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CHARLES W. L. HILL
University of Washington

THOMAS McKAIG
University of Guelph and University of Guelph-Humber

Contributor
TIM RICHARDSON
Seneca College of Applied Arts and Technology
and University of Toronto

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Global Business Today

Third Canadian Edition
Copyright 2012, 2009, 2006 by McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill
Companies. Copyright 2009, 2008, 2006, 2004, 2001, 1998 by The McGraw-Hill Companies
Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form
or by any means, or stored in a data base or retrieval system, without the prior written permission
of McGraw-Hill Ryerson Limited, or in the case of photocopying or other reprographic copying, a
licence from The Canadian Copyright Licensing Agency (Access Copyright). For an Access Copyright
licence, visit www.accesscopyright.ca or call toll free to 1-800-893-5777.
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a
website does not indicate an endorsement by the authors or McGraw-Hill Ryerson, and McGraw-Hill
Ryerson does not guarantee the accuracy of information presented at these sites.
Statistics Canada information is used with the permission of Statistics Canada. Users are forbidden
to copy this material and/or redisseminate the data, in an original or modified form, for commercial
purposes, without the expressed permission of Statistics Canada. Information on the availability of the
wide range of data from Statistics Canada can be obtained from Statistics Canadas Regional Offices,
its World Wide Web site at http://www.statcan.ca and its toll-free access number 1-800-263-1136.
ISBN-13: 978-0-07-040179-2
ISBN-10: 0-07-040179-9
1 2 3 4 5 6 7 8 9 10 QDB 1 9 8 7 6 5 4 3 2
Printed and bound in the United States of America
Care has been taken to trace ownership of copyright material contained in this text; however,
the publisher will welcome any information that enables it to rectify any reference or credit for
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Library and Archives Canada Cataloguing in Publication Data
Hill, Charles W. L.
Global business today / Charles W. L. Hill, Thomas McKaig, Tim Richardson. 3rd Canadian ed.
Includes index.
ISBN 978-0-07-040179-2
1. International business enterprisesManagementTextbooks. 2. International
tradeTextbooks. 3. Investments, ForeignTextbooks. 4. Capital marketTextbooks.
I. McKaig, Thomas II. Richardson, Tim III. Title.
HD62.4.H54 2011 658.049 C2011-903126-4

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D E D I C AT I O N For June and Mike Hill, my parents.

Charles Hill

To my mother and father, Dorothy and Russell McKaig.

Thomas McKaig

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ABOUT THE AUTHORS

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 PhD in indus-
trial organization economics in 1983 from the University of Manchesters Institute of
Science and Technology (UMIST) in Great Britain. In addition to his position at 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 40 articles in
peer-reviewed academic journals. He has also published
ve college textbooks, one on strategic management, one
on principles of management, and the other three on in-
ternational business (one of which you are now holding).
He serves on the editorial boards of several academic
journals and previously served as consulting editor at the
Academy of Management Review.
Professor Hill teaches in the MBA and executive MBA
programs at the University of Washington and has re-
ceived awards for teaching excellence in both programs.
He has also taught in several customized executive
programs. He lives in Seattle with his wife, Lane, and
children.
Thomas McKaig is Adjunct Professor at the Department
of Marketing and Consumer Studies at the University
of Guelph where he teaches in the Undergraduate and
Executive MBA programs. He is a Certied International
Trade Professional (CITP). He earned his Diplme for
his thesis on CanadaEEC Trade Relations and Certi-
cat majoring in International Relations and minoring
in European Economics, also at the Institut des Hautes
tudes Europennes of the Universit de Strasbourg III
(now Universit Robert Schuman). He earned his Honours
BA in Political Science from the University of Ottawa.
Thomas has worked in the Middle East, Africa, East and
West Europe, Central Asia, and North, Central, and South
America. He is uent in English, French, German, and Ital-
ian, with procient Spanish and intermediate Russian.
Thomas McKaig provides advisory services in
diverse industries, pinpointing and delivering strategic
realignment solutions in areas of business development,
operations and management reviews, international trade
research, and training. He is Principal in Thomas McKaig
International Inc. (TMI), an international development rm
(www.tm-int.com).

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BRIEF CONTENTS

PREFACE xii

PART ONE Globalization 2

CHAPTER ONE Globalization 2

PART TWO Country Differences 40

CHAPTER TWO Country Differences in Political Economy 40
CHAPTER THREE The Cultural Environment 88
CHAPTER FOUR Ethics in International Business 126

PART THREE Cross-Border Trade and Investment 162

CHAPTER FIVE International Trade Theories 162
CHAPTER SIX The Political Economy of International Trade 194
CHAPTER SEVEN Foreign Direct Investment 226
CHAPTER EIGHT Regional Economic Integration 260

PART FOUR Global Money System 298

CHAPTER NINE The Foreign Exchange Market 298
CHAPTER TEN The Global Monetary System 328

PART FIVE Competing in a Global Marketplace 366

CHAPTER ELEVEN Global Strategy 366
CHAPTER TWELVE Entering Foreign Markets 400
CHAPTER THIRTEEN Exporting, Importing, and Countertrade 426
CHAPTER FOURTEEN Global Marketing and R&D 448
CHAPTER FIFTEEN Global Production, Outsourcing, and Logistics 482
CHAPTER SIXTEEN Global Human Resource Management 506

GLOSSARY 533

END NOTES 539

NAME/COMPANY INDEX 558

SUBJECT INDEX 562

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CONTENTS

PREFACE xii Critical Thinking and Discussion

Questions 36
Research Task 37
PART ONE Globalization 2
Closing Case: Tim HortonsA Canadian
CHAPTER ONE Company Looking for New Markets 37
Globalization 2 Sustainability in Practice:
Opening Case: The Global Grocer 22 Adidas-Salomon: Supply-Chain
Introduction 5 Management 39
What Is Globalization? 7
The Globalization of Markets 7 PART TWO Country Differences 40
The Globalization of Production 8
The Emergence of Global Institutions 9 CHAPTER TWO
Drivers of Globalization 10 Country Differences in Political
Declining Trade and Investment Economy 40
Barriers 10 Opening Case: The Changing Political
The Role of Technological Change 14 Economy of India 40
The Changing Demographics of the Global Introduction 43
Economy 18 Political Systems 44
The Changing World Output and World Collectivism and Individualism 44
Trade Picture 18 Democracy and Totalitarianism 46
The Changing Foreign Direct Investment Economic Systems 48
Picture 21 Market Economy 48
The Changing Nature of the Command Economy 49
Multinational Enterprise 22 Mixed Economy 49
The Changing World Order 24 Legal Systems 50
The Global Economy of the Twenty-first Different Legal Systems 50
Century 25 Differences in Contract Law 52
The Globalization Debate 27 Property Rights 52
Antiglobalization Protests 28 The Protection of Intellectual
Globalization, Jobs, and Income 29 Property 57
Globalization, Labour Policies, and the Product Safety and Product
Environment 30 Liability 60
Globalization and National The Determinants of Economic
Sovereignty 31 Development 62
Globalization and the Worlds Poor 32 Differences in Economic
Managing in the Global Marketplace 34 Development 62
Implications for Business 34 Broader Conceptions of Development:
The NorthSouth Divide 35 Amartya Sen 63
The Role of Technology in International Political Economy and Economic
Trade 35 Progress 64
Key Terms 35 Geography, Education, and Economic
Summary 36 Development 68

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States in Transition 69
The Spread of Democracy 69
The New World Order? 71
The Spread of Market-Based Systems 72
Implications 77
Implications for Business 78
Attractiveness 78
Ethics and Regulations 81
Key Terms 83
Summary 84
Critical Thinking and Discussion Questions 84
Research Task 85
Closing Case: Chavezs Venezuela 86
CHAPTER THREE
The Cultural Environment 88
Opening Case: McDonalds in India 88
Introduction 90
What Is Culture? 92
Values and Norms 92
Culture, Society, and the Nation-State 93
The Determinants of Culture 94
Social Structure 95
Individuals and Groups 95
Social Stratification 98
Religious and Ethical Systems 100
Christianity 101
Islam 103
Hinduism 107
Buddhism 108
Confucianism 108
Language 109
Spoken Language 109
Education 111
Culture and the Workplace 113
Cultural Change 115
Implications for Business 118
Cross-Cultural Literacy 118
Culture and Competitive Advantage 119
Culture and Business Ethics 120
Key Terms 122
Summary 122
Critical Thinking and Discussion Questions 123
Research Task 124
Closing Case: Walmarts Foreign Expansion 124
CHAPTER FOUR
Ethics in International Business 126
Opening Case: Imagine No Metal 126
Introduction 129
Ethics, as Affected by the Environments
Ethical Issues in International Business 130
Ethics, as Affected by the Technological
Environments 161
Employment Practices 161
Human Rights 162
Environmental Pollution 134
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Corruption 135
Moral Obligations 137
Ethical Dilemmas 138
The Roots of Unethical Behaviour 139
Philosophical Approaches to Ethics 144
Straw Men 144
Utilitarian and Kantian Ethics 147
Rights Theories 148
Justice Theories 149
Ethical Decision Making 150
Hiring and Promotion 151
Organization Culture and Leadership 151
Decision-Making Processes 152
Ethics Officers 154
Moral Courage 155
Summary of Decision-Making Steps 155
Implications for Business 155
Benefits 156
Costs 156
Risks 156
Key Terms 156
Summary 157
Critical Thinking and Discussion Questions 157
Research Task 158
Closing Case: Etch-A-Sketch Ethics 158
Sustainability in Practice: B.C. Hydros
Aboriginal Relations Programs 160
PART THREE Cross-Border Trade and Investment 162
vii
CHAPTER FIVE
International Trade Theories 162
Contents
Opening Case: The Equadorean Rose Industry 162
Introduction 164
An Overview of Trade Theory 165
The Benefits of Trade 165
The Pattern of International Trade 166
Trade Theory and Government Policy 167
Mercantilism 168
Absolute Advantage 168
Comparative Advantage 170
The Gains from Trade 171
Qualifications and Assumptions 173
Trade and Simple Extensions of the Ricardian
Model 173
HeckscherOhlin Theory 177
The Leontief Paradox 177
The Product Life-Cycle Theory 178
Evaluating the Product Life-Cycle Theory 179
The New Trade Theory 181
The Aerospace Example 181
129 Implications 182
National Competitive Advantage: Porters Diamond 183
Factor Endowments 184
Demand Conditions 185
Related and Supporting Industries 185
Firm Strategy, Structure, and Rivalry 186
Evaluating Porters Theory 186
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Implications for Business 187 The Form of FDI: Acquisitions versus Green-Field
Location Implications 187 Investments 233
First-Mover Implications 188 Canadas Case 233
Policy Implications 189 The Theory of Foreign Direct Investment 237
Key Terms 190 Why Foreign Direct Investment? 237
Summary 190 The Pattern of Foreign Direct Investment 240
Critical Thinking and Discussion Questions 191 Political Ideology and Foreign Direct Investment 243
Research Task 191 The Radical View 243
Closing Case: The Rise of the Indian Software The Free Market View 244
Industry 192 Pragmatic Nationalism 245
Shifting Ideology 246
Costs and Benefits of FDI to the Nation-State 246
CHAPTER SIX Host-Country Effects: Benefits 246
The Political Economy of International Trade 194 Host-Country Effects: Costs 249
Opening Case: The Great Banana Wars 194 Home-Country Effects: Benefits 250
Introduction 196 Home-Country Effects: Costs 251
Instruments of Trade Policy 198 International Trade Theory and Foreign Direct
Tariffs 198 Investment 251
Subsidies 199 Government Policy Instruments and FDI 251
Import Quotas and Voluntary Export Restraints 201 Home-Country Policies 252
Local Content Requirements 202 Host-Country Policies 252
Administrative Policies 203 International Institutions and the Liberalization
Antidumping Policies 203 of FDI 254
The Case for Government Intervention 205 Implications for Business 255
Political Arguments for Intervention 205 The Theory of FDI 255
Economic Arguments for Intervention 209 Government Policy 256
The Revised Case for Free Trade 211 Key Terms 257
Retaliation and Trade War 211 Summary 257
Domestic Politics 212 Critical Thinking and Discussion Questions 258
viii Development of the World Trading System 212 Research Task 258
From Smith to the Great Depression 213 Closing Case: Lakshmi Mittal and the Growth
19471979: GATT, Trade Liberalization, and Economic of Mittal Steel 259
Contents

Growth 216
19801993: Disturbing Trends 214
The Uruguay Round and the World Trade
Organization 215 CHAPTER EIGHT
The Future of the WTO: Unresolved Issues and the Doha Regional Economic Integration 260
Round 217 Opening Case: The European Energy Market 260
Implications for Business 221 Introduction 262
Trade Barriers and Firm Strategy 221 Gold Brick Countries 262
Policy Implications 221 Model for Economic Integration 263
Key Terms 222 Levels of Economic Integration 264
Summary 222 The Case for Regional Integration 266
Critical Thinking and Discussion Questions 223 The Economic Case for Integration 266
Research Task 224 The Political Case for Integration 267
Closing Case: When Do Government Tax Incentives Impediments to Integration 267
Become Export Subsidies? 224 The Case Against Regional Integration 269
Regional Economic Integration in Europe 270
Evolution of the European Union 270
CHAPTER SEVEN Political Structure of the European Union 273
Foreign Direct Investment 226 The Single European Act 274
Opening Case: Starbucks Foreign Direct The Establishment of the Euro 275
Investment 226 Fortress Europe? 279
Introduction 228 Enlargement of the European Union 279
Foreign Direct Investment in the World Economy 228 Regional Economic Integration in the Americas 280
The Growth of FDI 229 The North American Free Trade Agreement 280
The Direction of FDI 232 The Andean Community of Nations 284
The Source of FDI 232 MERCOSUR 285

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Central American Common Market and
CARICOM 286
Free Trade Area of the Americas 286
Regional Economic Integration Elsewhere 287
Association of Southeast Asian Nations 287
Asia-Pacific Economic Cooperation 288
Regional Trade Blocs in Africa 290
Implications for Business 291
Opportunities 292
Threats 292
Key Terms 293
Summary 293
Critical Thinking and Discussion Questions 294
Research Task 294
Closing Case: Deutsche Banks Pan-European Retail
Banking Strategy 294
Sustainability in Practice: Foreign Investment for
Sustainable Community Development 296
PART FOUR Global Money System 298
CHAPTER NINE
The Foreign Exchange Market 298
Opening Case: Hyundai and Kia Face a Strong
Won 298
Introduction 300
The Functions of the Foreign Exchange Market 301
Currency Conversion 301
The World and the Canadian Dollar 302
Insuring Against Foreign Exchange Risk 605
The Nature of the Foreign Exchange Market 308
Economic Theories of Exchange Rate
Determination 309
Prices and Exchange Rates 310
Interest Rates and Exchange Rates 315
Investor Psychology and Bandwagon
Effects 318
Summary 319
Exchange Rate Forecasting 319
The Efficient Market School 319
The Inefficient Market School 319
Approaches to Forecasting 320
Currency Convertibility 321
Convertibility and Government Policy 321
Countertrade 322
Implications for Business 323
Transaction Exposure 323
Translation Exposure 323
Reducing Translation and Transaction Exposure 323
Reducing Economic Exposure 324
Other Steps for Managing Foreign Exchange Risk 324
Key Terms 325
Summary 325
Critical Thinking and Discussion Questions 325
Research Task 325
Closing Case: The Ultimate Store of Wealth 327
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CHAPTER TEN
The Global Monetary System 328
Opening Case: Argentinas Monetary Crisis 328
Introduction 330
The Gold Standard 332
Mechanics of the Gold Standard 332
Strength of the Gold Standard 332
The Period between the Wars: 19181939 333
The Bretton Woods System 334
The Role of the IMF 334
The Role of the World Bank 336
The Collapse of the Fixed Exchange Rate System 336
The Floating Exchange Rate Regime 338
The Jamaica Agreement 338
Exchange Rates since 1973 338
Fixed versus Floating Exchange Rates 340
The Case for Floating Exchange Rates 340
The Case for Fixed Exchange Rates 341
Who Is Right? 342
Exchange Rate Regimes in Practice 342
Pegged Exchange Rates 343
Currency Boards 344
Crisis Management by the IMF 345
Financial Crises in the Post-Bretton Woods Era 345
Third World Debt Crisis 346
Mexican Currency Crisis of 1995 347
Russian Ruble Crisis 351
The Asian Crisis 353
Evaluating the IMFs Policy Prescriptions 357
Implications for Business 359 ix
Currency Management 359
Business Strategy 359
Contents
CorporateGovernment Relations 360
Key Terms 360
Summary 361
Critical Thinking and Discussion Questions 361
Research Task 362
Closing Case: Chinas Managed Float 362
Sustainability in Practice: A Tax on Currency Speculation
to Finance Sustainable Development and Other
Suggestions for a Sustainable Global Economy 364
PART FIVE Competing in a Global Marketplace 366
CHAPTER ELEVEN
Global Strategy 366
Opening Case: The Evolving Strategy of
Coca-Cola 366
Introduction 368
Strategy and the Firm 369
Value Creation 370
The Firm as a Value Chain 371
The Role of Strategy 373
Profiting from Global Expansion 374
Location Economies 375
Experience Effects 376
Leveraging Core Competencies 377
Leveraging Subsidiary Skills 380
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Pressures for Cost Reductions and Local
Responsiveness 381
Pressures for Cost Reductions 382
Pressures for Local Responsiveness 382
Strategic Choices When Choosing a Strategy 385
International Strategy 385
Multidomestic Strategy 387
Global Strategy 388
Transnational Strategy 388
Summary 390
Strategic Alliances 390
The Advantages of Strategic Alliances 391
The Disadvantages of Strategic Alliances 392
Making Alliances Work 393
Partner Selection 393
Alliance Structure 393
Managing the Alliance 395
Implications for Business 396
International Business Requirements 396
Key Terms 396
Summary 396
Critical Thinking and Discussion Questions 397
Research Task 398
Closing Case: IKEAThe Global Retailer 398
CHAPTER TWELVE
Entering Foreign Markets 400
Opening Case: General Electrics
Joint Ventures 400
x
Introduction 402
Basic Entry Decisions 402
Contents
Which Foreign Markets? 402
Timing of Entry 403
Scale of Entry and Strategic Commitments 404
Evaluating the Level of Risk 406
Entry Modes 407
Exporting 407
Turnkey Projects 408
Licensing 408
Franchising 410
Joint Ventures 411
Wholly Owned Subsidiaries 413
Selecting an Entry Mode 414
Core Competencies and Entry Mode 414
Pressures for Cost Reductions and
Entry Mode 415
Establishing a Wholly Owned Subsidiary:
Green-Field Venture or Acquisition? 416
Pros and Cons of Acquisitions 416
Pros and Cons of Green-Field Ventures 419
Green-Field Venture or Acquisition? 420
Implications for Business 421
Key Terms 422
Summary 422
Critical Thinking and Discussion Questions 423
Research Task 424
Closing Case: Canadian Banks in the U.S.A. 424
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CHAPTER THIRTEEN
Exporting, Importing, and Countertrade 426
Opening Case: Megahertz Communications 426
Introduction 428
The Promise and Pitfalls of Exporting 428
Improving Export Performance 429
An International Comparison 430
Export Information Sources 430
Utilizing Export Management Companies 432
Exporting Strategy 432
Export and Import Financing 435
Lack of Trust 435
Letter of Credit 437
Draft 438
Bill of Lading 437
A Typical International Trade Transaction 439
Countertrade 440
The Growth of Countertrade 441
Types of Countertrade 441
The Pros and Cons of Countertrade 443
Implications for Business 444
Key Terms 445
Summary 445
Critical Thinking and Discussion Questions 446
Research Task 446
Closing Case: CAE Takes on the World 446
CHAPTER FOURTEEN
Global Marketing and R&D 448
Opening Case: Procter & Gamble in Japan: From
Marketing Failure to Success 448
Introduction 450
The Globalization of Markets and Brands 452
Market Segmentation 455
Product Attributes 455
Cultural Differences 455
Economic Development 456
Product and Technical Standards 457
Distribution Strategy 457
A Typical Distribution System 457
Differences between Countries 457
Choosing a Distribution Strategy 460
Communication Strategy 461
Barriers to International Communication 461
Push versus Pull Strategies 463
Global Advertising 466
Pricing Strategy 467
Price Discrimination 468
Strategic Pricing 470
Regulatory Influences on Prices 472
Configuring the Marketing Mix 473
New-Product Development 473
The Location of R&D 474
Integrating R&D, Marketing, and Production 475
Cross-Functional Teams 476
Implications for Business 477
Key Terms 478
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Summary 478 Training and Management Development 517

Critical Thinking and Discussion Questions 479 Training for Expatriate Managers 517
Research Task 480 Repatriation of Expatriates 518
Closing Case: Levi Strauss Goes Local 480 Management Development and Strategy 519
Performance Appraisal 520
Performance Appraisal Problems 520
CHAPTER FIFTEEN Guidelines for Performance Appraisal 521
Global Production, Outsourcing, and Logistics 482 Compensation 521
Opening Case: Managing Timberlands Global Supply National Differences in Compensation 521
Chain 482 Expatriate Pay 524
Introduction 484
Implications for Business 526
Strategy, Production, and Logistics 485
International Labour Relations 526
Where to Produce 487
The Concerns of Organized Labour 526
Country Factors 487
The Strategy of Organized Labour 526
Technological Factors 488
Approaches to Labour Relations 527
Product Factors 492
Key Terms 528
Locating Production Facilities 492
Summary 528
The Strategic Role of Foreign Factories 494
Critical Thinking and Discussion Questions 529
Outsourcing Production: Make-or-Buy Decisions 496
Research Task 529
The Advantages of Make 496
Closing Case: How Coca-Cola Retains
The Advantages of Buy 498
Employees 530
Trade-offs 500
Strategic Alliances with Suppliers 501 Sustainability in Practice: Interface: An Environmentally
Implications for Business 502 Sustainable Commitment to Business and Material
Coordinating a Global Production System 502 Management 531
The Power of Just-in-Time 502
The Role of Information Technology and the GLOSSARY 533
Internet 502
Key Terms 503
Summary 503 END NOTES 539
Critical Thinking and Discussion Questions 504 xi
Research Task 504 NAME/COMPANY INDEX 558

Contents
Closing Case: Foreign Direct Investment at the Source
of Raw Materials 505
SUBJECT INDEX 562
CHAPTER SIXTEEN
Global Human Resource Management 506
Opening Case: Molex 506
Introduction 508
The Strategic Role of International HRM 509
Staffing Policy 510
Types of Staffing Policy 510
Expatriate Managers 513

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P R E FA C E
THE GLOBAL BUSINESS TODAY
APPROACH
Global Business Today is intended for the first in-
ternational business course at either the under-
graduate or the MBA level. Our goal with this third
Canadian edition is to set new standards for inter-
national business textbooks. We have written a
book that (1) integrates the Canadian perspective
on international business and Canadas place
within the international business environment,
(2) is comprehensive and up-to-date, (3) goes be-
yond an uncritical presentation and shallow expla-
nation of the body of knowledge, and (4) focuses
on implications for business and makes important
theories, issues, and practices accessible and in-
teresting to Canadian students.
INTEGRATED COVERAGE OF THE CANADIAN
PERSPECTIVE
Although this book is geared to the Canadian
reader, this does not mean that all examples within
are Canadian examples. The authors have written
about those realities and examples that best por-
tray chapter topical themes, as well as writing
about what the market wants, based upon market
research in the academic field. The textbook pays
particular attention to small- and medium-sized
enterprises and their push onto the international
business scene.
COMPREHENSIVE AND UP-TO-DATE
COVERAGE
To be comprehensive, an international business
textbook must clearly communicate
how and why the worlds countries differ;
why a comprehensive review of
economics and politics of international
trade and investment is necessary in
understanding international trade;
how the functions and form of the global
monetary system are tied into global trade;
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how the strategies, objectives, and
international structures of international
business need to conform to certain
guidelines set out by international
organizations and other bodies; and
the special roles of an international
businesss activities.
This book pays close attention to these issues.
Ultimately, a successful business is an informed
business. It is our intention to cover, in an in-depth
manner, the linkages between success and knowl-
edge on the global business stage. As time moves
forward, an increasing number of students will be-
come international managers, and this book will
better equip them with knowledge about the strat-
egies, operations, and functions of small and large
businesses alike.
The theories behind international trade help
students to grasp the scope and execution of inter-
national business. Many books convey an ade-
quate task of communicating long-established
theories (e.g., the theory of comparative advan-
tage and Vernons product life-cycle theory) but
they ignore important newer works included in
Global Business Today, such as
the new trade theory and strategic
trade policy;
the work of Nobel prize-winning
economist Amartya Sen on economic
development;
Samuel Huntingtons influential thesis
on the clash of civilizations;
the new growth of economic
development championed by Paul
Romer and Gene Grossman;
recent empirical work by Jeffrey Sachs
and others on the relationship between
international trade and economic growth;
Michael Porters theory of the
competitive advantage of nations;
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Robert Reichs work on national competitive
advantage;
the work of Douglas North and others on national
institutional structures and the protection of
property rights;
the market imperfections approach to foreign direct
investment that has grown out of Ronald Coase and
Oliver Williamsons work on transaction cost
economics;
Bartlett and Ghoshals research on the
transnational corporation;
the writings of C.K. Prahalad and Gary Hamel on
core competencies, global competition, and global
strategic alliances, and
Paul Samuelsons critique of free trade.
In addition to cutting-edge theory and the exponentially
quickening pace of the international business environment,
every effort has been made to ensure that this book is as cur-
rent as possible when it goes to press. This Canadian edition
contains current data from the World Trade Organization, the
Organization for Economic Cooperation and Development
(OECD), the United Nations Commission on Trade and Develop-
ment (UNCTAD), Statistics Canada, and Export Development
Canada, among others. This book provides readers with a fresh
insight into factors influencing Canada and other countries in
the world of international trade, Canadian businesses forays into
world markets, and reactions to ongoing economic structural
readjustments in 2010 and beyond. Here are some examples:
Chapter 2, Country Differences in Political
Economy, deals with critical forces affecting
Canadian businesses working in the global arena.
Chapter 5, International Trade Theories, explains
various international trade theories, while providing
practical explanations of their applications within
various international companies.
Chapter 9, The Foreign Exchange Market, provides
insights into how Canadian corporations can receive
payment in international transactions. Similarly,
foreign exchange risks and various economic theories
of exchange rate determination will prove helpful for
those individuals and corporations contemplating
doing business beyond Canadas borders.
Leveraging core competencies and formulating
global strategies through distributions channels and
more are comprehensively covered in Chapter 11,
Global Strategy.
Chapter 12, Entering Foreign Markets, offers insight
into reactions in other countries to privatization issues,
as described in the Country Focus, JCB in India.
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Chapter 15, Global Manufacturing and Materials
Management, neatly clarifies the details of global
supply management through its opening case,
Managing Timberlands Global Supply Chain.
Significant explanations are provided on strategy,
manufacturing and logistics, the strategic roles of
foreign factories, and make-or-buy decisions.
Chapter 16, Global Human Resource
Management, underscores the benefits and
disadvantages of Human Resource Management in
terms of dealing with expatriate employees.
International labour relations complicates the
fabric of human resource departments for those
companies with foreign operations.
BEYOND UNCRITICAL PRESENTATION AND SHALLOW
EXPLANATION
Many issues in international business are complex and thus
necessitate considerations of pros and cons. To demonstrate
this concept to students, we have adopted a critical approach
that presents the arguments for and against economic theor-
ies, government policies, business strategies, organizational
structures, and so on.
Related to this, we have attempted to explain the complexi-
ties of the many theories and phenomena unique to international
business so the student might fully comprehend the statements
of a theory or the reasons a phenomenon is the way it is. These
xiii
theories and phenomena typically are explained in more depth
in Global Business Today than they are in competing textbooks.
Preface
FOCUS ON BUSINESS IMPLICATIONS AND
ACCESSIBLE PRESENTATION
The third Canadian edition of Global Business Today offers
many opportunities for students to engage with and apply the
material to their lives and their future careers. The features
listed below are explained in greater detail in the Learning
Features section beginning on page xviii.
Each chapter begins with an updated Opening
Case and concludes with a new or updated Closing
Case that illustrates the relevance of chapter
material for the practice of international business.
The opening case in Chapter 4, Imagine No
Metal, looks at mining and how big business in
northern Ontario is also an important and growing
sector worldwide. Chapter 12 opens with an
updated case about General Electric and its joint
ventures to gain entry into global markets. The new
closing case in Chapter 11, IKEAThe Global
Retailer, looks at the flexibility needed by a
successful, major corporation to adapt to change.
The case accentuates the need for a global
corporation to respect local preferences.
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Each chapter also contains at least one type of focus
box. Updated Management Focus boxes, like the
updated cases, illustrate the relevance of the chapter
material for the practice of international business.
Examples include: Starbucks Wins Key Trademark
Case in China in Chapter 2, Four Seasons Hotels
and Resorts in Chapter 7, NAFTAFriend or Foe of
Canadian Business? in Chapter 8, Barrick Gold
in Chapter 9, and The Tragedy of the Congo (Zaire) in
Chapter 10. Country Focus boxes provide background
on the political, economic, social, or cultural aspects
of countries grappling with an international business
issue. For example, 50 Years of Corruption in
Nigeria in Chapter 2, Foreign Direct Investment in
China in Chapter 7, Trade Missions, A Vital Part of
the Canadian Governments Global Business
Strategy in Chapter 11, and Countries Want to Hold
on to Their Jobs in Chapter 16.
Another Perspective sidebars help students to
think critically about adjacent text material.
Each chapter concludes with an Implications for
Business section that explains the managerial
implications of the chapter material. This feature
helps business students to understand the linkage
between practice and theory.
Sustainability in Practice Part-Ending Cases help
xiv students to understand how businesses are engaging
in the solutions to sustainable development challenges.
Preface
GlobalEdge Research Tasks allow students to
practise using real business data.
Could You Do This? Entrepreneurial Peer
Profiles featuring real students experiences with
starting their own global businesses are available
at the texts Online Learning Centre Web site at
www.mcgrawhill.ca/olc/hill.
THE STRUCTURE OF GLOBAL BUSINESS
TODAY, THIRD CANADIAN EDITION
Global Business Today, third Canadian Edition, offers a tight,
integrated flow of topics from chapter to chapter.
Part One: Globalization
Chapter 1 provides an overview of the key issues to be ad-
dressed and explains the plan of the book.
Part Two: Country Differences
Chapters 2, 3, and 4 focus on national differences in political
economy and culture and the implications of these differences
for ethical decision making. Most international business text-
books place this material later, but we believe it is vital to discuss
national differences first. After all, many of the central issues
in international trade and investment, the global monetary
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system, international business strategy and structure, and inter-
national business operations arise out of national differences in
political economy and culture. To understand these issues, stu-
dents must first appreciate the differences in countries and
cultures.
Part Three: Cross-Border Trade and Investment
Chapters 5 through 8 investigate the political economy of inter-
national trade and investment, fostering understanding of the
trade and investment environment in which international busi-
ness occurs.
Part Four: Global Money System
Chapters 9 and 10 examine the global monetary system, while
detailing the monetary framework in which international busi-
ness transactions are carried out.
Part Five: Competing in a Global Marketplace
Chapters 11 through 16 move away from the macro environment
of the international business realities into the workings of com-
panies within this framework. How do companies adapt their
strategies to compete beyond their own borders? How do pro-
duction and logistics proceed on a global scale? These chapters
explain how firms can perform their key functionsmanufactur-
ing, marketing, R&D, and human resource managementto
compete and succeed in the international business environment.
WHATS NEW IN THE THIRD
CANADIAN EDITION?
This third Canadian edition not only explains theoretical as-
pects of international trade but, more importantly, attempts to
connect the practical applications involving international
trade into a framework of helpful understanding for those ex-
porters, both new and experienced, in this field.
CHAPTER-BY-CHAPTER CHANGES
Chapter 1: Globalization. All of the statistics have been
updated to the most recent available at the time of this book go-
ing to production. Global Financial Services statistics updates
show a significant spike in the amount of foreign exchange
transactions since the data published in the first edition. This
chapter includes various introductory concepts that will further
substantiate the successes and challenges faced by Canadian
companies when doing business abroad. A new Management
Focus details the impact on businesses of the recent global
economic meltdown. The emergence of global institutions is
detailed. Also, the latest round of World Trade Organization talks
(WTO) and revised WTO membership numbers of the troubled,
yet growing membership of the WTO, are chronicled. Similarly,
the innovative spirit of one of Canadas best known corporations
shines through in a new closing case, Tim Hortons: A Canadian
Company Looking for New Markets,as this made-in-Canada
enterprise increases its forays into the American marketplace.
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The outcries resonating from some high-profile pro-Canada
crusaders, such as Maude Barlow, in the sensitive area of job
losses in Canada due to outsourcing to companies in develop-
ing countries, such as India and Mexico, are detailed.
Chapter 2: Country Differences in Political Econ-
omy. The section on economic development includes a review
of the work of Nobel prize-winning economist Amartya Sen.
Sen has argued that development should be assessed less by
material output measures such as GNP per capita and more by
the capabilities and opportunities that people enjoy. The grow-
ing number of Internet users in Canada and around the world
sheds an insight into the broader picture of how the Internet
has changed the way people and enterprises communicate in
Canada and beyond. The discussion of differences in legal
systems provides insight into the linkage between corruption
and negative economics within a country. Intellectual property
is discussed in the framework of inroads being made into
allowing the sale of cheaper generic versions of patented
medicinesincluding a powerful new drug for AIDS, without
permission from the patent owner. A new Management Focus,
Starbucks Wins Key Trademark Case in China talks about the
legalities in country differences and a new closing case,
Chavezs Venezuela depicts a socialist system. McDonalds
around the World, details the corporations ability to adapt
internationally.
Chapter 3: The Cultural Environment. The Implications
for Business section covers a broad cross-section of topics rang-
ing from cross-cultural literacy, to culture and competitive advan-
tage, to culture and business ethics. These themes pose problems
for Canadians doing business abroad. In many cases, countries
now have legal frameworks in place to regulate and interpret
what constitutes proper ethics in doing business internationally.
Bill S-21, passed into law in the late 1990s, lays out ethical busi-
ness standards to be adhered to by Canadian business people
when dealing abroad. The 2010 World Competitive Scoreboard
shows Canada lagging in areas of competitiveness when com-
pared to other countries. In areas of literacy, Canada, unlike many
countries, earns strong grades, yet in terms of GDP per capita
spending on education, Canada lags. Other areas of cultural dif-
ferences are described within this chapter. Various religions and
their significance within the world are discussed.
Chapter 4: Ethics in International Business. Canadian
examples such as the Talisman company in Sudan, SARS in
Toronto, Ivanhoe Mines in Myanmar, and the Conrad Black
trial, all with a global focus, are updated.
Chapter 5: International Trade Theories. Over the
past few years, numerous empirical studies have been pub-
lished that look at the relationship between a countrys open-
ness to international trade and its economic growth. This
work is discussed in this chapter. The work gives empirical
support to the theory of comparative advantage and a strong
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example of trade disputes is showcased through a new case
on Pizza Wars between the United States and Canada.
Chapter 6: The Political Economy of International
Trade. The contentious bilateral trade issues that have periodi-
cally soured Canadian trade relations with the United States
over the past couple of decades are dealt with in the context of
the World Trade Organization and the North American Free
Trade Agreement. In particular, the unresolved softwood lumber
dispute is previewed in this chapter, further discussion of which
takes place in Chapter 14. In Chapter 14 we present a Canadian
success story, Clearwater Seafoods. We explore this corpo-
rations competitive advantage and relate it to Chinas overall
status as one of the worlds low-cost seafood producers.
Chapter 7: Foreign Direct Investment. Both up-to-
date international foreign direct investment (FDI) Flows and
FDI figures show the importance of FDI, in its different forms,
including mergers and acquisitions, in the economies of
Canada and other countries. In spite of Canadas growing pres-
ence on the world economic stage, it can still only boast two
transational corporations that manage to slip into the worlds
top 100 non-financial TNCs, ranked by foreign assets.
Chapter 8: Regional Economic Integration. On Jan-
uary 1, 2007, two new member states joined the European
Union, bringing its current membership to 27. This chapter cov-
ers the post-World War II levels of economic integration within
Europe, leading to the European Union and its monetary union, xv
while covering lesser initiatives, including the Free Trade
Preface
Agreement, now NAFTA, which includes Mexico, Canada, and
the United States. Other efforts of regional economic integra-
tion are also discussed and these include customs unions in
South America such as MERCOSUR and the Andean Pact coun-
tries (now the Community of Andean Nations) , along with
similar dynamic pro-business undertakings in Asia (Associa-
tion of Southeast Asian NationsASEAN and the Asia Pacific
Economic CooperationAPEC) and Africa.
Chapter 9: The Foreign Exchange Market. The
Canadian dollars recent rise against the U.S. dollar and other
currencies is significant for Canadian importers and exporters.
Also, economic theories of exchange rate determination are
explained that are all vital to business people conducting busi-
ness abroad. A new Closing Case on The Ultimate Source of
Wealth depicts the importance of gold as an investment.
Chapter 10: The Global Monetary System. One of
the more interesting phases of the development and growth of
the Canadian economy came during the period of time in which
Canada was under the gold standard from 18541914 and
19141926. Internationally, many policies and institutions have
influenced and shaped the value of currencies. The ever-in-
creasing U.S. trade deficit and the fall of the U.S. dollar have
wreaked havoc on the international monetary system. Similarly,
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after reaching record-breaking prices, gold and oil prices have Chapter 14: Global Marketing and R&D. Global mar-
remained elevated through 2011, and their effect on the global keting and R&D are what makes or breaks a company. The
monetary system remains noteworthy. Management Focus Jean Coutu GroupMarketing to the
North American Consumer, depicts one successful Canadian
Chapter 11: Global Strategy. Multinational corpora-
companys evolving foray into markets beyond our borders.
tions have long recognized the importance of leveraging skills,
Distribution and communication strategies are also discussed
strategic alliances, and competencies in their foreign loca-
within this chapter. American-Canadian softwood lumber
tions for improved business practices at home and abroad.
irritants are further explained in the context of NAFTA and
How Canadian companies apply their know-how in foreign
WTO rulings on this evolving and contentious issue.
situations is discussed in several sections within this chapter,
including how the Canadian Managers Abroad component of Chapter 15: Global Production, Outsourcing, and
the former Team Canada has been reincarnated. The expand- Logistics. Web-based IT systems now play a vital role in
ing presence of IKEA stores, numbering 230 worldwide, with materials management around the world. Global tracking sys-
more openings planned for China, depicts the growth of an in- tems enable goods to be located within a 45-metre (50-yard)
creasingly popular home furnishings brand. radius as they travel to their destination. Cashier entries in
local supermarkets are tied into inventory data that signals
Chapter 12: Entering Foreign Markets. The ways
when certain goods should be replenished by the manufac-
through which companies enter foreign markets is covered
turer. An innovative look into global manufacturing and mate-
through a look at the pros and cons of greenfield investments and
rials management can be seen in the updated Management
other forms of alternative strategies for entering foreign markets.
Focus on Having Fun Making Money.
The Management Focus highlights the Jollibee Foods Corporation
from the Philippines and its ambitious expansion to the U.S. Chapter 16: Global Human Resource Manage-
ment. Employment legislation can have both positive and
Chapter 13: Exporting, Importing, and Counter-
negative impacts for foreign businesses operating abroad and
trade. The discussion on export assistance to Canadian com-
companies must be aware of rules and guidelines so they can
panies provides a detailed look at the institutional means and
act accordingly. A new Another Perspective box about expatri-
mechanisms through which many Canadian companies engage
ate employees was added based on an interview with the
in export, for example, Export Development Canada and the
Consul General of Uruguay in Toronto. The prickly issue of
Canadian Commercial Corporation. The Another Perspective box
xvi countries wanting to keep jobs at home is detailed in a Country
shows how innovative Board of Trade offices, such as the one
Focus. This chapter also discusses the complete range of fac-
featured (Brampton Board of Trade), partner with the private
Preface

tors affecting human resource management in other countries.

sector to enhance business opportunities for companies.

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SUPERIOR SERVICE
Your Integrated Learning Sales Specialist is a McGraw-Hill Ryerson representative who has the ex-
perience, product knowledge, training, and support to help you assess and integrate any of the below-
noted products, technology, and services into your course for optimum teaching and learning
performance. Whether its using our test bank software, helping your students improve their grades,
or putting your entire course online, your iLearning Sales Specialist is there to help you do it. Contact
your local iLearning Sales Specialist today to learn how to maximize all of McGraw-Hill Ryersons
resources!

iLearning Services Program

McGraw-Hill Ryerson offers a unique iServices package designed for Canadian faculty. Our mission
is to equip providers of higher education with superior tools and resources required for excellence in
teaching. For additional information visit http://www.mcgrawhill.ca/highereducation/iservices.

Teaching & Learning Conference Series

The educational environment has changed tremendously in recent years, and McGraw-Hill Ryerson
continues to be committed to helping you acquire the skills you need to succeed in this new milieu.
Our innovative Teaching & Learning Conference Series brings faculty together from across Canada
with 3M Teaching Excellence award winners to share teaching and learning best practices in a col-
laborative and stimulating environment. Pre-conference workshops on general topics, such as teach-
ing large classes and technology integration, will also be offered. We will also work with you at your
own institution to customize workshops that best suit the needs of your faculty.

INSTRUCTORS SUPPLEMENTS
Instructors Online Learning Centre (OLC)
The OLC at www.mcgrawhill.ca/olc/hill includes a password-protected Web site for instructors. The xvii
site offers downloadable supplements, including an Instructors Manual and Microsoft Power-

Preface
Point slides.

Instructors Resources:
Instructors Manual The Instructors Manual contains lecture notes and teaching suggestions for
each chapter, and is written by the text author, Thomas McKaig, to ensure accurate and current mate-
rial, relevant to text content.
Test Bank in Rich Text Format The test bank contains approximately 100 questions per chapter
and is written by the text author, Thomas McKaig, to ensure tight alignment to text content.
Computerized Test Bank. This flexible and easy-to-use electronic testing program allows in-
structors to create tests from book-specific items. It accommodates a wide range of question
types and instructors may add their own questions. Multiple versions of the test can be created
and printed.
Microsoft PowerPoint Slides These presentations offer approximately 15 to 20 slides per
chapter and were created by Tim Richardson, Seneca College of Applied Arts and Technology/
University of Toronto.

Video Collection
A video collection, consisting of news footage and original business documentaries for each chapter, is
available through your sales representative.

Course Management
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Please contact your local McGraw-Hill Ryerson iLearning sales specialist for details.

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Create Online
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customization as well as many licensed readings and cases. For more information, please visit
www.mcgrawhillcreate.com.

CourseSmart
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format providing unique benefits to students and faculty. By purchasing an eTextbook, students can
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access to powerful Web tools for learning, including full text search, notes and highlighting, and email
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STUDENT SUPPLEMENTS
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The OLC at www.mcgrawhill.ca/olc/hill includes learning and study tools such as quizzes, a search-
able glossary, streaming video, Globe and Mail headlines, interactive exercises, Web links, and more,
created by Tim Richardson, Seneca College of Applied Arts and Technology/University of Toronto.

xviii
Preface

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ACKNOWLEDGEMENTS
Numerous people deserve recognition for their assistance in preparing this book.
First and foremost, I would like to thank my parents, Dorothy and Russell McKaig, for always being
my greatest supporters. My father did not live to see this third edition of the book, but was an enthusi-
astic supporter of my efforts with all previous editions. Many thanks also to my sister, Janet McKaig,
and brother, Woody McKaig, for their support and advice.
I couldnt have been more fortunate to have my Research Directors, Susanna Boehm and Jim Helik.
They were able to handle my endless requests for massive amounts of research information, and synthe-
size it to meet my demanding time lines. They exceeded my expectations in the quality of their input. They
knew exactly what I wanted and made this massive mission of creating a Canadian-focused textbook on
global business a Mission Possible. Their dedication, can-do attitude, patience, intelligence, and sense
of humour is humbling to me and I can only say that I have found the best researchers possible.
A textbook on global business needs a global team, and I was fortunate that my colleagues here in
Canada, as well as in Uruguay, Panama, and elsewhere were so generous with their time and knowl-
edge. I would like to offer a special thanks to Nick Barisheff, (Chief Executive Officer), Paul de Sousa, VP
Business Development BMG Bullion Funds, Marc Farmer, VP Business Development BMG BullionBars, for
their unique global vision and understanding on doing business internationally and on the value of gold,
silver, and platinum bullion. The privilege of working internationally with Nick, Paul, and Marc, as well as
with the entire BMG team, is indeed an honour. I would like to offer a sincere thanks to Geoff Kelly; Michael,
Monique, and Maddisyn Wegner; Aqeel Mohammad; Sallie L. Storey; and Jaime Rozinsky for their kind
assistance through the years. I would like to specially thank Fernando Lopez-Fabregat, Consul General of
Uruguay in Toronto, for providing insights on international business. Also, thanks to Mr. Bosco Vallarino
Jr.,Consul General of Panama in Toronto, for his kind assistance and insights pertaining to Panama.
I would like to thank Charles W. L. Hill, for creating an excellent textbook and strong base from
which this Canadian edition was made possible. Trevor Buss similarly epitomizes the spirit of entrepre-
neurship. His business travels to China formed the basis for his insightful article Doing Business in
China in the Management Focus box in Chapter 3. As well, I would like to thank Dr. George Bragues,
Program Head, Business and Assistant Vice Provost, University of Guelph-Humber, for his continued
support and assistance. I would like to thank the Department of Marketing and Consumer Studies of
the University of Guelph for its support throughout the years. I also wish to thank Alexander Fry, Part-
ner, KPMG Montevideo, and Rodrigo F. Ribeiro, CFA, Partner, Advisory Services KPMG, Montevideo,
Uruguay, for the time spent interviewing them for confirmation of certain economic data. I would also
like to thank Charles Janthur for his international business support.
Market feedback indicated that more expansive coverage of the important role that ethics plays in the
international business arena was necessary. We called upon Tim Richardson, who teaches at Seneca
College of Applied Arts and Technology and the University of Toronto, Department of Management,
www.witiger.com. Tim enthusiastically and ably responded to this request, providing Chapter 4, Ethics
in International Business, rich in Canadian content and current research. We thank him for his invalu-
able and ongoing contribution to this text.
The team at McGraw-Hill Ryerson was also superb, including Kim Brewster, Executive Sponsoring
Editor; Lori McLellan, Developmental Editor; Cathy Biribauer, Supervising Editor; and Cat Haggert, Copy
Editor.
Finally, I extend sincere thanks to the reviewers of the third Canadian edition, who provided insight-
ful feedback that helped to shape this book:

Laurie Grant, BCIT Linda Stockton, McMaster University

Ramon Baltazar, Dalhousie University
Sheng Deng, Brock University
Shanker Seetharam, Centennial College
of Applied Arts and Technology
Ronald Camp, University of Regina
Pavel Vacek, University of Alberta
Che-hui Lien, Thompson Rivers University
Carlyle Farrell, Ryerson University
Minna Allarkakhia, University of Waterloo
Wasi Khan, Seneca College of Applied Arts
and Technology
Chris Houliez, University of Saskatchewan
Raymond Leduc, University of
Western Ontario

Thomas McKaig

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LEARNING FEATURES
Global Business Today, Third
Canadian Edition, has a rich
selection of learning features
that highlight companies ups
and downs in the internation-
al business arena, stimulate
learning and understanding,
and challenge students to
respond.
Opening Case
Each chapter begins with an engaging opening
case that sets the stage for the chapter. These brief
case studies introduce students to critical issues and
often challenge their preconceptions. For actual
countries/organizations providing rich, introduc-
tory examples, look to each chapters opening case.
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3 PART THREE
CROSS-BORDER TRADE AND INVESTMENT The Ecuadorean
Rose Industry
IT IS 6:20 A . M . FEBRUARY 7 IN THE ECUADOREAN TOWN OF CAYAMBE, and
Maria Pacheco has just been dropped off for work by the company bus. She pulls on
thick rubber gloves, wraps an apron over her white, traditional embroidered dress,
and grabs her clippers, ready for another long day. Any other time of year, Maria would
work until 2 P. M ., but its a week before Valentines Day, and Maria along with her
84co-workers at the farm are likely to be busy until 5 P. M . By then, Maria will have cut
more than 1000 rose stems.
A few days later, after they have been refrigerated and shipped via aircraft, the
roses Maria cut will be selling for premium prices in stores from New York to London.
Ecuadorean roses are quickly becoming the Rolls-Royce of roses. They have huge
heads and unusually vibrant colours, including 10 different reds, from bleeding heart
crimson to a rosy lovers blush.
Most of Ecuadors 460 or so rose farms are located in the Cayambe and Cotopaxi
regions, 10 000 feet up in the Andes about an hours drive from the capital, Quito. The
rose bushes are planted in huge flat fields at the foot of snowcapped volcanoes
thatrise to more than 20 000 feet. The bushes are protected by 20-foot-high canopies
of plastic sheeting. The combination of intense sunlight, fertile volcanic soil, an
equatorial location, and high altitude makes for ideal growing conditions, allowing
roses to flower almost year-round. Ecuador apparently has a comparative advantage
in the production of roses.
Ecuadors rose industry started some 20 years ago and has been expanding rapidly
since. Ecuador is now the worlds fourth largest producer of roses. Roses are the
nations fifth largest export, with customers all over the world. Rose farms generate
$240 million in sales and support tens of thousands of jobs. In Cayambe, the population
has increased in 10 years from 10 000 to 70 000, primarily as a result of the rose
industry. The revenues and taxes from rose growers have helped to pave roads, build
schools, and construct sophisticated irrigation systems.
Veer
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Learning Objectives
Learning Objectives tell students what they
will know after completing the chapter.
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LEARNING OBJECTIVES
1. Explore the three basic decisions that a rm contemplating foreign expansion must make:
whichmarkets to enter, when to enter those markets, and on what scale.
2. Review the different modes that rms use to enter a foreign market.
3. Demonstrate the advantages and disadvantages of each entry mode.
4. Analyze the relationship between strategy and a rms choice of entry mode.
5. Illustrate some pitfalls of exporting.
6. Give examples of the steps a rm can take to improve its export performance.
7. Explain the mechanics of export and import nancing.
INTRODUCTION
This chapter is concerned with two closely related topics: (1) the decision of which
foreign markets to enter, when to enter them, and on what scale, and (2) the choice
of entry mode. Any rm contemplating foreign expansion must rst struggle with
the issue of which foreign markets to enter and the timing and scale of entry. The
choice of which markets to enter should be driven by an assessment of relative long-
run growth and prot potential.
The choice of mode for entering a foreign market is another major issue with
402
which international businesses must wrestle. For example, the opening case described
GEs change of strategy toward entering foreign markets through joint ventures. The
various modes for serving foreign markets are exporting, licensing or franchising to
host-country rms, establishing joint ventures with a host-country rm, setting up
a new wholly owned subsidiary in a host country to serve its market, or acquiring
PART 5 Competing in a Global Marketplace an established enterprise in the host nation to serve that market. Each of these
options has advantages and disadvantages. The magnitude of the advantages and
disadvantages associated with each entry mode is determined by a number of factors,
including transport costs, trade barriers, political risks, economic risks, costs,
and rm strategy. The optimal entry mode varies by situation, depending on these
factors. Thus, whereas some rms may best serve a given market by exporting, other
rms may better serve the market by setting up a new wholly owned subsidiary or
by acquiring an established enterprise.
BASIC ENTRY DECISIONS
In this section, we look at three basic decisions that a rm contemplating foreign
expansion must make: which markets to enter, when to enter those markets, and on
what scale.1
WHICH FOREIGN MARKETS?
In 2010, there were 195 nation-states in the world, but they do not all hold the same
prot potential for a rm contemplating foreign expansion.2 Ultimately, the choice
must be based on an assessment of a nations long-run prot potential. This potential is
a function of several factors, many of which we have already studied in earlier chapters.
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potential attractiveness of a foreign market. There we noted that the attractiveness of a
country as a potential market for an international business depends on balancing the
benets, costs, and risks associated with doing business in that country.
5
CHAPTER
International
Trade Theories
C A S E
Maria works Monday to Saturday, and earns $210 a month ($US), which she says is
an average wage in Ecuador and substantially above the countrys $120 a month
minimum wage. The farm also provides her with health care and a pension. By
employing women such as Maria, the industry has fostered a social revolution in
O P E N I N G
which mothers and wives have more control over their familys spending, especially
on schooling for their children.
For all of the benefits that roses have bought to Ecuador, where the gross national
income per capita is only $1080 a year, the industry has come under fire from
environmentalists. Large growers have been accused of misusing a toxic mixture of
pesticides, fungicides, and fumigants to grow and export unblemished pest-free
flowers. Reports claim that workers often fumigate roses in street clothes without
protective equipment. Some doctors and scientists say that many of the industrys
50 000 employees have serious health problems as a result of exposure to toxic
chemicals. A study by the International Labour Organization reported that women in
the industry had more miscarriages than average and that some 60 percent of all
workers suffered from headaches, nausea, blurred vision, and fatigue. Still, the
critics acknowledge that their studies have been hindered by a lack of access to
thefarms, and they do not know what the true situation is. The International Labour
Organization has also said that some rose growers in Ecuador use child labour, a
claim that has been strenuously rejected by both the growers and Ecuadorean
government agencies.
In Europe, consumer groups have urged the European Union to press for improved
environmental safeguards. In response, some Ecuadorean growers have joined a
voluntary program aimed at helping customers identify responsible growers. The
certification signifies that the grower has distributed protective gear, trained
workers in using chemicals, and hired doctors to visit workers at least weekly.
Other environmental groups have pushed for stronger sanctions, including trade
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A NOTHER PERSPECTIVE
Another Perspective
Technology and knowledge transfer: a benefit With multiple examples per chapter, Another Perspective
and a danger
A joint venture is like a party where everyone boxes provide students with an alternate way of thinking
brings something and takes something. In a joint
venture located in a developing country, the about important global issues presented in the text. These
company with the business brings knowledge
about the business and its processes, while not only hone students critical thinking skills but also give a
often the local partner brings knowledge about
the market and long-standing relationships,
deeper understanding of chapter topics.
along with personnel. In its early preparation
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forentry into South Korea, KFC (then known as
Kentucky Fried Chicken) selected a joint-venture
partner, began training the partner, and began
tobring in its systems and layout, including the
pressure-cooked process, special equipment, COUNTRY FOCUS
and the 11 herbs and spices, to share with its
ENHANCING FINANCING POSSIBILITIESTHE BUSINESS
new Korean partner. Imagine the Americans DEVELOPMENT BANK OF CANADA
surprise when they found hundreds of Kentucky Businesses and governments working together is not a new idea. For example, the Business Development
Bank of Canada (BDC), formed on July 13, 1995, under the Business Development Bank of Canada Act, has
Fried Chicken stores already up and running in a broadened and dynamic public interest mandate, particularly focusing on Canadian exporting businesses
and around Seoul. They were tiny mom-and-pop in the technology sector. It does provide assistance to non-export ventures, but increasingly small
businesses are using its services for export-specic purposes.
shops, a result of a familys U.S. vacation, and The BDC took root during the end of the World War II era when, in September 1944, the Canadian
Parliament proclaimed the Industrial Development Bank of Canada (IDB), which was at that time an arm of
although they didnt prepare chicken the same the Bank of Canada. Its primary purpose was to assist manufacturing-based companies. Over the next few
way or offer the same product line, they did years, the IDB Act was amended several times, expanding its ability to grant loans to many companies
across a variety of industry sectors. By 1964, the bank had 22 cross-Canada branches.
confuse the public about the KFC concept for a The basic premise of the BDCs original set up in 1944 was to focus on providing nancial loans to
companies. During the 1970s, it began to acknowledge that companies needed more than money. It added
while. Even today, you can nd little Kentucky to its roster of services to Canadian business areas such as counselling, training, and planning for small
Fried Chicken stalls in the middle of Seoul. business owners. Another innovative concept to be injected into the IDB in the 1970s turned it into a sort of
one-stop shop for small businesses in need of nancing, export advice, and business planning counsel. It
then evolved into a separate Crown corporation and the Federal Business Development Bank took over
from the IDB in October 1975. The bank then decentralized and opened up more branches across Canada.
In April 2002, the BDCs mandate was renewed for a period of ten years and the partnership between
Canadian small businesses and the BDC continues. Doing business abroad is difcult enough and

Country Focus mostCanadian small businesses need all the help they can get. By 2008, the BDC boasted 93 branches
across Canada and in 2008, ranked 15th of the 100 best employers in Canada. Companies with a loan
withBDC can access an online Web site, BDC Connex, a virtual branch for Canadians, further expanding
the BDCs presence.
Its activities are similar to those of a regular chartered bank, such as the CIBC or the Royal Bank of

Country Focus boxes provide real-world Canada. The BDCs key activities involve granting exible business loans with oating and xed interest
rates for up to 20 years. It also has a micro-business program. This arm of the bank assists small business
owners with mentoring and continued management support for as long as two years after the initial signed

examples of how different countries agreement between the small business owner and the BDC. It can provide term nancing of up to $25 000
to new businesses and up to $50 000 to existing companies with solid and realistic plans. There are several
other types of services that enable eligible Canadian businesses to extend their business beyond Canadas

grapple with political, economic, social, borders. A Productivity Plus Loan assists well-established manufacturing companies to acquire various
types of up-to-date equipment in the range of $100 000 to $5 million. In addition to this, the BDC might offer
an extra 25 percent nancing for installation, assembly, and personnel training.

or cultural issues.
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Innovation Loans, geared primarily towards helping entrepreneurs grow their businesses, assist with
the organizational logistics and implementation of innovation strategies, frequently in training for R&D,
andInternational Organization for Standardization (ISO) standards training. Entrepreneurs can top up an
Innovation loan for up to $100 000 with a Working Capital for Exporters loan for amounts up to $250 000.
BDC also provides Venture Capital loans in amounts ranging from $500 000 to $5 000 000 irrespective
ofthe company life cycle. The BDC Tourism Investment Fund has funds available to those entrepreneurs
with good track records and future prospects in amounts ranging from $250 000 to $10 000 000 as well as
Growth Capital for Aboriginal Business for loans ranging between $25 000 and $100 000, also with exible
repayment turns. For costs relating to Web solutions, companies could be eligible to receive nancing from
MANAGEMENT FOCUS $25 000 to $50000 to meet the various costs related to the implementation of a Web solution.

THE REEL THREAT TO THE CANADIAN FILM INDUSTRY Sources: BDC at http://www.bdc.ca/EN/about/overview/history/Pages/default.aspx and http://www.bdc.ca/EN/about/overview/Pages/
overview1.aspx; Canada Business at http://www.canadabusiness.ca/eng/.
As avid moviegoers, many Canadians might not realize the magnitude of the lm business, both foreign and
domestic, operating within Canada. Movie trailers and lm lights are a common sight in Canadas major
cities to small towns. Many major American television series and movies, such as Haven and The Twilight
Saga have been filmed in Canada. However, this industry has been put at risk with the recent rise of the
Canadian dollar, which makes lming in Canada, compared to the United States, far less attractive than it 434
has been.
In 2008 and 2009 the Canadian lm industry decreased by 4.3 percent for a total volume of $5 billion in
total volume of production. The arts and entertainment industry makes up 1.07 percent of GDP, employing
over 776 000 Canadians. Nearly one quarter of all Hollywood lms are now shot in Canada, with many
Canadians showing front stage in this lucrative industryJames Cameron, Ivan Reitman, and Norman
Jewison, with the latter having founded the Canadian Film Centre. Canadians also make movies outside the
Hollywood system including such renowned directors as Rock Demers, Deepa Mehta, David Cronenberg,
Denys Arcand, and Atom Egoyan.
Provincial and federal lm tax credits do their share of the work in keeping the business of lming in
Canada. Over the years, governments in Canada have come to power on pledges to protect and to bolster
the Canadian lm and cultural industries. In the early 1990s, the Liberals now famous Liberal Handbook,
and their accompanying pledge to strengthen and protect the Canadian cultural industries against incursions
by the American cultural juggernautclaimed by some to be all talk and no actionwere well-known
trademarks of Liberal party cultural heritage policy. Sheila Copps, the former Minister of Canadian Heritage,
became associated with shining the beacon on Canadian culture, even if some pro-Canada culture interests,
such as the CBC, seemed to weaken during her time in power.
The Canadian governments intervention or intention to intervene in the business of Canadian culture
has met with culture shock in American media circles, where culture is not viewed as a national heritage,
but as a prot-making industry. Labour unrest in the Hollywood lm industry has frequently been a by-
product of the actors union, up in arms about lost jobs to cheaper and perhaps, friendlier climes, particularly
in the Great White North. Ed Asner, as head of the Screen Actors Guild and union activist, has spoken out
over the decades about the outow of Hollywood movie productions to Canada.
One who joined this chorus was Arnold Schwarzenegger, then-Governor of California, who threatened
the Hollywood movie industry with punitive measures for those companies filming in Canada and
elsewhere. It is clear that government intervention or lack thereof can play a determining role in the
future of this lucrative Canadian industry. To those American studios filming in Canada, there are many
attractive features built into the equation. However, one of the major factors is the currency question.
The Canadian dollar has been rising relative to the U.S. dollar for many years now, and became on par in
December 2010. This movement has gradually made filming in Canada far more expensive than it used to
be. Canadian concerns about a higher dollar intermittently send shivers through the Canadian film
industry as the thoughts of losing productions due to a more expensive Canadian dollar subconsciously
resonate.
The fact that the Canadian lm industry and the government have been able to make huge gains in spite
Management Focus
of the American cultural giants over the past century lends a degree of expectation about the continuation
of highly successful Canadian cultural industries. However, no industry is immune to competitive threats.
A continued strong Canadian dollar and a weak U.S. dollar may be enough to reverse the trend of the past
several decades.
Management Focus boxes illustrate the
Sources: Statistics Canada, Gross domestic product at basic prices, by industry, http://www40.statcan.gc.ca/l01/cst01/econ41-eng.htm;
Statistics Canada, Distribution of employed people, by industry, by province, http://www40.statcan.gc.ca/l01/cst01/labor21a-eng.htm;
relevance of chapter concepts for the
L. McNulty, Canadas lm industry is A-list celebrity hot, July 9, 2010, http://mediacentre.canada.travel/content/travel_story_ideas/
lm_in_canada_2010; Canadian Media Production Association, Statistical Indicators of Film and Television Production in Canada, http://
www.cftpa.ca/newsroom/fact_sheet/, accessed December 12, 2010. practice of international business.
350

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R E S E A R C H TA S K | globaledge.msu.edu

Use the globalEDGE site to complete the following exercises:

GlobalEDGE/CIBER Research Task
1. The Internet is rich with resources that provide guidance
for companies that wish to expand their markets through
exporting. GlobalEDGE provides links to these tutorial
2. Utilize the globalEDGE Glossary of International Business
Terms to identify the denitions of the following exporting
terms: air waybill, certicate of inspection, certicate of
Using the text and the GlobalEDGE Web site,
Web sites. Identify ve of these sources and provide a
description of the services available for new exporters
product origin, wharfage charge, and export broker.
http://globaledge.msu.edu, students solve realistic
through each of these sources.

Visit the Global Business Today Online Learning Centre at

international business problems related to each
www.mcgrawhill.ca/olc/hill to access quizzes, interactive exercises, a Business Around the
World interactive map, and other learning and study tools related to this chapter.
chapter. These exercises expose students to the
types of tools and data sources international manag-
ers use to make informed business decisions.

Critical Thinking and

Discussion Questions
These questions are suited for in-class
discussion or personal reflection.
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CRITICAL THINKING AND DISCUSSION QUESTIONS
1. The interest rate on one-year Canadian government
securities is 6 percent and expected inflation rate for the
coming year is 2 percent. The U.S. one-year government
security instrument interest rate is 4 percent with
expected inflation for this coming year of 1 percent. The
exchange rate for the US$/Cdn$ as of mid-June 2008 is
US$1 5 Cdn$1.02296 (US$100 5 Cdn$102.27). What is the
spot exchange rate a year from now? What is the forward
exchange rate a year from now? Explain the logic of your
answers.
2. Two countries, Canada and the United States, produce
just one good: beef. Suppose the price of beef in the
/201/MHRL065/hiL01799_disk1of1/0070401799/hiL01799_pagefiles
United States is $3 per kilogram and in Canada it is $4 per
kilogram.
a. According to the PPP theory, what should the spot
exchange rate be?
b. Suppose the price of beef is expected to rise to $3.50
per kilogram in the United States and to $4.75 per
kilogram in Canada. What should the one-year forward
US$/Cdn$ exchange rate be?
c. Given your answers to parts a and b, if the current interest
rate in the United States is 10percent, what would you
expect the current interest rate to be in Canada?

may still be preferable to enter via a greeneld venture. Things such as skills and
organizational culture, which are based on signicant knowledge that is difcult
to articulate and codify, are much easier to embed in a new venture than they
are in an acquired entity, where the rm may have to overcome the established
routines and culture of the acquired rm. Thus, as our earlier examples suggest,
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greeneld ventures.

I M P L I C AT I O N S F O R B U S I N E S S
Implications for Business
Several means of entering foreign markets have been detailed in this chapter. For example, in
some instances if a Canadian rm were considering overseas expansion, and depending on how
aggressively it wanted the business, a host country could stipulate that the Canadian rm
relinquish majority ownership in favour of host country majority ownership (equity joint venture).
At the end of every chapter, this section
Socialist countries or developing nations have been known to require this type of market entry
strategy to ensure that they derive benet from foreign corporations. In other words, more prots
can be retained within the host countrys borders. Table 12.2, although representative of common
spotlights the managerial implications of
problems and potential solutions to market entry modes in any and all countries, refers to China in
this instance.
Certain businesses have found that equity joint ventures can be helpful in enhancing business
the chapter material.
goals after entering China, while others nd that export and contractual joint ventures are more
exible. Export and contractual joint ventures can be useful to those companies with made in
Canada technology, products, or manufacturing processes. Export and contractual joint ventures
allow for low risk, minimal upfront cash outlay from the exporter, and a quick exit from the local
market should business or political conditions change.

AREAS OF MAIN
CONCERN EVALUATION HOW DID THE COMPANY DEAL WITH IT?
TABLE 12.2
Common Problems and
Solutions Regardless of 421
Key Terms and Summary
Entry Mode
Culture difference Large but Companies had executives
These resources help students review
CHAP TER 12 Entering Foreign Markets

manageable who were extremely fond of Source: Department of Foreign

Foreign exchange
Quality of local
employees
Training needs for the
Chinese
High cost of doing
business in China
Expatriates
Finding connections
to help navigate
the system
Affairs and International Trade
the Chinese culture. Hire local Canada, 2004. Reproduced
Chinese to bridge the gap.
Extremely
important
Help the Chinese apply for Export
Development Corporation
with the permission of Her
Majesty the Queen in Right of
Canada, represented by the
Minister of Public Works and
key concepts.
funding. Government Services Canada,
2005.
Very important High-quality local employees are
available. Higher pay to attract
quality people.
Extremely Written into the employment
important contract for the Chinese employees
to get training in Canada. Very
good motivational tool.
The cost is Hiring as many local Chinese as KEY TERMS
reasonable possible to lower the cost.
caste system, p. 98 individualism versus power distance, p. 113
Not critical None of the operations required
class consciousness, p. 100 collectivism, p. 113 religion, p. 100
full-time expatriate to be
stationed in China. class system, p. 99 karoshi, p. 98 social mobility, p. 98
Each company had an individual long-term vs. short-term
who spent about six months out Confucian dynamism, p. 115 social strata, p. 98
orientation, p. 114
of a year in China. ethical systems, p. 100 society, p. 92
masculinity versus femininity, p. 113
Very important Connections and local employees ethnocentric behaviour, p. 118 uncertainty avoidance, p. 113
help to do it. mores, p. 93
folkways, p. 92 values, p. 92
norms, p. 92
group, p. 95

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L A K S H M I M I T TA L A N D T H E G R O W T H
CLOSING CASE

O F M I T TA L S T E E L
In 2007 ArcelorMittal was created in a controversial
merger between Mittal Steel and Arcelor. The merger
was the brainchild of Mittal CEO Lakshmi Mittal and his
son, Aditya. Under Lakshmis leadership, the family-owned
Mittal Steel had grown from obscure origins in India to
become the largest steel company in the world. The story
dates to the early 1970s. At that time, the company was
facing limited growth opportunities in India. Regulations
constrained expansion opportunities, and Mittal competed
with both a state-owned rival, SAIL, and a private national
champion, Tata Steel. So Lakshmis father financed the
start-up of a steelmaking plant in Indonesia in 1975.
To reduce costs in his Indonesian plant, Mittal did not
smelt iron ore, but instead purchased direct reduced
iron pellets. The supplier was a struggling state-owned
steel firm in Trinidad. Impressed by Mittals success in
Indonesia, the Trinidadians asked him to turn their firm
around under a contract. Mittal set up another company
to run the Trinidad plant. In 1989, after a successful
turnaround, Mittal purchased the Trinidadian plant.
Now the company that had been born in India had two
major foreign operations, but it was just the beginning. The
global steel industry had been in a slump for 25 years due
market-based economy. By this time, Mittal was hungry for
more international growth, but his company was capital-
constrained. So he decided to take it public, but not in his
native India or Indonesia, where the liquidity of the capital
markets was limited. Instead, in 1997 he moved the
companys headquarters to Rotterdam, and then offered
stock in Mittal Steel for sale to the public through both
the Amsterdam and New York stock exchanges, raising
$776million in the process.
With capital from the initial public offering (IPO), Mittal
purchased two more German steelmakers in 1997. This
was followed in 1998 by the acquisition of Inland Steel
Closing Case
Company, a U.S. steelmaker. Over the next few years, more
acquisitions followed in France, Algeria, and Poland among
other nations. In 2005, Mittal Steel purchased International
The closing case wraps up the material in the
Steel, a company formed from the integration of troubled
U.S. steelmakers that had been in bankruptcy. By this time
Mittals prediction had come true; global demand for steel
chapter by relating the experience of a com-
was booming again for the rst time in a generation, driven
in large part by demand in China, and steel prices were
hitting record highs. Mittal Steel was now the worlds
pany to the practice of international business.
largest steelmaker. This set the scene for Mittal Steels
$32 billion hostile acquisition of Arcelor, a European rm

CHAP TER 7 Foreign Direct Investment

to excess capacity and slow demand growth as substitute
materials replaced steel in a number of applications, but
Mittal saw opportunity in purchasing the assets of
distressed companies on the cheap. He believed that the
global steel industry was about to turn a corner, driven
in large part not only by sustained economic growth in
developed nations, but also by growing demand in newly
industrializing nations including China and his own native
India. He saw all sorts of opportunities for buying poorly
run companies as they came up for sale, injecting them
with capital, improving their efciency by getting them to
adopt modern production technology, and taking advantage
of the coming boom in steel demand. He also saw the
opportunity to use the purchasing power of a global steel
company to drive down the price it would have to pay for
raw-material inputs.
formed from the merger of steelmakers from Luxembourg,
France, and Spain. The acquisition was bitterly contested,
with the management of Arcelor and many European
politicians opposing the acquisition of a European company
by an Indian enterprise (although Mittal Steel was legally a
Dutch company). Arcelors shareholders, however, saw
value in the deal and ultimately approved it in late 2006.
Today it is the worlds largest steel company, and ranks
99th on the 2010 Fortune Global 500 list. (ArcelorMittal
Mines Canada, formed in 2008, is one of Canadas leading
suppliers of iron ore to steel markets around the world.)
Sources: Mittalic Magic, The Economist, February 16, 2008, p. 80; K. Gopalan,
Steel Czar, Business Today, January 13, 2008, pp. 10206; S. Daneskhu, FDI
into Richest Countrys Set to Rise 20% This Year, Financial Times, June 22,
2007, p. 7; and historical information archived at ArcelorMittal Web site,
www.arcelormittal.com/, accessed March 17, 2008.

In 1992 Mittal made his next move, buying Sibalsa of
Mexico, a state-owned steel company that was being
privatized. This was followed in 1994 by the purchase of the
fourth largest Canadian steelmaker from the government of
Quebec. Then in 1995 Mittal Steel purchased a midsized
German steelmaker and Kazakhstans largest steelmaker,
which was at the time in something of a shambles as the
country transitioned from a socialist system to a more
CASE DISCUSSION QUESTIONS
1. ArcelorMittal has grown in the past by making multiple foreign direct
investments. Are there other ways for the company to grow in the future?
2. Can a company ever become too big to be effective? Could this happen to
ArcelorMittal?
3. Hamilton, Ontario, had been home to Dofasco Steel since 1912. In 2006,
Dofasco was bought by Arcelor. Does the foreign ownership of such a major
industry make a difference to Hamilton, or to Canada?

259
www.mcgrawhill.ca /olc/hill

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S U S TA I N A B I L I T Y I N P R A C T I C E

I N T E R F A C E : A N E N V I R O N M E N TA L LY S U S TA I N A B L E
C O M M I T M E N T T O B U S I N E S S A N D M AT E R I A L M A N A G E M E N T

The following case study describes a companys efforts
to be both profitable and environmentally sustainable.
Interface, Inc. is the worlds largest manufacturer
of carpet tiles and upholstery fabrics for commercial
interiors. But Interfaces core vision is not about carpet
or fabrics per se; it is about becoming a leading example
of a sustainable and restorative enterprise by 2020,
measured across five dimensions: people, place (the
planet), product, process, and profits. That is a
substantial challenge for a company that in 2000 had 27
(not just physical waste, but the whole concept of
waste); eliminating harmful emissions; using only
renewable energy; adopting closed loop processes;
using resource-efficient transportation; energizing
people (all stakeholders) around the vision; and
redesigning commerce so that a service is sold that
allows the company to retain ownership of its products
and to maximize resource productivity.
Throughout Interface, all employees were trained in
the principles of systems thinking. They were required

Sustainability in Practice factories, sales offices in 110 countries, annual sales of

$1.3 billion, over 7000 employees, and a supply chain
heavily dependent on petrochemicals.
Founder and Chairman Ray Anderson presented this
challenge to the organization in 1994. After 21 years of
to examine the impact of their work and how they
could work more sustainably in their business area.
Training was necessary, according to Anderson, because
traditional education continues to teach economics
students to trust the invisible hand of the market, when

Located at the end of each part, these unwittingly plundering the earth, I read Paul Hawkens
book The Ecology of Commerce (Harper 1993). . . . It
convicted me on the spot, not only as a plunderer of
the invisible hand is clearly blind to the externalities. . . .
The truth is, we have an essentially illiterate populace
when it comes to the environment. The feedback on

vignettes illustrate how businesses are Earth, but also as part of an industrial system that is
destroying Earths biosphere, the source and nurturer of
all life. . . . I was struck to the core by Hawkens central
engaging in the solutions to sustainable point, that only business and industry, the major culprit,
is also large enough, powerful enough, pervasive enough,
wealthy enough, to lead humankind away from the abyss
development challenges. toward which we are plunging. It was an epiphanal
experience for me, a spear in the chest. . . . I myself
became a recovering plunderer. At Interface we call this
new direction, climbing Mount Sustainability, the point at
its peak symbolically representing zero environmental
footprintour definition of sustainability for ourselves,
to reach a state in which our petro-intensive company
(energy and materials) takes nothing from the earth that
is not naturally and rapidly renewable, and does no harm
to the biosphere: zero footprint.
As a result, Interface has undergone considerable
transformation in its effort to reorient the entire
organization. Some positive results were achieved in
the beginning. Through its waste elimination drive, the
company has saved $165 million over five years, paying
for all of its sustainability work and delivering 27 percent
of the groups operating income over the period. Over
and above that, since 1994, Interface, Inc. has reduced
its carbon intensityits total supply chain virgin
petrochemical material and energy use in raw pounds
per dollar of revenueby some 31 percent. However,
Interface recognized that sustainability means far more
than that.
The company developed a shift in strategic orientation
based on a seven-step sustainability framework, using
the systems thinking of The Natural Step (www.
naturalstep.org/). These steps include eliminating waste
this training has been very positive and a great deal
of progress has been made as a result. However, there
were three areas where Interface could have improved
the process.
The first is always establishing a positive environment
for inspired employees, fresh from their training courses,
to return to. The company found that employees became
passionate as their understanding of sustainability grew,
and they needed an outlet for action. Although there
were many areas of good supportive management
across the business, there were also too many areas
where local managers were not prepared well enough
to facilitate motivated employees wanting to make a
difference. Issues of management and leadership explain
why some of the expected progress did not happen in
certain areas.
Second, people engage in different ways with
sustainability issues, and learning programs need to
provide the space to explore these differences. Programs
need to be flexible enough to go into detail on a hot issue
such as climate change, while the next question may
well be about equity of resource use. To keep people
motivated, programs need to maintain this flexibility.
Third, follow-up was not quick enough; it takes much
more than two days for people to really understand
sustainability. Sustainability issues need to be revisited
again and again, as employees begin to understand how
it impacts their daily lives. It is a big commitment to
revisit these issues on an ongoing basis, but the company
recognized that it was vital for employees to continually
buy in.
Interface has also learned the importance of making
sustainability a whole company approach. Those who

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3rd Pass