What is globalization? How does it impact international business? What are important aspects of globalization? In emerging markets and developing nations, what are some of the rising nationalist tendencies toward globalization that are becoming evident? Globalization has both positive and negative effects. What are four unpopular issues with globalization for Americans? You must provide examples to support your answer. Your response should be at least 200 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.
Herdesky, H. (2011). International management: Managing across the borders and cultures. (7 ed., pp. 5-10). Upper Saddle River: The Pearson Education Company.
(Herdesky, 2011)
Chapter I
” Assessing the Environment
2007. British Prime Minister Gordon Brown said in an interview, “It’s the first stage of a financial
protectionism that will lead eventually to the kind of trade protectionism that we’ve seen in the past.”7
Time will tell the long-term consequences around the world, but clearly executives and iheir
companies have been caught in the grip of a storm that will likely revoiutionize business.
The deep freeze of capitctl markts, the implasion of rt.nancial groups and tl’te resulting rise
in Sovernments’ s*’cty over the plivate seclor has called into question some of tlte founda-
tions of Anglo-Saxon capitalism.s
In an effort to develop consensus about how to revive apatalyzed global economy, the leaders of
the world’s latgest economies met at the Group of 20 (G20) meeting in London on April 2, 2009. They
agreed to bail out developing countries, stimulate world trade, and regulate financial flrms more
stringently. Leaders of those countries committed to $1.1 trillion in new funds to be available ro the
International Monetary Fund with the goal of a revival in trade, which was expected to coniract in 2009
for the first time in 30 years. But differences of opinion between Continental Europe and the United
States ovsr whether to act now or wait to see whether existing spentiing measures took effect resulted in
what many considered a shortfall of measures needed to stimulate the world economy. Prime Minister
Gordon Brown of Britain concluded the conference saying:
This is the day the vtorkl cune together to rtght against the global recessiott. Our nrcssctge
today is clear and certain: we believe that global problems require global solurions.g
As evidenced in the opening profile, managers in the twenty-first century are being challenged to
operate in an increasingly complex, interdependent, and dynamic global environment. In a global-
ized economy, developments such as those described in the opening prolile can have repercussions
alound the world aimost instantaneously. Clearly, those involved in intemational and global business
have to adjust their strategies and management styles to those kinds of giobal deveiopments as well
as to those regions of the world in which they want to operate, whether directly or through sorne
form of alliance.
Typical challenges that managers must face involve poiitics, cultural diff’erences, global
competition, terrorism, and technology. In addition, the opportunities and risks of the global
marketplace increasingly bring with them the societal obligations of operating in a global com-
munity. An example is the dilemma faced by Western drug manufacturers of how to fulfill their
responsibilities to stockholders, acquire capital for research, and protect theh pafents while also
being good global citizens by responding to the cry for free or low-cost drugs for AIDS in poor
countries. Managers in those companies are struggling to find ways to balance their social
responsibilities, their images, and their competitive strategies.
To compete aggressively, firms must make considerabie investments overseas-not only
capital investment but aiso investment in well-trained managers with the skills essential to
working effectively in a multicultural environment. In any fofeign envitonment, managerc need
to handle a set of dynamic and fast-changing variables, including the all-pervasive variable of
cultul’e that affects every facet of daily management. Added to that “behavioral software” are the
challenges ofthe burgeoning use oftechnological software and the borderless Internet, which are
rapidly changing the dynamics of competition and operations.
International management, then, is the process of developing strategies, designing and
operating systems, and working with people around the worid to ensure sustained competitive
advantage. Those management functions are shaped by the prevailing conditions and ongoing
developments in the world, as outlined in the ibllowing sections.
TI.IE GLOBAI. BUSIN’EsS ENVIROhIR/IENT
Following is a summary of some of the global situations and trends that managers need to moni-
tor and incorporate in their strategic and operational planning.
Globalization
The lVorld Is Flat
THona,qs Fnt pnilr,t N I o
Part I ” The Clobal Manager’s Environment
The forces and effects of globalization seem to be inescapably evident in our daily lives:
An estintated 2 billion people wituess Live Eanh, ct series af cotrcefts lteld itt I I loccttionsarotutd the vt:orld to raise erntironmental avuareness. chinese nnnufacturer.s clecoratetoys with paint corttctining learl, and childrcn aroLnrcl the ,vorlta hctve to give up tlrcirBatmans and Barbie dolls. Motgagelenders irt the {Jnited statesface a liquidity crunch,and global stocknw*ets go brrir,lk.tl
Business cornpetitiveness has now evolved to a level of sophistication commonly calledglotralization-global competition characterized by networks of internutional linkages thatbind countries’ institrrtions, and peopie in an interdependent giobal economy. Economic inte-gration results from the lessening of trade barriers ani the incrJased flow of goods and services,capital, labor, and technology around the world. The invisible hand of global competition isbeing propelled by the phenomenon of an increasingty uoraertess world, by technological
advancements, and by the rise of developing economies such as china and India-a processthat Thomas Friedman refers to as ‘.ieveling the playing fieid,; a*ong countries_or the”flattening of the world.’,12
whereas the general concept ofglobalization has been that business expanded from developed
to emerging economies., now it is just as likely to refer to business flowing from una un’onf a”*Ioping economies. Sirkin et al. use the term “gtobutity” stating that business these days is all about’tompeting with everyone from everywhere for eueryihing.”lfon ;;r” strategic level, Ghemawat
aiEff’d3; ri?frb?,”tfrhf16b^ob’si;ress’wiiirfriit-a srdt6^or””dem-r-gr6o’ariiarron,.,’ano’wrrT’remarn so rcir
decades to come. He bases this conviction on his analysis that “most types of economic activity that
can be conducted either within or across borders are still quite localized by country.”l4
Globality and Emerging Markets
It is clear, however, that globalization-in the broader sense-has led to the narrowing of dilfercnces
in regional output growth rates as economic activity increased, driven largely by increases led by
China, India, and Russia. In spite of the recent slowdown, world trade continues to grow – it has
grown by 133 percent in the last 15 years and is over 954 trillion. Importantly, global trade is increas_
ingly including the developing nations. Exhibit 1-1 shows the resulrs from research by the A.T.
Kearney Company of the Foreign Direct Investment GDI) intentions and preferences of the leaders
of top companies in 17 industry sectors spanning six continents. The exhibit shows the top
25 countries in which those executives have confidence for their investment opportunities. Their
results show that China and India continue to rank at the top of the FDI Confidence Index and that
six of the top 10 countries are emerging markets.15 This phenomenon, says Fareed Zakar-ia, is some-
thing much broader than the much-ballyhooed rise of China or even Asia. Rather, he says:
It is the rise of the rest-the rest of the world.
FeRepp Zararul, THs Posr-AprERrcAN
Wouo, zoo8.16
“The rest,” he says, include countries such as Brazil,Mexico, South Korea, Taiwan, India, China,
and Russia. He states that, as traditional industries in the United States continue to decline, ,.the
rest” are picking up those opportunities. Even so, the United States remains dominant in many
“new age” industries such as nanotechnology and biotechnology, and is ranked as the globe’s
most competitive economy by the World Economic Forum. It is clear, also, that as emerging
markets continue to grow their countries’ economies, they will provide growth markets for thi
products and sensices of developed economies.
Evidence of the growing number of companies from emerging markets can be seen in
the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the
so-calied BRIC economies of Brazil, Russia, India and China, up from 31 1n 2003.t7 Further
evidence that “globalization” is no longer just another word for’Americanisation,” is the
increase in the number of emerging-market companies acquiring established iarge businesses
and brands from the so-called “developed” countries. For example, in 2008 Budweiser,
America’s favourite beer, was bought by a Belgian-Brazilian conglomerate, and “several of
America’s leading financiai institutions avoided bankruptcy only by going cap in hand to the
Chapter I , Assessing the Environmenl
gxHlalr 1-1 2007 Foreign Direct tnvestment confidence lndex Top 25 Targets for FDI
I
,)
3
4
5
6
7
B United Arob Emiroles
Chino
lndio
United Stotes
United Kingdom
Hong Kong
Brozil
Singopore
2.
21
2.09
1.86
t.8t
9
10
1′,r
12
t1
IJ
14
1q
t6
17
18
.19
20
tl
22
23
24
l)
Russio
Germony
Ausholio
Vielnom
Frcnce
Conodo
Jopon
Molcysio
Other Gulf stotes
Souh A{rico
Mexico
Turkey
lndonesio
Polond
Cenlrcl Asio
South Koreo
Czech Republic
1.72
i.70
1.70
1.68
1.67
1.67
1.65
1.63
1.63
t.62
1.59
1.58
1.58
1.57
1.57
L56
Maintained ranking (oll athers
V lvloved uo
fri Moued down fron
20OS ranking
Low confidence High conlidence
Source’. A. T. Kearney, September 12, 20A8. Copyright A.T. Kearney. lnc., 2007. All rights reserved.
Reprinted with permission.
The main types o{ FDI are acquisition o{ a subsidiary or production facility, joint ventures, licensing,
investing in new facilities on expansion of facilities.
sovereign-wealth f’unds (state-owned investment funds) of various Arab kingdoms and the
Chinese government.”l8 Clearly companies in emerging markets are providing many oppor-
tunities for investment and alliances around the world, as well as establishing themselves as
competitors to leckon with.
However, there are important aspects of globalization other than economic factors,
though these aspects are intertwined. Exhibit 1-2 shows the top 20 countries as measured by
tbur comprehensive factors- economic integration, technological connectivity, personal con-
tact, and political engagement; the details for those categories are given below the charl. As you
can see, although the United States leads the world in technology, it falls behind a number of
countries on the other three factors.
As we consider the many facets of globalization and how they intertwine, we observe how
economic power and shifting opinions and ideals about politics and religion, for example, result
in an increasing backlash against globalization and a rekindling of nationalism. Globaliz-ation
has been propelled by capitalism and open malkets, most notably by Western companies. Now,
. . . econontic power is shi.fting fast to the enterging nations of the south. China
and India arc replacing the U.S. as the engines of *-orld economic growth,
FrNlNCrLL TI*ras,
March 3, 2006.te
The rising nationalist tendencies are evident as emerging and developing nations-
wielding their econornic power in attempted takeovers and inroads around the world-*encounler
protectionism, There is hostility to takeovers such as the Indian company Mittal Steel’s bid for
Europe’s largest steel company, Arcelor. At times Europe seems to be closing its borders; and
even the United States reacted to an attempted takeover of the British P&O by Dubai Ports World
early in 2006. In particular, as the demand on energy resources burgeons with heightened
industrial activity in China, we see increased protectionism of those resources al’ound the world
as Russia, Venezuela, and Bolivia have pdvatized their enelgy resources.
Part 1 , The Global Manager’s Environment
EXHIBIT 1-2 Measuring Globalization
EGONOflIICINTEGRAIION: PERSONAICONIACT:
lncluding inlemotionol trode ond lncluding telephone colls, kovel,
foreign direcl inveslmenl ond remittsnces
TECHNOTOGICAT
CONNECIIVITY!
lncluding number of lnlernel urers,
hosls, ond sKUre seruers
The wcrldt most integrcted counkies hore followed very different polhs to globolizolion.
. As shown, Singopore hos the high6t relotive composite score ond Sloienio rhe
lowsl sco€..lhe totol score comprises lriple weighting on FDI ond double weiqhlinq on kode.
lechnologicol voriobles ond politicol vorisbls ore mch collopsed into single {uolindicotore.
POIITICAT EN6AGTi/TENT:
lncluding foreign otd, ireqlies,
orgonizolions, ond pacekeping
Saurce: Global Retail Development lndex. Copyright A. T. Kearney, 2008. All rights reserved. Reprinted
with permission.
Recently, there has been increasing backlash against globalization coming from those who
feel that it benefits advanced industrial countries at the expense of many olher countries and
people within them who are not sharing in those benefits. Joseph Stiglitz, for example, argues that
such an economic system has been pressed upon many developing countries at the expense of
their sovereignty, their well-being, and their environment. Critics point to the growing numbers of
people around the world living in poverty.2O Recently, globalization has also become increasingly
unpopular with rnany in the United States as growth in emerging markets has raised prices for’
energy and commodities, as their jobs are being lost overseas, driving down wages, and as the
weak dollar makes companies in the United States vulnerable to foreign buyers.2l
While the debate about the effects of globalization continues, it is clear that economic
globalization will be advanced by corporations looking to maximize their profits with global
efficiencies, by politicians and leaders wishing to advance their countries’ economies, and by
technological and transportation advances which make theil production and supply networks
more efficient. However, presswe by parties against those trends, as well as the resurgence in
nationalism and protectionism, may serve to pull back those advances to a more regional scope
in some areas, or bilateral pacts. This was made clear by the breakdown in the Doha round of
talks; unfortunately,
In pursuit of the pedect–qn internationol trade deal agreetl upott by some I 50 countties
with vastly differeilt goals*tregotiators wound up with nothing. The way foruad is like$,
to be via bilaterul cwl regional agrcernents. A glohal deal, if one can be rcached, nmy be
a package of snnller agteen ents befiveen subsets af the fult bo$,.22
Chaprer 1
In addition, while competition to provide the best and cheapest products to consumers
exerts pressure on corporations to maximize elficiencies around the world, there is also incre-
asing pressure and publicity tbr them to consider the social responsibility of their activities
(discussed f’urther in Chapter 2).
*ffeets cf lnstitutions National institutions, in contrast, play a role in creating favorable conditions for domestic Some supranational institutions represent the interests of a smaller group of countries. For Effects erf Globaliaation on Corporations
In returning to our discussion at the corporate level, we can see tha{ alrnost all firms around the Clearly, conpetition is botderless. with most giobal companies producing ancl selling Investment by giobal companies around the world means that this aspect of globalization ” Assessing the Environment *r1.. 10 Part I ” The Global Manager’s Environment
locations, and their operations and allies are spread around the u orld as they source and It is essential, therefore, tbr managers io look beyond their domestic martet, If they do for business leaders, building a finn that is searnlessly integrated across tirne Tss Ecoloursr, Small and medium-sized companies (SMEs) are also affected by, and in turn affecr, 29
There has never been a better time for SMEs to go global; the Internet is as valid a tool for Segional Trading Blocs
The dominance af the Uflited States is already over What is emerging is a world (The late) Ps’tBR Dnucran3l
Much of today’s world trade takes place within three regional free-trade blocs (Western Europe, Chapter i Assessing the Environment 11
MAp 1.1 EU Member States and Candidate Countries
f_l Member Siotes q$I.
*! tceland I
( CY’RUS
So u rce : http://en.wikiped ia. org
THE XURftpEAf{ t.}rui0hJ The European Union (EU) now comprises a 27-nation unified Since the euro became a legally tradable currency, Europe’s business environment has been Global managers lace two major tasks. One is strategic (dealt with more fully in A5{A Hnnv,qnn BusrNsss RrvrsW Nol on moin mop; SPAIN 12 Part 1 . The Global Manager’s Environrnent
Manufacturing accounted for approximately 30 percent of GDP in Asia’s emerging markets in The Chinese nzarket offers big opportanities for foreign investment, but you FTN,TNCInL T\urs36
China has enjoyed success as an eKport powerhouse, a status built on its strengths of India: While China is known as the worid’s factory, India is becoming known as the Trade liberalization started in 1991; India’s Foreign Direct Investment (FDI) rules are more
open, and the refining sector is now open to outside investors. While there is talk of reduced comprising 35o/a of exports. But with a middle class growing at 100 million people per year,
improvernents in customs processes, and 30Vo annual growth in tax revenues, trade is looking
steady.a2
After the Indian economy began opening up to the outside world, therc has been a surge
based on strong industry and agriculture and rising Indian and foreign investment. The expanding
middle class of almost 300 million is fuelling demand-led growth. Increasing deregulation is A common comparison between China and India goes that China’s economy grows fed by firms like the Tata Group-a global conglomerate producing everything from cars and with the ten fast-growing countries in the Association of South-East Asian Nations (ASEAN)- in South Asia, an agreement was signed to form the South Asia Association of Regionai
Cooperation (SAARC), a free trade pact among seven South Asian nations: Bangladesh, Bhutan,
India, the Maldives, Nepal, Pakistan, and Sri Lanka, effective January 1, 2006. The agreemen{
will lower tariffs to 25 percent within three to five years and eliminate them within seven years. Chapter I
:riw’een India and Pakistan, the two largest countries in the region.# Officials in those countries Australia-while not regarded as part of Southeast Asia, but of the region called Oceania iliE AMEftICAS \AFTA: The goal of the North American Free Trade Agreement (NAFIA) between the United However, some changes for Mexico in those years are not debatable, whether or not they The trade agreements have lesulted in an increase in GDP from 9403 billion in 1993 to CAFTA: Modeled atier the NAFTA agreement, the goal of the U.S.-Central America Free Assessing the Environment 15 16 Part 1 ” The Clobal Manager’s Environment
Assemblies in the Central American countries before it becomes iaw. CAFTA is considered to MERCOSUR is the fourth largest trading bloc after the EU, NAFTA and ASEAN. Established OTHER REGIONS lf{ Tl{E WORTD Sweeping political, economic, and social changes around the One of the most striking changes today is that almost all nations have suddenly begun to The Russian Federation Foreign investment in Russia, as well as its consumers’ climbing The writittg has been on the wall for years. The Kremlin won’t stop antil it has INIEnr.ia.rroua.L HEna,lD ThtnuNE, Until recently, Russia has been regarded as more politically stable. New land, legal and labor
codes, as well as the now-convertible ruble have encouraged foreign fitms to take advantage of population of 145 million. Moscow, in particular, is teeming with new construction sites, high-end to be controlled by the so-callecl business “oligarchs”-a small group of businesspeople with politi-
cal influence who capitalized on the privatization of Russia’s economy and who limit competitive of the Yukos oil group, including jailing its head Mikhail Khodorkovsky with an eight-year approval. About two dozen Russian companies have come under the control of the Kremlin in the
tait few years, including newspapers and banks.sa As an example, in September 2008, British
Petroleum had to make deep concessions to its Russian paltner in its TNK-BP oil joint venture in
order to avoid a forced sale of its assets there to a state company. BP had to agree to dismiss the
American chief executive of its joint venture and give up som” board seats to its Russian partners.s5
The Middle East. The United Arab Emirates is the most competitive economy in the Arab Arab World Competitiveness Report 2OA7 by the World Economic Forum. It is followed by Qatar performing Arab econornies while Egypt is the regional best performer in the third group of Oit afld gas revenues provide unique irwestment opportunities, but the region’s investment barrters and educating the next generation to handle the wealth thqt is
now being produced. Education is the biggest challenge’56
Developing Economies are characterized by change that has come about more slowly as they
struggle with low gross national product (GNP) and low per capita income, as well as the burdens
of large, relatively unskilled populations and high international debt, Their economic situation and
the often-unacceptable level of government intervention discourage the foreign investment they 20 Part I . The Global Manager’s Environment
EX$fi&FT t-3 An Open Systems Model
NrEGA ENYlRotygr”,
&NC-Hosr-Country The frl*baE Manager’s R$ie
Whatever your level of involvement, it is important to understand the giobal business envi- YF{E PSLITICAL AruP EE*ruSHEtE ENV’ROIUfUETT An important aspect of the political environment is the phenomenon of ethnicity- Chapter I . Assessing the Environment
EXHIBIT 1-4 Greatest Risks affecting FDI Decisions. As Reported by Global Companies
Government regulofion
Country Iinonciol risk
Currency risk
Politicol ond sociol disfurbonces
Absence of rule of low
Disruption of key supplier, customer or portner
Corporote governonce issues
Security threots lo employees or ossels
Terrorist ofocks
Product quolity or sofoiy problems
Thelt of intellectuol properiy
lT disruption
Employee {roud or sobotoge
Noturol disosters
Activist qfiocks on globol or corporotge bronds
Oyo 10% ?07″ 307″ 40% 50% 6W” 707″8Q7″ are also based on religious differences, as in the Middle East. Managers must understand the In Pakistan one must underst{tnd the dffirences betweeft Punjabi and Sindi. In Political Risk
As shown in the example below, firms operating in some countdes are exposed to political risks Venezuela will take contrcl of cement plants and ffices belonging to Mexico’s Cemex WWW.BUSINESSWEEK.COM,
Attgust 19,2008.
In another example, Bolivian President Evo Morales’ move to nationalize the national gas indus- The managers of a global firm need to investigate the political risks to which they expose Nationalization in unstable areas, multinational corporations weigh the risks of national- 21 *.
?: zz Part 1 . The Global Manager’s Environment
ailing industries was verging on partial or f’ull nationalization-though for the most part not In Europe, nationalist impulses gathered storm in 2009, with many politicians arguing-as in Expropriation occurs when a iocal government seizes and provides inadequate com- Although political r’isk is typicaily higher in emerging markets, it is also evident in devel- An event that affects all foreign firms doing business in a country or region is called In many regions, termrism poses a severe and random political risk to company personnel An event that affects one industry or company or only a few companies is called 1. Expropriation of corporate assets without prompt and adequate compensation ments, extortion demands, and so forth.79
Politicat Risk Assessment
International companies must conduct some form of political risk assessment to manage thei suggestions for dealing with possible problems. Corporate advisers then establish guidelines fo Chapter I Risk assessment by rnultinational corporations usually takes two forms. One uses experts A second and increasingly common means of political risk assessment used by MNCs is No matter how sophisticated the methods of political risk assessment become, nothing can In addition to assessing the political risk facing a firm, alert managers also examine the lkTanaging Fclitieal Rlsk
After assessing the potential political risk of investing or maintaining curent operations in a coun- 1. Equity sharing includes the initiation ofjoint ventures with nationals (individuals or those 2. Panicipative management requires that the firm actively involve nationals, including those 3. Localization of the operation includes the modif,rcation of the subsidiary’s name, mana- 4. Development assistance includes the firm’s active involvement in inliastructure develop- In addition to avoidance and adaptation, two other means of risk reduction available to 1. Input control means that the firm maintains control over key inputs, such as raw materials, Assessing the Environment 23 24 Part I . The Global Manager’s Environment
2. Market control requires that the firm keep control of the means of distritrution (fo 3. Position controi involves keeping certain key subsidiary management positions in thr 4. Staged contribution strategies mean that the firm plans to increase, in each successive year Finally, even if the company cannot diminish or change political risks, it can minimize tht 1. Political risk insurance is offered by most industrialized countries. In the United States, thr 2. Local debt financing (money borowed in the host country), where available, helps a firn Multinational corporations also manage political risk through their global strategil Managing Terrorism Risk
No longer is the risk of terrorism for global businesses focused only on certain areas such a As incidents of terrorism accelerate around the world, many companies are increasingl Some companies have put together teams to monitor the patterns of terrorism around th Chapter I . Assessing the Environment marketing, finance, or some other aspect of business. Often, a decision regarding the level of When the choice is left to international managers, experts in economic development Global E-Business
Without doubt, the Internet has had a considerable impact on how companies buy and sell goods Dffircnt nstions, and dffirent peoples, nwy htant a dffirent kiild of Interttel-one FtN.qNcra,t Tinass,
May 17,20A6.e3
There is no doubt, however, that the Internet has introduced a new level of global com- 1. Convenience in conducting business worldwide; facilitating communicaiion across 2. An electronic meeting and trading place, which adds efficiency in conducting business sales. worldwide. Although lnost early attention was on e-commerce, experts now believe the real oppor- A successful Intelnet strategy-especially on a global scale-is, of course, not easy to 29 .: 30 Part I ” The Global Manager’s Environment
readiness of partners in the value chain, such as suppliers. If companies want to have an effective tomers’ capabilities. Other baniers at€ cultural. In Europe, for example, “Europe’s e-commerce In other areas of the world, bariers to creating global e-businesses include differences in for purchases. Also, many Japanese use convenience stores, such as 7-Eleven Japan, to pay for For these reasons, B2B e-business is likely to expand globally faster than BZC (business- Localizing . . . also lneans recognizing and confornting to tlte naqnces, subtleties In spite of various problems, use of the Internet to facilitate and improve global com- the European Commission advertises tender invitations online in order to transform the way It is clear that e-business is not only a new Web site on the Internet but also a soutce of venture-a public and private sectol combination-joined a global aerospace B2B exchange technology to enable those connections and synergies.
corucluStoN among these countries. Similarly, for ongoing operations, both the subsidiary manager anc events or undesirable changes that may require the redirection ofcertain subsidiaries or the entire
company. Some of the critical factors affecting the global manager’s environment (and therefore
requiring monitoring) are listed in Exhibit 1-5. business. The skills of companies and the measures taken to manage their exposure to environ’ The pervasive role of cultule in international management will be discussed fully ir Chapter 2 presents some more subtie, but critical, factors in the global environment-thosr
of social responsibility and ethicai behavior. We wiil consider a variety of questions: What is th,
firms and may make it more difficult for foreign firms to compete in those countries. For exam-
ple, the slringent drug testing rules required by the U.S. Food and Drug Administration (FDA)
and the anti-dumping ruies enforced by the U.S. Department of Commerce’s International Trade
Administration act as entry bamiers for foreign firms (see Chapter 6 for a more detailed dis-
cussion of these).
example, the European Commission acts in the interest of the 27 EU menrbers as a whole rather
than the interest of individual member countries. The European Commission is the executive arm
of the EU and is responsible for implernenting the decisions of the European Parliament and the
European Councii. Of relevance to international business, the European Commission speaks for
the EU at the World Trade Organization, and is responsible for negotiation trade agreements on
behalf of the EU.2a
world are aff’ected to some extent by globalization. Firms from any country now compete with
your firm both at home and abrcad, and your domestic competitors are competing on price by
outsourcing or offshoring resources and serrrices anywhere in the world. Ofien it is di{licult to
tell which competing products or services are of domestic or tbreign origin. While Ford, for
example, is pushing its Mustang with the slogan “buy American,” only about 65 percent of the
car content comes from the United States or Canada-the rest is purchased abroad. In contrast,
Japan’s Toyota Sienna model is far more American, with 90 percent local components being
assembled in Indiana.2’5 This didn’t happen overnight. Toyota has been investing in North
America for 20 years in plants, suppliers, and dealerships, as well as design, testing, and research
centers. Toyota became the largest auto-manufacturer in the world in sales in2009.In fact, on
June 1, 2009, General Motors (GM) filed for Chapter 1 1 bankruptcy, pushed into a temporary
partial nationalization by the U.S. government in order to save the company in a drastically
downsized fonn,26
more of their global brands and services abroa
beneiits developing economies-through the transfer of financial, technological, and manage-
rial resources, as well as through the development of local allies that later become self-
sufficient and have other operations. Global companies are becoming less tied to specific
t&i.’;
coordinate resources and activities in the most suitable areas, ancl as technology facilitates
faster and more flexible interactions and greater efficiencies.
not, they will be even further behind the majority of managers who have aiready recognized
that they must have a global vision fbr their firms, beginning with preparing themselvei with
the skills and tools of rnanaging in a global environment. Companies that desire to remain
globally competitive and to expand their operations to other countries will have to develop
a cadre of top management with experience operating abroad and an understanding of what
it takes to do business in other countries and to work with people of other cultures. Many
large firrns around the world are getting to the stage of evolution known as the stateless
multinational, where work is sourced wherever it is most efficient; the result of this stage of
development is that
zones and cultures presents daunting obstacles. Rather than huddling together in a
headquarters building in Annonk or Millbank, senior managers v,ill increasingly
be spread around the world, which will rcquire thetil to learn some netv tricks.28
September 20, 2008.
globalization. They play a vital role in contributing to their national economies-through
employment, new job creation, development of new products and services, and international
operations, typically exporting. The vast majority (about 98 percent) ofbusinesses in developed
economies are small and medium-sized enterprises (SMEs), which are typically referred to as
those companies having fewer than 500 employees. Small businesses are rapidly discovering
foreign markets. Although many small businesses are affected by globalism only to the extent
that they face competing products from abroad, an increasing numbel ofentrepreneurs are being
approached by potential offshore customers, thanks to the burgeoning number of trade shows,
federal and state expon initiatives, and the grorving use of Web sites, with the ease of makino
contact and placing orders online.
small companies to hnd customers and suppliers around the world as it is for large companies.
By using the Internet, email, and web-conferencing, small companies can inexpensively contact
customers and set up their global businesses. One example of a very small global business (two
people) is that of Gayle Warwick Fine Linen-a multinational player based in London. Its high-
end, handmade bed and table linens are woven in Europe, embroidered in Vietnam, and sold in
Britain and the United States. Sales are soaring, and its full-time staff recently doubled-to two:
Gayle Warwick and the assistant she recently hired. As she expanded, Ms. Warwick hired
a Frcnch freight forwarder, SDV International Logistics, to handle her far-flung business by
shipping unfinished and finished fabrics within Europe and to Vietnam, then delivering the
embroidered linens to London and the United States. (Freight forwarders can also manage
payments,-a potential godsend for small exporters dealing with partners scattered around
the globe.)30
economy of blocs represented by the North American Free Trade Agreement
(NAFTA), the EU, and the Associatiort of Southeast Asian Nations (ASEAN). There’s
no one cetter in this +porld econom\,.
Asia, and the Americas) grouped around the three dominant curyencies (the euro, the yen, and
the doilar). These trade blocs are continually expanding their borders to include neighboring
countries, either directly or with separate agreements.
l) Condidote Countries
E
market of over400 million people, as shown in the map (Map 1-1). This “borrlerless” market
now includes ten Central and Eastern Europe (CEE) countries-the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia-as well as Malta and
Cyprus. They joined the EU in May 2004, having met the EU accession requirements, including
privatizing state-run businesses, improving the infrastructure, and revamping their finance antl
banking systems.32 Bulgaria and Rornania joined in January 2007. Turke1,, Croatia, and the
Republic of Macedonia are oflicial candidates but must meet the requirements befbre 2015.
transformed. The vast majority of legislative measures have been adopted to create an internal mar-
ket with free movement of goods and people among the EU counffies. The elimination of internal
tarilli and customs, as weil as financial and commercial baniers, has not eliminated national pride.
Although most people in Europe are thought of simply as Europeans, they still think of themselves
first as British, F-rench, Danish, Italian, etc., and are wary of giving too much power to centralized
institutions or of giving up their national culture. The continuing enlargement of the EU to include
many less prosperous countries has also promoted divisions among the “older” members.33
Chapter 6): How firms outside of Europe can deal with the implications of the EU and of
what some have called a “Fortress Europe”-that is, a market giving preference to insiciers.
The other task is cultural: How to deal effectively with multipie sets of national cuitures,
traditions, and customs within Europe, such as diff’ering attitudes about how much time
should be spent on work versus leisure activities.
It tvould be clifficult to overstate the power of the fundamental drivers of Asian
grotvth. First, Asi{trt economies hat,e been. enjoltjllg a retnarkable periatl of
“productivitl’ cctt{:h-up:’ adaptirtg fttodern technologie,r, industrial practices, and
wctys of organiz,ittg*ilt softte cases leapfroggirtg western competitors.34
July/August 2009.
TRANCI
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Conory
2009, thus helping to luel the demand for materials and supplies from the developed world and
lending hope for a quick globai economic recovery.35 Jupun and the Four Tigers-singapore,
Hong Kong, Taiwan, and South Korea, each of which has abundant natural resources and
labor-have provided most of the capital and expertise lbr Asia’s developing countries. Now the
focus is on China’s role in driving closer integration in the region through its rapidly growing
exports. Japan continues to negotiate trade agreements with its neighbors; China is negotiating
with the entire thirteen-member Association of Southeast Asian Nations (ASEAN), while
ASEAN is negotiating for earlier development of its own free trade area, Asean Free Trade
Area (AFTA).
mu,st learn to tolerate ambiguity and fittd a godfather to look after your political
conttections.
low costs and a constant flow of capital. Its growth phenomenon is further discussed in the
accompanying feature “Comparative Management in Focus-China’s Economy Keeps on
Chugging.”
world’s services supplier, providing highly skilled and educated workers to foreign companies.
India is the world’s leader for outsourced back-office services, and increasingly for high-tech
services, with outsourcing firms like Infosys becoming global giants themselves. India is the
lastest-growing fiee market democracy, yet its biggest hindrance to growth, in particular for
the manufacturing sector, remains its poor infrastructure, with both locai and foreign
companies experiencing traffic gridlocks and power outages. Nevertheless, with growth
around 8.5 percent in recent years. second only to China, optimism abounds about the
country’s prospects.
tariffs, there is serious political concern for protecting India’s small to medium size enteryrises,
allowing whole sectors to be competitive. Here too there is considerable diversity in markets,
incomes and economies; there are fifteen major languages and over 1,600 dialects.
because of its government, while India’s economy grows in spite of it. However, with its one bil-
lion people, many are still mired in poverty, with per capita GDP below $1,000, although the
poverty rate is half that of twenty years ago. While India’s large upcoming youth buige, com-
pared with China, will bring a wave of workers for the economy, it also brings many more
mouths to feed. However, in many areas the economic transfbrmation is startling, with growth
steel to softwarc and consulting systems. In August, 2008, India ioined a free-trade agreement
making it clear that a regional deal was preferable to a compromise to plotect its farmers by
saying “no” to the multilateral trading ,yti”- in the Doha trade talks’a3
The member narions comprise 1.5 billion people, with an estimated one-third of them living in
poverty. Trade in South Asia is estimated at $14 billion, though the rnajority of that trade will be
;,i-;p€ to follow the success of the other Asian regional bloc, the ASEAN.
ii!3t includes also New Zealand and neighboring islands in the Pacific Ocean-did sign an
ISEAN friendship treaty with Southeast Asia. Australia is one of the richest countries in
,;e rvorld, and over 50 percent of her exports go to East Asia, with more transported through the
r:gion to rnarkets around the world.
Mexico’s exports have exploded ander NAF-TA, quintupling to $292 billion in 2008,
but Mexico is slill exporting people too, almost half a million each year, seeking
opportwities in the United States that they do not have at home.4s
States, Canada, and Mexico was to bring faster growth, more jobs, better working conditions,
and a cleaner environment for all as a result of increased exports and trade. This trading bloc-
”one America”-has 421 million consumers. Now, many years since the 1993 agreement, the
debate continues about the extent to which those goals have been accomplished. That perspec-
t.ive varies, of course, among the three NAFTA countries and also varies according to how it has
affected individual business tirms and employees in various parts of those countries. The
Canada-United States trade is the largest bilateral flow between two countries. In addition, the
vast majority-around 84 percent-of both Canadian and Mexican exports goes to the United
States. From Mexico’s perspective, the country’s exports have exploded under NAFTA,
quintupling to 5292 billion in 2008, but Mexico is still exporting people too, almost half
a million each year, seeking opportunities in the United States that they do not have at home, in
particular because MNCs displaced farming. However, Mexico’s dependence on the United
States for its exports-NAFTA’s greatest success-has become a liability, as Mexico feels the
full brunt of declining consumption in the United States. The auto industry, for example, which
has flourished underNAFTA, ground to a virtual standstill early 2009. Mexican auto expofis
fell more than 50 percent in the first two months of 2009 compared with 2008, and production
dropped almost 45 percent. In addition, since NAFTA attracted so many multinationals, which,
in turn sourced parts from its own suppliers, Mexico’s domestic industries were severely cur-
tailed. Overall, many feel that attracting MNCs was short-sighted for an overall strategy-in
particular because their low wages have perpetuated poverty and therefore also low purchasing
power, thus weakening the economy. “Economic growth has averaged about 3 percent a year
since NAFIA took et-fect, far below what is needed to create jobs for the miilion young people
who enter the work force each year and the millions more who barely scrape by.”a6
all are attributable to the NAFTA. Mexican trade policy is among the most open in the world, and
Mexico has become an important exporling and importing power. While the Mexican economic
cycles are very dependent on American economic behavior, she has signed 12 trade agrcements
with 43 nations, putting 90 percent of its trade under fiee trade regulations; the latest agreement
was made with Japan in2AA5.a7
$893.4 billion in 20O’r,, with exports of $213.4 billion.aB Mexico’s 3.3 percent GDP growth in
2007 also included an increase in remittances by migrants-those contributions made by
Mexicans living abroad both legally and illegally, mostly in the United States, to their families at
home in Mexico; they comprised $18 billion in 2005, up from $2.4 billion in 1994.4e Recent
competition from China for offshored jobs liom foreign firms has put downward pressure on
opportunities for Mexico, as manufacturing f’acilities and some service facilities migrate fiom
Mexico to China in a race for the lowest cost operations.sO
Trade Agreement (CAF?IA) was to promote trade liberalization between the United States and
five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras, and
Nicalagua. In2A04, the Dominican Republic joined the negotiations, and the agreement was
renamed DR-CAFTA. The treaty must be approved by the U.S. Congress and by National
be a stepping-stone to the larger Free Trade Area of the Americas (FTAA) that would encom-
pass 34 economies, but which has met with considerable resistance.5i
in 1991, it comprises the originai parties-Brazil, Argentina, Paraguay, and Uruguay; Venezuela
is an applicant country awaiting ratification, This regional trading bloc comprises 250 million
people and accounts for 75 percent of South America’s GDP.
wodd present new challenges to global managers. The worldwide move away from communism,
together with the trend toward privatization, has had an enornous influence on the world economy.
Economic freedom is a critical tactor in the relative wealth of nations.
develop decentralized, fi’ee market systems in order to manage a giobal economy of intense
competition, the complexity of high-tech industrialization, and an awakening hunger for freedom.
confidence and affluence, bode well for the economy. In the first quarter of 2009, for example,
FDI into the Russian economy was about $8.4 billion.52 However, co{ruption and government
interference persist:
recouped control of all the energj- assets that were sold off at bargain pfices when
the Ircn Curtain fell-and it tvill use any ftreQns necessary to achieve that goal.
Martle 20,2008.s3
oppofiunities in that immense area, in particular the vast natural resources and the well-educated
cars, and new restaurants. Growth has been steady, but the real GDP growth for Russia is considered
opportunities for small businesses. However, foreign investors became very wary.after the break up
sentence; this made foreign investors reluctant to propose new deals that would require political
world among the countries at the third and most advanced stage of development according to The
and Kuwait. Among countries at the second stage of development, Tunisia and Oman are the best
counrries. The Forum predicted there will be prosperity with challenges for the Middle East:
greatest challenges are likely to be in managing expectations, lotvering trcde and
/nterdependence
ronment and its influence on the manager’s role. This complex role demancls a contingency
approach to dynamic environments, each of which has its own unique requirements. Within
the larger context of global trends and competition, the ruies of the game f or the giobai
manager are set by each country (see Exhibit 1-3): its political and economic agenda, its
technological status and level of development, its regulatory environment, its compar-ative
and competitive advantages, and its culturai norms. Thc astute rnanager will analyze fhe new
environment, anticipate how it may affect the future of the company, and then clevelop
appropriate strategies and operating styles.
Proactive globally-oriented firms maintain an up-to-date profile of the political and economic
environment of the countries in which they maintain operations (or have pians tbr future invest-
ment). Su|veys of top executives around the world show that Sustainabitity-economic, political,
social, and environmental-has become a significant worldwide issue. Executives who recognize
that {‘act are leading their companies to develop new policies and to invest in sustainability
projects with the purpose of benefiting the environrnent as well as profitability.72 Arnong the
strategic and operational risks reported by global companies are government regulation, country
financial risks and currency risk and politicai and social disturbances. These concerns and other
risks, as reported by those companies, are shown in Exhibit I -4.
a driving force behind political instabiiity around the world. In fact, many uprisings ancl conflicts
that are thought to be political in nature are actually expressions of diff’erences among ethnic
groupings. Often, religious disputes lie at the heart of those difl’erences. Uprisings based on
religion operate either in conjunction with ethnic differences (as probalrly was the case in the
fbrmer Yugoslavia) or as separate from them (as in Norlhern Ireland). Many terrorisl activities
Source: www.atkearney.com, September 12, 2008. Copyright A. T. Kearney, lnc., 2007. All
rights reserved. Reprinted with permission.
ethnic and religious composition of the host country in order to anticipate problems of general
instability, as well as those of an operationai nature, such as effects on the workf’orce, on pro-
duciion and access to raw materials, and on the market. For example, consider the following:
Malaysia it is essential to recogttize the special economic relationship between
Chinese and Mala.v. In the Philippines it is impoftant to undenstand the significant
and learl financial role played by the Filipino-Chinese.13
that can drastically affect them with little warning:
as of ntidnight Monday night (August 18, 2008) afier failing to rcach an agreement in
nntionalization talks, the govemment said. The exptopiation is paft of a dive by il1s
socialist president, Huga Chdvez, ta place key industies under state contrcl.14
try followed that in Venezuela, where Mr. Chavez, in a move against Big Oil, forced major oil
companies to accept a minority stake in fields that they had owned, also giving more money for
higher taxes and royalties.Ts
their company in certain countries-and the implications of those risks for the economic success
of the firm. Political risks are any governmental action or politically motivated event that could
adversely affect the long-run profitability or value of a firm. The Middle East, as we have seen,
has traditionally been an unstable area where political risk heavily influences business decisions.
ization or expropriation, as in Bolivia and Venezuela in the examples previously cited.
Nationalization refers to the forced sale of an MNC’s assets to local buyers, with some com-
pensation to the firm, perhaps leaving a minority ownership with the MNC. As the fallout from
the financial meltdown spread around the world in 2009, government moves to take stakes in
t
forced. Japan, for example, was taking the cue from the United States in taking majority stakes in
major banks, while in Russia, The Kremlin was exploiting the economic crisis to establish more
control over industries such as energy that it has long coveted.T6
the United States-thal if the government is going to bail out banks, then taxpayers should get some
ownership and some say in how they operate. For instance, few banks expanded more rapidly in
Germany over the last decade than Royal Bank of Scotland. “The British financier muscled onto
Continental turf with attractive financing packages for German manufacturers. Today, Royal Bank is
majority-owned by the British government after losses in 2008 from f,7 billion to f8 billion, or
$9.2 billion to $10.5 billion.”77
pensation for the foreign-owned assets of an MNC; when no compensation is provided, it is
confiscation. In countries that have a proven history ofstability and consistency, the political risk to
a multinational corporation is relatively low. The risk of expropriation is highest in counh’ies that
expefience continuous political upheaval, vioience, and change, as evidenced by actions such as
that by Hugo Chavez in his continuing drive to piace key industries under state control, as shown in
the previous quote when he took conffol of Mexico’s Cemex cement plants in Venezuela.
oped econornies. Dubai Ports World found this when its bid in 2006 to manage six American
ports for the British owner, P&O, met with such opposition in the U.S. Congress that it withdrew
jlshid. Ihe C.h:^ne-se-Natjcrnal Offshore Oil Compaqv (CNOOC) ran into similar opposition when
it tried unsuccessfully to buy Unocal, the American oil company.
a maeropolitical risk event. In the Middle East, Iraq’s invasion of Kuwait in 1990 abruptly
halted all international business with and within both of those countries and caught businesses
wholly unprepared.
and assets and can, obviously, interupt the conduct of business. According to Micklous, tenodsm is
‘othe use, or tfueat of use, of anxiety-inducing . . . violence for ideological or political putposes.”78
The increasing incidence of terrorism around the world concerns MNCs. In particular, the
kidnapping of business execuiives has become quite common.
a micropolitical risk event, Such events have become more common than macropolitical risk
events. Such micro action is often called “creeping expropriation,” indicating a government’s
gradual and subtle action against foreign firms. This is a situation when you haven’t been expro-
priated, but it takes ten times longer to do anything. Typically, such continuing problems with an
investment present more difficulty tor foreign firms than do major events that are insurable b1
political-risk insurers. The following list describes seven typical political risk events commor
today (and possible in the future):
2. Forced sale ofequity to host-country nationals, usually at or below depreciated book valut
3. Discriminatory treatment against foreign firms in the application of regulations or laws
4. Barriers to repatriation of funds (profits or equity)
5. Loss of technology or other intellectual property (such as patents, trademalks, or trade names
6. Interference in managerial decision making
7. Dishonesty by government officials, including canceling or altering contractual agree
exposure to risk and to minimize financial losses. Typically, local managers in each countrl
assess potentially destabilizing issues and evaluate their future impact on their company, makini
each local manager to follow in handling these problems. Dow Chemical has a program in whicl
it uses line managers trained in political and economic analysis, as well as executives in foreig;
subsidiaries, to provide risk analyses ofeach country.
or consultants familiar with the country or region under consideration. Such consultants,
advisers, and committees usually monitor important trends that may portend political change,
such as the development of opposition or destabilizing political parties. They then assess the
likelihood of political change and develop several plausible scenarios to describe possible future
political conditions.
the development of internal staff and in-house capabilities. This type of assessment may be
accomplished by having staff assigned to foreign subsidiaries, by havrng affiliates monitor local
political activities, or by hiring people with expertise in the political and economic conditions in
regions critical to the firm’s operations. Frequently, all means are used. The focus must be on
monitoring political issues before they become headlines; the ability to minimize the negative
effects on the firm-or to be the first to take advantage of opportunities-is greatly reduced once
a major media source, such as CNN, has put out the news.
replace timely information from people on the fi’ont line. In other words, sophisticated tech-
niques and consultations are useful as an addition to, but not as a substitute for, the line managers
in fbreign subsidiaries, many of whom are host-country nationals. These managers represent the
most important resource for current information on the political environment, and how it might
affect their firm, because they are uniqueiy situated at the meeting point of the firm and the irost
country. Prudent MNCs, however, weigh the subjectivity of these managers’ assessments and
also realize that similar events will have different effects from one country to another.
specific types of impact that such risks may have on the company. For an autonomous inter-
national subsidiary, most of the impact from political risks (nationalization, terrorism) will be at
the level of the ownership and control of the firm because its acquisition by the host country
would provide the stafe with a fully operational business. For giobal firms, the primary risks are
likely to be from resirictions (on imports, exports, currency, and so forth), with the impact at the
level of the firm’s transfers (or exchanges) of money, products, or component pafis.
try, managers face perplexing decisions on how to manage that risk. On one level, they can decide
to suspend their frm’s dealings with a certain country at a given point—-either by the avoidance of
investment or by the withdrawal of current investment (by selling or abandoning plants and assets).
On another level, if they decide that the risk is relatively low in a particular country or that a high-
risk environment is worth the potential returns, they may choose to start (or maintain) operations
there and to accommodate that risk through adaptation to tha political regulatory environmenf . That
adaptation can take many forms, each designed to respond to the concerns of a particular local area.
Some means of adaptation suggested by Taoka and Beeman are as follows:
in firms, labor unions, or government) to reduce political risks.
in labclr organizations or government, in the management of the subsidiary.
gement style, and so forth, to suit local tastes. Localization seeks to transfbrm the
subsidiary trom a foreign firm to a national firm.
ment (foreign-exchange generation, local sourcing of materials or parts, management
training, technology transf’er, securing external debt, and so forth).80
managers are dependency and hedging. Some means that managers might use to maintain
dependency-keeping the subsidialy and the host nation dependeni on the parent corporation-
are as follows;
components, technology, and know-how.
instance, by only manufacturing components for the parent firm or iegally blocking saie
outside the host country).
hands of expatriate or home-office managers.
the subsidiary’s contributions to the host nation (in the form of tax revenues, jobs, infra
structure development, hard-currency generation, and so forth), For this strategy to br
most effective, the firm must infom the host nation of fhese projected contributions as ar
incentive.Sl
losses associated with these events by hedging. Some means of hedging are as follows:
Overseas Private Investment Corporation (OPIC) provides coverage for new investment
in projects in friendly, less developed countries. Insurance minimizes losses arising fron
specific risks-such as the inability to repatriate profits, expropriation, nationalization, o
confiscation-and from damage as a result of war, terrodsm, and so forth.s2 The Foreigr
Credit Insurance Association (FCIA) also covers political risks caused by war, revolution
cun€ncy inconvertibility, and the cancellation of impor”t or export licenses. Howeveq polit
ical risk insurance covers only the loss of a firm’s assets, not the loss of revenue resultin;
from expropriation.S3
hedge against being forced out of operation without adequate compensation. In sucl
instances, the firm withholds debt repayment in lieu of sufficient compensaiion for it
business losses.
choices. Many large companies diversify their operations both by investing in many counnie
and by operating through joint ventures with a local firm or government or through loca
licensees. By involving local people, companies, and agencies, firms minimize the risk of nega
tive outcomes due to politicai events. (See Chapters 6 and 7 for further discussion of these anr
other global strategies.)
South America or the Middle East. That risk now has to be considered in countries such as th
United States, which had previously been regarded as safe. Eighty countries lost citizens in th
World Trade Center attack on September 11, 2001. Many companies from Asia and Europe ha,
office branches in the towers of the Wodd Trade Center; most of those offices, along with th
employees from those countries, were destroyed in the attack. Thousands of lives and billions c
dollars were lost, not only by those immediately affected by the attack but also by countles
small and large businesses impacted by the ripple effect; global airlines and financial market
were devastated.
aware of the need to manage the risk of terorism. In high-risk countries, both IBM and Exxo
try to develop a benevolent image through charitable contributions to the local communitl
They also try to maintain low profiles and minimize publicity in the host countries by using, fc
example, discreet corporate signs at company sites.s4
world. Kidnappings are comrnon in Latin America (as a means of raising money for politicr
activities). in the Middle East, airplane hijackings, kidnapping of foreigners, and blackmail (fc
the release of political prisoners) are common. In Western Europe, terodsts typicatly aim bomb
at U.S.-owned banks and computer companies. Almost all MNCs have stepped up their secudt
measures abroad, hiring consultants in countertenorism (to train employees to cope with th
tkeat of terrorism) and advising their employees to avoid U.S. aidines when flying overseas. Fc
many firms, however, the opportunities outweigh the threats, even in high-risk areas.
technology transf’er is dominated by the host govemment’s regulations or requirements. In some
instances, the host country may require that foreign investors import only their most modern
machinery and methods so that the local area may benefit from new technology. In other cases,
ihe host country rnay insist that foreign companies use only labor-intensive processes, which can
help to reduce high unemployment in an area.
recommend that managers make informecl choices about appropriate technology. T’he choice of
technology may be capital intensive, labor intensive, or intermediate, but the key is that it should suit
the level of development in the area and the needs and expectations of the people who rvill use it.
around the world-mostly raw materials and services going to manufacturers. Internet-based
electronic trading and data exchange are changing the way companies do business, while
breaking down global barriers of time, space, logistics, and culture. HoweveE the Internet is not
totally open; governments still make sure that their laws are obeyed in cyberspace. This was
evidenced when France f’orced Yahoo! to stop displaying Nazi trinkets for sale where French
people couid view them.e2 The reality is that
whose language, content and norms confurm more closell, to their own.
petition by providing efficiencies through reducing numbers of suppliers and slashing
administration costs throughout the value chain. E’business is “the integration of systems,
processes, organizations, value chains, and entire markets using Internet-based and related
technologies and concepts.”94 E-commerce ref’ers directly to the marketing and sales process
via the Internet. Firms use e-business to help build new relationships between businesses and
customers.95 The Internet and e-business provide a number of uses and advantages in global
business, including the following:
borders contributes to the shift toward globalization and a global market.
3. A corporate Intranet service, merging internal and external information for enlerprises
4. Power [o consumers as they gain access to limitless options and price differentials.
5. A link and efficiency in distribution.e6
tunities are in business-to-business (B2B) transaetions. In addition, while the scope,
complexity, and sheer speed of the B2B phenomenon, including e-marketplaces, have global
executives scrambling to assess the impact and their own cotnpetitive roles, esiimates for
growth in the e-business marketplace nay have been overzealous because of the global
economic slowdown and its resultant dampening of corporate IT spending. While we hear
mostly about large companies embracing B2B, it is noteworthy that a large proportion of
cun’ent and projected B2B use is by small and medium-sized firms, for thlee common pur-
poses: supply chain, procurement, and distribution channel.
create. Potential problems abound, as experienced by the European and U.S. companies surveyed
by Forrester Research. Such problems include internal obstacles and politics, difficulties in
regional coordination and in balancing global versus local e-commerce, and cultural differences.
Such a large-scale change in organizing business clearly calls for absolute commitment from the
iop, empowered employees witlt a willingness to experiment, and good internal communica-
tions.97 Barriers to the adoption ancl progression of e-business arouncl the world include lack of
t
marketplace, they usually must invest in increasing their trading pafiners’ readiness and their cus-
excursion has been hindered by a laundry list of cultural and regulatory obstacles, like widely
varying tax systems, language hurdles, and curency issues.”98
physical, information, and payment infiastructure systems. In such countries, innovation is
required to use local systems for implementing a Web strategy. In Japan, for example, vety few
transactions are conducted using credit cards. Typically, bank transfers and COD are used to pay
their online purchases by choosing that option online.ge
to-consumer) transactions. In addition, consumer e-commelre depends on each country’s level
of access to computers and the Internet, as well as the relative elficiency of home delivery.
Clearly, companies who want to go global through e-commerce must localize to globalize, which
means much more than just presenting online content in local languages.
and tastes of multiple local cultures, as well as supporting transactians based on
each cotuiry’s currency, locctl connection speeds, pa1’ment prefetences, laws, taxes
and tarffi.lw
petitiveness continues to be explored and discovered. In the public sector in Europe, for example,
public sector contracts are awarded, using the Internet to build a truly singie market.
significant strategic advantage. Hoping to caplure this strategic advantage, the European Airbus
for aircraft parts. The exchange illustrates two major trends in global competition: (1) those of
cooperative global alliances, even among competitors, to achieve synergies and (2) the use ol
A skillful global manager cannot develop a suitable strategic plan or consider an investment
abroad without first assessing the environment-political, economic, legal, and technoiogical-
in which the company will operate. This assessment should result not so much in a comparison
of countries as in a comparison of ( 1 ) the relative risk and (2) the projected rsturn on investmentt
headquarters management must continually monitor the environment for potentially unsettlinp
Environmental risk, as discussed in this chapter, has become the new frontier in globa
mental risk on a world scale will soon largely replace their ability to develop, produce, ant
market global brands as the key element in global competitive advantage.
Part II, with a focus on how the managerial functions and the daily operations of a firm arr
also affected by a subtle, but powerful, environmental factor in the host country-that o
societal culture.
role of the firm in the future of other societies and their people? What stakeholders nus
managers consider in their strategic and operational decisions in other countries? How do th,
expectations of firm behavior vary around the world, and should those expectations influenc,
the international manager’s decisions? What role does long-term global economic inter
dependence play in the firm’s actions in other countries?
