International Business: Competing in the Global Marketplace 13e PDF

International Page i Business Competing in the Global Marketplace 13e Charles W.L. Hill UNIVERSITY OF WASHINGTON  Page ii INTERNATIONAL BUSINESS Published...

International Page i Business Competing in the Global Marketplace 13e Charles W.L. Hill UNIVERSITY OF WASHINGTON  Page ii INTERNATIONAL BUSINESS Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2021 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 21 20 ISBN 978-1-260-57586-6 MHID 1-260-57586-1 Cover Image: Buslik/Shutterstock All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered  Page iii For my children, Elizabeth, Charlotte, and Michelle —Charles W. L. Hill  Page iv about the AUTHOR Charles W. L. Hill University of Washington Charles W. L. Hill is the Hughes M. and Katherine Blake Professor of Strategy and International Business in the Foster School of Business at the University of Washington. Professor Hill has taught in the Management, MBA, Executive MBA, Technology Management MBA, and PhD programs at the University of Washington. During his time at the University of Washington, he has received over 25 awards for teaching excellence, including the Charles E. Summer Outstanding Teaching Award. A native of the United Kingdom, Professor Hill received his PhD from the University of Manchester, UK. In addition to the University of Washington, he has served on the faculties of the University of Manchester, Texas A&M University, and Michigan State University. Professor Hill has published over 50 articles in top academic journals, including the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, and Organization Science. Professor Hill has also published several textbooks, including International Business (McGraw-Hill) and Global Business Today (McGraw- Hill). His work is among the most widely cited in international business and strategic management. Professor Hill works on a private basis with a number of organizations. His clients have included Microsoft, where he taught in-house executive education courses for two decades. He has also consulted for a variety of other large companies (e.g., AT&T Wireless, Boeing, BF Goodrich, Group Health, Hexcel, Philips Healthcare, Philips Medical Systems, Seattle City Light, Swedish Health Services, Tacoma City Light, Thompson Financial Services, WRQ, and Wizards of the Coast). Additionally, Dr. Hill has served on the advisory board of several start-up companies. For recreation, Professor Hill enjoys skiing and competitive sailing!  Page v brief CONTENTS part one Introduction and Overview Chapter 1 Globalization 2 part two National Differences Chapter 2 National Differences in Political, Economic, and Legal Systems 38 Chapter 3 National Differences in Economic Development 62 Chapter 4 Differences in Culture 92 Chapter 5 Ethics, Corporate Social Responsibility, and Sustainability 132 part three The Global Trade and Investment Environment Chapter 6 International Trade Theory 164 Chapter 7 Government Policy and International Trade 200 Chapter 8 Foreign Direct Investment 230 Chapter 9 Regional Economic Integration 260 part four The Global Monetary System Chapter 10 The Foreign Exchange Market 294 Chapter 11 The International Monetary System 320 Chapter 12 The Global Capital Market 348 part five The Strategy and Structure of International Business Chapter 13 The Strategy of International Business 370 Chapter 14 The Organization of International Business 402 Chapter 15 Entering Developed and Emerging Markets 440 part six International Business Functions Chapter 16 Exporting, Importing, and Countertrade 470 Chapter 17 Global Production and Supply Chain Management 498 Chapter 18 Global Marketing and Business Analytics 528 Chapter 19 Global Human Resource Management 566 Chapter 20 Accounting and Finance in International Business 596 Page vi part seven Integrative Cases Globalization of BMW, Rolls-Royce, and the MINI 625 The Decline of Zimbabwe 627 Economic Development in Bangladesh 629 The Swatch Group and Cultural Uniqueness 630 Woolworths’ Corporate Responsibility Strategy 632 The Trans Pacific Partnership (TPP) Is Dead: Long Live the CPTPP! 634 Boeing and Airbus Are in a Dogfight over Illegal Subsidies 636 FDI in the Indian Retail Sector 637 Free Trade in Africa 639 The Mexican Peso, the Japanese Yen, and Pokémon Go 641 Egypt and the IMF 642 Alibaba’s Record-Setting IPO 643 Sony Corporation: Still a Leader Globally? 644 Organizational Architecture at P&G 646 Cutco Corporation—Sharpening Your Market Entry 647 Tata Motors and Exporting 649 Alibaba and Global Supply Chains 650 Best Buy Doing a Turnaround Again 651 Sodexo: Building a Diverse Global Workforce 653 Tesla, Inc.—Subsidizing Tesla Automobiles Globally 654 Glossary 656 Indexes 666  Page vii THE PROVEN CHOICE FOR INTERNATIONAL BUSINESS RELEVANT. PRACTICAL. INTEGRATED. It is now more than a quarter of a century since work began on the first edition of International Business: Competing in the Global Marketplace. By the third edition the book was the most widely used international business text in the world. Since then its market share has only increased. The success of the book can be attributed to a number of unique features. Specifically, for the thirteenth edition we have developed a learning program that Is comprehensive, state of the art, and timely. Is theoretically sound and practically relevant. Focuses on applications of international business concepts. Tightly integrates the chapter topics throughout. Is fully integrated with results-driven technology. Takes full and integrative advantage of globalEDGE. msu.edu—the Google-ranked #1 web resource for “international business resources.” International Business, now in its thirteenth edition, authored by Charles W. L. Hill, is a comprehensive and case-oriented version of our text that lends itself to the core course in international business for those courses that want a deeper focus on the global monetary system, structure of international business, international accounting, and international finance. We cover more and integrated cases in International Business 13e and we provide a deeper treatment of the global capital market, the organization of an international business, international accounting, and international finance–topics that are allocated chapters in International Business 13e but are not attended to in the shorter treatment of IB in Global Business Today 11e. Like our shorter text, Global Business Today 11e (2019), International Business 13e focuses on being current, relevant, application rich, accessible, and student focused. Our goal has always been to cover macro and micro issues equally and in a relevant, practical, accessible, and student focused approach. We believe that anything short of such a breadth and depth of coverage is a serious deficiency. Many of the students in these international business courses will soon be working in global businesses, and they will be expected to understand the implications of international business for their organization’s strategy, structure, and functions in the context of the global marketplace. We are proud and delighted to have put together this international business learning experience for the leaders of tomorrow. Over the years, and through now 13 editions, Dr. Charles Hill has worked hard to adhere to these goals. Since Global Business Today 9e (2015), and International Business 11e (2017), Charles has been guided not only by his own reading, teaching, and research but also by the invaluable feedback he receives from professors and students around the world, from reviewers, and from the editorial staff at McGraw-Hill Education. His thanks goes out to all of them. COMPREHENSIVE AND UP-TO-DATE To be relevant and comprehensive, an international business package must Explain how and why the world’s cultures, countries, and regions differ. Cover economics and politics of international trade and investment. Tackle international issues related to ethics, corporate social responsibility, and sustainability. Explain the functions and form of the global monetary system. Examine the strategies and structures of international businesses. Assess the special roles of the various functions of an international business. Relevance and comprehensiveness also require coverage of the major theories. It has always been a goal to incorporate the insights gleaned from recent academic scholarship into the book. Consistent with this goal, insights from the following research, as a sample of theoretical streams used in the book, have been incorporated: Page viii New trade theory and strategic trade policy. The work of Nobel Prize–winning economist Amartya Sen on economic development. Samuel Huntington’s influential thesis on the “clash of civilizations.” Growth theory of economic development championed by Paul Romer and Gene Grossman.  Empirical work by Jeffrey Sachs and others on the relationship between international trade and economic growth. Michael Porter’s theory of the competitive advantage of nations. Robert Reich’s work on national competitive advantage. The work of Nobel Prize–winner Douglass North and others on national institutional structures and the protection of property rights. The market imperfections approach to foreign direct investment that has grown out of Ronald Coase and Oliver Williamson’s work on transaction cost economics. Bartlett and Ghoshal’s research on the transnational corporation. The writings of C. K. Prahalad and Gary Hamel on core competencies, global competition, and global strategic alliances. Insights for international business strategy that can be derived from the resource-based view of the firm and complementary theories. Paul Samuelson’s critique of free trade theory. Conceptual and empirical work on global supply chain management—logistics, purchasing (sourcing), operations, and marketing channels. In addition to including leading-edge theory, in light of the fast-changing nature of the international business environment, we have made every effort to ensure that this product is as up-to-date as possible. A significant amount has happened in the world since we began revisions of this book. By 2019, almost $4 trillion per day were flowing across national borders. The size of such flows fueled concern about the ability of short-term speculative shifts in global capital markets to destabilize the world economy. The world continued to become more global. As you can see in Chapter 1 on Globalization, trade across country borders has almost exponentially escalated in the last few years. Several Asian economies, most notably China and India, continued to grow their economies at a rapid rate. New multinationals continued to emerge from developing nations in addition to the world’s established industrial powers. Increasingly, the globalization of the world economy affected a wide range of firms of all sizes, from the very large to the very small. We take great pride in covering international business for small- and medium-sized enterprises (SMEs), as well as larger multinational corporations. We also take great pride in covering firms from all around the world. Some sixty SMEs and multinational corporations from all six core continents are covered in the chapters’ opening cases, closing cases, and/or Management Focus boxes. And unfortunately, global terrorism and the attendant geopolitical risks keep emerging in various places globally, many new and inconceivable just a decade ago. These represent a threat to global economic integration and activity. Plus, with the United Kingdom opting to leave the European Union (Brexit), which has implications past 2019, the election of President Donald Trump in the United States (who espouses views on international trade that break with the long established consensus), and several elections around the world, the globe—in many ways—has paid more attention to nationalistic issues over trade. These topics and many more are integrated into this text for maximum learning opportunities. What’s New in the 13th Edition The success of the first twelve editions of International Business was based in part on the incorporation of leading-edge research into the text, the use of the up-to-date examples and statistics to illustrate global trends and enterprise strategy, and the discussion of current events within the context of the appropriate theory. Building on these strengths, our goals for the twelfth edition have focused on the following: 1. Incorporate new insights from scholarly research. 2. Make sure the content covers all appropriate issues. 3. Make sure the text is up-to-date with current events, statistics, and examples. 4. Add new and insightful opening and closing cases in most chapters. 5. Incorporate value-added globalEDGETM features in every chapter. 6. Connect every chapter to a focus on managerial implications. 7. Provide 20 new integrated cases that can be used as additional cases for specific chapters but, more importantly, as learning vehicles across multiple chapters. As part of the overall revision process, changes have been made to every chapter in the book. All statistics have Page ix been updated to incorporate the most recently available data. As before, we are the only text in International Business that ensures that all material is up-to-date on virtually a daily basis. The copyright for the book is 2021 but you are likely using the text in 2020, 2021, or 2022–we keep it updated to each semester you use the text in your course! We are able to do this by integrating globalEDGE features in every chapter. Specifically, the Google number-one-ranked globaledge.msu.edu site (for “international business resources”) is used in each chapter to add value to the chapter material and provide up-to-date data and information. This keeps chapter material constantly and dynamically updated for teachers who want to infuse globalEDGE material into the chapter topics, and it keeps students abreast of current developments in international business. In addition to updating all statistics, figures, and maps to incorporate most recently published data, a chapter-by- chapter selection of changes for the 13th edition include the following: Chapter 1: Globalization New opening case: How the iPhone is made: Apple’s Global Production System Updated statistics and figures to incorporate the most recent data on global trade flows and foreign direct investment Discussion of the implications of recent political trends (Brexit and the Trump Presidency) and what this might mean for cross border trade and investment New closing case: General Motors in China Chapter 2: National Differences In Political, Economic, and Legal Systems New opening case: Kenya: An African Lion Updated data on corruption New closing case: Transformation in Saudi Arabia Chapter 3: National Differences In Economic Development New opening case: Poland: Eastern Europe’s Economic Miracle Updated maps, figures, and in-text statistics to reflect most recently available data Addition of demographic trends to the discussion of Political Economy and Economic Progress Updated discussion of the spread of democracy to reflect recent countertrends toward greater authoritarianism in several nations (e.g., Turkey) New closing case: Brazil’s Struggling Economy Chapter 4: Differences In Culture New opening case: Singapore: One of the World’s Most Multicultural Places Inclusion of a discussion of patience across cultures Revised the foundation that most religions are now pro-business New Country Focus: Determining Your Social Class by Birth New Country Focus: Turkey, Its Religion, and Politics New closing case: China, Hong Kong, Macau, and Taiwan Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability New opening case: Ericsson, Sweden, and Sustainability Deepened focus related to United Nations’ Sustainable Development Goals Core focus on ethics as a lead-in to corporate social responsibility and sustainability issues (e.g., UN’s Sustainable Development Goals). New closing case: Sustainability Initiatives at Natura, the Bodyshop, and Aesop Chapter 6: International Trade Theory New opening case: A Tale of Two Nations: Ghana and South Korea Updated Country Focus on China and currency manipulation Reference to Donal Trump’s trade policies under section on mercantilism New closing case: Trade Wars are Good and Easy to Win Updated balance of payments data in the Appendix to reflect 2018 data Chapter 7: Government Policy and International Trade New opening case: American Steel Tariffs Updated discussion of the world trading system to reflect recent developments, including Brexit and the trade policies of President Trump Page x New closing case: The United States and South Korea Strike a Revised Trade Deal Chapter 8: Foreign Direct Investment New opening case: Starbuck’s Foreign Direct Investment Updated statistics and figures on foreign direct investment in the world economy to incorporate the most recently available data New Management Focus: Burberry Shifts its Entry Strategy in Japan New closing case: Geely Goes Global Chapter 9: Regional Economic Integration New opening case: The Cost of Brexit Updated discussion of Brexit Added discussion of the renegotiation of NAFTA by the Trump administration and the details of the United States–Canada–Mexico Agreement (USCMA) Additional discussion of new free trade deals in Africa Closing case: NAFTA 2.0: The USCMA Chapter 10: The Foreign Exchange Market New opening case: Managing Foreign Currency Exposure at 3M Updated data throughout the chapter to reflect currency exchange rates in 2019. New closing case: The Fluctuating Value of the Yuan Gives Chinese Business a Lesson in Foreign Exchange Risk Chapter 11: The International Monetary System New opening case: Pakistan Takes Another IMF Loan Updated data and discussion of the floating exchange rate regime through till 2019 New Country Focus: China’s Exchange Rate Regime New closing case: Can Dollarization Save Venezuela? Chapter 12: The Global Capital Market New opening case: Chinese IPOs in the United States Updated statistics and discussion to reflect most recently available data New closing case: Saudi Aramco Chapter 13: The Strategy of International Business New opening case: International Strategy in the Sharing Economy Inclusion of materials on the “sharing economy” related to strategy, including a discussion of Airbnb, Uber, Lyft, and Turo New Management Focus: IKEA’s Global Strategy New Management Focus: Unilever’s Global Organization New closing case: Red Bull, A Leader in International Strategy Chapter 14: The Organization of International Business New opening case: Bird, Lime, and Organizing Globally Integration of new materials on the “sharing economy” related to organizations, including a discussion of Bird and Lime  Deeper focus on small, medium, and sharing economy organizations New closing case: Walmart International Chapter 15: Entering Developed and Emerging Markets New opening case: Volkswagen, Toyota, and GM in China New scope of the chapter to include entering developed and emerging markets Inclusion of a discussion of less developed markets and base-of-the-pyramid New closing case: IKEA Entering India, Finally! Chapter 16: Exporting, Importing, and Countertrade New opening case: Higher Education in the U.S. Is about Exporting and International Competitiveness Revised material on globalEDGETM Diagnostic Tools New Management Focus: Embraer and Brazilian Importing New Management Focus: Exporting Desserts by a Hispanic Entrepreneur Page xi New Management Focus: Two Men and a Truck New closing case: Spotify and SoundCloud Chapter 17: Global Production and Supply Chain Management New opening case: Blockchain Technology and Global Supply Chains New material on blockchain technology New Management Focus: IKEA Production in China New Management Focus: Amazon’s Global Supply Chains New closing case: Procter & Gamble Remakes Its Global Supply Chains Chapter 18: Global Marketing and Business Analytics New chapter title to signal significant new material on Business Analytics New opening case: Marketing Sneakers New section on Business Analytics Revised section: International Marketing Research Inclusion of more social media topics throughout New Management Focus: Global Branding, Marvel Studios, and Walt Disney Company New Management Focus: Burberry’s Social Media Marketing New closing case: Fake News and Alternative Facts Chapter 19: Global Human Resource Management New opening case: Evolution of the Kraft Heinz Company New section: Building a Diverse Global Workforce New Management Focus: AstraZeneca and Global Staffing Policy New closing case: Global Mobility at Shell Chapter 20: Accounting and Finance in the International Business New opening case: Pfizer, Novartis, Bayer, and GlaxoSmithKline New material on the U.S. corporate tax rate and implications New Management Focus: Microsoft and Its Foreign Cash Holdings New closing case: Shoprite—Financial Success of a Food Retailer in Africa Integrated Cases All of the 20 integrated cases are new for International Business 13e. Many of these cases build on previous opening and closing chapter cases that have been revised, updated, and oftentimes adopted a new angle or focus. A unique feature of the opening and closing cases for the chapters as well as the integrated cases at the back-end of the text is that we cover all continents of the world and we do so with regional or country issues and large, medium, and small company scenarios. This makes the 60 total cases we have included in International Business 13e remarkably wealthy as a learning program. Globalization of BMW, Rolls-Royce, and the MINI The Decline of Zimbabwe Economic Development in Bangladesh The Swatch Group and Cultural Uniqueness Woolworths’ Corporate Responsibility Strategy The Trans Pacific Partnership (TPP) is Dead: Long Live the CTPP! Boeing and Airbus Are in a Dogfight over Illegal Subsidies FDI in the Indian Retail Sector Free Trade in Africa The Mexican Peso, the Japanese Yen, and Pokemon Go Egypt and the IMF Alibaba’s Record-Setting IPO Sony Corporation: Still a Leader Globally? Organizational Architecture at P&G Cutco Corporation--Sharpening Your Market Entry Tata Motors and Exporting Alibaba and Global Supply Chains Best Buy Doing a Turnaround Again Sodexo: Building a Diverse Global Workforce Tesla, Inc.--Subsidizing Tesla Automobiles Globally BEYOND UNCRITICAL PRESENTATION AND SHALLOW EXPLANATION Many issues in international business are complex and thus necessitate considerations of pros and cons. To demonstrate this to students, we have adopted a critical approach that presents the arguments for and against economic Page xii theories, government policies, business strategies, organizational structures, and so on. Related to this, we have attempted to explain the complexities of the many theories and phenomena unique to international business so the student might fully comprehend the statements of a theory or the reasons a phenomenon is the way it is. We believe that these theories and phenomena are explained in more depth in this work than they are in the competition, which seem to use the rationale that a shallow explanation is little better than no explanation. In international business, a little knowledge is indeed a dangerous thing. PRACTICAL AND RICH APPLICATIONS We have always believed that it is important to show students how the material covered in the text is relevant to the actual practice of international business. This is explicit in the later chapters of the book, which focus on the practice of international business, but it is not always obvious in the first half of the book, which considers macro topics. Accordingly, at the end of each chapter in Parts Two, Three, and Four—where the focus is on the environment of international business, as opposed to particular firms—there is a section titled Focus on Managerial Implications. In this section, the managerial implications of the material discussed in the chapter are clearly explained. Additionally, most chapters have at least one Management Focus box. The purpose of these boxes is to illustrate the relevance of chapter material for the practice of international business. A Did You Know? feature challenges students to view the world around them through the lens of international business (e.g., Did you know that sugar prices in the United States are much higher than sugar prices in the rest of the world?). The author recorded short videos explaining the phenomenon. In addition, each chapter begins with an opening case that sets the stage for the chapter and ends with a closing case that illustrates the relevance of chapter material for the practice of international business. To help students go a step further in expanding their application-level understanding of international business, each chapter incorporates two globalEDGETM research tasks. The exercises dovetail with the content just covered. INTEGRATED PROGRESSION OF TOPICS A weakness of many texts is that they lack a tight, integrated flow of topics from chapter to chapter. This book explains to students in Chapter 1 how the book’s topics are related to each other. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous ones in a logical fashion. Part One Chapter 1 provides an overview of the key issues to be addressed and explains the plan of the book. Globalization of markets and globalization of production is the core focus. Part Two Chapters 2 through 4 focus on country differences in political economy and culture, and Chapter 5 on ethics, corporate social responsibility, and sustainability issues in international business. Most international business textbooks place this material at a later point, but we believe it is vital to discuss national differences first. After all, many of the central issues in international trade and investment, the global monetary system, international business strategy and structure, and international business functions arise out of national differences in political economy and culture. Part Three Chapters 6 through 9 investigate the political economy of global trade and investment. The purpose of this part is to describe and explain the trade and investment environment in which international business occurs. Part Four Chapters 10 and 11 describe and explain the global monetary system, laying out in detail the monetary framework in which international business transactions are conducted. Part Five In Chapters 12 and 13, attention shifts from the environment to the firm. In other words, we move from a macro focus to a micro focus at this stage of the book. We examine strategies that firms adopt to compete effectively in the international business environment. Part Six In Chapters 14 through 17, the focus narrows further to investigate business functions and related operations. These chap t er s expl ain how f ir ms can per f ormthei r key f uncti ons —expor ti ng, importing, and counter tr ade; gl obal produ ct i on; global supply chain management; global marketing; global research and development (R&D); human resource management—to compete and succeed in the international business environment. Throughout the book, the relationship of new material to topics discussed in earlier chapters is pointed out to the students to reinforce their understanding of how the material comprises an integrated whole. We deliberately Page xiii bring a management focus to the macro chapters (Chapters 1 through 12). We also integrate macro themes in covering the micro chapters (Chapters 13 through 20). ACCESSIBLE AND INTERESTING The international business arena is fascinating and exciting, and we have tried to communicate our enthusiasm for it to the student. Learning is easier and better if the subject matter is communicated in an interesting, informative, and accessible manner. One technique we have used to achieve this is weaving interesting anecdotes into the narrative of the text, that is, stories that illustrate theory. Most chapters also have a Country Focus box that provides background on the political, economic, social, or cultural aspects of countries grappling with an international business issue. ACKNOWLEDGMENTS Numerous people deserve to be thanked for their assistance in preparing this book. First, thank you to all the people at McGraw-Hill Education who have worked with us on this project: Peter Jurmu, Portfolio Manager Haley Burmeister, Product Developer Nicole Young, Senior Marketing Manager Julia Blankenship, Marketing Coordinator Harvey Yep, Content Project Manager (Core) Keri Johnson, Content Project Manager (Assessment) Sandy Ludovissy, Senior Buyer Egzon Shaqiri, Designer Carrie Burger, Content Licensing Specialist Second, our thanks go to the reviewers who provided good feedback that helped shape this book: Yimai Lewis, Georgia State University Long S. Le, Santa Clara University Clare R. Greenlaw, Jr., Southern New Hampshire University – COCE Richard Ajayi, University of Central Florida Hussain Ahmad, Hofstra University Erica Kovacs, Indiana University Marta Szabo White, Georgia State University C. Jayachandran, Montclair State University, NJ T.S. Gardner, UNC Wilmington Marcel Zondag, Western Michigan University Mamoun Benmamoun, Saint Louis University Manveer Mann, Montclair State University Jose Luis Daniel, Saint Xavier University Walter C. van Hoof, San Jose State University, San Jose, CA Riikka M. Sarala, UNC Greensboro Samuel Okoroafo, University of Toledo, Toledo, Ohio Pamela S. Evers, University of North Carolina Wilmington A special thanks to David Closs and David Frayer for allowing us to borrow elements of the sections on Strategic Roles for Production Facilities; Make-or-Buy Decisions; Global Supply Chain Functions; Coordination in Global Supply Chains; and Interorganizational Relationships for Chapter 15 of this text from Tomas Hult, David Closs, and David Frayer (2014), Global Supply Chain Management, New York: McGraw-Hill. Page ivx Page xv  Page xvi CONTENTS part one Introduction and Overview CHAPTER 1 Globalization 2 Opening Case How the iPhone Is Made: Apple’s Global Production System 3 Introduction 4 What Is Globalization? 6 The Globalization of Markets 6 The Globalization of Production 7 Management Focus Boeing’s Global Production System 8 The Emergence of Global Institutions 9 Drivers of Globalization 11 Declining Trade and Investment Barriers 11 Role of Technological Change 13 The Changing Demographics of the Global Economy 15 The Changing World Output and World Trade Picture 15 Country Focus India’s Software Sector 17 The Changing Foreign Direct Investment Picture 17 The Changing Nature of the Multinational Enterprise 19 Management Focus The Dalian Wanda Group 20 The Changing World Order 21 Global Economy of the Twenty-First Century 22 The Globalization Debate 22 Antiglobalization Protests 23 Country Focus Protesting Globalization in France 24 Globalization, Jobs, and Income 24 Globalization, Labor Policies, and the Environment 26 Globalization and National Sovereignty 28 Globalization and the World’s Poor 29 Managing in the Global Marketplace 31 Key Terms 33 Summary 33 Critical Thinking and Discussion Questions 34 Research Task 34 Closing Case General Motors in China 35 Endnotes 36  part two National Differences CHAPTER 2 National Differences in Political, Economic, and Legal Systems 38 Opening Case Kenya: An African Lion 39 Introduction 40 Political Systems 41 Collectivism and Individualism 41 Democracy and Totalitarianism 43 Country Focus Putin’s Russia 44 Economic Systems 46 Market Economy 46 Command Economy 47 Mixed Economy 48 Legal Systems 49 Different Legal Systems 49 Differences in Contract Law 50 Property Rights and Corruption 51 Country Focus Corruption in Brazil 53 Management Focus Did Walmart Violate the Foreign Corrupt Practices Act? 54 The Protection of Intellectual Property 55 Management Focus Starbucks Wins Key Trademark Case in China 56 Product Safety and Product Liability 57 Focus on Managerial Implications: The Macro Environment Influences Market Attractiveness 57 Key Terms 58 Page xvii Summary 58 Critical Thinking and Discussion Questions 59 Research Task 59 Closing Case Transformation in Saudi Arabia 59 Endnotes 61 CHAPTER 3 National Differences in Economic Development 62 Opening Case Poland: Eastern Europe’s Economic Miracle 63 Introduction 64 Differences in Economic Development 64 Map 3.1 GNI per Capita, 2018 65 Map 3.2 GNI PPP per Capita, 2018 66 Map 3.3 Average Annual Growth Rate in GDP (%), 2009–2018 67 Broader Conceptions of Development: Amartya Sen 68 Map 3.4 Human Development Index, 2017 69 Political Economy and Economic Progress 69 Innovation and Entrepreneurship Are the Engines of Growth 69 Innovation and Entrepreneurship Require a Market Economy 70 Innovation and Entrepreneurship Require Strong Property Rights 70 The Required Political System 71 Economic Progress Begets Democracy 71 Country Focus Property Rights in China 72 Geography, Education, and Economic Development 72 States in Transition 74 The Spread of Democracy 74 Map 3.5 Freedom in the World, 2019 74 The New World Order and Global Terrorism 76 The Spread of Market-Based Systems 77 Map 3.6 Index of Economic Freedom, 2019 79 The Nature of Economic Transformation 79 Deregulation 79 Country Focus India’s Economic Transformation 80 Privatization 81 Legal Systems 81 Implications of Changing Political Economy 82 Focus on Managerial Implications: Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally 83 Key Terms 87 Summary 87 Critical Thinking and Discussion Questions 87 Research Task 88 Closing Case Brazil’s Struggling Economy 88 Endnotes 90 CHAPTER 4 Differences in Culture 92 Opening Case Singapore: One of the World’ Most Multicultural Places 93 Introduction 94 What Is Culture? 95 Values and Norms 96 Culture, Society, and the Nation-State 98 Determinants of Culture 99 Social Structure 99 Individuals and Groups 100 Social Stratification 102 Country Focus Determining Your Social Class by Birth 103 Religious and Ethical Systems 105 Map 4.1 World Religions 106 Christianity 106 Islam 107 Country Focus Turkey: Its Religion and Politics 110  Hinduism 111 Buddhism 112 Confucianism 113 Management Focus China and Its Guanxi 114 Language 115 Spoken Language 115 Unspoken Language 116 Education 116 Culture and Business 117 Cultural Change 120 Focus on Managerial Implications: Cultural Literacy and Competitive Advantage 122 Page xviii Key Terms 124 Summary 124 Critical Thinking and Discussion Questions 125 Research Task 126 Closing Case China, Hong Kong, Macau, and Taiwan 126 Endnotes 128 CHAPTER 5 Ethics, Corporate Social Responsibility, and Sustainability 132 Opening Case Ericsson, Sweden, and Sustainability 133 Introduction 134 Ethics and International Business 135 Employment Practices 136 Human Rights 137 Management Focus “Emissionsgate” at Volkswagen 138 Environmental Pollution 139 Corruption 140 Ethical Dilemmas 142 The Roots of Unethical Behavior 143 Personal Ethics 143 Decision-Making Processes 144 Organizational Culture 144 Unrealistic Performance Goals 145 Leadership 145 Societal Culture 145 Philosophical Approaches to Ethics 146 Straw Men 146 Utilitarian and Kantian Ethics 148 Rights Theories 149 Justice Theories 150 Focus on Managerial Implications: Making Ethical Decisions Internationally 151 Management Focus Corporate Social Responsibility at Stora Enso 156 Key Terms 157 Summary 158 Critical Thinking and Discussion Questions 159 Research Task 159 Closing Case Sustainability Initiatives at Natura, The Body Shop, and Aesop 160 Endnotes 161 part three The Global Trade and Investment Environment CHAPTER 6 International Trade Theory 164 Opening Case A Tale of Two Nations: Ghana and South Korea 165 Introduction 166 An Overview of Trade Theory 166 The Benefits of Trade 167 The Pattern of International Trade 168 Trade Theory and Government Policy 169 Mercantilism 169 Country Focus Is China Manipulating Its Currency in Pursuit of a Neo-Mercantilist Policy? 170 Absolute Advantage 170 Comparative Advantage 172 The Gains from Trade 173 Qualifications and Assumptions 175 Extensions of the Ricardian Model 175 Country Focus Moving U.S. White-Collar Jobs Offshore 179 Heckscher–Ohlin Theory 180 The Leontief Paradox 181 The Product Life-Cycle Theory 182 Product Life-Cycle Theory in the Twenty-First Century 183 New Trade Theory 183 Increasing Product Variety and Reducing Costs 184 Economies of Scale, First-Mover Advantages, and the Pattern of Trade 184 Implications of New Trade Theory 185 National Competitive Advantage: Porter’s Diamond 186 Factor Endowments 187 Demand Conditions 188 Related and Supporting Industries 188 Page xix Firm Strategy, Structure, and Rivalry 188 Evaluating Porter’s Theory 189 Focus on Managerial Implications: Location, First-Mover Advantages, and Government Policy 189 Key Terms 191 Summary 191 Critical Thinking and Discussion Questions 192 Research Task 193 Closing Case “Trade Wars Are Good and Easy to Win” 193 Appendix: International Trade and the Balance of Payments 195 Endnotes 197 CHAPTER 7 Government Policy and International Trade 200 Opening Case American Steel Tariffs 201 Introduction 202 Instruments of Trade Policy 202 Tariffs 202 Subsidies 203 Country Focus Are the Chinese Illegally Subsidizing Auto Exports? 204 Import Quotas and Voluntary Export Restraints 205 Export Tariffs and Bans 206 Local Content Requirements 206 Administrative Policies 207 Antidumping Policies 207 The Case for Government Intervention 207 Management Focus Protecting U.S. Magnesium 208 Political Arguments for Intervention 209 Economic Arguments for Intervention 211 The Revised Case for Free Trade 213 Retaliation and Trade War 213 Domestic Policies 214 Development of the World Trading System 214 From Smith to the Great Depression 215 1947–1979: GATT, Trade Liberalization, and Economic Growth 215 1980–1993: Protectionist Trends 215 The Uruguay Round and the World Trade Organization 216 WTO: Experience to Date 217 The Future of the WTO: Unresolved Issues and the Doha Round 218 Country Focus Estimating the Gains from Trade for the United States 221 Multilateral and Bilateral Trade Agreements 222 The World Trading System under Threat 222 Focus on Managerial Implications: Trade Barriers, Firm Strategy, and Policy Implications 223 Key Terms 225 Summary 225 Critical Thinking and Discussion Questions 226 Research Task 226 Closing Case The United States and South Korea Strike a Revised Trade Deal 227 Endnotes 228 CHAPTER 8 Foreign Direct Investment 230 Opening Case Starbucks’ Foreign Direct Investment 231 Introduction 232 Foreign Direct Investment in the World Economy 232 Trends in FDI 232 The Direction of FDI 233 The Source of FDI 234 Country Focus Foreign Direct Investment in China 235 The Form of FDI: Acquisitions versus Greenfield Investments 236 Theories of Foreign Direct Investment 236 Why Foreign Direct Investment? 236 Management Focus Burberry Shifts Its Entry Strategy in Japan 237 The Pattern of Foreign Direct Investment 240 The Eclectic Paradigm 241 Political Ideology and Foreign Direct Investment 242 The Radical View 242 The Free Market View 243 Pragmatic Nationalism 243 Shifting Ideology 244 Benefits and Costs of FDI 244 Host-Country Benefits 245 Host-Country Costs 247 Home-Country Benefits 248 Page xx Home-Country Costs 249 International Trade Theory and FDI 249 Government Policy Instruments and FDI 249 Home-Country Policies 249 Host-Country Policies 250 International Institutions and the Liberalization of FDI 251 Focus on Managerial Implications: FDI and Government Policy 252 Key Terms 254 Summary 254 Critical Thinking and Discussion Questions 255 Research Task 256 Closing Case Geely Goes Global 256 Endnotes 257 CHAPTER 9 Regional Economic Integration 260 Opening Case The Cost of Brexit 261 Introduction 262 Levels of Economic Integration 263 The Case for Regional Integration 265 The Economic Case for Integration 265 The Political Case for Integration 265 Impediments to Integration 266 The Case against Regional Integration 267 Regional Economic Integration in Europe 267 Evolution of the European Union 267  Map 9.1 Member States of the European Union in 2019 268 Political Structure of the European Union 269 Management Focus The European Commission and Google 270 The Single European Act 271 The Establishment of the Euro 272 Enlargement of the European Union 275 Country Focus The Greek Sovereign Debt Crisis 276 British Exit from the European Union (BREXIT) 277 Regional Economic Integration in the Americas 278 The North American Free Trade Agreement 278 Map 9.2 Economic Integration in the Americas 279 The United States–Canada–Mexico Agreement (USCMA) 281 The Andean Community 282 Mercosur 282 Central American Common Market, CAFTA, and CARICOM 283 Regional Economic Integration Elsewhere 284 Association of Southeast Asian Nations 284 Regional Trade Blocs in Africa 284 Map 9.3 ASEAN countries 285 Other Trade Agreements 286 Focus on Managerial Implications: Regional Economic Integration Threats 286 Key Terms 288 Summary 288 Critical Thinking and Discussion Questions 289 Research Task 290 Closing Case NAFTA 2.0: The USCMA 290 Endnotes 291 part four The Global Monetary System CHAPTER 10 The Foreign Exchange Market 294 Opening Case Managing Foreign Currency Exposure at 3M 295 Introduction 296 The Functions of the Foreign Exchange Market 297 Currency Conversion 297 Insuring against Foreign Exchange Risk 299 Management Focus Embraer and the Gyrations of the Brazilian Real 301 The Nature of the Foreign Exchange Market 301 Economic Theories of Exchange Rate Determination 302 Prices and Exchange Rates 303 Country Focus Quantitative Easing, Inflation, and the Value of the U.S. Dollar 307 Interest Rates and Exchange Rates 308  Investor Psychology and Bandwagon Effects 309 Summary of Exchange Rate Theories 309 Page xxi Exchange Rate Forecasting 310 The Efficient Market School 310 The Inefficient Market School 310 Approaches to Forecasting 310 Currency Convertibility 311 Focus on Managerial Implications: Foreign Exchange Rate Risk 312 Key Terms 315 Summary 315 Critical Thinking and Discussion Questions 316 Research Task 317 Closing Case The Fluctuating Value of the Yuan Gives Chinese Businesses a Lesson in Foreign Exchange Risk 317 Endnotes 318 CHAPTER 11 The International Monetary System 320 Opening Case Pakistan Takes Another IMF Loan 321 Introduction 322 The Gold Standard 323 Mechanics of the Gold Standard 323 Strength of the Gold Standard 324 The Period between the Wars: 1918–1939 324 The Bretton Woods System 325 The Role of the IMF 325 The Role of the World Bank 326 The Collapse of the Fixed Exchange Rate System 327 The Floating Exchange Rate Regime 328 The Jamaica Agreement 328 Exchange Rates since 1973 328 Fixed versus Floating Exchange Rates 331 The Case for Floating Exchange Rates 331 The Case for Fixed Exchange Rates 332 Who Is Right? 333 Exchange Rate Regimes in Practice 333 Country Focus China’s Exchange Rate Regime 334 Pegged Exchange Rates 335 Currency Boards 335 Crisis Management by the IMF 336 Financial Crises in the Post–Bretton Woods Era 337 Country Focus The IMF and Iceland’s Economic Recovery 337 Evaluating the IMF’s Policy Prescriptions 338 Focus on Managerial Implications: Currency Management, Business Strategy, and Government Relations 341 Management Focus Airbus and the Euro 342 Key Terms 344 Summary 344 Critical Thinking and Discussion Questions 345 Research Task 345 Closing Case Can Dollarization Save Venezuela? 346 Endnotes 347 CHAPTER 12 The Global Capital Market 348 Opening Case Chinese IPOs in the United States 349 Introduction 350 Benefits of the Global Capital Market 350 The Functions of a Generic Capital Market 350 Attractions of the Global Capital Market 351 Management Focus The Industrial and Commercial Bank of China Taps the Global Capital Market 353 Growth of the Global Capital Market 355 Global Capital Market Risks 357 Country Focus Did the Global Capital Markets Fail Mexico? 358 The Eurocurrency Market 359 Genesis and Growth of the Market 359 Attractions of the Eurocurrency Market 359 Drawbacks of the Eurocurrency Market 361 The Global Bond Market 361 Attractions of the Global Bond Market 362 The Global Equity Market 362 Foreign Exchange Risk and the Cost of Capital 363 Focus on Managerial Implications: Growth of the Global Capital Market 364 Key Terms 364 Summary 365 Critical Thinking and Discussion Questions 365 Research Task 366 Closing Case Page xxii Saudi Aramco 366 Endnotes 368 part five The Strategy and Structure of International Business CHAPTER 13 The Strategy of International Business 370 Opening Case International Strategy in the Sharing Economy 371 Introduction 372 Strategy and the Firm 373 Value Creation 374 Strategic Positioning 375 Management Focus AB InBev, Beer Globally, and Creating Value 377 The Firm as a Value Chain 378 Global Expansion, Profitability, and Profit Growth 380 Expanding the Market 381 Location Economies 382 Experience Effects 384 Leveraging Subsidiary Skills 386 Profitability and Profit Growth Summary 386 Cost Pressures and Pressures for Local Responsiveness 387 Pressures for Cost Reductions 387 Management Focus IKEA’s Global Strategy 388 Pressures for Local Responsiveness 388 Choosing a Strategy 392 Global Standardization Strategy 393 Localization Strategy 393 Management Focus Unilever’s Responsiveness to Its Dutch–British Roots 394 Transnational Strategy 395 International Strategy 396 The Evolution of Strategy 396 Key Terms 397 Summary 397 Critical Thinking and Discussion Questions 398 Research Task 398 Closing Case Red Bull: A Leader in International Strategy 399 Endnotes 400 CHAPTER 14 The Organization of International Business 402 Opening Case Bird, Lime, and Organizing Globally 403 Introduction 404 Organizational Architecture 405 Organizational Structure 406 Vertical Differentiation 406 Horizontal Differentiation 408 Management Focus Dow—(Failed) Early Global Matrix Adopter 414 Integrating Mechanisms 415 Control Systems and Incentives 420 Types of Control Systems 420 Incentive Systems 421 Control Systems and Incentives 422 Processes 424 Organizational Culture 425  Creating and Maintaining Organizational Culture 425 Organizational Culture and Performance 427 Management Focus Lincoln Electric and Culture 428 Synthesis: Strategy and Architecture 429 Localization Strategy 429 International Strategy 430 Global Standardization Strategy 430 Transnational Strategy 431 Environment, Strategy, Architecture, and Performance 431 Organizational Change 432 Organizational Inertia 432 Implementing Organizational Change 433 Key Terms 434 Summary 435 Critical Thinking and Discussion Questions 435 Research Task 436 Closing Case Page xxiii Walmart International 436 Endnotes 438 CHAPTER 15 Entering Developed and Emerging Markets 440 Opening Case Volkswagen, Toyota, and GM in China 441 Introduction 442 Basic Entry Decisions 443 Which Foreign Markets? 443 Management Focus Tesco’s International Growth Strategy 444 Timing of Entry 445 Scale of Entry and Strategic Commitments 446 Market Entry Summary 447 Entry Modes 448 Exporting 448 Turnkey Projects 449 Licensing 450 Franchising 451 Joint Ventures 452 Wholly Owned Subsidiaries 453 Selecting an Entry Mode 454 Core Competencies and Entry Mode 454 Pressures for Cost Reductions and Entry Mode 456 Greenfield Venture or Acquisition? 456 Pros and Cons of Acquisitions 456 Pros and Cons of Greenfield Ventures 458 Which Choice? 459 Strategic Alliances 459 Advantages of Strategic Alliances 460 Disadvantages of Strategic Alliances 460 Management Focus Gazprom and Global Strategic Alliances 461  Making Alliances Work 461 Key Terms 464 Summary 464 Critical Thinking and Discussion Questions 465 Research Task 465 Closing Case IKEA Entering India, Finally! 466 Endnotes 467 part six International Business Functions CHAPTER 16 Exporting, Importing, and Countertrade 470 Opening Case Higher-Education Exporting and International Competitiveness 471 Introduction 472 The Promise and Pitfalls of Exporting 473 Management Focus Embraer and Brazilian Importing 476 Improving Export Performance 476 International Comparisons 477 Information Sources 477 Management Focus Exporting Desserts by a Hispanic Entrepreneur 478 Service Providers 479 Export Strategy 480 Management Focus Two Men and a Truck 481 The globalEDGETM Exporting Tool 482 Export and Import Financing 483 Lack of Trust 483 Letter of Credit 485 Draft 485 Bill of Lading 486 A Typical International Trade Transaction 486 Export Assistance 488 The Export-Import Bank 488 Export Credit Insurance 489 Countertrade 489 The Popularity of Countertrade 490 Types of Countertrade 490 Pros and Cons of Countertrade 491 Key Terms 492 Summary 492 Critical Thinking and Discussion Questions 493 Research Task 493 Closing Case Spotify and SoundCloud 494 Endnotes 495 Page xxiv CHAPTER 17 Global Production and Supply Chain Management 498 Opening Case Blockchain Technology and Global Supply Chains 499 Introduction 500 Strategy, Production, and Supply Chain Management 501 Where to Produce 504 Country Factors 504 Management Focus IKEA Production in China 505 Technological Factors 505 Production Factors 508 The Hidden Costs of Foreign Locations 511 Management Focus Amazon’s Global Supply Chains 512 Make-or-Buy Decisions 513 Global Supply Chain Functions 516 Global Logistics 516 Global Purchasing 518 Managing a Global Supply Chain 519 Role of Just-in-Time Inventory 519 Role of Information Technology 520 Coordination in Global Supply Chains 521 Interorganizational Relationships 522 Key Terms 523 Summary 523 Critical Thinking and Discussion Questions 524 Research Task 525 Closing Case Procter & Gamble Remakes Its Global Supply Chains 525 Endnotes 526 CHAPTER 18 Global Marketing and Business Analytics 528 Opening Case Marketing Sneakers 529 Introduction 530 Globalization of Markets and Brands 531 Market Segmentation 533 Management Focus Global Branding, Marvel Studios, and the Walt Disney Company 534 Business Analytics 535 International Marketing Research 536 Product Attributes 540 Cultural Differences 540 Economic Development 541  Product and Technical Standards 541 Distribution Strategy 542 Differences between Countries 542 Choosing a Distribution Strategy 544 Communication Strategy 545 Management Focus Burberry’s Social Media Marketing 546 Barriers to International Communication 547 Push versus Pull Strategies 548 Global Advertising 549 Pricing Strategy 550 Price Discrimination 550 Strategic Pricing 552 Regulatory Influences on Prices 553 Configuring the Marketing Mix 554 Product Development and R&D 554 The Location of R&D 555 Integrating R&D, Marketing, and Production 556 Cross-Functional Teams 557 Building Global R&D Capabilities 558 Key Terms 559 Summary 560 Critical Thinking and Discussion Questions 561 Research Task 561 Closing Case Fake News and Alternative Facts 562 Endnotes 563 CHAPTER 19 Global Human Resource Management 566 Opening Case Evolution of the Kraft Heinz Company 567 Introduction 568 Strategic Role of Global HRM: Managing a Global Workforce 569 Staffing Policy 570 Page xxv Types of Staffing Policies 571 Expatriate Managers 574 Management Focus AstraZeneca and Global Staffing Policy 577 Global Mindset 578 Training and Management Development 579 Training for Expatriate Managers 580 Repatriation of Expatriates 580 Management Development and Strategy 581 Management Focus Monsanto’s Repatriation Program 582 Performance Appraisal 582 Performance Appraisal Problems 583 Guidelines for Performance Appraisal 583 Compensation 583 National Differences in Compensation 583  Expatriate Pay 584 Management Focus McDonald’s Global Compensation Practices 585 Building a Diverse Global Workforce 586 International Labor Relations 588 The Concerns of Organized Labor 588 The Strategy of Organized Labor 589 Approaches to Labor Relations 589 Key Terms 590 Summary 590 Critical Thinking and Discussion Questions 591 Research Task 591 Closing Case Global Mobility at Shell 592 Endnotes 593 CHAPTER 20 Accounting and Finance in International Business 596 Opening Case Pfizer, Novartis, Bayer, and GlaxoSmithKline 597 Introduction 598 National Differences in Accounting Standards 599 International Accounting Standards 600 Country Focus Chinese Accounting 601 Accounting Aspects of Control Systems 602 Exchange Rate Changes and Control Systems 603 Transfer Pricing and Control Systems 604 Separation of Subsidiary and Manager Performance 605 Financial Management: The Investment Decision 605 Capital Budgeting 606 Project and Parent Cash Flows 606 Management Focus Black Sea Oil and Gas Ltd. 607 Adjusting for Political and Economic Risk 607 Risk and Capital Budgeting 608 Financial Management: The Financing Decision 609 Financial Management: Global Money Management 610 Minimizing Cash Balances 610 Reducing Transaction Costs 611 Managing the Tax Burden 612 Management Focus Microsoft and Its Foreign Cash Holdings 614 Moving Money across Borders 614 Key Terms 618 Summary 619 Critical Thinking and Discussion Questions 620 Research Task 620 Closing Case Shoprite: The Financial Success of a Food Retailer in Africa 621 Endnotes 622 part seven Integrative Cases Globalization of BMW, Rolls-Royce, and the MINI 625 The Decline of Zimbabwe 627 Economic Development in Bangladesh 629 The Swatch Group and Cultural Uniqueness 630 Woolworths’ Corporate Responsibility Strategy 632 The Trans Pacific Partnership (TPP) Is Dead: Long Live the CPTPP! 634 Boeing and Airbus Are in a Dogfight over Illegal Subsidies 636 FDI in the Indian Retail Sector 637 Free Trade in Africa 639 The Mexican Peso, the Japanese Yen, and Pokémon Go 641 Egypt and the IMF 642 Alibaba’s Record-Setting IPO 643 Sony Corporation: Still a Leader Globally? 644 Organizational Architecture at P&G 646 Page xxvi Cutco Corporation—Sharpening Your Market Entry 647 Tata Motors and Exporting 649 Alibaba and Global Supply Chains 650 Best Buy Doing a Turnaround Again 651 Sodexo: Building a Diverse Global Workforce 653 Tesla, Inc.—Subsidizing Tesla Automobiles Globally 654 Glossary 656 Indexes 666 International Page 1 Business Competing in the Global Marketplace 13e part one Introduction and Overview Page 2 Globalization 1 LEARNING OBJECTIVES After reading this chapter, you will be able to: LO1-1 Understand what is meant by the term globalization. LO1-2 Recognize the main drivers of globalization. LO1-3 Describe the changing nature of the global economy. LO1-4 Explain the main arguments in the debate over the impact of globalization. LO1-5 Understand how the process of globalization is creating opportunities and challenges for management practice. Qilai Shen/In Pictures Ltd./Corbis/Getty Images How the iPhone Is Made: Apple’s Global Production System OPENING CASE In its early days, Apple usually didn’t look beyond its own backyard to manufacture its devices. A few years after Apple Page 3 started making its Macintosh computer back in 1983, Steve Jobs bragged that it was “a machine that was made in America.” As late as the early 2000s, Apple still manufactured many of its computers at the company’s iMac plant in Elk Grove, California. Jobs often said that he was as proud of the Apple’s manufacturing plants as he was of the devices themselves. By 2004, however, Apple had largely turned to foreign manufacturing. The shift to offshore production and assembly reached its peak with the iconic iPhone, which Apple first introduced in 2007. The iPhone contains hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, rare metals from Africa and Asia, and the gyroscope used for tracking the iPhone’s  orientation comes from Switzerland. Apple’s major subcontractor, the Taiwanese multinational firm, Foxconn, assembles half of all the iPhones sold in the world today at a huge factory in China. Foxconn also has factories devoted to iPhone assembly at several other locations, including Brazil and India. Another Taiwanese-based company, Pegatron, also assembles iPhones for Apple at a factory in China. Apple still employs some 80,000 people in the United States, and it has kept important activities at home, including product design, software engineering, and marketing. Furthermore, Apple claims that its business supports another 450,000 jobs at U.S.-based suppliers. For example, the glass for the iPhone is manufactured at Corning’s U.S. plants in Kentucky, Analog Devices in Massachusetts produces chips that enable the iPhone’s touch display, and a Texas Instruments plant in Maine makes electronic components that go in the iPhone. However, over 1.5 million people are involved in the engineering, building, and final assembly of its products outside of the United States, many of them working at subcontractors like Foxconn. When explaining its decision to assemble the iPhone in China, Apple cites a number of factors. While it is true that labor costs are lower in China, Apple executives point out that labor costs only account for a small portion of the total value of its products and are not the main driver of location decisions. Far more important, according to Apple, is the ability of its Chinese subcontractors to respond very quickly to requests from Apple to scale production up and down. In a famous illustration of this capability, back in 2007 Steve Jobs demanded that a glass screen replace the plastic screen on his prototype iPhone. Jobs didn’t like the look and feel of plastic screens, which at the time were standard in the industry, nor did he like the way they scratched easily. This last-minute change in the design of the iPhone put Apple’s market introduction date at risk. Apple had selected Corning to manufacture large panes of strengthened glass, but finding a manufacturer that could cut those panes into millions of iPhone screens wasn’t easy. Then, a bid arrived from a Chinese factory. When the Apple team visited the factory, they found that the plant’s owners were already constructing a new wing to cut the glass and were installing equipment. “This is in case you give us the contract,” the manager said. The plant also had a warehouse full of glass samples for Apple, and a team of engineers available to work with Apple. They had built onsite dormitories so the factory could run three shifts seven days a week to meet Apple’s demanding production schedule. The Chinese company got the bid. Another critical advantage of China for Apple was that it was much easier to hire engineers there. Apple calculated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers involved in manufacturing the original iPhone. The company had estimated it would take as long as nine months to find that many engineers in the United States. In China, it took 15 days. Also important is the clustering together of factories in China. Many of the factories providing components for the iPhone are located close to Foxconn’s assembly plant. As one executive noted, “The entire supply chain is in China. You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need a screw made a little bit different? That will take three hours.”* All this being said, there are drawbacks to outsourcing to China. Several of Apple’s subcontractors have been targeted for their poor working conditions. Criticisms include low pay of line workers, long hours, mandatory overtime for little or no additional pay, and poor safety records. Some former Apple executives say there is an unresolved tension within the company: Executives want to improve working conditions within the factories of subcontractors, such as Foxconn, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products. In addition, Apple’s outsourcing decisions have been criticized by President Trump, who argues that the company is guilty of moving U.S. jobs overseas. While Apple disagrees with this assessment, it has responded by increasing its investment in U.S. facilities. In 2018, for example, the company announced it would invest $30 billion over five years to create 20,000 new Apple jobs in the United States. Most of these jobs, however, are expected to be in software development and data center operations, not manufacturing and assembly. *C. Duhigg and K. Bradsher, “How U.S. Lost Out on iPhone Work.” The New York Times, January 22, 2012. Sources: Sam Costello, “Where Is the iPhone Made?" Lifewire, July 14, 2018; David Barboza, “How China Built iPhone City with Billions in Perks for Apple’s Partner,” The New York Times, December 29, 2016; Gu Huini, “Human Costs Are Built into iPad in China,” The New York Times, January 26, 2012; Chuck Jones, “Apple’s $350 Billion US Contribution Was Already on the Cards,” Forbes, January 19, 2018. Page 4 Introduction Over the past five decades, a fundamental shift has been occurring in the world economy. We have been moving away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. We have moved toward a world in which barriers to cross-border trade and investment have declined; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent, integrated global economic system. The process by which this transformation is occurring is commonly referred to as globalization. At the same time, recent political events have raised some questions about the inevitability of the globalization process. The exit of the United Kingdom from the European Union (Brexit), the renegotiation of the North American Free Trade Agreement (NAFTA) by the Trump Administration, and trade disputes between the United States and many of its trading partners, including most notably China, have all contributed to uncertainty about the future of globalization. While the world seems unlikely to pull back significantly from globalization, there is no doubt that the benefits of globalization are more in dispute now than at any time in the last half century. This is a new reality, albeit perhaps a temporary one, but it is one the international business community will have to adjust to. The opening case illustrates how one company, Apple, has taken advantage of globalization. Apple has created a global supply chain to efficiently produce its icon iPhone. While product design and software development are undertaken in California, component parts are manufactured all over the world, and the final product is assembled for Apple by Foxconn in factories in China, Brazil, India, and elsewhere. In configuring the production system of the iPhone in this manner, Apple is trying to partner with the most efficient subcontractors, wherever in the world they might reside. Apple could not have configured its production system in this manner had it not been for the systematic reductions in barriers to cross-border trade and investment that have occurred over the last half century. At the same time, Apple has been criticized by President Trump for placing too much productive activity outside of the United States. Moreover, trade disputes between the United States and China have raised the possibility that China may at some point not be the optimal location for assembling the iPhone. Apple has started to adjust its strategy to account for the potential risks here, establishing assembly operations outside of China (in India, for example), increasing its investment in the United States (in 2018, Apple announced it would invest $30 billion over five years in U.S. facilities, creating 20,000 new jobs in the process), and working with U.S.-based suppliers to help them become efficient Apple partners (Apple has established a $5 billion fund to help those suppliers upgrade their capabilities). Thus, Apple is taking advantage of globalization, and simultaneously hedging against any possible pullback from the level of globalization that existed in 2016, which for now at least may have been a high-water mark, albeit a temporary one. Proponents of increased global trade argue that cross-cultural engagement and trade across country borders is the future and that returning back to a nationalistic perspective is the past. On the other hand, the nationalistic argument rests in citizens wanting their country to be sovereign, self-sufficient as much as possible, and basically in charge of their own economy and country environment. We will touch on many aspects of this debate throughout this text’s 20 integrated chapters. Globalization now has an impact on almost everything we do. For example, an American medical doctor—let’s call her Laurie—might drive to work at her pediatric office in a sports utility vehicle (SUV) that was designed in Stuttgart, Germany, and assembled in Leipzig, Germany, and Bratislava, Slovakia, by Porsche from components from parts suppliers worldwide, which in turn were fabricated from Korean steel and Malaysian rubber. Laurie may have filled her car with gasoline at a Shell service station owned by a British-Dutch multinational company. The gasoline could Page 5 have been made from oil pumped out of a well off the coast of Africa by a French oil company that transported it to the United States in a ship owned by a Greek shipping line. While driving to work, Laurie might talk to her stockbroker (using a hands-free, in-car speaker) on an Apple iPhone that was designed in California and assembled in China using chip sets produced in Japan and Europe, glass made by Corning in Kentucky, and memory chips from South Korea. Perhaps on her way, Laurie might tell the stockbroker to purchase shares in Lenovo, a multinational Chinese PC manufacturer whose operational headquarters is in North Carolina and whose shares are listed on the New York Stock Exchange. This is the world in which we live. In many cases, we simply do not know, or perhaps even care, where a product was designed and where it was made. Just a couple of decades ago, “Made in the USA” or “Made in Germany” had strong meaning and referred to something. The U.S. often stood for quality, and Germany often stood for sophisticated engineering. Now the country of origin for a product has given way to, for example, “Made by BMW,” and the company is the quality assurance platform, not the country. In many cases, it goes even beyond the company to the personal relationship a customer has developed with a representative of the company, and so we focus on what has become known as CRM (Customer Relationship Management). Whether it is still the quality associated with the country of origin of a product, or the assurance given by a specific company regardless of where they manufacture their product, we live in a world where the volume of goods, services, and investments crossing national borders has expanded faster than world output for more than half a century. It is a world in which international institutions such as the World Trade Organization and gatherings of leaders from the world’s most powerful economies continue to work for even lower barriers to cross-border trade and investment. The symbols of material culture and popular culture are increasingly global, from Coca-Cola and Starbucks, to Sony PlayStation, Facebook, Netflix video streaming service, IKEA stores, and Apple iPads and iPhones. Vigorous and vocal groups protest against globalization, which they blame for a list of ills from unemployment in developed nations to environmental degradation and the Westernization or Americanization of local cultures. These protesters come from environmental groups, which have been around for some time, but more recently also from nationalistic groups focused on their countries being more sovereign. For businesses, the globalization process has many opportunities. Firms can expand their revenues by selling around the world and/or reduce their costs by producing in nations where key inputs, including labor, are cheap. The global expansion of enterprises has been facilitated by generally favorable political and economic trends. This has allowed businesses both large and small, from both advanced nations and developing nations, to expand internationally. As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition. Advances in technology, lower transportation costs, and the rise of skilled workers in developing countries imply that many services no longer need to be performed where they are delivered. As best- selling author Thomas Friedman has argued, the world is becoming “flat.”1 People living in developed nations no longer have the playing field tilted in their favor. Increasingly, enterprising individuals based in India, China, or Brazil have the same opportunities to better themselves as those living in Western Europe, the United States, or Canada. In this text, we will take a close look at these issues and many more. We will explore how changes in regulations governing international trade and investment, when coupled with changes in political systems and technology, have dramatically altered the competitive playing field confronting many businesses. We will discuss the resulting opportunities and threats and review the strategies that managers can pursue to exploit the opportunities and counter the threats. We will consider whether globalization benefits or harms national economies. We will look at what economic theory has to say about the outsourcing of manufacturing and service jobs to places such as India and China and look at the benefits and costs of outsourcing, not just to business firms and their employees but to entire economies. Page 6 First, though, we need to get a better overview of the nature and process of globalization, and that is the function of this first chapter. What Is Globalization? LO1-1 Understand what is meant by the term globalization. As used in this text, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the globalization of markets and the globalization of production. THE GLOBALIZATION OF MARKETS The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade and investment have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping create a global market.2 Consumer products such as Citigroup credit cards, Coca- Cola soft drinks, Sony video games, McDonald’s hamburgers, Starbucks coffee, IKEA furniture, and Apple iPhones are frequently held up as prototypical examples of this trend. The firms that produce these products are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help create a global market. A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets. In the United States, for example, according to the International Trade Administration, more than 300,000 small and medium-sized firms with fewer than 500 employees account for 98 percent of the companies that export. More generally, exports from small and medium-sized companies account for 33 percent of the value of U.S. exports of manufactured goods.3 Typical of these is B&S Aircraft Alloys, a New York company whose exports account for 40 percent of its $8 million annual revenues.4 The situation is similar in several other nations. For example, in Germany, a staggering 98 percent of small and midsize companies have exposure to international markets, via either exports or international production. Since 2009, China has been the world’s largest exporter, sending more than $2 trillion worth of products and services last year to the rest of the world. global EDGE INTERNATIONAL BUSINESS RESOURCES globalEDGE™ has been the world’s go-to site online for global business knowledge since 2001. Google typically ranks the site number 1 for “international business resources” from anywhere in the world you access it. Created by a 30-member team in the International Business Center in the Broad College of Business at Michigan State University under the supervision of Dr. Tomas Hult and Dr. Tunga Kiyak, globalEDGE™ is a knowledge resource that connects international business professionals worldwide to a wealth of information, insights, and learning resources on global business activities.  The site offers the latest and most comprehensive international business and trade content for a wide range of topics. Whether conducting extensive market research, looking to improve your international knowledge, or simply browsing, you’re sure to find what you need to sharpen your competitive edge in today’s rapidly changing global marketplace. The easy, convenient, and free globalEDGE™ website’s tagline is “Your Source for Global Business Knowledge.” Take a look at the site at globaledge.msu.edu. We will use globalEDGE throughout this text for exercises, information, data, and to keep every facet of the text up-to-date on a daily basis! Page 7 Despite the global prevalence of Citigroup credit cards, McDonald’s hamburgers, Starbucks coffee, and IKEA stores, for example, it is important not to push too far the view that national markets are giving way to the global market. As we shall see in later chapters, significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. Uber, for example, the fast-growing ride-for-hire service, is finding it needs to refine its entry strategy in many foreign cities in order to take differences in the regulatory regime into account. Such differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country. The most global of markets are not typically markets for consumer products—where national differences in tastes and preferences can still be important enough to act as a brake on globalization. They are markets for industrial goods and materials that serve universal needs the world over. These include markets for commodities such as aluminum, oil, and wheat; for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; for computer software; and for financial assets, from U.S. Treasury bills to Eurobonds, and futures on the Nikkei index or the euro. That being said, it is increasingly evident that many newer high-technology consumer products, such as Apple’s iPhone, are being successfully sold the same way the world over. In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca- Cola’s rivalry with PepsiCo is a global one, as are the rivalries between Ford and Toyota; Boeing and Airbus; Caterpillar and Komatsu in earthmoving equipment; General Electric and Rolls-Royce in aero engines; Sony, Nintendo, and Microsoft in video-game consoles; and Samsung and Apple in smartphones. If a firm moves into a nation not currently served by its rivals, many of those rivals are sure to follow to prevent their competitor from gaining an advantage.5 As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets—their products, operating strategies, marketing strategies, and brand names—creating some homogeneity across markets. Thus, greater uniformity replaces diversity. In an increasing number of industries, it is no longer meaningful to talk about “the German market,” “the American market,” “the Brazilian market,” or “the Japanese market”; for many firms, there is only the global market. THE GLOBALIZATION OF PRODUCTION The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. For example, Boeing has made extensive use of outsourcing to foreign suppliers. Consider Boeing’s 777 first introduced in 1995: Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.6 In total, some 30 percent of the 777, by value, is built by foreign companies. And for its most recent jet airliner, the 787, Boeing has pushed this trend even further; some 65 percent of the total value of the aircraft is outsourced to foreign companies, 35 percent of which goes to three major Japanese companies. Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at their particular activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus. Boeing also outsources some production to foreign countries to increase the chance it will win significant orders from airlines based in that country. For a more detailed look at the globalization of production at Boeing, see the accompanying Management Focus. Page 8 MANAGEMENT FOCUS  Boeing’s Global Production System Executives at the Boeing Corporation, America’s largest exporter, say that building a large commercial jet aircraft like the 787 Dreamliner involves bringing together more than a million parts in flying formation. Half a century ago, when the early models of Boeing’s venerable 737 and 747 jets were rolling off the company’s Seattle-area production lines, foreign suppliers accounted for only 5 percent of those parts, on average. Boeing was vertically integrated and manufactured many of the major components that went into the planes. The largest parts produced by outside suppliers were the jet engines, where two of the three suppliers were American companies. The lone foreign engine manufacturer was the British company Rolls-Royce. Fast-forward to the modern era, and things look very different. In the case of Boeing’s super-efficient 787 Dreamliner, 50 outside suppliers spread around the world account for 65 percent of the value of the aircraft. Italian firm Alenia Aeronautica makes the center fuselage and horizontal stabilizer. Kawasaki of Japan makes part of the forward fuselage and the fixed trailing edge of the wing. French firm Messier-Dowty makes the aircraft’s landing gear. German firm Diehl Luftahrt Elektronik supplies the main cabin lighting. Sweden’s Saab Aerostructures makes the access doors. Japanese company Jamco makes parts for the lavatories, flight deck interiors, and galleys. Mitsubishi Heavy Industries of Japan makes the wings. KAA of Korea makes the wing tips. And so on. Why the change? One reason is that 80 percent of Boeing’s customers are foreign airlines, and to sell into those nations, it often helps to be giving business to those nations. The trend started in 1974 when Mitsubishi of Japan was given contracts to produce inboard wing flaps for the 747. The Japanese reciprocated by placing big orders for Boeing jets. A second rationale was to disperse component part production to those suppliers who are the best in the world at their particular activity. Over the years, for example, Mitsubishi has acquired considerable expertise in the manufacture of wings, so it was logical for Boeing to use Mitsubishi to make the wings for the 787. Similarly, the 787 is the first commercial jet aircraft to be made almost entirely out of carbon fiber, so Boeing tapped Japan’s Toray Industries, a world-class expert in sturdy but light carbon-fiber composites, to supply materials for the fuselage. A third reason for the extensive outsourcing on the 787 was that Boeing wanted to unburden itself of some of the risks and costs associated with developing production facilities for the 787. By outsourcing, it pushed some of those risks and costs onto suppliers, who had to undertake major investments in capacity to ramp up to produce for the 787. So what did Boeing retain for itself? Engineering design, marketing and sales, and final assembly are done at its Everett plant north of Seattle, all activities where Boeing maintains it is the best in the world. Of major component parts, Boeing made only the tail fin and wing to body fairing (which attaches the wings to the fuselage of the plane). Everything else was outsourced. As the 787 moved through development, it became clear that Boeing had pushed the outsourcing paradigm too far. Coordinating a globally dispersed production system this extensive turned out to be very challenging. Parts turned up late, some parts didn’t “snap together” the way Boeing had envisioned, and several suppliers ran into engineering problems that slowed down the entire production process. As a consequence, the date for delivery of the first jet was pushed back more than four years, and Boeing had to take millions of dollars in penalties for late deliveries. The problems at one supplier, Vought Aircraft in North Carolina, were so severe that Boeing ultimately agreed to acquire the company and bring its production in-house. Vought was co- owned by Alenia of Italy and made parts of the main fuselage. There are now signs that Boeing is rethinking some of its global outsourcing policy. For its next jet, a new version of its popular wide-bodied 777 jet, the 777X, which will use the same carbon-fiber technology as the 787, Boeing will bring wing production back in-house. Mitsubishi and Kawasaki of Japan produce much of the wing structure for the 787 and for the original version of the 777. However, recently Japan’s airlines have been placing large orders with Airbus, breaking with their traditional allegiance to Boeing. This seems to have given Boeing an opening to bring wing production back in-house. Boeing executives also note that Boeing has lost much of its expertise in wing production over the last 20 years due to outsourcing, and bringing it back in-house for new carbon-fiber wings might enable Boeing to regain these important core skills and strengthen the company’s competitive position. Sources: M. Ehrenfreund, “The Economic Reality Behind the Boeing Plane Trump Showed Off,” The Washington Post, February 17, 2017; K. Epstein and J. Crown, “Globalization Bites Boeing,” Bloomberg Businessweek, March 12, 2008; H. Mallick, “Out of Control Outsourcing Ruined Boeing’s Beautiful Dreamliner,” The Star, February 25, 2013; P. Kavilanz, “Dreamliner: Where in the World Its Parts Come From,” CNN Money, January 18, 2013; S. Dubois, “Boeing’s Dreamliner Mess: Simply Inevitable?” CNN Money, January 22, 2013; and A. Scott and T. Kelly, “Boeing’s Loss of a $9.5 Billion Deal Could Bring Jobs Back to the U.S.,” Business Insider, October 14, 2013. Page 9 Early outsourcing efforts were primarily confined to manufacturing activities, such as those undertaken by Boeing and Apple. Increasingly, however, companies are taking advantage of modern communications technology, particularly the Internet, to outsource service activities to low-cost producers in other nations. The Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep; the results are ready for them in the morning. Many software companies, including Microsoft, now use Indian engineers to perform test functions on software designed in the United States. The time difference allows Indian engineers to run debugging tests on software written in the United States when U.S. engineers sleep, transmitting the corrected code back to the United States over secure Internet connections so it is ready for U.S. engineers to work on the following day. Dispersing value-creation activities in this way can compress the time and lower the costs required to develop new software programs. Other companies, from computer makers to banks, are outsourcing customer service functions, such as customer call centers, to developing nations where labor is cheaper. In another example from health care, workers in the Philippines transcribe American medical files (such as audio files from doctors seeking approval from insurance companies for performing a procedure). Some estimates suggest the outsourcing of many administrative procedures in health care, such as customer service and claims processing, could reduce health care costs in America by more than $100 billion. Did You Know? Did you know that trade as a percentage of GDP for the U.S. has nearly tripled since 1960? Visit your instructor’s Connect® course and click on your eBook or SmartBook® to view a short video explanation from the author. The economist Robert Reich has argued that as a consequence of the trend exemplified by companies such as Boeing, Apple, and Microsoft, in many cases it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, the outsourcing of productive activities to different suppliers results in the creation of products that are global in nature—that is, “global products.”7 But as with the globalization of markets, companies must be careful not to push the globalization of production too far. As we will see in later chapters, substantial impediments still make it difficult for firms to achieve the optimal dispersion of their productive activities to locations around the globe. These impediments include formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs, issues associated with economic and political risk, and the sheer managerial challenge of coordinating a globally dispersed supply chain (an issue for Boeing with the 787 Dreamliner, as discussed in the Management Focus). For example, government regulations ultimately limit the ability of hospitals to outsource the process of interpreting MRI scans to developing nations where radiologists are cheaper. TEST PREP Use SmartBook to help retain what you have learned. Access your Instructor’s Connect course to check out SmartBook or go to learnsmartadvantage.com for help. Nevertheless, the globalization of markets and production will probably continue. Modern firms are important actors in this trend, their actions fostering increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment—as well they should. The Emergence of Global Institutions As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system. Over the past 75 years, a number of important global institutions have been created to help perform these functions, including the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization; the International Monetary Fund and its sister institution, the World Bank; and the United Nations. All these institutions were created by voluntary agreement between individual nation-states, and their functions are enshrined in international treaties. The World Trade Organization (WTO) (like the GATT before it) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states. As of 2019, 164 nations that collectively accounted for 98 percent of world trade were WTO members, Page 10 thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements among WTO member states. Over its entire history, and that of the GATT before it, the WTO has promoted the lowering of barriers to cross-border trade and investment. In doing so, the WTO has been the instrument of its member states, which have sought to create a more open global business system unencumbered by barriers to trade and investment between countries. Without an institution such as the WTO, the globalization of markets and production is unlikely to have proceeded as far as it has. However, as we shall see in this chapter and in Chapter 7 when we look closely at the WTO, critics charge that the organization is usurping the national sovereignty of individual nation-states. The International Monetary Fund (IMF) and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the international monetary system; the World Bank was set up to promote economic development. In the more than seven decades since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the two sister institutions. It has focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads). The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against those of other nations. During the past two decades, for example, the IMF has lent money to the governments of troubled states including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey. More recently, the IMF took a proactive role in helping countries cope with some of the effects of the 2008– 2009 global financial crisis. IMF loans come with strings attached, however; in return for loans, the IMF requires nation- states to adopt specific economic policies aimed at returning their troubled economies to stability and growth. These requirements have sparked controversy. Some critics charge that the IMF’s policy recommendations are often inappropriate; others maintain that by telling national governments what economic policies they must adopt, the IMF, like the WTO, is usurping the sovereignty of nation-states. We will look at the debate over the role of the IMF in Chapter 11. The United Nations (UN) was established October 24, 1945, by 51 countries committed to preserving peace through international cooperation and collective security. Today, nearly every nation in the world belongs to the United Nations; membership now totals 193 countries. When states become members of the United Nations, they agree to accept the obligations of the UN Charter, an international treaty that establishes basic principles of international relations. According to the charter, the UN has four purposes: to maintain international peace and security, to develop friendly relations among nations, to cooperate in solving international problems and in promoting respect for human rights, and to be a center for harmonizing the actions of nations. Although the UN is perhaps best known for its peacekeeping role, one of the organization’s central mandates is the promotion of higher standards of living, full employment, and conditions of economic and social progress and development—all issues that are central to the creation of a vibrant global economy. As much as 70 percent of the work of the UN system is devoted to accomplishing this mandate. To do so, the UN works closely with other international institutions such as the World Bank. Guiding the work is the belief that eradicating poverty and improving the well-being of people everywhere are necessary steps in creating conditions for lasting world peace.8 Another institution in the news is the Group of Twenty (G20). Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank. Collectively, the G20 represents 90 percent of global GDP and 80 percent of international global trade. Originally established to formulate a coordinated policy response to financial cris