaged the envi- ronment, particularly along the United States–Mexico border. Although the agreement included provisions for environmental protection, Mexico is making
- 1367. some headway in dealing with the envi- ronmental impact of greater economic activity. Mexico’s Instituto Nacional de Ecologia (www.ine .gob.mx) has developed an industrial waste–management program, including an incentive system to encourage waste reduction and recycling. The US and Mexican federal governments have invested several billion dollars in environmental protection efforts since the creation of NAFTA.8 EXPANSION OF NAFTA Continued ambivalence among union leaders and environmental watchdogs regarding the long-term effects of NAFTA are partly responsible for delays in the possible expansion of NAFTA. The pace at which it expands will depend to a large extent on whether the US Congress grants successive US presidents trade- promotion (“fast track”) authority. M08_WILD9220_09_SE_C08.indd 210 10/30/17 8:49 PM http://www.ine.gob.mx/ http://www.ine.gob.mx/ http://www.naftasecalena.org/
- 1368. CHAPTER 8 • REgionAl EConomiC inTEgRATion 211 Trade-promotion authority allows a US administration to engage in all necessary talks surrounding a trade deal without the official involvement of Congress. After details of the deal are decided, Congress then simply votes yes or no on the deal and cannot revise the treaty’s provisions. If the pace of expansion accelerates for NAFTA, it i s possible that the North American econo- mies will one day adopt a single currency. As trade among Canada, Mexico, and the United States strengthens, a single currency (likely the US dollar) would benefit companies in these countries with reduced exposure to changes in exchange rates. Although this would be difficult for Canada and Mexico to accept politically, in the long run we could see one currency for all of North America. Central American Free Trade Agreement (CAFTA-DR) The potential benefits from freer trade induced another trading bloc between the United States and six far smaller economies. The Central American Free
- 1369. Trade Agreement (CAFTA-DR) was established in 2006 between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and, later, the Dominican Republic. Prior to its creation, CAFTA-DR nations had already traded a great deal. The Central American nations and the Dominican Republic are already the second-largest US export market in Latin America behind Mexico. The CAFTA-DR nations represent a US export market larger than India, Indonesia, and Russia combined. Likewise, nearly 80 percent of exports from the Central American nations and the Dominican Republic already enter the United States tariff free. And Central American nations have already cut average tariffs from 45 percent in 1985 to around 7 percent today. The combined value of goods traded between the United States and the six other CAFTA-DR countries is around $50 billion.9 The agreement benefits the United States in several ways. CAFTA-DR aims to reduce tariff and nontariff barriers against US exports to the region. It also ensures that US companies are not disad-
- 1370. vantaged by Central American nations’ trade agreements with Mexico, Canada, and other countries. The agreement also requires the Central American nations and the Dominican Republic to reform their legal and business environments to encourage competition and investment, protect intellectual property rights, and promote transparency and the rule of law. CAFTA-DR is also designed to sup- port US national security interests by advancing regional integration, peace, and stability. Andean Community (CAN) Attempts at integration among Latin American countries had a rocky beginning. The first try, the Latin American Free Trade Association (LAFTA), was formed in 1961. The agreement first called for the creation of a free trade area by 1971 but then extended that date to 1980. Yet because of a Coffee is a main crop for small farmers across Central America. Like other free trade agreements, CAFTA-DR has supporters as well as detractors. Supporters say the agreement will encourage trade
- 1371. efficiency and promote invest- ment that will bring good-paying jobs to the region. Others fear that the agreement will benefit large U.S. companies and badly dam- age small businesses and farmers across Central America. Darrin Henry/123RF.com M08_WILD9220_09_SE_C08.indd 211 10/30/17 8:49 PM 212 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT crippling debt crisis in South America and a reluctance of member nations to do away with pro- tectionism, the agreement was doomed to an early demise. Disappointment with LAFTA led to the creation of two other regional trading blocs—the Andean Community and the Latin American Integration Association. Formed in 1969, the Andean Community (in Spanish Comunidad
- 1372. Andina de Naciones, or CAN) includes four South American countries located in the Andes mountain range—Bolivia, Colombia, Ecuador, and Peru (see Map 8.1). Today, the Andean Community (www. comunidadandina.org) comprises a market of around 100 million consumers and a combined GDP of about $600 bil- lion. The main objectives of the group include tariff reduction for trade among member nations, a common external tariff, and common policies in both transportation and certain industries. The Andean Community had the ambitious goal of establishing a common market by 1995, but delays mean that it remains a somewhat incomplete customs union. Several factors hamper progress. Political ideology among member nations is somewhat hos- tile to the concept of free markets and favors a good deal of government involvement in business affairs. Also, inherent distrust among members makes lower tariffs and more open trade hard to achieve. The common market will be difficult to implement within the framework of the Andean Community. One reason is that each country has been given significant exceptions in the tariff
- 1373. structure that they have in place for trade with nonmember nations. Another reason is that coun- tries continue to sign agreements with just one or two countries outside the Andean Community framework. Independent actions impair progress internally and hurt the credibility of the Andean Community with the rest of the world. Southern Common Market (MERCOSUR) The Southern Common Market (in Spanish El Mercado Comun del Sur, or MERCOSUR) was established in 1988 between Argentina and Brazil but expanded to include Paraguay and Uruguay in 1991 and Venezuela in 2006. Venezuela’s membership was later suspended in 2016. Associate members of MERCOSUR (www.mercosur.int) include Bolivia, Chile, Colombia, Ecuador, Peru, and Suriname (see Map 8.1). Mexico has been granted observer status in the bloc. Today, MERCOSUR acts as a customs union and boasts a market of more than 290 million consumers (nearly half of Latin America’s total population) and a GDP of around $4 trillion. Its first years of existence were very successful, with trade among
- 1374. members growing nearly four- fold. MERCOSUR is progressing on trade and investment liberalization and is emerging as the most powerful trading bloc in all of Latin America. Latin America’s large consumer base and its potential as a low-cost production platform for worldwide export appeal to both the European Union and the United States. Central America and the Caribbean Attempts at economic integration in Central American countries and throughout the Caribbean basin have been much more modest than efforts elsewhere in the Americas. Nevertheless, let’s look at two efforts at integration in these two regions— CARICOM and CACM. CARIBBEAN COMMUNITY AND COMMON MARKET (CARICOM) The Caribbean Commu- nity and Common Market (CARICOM) trading bloc was formed in 1973. There are 15 full mem- bers, 5 associate members, and 8 observers active in CARICOM (www.caricom.org). Although the Bahamas is a member of the community, it does not belong to the common market. As a whole,
- 1375. CARICOM has a combined GDP of nearly $30 billion and a market of almost 16 million people. A key CARICOM agreement calls for the establishment of a Single Market, which would permit the free movement of factors of production including goods, services, capital, and labor. The main difficulty CARICOM will continue to face is that most members trade more with non- members than they do with one another simply because members do not have the imports each other needs. CENTRAL AMERICAN COMMON MARKET (CACM) The Central American Common Market (CACM) was formed in 1961 to create a common market. Today, its members are Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Together, the members of CACM comprise a market of 30 million consumers and have a combined GDP of about $200 billion. The common market was never realized, however, because of a long war between El Salvador and Honduras and guerrilla conflicts in several countries. Yet, renewed peace is creating more business confidence
- 1376. and optimism, which is driving double-digit growth in trade between members. M08_WILD9220_09_SE_C08.indd 212 10/30/17 8:49 PM http://www.comunidadandina.org/ http://www.mercosur.int/ http://www.caricom.org/ CHAPTER 8 • REgionAl EConomiC inTEgRATion 213 Furthermore, the group has not yet created a customs union. External tariffs among members range between 4 and 12 percent. The tentative nature of cooperation was obvious when Honduras and Nicaragua slapped punitive tariffs on each other’s goods during a recent dispute. But officials remain positive, saying that their ultimate goal is European- style integration, closer political ties, and adoption of a single currency—probably the dollar. In fact, El Salvador has adopted the US dollar as its official currency, and Guatemala already uses the dollar alongside its own currency, the quetzal.
- 1377. Free Trade Area of the Americas (FTAA) A truly daunting trading bloc would be the creation of a Free Trade Area of the Americas (FTAA). The objective of the FTAA (www.alca-ftaa.org) is to create the largest free trade area on the planet, stretching from the northern tip of Alaska to the southern tip of Tierra del Fuego, in South America. The FTAA would comprise 34 nations and 830 million consumers, with Cuba being the only Western Hemisphere nation excluded from participating. The FTAA would work alongside existing trading blocs throughout the region. The first official meeting, the 1994 Summit of the Americas, created the broad blueprint for the agreement. Nations reaffirmed their commitment to the FTAA at the Second Summit of the Americas four years later when negotiations began. The Third Summit of the Americas in 2001 met with fierce protests. The ambitious plan of the FTAA means that it will likely be many years before such an agreement would be realized. QUiCK STUDY 3
- 1378. 1. Canada, Mexico, and the United States belong to the regional trading bloc called what? 2. What countries belong to the regional trading bloc called CAFTA-DR? 3. What is the name of Latin America’s most powerful regional trading bloc? 8.4 Integration in Asia and Elsewhere Efforts toward economic and political integration outside Europe and the Americas tend to be looser arrangements. Let’s take a look at important coalitions in Asia, the Middle East, and Africa. Association of Southeast Asian Nations (ASEAN) Indonesia, Malaysia, the Philippines, Singapore, and Thailand formed the Association of Southeast Asian Nations (ASEAN) in 1967. Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1998 (see Map 8.1). Together, the 10 ASEAN (www.asean.org) countries comprise a market of nearly 600 million consumers and a GDP of nearly $2.4 trillion. The three main objectives of the alliance are to (1) promote economic, cultural, and social development in
- 1379. the region; (2) safeguard the region’s economic and political stability; and (3) serve as a forum in which differences can be resolved fairly and peacefully. The decision to admit Cambodia, Laos, and Myanmar was criticized by some Western nations. The concern regarding Laos and Cambodia being admitted stems from their roles in supporting the communists during the Vietnam War. The quarrel with Myanmar centered on evidence cited by the West of its human rights violations. Yet, ASEAN felt that adding these countries to the coalition could help it to counter China’s rising strength with its abundance of inexpensive labor and raw materials. Companies involved in Asia’s developing economies are likely to be doing business with an ASEAN member. This is even a more likely prospect as China, Japan, and South Korea accelerate their efforts to join ASEAN. China’s admission would allow the club to bridge the gap between less advanced and more advanced economies. Some key facts about ASEAN that companies should consider are contained in the Manager’s Briefcase, titled
- 1380. “The Ins and Outs of ASEAN.” Asia Pacific Economic Cooperation (APEC) The organization for Asia Pacific Economic Cooperation (APEC) was formed in 1989. Begun as an informal forum among 12 trading partners, APEC (www.apec.org) now has 21 members 8.4 Summarize integration in Asia and elsewhere. M08_WILD9220_09_SE_C08.indd 213 10/30/17 8:49 PM http://www.alcaftaa.org/ http://www.asean.org/ http://www.apec.org/ 214 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT (see Map 8.1). Together, the APEC nations account for more than 44 percent of world trade and have a combined GDP of nearly $36 trillion. The stated aim of APEC is not to build another trading bloc.
- 1381. Instead, it desires to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade and investment procedures among member nations. In the long term, APEC hopes to have completely free trade and investment throughout the region. THE RECORD OF APEC APEC has succeeded in halving its members’ tariff rates from an average of 15 to 7.5 percent. The early years saw the greatest progress, but liberalization received a setback when the Asian financial crisis struck in the late 1990s. APEC is at least as much a political body as it is a movement toward freer trade. After all, APEC certainly does not have the focus or the record of accomplishments of NAFTA or the EU. Nonetheless, open dialogue and attempts at cooperation should continue to encourage progress, however slow. Further progress may create some positive benefits for people doing business in APEC nations. APEC is changing the granting of business visas so that businesspeople can travel throughout the region without obtaining multiple visas. It is
- 1382. recommending mutual recognition agreements on professional qualifications so that engineers, for example, can practice in any APEC country, regardless of nationality. And APEC is ready to simplify and harmonize customs procedures. Eventually, businesses could use the same customs forms and manifests for all APEC economies. Closer Economic Relations (CER) Agreement Australia and New Zealand created a free trade agreement in 1966 and formed the Closer Eco- nomic Relations (CER) Agreement in 1983 to further advance free trade and integrate their two economies (see Map 8.1). The CER completely eliminated tariffs and quotas between Australia and New Zealand in 1990, five years ahead of schedule. Each nation allows goods (and most ser- vices) to be sold within its borders that can be legally sold in the other country. Each nation also recognizes most professionals who are registered to practice their occupation in the other country. Gulf Cooperation Council (GCC) Several Middle Eastern nations formed the Gulf Cooperation
- 1383. Council (GCC) in 1980. Members of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The primary purpose of the GCC at its formation was to cooperate with the EU and EFTA. But it evolved to become as much a political entity as an economic one. Its cooperative thrust allows citizens of member countries to travel freely in the GCC without visas. It also permits citizens of one member nation to own land, property, and businesses in any other member nation without the need for local sponsors or partners. Businesses unfamiliar with operating in ASEAn countries should exercise caution in their dealings. Some inescapable facts about ASEAn that warrant consideration are the following: • Diverse Cultures and Politics The Philippines is a repre- sentative democracy, Brunei is an oil-rich sultanate, and Vietnam is a state-controlled country. Business policies and protocols must be adapted to suit each country. • Economic Competition many ASEAn nations are feeling the effects of China’s power to attract investment from
- 1384. multinational corporations worldwide. Whereas ASEAn members used to attract around 30 percent of foreign direct investment into Asia’s developing economies, they now attract about half that amount. • Corruption and Shadow Markets Bribery and shadow (unofficial) markets are common in many ASEAn countries, including indonesia, myanmar, the Philippines, and Viet- nam. Studies typically place these countries very high on the list of nations surveyed for corruption. • Political Change and Turmoil Several nations in the region recently elected new leaders and some go through presi - dents at a fast clip. Companies must remain alert to shifting political winds and laws regarding trade and investment. • Border Disputes Parts of Thailand’s borders with Cambodia and laos are tested frequently. Hostilities break out spo- radically between Thailand and myanmar over border alignment and ethnic Shan rebels operating along the border. • Lack of Common Tariffs and Standards Doing business in ASEAn nations can be costly. Harmonized tariffs, quality
- 1385. and safety standards, customs regulations, and investment rules could cut transaction costs significantly. MANAGER’S BRIEFCASE The Ins and Outs of ASEAN M08_WILD9220_09_SE_C08.indd 214 10/30/17 8:49 PM CHAPTER 8 • REgionAl EConomiC inTEgRATion 215 Economic Community of West African States (ECOWAS) The Economic Community of West African States (ECOWAS) was formed in 1975 but its efforts at economic integration were restarted in 1992 because of a lack of early progress. The most impor- tant goals of ECOWAS (www.ecowas.int) include the formation of a customs union, an eventual common market, and a monetary union. The ECOWAS nations comprise a large portion of the economic activity in sub-Saharan Africa, but progress on market integration is almost nonexistent. In fact, the value of trade occurring among ECOWAS nations is just 11 percent of the value that the trade members undertake with third parties. But ECOWAS made
- 1386. progress in the free movement of people, construction of international roads, and development of international telecommunication links. Some of its main problems are due to political instability, poor governance, weak national economies, poor infrastructure, and poor economic policies. African Union (AU) A group of 55 nations on the African continent joined forces in 2002 to create the African Union (AU). Heads of state of the nations belonging to the Organization of African Unity paved the way for the AU (www.au.int.en/) when they signed the Sirte Declaration in 1999. The AU is based on the vision of a united and strong Africa and on the need to build a partner- ship among governments and all segments of civil society in order to strengthen cohesion among the peoples of Africa. Its ambitious goals are to promote peace, security, and stability across Africa and to accelerate economic and political integration while addressing problems compounded by globalization. Specifically, the stated aims of the AU are to (1) rid the continent of the remaining
- 1387. vestiges of colonialism and apartheid, (2) promote unity and solidarity among African states, (3) coordinate and intensify cooperation for development, (4) safeguard the sovereignty and territo- rial integrity of members, and (5) promote international cooperation within the framework of the United Nations. Although it is too early to judge the success of the AU, there is no shortage of opportunities for it to demonstrate its capabilities. A Nigerian fisherman and child attend to fishing nets on their boat. Nigeria participates in the regional trading bloc—known as ECOWAS—in order to improve the lives of its people. The latest food crisis to hit Africa brought participants to Lagos from 25 African countries to exchange ideas with international organiza- tions. Africa is the only region in the world where fish consumption is falling, which led to calls for massive investment in fish farms.
- 1388. Sarah Errington/Hutchison Archive/Eye Ubiquitous/Alamy Stock Photo QUiCK STUDY 4 1. What are the stated aims of the Association of Southeast Asian Nations (ASEAN)? 2. The stated aim of which organization is not to build a trading bloc but instead to strengthen the multilateral trading system? 3. What is the name of the grouping of 55 nations across the continent of Africa? M08_WILD9220_09_SE_C08.indd 215 10/30/17 8:49 PM http://www.au.int.en/ http://www.ecowas.int/ 216 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT Regional economic integration can expand buyer selection, lower prices, increase productivity, and boost national com- petitiveness. Yet, integration has its drawbacks, and
- 1389. governments and independent organizations work to counter those negative effects. Here we review regional integration as it relates to busi- ness operations and employment. Integration and Business Operations Regional trade agreements are changing the landscape of the global marketplace. They are lowering trade barriers and opening up new markets for goods and services. markets otherwise off- limits because tariffs made imported products too expensive can become attractive after tariffs are lifted. Trade agreements can also be double-edged swords for companies. not only do they allow domestic companies to seek new markets abroad, they also let competitors from other nations enter the domestic market. Such mobility increases competition in every market that participates in such an agreement. Despite increased competition that often accompanies regional integration, there can be economic benefits, such as those pro- vided by a single currency. Companies in the European Union clearly benefit from its common currency, the euro. First, charges
- 1390. for converting from one member nation’s currency to that of another can be avoided. Second, business owners need not worry about potential losses due to shifting exchange rates on cross-border deals. not having to cover such costs and risks frees up capital for greater investment. Third, the euro makes prices between markets more transparent, making it more difficult to charge different prices in different markets. This helps companies compare prices among suppliers of a raw material, intermediate product, or service. Another benefit is lower tariffs or none at all. This allows a mul- tinational company to reduce its number of factories that supply a region and thereby reap economies of scale benefits. This is pos- sible because a company can produce in one location and then ship products throughout the low-tariff region at little additional cost. This lowers costs and increases productivity. one potential drawback of regional integration is that lower
- 1391. tariffs between members of a trading bloc can result in trade diversion. This can increase trade with less-efficient producers within the trading bloc and reduce trade with more-efficient non- member producers. Unless there is other internal competition for the producer’s good or service, buyers will likely pay more after trade diversion. Integration and Employment Perhaps most controversial is the impact of regional integration on jobs. Companies can affect the job environment by contribut- ing to dislocations in labor markets. The nation that supplies a particular good or service within a trading bloc is likely to be the most-efficient producer. When that product is labor intensive, the cost of labor in that market is likely to be quite low. Competitors in other nations may shift production to that relatively lower - wage nation within the trading bloc to remain competitive. This can mean lost jobs in the relatively higher-wage nation. Yet job dislocation can be an opportunity for workers to
- 1392. upgrade their skills and gain more advanced training. This can help nations increase their competitiveness because a more edu- cated and skilled workforce attracts higher-paying jobs. An oppor- tunity for a nation to improve its competitiveness, however, is little consolation to people finding themselves suddenly out of work. Although there are drawbacks to integration, there are poten- tial gains from increased trade such as raising living standards. Regional economic integration efforts are likely to continue rolling back barriers to international trade and investment because of their potential benefits. BOTTOM LINE FOR BUSINESS MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO8.1 Outline the levels of economic integration and its debate.
- 1393. • There are five levels of regional economic integration, with each level signifying greater cooperation among nations: free trade area, customs union, common market, economic union, and political union. • Arguments for free trade include: (1) trade creation expands buyer selection, decreases prices, increases productivity, and boosts national competitiveness; (2) greater consensus to reduce barriers among smaller groups of nations; (3) political cooperation can enhance negotiating power, and reduce potential military conflict; and (4) corporate savings can arise from modifying strategies and eliminating dupli- cate factories. • Arguments against free trade include: (1) trade diversion can result in increased trade with a less-efficient producer within the trading bloc; (2) jobs are lost when factories close and jobs move to lower-wage nations; and (3) cultural identity and national sovereignty is diminished due to increased exposure to other
- 1394. cultures. M08_WILD9220_09_SE_C08.indd 216 10/30/17 8:49 PM http://www.pearson.com/mylab/management CHAPTER 8 • REgionAl EConomiC inTEgRATion 217 LO8.2 Describe integration in Europe and its enlargement. • The European Coal and Steel Community formed in 1951 to remove trade barriers for coal, iron, steel, and scrap metal among members. After waves of expansion, broadenings of its scope, and name changes, the community is now called the European Union (EU) and currently has 28 members. • Five main institutions of the EU are the European Parliament, European Commis- sion, Council of the European Union, Court of Justice, and Court of Auditors. The EU single currency has been adopted by 19 member nations, which benefit from no
- 1395. exchange-rate risk and currency conversion costs within the euro zone. • The European Free Trade Association (EFTA) has four members and was created to focus on trade in industrial goods. LO8.3 Describe integration in the Americas and its prospects. • The North American Free Trade Agreement (NAFTA) began in 1994 among Canada, Mexico, and the United States; it seeks to eliminate all tariffs and nontariff trade bar- riers on goods originating from within North America. The Central American Free Trade Agreement (CAFTA-DR) was established in 2006 between the United States and six Central American nations to boost the efficiency of trade. • The Andean Community was formed in 1969 and calls for tariff reduction for trade among member nations, a common external tariff, and common policies in transpor- tation and certain industries. The Southern Common Market
- 1396. (MERCOSUR), estab- lished in 1988, acts as a customs union. • The Caribbean Community and Common Market (CARICOM) trading bloc was formed in 1973, and the Central American Common Market (CACM) was formed in 1961. LO8.4 Summarize integration in Asia and elsewhere. • The Association of Southeast Asian Nations (ASEAN) formed in 1967 and seeks to: (1) promote economic, cultural, and social development; (2) safeguard economic and political stability; and (3) serve as a forum to resol ve differences peacefully. • The organization for Asia Pacific Economic Cooperation (APEC) was formed in 1989 and strives to strengthen the multilateral trading system and expand the global economy. The Closer Economic Relations (CER) Agreement in 1983 between Australia and New Zealand totally eliminated tariffs and quotas
- 1397. between the two economies. • The Gulf Cooperation Council (GCC) of 1980 allows citizens of Middle Eastern countries to travel freely without visas and to own properties in other member nations. The African Union (AU) was started in 2002 among 55 nations to promote peace, security, and stability and to accelerate economic and political integration across Africa. common market (p. 199) customs union (p. 199) economic union (p. 199) European monetary union (p. 203) free trade area (p. 198) political union (p. 199) regional economic integration (regionalism) (p. 198) trade creation (p. 200)
- 1398. trade diversion (p. 201) Key Terms TALK ABOUT IT 1 Some people believe that the rise of regional trading blocs threatens free trade progress made by the World Trade Organization (WTO). 8-1. What arguments can you present to counter this point of view? 8-2. Do you think regional trading blocs promote or undermine regional or global stabil- ity? Explain. M08_WILD9220_09_SE_C08.indd 217 10/30/17 8:49 PM 218 PART 3 • inTERnATionAl TRADE AnD inVESTmEnT MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded
- 1399. writing questions: 8-14. Supporters of free trade agreements are winning the argument as nations continue to form bilateral and multilateral agreements with other nations. When do you think the proliferation of regional trading blocs and the integration process will stop, if ever? Explain. 8-15. Certain groups of countries, particularly in Africa, are far less economically developed than other regions, such as Europe and North Amer- ica. What sort of integration arrangement do you think developed countries could create with less developed nations to improve living standards? TALK ABOUT IT 2 Some governments across the Americas are strong supporters of the Free Trade Area of the Americas (FTAA). This is true despite evidence that small companies typically have difficulty competing against large multinationals when their nations take part in regional trading blocs.
- 1400. 8-3. Do you think the FTAA would improve living standards in small countries (such as Ecuador and Nicaragua) or benefit only the largest nations such as Canada and the United States? Explain. 8-4. What can national governments do to help small companies compete in large trading blocs like the FTAA? Ethical Challenge The Caribbean nations do not participate in NAFTA and CAFTA-DR. Many people in southern US states complain that NAFTA and CAFTA-DR are unfair to their extended families living on the Caribbean islands. Some experts argue that the term free trade agreement is misleading. They say these agreements are really “preferential trade agreements” that offer free trade only to members and relative protection against nonmembers. They argue that these trade agree- ments have meant lost jobs, market share, and revenue for small businesses ranging from ap- parel factories in Jamaica to sugar cane fields in Trinidad.
- 1401. 8-5. Given the impact on nonmembers, do you think such trade agreements are ethical? 8-6. Why do you think the Caribbean islands are not part of NAFTA or CAFTA-DR? 8-7. What arguments would you make for including the Caribbean in the expansion of NAFTA or CAFTA-DR? Teaming Up Two groups of four students each will debate the merits of extending NAFTA to more ad- vanced levels of economic (and even political) integration. After the first student from each side has spoken, the second student will question the opponent’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. The fourth stu- dent will present a summary of each side’s arguments. Finally, the class will vote on which team offered the more compelling argument. Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For
- 1402. the country your team is re- searching, integrate your answers to the following questions into your completed MESP report. 8-8. Is the nation participating in any regional integration efforts? 8-9. What other nations are members of the group? 8-10. What economic, political, and social objectives are driving the integration efforts? 8-11. So far, what have been the positive and negative results of integration? 8-12. How are international companies coping? 8-13. Are companies’ coping strategies succeeding or failing? M08_WILD9220_09_SE_C08.indd 218 10/30/17 8:49 PM http://www.pearson.com/ mylab/management CHAPTER 8 • REgionAl EConomiC inTEgRATion 219 PRACTICING INTERNATIONAL MANAGEMENT CASE Global Trade Deficit in Food Safety
- 1403. Today, US citizens trudging through a freezing Minnesota win- ter can indulge their cravings for summer-fresh raspberries. Europeans who are thousands of miles away from North America can put Mexican mangoes in their breakfast cereal. Japanese shop- pers can buy radishes that were grown from seeds cultivated in Oregon. Globalization of the food industry, falling trade barriers, and the formation of regional trading blocs make it possible for people to choose from produce grown all over the world. Unfortu- nately, these forces have also made it more likely that consumers will contract illnesses from food-borne pathogens. In recent years, several outbreaks linked to the burgeoning global trade in produce have made headlines. One serious case occurred when 2,300 people were victims of a parasite called Cyclospora that had hitched a ride on raspberries grown in Guatemala. Outbreaks
- 1404. of hepatitis A and Salmonella from tainted strawberries and alfalfa sprouts, respectively, have also sickened consumers. The outbreak of severe acute respiratory syndrome (SARS) killed hundreds and sickened hundreds more, mainly in China, Singapore, and Canada. Some scientists believe a fair amount of those cases might actually have been cases of H5N1, also called Avian (bird) flu. Avian flu is particularly virulent and can cross barriers between species. It is most likely transmitted through the handling of poultry and poor sanitation. Although health officials say that there is no evidence that imports are inherently more dangerous, they do cite several reasons for concern. For one thing, produce is often imported from less- advanced countries where food hygiene and sanitation are lacking in important ways. Also, some microbes that cause no damage in their
- 1405. home country can be deadly when introduced to other countries. Finally, the longer the journey from farm to table, the greater is the chance of contamination. Just consider the journey taken by the Salmonella-ridden alfalfa sprouts: The seeds for the sprouts were bought from Uganda and Pakistan, among other nations, shipped through the Netherlands, flown into New York, trucked to retailers all across the United States, and then purchased by consumers. Incidences of food contamination show no sign of abating. Since the passage of NAFTA, cross-border trade in food among Canada, Mexico, and the United States skyrocketed. Meanwhile, federal inspections of US imports by the Food and Drug Adminis- tration (FDA) have declined. Increasing imports have strained the US food-safety system, which was built 100 years ago for a country contained within its own borders. Yet the US Congress continues to try to advance the cause of greater food safety when it comes to trade. Changes that have been considered include giving the
- 1406. FDA mandatory recall authority, increasing the frequency of food inspec- tions, and requiring food safety plans for food makers. Although it isn’t feasible for the United States to plant FDA inspec- tors in every country, options are available. The US Congress could further tighten the ban on importing fruit and vegetables from countries that fail to meet expanded US food-safety standards. Better inspec- tions could be performed of farming methods and government safety systems in other countries. Countries that blocked the new inspections could be forbidden to sell fruit and vegetables in the United States. The World Health Organization (WHO) also proposes new policies for food safety, such as introducing food irradiation and other technologies. The WHO believes the most critical intervention in preventing food- borne
- 1407. diseases is promoting good manufacturing practices and educating retailers and consumers on appropriate food handling. Global trade in food is worth more than $1 trillion annually. The global supply chain for food today resembles a massive web of product flows among countries. Experts worry that this may mean a decreasing ability to track contaminated food or products causing foodborne illness. This can be especially complex when a raw food is imported, processed into an intermediate product, exported to a country that then processes it into a finished product (or perhaps into another intermediary product even), before it is sold to another country that processes it into a finished product. Such networks in the global food trade can impede the key task of quickly determin- ing the origin of any food contamination when it occurs.
- 1408. Thinking Globally 8-16. How do you think countries with a high volume of exports to the United States, such as Mexico, would respond to stricter food-safety rules? Do you think such measures are an effective way to stem the tide of food-related illnesses? 8-17. Some people believe that free trade agreements force con- sumers to trade the health and safety of their families for free trade. What are the benefits and drawbacks of putting food-safety regulations into regional trade pacts? 8-18. The lack of harmonized food-safety practices and standards is just one of the challenges faced by the food industry as it becomes more global. What other challenges face the food industry in an era of economic integration and open markets? Sources: Gaynor Selby, “Special Report: Food Safety in the Spotlight,” Food Ingredients First (www.foodingredientsfirst.com), May 16, 2017; Maryn
- 1409. McKenna, “Food Trade Too Complex to Track Food Safety,” Wired (www.wired .com), June 4, 2012; Christopher Doering and Roberta Rampton, “Delauro Sees US Food Safety Law in 2010,” Reuters (www.reuters.com), March 17, 2010; “A Game of Chicken,” The Economist (www.economist.com), June 26, 2008; “Food Safety and Foodborne Illness,” World Health Organization Fact Sheet No. 237, March 2007. M08_WILD9220_09_SE_C08.indd 219 10/30/17 8:49 PM http://www.reuters.com/ http://www.wired.com/ http://www.wired.com/ http://www.economist.com/ http://www.foodingredientsfirst.com/ 220 MyLab Management IMPROVE YOUR GRADE!
- 1410. When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 9.1 Explain the importance of the international capital market. 9.2 Describe the main components of the international capital market. 9.3 Outline the functions of the foreign exchange market. 9.4 Explain the different types of currency quotes and exchange rates. 9.5 Describe the instruments and institutions of the foreign exchange market. Learning Objectives After studying this chapter, you should be able to International Financial Markets
- 1411. Chapter Nine A Look Back Chapter 8 introduced the most prominent efforts at regional economic integration occurring around the world. We saw how international companies are responding to the challenges and opportunities that regional integration is creating. A Look at This Chapter This chapter introduces us to the international financial system by describing the structure of international financial markets. We learn first about the international capital market and its main components. We then turn to the foreign exchange market, explaining how it works and outlining its
- 1412. structure. A Look Ahead Chapter 10 concludes our study of the international financial system. We discuss the factors that influence exchange rates and explain why and how governments and other institutions try to manage exchange rates. We also present recent monetary problems in emerging markets worldwide. 4 The International Financial SystemPart M09_WILD9220_09_SE_C09.indd 220 10/30/17 8:49 PM http://www.pearson.com/mylab/management CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 221 Wii Is the Champion KYOTO, Japan—Nintendo (www.nintendo.com) has been
- 1413. feeding the addiction of video- gaming fans worldwide since 1989. One hundred years earlier, in 1889, Fusajiro Yamauchi started Nintendo when he began manufacturing Hanafuda playing cards in Kyoto, Japan. Today, Nintendo produces and sells mobile gaming devices and home gaming systems, including Switch, Wii, Nintendo DS, GameCube, and Game Boy Advance, which feature such global icons as Mario, Donkey Kong, Pokémon, and others. Nintendo took the global gaming industry by storm when it introduced the Wii with its wireless motion- sensitive remote controllers, built-in Wi-Fi, and other features. Nintendo’s Wii Fit forces players through 40 exercises consisting of yoga, strength training, cardio, and even the hula- hoop. Amazingly, Nintendo has sold more than 100 million Wii units. Nintendo’s newer Switch gaming system allows players to unplug their
- 1414. home-based system and take it with them for on-the-go fun. Retail stores sold out of the devices within a few hours of receiving a shipment, leaving some to fear “customer tantrums” when Nintendo released its flagship, Mario Odyssey. Nintendo’s marketing and game-design talents are not all that affect its perfor- mance—so, too, do exchange rates between the Japanese yen (¥) and other currencies. The earnings of Nintendo’s subsidiaries and affiliates outside Japan must be integrated into consolidated financial statements at the end of each year. Translating subsidiaries’ earnings from other currencies into a strong yen decreases Nintendo’s stated earnings in yen. Nintendo recently reported an annual net income of ¥ 257.3 billion ($2.6 billion), but also reported that its income included a foreign exchange loss of ¥ 92.3 billion ($923.5 million). A rise of the yen against foreign currencies prior to the translation of subsidiaries’ earnings
- 1415. into yen caused the loss. As you read this chapter, consider how shifting currency values affect financial performance and how managers can reduce their impact.1 Elena Nichizhenova/123RF.com M09_WILD9220_09_SE_C09.indd 221 10/30/17 8:49 PM http://www.nintendo.com/ 222 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM Well-functioning financial markets are an essential element of the international business environment. They funnel money from organizations and economies with excess funds to those with shortages. International financial markets also allow companies to exchange one currency for another. The trading of currencies and the rates at which they are exchanged are crucial to international business. Suppose you purchase an MP3 player imported from a company
- 1416. based in the Philippines. Whether you realize it or not, the price you paid for that MP3 player was affected by the exchange rate between your country’s currency and the Philippine peso. Ultimately, the Filipino company that sold you the MP3 player must convert the purchase made in your currency into Philippine pesos. Thus, the profit earned by the Filipino company is also influenced by the exchange rate between your currency and the peso. Managers must understand how changes in currency values—and thus in exchange rates—affect the profitability of their international business activities. Among other things, our hypothetical company in the Philippines must know how much to charge you for its MP3 player. In this chapter, we launch our study of the international financial system by exploring the structure of the international financial markets. The two interrelated systems that comprise the international financial markets are the international capital market and foreign exchange market. We start by examining the purposes of the international capital market and tracing its recent development. We then take a detailed look at the international
- 1417. bond, equity, and Eurocurrency markets, each of which helps companies to borrow and lend money internationally. Later, we take a look at the functioning of the foreign exchange market—an international market for currencies that facilitates international business transactions. We close this chapter by exploring how currency convertibility affects international transactions. 9.1 Importance of the International Capital Market A capital market is a system that allocates financial resources in the form of debt and equity according to their most efficient uses. Its main purpose is to provide a mechanism through which those who wish to borrow or invest money can do so efficiently. Individuals, companies, govern- ments, mutual funds, pension funds, and all types of nonprofit organizations participate in capital markets. For example, an individual might want to buy her first home, a midsized company might want to add production capacity, and a government might want to support the development of a new wireless communications system. Sometimes, these individuals and organizations have excess cash to lend, and, at other times, they need funds.
- 1418. 9.1 Explain the importance of the international capital market. capital market System that allocates financial resources in the form of debt and equity according to their most effi- cient uses. A customer shows the Philip- pine pesos he just converted from U.S. dollars at a moneychanger in Manila, the Philippines. The foreign exchange market gives Filipinos working overseas a safe way to wire money to relatives back home. The prices of cur- rencies on the foreign exchange market also help determine the prices of imports and exports. And exchange rates affect the amount of profit a company receives when it translates revenue earned abroad into the home currency.
- 1419. Paul Jan Hilton/Alamy Stock Photo M09_WILD9220_09_SE_C09.indd 222 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 223 Purposes of National Capital Markets There are two primary means by which companies obtain external financing: debt and equity. National capital markets help individuals and institutions borrow the money that other individuals and institutions want to lend. Although in theory borrowers could search individually for various parties who are willing to lend or invest, this would be an extremely inefficient process. ROLE OF DEBT Debt consists of loans, for which the borrower promises to repay the bor- rowed amount (the principal) plus a predetermined rate of interest. Company debt normally takes the form of bonds—instruments that specify the timing of principal and interest payments. The
- 1420. holder of a bond (the lender) can force the borrower into bankruptcy if the borrower fails to pay on a timely basis. Bonds issued for the purpose of funding investments are commonly issued by private-sector companies and by municipal, regional, and national governments. ROLE OF EQUITY Equity is part ownership of a company in which the equity holder participates with other part owners in the company’s financial gains and losses. Equity normally takes the form of stock—shares of ownership in a company’s assets that give shareholders (stockholders) a claim on the company’s future cash flows. Shareholders may be rewarded with dividends— payments made out of surplus funds—or by increases in the value of their shares. Of course, they may also suffer losses due to poor company performance and thus experience a decrease in the value of their shares. Dividend payments are not guaranteed but are determined by the company’s board of directors and are based on financial performance. In capital markets, shareholders can sell one company’s stock for that of another or can liquidate them—exchange them for cash.
- 1421. Liquidity, which is a feature of both debt and equity markets, refers to the ease with which bondholders and shareholders can convert their investments into cash. Purposes of the International Capital Market The international capital market is a network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries. It consists of both formal exchanges (in which buyers and sellers meet to trade financial instruments) and electronic networks (in which trading occurs anonymously). This market makes use of unique and innovative financial instruments specially designed to fit the needs of investors and borrowers located in different countries. Large international banks play a central role in the international capital market. They gather the excess cash of investors and savers around the world and then channel this cash to borrowers across the globe. EXPANDS THE MONEY SUPPLY FOR BORROWERS The international capital market is a conduit for joining borrowers and lenders in different national
- 1422. capital markets. A company that is unable to obtain funds from investors in its own nation can seek financing from investors else- where. The option of going outside the home nation is particularly important to firms in countries with small or developing capital markets of their own. REDUCES THE COST OF MONEY FOR BORROWERS An expanded money supply reduces the cost of borrowing. Similar to the prices of potatoes, wheat, and other commodities, the “price” of money is determined by supply and demand. If its supply increases, its price—in the form of interest rates—falls. That is why excess supply creates a borrower’s market, forcing down interest rates and the cost of borrowing. Projects regarded as infeasible because of low expected returns might be viable at a lower cost of financing. REDUCES RISK FOR LENDERS The international capital market expands the available set of lending opportunities. In turn, an expanded set of opportunities helps reduce risk for lenders (investors) in two ways:
- 1423. 1. Investors enjoy a greater set of opportunities from which to choose. They can thus reduce overall portfolio risk by spreading their money over a greater number of debt and equity instru- ments. In other words, if one investment loses money, the loss can be offset by gains elsewhere. 2. Investing in international securities benefits investors because some economies are growing while others are in decline. For example, the prices of bonds in Thailand may follow a pattern that is different from bond-price fluctuations in the United States. Thus, investors reduce risk by holding international securities whose prices move independently. debt Loan in which the borrower prom- ises to repay the borrowed amount (the principal) plus a predetermined rate of interest. bond Debt instrument that specifies the timing of principal and interest
- 1424. payments. stock Shares of ownership in a compa- ny’s assets that give shareholders a claim on the company’s future cash flows. equity Part ownership of a company in which the equity holder partici- pates with other part owners in the company’s financial gains and losses. liquidity Ease with which bondholders and shareholders may convert their investments into cash. international capital market Network of individuals, companies, financial institutions, and govern- ments that invest and borrow across national boundaries.
- 1425. M09_WILD9220_09_SE_C09.indd 223 10/30/17 8:49 PM 224 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM Would-be borrowers in developing nations often face difficulties trying to secure loans. Interest rates are often high, and borrowers typically have little or nothing to put up as collateral. For some unique methods of getting capital to small business owners in developing nations, see this chapter’s Global Sustainability feature, titled “Big Results from Microfinance.” Forces Expanding the International Capital Market Around 40 years ago, national capital markets functioned largely as independent markets. But since that time, the amount of debt, equity, and currencies traded internationally has increased dramatically. This rapid growth can be traced to three main factors: • Information Technology Information is the lifeblood of every
- 1426. nation’s capital market because investors need information about investment opportunities and their corresponding risk levels. Large investments in information technology over the past two decades have drastically reduced the costs, in both time and money, of communicating around the globe. Investors and borrowers can now respond in record time to events in the international capital market. The introduction of electronic trading that can occur after the daily close of formal exchanges also facilitates faster response times. • Deregulation Deregulation of national capital markets has been instrumental in the expan- sion of the international capital market. The need for deregulation became apparent in the early 1970s, when heavily regulated markets in the largest countries were facing fierce competition from less regulated markets in smaller nations. Deregulation increased compe- tition, lowered the cost of financial transactions, and opened many national markets to global investing and borrowing. But the pendulum swung the other direction when legisla-
- 1427. tors tightened regulation to help avoid another global financial crisis like that of 2008– 2009. More recently, the United States has loosened some of the most stringent regulations enacted during that time. • Financial Instruments Greater competition in the financial industry is creating the need to develop innovative financial instruments. One result of the need for new types of financial instruments is securitization—the unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments (or securities). For example, a mortgage loan from a bank is not liquid or negotiable because it is a customized securitization Unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and mar- ketable financial instruments (or securities). Developing nations are teeming with budding entrepreneurs who
- 1428. need a bit of start-up capital to get going. A practice called micro- finance has several key characteristics. • Overcoming Obstacles. If a person in a developing country is lucky enough to obtain a loan, it is typically from a loan shark, whose sky-high interest rates devour most of the entrepreneur’s profits. Thus, microfinance is an increasingly popular alternative to lend money to low-income entrepre- neurs at competitive interest rates (around 10 to 20 percent) without requiring collateral. now institutions are warming to the idea of “microsavings” so that people can manage their small but highly uneven flows of income over time. • One for All, and All for One. sometimes a loan is made to a group of entrepreneurs who sink or swim together. If one member fails to pay off a loan, all members of the group may lose future credit. Peer pressure and support often defend against defaults, however. support networks in developing countries often incorporate extended family ties. one bank in Bangladesh boasts 98 percent on-time repayment. • No Glass Ceiling Here. Although outreach to male bor- rowers is increasing, most microfinance borrowers are
- 1429. female. Women tend to be better at funneling profits into family nutrition, clothing, and education, as well as into business expansion. The successful use of microfinance in Bangladesh has increased wages, community income, and the status of women. The microfinance industry is esti - mated at around $8 billion worldwide. • Developed Country Agenda. The microfinance concept was pioneered in Bangladesh as a way for developing coun- tries to create the foundation for a market economy. It now might be a way to spur economic growth in depressed areas of developed nations, such as in decaying city centers. But whereas microfinance loans in developing countries typically average a few hundred dollars, those in developed nations would need to be significantly larger. Sources: “A Better Mattress,” The Economist, March 13, 2010, pp. 75–76; Steve Hamm, “Setting Standards for Microfinance,” Bloomberg Businessweek (www.businessweek.com), July 28, 2008; Jennifer L. Schenker, “Taking Microfinance to the Next Level,” Bloomberg Businessweek (www.businessweek.com), February 26, 2008; Grameen Bank website (www.grameen-info.org), select reports.
- 1430. GLOBAL SUSTAINABILITY Big Results from Microfinance M09_WILD9220_09_SE_C09.indd 224 10/30/17 8:49 PM http://www.businessweek.com http://www.businessweek.com http://www.grameen-info.org CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 225 contract between the bank and the borrower. But agencies of the US government, such as the Federal National Mortgage Association (www.fanniemae.com), guarantee mortgages against default and accumulate them as pools of assets. Securities that are backed by these mortgage pools are then sold in capital markets to raise capital for investment. Securitization is criticized for the excessive debt that financial institutions took on in the boom years prior to 2007. When investors lost faith in securities backed by sub-prime mortgages,
- 1431. they sold their investments and helped spark the global credit crisis of 2008–2009. Although the trigger for the crisis was lost value in mortgage-backed securities, legislators soon began exploring the option of placing reasonable limits on securitization in order to discourage an appetite for excessive levels of debt. MyLab Management Watch It Root Capital International Strategy Apply what you have learned so far about international capital markets. If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video case about how one organization lends money to businesses that fall through the cracks of traditional capital mar- kets and answer questions. QUICk sTUDY 1 1. What is the purpose of the international capital market? 2. Unbundling and repackaging hard-to-trade financial assets into more marketable financial
- 1432. instruments is called what? 3. What is a characteristic of an offshore financial center? World Financial Centers The world’s three most important financial centers are London, New York, and Tokyo. But tradi- tional exchanges may become obsolete unless they continue to modernize, cut costs, and provide new customer services. In fact, trading over the Internet and other systems might increase the popularity of offshore financial centers. OFFSHORE FINANCIAL CENTERS An offshore financial center is a country or territory whose financial sector features very few regulations and few, if any, taxes. These centers tend to be economically and politically stable and tend to provide access to the international capital market through an excellent telecommunications infrastructure. Most governments protect their own currencies by restricting the amount of activity that domestic companies can conduct in foreign currencies. So, companies that find it hard to borrow funds in foreign currencies can turn
- 1433. to offshore centers. Offshore centers are sources of (usually cheaper) funding for companies with multinational operations. Offshore financial centers fall into two categories: • Operational centers see a great deal of financial activity. Prominent operational centers include London (which does a good deal of currency trading) and Switzerland (which sup- plies a great deal of investment capital to other nations). • Booking centers are usually located on small island nations or territories with favorable tax and/or secrecy laws. Little financial activity takes place here. Rather, funds simply pass through on their way to large operational centers. Booking centers are typically home to offshore branches of domestic banks that use them merely as bookkeeping facilities to record tax and currency-exchange information. Some important booking centers are the Cayman Islands and the Bahamas in the Caribbean; Gibraltar, Monaco, and the Channel Islands in Europe; Bahrain and Dubai in the Middle East; and
- 1434. Singapore in Southeast Asia. offshore financial center Country or territory whose financial sector features very few regula- tions and few, if any, taxes. M09_WILD9220_09_SE_C09.indd 225 10/30/17 8:49 PM http://www.fanniemae.com/ http://www.pearson.com/mylab/management 226 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM 9.2 International Capital Market Components Now that we have covered the basic features of the international capital market, let’s take a closer look at its main components: the international bond, international equity, and Eurocurrency markets. International Bond Market The international bond market consists of all bonds sold by issuing companies, governments,
- 1435. or other organizations outside their own countries. Issuing bonds internationally is an increas- ingly popular way to obtain needed funding. Typical buyers include medium-sized to large banks, pension funds, mutual funds, and governments with excess financial reserves. Large international banks typically manage the sales of new international bond issues for corporate and government clients. TYPES OF INTERNATIONAL BONDS One instrument used by companies to access the inter- national bond market is called a Eurobond—a bond issued outside the country in whose currency it is denominated. In other words, a bond issued by an Australian company, denominated in US dollars, and sold in Britain, France, Germany, and the Netherlands (but not available in the United States or to its residents) is a Eurobond. Because this Eurobond is denominated in US dollars, the Australian borrower both receives dollars and makes its interest payments in dollars. Eurobonds are popular (accounting for 75 to 80 percent of all international bonds) because
- 1436. the governments of countries in which they are sold do not regulate them. The absence of regula- tion substantially reduces the cost of issuing a bond. Unfortunately, it increases its risk level—a fact that may discourage some potential investors. The traditional markets for Eurobonds are Europe and North America. Companies also obtain financial resources by issuing so-called foreign bonds—bonds sold outside the borrower’s country and denominated in the currency of the country in which they are sold. For example, a yen-denominated bond issued by the German carmaker BMW in Japan’s domestic bond market is a foreign bond. Foreign bonds account for about 20 to 25 percent of all international bonds. Foreign bonds are subject to the same rules and regulations as the domestic bonds of the country in which they are issued. Countries typically require issuers to meet certain regulatory requirements and to disclose details about company activities, owners, and upper management. Thus BMW’s samurai bonds (the name for foreign bonds issued
- 1437. in Japan) would need to meet the same disclosure and other regulatory requirements that Toyota’s bonds in Japan must meet. Foreign bonds in the United States are called yankee bonds, and those in the United Kingdom are called bulldog bonds. Foreign bonds issued and traded in Asia outside Japan (and normally denominated in dollars) are called dragon bonds. INTEREST RATES: A DRIVING FORCE Today, low interest rates (the cost of borrowing) fuel growth in the international bond market. Unfortunately, low interest rates in developed nations mean that investors earn relatively little interest on bonds in those markets. So, banks, pension funds, and mutual funds are seeking higher returns in emerging markets, where higher interest payments reflect the greater risk of the bonds. At the same time, corporate and government bor- rowers in emerging markets badly need capital to invest in corporate expansion plans and public works projects. This situation raises an interesting question: How can investors who are seeking higher returns
- 1438. and borrowers who are seeking to pay lower interest rates both come out ahead? The answer, at least in part, lies in the international bond market: • By issuing bonds in the international bond market, borrow ers from emerging markets can borrow money from other nations where interest rates are lower. • By the same token, investors in developed countries buy bonds in emerging markets in order to obtain higher returns on their investments (although they also accept greater risk). Despite the attraction of the international bond market, many emerging markets see the need to develop their own national markets because of volatility in the global currency market. A currency whose value is rapidly declining can wreak havoc on companies that earn profits in, 9.2 Describe the main components of the interna- tional capital market. international bond market
- 1439. Market consisting of all bonds sold by issuing companies, govern- ments, or other organizations out- side their own countries. Eurobond Bond issued outside the country in whose currency it is denominated. foreign bond Bond sold outside the borrower’s country and denominated in the currency of the country in which it is sold. M09_WILD9220_09_SE_C09.indd 226 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 227 say, Indonesian rupiahs but must pay off debts in dollars. Why? A drop in a country’s currency forces borrowers to shell out more local currency in order to pay off the interest owed on bonds
- 1440. denominated in a stable currency. International Equity Market The international equity market consists of all stocks bought and sold outside the issuer’s home country. Companies and governments frequently sell shares in the international equity market. Buyers include other companies, banks, mutual funds, pension funds, and individual investors. The stock exchanges that list the greatest number of companies from outside their own borders are Frankfurt, London, and New York. Large international companies frequently list their stocks on several national exchanges simultaneously and sometimes offer new stock issues only outside their country’s borders. Four factors are responsible for much of the past growth in the international equity market, discussed in the following sections. SPREAD OF PRIVATIZATION As many countries abandoned central planning and socialist-style economics, the pace of privatization accelerated worldwide. A single privatization often places billions of dollars of new equity on stock markets. When the government of Peru sold its 26-percent
- 1441. share of the national telephone company, Telefonica del Peru (www.telefonica.com.pe), it raised $1.2 billion. Of the total value of the sale, 26 percent went to domestic retail and institutional investors in Peru, but 48 percent was sold to investors in the United States and 26 percent was sold to other international investors. ECONOMIC GROWTH IN EMERGING MARKETS Continued economic growth in emerging markets is contributing to growth in the international equity market. Companies based in these economies require greater investment as they succeed and grow. The international equity market becomes a major source of funding because only a limited supply of funds is available in these nations. ACTIVITY OF INVESTMENT BANKS Global banks facilitate the sale of a company’s stock worldwide by bringing together sellers and large potential buyers. Increasingly, investment banks are searching for investors outside the national market in which a company is headquartered. In fact, this method of raising funds is becoming more common
- 1442. than listing a company’s shares on another country’s stock exchange. ADVENT OF CYBERMARKETS The automation of stock exchanges is encouraging growth in the international equity market. The term cybermarkets denotes stock markets that have no central geographic locations. Rather, they consist of global trading activities conducted on the Internet. Cybermarkets (consisting of supercomputers, high-speed data lines, satellite uplinks, and indi- vidual personal computers) match buyers and sellers in nanoseconds. They allow companies to list their stocks worldwide through an electronic medium in which trading takes place 24 hours a day. Eurocurrency Market All the world’s currencies that are banked outside their countries of origin are referred to as Eurocurrency and trade on the Eurocurrency market. Thus, US dollars deposited in a bank in Tokyo are called Eurodollars, and British pounds deposited in New York are called Europounds. Japanese yen deposited in Frankfurt are called Euroyen, and so forth.
- 1443. Because the Eurocurrency market is characterized by very large transactions, only the very largest companies, banks, and governments are typically involved. Deposits originate primarily from four sources: • Governments with excess funds generated by a prolonged trade surplus • Commercial banks with large deposits of excess currency • International companies with large amounts of excess cash • Extremely wealthy individuals Eurocurrency originated in Europe during the 1950s—hence the “Euro” prefix. Governments across Eastern Europe feared they might forfeit dollar deposits made in US banks if US citizens were to file claims against them. To protect their doll ar reserves, they deposited them in banks across Europe. Banks in the United Kingdom began lending these dollars to finance international international equity market Market consisting of all stocks bought and sold outside the issuer’s
- 1444. home country. Eurocurrency market Market consisting of all the world’s currencies (referred to as “Eurocur- rency”) that are banked outside their countries of origin. M09_WILD9220_09_SE_C09.indd 227 10/30/17 8:49 PM http://www.telefonica.com.pe/ 228 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM trade deals, and banks in other countries (including Canada and Japan) followed suit. The Euro- currency market is valued at around $6 trillion, with London accounting for about 20 percent of all deposits. Other important markets include Canada, the Caribbean, Hong Kong, and Singapore. APPEAL OF THE EUROCURRENCY MARKET Governments tend to strictly regulate com- mercial banking activities in their own currencies within their
- 1445. borders. For example, they often force banks to pay deposit insurance to a central bank, where they must keep a certain portion of all deposits “on reserve” in noninterest-bearing accounts. Although such restrictions protect investors, they add costs to banking operations. By contrast, the main appeal of the Eurocurrency market is the complete absence of regulation, which lowers the cost of banking. The large size of transactions in this market further reduces transaction costs. Thus, banks can charge borrowers less, pay investors more, and still earn healthy profits. Interbank interest rates—rates that the world’s largest banks charge one another for loans— are determined in the free market. The most commonly quoted rate of this type in the Eurocurrency market is the London Interbank Offer Rate (LIBOR)—the interest rate that London banks charge other large banks that borrow Eurocurrency. The London Interbank Bid Rate (LIBID) is the interest rate offered by London banks to large investors for Eurocurrency deposits. An unappealing feature of the Eurocurrency market is greater
- 1446. risk; government regulations that protect depositors in national markets are nonexistent here. Despite the greater risk of default, however, Eurocurrency transactions are fairly safe because the banks involved are large, with well-established reputations. 9.3 The Foreign Exchange Market Unlike domestic transactions, international transactions involve the currencies of two or more nations. To exchange one currency for another in international transactions, companies rely on a mechanism called the foreign exchange market—a market in which currencies are bought and sold and their prices are determined. Financial institutions can convert currencies using an exchange rate—the rate at which one currency is exchanged for another. Rates depend on the size of the transaction, the trader conducting it, general economic conditions, and, sometimes, government mandate. The forces of supply and demand determine currency prices, and transactions are conducted through a process of bid and ask quotes. If someone asks for the
- 1447. current exchange rate of a certain currency, the bank does not know whether it is dealing with a prospective buyer or seller so it quotes two rates. The bid quote is the price at which the bank will buy. The ask quote is the price at which the bank will sell. For example, say that the British pound is quoted in US dollars at $1.5054. The bank may then bid $1.5052 to buy British pounds and offer to sell them at $1.5056. The difference between the two rates is the bid–ask spread. Naturally, banks will buy currencies at a lower price than they sell them and earn their profits from the bid–ask spread. Functions of the Foreign Exchange Market The foreign exchange market is not really a source of corporate finance. Rather, it facilitates corporate financial activities and international transactions. Investors use the foreign exchange market for four main reasons, as discussed in the following sections. CURRENCY CONVERSION Companies use the foreign exchange market to convert one cur- rency into another. Suppose a Malaysian company sells a large
- 1448. number of computers to a customer in France. The French customer wants to pay for the computers in euros, the European Union currency, whereas the Malaysian company wants to be paid in its own ringgit. How do the two parties resolve this dilemma? They turn to banks that will exchange the currencies for them. interbank interest rates Interest rates that the world’s larg- est banks charge one another for loans. 9.3 Outline the functions of the foreign exchange market. foreign exchange market Market in which currencies are bought and sold and their prices determined. exchange rate Rate at which one currency is exchanged for another.
- 1449. QUICk sTUDY 2 1. What type of financial instrument is traded in the international bond market? 2. The market of all stocks bought and sold outside the issuer’s home country is called what? 3. What does the Eurocurrency market consist of? M09_WILD9220_09_SE_C09.indd 228 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 229 Companies also must convert to local currencies when they undertake foreign direct investment. Later, when a firm’s international subsidiary earns a profit and the company wants to return some of it to the home country, it must convert the local money into the home currency. CURRENCY HEDGING The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency hedging. International companies commonly use
- 1450. hedging for one of two purposes: 1. To lessen the risk associated with international transfers of funds. 2. To protect themselves in credit transactions in which there is a time lag between billing and receipt of payment. Suppose a South Korean automaker has a subsidiary in Britain. The parent company in Korea knows that in 30 days—say, on February 1—its British subsidiary will be sending it a payment in British pounds. Because the parent company is concerned about the value of that payment in South Korean won a month in the future, it wants to insure against the possibility that the pound’s value will fall over that period—meaning, of course, that it will receive less money. Therefore, on January 2, the parent company contracts with a financial institution, such as a bank, to exchange the payment in one month at an agreed-upon exchange rate specified on January 2. In this way, as of January 2, the Korean company knows exactly how many won the payment will be worth
- 1451. on February 1. CURRENCY ARBITRAGE Currency arbitrage is the instantaneous purchase and sale of a cur- rency in different markets for profit. Suppose a currency trader in New York notices that the value of the European Union euro is lower in Tokyo than it is in New York. The trader can buy euros in Tokyo, sell them in New York, and earn a profit on the difference. High-tech communication and trading systems allow the entire transaction to occur within seconds. But note that the trade is not worth making if the difference between the value of the euro in Tokyo and the value of the euro in New York is not greater than the cost of conducting the transaction. Currency arbitrage is a common activity among experienced traders of foreign exchange, very large investors, and companies in the arbitrage business. Firms whose profits are generated primarily by another economic activity, such as retailing or manufacturing, take part in currency arbitrage only if they have very large sums of cash on hand.
- 1452. Interest arbitrage is the profit-motivated purchase and sale of interest-paying securities denominated in different currencies. Companies use interest arbitrage to find better interest rates abroad than those that are available in their home countries. The securities involved in such trans- actions include government treasury bills, corporate and government bonds, and even bank currency hedging Practice of insuring against poten- tial losses that result from adverse changes in exchange rates. currency arbitrage Instantaneous purchase and sale of a currency in different markets for profit. interest arbitrage Profit-motivated purchase and sale of interest-paying securi- ties denominated in different currencies.
- 1453. China and Japan began direct trading between their currencies in Tokyo, Japan, and Shanghai, China, in 2012. Average daily turn- over on Tokyo’s foreign exchange market is about $240 billion. While impressive, this is signifi- cantly lower than trading volume in the U.K. market ($1.33 trillion) and the U.S. market ($618 billion). Around $3.2 trillion worth of cur- rency is traded on global foreign exchange markets every day. Gumpanat Thavankitdumrong/Alamy Stock Photo M09_WILD9220_09_SE_C09.indd 229 10/30/17 8:49 PM 230 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM deposits. Suppose a trader notices that the interest rates paid on bank deposits in Mexico are higher
- 1454. than those paid in Sydney, Australia (after adjusting for exchange rates). He can convert Australian dollars to Mexican pesos and deposit the money in a Mexican bank account for, say, one year. At the end of the year, he converts the pesos back into Australian dollars and earns more in interest than the same money would have earned had it remained on deposit in an Australian bank. CURRENCY SPECULATION Currency speculation is the purchase or sale of a currency with the expectation that its value will change and generate a profit. The shift in value might be expected to occur suddenly or over a longer period. The foreign exchange trader may bet that a currency’s price will go either up or down in the future. Suppose a trader in London believes that the value of the Japanese yen will increase over the next three months. She buys yen with pounds at today’s current price, intending to sell them in 90 days. If the price of yen rises in that time, she earns a profit; if it falls, she takes a loss. Speculation is much riskier than arbitrage because the value, or price, of currencies is quite volatile and is affected by many factors. Similar to arbitrage, currency
- 1455. speculation is commonly the realm of foreign exchange specialists rather than the managers of firms engaged in other endeavors. A classic example of currency speculation unfolded in Southeast Asia in 1997. After news emerged in May about Thailand’s slowing economy and political instability, currency traders sprang into action. They responded to poor economic growth prospects and an overvalued currency, the Thai baht, by dumping the baht on the foreign exchange market. When the supply glutted the market, the value of the baht plunged. Meanwhile, traders began speculating that other Asian economies were also vulnerable. From the time the crisis first hit until the end of 1997, the value of the Indonesian rupiah fell by 87 percent, the South Korean won by 85 percent, the Thai baht by 63 percent, the Philippine peso by 34 percent, and the Malaysian ringgit by 32 percent.2 Although many currency speculators made a great deal of money, the resulting hardship experienced by these nations’ citizens caused some to question the ethics of currency speculation on such a scale.
- 1456. 9.4 Currency Quotes and Rates Because of the importance of foreign exchange to trade and investment, businesspeople must understand how currencies are quoted in the foreign exchange market. Managers must know what financial instruments are available to help them protect the profits earned by their international business activities. And they must be aware of government restrictions that may be imposed on the convertibility of currencies and know how to work around these and other obstacles. Quoting Currencies There are two components to every quoted exchange rate: the quoted currency and the base currency. If an exchange rate quotes the number of Japanese yen needed to buy one US dollar (¥/$), the yen is the quoted currency and the dollar is the base currency. When you designate any exchange rate, the quoted currency is always the numerator and the base currency is the denominator. For example, if you were given a yen/dollar exchange rate quote of 90/1 (meaning that 90 yen are needed to buy one dollar), the numerator is 90
- 1457. and the denominator is 1. We can also designate this rate as ¥ 90/$. DIRECT AND INDIRECT RATE QUOTES Table 9.1 lists exchange rates between the US dollar and a number of other currencies. The columns under the heading “Currency per US $” tell us how many units of each listed currency can be purchased with one US dollar. For example, in the row currency speculation Purchase or sale of a currency with the expectation that its value will change and generate a profit. 9.4 Explain the different types of currency quotes and exchange rates. quoted currency The numerator in a quoted exchange rate, or the currency with which another currency is to be purchased.
- 1458. base currency The denominator in a quoted exchange rate, or the currency that is to be purchased with another currency. QUICk sTUDY 3 1. What is the market in which currencies are bought and sold and their prices are determined? 2. Insuring against potential losses that may result from adverse changes in exchange rates is called what? 3. What do we call the instantaneous purchase and sale of a currency in different markets to make a profit? M09_WILD9220_09_SE_C09.indd 230 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 231
- 1459. Country (Currency) Currency per Us $ Argentina (peso) 3.9512 Australia (dollar) 1.1189 Bahrain (dinar) 0.3770 Brazil (real) 1.7559 Britain (pound) 0.6515 Canada (dollar) 1.0645 Chile (peso) 502.75 China (yuan) 6.8090 Colombia (peso) 1,826.45 Czech Rep. (koruna) 19.5210 Denmark (krone) 5.8684 Ecuador (US dollar) 1
- 1460. Egypt (pound) 5.7055 Euro area (euro) 0.7883 Hong Kong (dollar) 7.7788 Hungary (forint) 226.3250 India (rupee) 47.0750 Indonesia (rupiah) 9040.0 Israel (shekel) 3.8147 Japan (yen) 84.3770 Jordan (dinar) 0.7057 Kenya (shilling) 81.0200 Kuwait (dinar) 0.2885 Lebanon (pound) 1,507.39
- 1461. Malaysia (ringgit) 3.1405 Mexico (peso) 13.2040 New Zealand (dollar) 1.4286 Norway (krone) 6.3030 Pakistan (rupee) 85.470 Peru (new sol) 2.7970 Philippines (peso) 45.2250 Poland (zloty) 3.1551 Romania (leu) 3.3659 Russia (ruble) 30.8040 Saudi Arabia (riyal) 3.7509 Singapore (dollar) 1.3546 Slovak Rep (koruna) 23.7470
- 1462. South Africa (rand) 7.3872 South Korea (won) 1,191.55 Sweden (krona) 7.3773 Switzerland (franc) 1.0163 Taiwan (dollar) 32.0250 Thailand (baht) 31.2170 Turkey (lira) 1.5266 TABLE 9.1 Exchange Rates of Major Currencies (continued) M09_WILD9220_09_SE_C09.indd 231 10/30/17 8:49 PM 232 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM
- 1463. labeled “Japan (yen),” we see that 84.3770 Japanese yen can be bought with one US dollar. We state this exchange rate as ¥ 84.3770/$. Because the yen is the quoted currency, we say that this is a direct quote on the yen and an indirect quote on the dollar. Note that the exchange rate for a nation participating in the single currency (euro) of the European Union is found on the line in the table that reads “Euro area (euro).” When we have a direct quote on a currency and wish to calculate the indirect quote, we simply divide the currency quote into the numeral 1. The following formula is used to derive a direct quote from an indirect quote: Direct quote = 1 Indirect quote And for deriving an indirect quote from a direct quote: Indirect quote = 1
- 1464. Direct quote In the previous example, we were given an indirect quote on the US dollar of ¥ 84.3770/$. To find the direct quote on the dollar we simply divide ¥ 84.3770 into $1: $1 ÷ ¥ 84.3770 = $0.011852/ ¥ This means that it costs $0.011852 to purchase one yen (¥) — slightly more than one US cent. We state this exchange rate as $0.011852/¥. In this case, because the dollar is the quoted currency, we have a direct quote on the dollar and an indirect quote on the yen. Businesspeople and foreign exchange traders track currency values over time because changes in currency values can benefit or harm international transactions. Exchange-rate risk (foreign exchange risk) is the risk of adverse changes in exchange rates. Managers develop strategies to minimize this risk by tracking percentage changes in exchange rates. To see how to calculate
- 1465. percentage change in the value of currencies, read this chapter ’s appendix on page 243. CROSS RATES International transactions between two currencies other than the US dollar often use the dollar as a vehicle currency. For example, a retail buyer of merchandise in the Netherlands might convert its euros (recall that the Netherlands uses the European Union currency) to US dollars and then pay its Japanese supplier in US dollars. The Japanese supplier may then take those US dollars and convert them to Japanese yen. This process was more common years ago, when fewer currencies were freely convertible and when the United States greatly dominated world trade. Today, a Japanese supplier may want payment in euros. In this case, both the Japanese and the Dutch companies need to know the exchange rate between their respective currencies. To find this rate using their respective exchange rates with the US dollar, we calculate what is called a cross rate—an exchange rate calculated using two other exchange rates. Cross rates between two currencies can be calculated using both
- 1466. currencies’ indirect or direct exchange rates with a third currency. For example, suppose we want to know the cross rate between the currencies of the Netherlands and Japan. Looking at Table 9.1 again, we see that the direct quote on the euro is € 0.7883/$. The direct quote on the Japanese yen is ¥ 84.3770/$. To find the cross rate between the euro and the yen, with the yen as the base currency, we simply divide € 0.7883/$ by ¥ 84.3770/$: € 0.7883/$ ÷ ¥ 84.3770/$ = € 0.0093/ ¥ Thus, it costs 0.0093 euros to buy 1 yen. Table 9.2 shows the cross rates for major world currencies. When finding cross rates using direct quotes, currencies down the left-hand side represent quoted currencies; those across the top exchange-rate risk (foreign exchange risk) Risk of adverse changes in exchange rates.
- 1467. cross rate Exchange rate calculated using two other exchange rates. Country (Currency) Currency per Us $ U.A.E. (dirham) 3.6724 Uruguay (peso) 20.83 Venezuela (b. fuerte) 4.2946 Vietnam (dong) 19,495 Table 9.1 Continued M09_WILD9220_09_SE_C09.indd 232 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 233 represent base currencies. Conversely, when finding cross rates using indirect quotes, currencies down the left side represent base currencies; those across the
- 1468. top represent quoted currencies. Look at the intersection of the “Euro area” row (the quoted currency in our example) and the “Yen” column (our base currency). Note that the solution we calculated above for the cross rate between euro and yen match the listed rate of 0.0093 euros to the yen. Naturally, the exchange rate between the euro and the yen is quite important to both the Japanese supplier and Dutch retailer we mentioned earlier. If the value of the euro falls relative to the yen, the Dutch company must pay more in euros for its Japanese products. This situation will force the Dutch company to take one of two steps: either increase the price at which it resells the Japanese product (perhaps reducing sales) or keep prices at current levels (thus reducing its profit margin). Ironically, the Japanese supplier will suffer if the yen rises too much. Why? Under such circumstances, the Japanese supplier can do one of two things: allow the exchange rate to force its euro prices higher (thus maintaining profits) or reduce its
- 1469. yen prices to offset the decline of the euro (thus reducing its profit margin). Both the Japanese supplier and the Dutch buyer can absorb exchange rate changes by squeezing profits—but only to a point. After that point is passed, they will no longer be able to trade. The Dutch buyer will be forced to look for a supplier in a country with a more favorable exchange rate or for a supplier in its own country (or another European country that uses the euro). Spot Rates All the exchange rates we’ve discussed so far are called spot rates—exchange rates that require delivery of the traded currency within two business days. Exchange of the two currencies is said to occur “on the spot,” and the spot market is the market for currency transactions at spot rates. The spot market assists companies in performing any one of three functions: 1. Converting income generated from sales abroad into their home-country currency; 2. Converting funds into the currency of an international
- 1470. supplier; 3. Converting funds into the currency of a country in which they wish to invest. BUY AND SELL RATES The spot rate is available only for trades worth millions of dollars. That is why it is available only to banks and foreign exchange brokers. If you are traveling to another country and want to exchange currencies at your local bank before departing, you will not be quoted the spot rate. Rather, you will receive a quote that includes a markup to cover the costs your bank incurs when performing this transaction for you. Suppose you are taking a business trip to Spain and need to buy some euros. The bank will quote you exchange-rate terms, such as $1.268/78 per €, which means that the bank will buy US dollars at the rate of $1.268/€ and sell them at the rate of $1.278/€. Forward Rates When a company knows that it will need a certain amount of foreign currency on a certain future date, it can exchange currencies using a forward rate—an
- 1471. exchange rate at which two parties agree to exchange currencies on a specified future date. Forward rates represent the expectations of currency traders and bankers regarding a currency’s future spot rate. Ref lected in these spot rate Exchange rate requiring delivery of the traded currency within two business days. spot market Market for currency transactions at spot rates. forward rate Exchange rate at which two parties agree to exchange currencies on a specified future date. Dollar Euro Yen Pound swiss Franc Canadian Dollar Canada 1.0646 1.3505 0.0126 1.6345 1.0476 . . . Switzerland 1.0163 1.2892 0.0120 1.5603 . . . 0.9546
- 1472. Britain 0.6513 0.8262 0.0077 . . . 0.6409 0.6118 Japan 84.454 107.13 . . . 129.66 83.102 79.330 Euro area 0.7883 . . . 0.0093 1.2103 0.7757 0.7405 United States . . . 1.2686 0.0118 1.5354 0.9840 0.9393 TABLE 9.2 Key Currency Cross Rates M09_WILD9220_09_SE_C09.indd 233 10/30/17 8:49 PM 234 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM expectations are a country’s present and future economic conditions (including inflation rate, national debt, taxes, trade balance, and economic growth rate) as well as its social and political situation. The forward market is the market for currency transactions at forward rates. To insure themselves against unfavorable exchange-rate
- 1473. changes, companies commonly turn to the forward market. It can be used for all types of transactions that require future payment in other currencies, including credit sales or purchases, interest receipts or payments on investments or loans, and dividend payments to stockholders in other countries. But not all nations’ currencies trade in the forward market, such as countries experiencing high inflation or currencies not in demand on international financial markets. FORWARD CONTRACTS Suppose a Brazilian bicycle maker imports parts from a Japanese supplier. Under the terms of their contract, the Brazilian importer must pay 100 million Japanese yen in 90 days. The Brazilian firm can wait until one or two days before payment is due, buy yen in the spot market, and pay the Japanese supplier. But in the 90 days between the contract date and the due date the exchange rate will likely change. What if the value of the Brazilian real goes down? In that case, the Brazilian importer will have to pay more reais (plural of real) to get the same 100 million Japanese yen. Therefore, our importer may want to pay off the debt before the
- 1474. 90-day term. But what if it does not have the cash on hand? What if it needs those 90 days to col- lect accounts receivable from its own customers? To decrease its exchange-rate risk, our Brazilian importer can enter into a forward contract—a contract that requires the exchange of an agreed-on amount of a currency on an agreed-on date at a specified exchange rate. Forward contracts are commonly signed for 30, 90, and 180 days into the future, but customized contracts (say, for 76 days) are possible. Note that a forward contract requires the exchange to occur: The bank must deliver the yen, and the Brazilian importer must buy them at the prearranged price. Forward contracts belong to a family of financial instruments called derivatives—instruments whose values derive from other commodities or financial instruments. These include not only forward contracts but also currency swaps, options, and futures (presented next in this chapter). In our example, the Brazilian importer can use a forward contract to pay yen to its Japanese supplier in 90 days. It is always possible, of course, that in 90
- 1475. days, the value of the real will be lower than its current value. But by locking in at the forward rate, the Brazilian firm protects itself against the less favorable spot rate at which it would have to buy yen in 90 days. In this case, the Brazilian company protects itself from paying more to the supplier at the end of 90 days than if it were to pay at the spot rate in 90 days. Thus, it protects its profit from further erosion if the spot rate becomes even more unfavorable over the next three months. Remember, too, that such a contract prevents the Brazilian importer from taking advantage of any increase in the value of the Brazilian real in 90 days that would reduce what the company owed its Japanese supplier. Swaps, Options, and Futures In addition to forward contracts, three other types of currency instruments are used in the forward market: currency swaps, options, and futures. CURRENCY SWAPS A currency swap is the simultaneous purchase and sale of foreign exchange for two different dates. Currency swaps are an increasingly important component of the foreign exchange market. Suppose a Swedish automaker
- 1476. imports parts from a subsidiary in Turkey. The Swedish company must pay the Turkish subsidiary in Turkish lira for the parts when they are delivered today. The company also expects to receive Turkish liras for automobiles sold in Turkey in 90 days. Our Swedish company exchanges kronor for lira in the spot market today to pay its subsidiary. At the same time, it agrees to a forward contract to sell Turkish lira (and buy Swedish kronor) in 90 days at the quoted 90-day forward rate for lira. In this way, the Swedish company uses a swap both to reduce its exchange-rate risk and to lock in the future exchange rate. In this sense, we can think of a currency swap as a more complex forward contract. CURRENCY OPTIONS Recall that, once it is entered into, a forward contract requires an exchange of currencies. By contrast, a currency option is a right, or option, to exchange a specified amount of a currency on a specified date at a specified rate. Suppose a company buys an option to purchase Swiss francs at SF 1.02/$ in 30 days. If, at the end of the 30 days, the exchange rate is SF 1.05/$, the
- 1477. company would not exercise its currency forward market Market for currency transactions at forward rates. forward contract Contract that requires the exchange of an agreed-on amount of a currency on an agreed-on date at a specified exchange rate. derivative Financial instrument whose value derives from other commodities or financial instruments. currency swap Simultaneous purchase and sale of foreign exchange for two different dates. currency option Right, or option, to exchange a specified amount of a currency on
- 1478. a specified date at a specified rate. M09_WILD9220_09_SE_C09.indd 234 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 235 option. Why? It could get SF 0.03 more for every dollar by exchanging at the spot rate in the cur- rency market rather than at the stated rate of the option. Companies often use currency options to hedge against exchange-rate risk or to obtain foreign currency. CURRENCY FUTURES CONTRACTS Similar to a currency forward contract is a currency futures contract—a contract requiring the exchange of a specified amount of currency on a speci- fied date at a specified exchange rate, with all conditions fixed and not adjustable. 9.5 Market Instruments and Institutions The foreign exchange market is actually an electronic network that connects the world’s major financial centers. In turn, each of these centers is a network of
- 1479. foreign exchange traders, currency trading banks, and investment firms. The daily trading volume on the foreign exchange market (comprising currency swaps and spot and forward contracts) amounts to around $4 trillion—an amount greater than the yearly gross domestic product of many small nations.3 Several major trading centers and several currencies dominate the foreign exchange market. Trading Centers Most of the world’s major cities participate in trading on the foreign exchange market. In recent years, just three countries have come to account for more than half of all global currency trading: the United Kingdom, the United States, and Japan. Accordingly, most of this trading takes place in the financial capitals of London, New York, and Tokyo. London dominates the foreign exchange market for historic and geographic reasons. The United Kingdom was once the world’s largest trading nation. British merchants needed to exchange currencies of different nations, and London naturally assumed the role of financial trading center.
- 1480. London quickly came to dominate the market and still does so because of its location halfway between North America and Asia. A key factor is its time zone. Because of differences in time zones, London is opening for business as markets in Asia close trading for the day. When New York opens for trading in the morning, trading is beginning to wind down in London. Also, most large banks active in foreign exchange employ overnight traders to ensure continuous trading (see Figure 9.1). Important Currencies Although the United Kingdom is the major location of foreign exchange trading, the US dollar is the currency that dominates the foreign exchange market. The US dollar’s dominance makes it a vehicle currency—a currency used as an intermediary to convert funds between two other cur- rencies. The currencies most often involved in currency transactions are the US dollar, European Union euro, Japanese yen, and British pound. One reason the US dollar is a vehicle currency is because the United States is the world’s largest
- 1481. trading nation. Many companies and banks maintain dollar deposits, making it easy to exchange other currencies with dollars. Another reason is that, following the Second World War, all of the world’s major currencies were tied indirectly to the dollar because it was the most stable currency. In turn, the dollar’s value was tied to a specific value of gold— a policy that held wild currency swings in check. Although world currencies are no longer linked to the value of gold (see Chapter 10), the stability of the dollar, along with its resistance to inflation, sometimes helps people and organizations maintain their purchasing power better than their own national currencies. currency futures contract Contract requiring the exchange of a specified amount of currency on a specified date at a specified exchange rate, with all conditions fixed and not adjustable. 9.5 Describe the instruments and institutions of the foreign exchange market.
- 1482. vehicle currency Currency used as an intermediary to convert funds between two other currencies. QUICk sTUDY 4 1. The numerator in a quoted exchange rate, or the currency with which another currency is to be purchased, is called a what? 2. What is the name given to the risk of adverse changes in exchange rates? 3. What do we call an exchange rate requiring delivery of a traded currency within two business days? 4. What instruments are used in the forward market? M09_WILD9220_09_SE_C09.indd 235 10/30/17 8:49 PM 236 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM
- 1483. Interbank Market It is in the interbank market that the world’s largest banks exchange currencies at spot and forward rates. Companies tend to obtain foreign exchange services from the bank where they do most of their business. Banks satisfy client requests for exchange quotes by obtaining quotes from other banks in the interbank market. For transactions that involve commonly exchanged currencies, the largest banks often have sufficient currency on hand. Yet, rarely exchanged currencies are not typically kept on hand and may not even be easily obtainable from another bank. In such cases, banks turn to foreign exchange brokers, who maintain vast networks of banks through which they obtain seldom-traded currencies. In the interbank market, then, banks act as agents for client companies. In addition to locating and exchanging currencies, banks commonly offer advice on trading strategy, supply a variety of currency instruments, and provide other risk-management services. Banks also help their clients manage exchange-rate risk by supplying information on rules and regulations around the world.
- 1484. Large banks in the interbank market use their influence in currency markets to get better rates for their largest clients. Small and medium-sized businesses often cannot get the best exchange rates because they deal only in small volumes of currencies and do so rather infrequently. A small company might get better exchange rate quotes from a discount international payment service. CLEARING MECHANISMS Clearing mechanisms are an important element of the interbank market. Foreign exchange transactions among banks and foreign exchange brokers happen con- tinuously. The accounts are not settled after each individual trade but are settled following a number of completed transactions. The process of aggregating the currencies that one bank owes another and then carrying out that transaction is called clearing. Years ago, banks performed clearing every day or every two days, and they physically exchanged currencies with other banks. Nowadays, clearing is performed more frequently and occurs digitally, which eliminates the need to trade currencies physically.
- 1485. Securities Exchanges Securities exchanges specialize in currency futures and options transactions. Buying and selling currencies on these exchanges entails the use of securities brokers, who facilitate transactions by transmitting and executing clients’ orders. Transactions on securities exchanges are much smaller interbank market Market in which the world’s largest banks exchange currencies at spot and forward rates. clearing Process of aggregating the curren- cies that one bank owes another and then carrying out the transaction. securities exchange Exchange specializing in currency futures and options transactions. Figure 9.1 Financial Trading Centers
- 1486. by Time Zone San Francisco New York London Tokyo Hong Kong Tokyo Singapore Sydney M09_WILD9220_09_SE_C09.indd 236 10/30/17 8:49 PM CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 237 than those in the interbank market and vary with each currency.
- 1487. The leading exchange that deals in most major asset classes of futures and options is the CME Group, Inc. (www.cmegroup.com). The CME Group merged the futures and options operations of the Chicago Board of Trade, the Chicago Mercantile Exchange, and the New York Mercantile Exchange. The CME Group’s for- eign exchange marketplace is the world’s second largest electronic foreign exchange marketplace, with more than $80 billion in daily liquidity.4 Another exchange is the London International Financial Futures Exchange (www.euronext .com), which trades futures and options for major currencies. In the United States, trading in cur- rency options occurs only on the Philadelphia Stock Exchange (www.nasdaqtrader.com). It deals in both standardized options and customized options, allowing investors flexibility in designing currency option contracts.5 Over-the-Counter Market The over-the-counter (OTC) market is a decentralized exchange encompassing a global computer network of foreign exchange traders and other market
- 1488. participants. All foreign exchange transactions can be performed in the OTC market, where the major players are large financial institutions. The over-the-counter market has grown rapidly because it offers distinct benefits for business. It allows businesspeople to search freely for the institution that provides the best (lowest) price for conducting a transaction. It also offers opportunities for designing customized transactions. For additional ways companies can become more adept in their foreign exchange activities, see this chapter’s Manager’s Briefcase, titled “Managing Foreign Exchange.” CURRENCY RESTRICTION A convertible (hard) currency is traded freely in the foreign exchange market, with its price determined by the forces of supply and demand. Countries that allow full convertibility are those that are in strong financial positions and that have adequate reserves of foreign currencies. Such countries have no reason to fear that people will sell their own currency for that of another. Still, many newly industrialized and developing countries do
- 1489. not permit the free convertibility of their currencies. Governments impose currency restrictions to achieve several goals. One goal is to preserve a country’s reserve of hard currencies with which to repay debts owed to other nations. Developed nations, emerging markets, and some countries that export natural resources tend to have the greatest amounts of foreign exchange. Without sufficient reserves (liquidity), a country could default on its loans and thereby discourage future investment flows. This is precisely what hap- pened to Argentina several years ago when the country defaulted on its international public debt. over-the-counter (OTC) market Decentralized exchange encom- passing a global computer network of foreign exchange traders and other market participants. convertible (hard) currency Currency that trades freely in the foreign exchange market, with its price determined by the forces of
- 1490. supply and demand. • Match Needs to Providers Analyze your foreign exchange needs and the range of service providers available. Find a provider that offers the transactions you undertake in the currencies you need, and consolidate repetitive transfers. Many businesspeople naturally look to local bankers when they need to transfer funds abroad, but this may not be the cheapest or best choice. A mix of service providers some- times offers the best solution. • Work with the Majors Money-center banks (those located in financial centers) that participate directly in the foreign exchange market can have cost and service advantages over local banks. Dealing directly with a large trading institution is often more cost effective than dealing with a local bank because it avoids the additional markup that the local bank charges for its services. • Consolidate to Save save money by timing your interna- tional payments to consolidate multiple transfers into one large transaction. open a local currency account abroad against which you can write drafts if your company makes multiple smaller payments in the same currency. Consider
- 1491. allowing foreign receivables to accumulate in an interest- bearing account locally until you repatriate them in a lump sum to reduce service fees. • Get the Best Deal Possible If your foreign exchange activity is substantial, develop relationships with two or more money-center banks to get the best rates. Also, monitor the rates your company gets over time, as some banks raise rates if you’re not shopping around. obtain real-time market rates provided by firms like Reuters and Bloomberg. • Embrace Information Technology Every time an employee phones, e-mails, or faxes in a transaction, human error could delay getting funds where and when your company needs them. Embrace information technology in your business’s international wire transfers and drafts. Automated software programs available from specialized service providers reduce the potential for errors while speeding the execution of transfers. MANAGER’S BRIEFCASE Managing Foreign Exchange M09_WILD9220_09_SE_C09.indd 237 10/30/17 8:49 PM
- 1492. http://www.cmegroup.com/ http://www.euronext.com/ http://www.euronext.com/ http://www.nasdaqtrader.com/ 238 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM A second goal of currency restriction is to preserve hard currencies in order to pay for imports and to finance trade deficits. Recall from Chapter 5 that a country runs a trade deficit when the value of its imports exceeds the value of its exports. Currency restrictions help governments maintain inventories of foreign currencies with which to pay for such trade imbalances. They also make importing more difficult because local companies cannot obtain foreign currency to pay for imports. The resulting reduction in imports directly improves the country’s trade balance. A third goal is to protect a currency from speculators. For example, in the wake of the Asian financial crisis years ago, some Southeast Asian nations considered controlling their currencies
- 1493. to limit the damage done by economic downturns. Malaysia stemmed the outf low of foreign money by preventing local investors from converting their Malaysian holdings into other curren- cies. Although the move also curtailed currency speculation, it effectively cut off Malaysia from investors elsewhere in the world. A fourth (less common) goal is to keep resident individuals and businesses from investing in other nations. These policies can generate more rapid economic growth in a country by forcing investment to remain at home. Unfortunately, although this might work in the short term, it normally slows long- term economic growth. The reason is that there is no guarantee that domestic funds held in the home country will be invested there. Instead, they might be saved or even spent on consumption. Ironically, increased consumption can mean further increases in imports, making a trade deficit even worse. Instruments for Restricting Currencies Certain government policies are frequently used to restrict currency convertibility. Governments can require that all foreign exchange transactions be performed
- 1494. at or approved by the country’s central bank. They can also require import licenses for some or all import transactions. These licenses help the government control the amount of foreign currency leaving the country. Some governments implement systems of multiple exchange rates, specifying a higher exchange rate on the importation of certain goods or on imports from certain countries. The gov- ernment can thus reduce importation while ensuring that important goods still enter the country. It also can use such a policy to target the goods of countries with which it is running a trade deficit. Other governments issue import deposit requirements that require businesses to deposit certain percentages of their foreign exchange funds in special accounts before being granted import licenses. In addition, quantity restrictions limit the amount of foreign currency that residents can take out of the home country when traveling to other countries as tourists, students, or medical patients. One way to get around national restrictions on currency
- 1495. convertibility is countertrade—the practice of selling goods or services that are paid for, in whole or in part, with other goods or ser- vices. One simple form of countertrade is a barter transaction, in which goods are exchanged for others of equal value. Parties exchange goods and then sell them in world markets for hard currency. For example, Cuba once exchanged $60 million worth of sugar for cereals, pasta, and vegetable oils from the Italian firm Italgrani. And Boeing (www.boeing.com) has sold aircraft to Saudi Arabia in return for oil. We detail the many different forms of countertrade in Chapter 13. countertrade Practice of selling goods or ser- vices that are paid for, in whole or in part, with other goods or services. QUICk sTUDY 5 1. Where does more than half of all global currency trading take place? 2. A currency used as an intermediary to convert funds between
- 1496. two other currencies is called a what? 3. What is another name for a freely convertible currency? 4. Why do governments sometimes engage in currency restriction? Well-functioning financial markets are essential to conducting international business. International financial markets supply companies with the mechanism they require to exchange currencies, and more. Here we focus on the main implications of these markets for international companies. International Capital Market and Businesses The international capital market joins borrowers and lenders from different national capital markets. A company unable to obtain funds in its own nation may use the international capital market to obtain financing elsewhere and allow the firm to undertake an BOTTOM LINE FOR BUSINESS M09_WILD9220_09_SE_C09.indd 238 10/30/17 8:49 PM
- 1497. http://www.boeing.com/ CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 239 MyLab Management Go to www.pearson.com/mylab/management to complete the problems marked with this icon . Chapter Summary LO9.1 Explain the importance of the international capital market. • The international capital market is meant to (1) expand the supply of capital for bor- rowers, (2) lower interest rates for borrowers, and (3) lower risk for lenders. • Growth in the international capital market is due mainly to (1) advances in informa- tion technology, (2) deregulation of capital markets, and (3) innovation in financial instruments. • London, New York, and Tokyo are the world’s most important
- 1498. financial centers. Off- shore financial centers handle less business than the world’s most important financial centers but have few regulations and few, if any, taxes. LO9.2 Describe the main components of the international capital market. • The international bond market consists of all bonds sold by issuers outside their own countries. It is growing as investors in developed markets search for higher rates from borrowers in emerging markets, and vice versa. • The international equity market consists of all stocks bought and sold outside the home country of the issuing company. Factors driving its growth are (1) privatization, (2) increased activity by companies in emerging nations, (3) global reach of invest- ment banks, and (4) global electronic trading. • The Eurocurrency market consists of all the world’s currencies banked outside their countries of origin. Its appeal is a lack of government regulation
- 1499. and a lower cost of borrowing. LO9.3 Outline the functions of the foreign exchange market. • One function is to convert one currency into another for individuals, companies, and governments. • Second, it is used as a hedging device to insure against adverse changes in exchange rates. otherwise impossible project. This option can be especially impor- tant for firms in countries with small or emerging capital markets. similar to the prices of any other commodity, the “price” of money is determined by supply and demand. If the supply increases, the price (in the form of interest rates) falls. The inter- national capital market opens up additional sources of financing for companies, possibly financing projects previously regarded as
- 1500. not feasible. The international capital market also expands lending opportunities, which reduces risk for lenders by allowing them to spread their money over a greater number of debt and equity instruments and to benefit from the fact that securities markets do not move up and down in tandem. International Financial Market and Businesses Companies must convert to local currencies when they undertake foreign direct investment. later, when a firm’s international sub- sidiary earns a profit and the company wishes to return profits to the home country, it must convert the local money into the home currency. The prevailing exchange rate at the time profits are exchanged influences the amount of the ultimate profit or loss. This raises an important aspect of international financial mar - kets—fluctuation. International companies can use hedging in foreign exchange markets to lessen the risk associated with inter- national transfers of funds and to protect themselves in credit transactions in which there is a time lag between billing and receipt of payment. some firms take part in currency arbitrage
- 1501. when they have large sums of cash on hand. Companies can also use interest arbitrage to find better interest rates abroad than those available in their home countries. Businesspeople are also interested in tracking currency values over time because changes in currency values affect their i nter- national transactions. Profits earned by companies that import products for resale are influenced by the exchange rate between their currency and that of the nation from which they import. Man- agers who understand that changes in these currencies’ values affect the profitability of their international business activities can develop strategies to minimize risk. In the next chapter, we extend our coverage of the international financial system to see how market forces (including interest rates and inflation) have an impact on exchange rates. We also conclude our study of the international financial system by looking at the roles of government and international institutions in managing movements in exchange rates. M09_WILD9220_09_SE_C09.indd 239 10/30/17 8:49 PM
- 1502. http://www.pearson.com/mylab/management 240 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM • Third, it is used to earn a profit from currency arbitrage or other interest-paying security in different markets. • Fourth, it is used to speculate about a change in the value of a currency and thereby earn a profit. LO9.4 Explain the different types of currency quotes and exchange rates. • An exchange-rate quote between currency A and currency B (A/B) of 10/1 means that it takes 10 units of currency A to buy 1 unit of currency B (this is a direct quote of currency A and an indirect quote of currency B). • Exchange rates can also be found using two currencies’ exchange rates with a com-
- 1503. mon currency, which results in a cross rate. • An exchange rate that requires delivery of a traded currency within two business days is called a spot rate. • A forward rate is the rate at which two parties agree to exchange currencies on a specified future date. LO9.5 Describe the instruments and institutions of the foreign exchange market. • The interbank market is where the world’s largest banks locate and exchange cur- rencies for companies. Securities exchanges are physical locations at which currency futures and options are bought and sold (in smaller amounts than those traded in the interbank market). • Goals of currency restriction include (1) preserve hard currency reserves for repaying debts owed to other nations, (2) preserve hard currency to pay for needed imports or
- 1504. to finance a trade deficit, (3) protect a currency from speculators, and (4) keep badly needed currency from being invested abroad. • Instruments used to restrict currencies include (1) government approval for currency exchange, (2) imposed import licenses, (3) a system of multiple exchange rates, and (4) imposed quantity restrictions. base currency (p. 230) bond (p. 223) capital market (p. 222) clearing (p. 236) convertible (hard) currency (p. 237) countertrade (p. 238) cross rate (p. 232) currency arbitrage (p. 229) currency futures contract (p. 235) currency hedging (p. 229) currency option (p. 234) currency speculation (p. 230) currency swap (p. 234) debt (p. 223)
- 1505. derivative (p. 234) equity (p. 223) Eurobond (p. 226) Eurocurrency market (p. 227) exchange rate (p. 228) exchange-rate risk (foreign exchange risk) (p. 232) foreign bond (p. 226) foreign exchange market (p. 228) forward contract (p. 234) forward market (p. 234) forward rate (p. 233) interbank interest rates (p. 228) interbank market (p. 236) interest arbitrage (p. 229) international bond market (p. 226) international capital market (p. 223) international equity market (p. 227) liquidity (p. 223) offshore financial center (p. 225) over-the-counter (OTC) market (p. 237) quoted currency (p. 230) securities exchange (p. 236)
- 1506. securitization (p. 224) spot market (p. 233) spot rate (p. 233) stock (p. 223) vehicle currency (p. 235) Key Terms TALK ABOUT IT 1 The microfinance concept has been a blessing for many people in developing countries. Its success there is prompting some to wonder if it can spur growth in poor areas of devel- oped nations, such as in some poverty-stricken city centers. 9-1. What do you think is at the root of the success of such programs in developing nations? 9-2. What, if any, cultural or commercial obstacles do you foresee derailing this concept in developed nations? M09_WILD9220_09_SE_C09.indd 240 10/30/17 8:49 PM
- 1507. CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 241 TALK ABOUT IT 2 Offshore financial centers operate with little oversight, few regulations, and often fewer taxes. Many governments complain that these centers sometimes facilitate money laundering. 9-3. Do you think that electronic commerce makes it easier or harder to launder money and camouflage other illegal activities? 9-4. Should offshore financial centers be allowed to operate as freely as they do now, or do you favor regulation? Explain. Ethical Challenge The goal of government regulation of financial-services industries is to maintain the integrity and stability of financial systems, thereby protecting both depositors and investors. Regulations include prohibitions against insider trading, against lending by management to itself or to closely related entities (called “self-dealing”), and against other
- 1508. transactions in which there is a conflict of interest. In less than two decades, deregulation transformed the world’s financial markets. It drove competition and growth in financial sectors and boosted the economies of developed and emerging countries alike. It also helped bring the international financial system to the brink of a complete collapse. Although it is also true that intervention in financial markets by government officials helped fuel the financial bubble that eventually burst. 9-5. What do you see as the “dark side” of deregulation in terms of business ethics? 9-6. Do you think the recent increase in regulation is effective in helping prevent another global financial meltdown? 9-7. Do you think the warning of Adam Smith, one of the first philosophers of capitalism, against the dangers of “colluding producers,” applies to the financial-services sector? Teaming Up Suppose your team works for a firm that has $10
- 1509. million in excess cash to invest for one month. Your team’s task is to invest this money in the foreign exchange market to earn a profit—holding dollars is not an option. Select the currencies you wish to buy at today’s spot rate, but do not buy less than $2.5 million of any single currency. Track the spot rate for each currency over the next month in the business press. On the last day of the month, exchange your currencies at the day’s spot rate. Calculate your team’s gain or loss over the one-month period. (Your instructor will determine whether, and how often, currencies may be traded throughout the month.) Market Entry Strategy Project This exercise corresponds to the MESP online simulation. For the country your team is researching, integrate your answers to the following questions into your completed MESP report. 9-8. Is the nation home to a city that is an important financial center?
- 1510. 9-9. What volume of bonds is traded on the country’s bond market? 9-10. How has its stock market(s) performed over the past year? 9-11. What is the exchange rate between its currency and that of your own country? 9-12. What factors are responsible for the stability or volatility in that exchange rate? 9-13. Are there any restrictions on the exchange of the nation’s currency? MyLab Management Go to www.pearson.com/mylab/management for Auto-graded writing questions as well as the following Assisted-graded writing questions: 9-14. Past growth in the international capital market has been fueled by advancements in information technology, deregulation, and securitiza- tion. What factors do you think are holding back the creation of a truly global capital market? 9-15. The use of different national currencies creates a barrier to further growth in international business activity due to conversion costs and
- 1511. exchange-rate risk. What are the pros and cons, among companies and governments, of replacing national currencies with regional currencies, or even a global currency? M09_WILD9220_09_SE_C09.indd 241 10/30/17 8:49 PM http://www.pearson.com/mylab/management 242 PART 4 • THE InTERnATIonAl FInAnCIAl sYsTEM PRACTICING INTERNATIONAL MANAGEMENT CASE Should We Cry for Argentina? Argentina’s past President Eduardo Duhalde had summed it up perfectly: “Argentina is bust. It’s bankrupt. Business is halted, the chain of payments is broken, there is no currency to get the economy moving and we don’t have a peso to pay Christmas bonuses, wages, or pensions,” he said in a speech to Argentina’s Congress. Although it was the star of Latin America in the 1990s, Argen-
- 1512. tina defaulted on its $155 billion of public debt in early 2002, the largest default by any country ever. After taking office in January 2002, President Duhalde implemented many measures to keep the country’s fragile economy from complete collapse after four years of recession. For 10 years, the Argentine peso was fixed at parity to the dollar through a currency board. But when those strings were cut and the currency was allowed to float freely on currency markets, Argentina’s peso quickly lost two-thirds of its value and was trad- ing at 3 pesos to the dollar. Then, strapped for cash, the government seized the savings accounts of its citizens and restricted how much they could withdraw at one time. Street protesters turned violent, beating up several politicians and attacking dozens of banks. Local companies were having a difficult time, too. Many
- 1513. companies blamed their defaults on the requirement that they get authorization from the central bank to send money abroad. Stiff restrictions on foreign currency exchange forced importers to wait several months or more while the government authorized payments in dollars. Companies also struggled with new rules that raised taxes on exporters and other cash-rich firms to help the government pay for social services. Local firms also had a hard time obtaining funds to pay their debts to foreign suppliers. But the loss of confidence among non- Argentine businesses was more difficult to quantify. Many entered Argentina during a wave of free-market changes and privatizations in the 1990s, but grew weary over time. Foreign businesspeople believed that if the government could arbitrarily change contracts as it saw fit, then they could not feel secure about the future.
- 1514. The declining peso intensified problems for US companies that fought to manage soaring debts and mounting losses from their Argentine operations. Argentine units of US companies, which tend to collect revenues in pesos, had an increasingly difficult time repaying their dollar-denominated debts as the peso’s value fell. The government decreed that electricity and gas companies switch their contracts from dollars to less valuable pesos and then froze utility rates to protect consumers. But parent companies were unlikely to rescue their ailing operations in Argentina because the parents generally were not required to support the cash flow or debt service obligations of these independent subsidiaries. The government, trying to lighten its debt load and restore credibility with the International Monetary Fund (www.imf.org), ordered $50 billion in dollar-denominated government debt (mostly domestic) swapped into pesos. The swap was aimed at unlocking
- 1515. $10 billion in IMF loans that were frozen when Argentina failed to meet certain economic targets. US and European investors owned another $46 billion in government bonds, which were to be restruc- tured in a separate transaction. Argentina’s government spent the previous decade amassing debts in dollars and other foreign curren- cies. But when the government cut loose the peso from the dollar in January 2002, the weak peso made the debt far more expensive to repay. Argentina’s economic collapse was devastating. From 2001 through 2002, the economy shrank by 15 percent, unemployment shot up to 21 percent, and poverty engulfed 56 percent of its citizens. Many news agencies stopped reporting Argentina’s inflation rate altogether after that because of suspicion that the government was
- 1516. not reporting a truthful figure. The government’s plan of stimulating demand by raising wages, imposing price controls, keeping the peso low, and spending public funds worked for a time. But inflation soon reached double digits, hitting around 40 percent in 2016, cutting consumers’ purchasing power and increasing poverty. Though the economy had again shrunk in 2016, leaders were hopeful that the country would turn the corner and return to growth in 2017. Thinking Globally 9-16. Argentina’s peso was linked to the US dollar through a currency board for 10 years before it was cut loose. Why did Argentina peg its currency to the dollar in the first place? 9-17. Companies encounter many difficulties in adapting their strategies to deal with the effects of a currency crisis that becomes an economic crash. How did local and interna- tional companies adapt to the business environment at the height of Argentina’s crisis?
- 1517. 9-18. What has been the impact on the savings and purchasing power of ordinary citizens? Sources: Luc Cohen and Lisa Shumaker, “Argentina Economy To Expand More Than 3 Pct This Year–Minister,” Reuters (www.reuters.com), May 11, 2017; “Economic and Financial Indicators,” The Economist, October 6, 2012, p. 108 Dani Rodrik, The Globalization Paradox, (New York: W.W. Norton, 2011), pp. 184–187; Roben Farzad, “Don’t Cry for Argentina,” Bloomberg Businessweek, May 24–May 30, 2010, pp. 9–10; “Clouds Gather Again over the Pampas,” The Economist, August 23, 2008, pp. 30–31. M09_WILD9220_09_SE_C09.indd 242 10/30/17 8:49 PM http://www.reuters.com/ http://www.imf.org/ CHAPTER 9 • InTERnATIonAl FInAnCIAl MARkETs 243
- 1518. Appendix Calculating Percent Change in Exchange Rates Businesspeople and foreign exchange traders track currency values over time as measured by exchange rates because changes in currency values can benefit or harm current and future interna- tional transactions. Managers develop strategies to minimize exchange-rate risk (foreign exchange risk) by tracking percent changes in exchange rates. For example, take PN as the exchange rate at the end of a period (the currency’s new price) and PO as the exchange rate at the beginning of that period (the currency’s old price). We now can calculate percent change in the value of a currency with the following formula: Percent change (%) = Pn - Po Po * 100 Note: This equation yields the percent change in the base
- 1519. currency, not in the quoted currency. Let’s illustrate the usefulness of this calculation with a simple example. Suppose that on February 1 of the current year, the exchange rate between the Norwegian krone (NOK) and the US dollar was NOK 5/$. On March 1 of the current year, suppose the exchange rate stood at NOK 4/$. What is the change in the value of the base currency, the dollar? If we plug these numbers into our formula, we arrive at the following change in the value of the dollar: Percent change (%) = 4 - 5 5 * 100 = - 20% Thus, the value of the dollar has fallen 20 percent. In other words, one US dollar buys 20 percent fewer Norwegian krone on March 1 than it did on February 1. To calculate the change in the value of the Norwegian krone, we must first calculate the indirect
- 1520. exchange rate on the krone. This step is necessary because we want to make the krone our base currency. Using the formula presented earlier in this chapter we obtain an exchange rate of $.20/ NOK (1 , NOK 5) on February 1 and an exchange rate of $.25/NOK (1 , NOK 4) on March 1. Plugging these rates into our percent-change formula, we get: Percent change (%) = .25 - .20 .20 * 100 = 25% Thus, the value of the Norwegian krone has risen 25 percent. One Norwegian krone buys 25 percent more US dollars on March 1 than it did on February 1. How important is this difference to businesspeople and exchange traders? Consider that the typical trading unit in the foreign exchange market (called a round lot) is $5 million. Therefore, a $5 million purchase of krone on February 1 would yield NOK 25 million. But because the dollar
- 1521. has lost 20 percent of its buying power by March 1, a $5 mi llion purchase would fetch only NOK 20 million—5 million fewer krone than a month earlier. M09_WILD9220_09_SE_C09.indd 243 10/30/17 8:49 PM 244 MyLab Management IMPROVE YOUR GRADE! When you see this icon , visit www.pearson.com/mylab/management for activities that are applied, personalized, and offer immediate feedback. 10.1 Describe the importance of exchange rates to business activities. 10.2 Outline the factors that help determine exchange rates. 10.3 Explain attempts to construct a system of fixed exchange rates.
- 1522. 10.4 Describe efforts to create a system of floating exchange rates. Learning Objectives After studying this chapter, you should be able to International Monetary System Chapter Ten A Look Back Chapter 9 examined how the international capital market and foreign exchange market operate. We also learned how exchange rates are calculated and how different rates are used in international business. A Look at This Chapter
- 1523. This chapter extends our knowledge of exchange rates and international financial markets. We examine factors that help determine exchange rates and explore rate- forecasting techniques. We discuss international attempts to manage exchange rates and review recent currency problems in various emerging markets. A Look Ahead Chapter 11 introduces the topic of the last part of this book—international business management. We will explore the specific strategies and organizational structures that companies use in accomplishing their international business objectives. M10_WILD9220_09_SE_C10.indd 244 10/30/17 8:49 PM http://www.pearson.com/mylab/management
- 1524. CHAPTER 10 • InTERnATIonAl MonETARy SySTEM 245 Euro Rollercoaster BRUSSELS, Belgium—“Europe’s Big Idea,” “Ready, Set, Euros!” cried the headlines that greeted the launch of Europe’s single currency, the euro. Not since the time of the Roman Empire has a currency circulated so widely in Europe. Greece even gave up its drachma, a currency it had used for nearly 3,000 years. The euro is the official currency for 19 European countries and is accepted as legal tender in a number of other European nations. The euro initially traded at around one- for-one against the dollar. Its value began to rise significantly, and a euro soon could buy around $1.57. The rise of the euro dem- onstrated confidence in the future expected growth and development of nations in the euro zone. It also boosted the status of the euro as a global currency, one that could perhaps rival the US dollar.
- 1525. But the global credit crisis and subse- quent recession exposed Europe’s econo- mies that were carrying too much national debt. By late 2017, the euro could buy only around $1.10. The euro rollercoaster rose and fell with each new revelation about the economic health of European nations. But financial markets stabilized and the euro’s future again seemed secure. Analysts who once predicted the dollar and euro would move toward one-to- one parity forecast that a euro would soon buy $1.18. The passage of time would determine the accuracy of this forecast. The euro holds long-term benefits for European companies. Using a common cur- rency in business transactions eliminates exchange-rate risk for companies in the euro zone and improves financial planning. It boosts competitiveness as synergies and econo- mies of scale arise from mergers and acquisitions. Europe’s exporters benefit from a weak euro because it lowers their prices on world markets. Some
- 1526. European companies who lost market share abroad when their currency was strong could perhaps win back some of those customers. As you read this chapter, consider how the international monetary system affects managerial decisions and firm performance.1 Daniel Kaesler/123RF.com M10_WILD9220_09_SE_C10.indd 245 10/30/17 8:49 PM 246 PART 4 • THE InTERnATIonAl FInAnCIAl SySTEM In Chapter 9, we explained the fundamentals of how exchange rates are calculated and how different types of exchange rates are used. This chapter extends our understanding of the inter- national financial system by exploring factors that determine exchange rates and various inter- national attempts to manage them. We begin by learning how exchange-rate movements affect a company’s activities and the importance of forecasting exchange rates. We then examine the
- 1527. factors that help determine currency values and, in turn, exchange rates. Next, we learn about dif- ferent attempts to create a system of fixed exchange rates. We conclude this chapter by exploring efforts to develop a system of floating exchange rates and reviewing several recent financial crises. 10.1 Importance of Exchange Rates Exchange rates influence demand for a company’s products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country’s exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison. Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local cur- rency and sells its products in a rising currency, the company
- 1528. benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet, managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company’s long-term competitiveness. Exchange rates also affect the amount of profit a company earns from its international sub- sidiaries. The earnings of international subsidiaries are typically integrated into the parent com- pany’s financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency. Figure 10.1 shows exchange rates between the US dollar and several major currencies. The intentional lowering of the value of a currency by the nation’s government is called devaluation. The reverse, the intentional raising of the value of a currency by the nation’s govern-
- 1529. ment, is called revaluation. These concepts are not to be confused with the terms weak currency and strong currency, although their effects are similar. 10.1 Describe the impor- tance of exchange rates to busin