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International Business COMPETING IN THE GLOBAL MARKETPLACE This page intentionally left blank  9E Intern at ion a 1 Business COMPETING IN THE GLOBAL MA...

International Business COMPETING IN THE GLOBAL MARKETPLACE This page intentionally left blank  9E Intern at ion a 1 Business COMPETING IN THE GLOBAL MARKETPLACE Charles W. L. Hill UNIVERSITY OF WASHINGTON  The McGraw·Hill Companies D McGraw-Hill 1rwin INTERNATIONAL BUSINESS: COMPETING IN THE GLOBAL MARKETPLACE Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright© 2013, 2011, 2009, 2007, 2005, 2003, 2000, 1997, 1994 by The McGraw-Hill Companies, Inc. 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 The McGraw-Hill Companies, Inc., 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 recycled, acid-free paper containing 10% postconsumer waste. 1 2 3 4 5 6 7 8 9 0 DOW /DOW 1 0 9 8 7 6 5 4 3 2 ISBN 978-0-07-802924-0 MHID 0-07-802924-4 Vice president and editor-in-chief: Brent Gordon Editorial director: Paul Ducham Executive editor: John Weimeister Executive director of development: Ann Torbert Development editor II: Megan Shultz Editorial coordinator: Heather Darr Vice president and director of marketing: Robin J. Zwettler Marketing director: Amee Mosley Marketing manager: Jaime Halteman Vice president of editing, design, and production: Sesha Bolisetty Lead project manager: Christine A. Vaughan Buyer II: Debra R. Sylvester Senior designer: Mary Kazak Sander Senior photo research coordinator: Jeremy Cheshareck Photo researcher: Payee Oster Senior media project manager: Allison Souter Media project manager: Cathy L. Tepper Cover design: Pam Verros Interior design: Kay Lieberherr Typeface: 10.5/12 Goudy Compositor: Aptara®, Inc. Printer: R.R. Donnelley Library of Congress Cataloging-in-Publication Data Hill, Charles W. L. International business: competing in the global marketplace/Charles W. L. Hill.-9th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-07-802924-0 (alk. paper) ISBN-10: 0-07-802924-4 (alk. paper) 1. International business enterprises-Management. 2. Competition, International. I. Title. HD62.4.H55 2013 658'.049-dc23 2011032370 www.mhhe.com  For June & Mike Hill, my parents about the AUTHOR Charles W. L. Hill University of Washington Charles W. L. Hill is the Hughes M. Blake Professor of International Business at the School of Business, University of Washington. Professor Hill received his Ph.D. from the University of Manchester's Institute of Science and Technology (UMIST) in Britain. In addition to the University of Washington, he has served on the faculties of UMIST, Texas A&M University, and Michigan State University. Professor Hill has published more than 50 articles in peer-reviewed academic jour­ nals, including the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, and Organization Science. He has also published two college texts: one on strategic management and the other on international business. Professor Hill has served on the editorial boards of several academic journals, including the Strategic Management Journal and Organization Science. Between 1993 and 1996 he was consulting editor at the Academy of Management Review. Professor Hill teaches in the MBA, Executive MBA, Management, and Ph.D. pro­ grams at the University of Washington. He has received awards for teaching excellence in the MBA, Executive MBA, and Management programs. He has also taught custom­ ized executive programs. Professor Hill works on a consulting basis with a number of organizations. His clients have included ATL, Boeing, BF Goodrich, Hexcel, House of Fraser, Microsoft, Seattle City Light, Tacoma City Light, T hompson Financial Services, and Wizards of the Coast.  brief CONTENTS partone Introduction and Overview Chapter 1 Globalization 2 Case: The Globalization of Health Care 42 parttwo Country Differences Chapter 2 National Differences in Political Economy 44 Chapter 3 Political Economy and Economic Development 68 Chapter 4 Differences in Culture 98 Chapter 5 Ethics in International Business 134 Cases: Siemens Bribery Scandal 166 Walmart's Foreign Expansion 167 Nike:The Sweatshop Debate 168 Etch-A-Sketch Ethics 172 partthree The Global Trade and Investment Environment Chapter 6 International Trade Theory 174 Chapter 7 The Political Economy of International Trade 212 Chapter 8 Foreign Direct Investment 248 Chapter 9 Regional Economic Integration 282 Cases: Logitech 316 The Ecuadorean Rose Industry 317 The European Energy Market 318 Global Food Prices 319 partfour The Global Monetary System Chapter 10 The Foreign Exchange Market 322 Chapter 11 The International Monetary System 352 Chapter 12 The Global Capital Market 386 Cases: Hyundai and Kia 410 Anatomy of a Currency Crisis 410 Russian Ruble Crisis and Its Aftermath 412 partfive The Strategy and Structure of International Business Chapter 13 The Strategy of International Business 416 Chapter 14 The Organization of International Business 446  GJ Brief Contents Chapter 15 Entry Strategy and Strategic Alliances 484 Cases: Coca-Cola 518 Diebold 519 JCB in India 520 IKEA 521 G partsix Business Operations Chapter 16 Exporting, Importing, and Countertrade 528 Chapter 17 Global Production, Outsourcing, and Logistics 552 Chapter 18 Global Marketing and R&D 580 Chapter 19 Global Human Resource Management 614 Chapter 20 Accounting and Finance in the International Business 642 Cases: Building the Boeing 787 668 Adopting International Accounting Standards 669 Li & Fung 670 Glossary 671 Photo Credits 683 Index 685 list of MAPS Map 3.1 GNI per Capita, 2009 71 Map 3.2 GNI PPP per Capita, 2009 73 Map 3.3 Growth Rate in GDP per Capita, 1999-2009 74 Map 3.4 Human Development Index, 2010 76 Map 3.5 Political Freedom in 2010 82 Map 3.6 Distribution of Economic Freedom, 2011 86 Map 4.1 World Religions 110 Map 9.1 Member States of the European Union in 2011 290 Map 9.2 Economic Integration in the Americas 300 Map 9.3 ASEAN Countries 30 6 Map 9.4 APEC Members 307 PREFACE It is now two decades since I began work on the first edi­ I have always endeavored to do all of these things in tion of International Business: Competing in the Global International Business. In my view, many other texts paid Marketplace. By the third edition the book was the most insufficient attention to the strategies and structures of widely used international business text in the world. international businesses and to the implications of inter­ Since then its market share has only increased. I attri­ national business for firms' various functions. This omis­ bute the success of the book to a number of goals I set for sion has been a serious deficiency. Many of the students myself when I embarked on the first edition of the book. in these international business courses will soon be Specifically, I wanted to write a book that ( 1) was com­ working in international businesses, and they will be ex­ prehensive and up-to-date, (2) went beyond an uncriti­ pected to understand the implications of international cal presentation and shallow explanation of the body of business for their organization's strategy, structure, and knowledge, (3) maintained a tight, integrated flow be­ functions. This book pays close attention to these tween chapters, ( 4) focused on managerial implications, issues. and (5) made important theories accessible and interest­ Comprehensiveness and relevance also require cover­ ing to students. age of the major theories. It has always been my goal to Over the years, and through eight additional editions, I incorporate the insights gleaned from recent academic have worked hard to adhere to these goals. It has not al­ work into the text. Consistent with this goal, over the ways been easy. An enormous amount has happened over last eight editions I have added insights from the follow­ the past two decades, both in the real world of economics, ing research: politics, and business and in the academic world of theory The new trade theory and strategic trade policy. and empirical research. Often I have had to significantly rewrite chapters, scrap old examples, bring in new ones, The work of Nobel Prize-winning economist incorporate new theory and evidence into the book, and Amartya Sen on economic development. phase out older theories that are increasingly less relevant The work of Hernando de Soto on the link to the modem and dynamic world of international busi­ between property rights and economic ness. That process continues in the current edition. As development. noted below, there have been significant changes in this Samuel Huntington's influential thesis on the edition, and that will no doubt continue to be the case in "clash of civilizations." the future. In deciding what changes to make, I have been guided not only by my own reading, teaching, and research, The new growth theory of economic develop­ but also by the invaluable feedback I receive from profes­ ment championed by Paul Romer and Gene sors and students around the world who use the book, from Grossman. reviewers, and from the editorial staff at McGraw- Hill. My Empirical work by Jeffrey Sachs and others on the thanks go out to all of them. relationship between international trade and eco­ nomic growth. COMPREHENSIVE AND UP-TO-DATE Michael Porter's theory of the competitive advan­ tage of nations. To be comprehensive, an international business text­ Robert Reich's work on national competitive book must: advantage. Explain how and why the world's countries differ. The work of Nobel Prize-winner Douglass North Present a thorough review of the economics and and others on national institutional structures politics of international trade and investment. and the protection of property rights. Explain the functions and form of the global The market imperfections approach to foreign monetary system. direct investment that has grown out of Ronald Examine the strategies and structures of interna­ Coase and Oliver Williamson's work on tional businesses. transaction cost economics. Assess the special roles of an international busi­ Christopher Bartlett and Sumantra Ghoshal's ness's various functions. research on the transnational corporation. xx  The writings of C. K. Prahalad and Gary Hamel Reflecting this rapid pace of change, in this edition of on core competencies, global competition, and the book I have tried to ensure that all material and sta­ global strategic alliances. tistics are as up-to-date as possible as of 2009. However, Insights for international business strategy that being absolutely up-to-date is impossible because change can be derived from the resource-based view of is always with us. What is current today may be outdated the firm. tomorrow. Accordingly, I have established a home page for this book on the World Wide Web at www.mhhe. In addition to including leading-edge theory, in light com/hill. From this home page the reader can access of the fast-changing nature of the international business regular updates of chapter material and reports on topi­ environment, every effort is being made to ensure that cal developments that are relevant to students of inter­ the book is as up-to-date as possible when it goes to press. national business. I hope readers find this a useful Much has happened in the world since the first edition of addition to the support material for this book. this book was published in 1993. The Uruguay Round of GATI negotiations was successfully concluded and the BEYOND UNCRITICAL World Trade Organization was established. In 2001 the W TO embarked upon another major round of talks PRESENTATION AND SHALLOW aimed to reduce barriers to trade, the Doha Round. The EXPLANATION European Union moved forward with its post-1992 Many issues in international business are complex and agenda to achieve a closer economic and monetary thus necessitate considerations of pros and cons. To union, including the establishment of a common cur­ demonstrate both sides of issues to students, I have ad­ rency in January 1999. The North American Free Trade opted a critical approach that presents the arguments for Agreement passed into law. The former Communist and against economic theories, government policies, states of Eastern Europe and Asia continued on the road business strategies, organizational structures, and so on. to economic and political reform. As they did, the eu­ Therefore, I have attempted to explain the complexi­ phoric mood that followed the collapse of communism in ties of the many theories and phenomena unique to in­ 1989 was slowly replaced with a growing sense of realism ternational business so the student might fully about the hard path ahead for many of these countries. comprehend the statements of a theory or the reasons a The global money market continued its meteoric growth. phenomenon is the way it is. I believe these theories and By 2009 more than $2 trillion per day was flowing across phenomena are explained in more depth in this book national borders. The size of such flows fueled concern than they are in competing textbooks, the rationale be­ about the ability of short-term speculative shifts in global ing that a shallow explanation is little better than no capital markets to destabilize the world economy. The explanation. In international business, a little knowl­ World Wide Web emerged from nowhere to become the edge is indeed a dangerous thing. backbone of an emerging global network for electronic commerce. The world continued to become more global. Several Asian Pacific economies, including most notably INTEGR ATED PROGRESSION China, continued to grow their economies at a rapid rate. OF TOPICS Outsourcing of service functions to places such as China and India emerged as a major issue in developed Western A weakness of many texts is that they lack a tight, inte­ nations. New multinationals continued to emerge from grated flow of topics from chapter to chapter. This book developing nations in addition to the world's established explains to students in Chapter 1 how the book's topics industrial powers. Increasingly, the globalization of the are related to each other. Integration has been achieved world economy affected a wide range of firms of all sizes, by organizing the material so that each chapter builds on from the very large to the very small. the material of the previous ones in a logical fashion. Also, unfortunately, in the wake of the terrorist at­ tacks on the United States that took place on Septem­ Part One ber 11, 2001, global terrorism and the attendant geopolitical risks emerged as a threat to global economic Chapter 1 provides an overview of the key issues to be integration and activity. addressed and explains the plan of the book. xxi xxii - Preface Part Two the actual practice of international business. This is ex­ plicit in the later chapters of the book, which focus on Chapters 2 and 4 focus on national differences in political the practice of international business, but it is not al­ economy and culture, and Chapter 5 on ethical issues in ways obvious in the first half of the book, which consid­ international business. Most international business text­ ers many macroeconomic and political issues, from books place this material at a later point, but I believe it is international trade theory and foreign direct investment vital to discuss national differences first. After all, many of flows to the IMF and the influence of inflation rates on the central issues in international trade and investment, foreign exchange quotations. Accordingly, at the end of the global monetary system, international business strategy each chapter in Parts Two, Three, and Four-where the and structure, and international business operations arise focus is on the environment of international business, as out of national differences in political economy and cul­ opposed to particular firms-a section titled "Implica­ ture. To fully understand these issues, students must first tions for Managers" clearly explains the managerial im­ appreciate the differences in countries and cultures. We plications of the material discussed in the chapter. For discuss ethical issues at this juncture primarily because example, Chapter 6, "International Trade Theory," ends many ethical dilemmas flow out of national differences in with a detailed discussion of the various trade theories' political systems, economic systems, and culture. implications for international business management. In addition, each chapter begins with a case that il­ Part Three lustrates the relevance of chapter material for the prac­ tice of international business. Chapter 2, "National Chapters 6 through 9 investigate the political economy of Differences in Political Economy," for example, opens international trade and investment. The purpose of this with a case that profiles the economy of Poland. part is to describe and explain the trade and investment I have also added a closing case to each chapter. environment in which international business occurs. These cases are also designed to illustrate the relevance of chapter material for the practice of international busi­ Part Four ness. The closing case for Chapter 2, for example, looks Chapters 10 through 12 describe and explain the global at Indonesia's economy. monetary system, laying out in detail the monetary Another tool that I have used to focus on managerial framework in which international business transactions implications is a Management Focus box. There is at are conducted. least one Management Focus in each chapter. Like the opening case, the purpose of these boxes is to illustrate the relevance of chapter material for the practice of Part Five international business. The Management Focus in In Chapters 13 through 15 attention shifts from the en­ Chapter 2, for example, looks at how Starbucks has been vironment to the firm. Here the book examines the able to enforce its trademark in China. This box illus­ strategies and structures that firms adopt to compete ef­ trates the important role that national differences in the fectively in the international business environment. protection of intellectual property rights can play in international business. Part Six ACCESSIBLE AND IN TERES TING In Chapters 16 through 20 the focus narrows further to investigate business operations. These chapters explain The international business arena is fascinating and ex­ how firms can perform their key functions-manufac­ citing, and I have tried to communicate my enthusiasm turing, marketing, R&D, human resource management, for it to the student. Learning is easier and better if the accounting, and finance-to compete and succeed in subject matter is communicated in an interesting, infor­ the international business environment. mative, and accessible manner. One technique I have Throughout the book, the relationship of new mate­ used to achieve this is weaving interesting anecdotes rial to topics discussed in earlier chapters is pointed out into the narrative of the text-stories that illustrate the­ to the students to reinforce their understanding of how ory. The opening cases and focus boxes are also used to the material comprises an integrated whole. make the theory being discussed in the text both acces­ sible and interesting. FOCUS ON MANAGERIAL Each chapter has two kinds of focus boxes-a Man­ agement Focus box (described above) and a Country Fo­ IMPLICATIONS cus box. Country Focus boxes provide background on I have always believed that it is important to show stu­ the political, economic, social, or cultural aspects of dents how the material covered in the text is relevant to countries grappling with an international business issue.  Preface xxiii In Chapter 2, for example, one Country Focus box dis­ ACKNOWLEDGMENTS cusses how the economy of Venezuela has performed un­ Numerous people deserve to be thanked for their assis­ der the leadership of Hugo Chavez. tance in preparing this book. First, thank you to all the people at McGraw-Hill/Irwin who have worked with me WHAT'S NEW IN THE 9TH EDITION on this project: T he success of the first eight editions of International Paul Ducham, Publisher Business was based in part upon the incorporation of John Weimeister, Executive Editor leading-edge research into the text, the use of the up-to­ date examples and statistics to illustrate global trends Megan Shultz, Developmental Editor and enterprise strategy, and the discussion of current Jaime Halteman, Marketing Manager events within the context of the appropriate theory. Elizabeth Steiner, Marketing Coordinator Building on these strengths, my goals for this revision Denise Showers, Project Manager have been threefold: Christine Vaughan, Lead Project Manager 1. To incorporate new insights from recent scholarly Allison Souter, Media Project Manager research wherever appropriate. Debra Sylvester, Production Supervisor 2. To make sure the content of the text covers all appropriate issues. Cara Hawthorne, Designer 3. To make sure the text is as up-to-date as possible Jeremy Cheshareck, Senior Photo Research with regard to current events, statistics, and Coordinator examples. Second, my thanks go to the reviewers who provided As part of the overall revision process, changes have good feedback that helped shape this book. been made to every chapter in the book. All statistics Yeqing Bao, University of Alabama, Huntsville have been updated to incorporate the most recently Jacobus F. Boers, Georgia State University available data. New examples, cases, and boxes have been added and older examples updated to reflect new Ken Chinen, California State University, developments. Almost all of the chapter opening and Sacramento closing cases are new to this edition. New material has Abiola 0. Fanimokun, Pennsylvania State been inserted wherever appropriate to reflect recent University, Fayette academic work or important current events. John Finley, Columbus State University Most notably for this edition, detailed discussion of the Michael Harris, East Carolina University global financial crisis that occurred in 2008 and 2009, and its implications for international business, has been added to Anthony C. Koh, University of Toledo many chapters. For example, Chapter 7 opens with a case Steve Lawton, Oregon State University that discusses the impact of the global financial crisis on Ruby Lee, Florida State University attitudes toward protectionism in many countries. Simi­ Joseph W. Leonard, Miami University larly, Chapter 11 closes with a case that profiles how the global financial crisis triggered economic turmoil and a David N. McArthur, Utah Valley University currency crisis in Latvia. Sunder Narayanan, New York University Elsewhere, Chapter 7 has been updated to discuss Eydis Olsen, Drexel University progress on the current round of talks sponsored by the Daria Panina, Texas A&M University WTO aimed at reducing barriers to trade, particularly in agriculture (the Doha Round). Chapter 8 now discusses Hoon Park, University of Central Florida the slump in foreign direct investment flows that took Dr. Mahesh Raisinghani, Texas Women's place in 2008 and 2009, and explains how the global fi­ University nancial crisis of 2008 contributed to it. Chapter 10 dis­ Brian Satterlee, EdD, DBA, Liberty University cusses the weakness in the U.S. dollar between 2004 and Michael Volpe, University of Maryland 2008, and its paradoxical rebound in late 2008 in the midst of a severe financial crisis in the United States and elsewhere. And so on. Guided Tour Cases, focus boxes, and exercises throughout the book make theories accessible and interesting and show how theory relates to the practice of international business. part two Country Differences 2 National Differences in Political Economy Lll:AllNING OllJll:CTIVll:S: Aft r reading this chaptaryc;1uwill baabhJto: LO 1 UndE1rst1md how th El polihcal systams of oountnes diffsr LQl Understand how the economic systems or countries differ. LOl UndE1rstand how lh9 l9gel systems of o:iunt1iE1s differ. LO EKPlain the implications for management practice of netionald1ffln9ncE1sin political110Jnomy. The Polish Surprise and ease Poland's entry into the European Union, theWorldBank put thePolish lilxsystemat151 st outof A!'J the finaocial crisis of2006 and2009 u11fuldland privallzed WestsrnEurope.All thishelped transformFbland into a aconomiccrisis thatraquirsdths lMFandEU to stepin returning !Jorn Western Europe have swelled the ranll ick,..""" 1m.,.dif. uocd in the inda. Which nf the indiC>ol""'would h;:ive fcrenJ. mcani in different contexts worldwidc. lnf.icr, grcatu importance for a company duu marl:= laprop thefmodpedinwi1h a$43bil· in the eountry,and1eparntist1 ;,re ;,ctive in a1Wmkr limtrcigc. Whenit,....revcak:d1hm muchd off)rcwinces. Fo1 30 ycar1the 1trnf\ia1rrtolPtcsiden1 this moncy found it:s way into the penrmal cnffcn ol Suha.rro held this spra.wlina natinn taerhu.Suharte> Suharto and h!s crontc1.pcople 1ooktolhe streets in ""'a virtual dkt»tor"'how;,1b;,ckedbr the milimry prote t ;md ho:"'"'forced to r1J1lhcro.te e1pen1lve ptixedure ( ;i.\thq>en..,s.H..dtho.., operntiombo:..n donieinthe Who w:e theW...,nl United States, they wonld h;i.v, re.pectivdy.Forr... t andJun."are nvt alone; tion tihe-.ilth c;ae!Cm th.... risb be mitigated! in 200750lne 750,000Americ;m trnveled abtatd fot H l mOOical treatment.The coruulting companyDebi ii 4. On ba\;mce, do you think that 1he globali.-..tion of fotec-...ting the numbers to te;i.ch 10 million by 2012, health care i a goodthing, ornnr? whkhwould heworth ahout$2lhillion tn 1h..,...,na­ rion:iwherethe procedure ar new hospitals, 1un11t nfwhich are ptivate, where Decen1ber 13,2004,p. 80; A. P.;,lb.d:,"Wh.;,"11\ctdini Your h hly killed physicians treat them, in.any nfwhotn X·R y,"T'l Ner 16,2003.Pfl.l.9. tralnedintht:UnltedState11MBritaln.The 1lvee Anooy1000","Sun, nJ1nJ1rivety curtailed despite stmng global demand,oil production inVenezuel1 i On the economic: tront things rerrw ned rough.The appears to be lllippifl'J, having faMen every year since economy ahrank bv9 percent in2002 and another 8pef 2006. Moreover. wtien oi l prices fell in 2009-2009, cent in20ro.Unemployment 1emai1ed persistently high theVenezuelan economy went into reverse,shrinking by at 15 to 17 percent end the pwerty rate roae to more 3.3 percent in2009Wld2.Bpercent in2010 than 50 percent of the population.A 200 3 study by the l Aidifl'J a WiNe of popu arity at home. in December World Ban concluded Venezuel.i was one of the moat 2000Cll!rfflz won reelection as president.He celebrated regulated ecooomies ln the world and thatstate control3 hl3 vietory bvstepping on the revolutionary accelerator. co.ter business octMlies {l8Ye ptiblic officials ample oppof Pariamefll {IB'le him thepower 10 legislate bvdecree for !t.lnitles lo enrich themset.ea by demanding bribes in re- IS moflltls,arid 11 committee ol hi SUPPOrters $10rted lo 1urnfor p&rmission 1o oxpend opora1ions or ont&rMw draftaeonstitutional reformtoMn V&n&Zuola inlo an linesofbu.smtMicro5Qf1,lor e,.,.,,,ple,di1CCvered that pira1edMicr$0l'1ooftw.i.r,.,p rodocedilk­ gallyinlnaihmd. '>f rold wcrldwid.- a1 theInmcnL Both civil and crimim1l liability !"""' arc probably more  P rt21; CeuruyDU.eio:.ccs mplications for Managers exteruive in the United States thm in any other COW\try, altho many other We&t· cm n:i.ti(ln! alM"> h:i.ve c.oml'reh ive li hility laws. l!:i.hility la"" are tV(lic.illy lc:i.. catablllhrnent. Under hil!rule, the lndoneoian ccon­ AfterSuharto,lndonaioi...pJlytowardavigr­ omy grew steadily,hut there was a cost. Suharui bru­ ()U &mocrn.cy,culminatini: in October W04 with the tally "'pre,..,d internal di,.ent. He wa also famou for inaugurationclSmilo&nnmg:YW th.counlrjr' Supplements for the Instructor Online Learning Center (OLC)­ www.mhhe.com/hill A password-protected portion of the book's website will be available to adopters of International Business, featuring online access to the instructor's manual, PowerPoint presentations, video cases, and globalEDGE answers. Instructors can also Videos view student resources to make more effective A new Video collection features recent news supplementary assignments. footage. V ideos correspond to video teaching notes accessible on the instructor's side of the For students, this website also provides rich Online Learning Center. interactive resources to help them learn how to practice international business, including chapter An updated Instructor's Manual and Video quizzes and interactive modules. Guide (prepared by Veronica Horton) includes course outlines, chapter overviews and teaching suggestions, lecture outlines, ideas for student exercises and projects, teaching notes for all Test Bank cases in the book, and video notes. T he Test Bank contains over 100 true/false, multiple choice, and essay questions per chapter, each tagged to the Learning Objectives, page number, level of difficulty, AACSB, and Bloom's Taxonomy standards. PowerPoint Two sets of slides per chapter (one prepared by Veronica Horton, one by Steve Lawton of Oregon State University) feature original materials not found in the text in addition to reproductions of key text figures, tables, and maps. McGRAW-HILL CONNECT Access and review each response; manually change grades or leave comments for students to INTERNATIONAL BUSINESS review. Reinforce classroom concepts with practice tests onnect Less Managing. and instant quizzes. Learn More Teaching. Instructor Library The Connect International Business Succeed" Greater Leaming. Instructor Library is your repository for additional re­ McGraw-Hill Connect In- sources to improve student engagement in and out of ternational Business is an class. You can select and use any asset that enhances online assignment and assessment solution that con­ your lecture. The Connect International Business Instruc­ nects students with the tools and resources they'll need tor Library includes: to achieve success. E-book McGraw-Hill Connect International Business helps prepare students for their future by enabling faster Instructor's Manual learning, more efficient studying, and higher retention PowerPoint files of knowledge. Answers to the end-of-chapter globalEDGE Research Tasks McGraw-Hill Connect International Videos and Instructional Notes Business Features International Business Newsletter archives Connect International Business offers a number of pow­ Access to interactive study tools such as Business erful tools and features to make managing assignments Around the World, Drag-and-drop maps, the Global easier, so faculty can spend more time teaching. With Business Plan, and iGlobe Connect International Business, students can engage Student Study Center The Connect International with their coursework anytime and anywhere, making Business Student Study Center is the place for students the learning process more accessible and efficient. to access additional resources. 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One of our Technical Support Analysts 9th edition, are provided only as a guide for the users of will be able to assist you in a timely fashion. xxxi This page intentionally left blank International Business COMPETING IN THE GLOBAL MARKETPLACE  part one Introduction and Overview 1 Globalization LEARNING OBJECTIVES After reading this chapter you will be able to: L01 Understand what is meant by the term globalization. L02 Recognize the main drivers of globalization. L03 Describe the changing nature of the global economy. LQ4 Explain the main arguments in the debate over the impact of globalization. L05 Understand how the process of globalization is creating opportunities and challenges for business managers. Legal Outsourcing Sacha Baron Cohen, the irreverent British comedian noted that without legal outsourcing to somewhere such whose fictional characters have included Borat, Ali G, as India, mounting a defense against this kind of lawsuit and Bruno, is no stranger to lawsuits, including several would not have made economic sense. The defendants from members of the public who claimed they were would have simply paid the plaintiff to go away to avoid duped into appearing in his 2006 film, Borat: Cultural paying U.S. legal fees, even though the case had no Learnings of America for Make Benefit Glorious Nation merit. But with a team of excellent Indian attorneys of Kazakhstan. In 2009, Cohen was sued yet again, this trained in U.S. law doing a major chunk of the legal work, time by a woman who claimed Cohen defamed her dur­ it was less expensive to fight and win the suit than it was ing a sketch in the Da Ali G Show, in which Cohen plays to settle out of court. the linguistically challenged rap star Ali G. Like most Legal outsourcing to places such as India and the other suits against Cohen, this one was dismissed. In Philippines is growing. Although the amounts involved rendering his opinion, Los Angeles Superior Court Judge are still small-estimates suggest that of the $180 billion Terry Friedman stated, "No reasonable person could Americans spend on legal services each year only about consider the statements made by Ali G on the program $1 billion is outsourced-the growth rate is high at 20 to to be factual. It is obvious that the Ali G character is 30 percent annually. The driving force has been spiraling absurd, and all his statements are gibberish and intended legal fees in the United States. Between 1998 and 2009, as comedy." hourly rates at big American law firms shot up more than An interesting aspect of this case was that the major­ 65 percent, according to industry sources. ity of the preparatory work was done not by lawyers in Faced with escalating costs, law firms and corporate Los Angeles but by a six-member team of lawyers and law departments are exploring outsourcing. Some legal legal assistants in Mysore, India. A veteran media lawyer tasks cannot be done cheaply. If the fate of your company hangs on the verdict. you will probably want a brilliant underlies American law. Also, educated Indians speak lawyer to argue your case. However, plenty of legal tasks good English, and the 10- to 12-hour time difference be­ are routine. These include reviewing documents, drafting tween India and the United States means that work can contracts, and the like. American law firms typically use be done overnight in India, increasing responsiveness fresh law graduates to do such grunt work, billing them to clients. out at steep rates to generate lots of profit for the firm. Pangea3 serves two kinds of clients, corporations and The 2008-2009 recession promoted clients to rebel U.S. law firms seeking to outsource routine legal work against this practice. Increasingly, clients are pushing to low-cost locations. Some 75 percent of its business their law firms to drive down legal costs through out­ comes from Fortune 1000 companies, while the rest sourcing. While hourly rates for U.S. lawyers doing grunt comes from law firms. Pangea3's value proposition is work can run from $100 to as high as $500, lawyers in simple: It helps companies and law firms improve their India will do the work for between $20 and $60 an hour, efficiency, and minimize their business and legal risks, by resulting in significant cost savings. having routine, labor-intensive legal work that requires a One major beneficiary of this trend has been an out­ low degree of judgment done in India. Most industry ex­ sourcing company known as Pangea3. Founded in 2004 perts believe that in the short to medium term, compa­ by David Perla, the former general counsel of Monster. nies such as Pangea3 will see their market opportunity com, Pangea3 has headquarters in New York and Mumbai, expand from about $1 billion today to $3 billion to $5 bil­ India, and a staff of more than 450. India is favored lion by decade's end. In anticipation of this rapid growth, because local universities produce a steady stream of Thomson Reuters, one of the world's largest media lawyers trained in common law, which is the legal tradi­ and information services companies, bought Pangea3 in tion India inherited from the British. The same tradition November 2010.1 3 4 Part 1 Introduction and Overview Over the past three decades a fundamental shift has been occurring in the world econ­ omy. We have been moving away from a world in which national economies were rela­ tively 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. And we are moving toward a world in which barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances in transportation and telecommunications tech­ nology; material culture is starting to look similar the world over; and national econo­ mies are merging into an interdependent, integrated global economic system. The process by which this is occurring is commonly referred to as globalization. In today's interdependent global economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by Ford from components made in the United States and Japan that were fabricated from Korean steel and Malaysian rub­ ber. She may have filled the car with gasoline at a BP service station owned by a British multinational company. The gasoline could 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, the American might talk to her stockbroker (using a headset) on a Nokia cell phone that was designed in Finland and assembled in Texas using chip sets produced in Taiwan that were de­ signed by Indian engineers working for Texas Instruments. She could tell the stockbroker to purchase shares in Deutsche Telekom, a German telecommunications firm that was transformed from a former state-owned monopoly into a global company by an energetic Israeli CEO. She may tum on the car radio, which was made in Malaysia by a Japanese firm, to hear a popular hip-hop song composed by a Swede and sung by a group of Danes in English who signed a record contract with a French music company to promote their record in America. The driver might pull into a drive-through Starbucks coffee shop managed by a Korean immigrant and order a "single, tall, nonfat latte" and chocolate­ covered biscotti. The coffee beans came from Costa Rica and the chocolate from Peru, while the biscotti was made locally using an old Italian recipe. After the song ends, a news announcer might inform the American listener that antiglobalization protests at a meeting of the World Economic Forum in Davos, Switzerland, have turned violent. One protester has been killed. The announcer then turns to the next item, a story about how a financial crisis that started in the U.S. banking sector may trigger a global recession and is sending stock markets down all over the world. This is the world in which we live. It is a world where the volume of goods, services, and investment crossing national borders has expanded faster than world output for more than half a century. It is a world where more than $4 trillion in foreign exchange transactions are made every day, where $15 trillion of goods and $3. 7 trillion of services were sold across national borders in 2010.2 It is a world in which international institu­ tions such as the World Trade Organization and gatherings of leaders from the world's most powerful economies have repeatedly called for even lower barriers to cross-border trade and investment. It is a world where the symbols of material and popular culture are increasingly global: from Coca-Cola and Starbucks to Sony PlayStations, Samsung cell phones, MTV shows, Disney films, IKEA stores, and Apple iPods and iPhones. It is a world in which products are made from inputs that come from all over the world. It is a world in which a financial crisis in America can trigger a global economic recession, which is exactly what occurred in 2008 and 2009. It is also a world in which 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 American­ ization of popular culture. And yes, these protests have on occasion turned violent. For businesses, this globalization process has produced many opportunities. Firms can expand their revenues by selling around the world and/or reduce their costs by produc­ ing in nations where key inputs, including labor, are cheap. The global expansion of  Globalization ei Chapter 1 5 enterprises has been facilitated by favorable political and economic trends. Since the collapse of communism at the end of the 1980s, the pendulum of public policy in nation after nation has swung toward the free market end of the economic spectrum. Regula­ tory and administrative barriers to doing business in foreign nations have been reduced, while those nations have often transformed their economies, privatizing state-owned enterprises, deregulating markets, increasing competition, and welcoming investment by foreign businesses. This has allowed businesses both large and small, from both advanced nations and developing nations, to expand internationally. The history of Starbucks exemplifies the opportunities that a global economy offers businesses. The original idea for Starbucks came from Italian coffeehouses. After refining the concept in the United States, in 1995 the company started to expand globally. As a result, a company that had only a handful of stores 25 years ago is now one of the world's best-known brands with almost 17 ,000 stores in 50 countries. Starbucks has had an im­ pact on consumer behavior around the world, changing the way people consume coffee and profiting in the process. The company is also changing the way coffee is produced. By committing itself to purchasing only Fair Trade Certified coffee beans, Starbucks is promoting nonexploitive and environmentally sound growing policies in developing nations, and finding that doing good is also good business, since it reinforces the value of the Starbucks brand. The opening case, which looks at the process of outsourcing legal services to lower­ cost locations, is indicative of what is occurring in today's global economy. Law firms are starting to outsource to places such as India routine legal work that does not require much judgment or subjective review. They have found the work can be done just as effectively in India as in the United States, and at a much lower cost. Twenty years ago this would not have been possible, but because of rapid advances in telecommunications and the removal of barriers to cross-border trade and investment, such outsourcing is becoming increasingly common. As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition. Historically, while many workers in manufacturing industries worried about the impact foreign com­ petition might have on their jobs, workers in service industries felt more secure. Now this too is changing. 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 the opening case illustrates, some legal work is being outsourced to India. The same is true of some accounting services. Today many individual U.S. tax returns are compiled in India. Indian accountants, trained in U.S. tax rules, perform work for U.S. accounting firms.3 They access individual tax returns stored on computers in the United States, perform routine calculations, and save their work so that it can be inspected by a U.S. accountant, who then bills clients. As the best-selling author Thomas Friedman has argued, the world is becoming flat.4 People liv­ ing in developed nations no longer have the playing field tilted in their favor. Increas­ ingly, 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 book we will take a close look at the issues introduced here and many more. We will explore how changes in regulations governing international trade and invest­ ment, when coupled with changes in political systems and technology, have dramati­ cally altered the competitive playing field confronting many businesses. We will discuss the resulting opportunities and threats and review the strategies that managers can pur­ sue 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 at the benefits and costs of outsourcing, not just to business firms and their employees, but also to entire economies. First, though, we need to get a better overview of the nature and process of globalization, and that is the function of the current chapter. 6 Part 1 GJ Introduction and Overview LO, What Is Globalization? As used in this book, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the global­ ization of markets and the globalization of production. THE GLOBALIZATION OF MARKETS The globalization of markets refers to the merging of historically distinct and sepa­ rate national markets into one huge global marketplace. Falling barriers to cross-border trade 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 to create a global market.5 Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation video games, McDonald's hamburgers, Starbucks coffee, and IKEA furniture are frequently held up as prototypical examples of this trend. Firms such as those just cited are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic prod­ uct worldwide, they help to 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, nearly 90 percent of firms that export are small businesses employing less than 100 peo­ ple, and their share of total U.S. exports has grown steadily over the past decade to now exceed 20 percent.6 Firms with less than 500 employees accounted for 97 percent of all U.S. exporters and almost 3 0 percent of all exports by value. 7 Typical of these is Hytech, a New York-based manufacturer of solar panels that generates 40 percent of its $3 million in annual sales from exports to five countries, or B&S Aircraft Alloys, another New York company whose exports account for 40 percent of its $8 million annual revenues.8 The situation is similar in several other nations. For example, in Germany, the world's largest exporter, a staggering 98 percent of small and midsize companies have exposure to international markets, via either exports or international production.9 Despite the global prevalence of Citigroup credit cards, McDonald's hamburgers, Starbucks coffee, and IKEA stores, 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 dimen­ sions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal reg­ ulations. These differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particu­ lar country. The most global markets currently are not markets for consumer products-where national differences in tastes and preferences are still often important enough to act as a brake on globalization-but markets for industrial goods and materials that serve a universal need the world over. These include the 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 Shoppers walk through Beijing's main downtown shopping futures on the Nikkei index or the euro. promenade past a KFC franchise. KFC is one of the most In many global markets, the same firms frequently successful international businesses in China because of its confront each other as competitors in nation after adaptation and appeal to the Chinese market. nation. Coca-Cola's rivalry with PepsiCo is a global one,  Globalization ei Chapter 1 7 as are the rivalries between Ford and Toy ota, Boeing and Airbus, Caterpillar and Komatsu in earthmoving equipment, General Electric and Rolls-Royce in aero engines, and Sony, Nintendo, and Microsoft in video games. 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.10 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 effec­ tively. Consider Boeing's 777, a commercial jet airliner. 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.11 In total, some 30 percent of the 777, by value, is built by foreign companies. 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.12 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 y ields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival Airbus lndustrie. Boeing also outsources some production to foreign countries to increase the chance that it will Boeing's new global product, the 787 airliner, rolls out. Vizio and the Market for Flat Panel TVs Operating sophisticated tooling in environments that Vizio, founded by a Taiwanese immigrant. In just six must be kept absolutely clean, fabrication centers in years, sales of Vizio flat panel TVs ballooned from noth­ South Korea, Taiwan, and Japan produce to exacting ing to over $2 billion in 2008. In early 2009, the com­ specifications sheets of glass twice as large as king­ pany was the largest provider to the U.S. market with a size beds. From there, the glass panels travel to Mexi­ 21.7 percent share. Vizio, however, has fewer than 100 can plants located alongside the U.S. border. There employees. These focus on final product design, sales, they are cut to size, combined with electronic compo­ and customer service. Vizio outsources most of its en­ nents shipped in from Asia and the United States, as­ gineering work, all of its manufacturing, and much of sembled into finished flat panel TVs, and loaded onto its logistics. For each of its models, Vizio assembles a trucks bound for retail stores in the United States, team of supplier partners strung across the globe. Its where consumers spend over $35 billion a year on flat 42-inch flat panel TV, for example, contains a panel panel TVs. from South Korea, electronic components from China, The underlying technology for flat panel displays was and processors from the United States, and it is as­ invented in the United States in the late 1960s by RCA. sembled in Mexico. Vizio's managers scour the globe But after RCA and rivals Westinghouse and Xerox opted continually for the cheapest manufacturers of flat panel not to pursue the technology, the Japanese company displays and electronic components. They sell most of Sharp made aggressive investments in flat panel dis­ their TVs to large discount retailers such as Costco and plays. By the early 1990s Sharp was selling the first flat Sam's Club. Good order visibility from retailers, cou­ panel screens, but as the Japanese economy plunged pled with tight management of global logistics, allows into a decade-long recession, investment leadership Vizio to turn over its inventory every three weeks, shifted to South Korean companies such as Samsung. twice as fast as many of its competitors, which allows Then the 1997 Asian crisis hit Korea hard, and Taiwanese major cost savings in a business where prices are fall­ companies seized leadership. Today, Chinese companies ing continually. are starting to elbow their way into the flat panel display On the other hand, the shift to flat panel TVs has manufacturing business. caused pain in certain sectors of the economy, such as As production for flat panel displays migrates its those firms that make traditional cathode ray TVs in way around the globe to low-cost locations, there are high-cost locations. In 2006, for example, Japanese clear winners and losers. U.S. consumers have bene­ electronics manufacturer Sanyo laid off 300 employees fited from the falling prices of flat panel TVs and are at its U.S. factory, and Hitachi closed its TV manufactur­ snapping them up. Efficient manufacturers have taken ing plant in South Carolina, laying off 200 employees. advantage of globally dispersed supply chains to make Sony and Hitachi both still make TVs, but they are flat and sell low-cost, high-quality flat panel TVs. Foremost panel TVs assembled in Mexico from components among these has been the California-based company manufactured in Asia.13 win significant orders from airlines based in that country. For another example of a global web of activities, consider the example of Vizio profiled in the accompanying Management Focus. Early outsourcing efforts were primarily confined to manufacturing activities, such as those undertaken by Boeing and Vizio; 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 and the results are ready for them in the morning. Many software companies, including IBM and Microsoft, now use 8  Globalization Gi Chapter 1 9 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 writ­ ten 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 pro­ grams. 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, in 2008 some 34,000 Filipinos were transcribing 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 ser­ vice and claims processing, could reduce health care costs in America by as much as $ 70 billion.14 Robert Reich, who served as secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by companies such as Boeing, IBM, and Vizio, in many cases it is becoming irrelevant to talk about American prod­ ucts, Japanese products, German products, or Korean products. Increasingly, accord­ ing 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."15 But as with the globalization of markets, companies must be careful not to push the glo­ balization of production too far. As we will see in later chapters, substantial impedi­ ments 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 in­ vestment, transportation costs, and issues associated with economic and political risk. For example, government regulations ultimately limit the ability of hospitals to out­ source the process of interpreting MRI scans to developing nations where radiologists are cheaper. Nevertheless, the globalization of markets and production will continue. Modern firms are important actors in this trend, their very actions fostering increased globaliza­ tion. 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 na­ tional 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 half century, a number of important global insti­ tutions have been created to help perform these functions, including the General A greement onTariffs andTrade (GATT) and its successor, the World Trade Organi­ zation (WTO); the International Monetary Fund (IMF) and its sister institution, the World Bank; and the United Nations (UN). All these institutions were created by voluntary agreement between individual nation-states, and their functions are en­ shrined in international treaties. The WorldTrade Organization (like the GAT T 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 2011, 154 nations that collectively accounted for 97 percent of world trade were WTO members, thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements between WTO member states. Over its entire history, and that of the GAT T before it, the WTO has promoted the lowering of barriers to cross-border trade and investment. In 10 Part 1 ei Introduction and Overview 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 global­ ization of markets and production is unlikely to have proceeded as far as it has. How­ ever, 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 indi­ vidual nation-states. The International Monetary Fund and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was estab­ lished to maintain order in the international monetary sy stem; the World Bank was set up to promote economic development. In the more than six decades since their creation, both institutions have emerged as significant play ers 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 na­ tions 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. Dur­ ing 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 has taken a very proactive role in help­ ing countries to 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 shall look at the debate over the role of the IMF in Chapter 11. The United Nations was established October 24, 1945, by 51 countries commit­ ted to preserving peace through international cooperation and collective security. The United Nations has the important goal of improv­ ing the well-being of peo­ ple around the world.  Globalization GJ Chapter 1 11 Today nearly every nation in the world belongs to the United Nations; membership now totals 191 countries. When states become members of the United Nations, they agree to accept the obligations of the UN Charter, an international treaty that estab­ lishes 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.16 Another institution in the news is the G20tx. 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. Originally established to formulate a coordinated policy response to financial crises in developing nations, in 2008 and 2009 it became the forum though which major nations attempted to launch a coordinated policy response to the global financial crisis that started in America and then rapidly spread around the world, ushering in the first serious global economic recession since 1981. Drivers of Globalization L02 Two macro factors underlie the trend toward greater globalization.17 The first is the de­ cline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II. The second factor is technological change, particularly the dra­ matic developments in recent decades in communication, information processing, and transportation technologies. DECLINING TRADE AND INVESTMENT BARRIERS During the 1920s and 30s many of the world's nation-states erected formidable barriers to international trade and foreign direct investment. International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition. One consequence, however, was "beggar thy neighbor" retaliatory trade policies, with countries progressively raising trade bar­ riers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s. Having learned from this experience, the advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.18 This goal was enshrined in the Gen­ eral Agreement on Tariffs and Trade. Under the umbrella of GAT T, eight rounds of negotiations among member states worked to lower barriers to the free flow of goods and services. The most recent negotiations to be completed, known as the Uruguay Round, were finalized in December 1993. The Uruguay Round further reduced trade barriers; extended GAT T to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the 12 Part 1 GJ Introduction and Overview TABLE 1.1 1913 1950 1990 2010 Average Tariff Rates on France 21 % 18% 5.9% 3.9% Manufactured Products as Percent of Value Germany 20 26 5.9 3.9 Source: 1913-90 data are from Italy 18 25 5.9 3.9 "Who Wants to Be a Giant?" The Economist: A Survey of the Multi- Japan