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c h a p t e r

Introduction: What Is International Business?

Learning Objectives
In this chapter, you will learn about: 1. What is international business? 2. What are the key concepts in international trade and investment? 3. How does international business differ from domestic business? 4. Who participates in international business? 5. Why do firms pursue internationalization strategies? 6. Why should you study international business?

> A Day in the Global Economy

Julie Valentine is a college junior majoring in business. On a recent Saturday, she went shopping at a local mall. First, she ordered a big breakfast, unaware that most of her meal was imported from abroad: bacon from Spain, fruit from Costa Rica, juice from Brazil, French-branded yogurt, and bread made from wheat grown in Argentina. Julie then headed to the department store to buy a gift for her dad. She perused neckties with Italian and French brand names, and others made in China, Mexico, and Romania. She also considered electric shavers made by Braun (a German brand) and Philips (a Dutch brand). She eventually bought a Panasonic (a Japanese brand). Next, she headed to the perfume counter, where she tried various brands, including Chanel (France), French Connection (UK), Eau de Gucci (Italy), and Shiseido (Japan). Julie was dreaming of buying a laptop computer. At the electronics store, she explored several models made in China, Ireland, Malaysia, and Taiwan. As she passed a travel agency, she remembered that her spring vacation was just around the corner and decided to consult her best friend Melissa. Whipping out her Nokia cell phone (a Finnish brand, but made in Hungary, Mexico, and South Korea), she

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reached Melissa. Melissa answered on her Motorola phone (a U.S. firm, but made in Malaysia and other Asian locations). The two chatted about their dream trip to the beaches of southern Spain, considered Mexico, but decided they will probably end up in Panama City, Florida. Julie looked at a blouse made in Vietnam, but hesitated to purchase it because she had read that some products from southeast Asia are made by child labor. Julie left the mall and drove away in her Hyundai (a Korean brand, but made in China). She was envious of Melissas car, a BMW (German, but made in the United States from Asian, European, and South African components). Over the following weeks, Julie and her exchange-student friend, Anders (her favorite Norwegian import), meet up several times at restaurants featuring food from various nations, including France, India, Lebanon, and Mexico. On Friday night, they watched the latest movie in the Matrix series (made in Australia and the United States, financed by the Japanese) on a friends big-screen TV (a Dutch brand, but made in Indonesia). Over dinner, Julie and Anders enjoyed pasta from Italy and shrimp from El Salvador, and chatted about their future. Julie was dreaming of an international career.

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Chapter 1 Introduction: What Is International Business?

What Is International Business?


International business Performance of trade and investment activities by firms across national borders.

Globalization of markets Ongoing economic integration and growing interdependency of countries worldwide.

As you can see from the opening vignette, international business touches our daily experiences. International business refers to the performance of trade and investment activities by firms across national borders. Since the most conspicuous aspect of international business is the crossing of national boundaries, we also refer to international business as cross-border business. Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale. They seek foreign customers and engage in collaborative relationships with foreign business partners. While international business is primarily carried out by individual firms, governments and international agencies also engage in international business transactions.1 Firms and nations exchange many physical and intellectual assets including products, services, capital, technology, know-how, and labor. In this book, we are concerned primarily with the international business activities of the individual firm. While international business has been around for centuries, it has gained much speed and complexity over the past two decades. Firms seek international market opportunities more today than ever before, touching the lives of billions of people around the world. Daily chores such as shopping and leisure activities such as listening to music, watching a movie, or surfing the Internet involve international business transactions that connect you to the global economy. International business gives you access to products and services from around the world and profoundly affects your quality of life and economic well-being. The growth of international business activity coincides with the broader phenomenon of globalization of markets. The globalization of markets refers to the ongoing economic integration and growing interdependency of countries worldwide. While internationalization of the firm refers to the tendency of companies to systematically increase the international dimension of their business activities, globalization refers to a macrotrend of intense economic interconnectedness between countries. In essence, globalization leads to compression of time and space. It allows many firms to internationalize and has substantially increased the volume and variety of cross-border transactions in goods, services, and capital flows. It has also led to more rapid and widespread diffusion of products, technology, and knowledge worldwide, regardless of origin. In practical terms, the globalization of markets is evident in several related trends. First is the unprecedented growth of international trade. In 1960, crossborder trade was modestabout $100 billion per year. Today, it accounts for a substantial proportion of the world economy, amounting to some $10 trillion annuallythat is, $10,000,000,000,000! Second, trade between nations is accompanied by substantial flows of capital, technology, and knowledge. Third is the development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge. Fourth, globalization has brought about a greater degree of collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO) and the International Monetary Fund (IMF). Globalization both compels and facilitates companies to pursue cross-border business activities and international expansion. Simultaneously, going international for a firm has become easier than ever before. A few decades ago, international business was largely the domain of large, multinational companies. Recent developments have created a more level playing field that allows firms of any size to benefit from active participation in international business. In this text, you will read about the international activities of smaller firms, along with those of large multinational enterprises. In addition, where cross-border business was once mainly undertaken by manufacturing firms, this is no longer the case. Companies in the services sector are also internationalizing, in such industries as banking, transportation, engineering, design, advertising, and retailing.

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What Are the Key Concepts in International Trade and Investment?

We will study the globalization of markets in greater detail in Chapter 2. Lets now review key concepts and trends associated with international business as practiced by firms.

What Are the Key Concepts in International Trade and Investment?


The most conventional forms of international business transactions are international trade and investment. International trade refers to an exchange of products and services across national borders. Trade involves both products (merchandise) and services (intangibles). Exchange can be through exporting, an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country. Exchange can also take the form of importing, or global sourcingthe procurement of products or services from suppliers located abroad for consumption in the home country or a third country. Therefore, exporting is an outbound activity, while importing is an inbound flow of products and services. Both finished products and intermediate goods, such as raw materials and components, are subject to importing and exporting. International investment refers to the transfer of assets to another country, or the acquisition of assets in that country. These assets include capital, technology, managerial talent, and manufacturing infrastructure. Economists refer to such assets as factors of production. With trade, products and services cross national borders. With investment, by contrast, the firm itself crosses borders to secure ownership of assets located abroad. The two essential types of cross-border investment are portfolio investment and foreign direct investment. International portfolio investment refers to the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. It does not entail active management or control over these assets. The foreign investor has a relatively short-term interest in the ownership of these assets. Foreign direct investment (FDI) refers to an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment. It is a foreign-market entry strategy that gives investors partial or full ownership of a productive enterprise dedicated to manufacturing, marketing, or research and development activities. Firms usually have a longterm plan to invest such resources in foreign countries.
International trade Exchange of products and services across national borders; typically through exporting and importing. Exporting Sale of products or services to customers located abroad, from a base in the home country or a third country. Importing or Global sourcing Procurement of products or services from suppliers located abroad for consumption in the home country or a third country. International investment The transfer of assets to another country or the acquisition of assets in that country. International portfolio investment Passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. Foreign direct investment (FDI) An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment.

The Nature of International Trade


Exhibit 1.1 contrasts the growth of total world exports to the growth of total world gross domestic product (GDP) since 1970. GDP is the total value of products and services produced in a country over the course of a year. The growth of export activity by nations has continued to outpace the growth of domestic production during the last few decades, illustrating the fast pace of globalization. In fact, world exports grew more than thirty-fold during this period, while world GDP grew more than tenfold. This difference is in part due to advanced economies such as Canada and Japan now sourcing many of the products that they consume from low-cost manufacturing locations such as China and Mexico. For example, although the United States once produced most of the products that it consumes, today it has become much more dependent on imports. Rapid integration of world economies is fueled by such factors as advances in information and transportation technologies, the decline of trade barriers, liberalization of markets, and the remarkable economic growth of emerging market countries.

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4,000

Exports GDP
3,000

Index: 1970 = 100

2,000

1,000

100 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Exhibit 1.1

Comparing the Growth Rates of World GDP and World Exports

SOURCE: International Monetary Fund, World Economic Outlook database, April 2006 (www.imf.org).

Exhibit 1.2 identifies the leading nations involved in the exporting and importing of products (but not services) that is, international merchandise trade. Panel (a) shows the total value of products traded in billions of U.S. dollars. Panel (b) shows the annual value of products traded as a percentage of each nations GDP. While the United States is the leading country in terms of the absolute value of total merchandise trade, trade accounts for only 19 percent of its GDP. In contrast, merchandise trade is a much larger component of economic activity in countries such as Belgium (167 percent), the Netherlands (117 percent), and Germany (59 percent). These percentages show that some economies are very dependent on international trade relative to the value of all goods and services produced domestically. The same is true for countries such as Singapore, Hong Kong, South Korea, and Malaysia, because trade accounts for more than 100 percent of their GDPs. These countries are known as entrept economies because they import a large volume of products, some of which they process into higher valueadded products, and some they simply re-export to other destinations. For example, Singapore is a major entrept, or depot, for petroleum products received from the Middle East, which it then exports to China and other destinations in Asia.

The Nature of International Investment


Of the two types of investment flows between nationsportfolio investment and foreign direct investmentwe are concerned primarily with FDI, because it is the ultimate stage of internationalization, and encompasses the widest range of international business involvement. FDI is the foreign entry strategy practiced by the most internationally active firms. Companies usually engage in FDI for the long term, and retain partial or complete ownership of the assets they acquire. Firms undertake FDI for a variety of strategic reasons, including: (1) to set up manufacturing or assembly operations, or other physical facilities; (2) to

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United States Germany Japan China France United Kingdom Italy Netherlands Canada Belgium

Belgium Netherlands Germany Canada France United Kingdom Italy Japan United States China
0 400 800 1200 1600 2000

40

80

120

160

(a) Total annual value of products trade (exports + imports) in billions of U.S. dollars

(b) Total annual value of products trade (exports + imports) as a percentage of nations GDP

Exhibit 1.2

Leading Countries in International Merchandise Trade

SOURCE: World Trade Organization (www.wto.org); data for 2005.

open a sales or representative office or other facility to conduct marketing or distribution activities; or (3) to establish a regional headquarters. In the process, the firm establishes a new legal business entity, subject to the regulations of the host government. FDI is especially common among large, resourceful companies with substantial international operations. For instance, many European and U.S. firms have invested in China, India, and Russia to manufacture or assemble products, taking advantage of low-cost labor and other resources in these countries. At the same time, companies from these rapidly developing economies have begun to invest in western markets. For example, Indias Mittal Steel Co. acquired the Luxembourgbased Arcelor SA in 2006, creating a $38 billion conglomeratethe worlds largest steel company. Also, the Russian oil and gas firm Lukos recently established thousands of service stations in the United States and Europe. Exhibit 1.3 shows the dramatic growth of FDI into various world regions since the 1980s. The exhibit reveals that the dollar volume of FDI has grown immensely since the 1980s, especially into advanced (or developed) economies such as Japan, Europe, and North America. FDI inflows were interrupted in 2001 by the worldwide panic that ensued following the September 11 terrorist attacks in the United States, but the trend remains strong and, over time, is growing. Of particular significance is the growth of FDI into developing economies, nations with lower incomes, less-developed industrial base, and less investment capital than advanced economies. Most of the developing economies are located in parts of Africa, Asia, and Latin America. Despite poor income levels, developing economies collectively comprise a substantial and growing proportion of international trade and investment activities. The ability to invest in other countries provides customers in both developing and advanced economies with a wider selection of products and services at lower prices. Living standards of billions of people are better because of international trade and investment activities.

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1,400

World total
1,200

1,000

Advanced economies
800

600

Developing economies
400

Former Soviet Union and South-East Europe


200

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Exhibit 1.3
Dollars per Year)

Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U.S.

SOURCE: UNCTAD (2005), World Investment Report, New York: United Nations (www.unctad.org).

Services as Well as Products


Traditionally, international trade and investment have been regarded as the domain of companies that make and sell productstangible merchandise such as clothing, computers, and cars. Today, firms that produce services (intangibles) are key international business players as well. Services are deeds, performances, or efforts performed directly by people working in banks, consulting firms, hotels, airlines, construction companies, retailers, and countless other firms in the services sector. For instance, advertising for the Procter & Gamble products that you purchased may have been created by Saatchi & Saatchi, headquartered in the United Kingdom. If you own a house, the mortgage may be underwritten by the Dutch bank ABN Amro. Perhaps you eat lunch in a cafeteria owned by the French firm Sodexho, which manages the food and beverage operations on numerous university campuses. In the United States and several European countries, travel and tourism are now the number one source of revenue from foreigners. International trade in services accounts for about one quarter of all international trade and is growing rapidly. In recent years, services trade has been growing faster than products trade. Exhibit 1.4 identifies the leading countries in total international services trade, including both exports and imports. Panel (a) shows the total annual value of services trade in billions of U.S. dollars. Panel (b) shows the total annual value of services trade as a percentage of each nations GDP. As with products, larger advanced economies account for the greatest proportion of world services trade. This is expected, because these tend to be postindustrial, service-based economies. Compare the value of mer-

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United States Germany United Kingdom France Japan Italy Netherlands Spain China Canada

Netherlands United Kingdom Germany Spain France Canada Italy Japan United States China

100

200

300

400

500

12

15

18

21

24

27

(a) Total annual value of services trade (exports + imports) in billions of U.S. dollars

(b) Total annual value of services trade (exports + imports) as a percentage of nations GDP

Exhibit 1.4

Leading Countries in International Services Trade

SOURCE: World Trade Organization (www.wto.org); data for 2005.

chandise trade in Exhibit 1.2 with the value of services trade in Exhibit 1.4 for each country. Even though trade in services is rapidly rising, the absolute value of merchandise trade is still several times larger than the value of services trade. One reason is that services face greater challenges and barriers in crossborder trade than merchandise goods. Not all services can be exported. As examples, you cannot export the construction work to build a house, repair work done on your car, or the experience of eating a meal in a restauranteven though some services can be digitized and moved across borders. Most services can be offered internationally only by establishing a physical presence abroad through direct investment. Firms employ FDI to set up restaurants, retail stores, and other physical facilities, through which they sell trillions of dollars worth of services abroad every year. There are numerous industries in the services sector with strong potential for internationalization. The largest auction-based retailer on the Internet is eBay. The firm earned over 6 billion dollars in 2006, of which about 40 percent came from international sales. The company expects most future revenue growth will come from abroad. When developing its business in India, eBay acquired the Mumbaibased e-retailer Baazee. This acquisition followed eBays expansion into China, Korea, and Europe.2 With more than 1 billion people, India is the worlds second most populous nation (China is the first, with 1.3 billion). There are an estimated 40 million Internet users in India, compared with 132 million in China and 210 million in the United States. However, the number of Indian consumers who shop online is growing rapidly. Exhibit 1.5 illustrates the diversity of service sectors that are internationalizingextending their reach beyond the countries where they are based. If you are considering a career in international business, keep these industries in mind.

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Chapter 1 Introduction: What Is International Business?

Exhibit 1.5
Service Industry Sectors That Are Rapidly Internationalizing
SOURCE: International Trade Administration, Washington, DC: U.S. Department of Commerce.

Industry Architectural, construction, and engineering Banking, finance, and insurance Education, training, and publishing Entertainment

Information services

Professional business services Transportation

Representative Activities Construction, electric power utilities, design, engineering services for airports, hospitals, dams Banks, insurance, risk evaluation, management Management training, technical training, English language training Movies, recorded music, Internet- based entertainment E-commerce, e-mail, funds transfer, data interchange, data processing, network services, professional computer services Accounting, advertising, legal, management consulting Aviation, ocean shipping, railroads, trucking, airports Transportation, lodging, food and beverage, recreation, travel on aircraft, ocean carriers, and railways

Representative Companies ABB, Bechtel Group, Halliburton, Kajima, Philip Holzman, Skanska AB Citigroup, CIGNA, Barclays, HSBC, Ernst & Young Berlitz, Kumon Math & Reading Centers, NOVA, Pearson, Elsevier Time Warner, Sony, Virgin, MGM Infosys, EDI, Hitachi, Qualcomm, Cisco

Travel and tourism

Leo Burnett, EYLaw, McKinsey, A.T. Kearney, Booz Allen Hamilton, Cap Gemini Maersk, Sante Fe, Port Authority of New Jersey, SNCF (French railroads) Carlson Wagonlit, Marriott, British Airways

The International Financial Services Sector


International banking and financial services are among the most internationally active service industries. The explosive growth of investment and financial flows beginning in the 1970s led to the development of capital markets worldwide. Much of this growth is due to two factors: money flowing across national borders into portfolio investments and pension funds, and the internationalization of banks. The activities of banks and other financial institutions help increase economic activity in developing economies by increasing the amount of cheap, local investment capital, stimulating development of local financial markets, and encouraging people to save money. International banking is flourishing in such regions as the Middle East, where the return on equity in Saudi Arabia, for instance, exceeds 20 percent (as compared to 15 percent in the United States and much less in France and Germany). Citibank, Deutsche Bank, BNP Paribas, and other international banks are thriving

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because of high oil prices, a boom in consumer banking, and low taxes. National Commercial Bank, the biggest bank in the region, calculates that non interest-bearing deposits comprise nearly 50 percent of total deposits in Saudi Arabia. Banks lend this free money to companies and consumers at high margins. Banks bypass Islamic rules against paying interest by structuring loans as partnerships.3

How Does International Business Differ from Domestic Business?


Firms engaged in international business operate in business environments characterized by unique economic conditions, political systems, laws and regulations, and national culture. For example, the economic environment of India differs sharply from that of Germany. The legal environment of Saudi Arabia does not resemble that of Japan. The cultural environment of China is very distinct from that of Canada. Not only does the firm find itself in less familiar surroundings than it does domestically, it encounters many uncontrollable variablesfactors over which the firm has little control. These factors introduce new or elevated types of business risks for the firm.

The Four Risks in Internationalization


Internationalizing firms are routinely exposed to four major types of risk, as illustrated in Exhibit 1.6: cross-cultural risk, country risk, currency risk, and commercial risk. The firm must manage these risks to avoid financial loss or product failures. Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and/or religion. Values unique to a culture

Cross-cultural risk A situation or event where a cultural miscommunication puts some human value at stake.

Commercial Risk

Weak partner Operational problems Timing of entry Competitive intensity Poor execution of strategy

Cultural differences Negotiation patterns Decision-making styles Ethical practices

Cross-Cultural Risk

Risks in International Business

Currency (Financial) Risk

Currency exposure Asset valuation Foreign taxation Inflationary and transfer pricing

Country Risk

Government intervention, protectionism, and barriers to trade and investment Bureaucracy, red tape, administrative delays, and corruption Lack of legal safeguards for intellectual property rights Legislation unfavorable to foreign firms Economic failures and mismanagement Social and political unrest and instability

Exhibit 1.6

The Four Risks of International Business

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Country risk Potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country.

Currency risk Risk of adverse fluctuations in exchange rates.

Commercial risk Firms potential loss or failure from poorly developed or executed business strategies, tactics, or procedures.

tend to be long-lasting and transmitted from one generation to the next. These values influence the mindset and work style of employees and the shopping patterns of buyers. Foreign customer characteristics differ significantly from those of buyers in the home market. Language is a critical dimension of culture. In addition to facilitating communication, language is a window on peoples value systems and living conditions. For example, Eskimo languages have various words for snow while the South American Aztecs used the same basic word stem for snow, ice, and cold. When translating from one language to another, it is often difficult to find words that convey the same meanings. For example, a one-word equivalent to aftertaste does not exist in many languages. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers. We examine cross-cultural risk in greater detail in Chapter 5. Country risk (also known as political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. Country risk includes the possibility of foreign government intervention in firms business activities. For example, governments may restrict access to markets, impose bureaucratic procedures on business transactions, and limit the amount of earned income that firms can bring home from foreign operations. The degree of government intervention in commercial activities varies from country to country. For instance, Singapore and Ireland are characterized by substantial economic freedomthat is, a fairly liberal economic environment. By contrast, the Chinese and Russian governments intervene regularly in business affairs.4 Country risk also includes laws and regulations that potentially hinder company operations and performance. Critical legal dimensions include property rights, intellectual property protection, product liability, and taxation policies. Nations also experience potentially harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade. We examine country risk in greater detail in Chapter 6. Currency risk (also referred to as financial risk) refers to the risk of adverse fluctuations in exchange rates. Fluctuation is common for exchange rates, or the value of one currency in terms of another. Currency risk arises because international transactions are often conducted in more than one national currency. When Frankfort, Michigan-based fruit processor Graceland Fruit, Inc. exports dried cherries to confectioneries in Japan, it will normally be paid in Japanese yen. When currencies fluctuate significantly, however, the value of the firms assets, earnings, and operating income can be reduced. The cost of importing parts or components used in manufacturing finished products can increase dramatically if the value of the currency in which the imports are denominated rises sharply. Inflation and other harmful economic conditions experienced in one country may have immediate consequences for exchange rates due to the growing interconnectedness of national economies. We elaborate on country risk in Chapters 10, 17, and 19. Commercial risk refers to the firms potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. While such failures also exist in domestic business, the consequences are usually more costly when they are committed abroad. For example, in domestic business a company may terminate a poorly performing distributor simply with advance notice. In a foreign market, however, terminating business partners can prove costly due to regulations that protect local firms. Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer service may harm the firms reputation and international performance. The four types of international business risks are omnipresent; the firm may encounter them around every corner. While these risks cannot be avoided, they can be anticipated and managed. Experienced international firms conduct

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research to anticipate potential risks, understand their implications, and take proactive action to reduce their effects. In fact, this book is dedicated to providing you, the future manager, with a good understanding of the risks as well as managerial skills and strategies to effectively counter them. Some international risks are extremely challenging. An example is the East Asian economic crisis of the late 1990s. Between January and July of 1998, the currencies of several East Asian countries lost between 35 and 70 percent of their value, leading to the collapse of national stock markets, deepening trade deficits, and suspension of normal business activity. Political and social unrest soon followed in Indonesia, Malaysia, South Korea, Thailand, and the Philippines. In all, the East Asian economic crisis generated substantial commercial, currency, and country risks. Nevertheless, some farsighted firms foresaw these challenges and proactively redeployed key resources to minimize their negative effects. National differences require managers to formulate approaches tailored to conditions in each country where the firm does business. Differences typically require firms to substantially alter their products and services. For instance, Citibank varies its banking practices around the world; approaches for loaning funds must conform to unique regulatory and cultural conditions from Africa, to Asia, to the Middle East. Nestl must alter the packaging and ingredients it uses for the breakfast cereals that it sells abroad. For example, compared to North Americans, Asians generally prefer less sugar in their cereals. McDonalds varies the type of menu items that it sells in its restaurants around the world.

Who Participates in International Business?


What types of organizations are active in international business? Among the most important are focal firms, the firms that directly initiate and implement international business activity. Lets briefly highlight two types of focal firms in international business: the multinational enterprise (MNE) and small and medium-sized enterprise (SME).

Multinational Enterprise (MNE)


Multinational enterprises (also known as multinational corporations) have historically been the most important type of focal firm. A multinational enterprise is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries. One of the hallmarks of MNEs is that they tend to carry out R&D, procurement, manufacturing, and marketing activities wherever in the world it makes most economic sense. In addition to a home office or headquarters, the typical MNE owns a worldwide network of subsidiaries. It collaborates with numerous suppliers and independent business partners abroad (sometimes termed affiliates). Typical MNEs include Caterpillar, Kodak, Nokia, Samsung, Unilever, Citibank, Vodafone, Carrefour, Bechtel, Four Seasons Hotels, Disney, DHL, and Nippon Life Insurance. The most well-known multinational firms are ranked, based on international sales revenue, in annual listings such as Fortune magazines Global 500. In recent years, the largest MNEs are found in the oil industry (such as Exxon Mobil, Royal Dutch Shell, and BP) and the automotive industry (General Motors, Renault-Nissan, Toyota, and Ford), as well as retailing (Wal-Mart). Exhibit 1.7 shows the geographic distribution of the worlds leading MNEs. The size of each circle is indicated by the total revenues of the MNEs headquartered in a particular country, as ranked in Fortune Global 500. For example, the United States hosts 170 MNEs, whose combined revenues amount to $6,645 billion. While MNEs are among the leading participants, international business is not the domain of large, resourceful firms alone. Many small and medium-sized enterprises (SMEs) participate as well. In the United States, an SME is a company
Multinational enterprise (MNE) A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries.

Small and Medium-sized Enterprise (SME) A company with 500 or fewer employees in the United States, although this number may need to be adjusted downward for other countries.

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Geographic Location and Revenues of Top Multinational Enterprises, 2006


France $1,612 (38) Germany $1,648 (35) Netherlands $773 (14) Switzerland $481 (12) Spain $264 (9)

Italy $427 (10) United States Revenue: $6,645 billion Number of companies: (170) Belgium $133 (4)

Britain $1,528 (38)

Russia $158 (5) Sweden $118 (6)

Canada $285 (14) Brazil $115 (4) Australia Mexico $175 $147 (8) (5)

Japan $2,334 (70)

India $122 (6)

South Korea $404 (12) China $570 (20)

Exhibit 1.7

Geographic Location of Multinational Enterprises, 2006

SOURCE: Fortune, Fortune Global 500 (money.cnn.com/fortune).

Born global firm A young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets.

with 500 or fewer employees, although this number may need to be adjusted downward for other countries. In addition to being smaller players in their respective economies, SMEs tend to have limited managerial and other resources, and primarily use exporting to expand internationally. In most nations, SMEs constitute between 90 and 95 percent of all firms. With the globalization of markets, advances in various technologies, and other facilitating factors, more and more SMEs are pursuing business opportunities around the world. SMEs account for about one third of exports from Asia and about a quarter of exports from the affluent countries in Europe and North America. In selected countries such as Italy, South Korea, and China, SMEs contribute more than 50 percent of total national exports.5 One type of contemporary international SME is the born global firm, a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets. Born globals are found in advanced economies, such as Australia and Japan, and in emerging markets, such as China and India. One example is DLP, Inc., a leading manufacturer of disposable medical products for heart surgery. DLP began international operations as a young firm, acquiring nearly a third of total sales from abroad. The founder spent much of DLPs early years traveling around Europe and Asia, doggedly developing markets. From their earliest days, born globals established much of their business activities overseas. The main difference between born globals and large MNEs is that born globals internationalize at or near their founding, despite the scarce resources typical of new firms. The emergence of born globals has been facilitated by information and communications technologies, and globe-spanning transportation systems that make international trade easier for all firms.

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International business requires specialized knowledge, commitment of resources, and considerable time to develop foreign business partnerships. How do SMEs succeed in international business despite resource limitations? First, compared to large MNEs, smaller firms are often more innovative, more adaptable, and have quicker response times when it comes to implementing new ideas and technologies and meeting customer needs. Second, SMEs are better able to serve niche markets around the world that hold little interest for MNEs. Third, smaller firms are usually avid users of new information and communication technologies, including the Internet. Fourth, as they usually lack substantial resources, smaller firms minimize overhead or fixed investments. Instead, they rely on external facilitators such as FedEx and DHL, as well as independent distributors in foreign markets. Fifth, smaller firms tend to thrive on private knowledge that they possess or produce. They access and mobilize resources through their cross-border knowledge networks, or their international social capital.6 In each chapter, the feature entitled Global Trend profiles an important new development in international business. The first Global Trend features Diesel, an SME that eventually grew into a large firm.

> GLOBAL TREND


DIESEL S.p.A.: A Smaller Firms Smashing Success in International Markets
or the global youth culture, Diesels fashions are highly preferred to other brands. Founded in Italy in 1978, Diesel started out as an SME, and eventually grew to achieve annual sales of more than $1 billion (U.S.), 85 percent of which come from abroad. Diesel produces unusual but popular mens and womens casual wear. Competing with Donna Karan and Tommy Hilfiger, Diesel wear is futuristic. Its jeans come in exotic shades and styles. Diesel management sees the world as a single, borderless macroculture, and Diesel staff includes an assortment of personalities from all parts of the globe who create an unpredictable, dynamic vitality and energy. The firm focuses on design and marketing, leaving the production of jeans to subcontractors. Diesel is Europes hottest blue jeans brand, and has expanded its distribution to over 80 countries through department stores and specialty retailers, as well as some 200 Diesel-owned stores from Paris to Miami to Tokyo. At over $100 a pair,

Diesel jeans are expensive for many, but controversial advertising has propelled the company to huge international success. The companys advertising has featured sumo wrestlers kissing, a row of chimpanzees giving the fascist salute, and inflatable naked dolls in a board meeting with a hugely overweight CEO. Its ads poke fun at death, obesity, murder, and dogooders. Some people in the United States see the prankish campaigns as politically incorrect. For instance, under pressure from activists, Diesel withdrew ads that applauded smoking and gun ownership with slogans such as 145 cigarettes a day will give you that sexy voice and win new friends. Another ad featured nuns in blue jeans below the copy: Pure, virginal 100% cotton. Soft and yet miraculously strong. If Starbucks can charge several dollars for coffee, then Diesel executives believe they can persuade consumers to pay $108 for its jeans. Diesel was one of the first companies to have a major Internet presence

(www.diesel.com), selling jeans via an online virtual store. Diesels web advertising is hip, with a powerful, market-friendly message that drives its popularity to youth worldwide. The firm introduces some 1,500 new designs every 6 months, and employs a multicultural team of young designers who travel the globe for inspiration and weave their impressions into the next collection. Diesel is a classic success story in international business by a smaller firm. Its strategy is instructive for other marketers of jeans such as Kitson, Lucky Brand, Mavi Jeans, and 7 For All Mankind.
Sources: Diesels online Web site at www.diesel.com; Edmondson, Gail. (2003). Diesel is Smoking But Can Its Provocative Ads Keep Sales Growth Hot?, Business Week, February 10, p. 64; Hoovers online Web site for Whirlpool Corporation, www.hoovers.com; Helliker, Kevin. (1998). Teen Retailing: The Underground Taste MakersIs Diesel Apparel a Bit Too Trendy for Its Own Good?, Wall Street Journal, December 9, p. B1; OECD. (1997). Globalization and Small and Medium Enterprises (SMEs). Paris: OECD; Sansoni, Sylvia. (1996). Full Steam Ahead for Diesel; Will Its Pricey Jeans and Outrageous Ads Succeed in the U.S.? Business Week, April 29, pp. 5860.

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Non-governmental Organizations (NGOs)


In addition to profit-seeking focal firms in international business, there are numerous non-profit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). They pursue special causes and serve as an advocate for the arts, education, politics, religion, and research. They operate internationally to either conduct their activities or raise funds. Examples of nonprofit organizations include the Bill and Melinda Gates Foundation and the British Wellcome Trust, which support health and educational initiatives. CARE is an international non-profit organization dedicated to reducing poverty. Many MNEs operate charitable foundations that support various initiatives worldwide. GlaxoSmithKline (GSK), the giant pharmaceutical firm, operates a number of small country-based foundations in Canada, the Czech Republic, France, Italy, Romania, Spain, and the United States. GSK developed Barretstown in Ireland and LEnvol in France as residential camps where seriously ill children can have fun and develop self-confidence. GSK promotes healthy eating and exercise to Slovakian children living on urban housing estates; healthcare for homeless and abandoned children in Spain; and the integration of children with disabilities into Russian society. GSK developed the Integrated Management of Childhood Illnesses initiative in Ethiopia, aiming to reduce childhood deaths from preventable and treatable conditions such as malaria, measles, and malnutrition. In Vietnam, GSK supports the 500 Ethnic Midwives initiative to provide birthing support to communities in poor rural areas with limited access to health care services.

Why Do Firms Pursue Internationalization Strategies?


The drive for market diversification beyond London led to ATMs appearing throughout the world, including Japan.

Firms pursue internationalization strategies for a variety of reasons. Firms often have more than one motive for international expansion. Some motives are strategic in nature, while others are reactive. An example of a strategic, or proactive, motive is to tap foreign market opportunities or acquire new knowledge. An example of a reactive motive is the need to serve a key customer who has expanded abroad. Nine specific motivations include: 1. Seek opportunities for growth through market diversification. Substantial market potential exists outside the home country. Many large and small companies, including Gillette, Siemens, Sony, and Biogen, derive more than half of their sales from abroad. When they diversify into foreign markets, firms can generate sales and profit opportunities that cannot be matched at home. Internationalization can also extend the marketable life of products or services that have reached their maturity in the home country. One example is the internationalization of automatic teller machines (ATMs). The first ATM was installed outside a north London branch of Barclays Bank in 1967. The machines were next adopted in the United States and Japan. As the growth of ATMs began to slow in these countries, they were marketed throughout the rest of the world. Today there are more than 1.5 million ATMs worldwide, with one installed somewhere every seven minutes or so. 2. Earn higher margins and profits. For many types of products and services, market growth in mature economies is sluggish or flat. Competition is often intense, forcing firms to get by on slim profit margins. By contrast, most foreign markets may be underserved

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(typical of high-growth emerging markets) or not served at all (typical of developing economies). Less intense competition, combined with strong market demand, implies that companies can command higher margins for their offerings. For example, compared to their respective home markets, bathroom fixture manufacturers American Standard and Toto (of Japan) have found a more favorable competitive environment in rapidly industrializing countries such as Indonesia, Mexico, and Vietnam. Just imagine the demand for bathroom fixtures in the thousands of office buildings and residential complexes that are going up from Shanghai to Singapore! 3. Gain new ideas about products, services, and business methods. International markets are characterized by tough competitors and demanding customers with various needs. Unique foreign environments expose firms to new ideas for products, processes, and business methods. The experience of doing business abroad helps firms acquire new knowledge for improving organizational effectiveness and efficiency. For example, just-in-time inventory techniques were refined by Toyota and then adopted by other manufacturers all over the world. Several of Toyotas foreign suppliers learned about just-in-time practices from the Japanese firm, and then applied those methods to their own manufacturing operations. 4. Better serve key customers that have relocated abroad. In a global economy, many firms internationalize to better serve clients that have moved into foreign markets. For example, when Toyota opened its first factory in the United Kingdom, many Japanese auto parts suppliers followed, establishing their own operations there. 5. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products. Companies in extractive industries such as petroleum, mining, and forestry establish international operations where these raw materials are located. One example is the aluminum producer Alcoa, which locates mining operations abroad to extract aluminums base mineral bauxite from mines in Brazil, Guinea, Jamaica, and elsewhere. In addition, some firms internationalize to gain flexibility from a greater variety of supply bases. For instance, Dell Computer has assembly facilities in Asia, Europe, and the Americas that allow management to quickly shift production from one region to another. Compared to less agile rivals, this flexibility provides Dell with competitive advantagesa distinctive competency that provides the firm with superior competitive positioning. In particular, it allows the firm to skillfully manage currency exchange rate fluctuations. 6. Gain access to lower-cost or better-value factors of production. Internationalization enables the firm to access capital, technology, managerial talent, labor, and land at lower costs, higher-quality, or better overall value at locations worldwide. For example, some Taiwanese computer manufacturers have established subsidiaries in the United States to access low-cost capital. The United States is home to numerous capital sources in the high-tech sector, such as stock exchanges and venture capitalists, which have attracted countless firms from abroad seeking funds. More commonly, firms venture abroad in search of skilled or low-cost labor. For instance, the Japanese firm, Canon, relocated much of its production to China to profit from that countrys inexpensive, productive workforce. 7. Develop economies of scale in sourcing, production, marketing, and R&D. Economies of scale refer to the reduction of the per-unit cost of manufacturing and marketing due to operating at high volume. For example, manufacturing the 100,000th DVD player on a production line is always cheaper than manufacturing the first one. By expanding internationally, the firm greatly increases the size of its customer base, thereby increasing the volume of products that it manufactures. On a per-unit-of-output basis, the greater the volume of production, the lower the total cost. Economies of scale are also present in R&D, sourcing, marketing, distribution, and after-sales service.

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8. Confront international competitors more effectively or thwart the growth of competition in the home market. International competition is substantial and increasing, with multinational competitors invading markets worldwide. The firm can enhance its competitive positioning by confronting competitors in international markets or preemptively entering a competitors home markets to destabilize and curb its growth. One example is Caterpillars preemptive entry into Japan just as its main rival in the earthmoving equipment industry, Komatsu, was getting started in the early 1970s. Caterpillars preemptive move hindered Komatsus international expansion for at least a decade. Had it not moved proactively to stifle Komatsus growth in Japan, Komatsus home market, Caterpillar would certainly have had to face a more potent rival sooner. 9. Invest in a potentially rewarding relationship with a foreign partner. Firms often have long-term strategic reasons for venturing abroad. Joint ventures or projectbased alliances with key foreign players can lead to the development of new products, early positioning in future key markets, or other long-term, profit-making opportunities. For example, Black and Decker entered a joint venture with Bajaj, an Indian retailer, to position itself for expected long-term sales in the huge Indian market. The French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing the next generation of information technology. At the broadest level, companies internationalize to enhance competitive advantage and to seek growth and profit opportunities. Throughout this book, we explore the environment within which firms seek these opportunities, as well as discuss the strategies and managerial skills necessary for achieving international business success.

Why Should You Study International Business?


There are many reasons to study international business. We can examine the reasons from the perspectives of the global economy, the national economy, the firm, and you as a future manager.

A young workforce in China and other emerging markets is causing faster integration of these economies with the rest of the world.

Facilitator of the Global Economy and Interconnectedness


International business is transforming the world as never before. The decades following the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947 witnessed unprecedented growth in international trade and investment. Companies focused more and more on the mass production of products and services to meet insatiable world demand. Since the 1980s, emerging markets provided new impetus to worldwide economic interconnectedness. These fast-growth developing economiessome two dozen countries including Brazil, India, China, and Polandare experiencing substantial market liberalization, privatization, and industrialization, which are fueling global economic transformation. These emerging markets, located on every continent, are gradually breaking away from the stagnation typical of developing economies. Collectively, the emerging markets are home to the largest proportion of world population and participate increasingly in foreign trade. In the opening vignette, Julie sampled products from several emerging markets, including Argentina, Hungary, and Mexico.

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Along with market globalization, another megatrend, advances in technology, has also served to transform the global economy. The rise of information and communication technologies, as well as production and process technologies, has dramatically reduced the cost of conducting business with customers located abroad. The Internet and e-commerce make international business increasingly imperative for firms of all sizes and resource levels. Technological advances both facilitate, and are facilitated by, globalization. They allow globalization to progress more rapidly. Globalization, in turn, accelerates the development of the latest technologies.

Contributor to National Economic Well-Being


International business contributes to economic prosperity and standards of living, provides interconnectedness to the world economy and access to a range of valuable intermediate and finished products and services, and helps countries use their resources more efficiently. Consequently, governments have become more willing to open their borders to foreign trade and investment. International trade is a critical engine for job creation. It is estimated that every $1 billion increase in exports creates more than 20,000 new jobs. In the United States, cross-border trade directly supports at least 12 million jobs. One of every seven dollars of U.S. sales is made abroad. One of every three U.S. farm acres and one of every six U.S. jobs is producing for export markets. Generally, exporting firms create jobs faster than nonexporting firms. Wages and benefits for export-related jobs are better, on average, than those for nonexporting jobs.7 There is a strong relationship between a nations level of prosperity and its participation in cross-border trade and investment. International business is both a cause and a result of increasing national prosperity. It is helping to spread national prosperity and abundance beyond advanced economies into developing economies. Nations once suffering from economic stagnation are now increasingly prosperous. For instance, China, India, and Eastern European nations are active international traders. The proportion of affluent citizens in these countries is rapidly growing. In terms of material gain, households in many developing economies have recently experienced huge increases in the ownership of televisions, refrigerators, and other mass-produced products. While these gains are attributable to various causes, the benefits of free exchange of products, services, capital, and technology among nations are paramount. International trade and investment can also help reduce poor economic conditions in developing economies. The rapid economic growth of emerging countries is stimulating solid gains in living standards. Growing prosperity is accompanied by gains in literacy rates, nutrition, and health care. Trade and investment help to promote freedom and democracy and may reduce the likelihood of cross-border conflict. The world has recently entered a new era of international tension, sometimes accompanied by terrorism. International business can help to limit such tension, by reducing world poverty and increasing interactions that help soothe relations among nations.8 The development of the European Union (EU) is helping to raise living standards of millions of EU citizens, particularly in Eastern Europe. The EU is making international trade

International trade is causing faster diffusion of consumer products and brands.

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and investment much easier for European businesses. It is transforming Europe into a new powerhouse in global trade. Cross-border business also helps integrate world economies. The North American Free Trade Agreement (NAFTA), launched in 1994, integrates the economies of Canada, Mexico, and the United States in a giant market of roughly 450 million consumers. Multicountry collaboration in the automobile industry and other sectors created good-paying jobs and helped make Mexico one of the top U.S. trading partners. Following NAFTAs launch, the volume of trade among the three countries increased dramatically, helping to improve living standards for millions of people. In Mexico, NAFTA led to substantially higher wages, better social systems, and higher employment rates.9 Recently, a new accord was launched between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. Known as the Dominican Republic Central American Free Trade Agreement (DR-CAFTA), it promises to invigorate the economies of the member countries.

A Competitive Advantage for the Firm


To sustain a competitive advantage in the global economy, firms must readily participate in cross-border business and acquire the necessary skills, knowledge, and competence. Procter & Gamble sells shampoo, disposable diapers, and other consumer products in more than 150 countries. MTV broadcasts its programming in some 140 countries. Nestl sells its food and beverage products worldwide, obtaining nearly all its revenue from foreign operations. As these examples imply, going international offers countless opportunities for firms to increase revenue. Young companies can achieve substantial growth by targeting new markets and opportunities to earn additional profits. Foreign markets are likely to generate favorable outcomes for the firm in terms of sales, profit margins, growth, and new knowledge. In addition, firms can maximize the efficiency of their operations through international business. Companies secure cost-effective factor inputs by establishing manufacturing in emerging markets like Brazil, Mexico, and Poland, or sourcing from foreign suppliers. For example, Microsoft cuts the costs of its operations by having much of its software written in India. Renault achieves efficiency by assembling cars at low-cost factories in Romania. International business also allows firms to access critical resources that may be unavailable at home. It helps firms reduce the costs of new product development, after-sales service, and other critical business activities. Companies access foreign sources of information and knowledge that provide the basis for future R&D, improved production and administrative processes, and other innovations. Internationalization broadens the options for dealing with competitors, offering opportunities to make globally strategic moves and countermoves that help the firm compete more effectively with domestic and foreign rivals.10

An Opportunity for Global Corporate Citizenship


As firms increasingly venture into international markets, they need to learn how to become global citizens. Beyond delivering value-added products, technology, and other benefits to their customers, they need to be responsive to the needs of other stakeholder groups, including the media, local communities, academics, and the nonprofit sector. In foreign markets, firms must try in earnest to meet local expectations with respect to labor and environmental standards, accepted codes of conduct, and the overall welfare of the society that hosts them. As businesses operating in a host society, internationalizing firms are always under public scrutiny. Their actions are closely monitored and held to local ethical

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standards. Firms with iconic global brands such as Coca-Cola, McDonalds, and Citibank are especially conspicuous. When consumers or other groups wish to express their discontent, say, with United States foreign policy, these firms may become favorite targets of public protests. Actions of internationalizing firms can also raise nationalistic sentiments. For example, when the news of United Arab Emirates-controlled firm Dubai Ports World winning a contract to operate some United States ports hit the media in 2006, the U.S. Congress acted swiftly to block the deal in response to strong disapproval from the public. Rather than being caught red-handed or off guard, firms are proactively developing socially responsible policies and practices. For example, Starbucks recently announced that it will sell only coffee from growers certified by the Rain Forest Alliance, a global nonprofit organization that promotes the interests of coffee growers and the environment. Such multinational enterprises as Philips, Unilever, and Wal-Mart have announced practices that would help to enforce sustainable development. McDonalds has announced that it will only purchase beef from farmers who meet special standards on animal welfare and environmental practices. The firm also recently implemented a global ban on growth-promoting antibiotics in the poultry that it purchases. McDonalds is now publishing the nutritional content of its products in all the markets it operates. Its outlets in Britain, Germany, Sweden, and Austria sell only organic milk.11 Clearly, internationally active firms must embed corporate citizenship into their strategic decisions, as well as their ongoing processes and practices.

Conspicuous global brands such as Coca-Cola are constantly under scrutiny.

A Competitive Advantage for You


Julie, the student in the opening vignette, is touched every day by a variety of international business transactions. She is considering a career in international business because she is starting to grasp its growing importance. She is beginning a path full of intrigue and excitement. While most international careers are based in ones home country, managers travel the world and meet people from various cultures and backgrounds. Traveling to countries such as Argentina, China, India, Poland, or South Africa can lead to exciting learning experiences and provide challenges. Managers rising to the top of most of the worlds leading corporationsAIG, ABB, Citigroup, Coca-Cola, Kellogg, McDonalds, Oracle, Nissan, and SAP honed their managerial skills in international business. Working across national cultures exposed these managers to a range of enlightening experiences, new knowledge, novel ways of seeing the world, and various unusual challenges. Managers with extensive international experience are generally more confident, cosmopolitan, and better suited to meet the variety of challenges they may encounter throughout their careers. In short, acquiring knowledge and managerial skills in international business is not only exciting, challenging, and fun, but it is also a unique professional development opportunity. In this text you will learn more about the merits of gaining international business proficiency, through the experiences of people like you, in a special feature called Recent Grad in IB. Read about Ashley Lumb, a recent graduate who is enjoying her early experiences in international business.

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> RECENT GRAD IN IB


n Ashley Lumbs senior year in college, a six-week study abroad program to Europe sparked a strong desire for an international career. Following graduation, she worked as a Junior Analyst at KPMG in London, where she gained technical training and analytical skills. She wanted to work in the luxury goods industry in Europe and eventually took a 6month contract job at Vins Sans Frontieres. VSF enrolled Ashley in its wine courses at company headquarters in the south of France. VSF imports wine from around the world and sells it exclusively to private yachts along the Cote DAzur (French Riviera). Ashley gained experience in various innovative marketing methods. For instance, VSF attends yacht trade fairs and hosts wine tastings. The primary method for reaching the yachts, however, is by foot. VSFs marketing reps like Ashley scour the ports from San Remo, Italy, to St. Tropez, France, daily, speaking with yacht chefs, stewards, or captains about wine and distributing wine catalogs. Ashley next worked as an account representative for The Ultimate Living Group in Monte Carlo, Monaco. The company caters to the corporate jet set that travels to Cannes for meetings and conferences. The key event of the year is the Cannes Film Festival. Next, Ashley worked as a marketing associate at Made in Museum (MIM) in Rome, Italy. MIM specializes in the design, production, and delivery of authorized museum reproductions. It markets jewelry, sculptures, mosaics, and Etruscan pottery. Ashley organized the products into groups, and restructured the inventory and web site.

ASHLEY LUMB

While in Italy, Ashley developed a passion for the fashion industry, so she decided to move to New York. Before leaving Italy, Ashley took a course at the prestigious Polimoda International Institute of Design and Marketing in Florence entitled Business and Marketing in the Fashion Industry. In New York, Ashley worked at the headquarters of fashion houses Hermes and J. Crew. After two months, she leveraged the services of a bilingual recruiting agency, Euromonde Inc., to land a job at Italian Vogue magazine in Times Square to work as the U.S. advertising/marketing coordinator.

Ashleys majors: Finance, Marketing, and International business Objectives: Adventure, international perspective, career growth, selfunderstanding, and the opportunity to learn foreign languages Internships during college: Merrill Lynch Jobs held since graduating: Junior Analyst at KPMG, London, England Marketing Representative, Vins Sans Frontieres; Nice, France Account Representative, The Ultimate Living Group: Monte Carlo, Monaco Marketing Associate, Made in Museum: Rome, Italy Advertising/Marketing Coordinator, Italian Vogue: New York, United States

Ashleys Advice for an International Business Career


Working abroad helped me sort through my career goals, as Europe offered a view into other industries that the United States lacked. I had the opportunity to sample different environments, and although they might seem far apart, I clearly saw a shared passion for exceptional products and dynamism. Back in the United States, my international experience is an impressive asset to prospective employers because it is valued as proof of ones ability to handle challenging assignments and work with people from diverse cultures and backgrounds.

Challenges
The decision to work abroad carries some risks. After all, youre leaving much of what you know behind. Whats more, I was stepping outside a clearly defined career path. The language barrier was always present. The work was almost always in English, though I did pick up Italian and a bit of French through classes and immersing myself in the culture.

Success Factors
The two most important factors in working abroad were hard work and networking. I had to cast a wide net and meet a lot of people, send a lot of rsums, ask a lot of questions, and research the market. To keep myself afloat between assignments, I worked in jobs that were not quite as glamorous.

Whats Ahead?
Id like to continue my path in the fashion magazine industry and work in a merchandising, special events, or promotions capacity. Im also studying French and eventually I would like to attend the graduate school ESSEC, Paris, to pursue an MBA program that specializes in international luxury goods management.

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CLOSING CASE
Whirlpools Dramatic Turnaround Through Internationalization
Home appliance maker Whirlpool Corporation, headquartered in Benton Harbor, Michigan, generated over $19 billion in annual sales in 2006, an increase of 26 percent from the previous year. Key factors influencing this performance include the acquisition of the Maytag Corporation in 2006 and an increased global demand for its brands and innovative products. During the next several years, the company expects growth in Asia and Latin America to be significantly higher than in North America and Europe. Whirlpool employs more than 80,000 employees in over 60 manufacturing and technology centers worldwide. The firm manufactures washers, dryers, refrigerators, dishwashers, freezers, ranges, compactors, and microwave ovens in 13 countries and sells them in 170 others under brand names such as Whirlpool, Maytag, Magic Chef, Jenn-Air, Amana, KitchenAid, Kenmore, Brastemp, and Bauknecht. Whirlpool generates almost 60 percent of its sales from North America, 25 percent from Europe, 15 percent from Latin America, and just 2 percent from Asia. popular models to target customers in low-income markets in Latin America, China, and India. Three factors have driven this global expansion. First, Whirlpool sought to reduce its costs of R&D, manufacturing, and service by locating plants and other operations in lower-cost locations such as China, Mexico, and Poland. Second, flat to declining sales growth in the United States pressured management to target sales in new markets abroad. Third, Whirlpool realized the firms manufacturing and assembly operations would benefit from a more global approach. Management redesigned products with more standardized parts and ramped up marketing to make Whirlpool a globally recognized brand. The company integrated the activities of regional subsidiaries so that Whirlpools most advanced expertise in appliance technology, production, and distribution could be shared with the firms divisions worldwide.

Innovation
Whirlpool conducted an internal critical assessment in the late 1990s. It became apparent that a consumer walking into any appliance store anywhere in the world would witness a sea of white appliances with little differentiation, even between manufacturers. The industry became known as the white goods business. Consumers perceived the products as commodities, which offered little differential advantage and commanded ever lower prices due to increasing competition. In 1999, Whirlpool management launched a major campaign to differentiate the firms offerings by emphasizing innovative, value-added products. In early 2000, Whirlpool enlisted 75 employees from almost every job classification and assigned them in groups to Benton Harbor, Italy, and Brazil. Training lasted nearly a year and was conducted by an outside consulting group. The next step was to get the rest of the global workforce involved. Whirlpool established an intranet site and created a do-it-yourself course in innovation. Throughout 2001 and 2002 Whirlpools knowledge management intranet site recorded up to 300,000 hits per month. The company established a rating system to identify high potential, innovative ideas. Since 2003, revenue has quadrupled annually. Whirlpool estimates that the new appliances in development from this system, once marketed, could produce $3 billion in annual sales, up from

International Expansion
As the U.S. appliance market matured in the 1990s, Whirlpool faced intense domestic competition and more demanding buyers, resulting in lower profit margins. Meanwhile, international market trade barriers fell, consumer affluence grew, and capitalism flourished. Management realized that it could best deal with these threats and opportunities by undertaking a systematic program of internationalization. As a result, Whirlpool engaged in a series of moves over the next decade. Whirlpool acquired the appliance business of Philips in Europe, 65 percent of Italian cooling compressor manufacturer Aspera, and purchased Polands second largest appliance maker. In Eastern Europe, Whirlpool created subsidiaries to sell and service appliances in Bulgaria, Hungary, Romania, Russia, Slovakia, and the Czech Republic. In China, Whirlpool formed a joint venture to produce air conditioners and established a corporate headquarters and product development/technology center in Shanghai. The company also opened regional offices in Hong Kong, New Delhi, and Singapore. In Mexico, Whirlpool acquired Vitromatic, a former joint venture partner in Mexico. It also developed low-cost versions of

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projections of $1.3 billion in 2003. Whirlpool developed microwave ovens that can grill steaks, bake pizzas, or come in the form of a drawer that slides out for easy access to large dishes. The firm invented a washer with a built-in sensor that detects the size of the load and automatically picks the water level, spin speed, and type of wash cycle, essentially making all decisions for the user.

Local Preferences
Cross-regional R&D teams also collaborate on innovations to adapt offerings to meet local demands in diverse international environments. For example, due to very different climates, Italians often line-dried their clothing, while the Danes need to spin-dry their clothes. Capacity requirements vary greatly for refrigerators. The Spanish care about capacity for meats, the British want well-constructed units, and the French are more concerned about the capacity for keeping fruits and vegetables fresh. Germans are particularly concerned about environmental features, while child safety features are very important to the Italians. In India, Whirlpool developed a washing machine that delivers a higher level of cleanliness for consumers who believe whiteness of clothing expresses purity. The washers gentle handscrub movement and unique hot wash technology maximize the effectiveness of laundry detergent. Whirlpool has benefited immensely from international business. The firm is a leading example of how internationalization can revive declining sales and optimize cost structures. It has developed international distribution that reduces expenses, leading to higher profits, and has positioned itself to challenge competitors on a global scale. The firm has thrived through sensitivity and commitment to consumers in diverse cultural and economic settings around the world.

tile jobs to factories in China. South Carolina receives foreign direct investment from various countries and is home to four Japanese and 18 European facilities. These trends show that globalization both benefits and poses new threats to Whirlpools international ambitions. As it struggles to remain a world-class player in a key industry, Whirlpool faces new challenges. Management wants to expand sales in emerging markets while defending the home market from global rivals from China and elsewhere. The firm seeks to continue to leverage and enjoy all the benefits of international business.

AACSB: Reflective Thinking, Analytic Skills

Case Questions
1. What is the nature of Whirlpools domestic and international business environments? What types of risk does the firm face? 2. How can Whirlpool benefit from going international? What types of advantages can the firm obtain? What advantages acquired abroad can help management improve Whirlpools performance in its home market? 3. What actions has Whirlpool management taken to ensure that the firm succeeds in local markets throughout the world? To what extent is the appliance business local/regional rather than global? 4. How can Whirlpool effectively compete with new rivals originating from low-cost countries, such as Haier from China? Should Whirlpools response differ in its home and foreign markets? If so, how? 5. The Careers section at Whirlpools website (www.whirlpool.com/) advertises opportunities you never knew existed . . . everywhere across the globe. Visit the site and report on the types of jobs available at Whirlpool and the locations of these positions worldwide. What positions interest you most? Would you like to work in Whirlpools international operations? Why or why not?

Growing Competitive Threat from Abroad


Yet not all is bright and sparkling on Whirlpools horizon. Haier, Chinas largest appliance maker, established a production base and a distribution center in South Carolina in the United States. The firm also bought a six-story landmark structure in New York, dubbed the Haier Building, to house its U.S. headquarters. The worlds fifth-largest kitchen appliance maker, Haier has captured nearly 20 percent and 50 percent of the markets for window air conditioners and small refrigerators, respectively. Now it is expanding into full-size refrigerators. Haiers moves are especially troubling given that Whirlpool generates very little of its sales from Asia, the worlds most populous region, where Haier already has a strong presence. Ironically, Haiers South Carolina factory is creating new jobs in a state that witnessed a mass exodus of tex-

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Sources: Association of Home Appliance Manufacturers Web site, www.aham.org/News; Cavusgil, Tamer. (2001). Globalization Headaches at Whirlpool Global Marketing 3rd Edition. Boston: McGraw-Hill. Hoovers online Web site for Whirlpool Corporation www.hoovers.com; Spors, Kelly. (2004). Against the Grain: A Chinese Appliance Maker has Placed Its Bet on a Counterintuitive Strategy: Its Bringing Jobs to the U.S. Wall Street Journal, September 27, p. R6; Stepanek, Marcia. (2000). As I Was Saying to My Refrigerator. . ., Business Week, September 18, p. 40; Stevens, James. (2002). In Hot pursuit of Mexico: Whirlpool, Appliance Manufacturer, October 50(10), pp. 1213; Whirlpool Corporation Annual Report 2005. Whirlpools corporate Web site; press release, February 7, 2007, www.whirlpoolcorp.com; May 8, 2006. Creativity Overflowing www.businessweek.com; May 8, 2006. Whirlpools Future Wont Fade www.businessweek.com

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CHAPTER ESSENTIALS
Key Terms
born global firm, p. 14 commercial risk, p. 12 country risk, p. 12 cross-cultural risk, p. 11 currency risk, p. 12 exporting, p. 5 foreign direct investment (FDI), p. 5 globalization of markets, p. 4 importing or global sourcing, p. 5 international business, p. 4 international investment, p. 5 international portfolio investment, p. 5 international trade, p. 5 multinational enterprise (MNE), p. 13 small and medium-sized enterprise (SMEs), p. 13

Summary
In this chapter, you learned about:
1. What is international business? International business refers to the performance of trade and investment activities by firms across national borders. Globalization of markets is the ongoing economic integration and growing interdependency of countries worldwide. International business is characterized by international trade and investment. 2. What are the key concepts in international trade and investment? International trade refers to exchange of products and services across national borders, typically through exporting and importing. Exporting is the sale of products or services to customers located abroad, from a base in the home country or a third country. Importing or global sourcing refers to procurement of products or services from foreign suppliers for consumption in the home country or a third country. International investment refers to international transfer or acquisition of ownership in assets. International portfolio investment is passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. Foreign direct investment is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment. 3. How does international business differ from domestic business? International firms are constantly exposed to four major categories of risk that must be managed. Cross-cultural risk refers to a situation or event where some human value has been put at stake due to a cultural miscommunication. Country risk refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. Currency risk refers to the risk of adverse fluctuations in exchange rates. Commercial risk arises from the possibility of a firms loss or failure from poorly developed or executed business strategies, tactics, or procedures. The risks are everpresent in international business and firms take proactive steps to reduce their effects. 4. Who participates in international business? A key participant in international business is the multinational enterprise (MNE)a large company with many resources whose business activities are performed by a network of subsidiaries located in multiple countries. Also very active in international business are small and medium-sized enterprises (SMEs)companies with 500 or fewer employees. Born globals are entrepreneurial firms that initiate international business from or near their founding. Non-governmental organizations (NGOs) are nonprofit organizations that pursue special causes and serve as an advocate for the arts, education, politics, religion, and research. 5. Why do firms pursue internationalization strategies? Companies internationalize for various reasons. These include the ability to increase sales and profits, better serve customers, access lower-cost or superior production factors, optimize sourcing activities, develop economies of scale, confront competitors more effectively, develop rewarding relationships
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Chapter 1 Introduction: What Is International Business?

with foreign partners, and gain access to new ideas for creating or improving products and services. 6. Why should you study international business? There are many reasons to study international business. It enhances a firms competitive positioning in the global market, facilitates development of the

global economy and of the interconnectedness among nations, and contributes to national economic well-being. International business also compels firms to act as a socially responsible corporate citizen in the host country. From a career standpoint, learning about international business will provide you with a competitive edge and enhance your ability to thrive in the job market.

Test Your Comprehension

AACSB: Reflective Thinking


5. Who are the major participants in international business? 6. What is the difference between a multinational enterprise (MNE) and a small and medium-sized enterprise (SME)? 7. What are some of the key motivations for firms to engage in international business? 8. Why should you care about international business?

1. Distinguish between international business and globalization of markets. 2. What is the difference between exporting and foreign direct investment? 3. What makes international business different from domestic business? 4. What are the various types of risks that firms face when they conduct international business?

Apply Your Understanding

AACSB: Communication, Reflective Thinking


should internationalize. Write a memo to your boss in which you explain why your company should pursue international business. What are the benefits to Beck of venturing abroad? Explain why firms internationalize. 3. You have become the president of the International Business Club at your school. You are trying to recruit new members and find that many students do not recognize the importance of international business or the career opportunities available to them. You decide to give a presentation on this theme. Prepare an outline of a presentation in which you explain what types of companies participate in international business, why students should study international business, and possible career opportunities.

1. Richard Bendix is the marketing manager at a firm that makes and sells high-quality prefabricated houses. He believes there is little difference between his home-country market and foreign markets, and that he can use the same methods for selling in Asia or Latin America as he does in his home country. Write a memo in which you explain to Richard the differences between domestic and international business. Explain the risks and other differences that Richards firm will likely encounter if it expanded abroad. 2. After graduation, suppose you get a job with Beck Corporation, a small firm that does business only in its domestic market. You have just completed coursework in international business, are aware of various business opportunities abroad, and believe that Beck

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Knowledge Portal
(http://globalEDGE.msu.edu) globalEDGE is a leading knowledge portal for professionals in international business. It is a gateway to specialized knowledge on countries, international business transactions, culture, and firm practice. globalEDGE has been developed at Michigan State Universitys Center for International Business Education and Research (CIBER) under the direction of Professor S. Tamer Cavusgil. Consult the globalEDGE portal to complete the Internet exercises at the end of each chapter.

Internet Exercises
AACSB: Communication, Use of Information Technology, Analytic Skills
1. You can gain valuable insights into international business by examining how countries compare to each other. Various research groups and international agencies systematically examine economic, political, and other features of nations and provide annual rankings. Visit globalEDGE Resource Desk, click on Research: Rankings. You will find more than two dozen country rankings based on: degree of globalization, attractiveness with respect to FDI or global sourcing, retail development, extent of E-readiness, degree of economic freedom, quality of living, global competitiveness, and many other factors. Choose the ranking study that is of most interest to you. Learn about the methodology and the specific indicators used to rate countries. Then, examine how the following three countries rank in this study: Germany, Singapore, and South Africa. Based on your examination of their relative standing, provide an explanation of why they rank where they do. Indicate whether their relative positions makes sense to you. 2. In this chapter, we reviewed the four major risks that firms face in international business: cross-cultural risk, country risk, currency risk, and commercial risk. Identify one or more countries that interest you, then visit globalEDGE and research the countries to uncover examples of each of the four types of risks. For example, China is characterized by various cultural differences and a national government that tends to intervene in business. Research by entering the country name into the search engine. Then, under Quick Links, visit links such as the Country Commercial Guide and Economist Country Briefing. Illustrate each risk with examples. 3. You have recently been hired by a smaller firm that is beginning to expand internationally. When first starting out, most firms choose exporting as their main foreign market entry strategy. However, no one in your firm knows how to conduct exporting. Therefore, your boss has given you an assignment: Prepare a presentation for your coworkers on how to engage in exporting. Using globalEDGE, your task is to find and review a Guide to Exporting that you can use to create your presentation.

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