Tw elfth Edition

INTERNATIONAL BUSINESS
Environments and Operations

John D. Daniels
University of Miami

Lee H. Radebaugh
Brigham Young University

Daniel P. Sullivan
University of Delaware

Pearson Education International

Contents
Preface 29
About the Authors 39

• PART ONE BACKGROUND FOR INTERNATIONAL

BUSINESS 44

1 Globalization and International Business 44

CASE: The Global Playground 45
Introduction 48
W h a t Is International Business7. 49

The Forces Driving Globalization 50

Factors in Increased Globalization 51
What's Wrong with Globalization? 56
Threats to National Sovereignty 56
Economic Growth and Environmental Stress 57
Growing Income Inequality 57
s
| Point ^J3ffi^S^^3 ' Offshoring Good Strategy? 58
Why Companies Engage in InternationaLBusiness 60
Expanding Sales 60 ,
Acquiring Resources 60
Minimizing Risk 60
Modes of Operations in International Business 61
Merchandise Exports and Imports 62
Service Exports and Imports 62
Investments 63
Types of International Organizations 63
Why International Business Differs from Domestic
Business 64
Physical and Social Factors 65
The Competitive Environment 67
Looking to the Future: Three Ways of Looking at Globalization 68
C A S E : Carnival Cruise Lines: Exploiting a Sea of Global
Opportunity 69
Summary 74
Key Terms 75
Endnotes 75
An Atlas 78
Map Index 86
Contents

• PART TWO COMPARATIVE ENVIRONMENTAL FRAMEWORKS 90

2 The Cultural Environments Facing Business 90

C A S E : The Java Lounge—Adjusting to Saudi Arabian Culture 91
Introduction 94
The People Factor 95
Cultural Awareness 96
A Little Learning Goes a Long Way 97
The Idea of a "Nation": Delineating Cultures 98
The Nation as a Point of Reference 98
How Cultures Form and Change 99
Language as Both a Diffuser and Stabilizer of Culture 100
Does Geography Matter? Where Birds of a Feather Flock Together 103
Religion as a Cultural Stabilizer 104
Behavioral Practices Affecting Business 106
Issues in Social Stratification 106
Work Motivation 109
Relationship Preferences I II
Risk-Taking Behavior I 12
Information and Task Processing I 13
Communications I 15
Dealing with Cultural Differences 118
Accommodation I 18
Cultural Distance: Usefulness and Limitations I 19
Culture Shock 119
Company and Management Orientations 121
[ P o j n t B f f l J H ^ f f l Does International Business Lead to Cultural Imperialism? 123
Strategies for Instituting Change 125
Looking to the Future: What Will Happen to National Cultures? 127
C A S E : Charles Martin in Uganda: What to Do When a Manager
Goes Native 128
Summary 132
Key Terms 133
Endnotes 133

3 The Political and Legal Environments Facing Business 136

C A S E : China—Legal Growing Pains in a Land of Opportunity 137
Introduction 141
The Political Environment 142
Individualism Versus Collectivism 143
Political Ideology 144
Trends in Political Systems 150
Looking to the Future: What Might Become of Democracy? 153
Contents J
Political Risk 154
| Point | g ^ | ^ ^ ^ j 3 Should Political Risk Management Be an Active Strategy? 156
The Legal Environment 157
Legal Systems 158
Types of Legal Systems 158
The Diffusion of Legal Systems 159
Trends in Legal Systems 160
Understanding Bases of Rule 161
Implications for Managers 162
Legal Issues in International Business 164
Operational Concerns 164
Strategic Concerns 166
Intellectual Property Rights 168
C A S E : Crime That Pays (and Pretty Well, Too) 172
Summary 177
Key Terms 178
Endnotes 178

4 The Economic Environments Facing Businesses 180

C A S E : Economic Conundrums and the Comeback of Emerging Economies 181
Introduction 184
International Economic Analysis 186
Elements of the Economic Environment 187
Gross National Income 187
Features of an Economy 196
Inflation 196
Unemployment 197
Debt 198
Income Distribution 199
Poverty 200
Labor Costs 201
Productivity 202
The Balance of Payments 202
| Point |gj@flfl§3^^fl Is a Trade Deficit an Advantage? 204
Integrating Economic Analysis 206
Types of Economic Systems 206
Economic Freedom and Market Transitions 209
Making the Transition to a Market Economy 21 I
Looking to the Future: Is There a Move to Push Back Economic
Freedom? 216
C A S E : Meet the BRICs 218
Summary 222
Contents

Key Terms 223

Endnotes 223

5 Globalization and Society 226

C A S E : Ecomagination and the Global Greening of GE 227
Introduction 230
Evaluating the Impact of FDI 231
Considering the Logic of FDI 232
The Economic Impact of the M N E 234
Balance-of-Payments Effects 234
Growth and Employment Effects 236
The Foundations of Ethical Behavior 237
Why Do Companies Care About Ethical Behavior? 237
The Cultural Foundations of Ethical Behavior 238
The Legal Foundations of Ethical Behavior 240
Ethics and Corporate Bribery 241
Corruption and Bribery 241
| Point | j E B 5 E ^ f f l Are Top Managers Responsible When Corruption
Is Afoot? 244
Ethics and the Environment 246
What Is "Sustainability"? 246
Global Warming and the Kyoto Protocol 246
Looking to the Future: How to See the Trees in the Rain Forest 248
Ethical Dilemmas and Business Practices 249
Ethical Dilemmas and the Pharmaceutical Industry 249
Ethical Dimensions of Labor Conditions 251
Corporate Codes of Ethics: How Should a Company Behave? 254
C A S E : Anglo American PLC in South Africa: What Do You Do When Costs Reach
Epidemic Proportions? 256
Summary 260
Key Terms 261
Endnotes 261

• PART THREE THEORIES AND INSTITUTIONS:

TRADE AND INVESTMENT 264

6 International Trade and Factor-Mobility Theory 264

C A S E : Costa Rica: Using Foreign Trade to Trade-Up Economically 265
Introduction 268
Laissez-Faire Versus Interventionist Approaches to Exports
and Imports 269
Theories of Trade Patterns 269
 Contents

Interventionist Theories 270

Mercantilism 270
Free Trade Theories 271
Theory of Absolute Advantage 272
Theory of Comparative Advantage 274
Theories of Specialization: Some Assumptions and Limitations 276
Trade Patterns Theories 278
How Much Does a Country Trade? 278
What Types of Products Does a Country Trade? 279
With Whom Do Countries Trade? 282
Does Geography Matter? Variety Is the Spice of Life 284
The Statics and Dynamics of Trade 285
Product Life Cycle (PLC) Theory 285
The Porter Diamond 287
| Point |g^^^J35flfl Should Nations Use Strategic Trade Policies? 289
Factor-Mobility Theory 291
Why Production Factors Move 292
Effects of Factor Movements 293
The Relationship Between Trade and Factor Mobility 295
Looking to the Future: In What Direction Will Trade Winds Blow? 298
C A S E : LUKOIL: Trade Strategy atja Privatized Exporter 299
Summary 302 J
Key Terms 304
Endnotes 304

7 Governmental Influence on Trade 306

C A S E : Making the Emperor's (and Everyone Else's) New Clothes:
Textile and Clothing Trade 307
Introduction 310
Conflicting Results of Trade Policies 311
The Role of Stakeholders 31 I
Economic Rationales for Governmental Intervention 311
Fighting Unemployment 312
Protecting "Infant Industries" 313
Developing an Industrial Base 314
Economic Relationships with Other Countries 316
Noneconomic Rationales for Government Intervention 319
Maintaining Essential Industries 319
Preventing Shipments to "Unfriendly" Countries 319
^ § j t ^ ^ 3 Should Governments Forgo Trade Sanctions? 320
Maintaining or Extending Spheres of Influence 321
Preserving National Identity 321
10 Contents

Instruments of Trade Control 321

Tariffs 322
Nontariff Barriers: Direct Price Influences 323
Nontariff Barriers: Quantity Controls 325
Dealing with Governmental Trade Influences 328
Tactics for Dealing with Import Competition 329
Looking to the Future: Dynamics and Complexity 330
C A S E : U.S.-Cuban Trade: When Does a Cold War Strategy Become
a Cold War Relic? 330
Summary 333
Key Terms 334
Endnotes 334

8 Cross-National Cooperation and Agreements 336

C A S E : Toyota's European Drive 337
Introduction 339
The World Trade Organization (WTO) 340
GATT: The Predecessor to the W T O 340
What Does the W T O Do? 341
The Rise of Bilateral Agreements 342
Regional Economic Integration 343
The Effects of Integration 344
Major Regional Trading Groups 345
The European Union 346
The NorthAmerican Free Trade Agreement (NAFTA) 351
Regional Economic Integration in the Americas 356
| Point U B I I H H B I Is CAFTA-DR a Good Idea? 359
Regional Economic Integration in Asia 360
Regional Economic Integration in Africa 362
Looking to the Future: Will the WTO Overcome Bilateral and Regional
Integration Efforts? 363
Other Forms of International Cooperation 364
Commodity Agreements 365
Commodities and the World Economy 366
Consumers and Producers 366
The Organization of Petroleum Exporting Countries (OPEC) 366
C A S E : Wal-Mart Goes South 367
Summary 370
Key Terms 371
Endnotes 371
 Contents 11

• PART FOUR WORLD FINANCIAL ENVIRONMENT 374

9 Global Foreign-Exchange Markets 374

CASE: Going Down to the Wire in the Money-Transfer Market 375
Introduction 377
W h a t Is Foreign Exchange? 377
Players on the Foreign-Exchange Market 378
Some Aspects of the Foreign-Exchange Market 378
Does Geography Matter? Foreign-Exchange Trades 382
Major Foreign-Exchange Markets 383
The Spot Market 383
The Forward Market 387
Options 388
Futures 388
The Foreign-Exchange Trading Process 388
Banks and Exchanges 390
Looking to the Future: Where Are Foreign-Exchange Markets Headed? 392
How Companies Use Foreign Exchange 393
Business Purposes (I): Cash Flow Aspects of Imports and Exports 394
Business Purposes (II): Other Financial Flows 395
| Point | { | j f l j ^ ; g f i 3 Is It Ok to Speculate on Currency? 396
C A S E : Banking on Argentina 398
Summary 402
Key Terms 403
Endnotes 404

10 The Determination of Exchange Rates 406

C A S E : El Salvador Adopts the U.S. Dollar 407
Introduction 409
The International Monetary Fund 410
Origin and Objectives 410
The IMF Today 410
Evolution to Floating Exchange Rates 41 I
Exchange-Rate Arrangements 412
Fixed Versus Flexible Currencies 414
Exchange Arrangements with No Separate Legal Tender 416
Currency Board Arrangements 416
Conventional Fixed-Peg Arrangements 416
Pegged Exchanges Rates Within Horizontal Bands 416
More Flexible Arrangements 417
12 Contents

Exchange Rates: The Bottom Line 417

The Euro 419
^^3fflB Should Africa Develop a Common Currency? 421
Determining Exchange Rates 423
Nonintervention: Currency in a Floating-Rate World 423
Intervention: Currency in a Fixed-Rate or Managed-Floating-Rate World 424
The Role of Central Banks 424
Black Markets 428
Foreign-Exchange Convertibility and Controls 428
Exchange Rates and Purchasing Power Parity 429
Exchange Rates and Interest Rates 432
Other Factors in Exchange-Rate Determination 432
Forecasting Exchange-Rate Movements 433
Fundamental and Technical Forecasting 433
Factors to Monitor 435
Business Implications of Exchange-Rate Changes 436
Marketing Decisions 436
Production Decisions 436
Financial Decisions 436
Looking to the Future: In Which Direction Is Exchange-Rate Flexibility
Headed? 437
C A S E : The Chinese Yuan: Be Careful of the Dragon's Tail 438
Summary 442
Key Terms 443
Endnotes 444

• PART FIVE GLOBAL STRATEGY, STRUCTURE, A N D

IMPLEMENTATION 446

11 The Strategy of International Business 446

CASE: Value Creation in the Global Apparel Industry 447
Introduction 451
Industry, Strategy, and Firm Performance 452
Industry Organization Paradigm Leading Strategy Perspectives 453
The Idea of Industry Structure: The Five-Forces Model 454
Industry Change 455
Strategy and Value 456
CreatingValue 457
The Firm as Value Chain 457
What Is the Value Chain? 458
Using the Value Chain 459
Change and the Value Chain 468
 Contents 13

Are Value Chains Real? 469

Global Integration Versus Local Responsiveness 470
Pressures for Global Integration 470
Pressures for Local Responsiveness 472
When Pressures Interact 473
Types of Strategy 474
International Strategy 474
Multidomestic Strategy 475
Global Strategy 476
Transnational Strategy 477
Looking to the Future: What's New in the World of Strategy Types? 479
C A S E : The Globalization of eBay 481
Summary 484
Key Terms 485
Endnotes 485

12 Country Evaluation and Selection 488

C A S E : Carrefour: Finding Retail Space in All the Right Places 489
Introduction 493
How Does Scanning Work? 494
Managing the Alternatives 494
Scanning Versus Detailed Analysis 494
What Information Is Important in Scanning? 496
Opportunities 496
Risks 501
Does Geography Matter? Don't Fool with Mother Nature 504
Collecting and Analyzing Data 507
Some Problems with Research Results and Data 508
External Sources of Information 509
Internally Generated Data 510
| Point | g ^ ^ ^ ^ ^ 3 Should Companies Forgo Investment in Violent Areas? 51 I
Country Comparison Tools 512
Grids 512
Matrices 513
Allocating Among Locations 515
Alternative Gradual Commitments 515
Geographic Diversification Versus Concentration 516
Reinvestment Versus Harvesting 518
Noncomparative Decision Making 519
Looking to the Future: Will Prime Locations Change? 520
CASE: FDI in South Africa 521
14 Contents

Summary 524
Key Terms 525
Endnotes 525

13 Export and Import Strategies 528

C A S E : Grieve—A Small-Business Export Strategy 529
Introduction 532
Exporting and Importing 533
Export Strategy 534
Advantages to Consider 534
Questions to Ask 535
Strategic Advantages of Exporting 535
Characteristics of Exporters 536
Stages of Export Development 537
Pitfalls of Exporting 538
Designing an Export Strategy 539
Import Strategy 543
Types of Importers 543
Strategic Advantages of Imports 543
The Import Process 544
Import Brokers 544
Customs Agencies 545
Looking to the Future: The Technology of Trade 546
Import Documentation 548
The Export Process 548
Indirect Selling 548
Direct Selling 551
| Point | g ^ ^ § f l 8 ^ ^ A Dirty Dilemma: Exporting Hazardous Waste 553
Export Documentation 554
Sources of Regulatory Assistance 556
Foreign Freight Forwarders 558
Countertrade 559
C A S E : A Little Electronic Magic atAlibaba.com 561
Summary 564
Key Terms 565
Endnotes 565

14 Direct Investment and Collaborative Strategies 568

C A S E : The Fizz Biz: Coca-Cola 569
Introduction 572
Why Exporting May Not Be Feasible 573
When It's Cheaper to Produce Abroad 574
 Contents 15

When Transportation Costs Too Much 575

When Domestic Capacity Isn't Enough 575
When Products and Services Need Altering 575
When Trade Restrictions Hinder Imports 576
When Country of Origin Becomes an Issue 576
Noncollaborative Foreign Equity Arrangements 576
Taking Control: Foreign Direct Investment 577
How to Make FDI 578
Why Companies Collaborate 579
Alliance Types 579
General Motives for Collaborative Arrangements 580
- - International Motives for Collaborative Arrangements 582
Types of Collaborative Arrangements 583
Some Considerations in Collaborative Arrangements 583
| Point j j f l j m ^ j ^ f f l Should Countries Limit Foreign Control of Key Industries? 584
Licensing 586
Franchising 587
Management Contracts 588
Turnkey Operations 589
JointVentures 590
Equity Alliances 591
Problems w i t h Collaborative Arrangements 592
Relative Importance 592
Divergent Objectives 593
Questions of Control 593
Comparative Contributions and Appropriations 594
, Culture Clashes 595
Managing Foreign Arrangements 595
Dynamics of Collaborative Arrangements 596
Finding Compatible Partners 597
Negotiating the Arrangement 598
Drawing Up the Contract 598
Assessing Performance 599
Looking to the Future: Why Innovation Breeds Collaboration 599
C A S E : Getting Airline Alliances Off the Ground 600
Summary 603
Key Terms 604
Endnotes 605

15 The Organization of International Business 608

C A S E : Organizing "People.Values, and Environment"
at Johnson & Johnson 609
Introduction 614
16 Contents

Change: The Critical Factor 614

Organizing Today's International Business 617
Organization Structure 617
Vertical Differentiation: Centralization Versus Decentralization 618
Horizontal Differentiation: The Design of the Formal Structure 620
Contemporary Structures 624 •a*
| Point IgEfl^^^Sffl Hierarchies or Hyperarchies? 628
Coordination and Control Systems 629
Coordination Systems 629
Control Systems 632
Organization Culture 635
The Importance of Culture 635
Challenges and Pitfalls 637
Organization Culture and Strategy 638
Looking to the Future: The Role and Rise of Corporate Universities 639
C A S E : Infosys: The Search for the Best and the Brightest 640
Summary 644
Key Terms 645
Endnotes 645

• PART SIX MANAGING INTERNATIONAL OPERATIONS 648

16 Marketing Globally 648

C A S E : Avon Calls on Foreign Markets 649
Introduction 654
Marketing Strategies 655
Marketing Orientations 655
Segmenting and Targeting Markets 657
Product Policies 659
Why Firms Alter Products 659
[]PoIrTtJ3BffiHEffl Should Home Governments Regulate Their Companies' Marketing
in Developing Countries? 660
Alteration Costs 663
The Product Line: Extent and Mix 664
Pricing Strategies 664
Potential Obstacles in International Pricing 664
Promotion Strategies 669
The Push-Pull Mix 669
Some Problems in International Promotion 670
Branding Strategies 672
Worldwide Brand Versus Local Brands 673
 Contents 17

Distribution Strategies 674

Does Geography Matter? Is Necessity the Mother of Invention? 675
Deciding Whether to Standardize 676
Choosing Distributors and Channels 676
The Challenge of Getting Distribution 677
Hidden Costs in Distribution 678
E-Commerce and the Internet 679
Managing the Marketing Mix 680
Gap Analysis 680
Looking to the Future: Marketing to the "Haves," the "Have-Nots"
(and the "Have-Somes") 682
CASE: Tommy Hilfiger: Clothes Make the Man and Vice Versa 683
Summary 686
Key Terms 687
Endnotes 687

17 Global Manufacturing and Supply Chain Management 690

C A S E : Samsonite's Global Supply Chain 691
Introduction 694
What Is Supply Chain Management? 695
Global Manufacturing Strategies \ 696
Four Key Factors in Manufacturing Strategy 696
Information Technology and Global Supply Chain Management 700
Information Technology 701
Quality 703
Zero Defects Versus Acceptable Quality Level 703
The Deming Approach to Quality Management 704
Total Quality Management (TQM) 704
Six Sigma 705
Quality Standards 705
Supplier Networks 707
Global Sourcing 708
Major Sourcing Configurations 709
The Make or Buy Decision 710
| Point | g f f l f l 3 ^ f f l Should Firms Outsource Innovation? 710
Supplier Relations 712
The Purchasing Function 713
Inventory Management 715
Lean Manufacturing and Just-in-Time Systems 715
Foreign Trade Zones 716
Transportation Networks 717
18 Contents

Looking to the Future: Uncertainty and the Global Supply Chain 717
C A S E : Ventus and Business Process Outsourcing 718
Summary 724
Key Terms 724
Endnotes 725

18 International Accounting Issues 728

C A S E : Parmalat: Europe's Enron 729
Introduction 733
The Crossroads of Accounting and Finance 733
Accounting for International Differences 736
Accounting Objectives 737
Factors in International Accounting Practices 738
Cultural Differences in Accounting 739
Classifying Accounting Systems 741
International Standards and Global Convergence 744
| Point |«piffiffJHBfffil Should U.S. Companies Be Allowed to Close the GAAP? 748
Transactions in Foreign Currencies 749
Recording Transactions 749
Translating Foreign-Currency Financial Statements 750
Translation Methods 750
Management Accounting Issues 753
Performance Evaluation and Control 753
Transfer Pricing and Performance Evaluation 756
The Balanced Scorecard 757
Corporate Governance 758
External Control Mechanisms:The Legal System 759
Internal Control Mechanisms 759
Looking to the Future: Will IFRS Become the Global Accounting
Standard? 760
C A S E : Ericsson: The Challenges of Listing on Global Capital Markets
and the Move to Adopt International Financial Reporting Standards 761
Summary 766
Key Terms 767
Endnotes 767

19 The Multinational Finance Function 770

C A S E : GPS: In the Market for an Effective Hedging Strategy? 771
Introduction 774
The Finance Function 774
The Role of the CFO 775
 Contents 19

Capital Structure 776

Leveraging Debt Financing 776
Factors Affecting the Choice of Capital Structure 776
Debt Markets as Means of Expansion 778
Global Capital Markets 778
Eurocurrencies and the Eurocurrency Market 778
International Bonds 780
Equity Securities and the Euroequity Market 781
The Size of Global Stock Markets 782
Offshore Financing and Offshore Financial Centers 784
What's an OFC? 784
Counterpoint Should Offshore Financial Centers and Aggressive Tax
Practices Be Eliminated? 786
Capital Budgeting in a Global Context 787
Methods of Capital Budgeting 788
Complications in Capital Budgeting 788
Internal Sources of Funds 789
Global Cash Management 790
Foreign-Exchange Risk Management 792
Types of Exposure 792
Exposure-Management Stratgey, 794
Taxation of Foreign-Source Income 797
International Tax Practices 798
Taxing Branches and Subsidiaries 800
Transfer Prices 803
Double Taxation and Tax Credit 803
Looking to the Future: Technology and Cash Flows 804
C A S E : Dell Mercosur: Getting Real in Brazil 805
Summary 809
Key Terms 810
Endnotes 810

20 Human Resource Management 812

CASE: Go Or No Go: Your Career? 813
Introduction 817
What Is HRM? 817
The Strategic Function of International HRM 818
Strategizing HRM 819
Developing Staffing Policies 821
Managing Expatriates 826
Selecting Expatriates 827
Expatriate Failure 828
Training Expatriates 829
20 Contents

Learning a Foreign Language—Still Useful? 83 I

Compensating Expatriates 832
Repatriating Expatriates 836
International Labor Relations 839
How Labor Looks at the MNE ~840
How Labor Responds to the MNE 842
The Labor Struggle: Barriers to International Unanimity 843
Looking to the Future: Which Countries Will Have the Jobs
of the Future? 845
Trends in MNE-Labor Relations 845
C A S E : Tel-Comm-Tek (TCT) 847
Summary 851
Key Terms 853
Endnotes 853
Glossary 857
Photo Credits 873
Company Index and Trademarks 875
Name Index 879
Subject Index 887