International Management Culture, Strategy, and Behavior

INTERNATIONAL MANAGEMENT: CULTURE, STRATEGY, AND BEHAVIOR, NINTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2015 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2012, 2009, and 2006. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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Library of Congress Cataloging-in-Publication Data

Luthans, Fred. International management : culture, strategy, and behavior / Fred Luthans, University

of Nebraska-Lincoln, Jonathan P. Doh, Villanova University.—Ninth edition. pages cm

ISBN-13: 978-0-07-786244-2 (alk. paper) ISBN-10: 0-07-786244-9 1. International business enterprises—Management. 2. International business

enterprises—Management—Case studies. I. Doh, Jonathan P. II. Title. HD62.4.H63 2014 658′.049—dc23

2013039863

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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iii

Dedicated in Memory of

Richard M. Hodgetts A Pioneer in International Management Education

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v

Preface

C hanges in the global business environment continue at a rapid and often unpredict-able pace. The global financial crisis and economic recession of 2008–2010 have given way to destabilizing political changes in many regions of the world, especially North Africa and the Middle East (see Chapter 2 opening article). In addition, rapid advances in social media have not only accelerated globalization but also provided a means for those who seek political and economic changes to organize and influence their leaders for more responsible governance (see Chapter 1 opening article). In addition, concerns about the exhaustion of finite resources and the need to pursue more sustainable growth have prompted governments, companies, and NGOs to consider alternate approaches to business and gov- ernance (see Chapter 3 opening article).

Some of these developments have challenged assumptions about globalization and economic integration, but they also underscore the inexorably interconnected nature of global economies. Although many countries and regions around the world are closely and inextricably linked, important differences in institutional and cultural environments persist, and some of these differences have become even starker in recent years. The challenges for international management reflect this dynamism and the increasing unpre- dictability of global economic and political events. Continued growth of the emerging markets is reshaping the global balance of economic power, even though differences exist between and among regions and countries. Although many emerging markets continued to experience growth during a period when developed countries’ economies stagnated or declined, some developed economies bucked this trend and some developing countries did not share in what was otherwise a dynamic period for the emerging world.

The global political and security environment remains unpredictable and volatile, with ongoing conflicts in the Middle East and Africa and continuing tensions in Iran, North Korea, Iraq, and Afghanistan. On the economic front, although little progress was made in the efforts to conclude a global multilateral agreement under the World Trade Organization (WTO), regional and bilateral agreements have proliferated, including the Trans-Pacific Partnership (TPP), a proposed free-trade agreement that would involve more than a dozen countries in the Americas and Asia. In addition, the tragic fire, building collapse, and other industrial accidents in India, Bangladesh, and China have renewed calls for corporations to do more to protect workers and for governments to get tougher with companies in terms of oversight and accountability. (See Chapter 3 for additional discussion.)

As noted above, the advent of social networking has transformed the way citizens interact, how businesses market, promote, and distribute their products globally, and how civil society expresses its concerns that governments provide greater freedoms and accountability. Concurrently, companies, individuals, and even students can now engage in broad “mass” collaboration through digital, online technology for the development of new and innovative systems, products, and ideas. Both social networking and mass col- laboration bring new power and influence to individuals across borders and transform the nature of their relationships with global organizations. Although globalization and tech- nology continue to link nations, businesses, and individuals, these connections also high- light the importance of understanding different cultures, national systems, and corporate management practices around the world. The world is now interconnected geographically, but also electronically and psychologically; as such, nearly all businesses have been touched in some way by globalization. Yet, as cultural, political, and economic differences persist, astute international managers must be in a position to adapt and adjust to the vagaries of different contexts and environments.

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vi Preface

In this new ninth edition of International Management , we have retained the strong and effective foundations gained from research and practice over the past decades while incorporating the important latest research and contemporary insights that have changed the context and environment for international management. Several trends have emerged that pose both challenges and opportunities for international managers. First, emerging markets continue to rise in importance, with dynamic growth and development in many emerging regions and countries. This includes the emergence of multinationals from emerging markets that are becoming globally competitive. Second, pressure for greater social and environmental responsibility among multinational organi- zations has increased, especially in light of rising pollution and the exposure of poor working conditions in many factories around the world. Third, the importance of cultural differences continues to be an omnipresent reality for international managers. And social media and other forms of electronic connectivity continue to facilitate international busi- ness of all sorts. Although we have extensive new, evidence-based material in this edition, we con- tinue to strive to make the book even more user-friendly and applicable to practice. We continue to take a balanced approach in the ninth edition of International Management: Culture, Stra t egy, and Behavior . Whereas other texts stress culture, strategy, or behavior, our emphasis on all three critical dimensions—and the interactions among them—has been a primary reason why the previous editions have been the market-leading international management text. Specifically, this edition has the following chapter distribution: environ- ment (three chapters), culture (four chapters), strategy (four chapters), and organizational behavior/human resource management (three chapters). Because the context of interna- tional management changes rapidly, all the chapters have been updated and improved. New real-world examples and research results are integrated throughout the book, accentuating the experiential relevance of the straightforward content. As always, we emphasize a bal- ance of research and application. For the new ninth edition we have incorporated important new content in the areas of sustainability and sustainable management practices, the emergence and role of social media as a means of transacting business around the world, the rise of emerging market multinationals and the challenges they pose for developed country MNCs, and other important developments in the international management field. Many of these topics— such as social media—are integrated throughout the book, as they touch on—and influence—many aspects of international management. We have incorporated the latest research and practical insights on pressure for MNCs to adopt more sustainable practices, and the strategies many companies are using to differentiate their products through such “green” management practices. We have updated discussion of a range of contemporary topics, including continued exploration of the role of the comprehensive GLOBE study on cross-cultural leadership. A continuing and relevant end-of-chapter feature in this edition is the “Internet Exercise.” The purpose of each exercise is to encourage students to use the Internet to find information from the websites of prominent MNCs to answer relevant questions about the chapter topic. An end-of-book feature is a series of Skill-Building and Experi- ential Exercises for aspiring international managers. These in-class exercises represent the various parts of the text (culture, strategy, and behavior) and provide hands-on experience. We have extended from the eighth edition of International Management the chapter- opening discussions called “The World of International Management” (WIM) based on very recent, relevant news stories to grab readers’ interest and attention. Many of these opening articles are new to this edition and all have been updated. These timely opening discussions transition the reader into the chapter topic. At the end of each chapter, there is a pedagogical feature that recapitulates the chapter’s subject matter: “The World of International Management—Revisited.” Here we pose several discussion questions based on the topic of the opening feature in light of the student’s entire reading of the chapter. Answering these questions requires readers to reconsider and to draw from the chapter material. Suggested answers to these “WIM—Revisited” discussion questions appear in

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Preface vii

the completely updated Instructor’s Manual, where we also provide some multiple-choice and true-false questions that draw directly from the chapters’ World of International Management topic matter for instructors who want to include this material in their tests. The use and application of cases is further enhanced in this edition. All cases have been updated and several new ones have been added. The short within-chapter country case illustrations—“In the International Spotlight”—can be read and discussed in class. These have all been revised and two have been added—Turkey and Indonesia. The revised or newly added “Integrative Cases” positioned at the end of each main part of the text were created exclusively for this edition and provide opportunities for reading and anal- ysis outside of class. Review questions provided for each case are intended to facilitate lively and productive written analysis or in-class discussion. Our “Brief Integrative Cases” typically explore a specific situation or challenge facing an individual or team. Our lon- ger and more detailed “In-Depth Integrative Cases” provide a broader discussion of the challenges facing a company. These two formats allow maximum flexibility so that instructors can use the cases in a tailored and customized fashion. Accompanying many of the in-depth cases are short exercises that can be used in class to reinforce both the substantive topic and students’ skills in negotiation, presentation, and analysis. The cases have been extensively updated and several are new to this edition. Cases concerning the global AIDS epidemic, Dansko, Russell Athletics/Fruit of the Loom, Euro Disneyland and Disney Asia, Google in China, IKEA, HSBC, Nike, Walmart, Tata, AirAsia, Sony, Danone, Chiquita, Coca-Cola, and others are unique to this book and specific to this edition. Of course, instructors also have access to Create (www.mcgraw-hillcreate.com), McGraw-Hill’s extensive content database, which includes thousands of cases from major sources such as Harvard Business School, Ivey, Darden, and NACRA case databases. Along with the new or updated “International Management in Action” boxed appli- cation examples within each chapter and other pedagogical features at the end of each chapter (i.e., “Key Terms,” “Review and Discussion Questions,” “The World of Interna- tional Management—Revisited,” and “Internet Exercise”), the end-of-part brief and in- depth cases and the end-of-book skill-building exercises and simulations on the Online Learning Center complete the package. To help instructors teach international management, this text is accompanied by a revised and expanded Instructor’s Resource Manual, Test Bank, and PowerPoint Slides, all of which are available password protected on the Online Learning Center at www. mhhe.com/luthans9e. Another important innovation is carried over and updated from the 8th edition: we have provided instructors with a guide to online publicly available videos, many available on YouTube, that link directly to chapter themes. These short clips give instructors an opportunity to use online visual media in conjunction with traditional lecture, discussion, and PowerPoint presentations. Our guide includes the name, short description, and link for the videos, which we will keep updated on the book website. International Management is generally recognized to be the first “mainstream” text of its kind. Strategy casebooks and specialized books in organizational behavior, human resources, and, of course, international business, finance, marketing, and economics pre- ceded it, but there were no international management texts before this one, and it remains the market leader. We have had sustainability because of the effort and care put into the revisions. We hope you agree that this ninth edition continues the tradition and remains the “world-class” text for the study of international management.

Acknowledgments

We would like to acknowledge those who have helped to make this book a reality. We will never forget the legacy of international management education in general and for this text in particular provided by our departed colleague Richard M. Hodgetts. Special thanks also go to our growing number of colleagues throughout the world who have given us many ideas and inspired us to think internationally. Closer to home, Fred Luthans would

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viii Preface

like to give special recognition to two international management scholars: Henry H. Albers, former Chair of the Management Department at the University of Nebraska and former Dean at the University of Petroleum and Minerals, Saudi Arabia, to whom previ- ous editions of this book were dedicated; and Sang M. Lee, former Chair of the Manage- ment Department at Nebraska, founding and current President of the Pan Pacific Business Association, and close colleague on many ventures around the world over the past 30  years. Jonathan Doh would like to thank the Villanova School of Business and its leadership, especially Dean Pat Maggitti, Vice Dean Daniel Wright, and Herb Rammrath who generously endowed the Chair in International Business Jonathan now holds. Also, for this new ninth edition we would like to thank Ben Littell, who did much of the research and drafting of the chapter opening World of International Management features and provided extensive research assistance for other revisions to the book. In addition, we would like to acknowledge the help that we received from the many reviewers from around the globe, whose feedback guided us in preparing the ninth edition of the text. These include:

Thomas M. Abbott, Post University

David Elloy, Gonzaga University

James Gran, Buena Vista University

Julie Huang, Rio Hondo College

Jae C. Jung, University of Missouri– Kansas City

Emeric Solymossy, Western Illinois University .

Our thanks, too, to the reviewers of previous editions of the text:

Yohannan T. Abraham, Southwest Missouri State University Janet S. Adams, Kennesaw State University Irfan Ahmed, Sam Houston State University Chi Anyansi-Archibong, North Carolina A&T State University Kibok Baik, James Madison University R. B. Barton, Murray State University Lawrence A. Beer, Arizona State University Koren Borges, University of North Florida Tope A. Bello, East Carolina University Mauritz Blonder, Hofstra University Gunther S. Boroschek, University of Massachusetts–Boston Charles M. Byles, Virginia Commonwealth University Constance Campbell, Georgia Southern University Scott Kenneth Campbell, Georgia College & State University M. Suzanne Clinton, University of Central Oklahoma Helen Deresky, SUNY Plattsburgh Dr. Dharma deSilva, Center for Interna- tional Business Advancement (CIBA) Val Finnigan, Leeds Metropolitan University David M. Flynn, Hofstra University Jan Flynn, Georgia College and State University

Joseph Richard Goldman, University of Minnesota

Robert T. Green, University of Texas at Austin

Annette Gunter, University of Central Oklahoma

Jerry Haar, Florida International University–Miami

Jean M. Hanebury, Salisbury State University

Richard C. Hoffman, Salisbury State University

Johan Hough, University of South Africa

Steve Jenner, California State University–Dominguez Hills

James P. Johnson, Rollins College

Marjorie Jones, Nova Southeastern University

Ann Langlois, Palm Beach Atlantic University

Curtis Matherne III, East Tennessee State University

Alan N. Miller, University of Nevada, Las Vegas

Mohd Nazari Ismail, University of Malaya

Robert Kuhne, Hofstra University

Christine Lentz, Rider University

Ben Lever III, College of Charleston

Robert C. Maddox, University of Tennessee

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Preface ix

Douglas M. McCabe, Georgetown University

Jeanne M. McNett, Assumption College

Lauryn Migenes, University of Central Florida

Ray Montagno, Ball State University

Rebecca J. Morris, University of Nebraska–Omaha

Ernst W. Neuland, University of Pretoria

William Newburry, Rutgers Business School

Yongsun Paik, Loyola Marymount University

Valerie S. Perotti, Rochester Institute of Technology

Richard B. Peterson, University of Washington

Suzanne J. Peterson, University of Nebraska–Lincoln

Joseph A. Petrick, Wright State University

Juan F. Ramirez, Nova Southeastern University

Richard David Ramsey, Southeastern Louisiana University

Mansour Sharif-Zadeh, California State Polytechnic University–Pomona

Owen Sevier, University of Central Oklahoma

Jane H. Standford, Texas A&M University– Kingsville

Dale V. Steinmann, San Francisco State University

Randall Stross, San Jose State University

George Sutija, Florida International University

Deanna Teel, Houston Community College

David Turnipseed, University of South Alabama–Mobile

Katheryn H. Ward, Chicago State University

Li Weixing, University of Nebraska– Lincoln

Aimee Wheaton, Regis College

Timothy Wilkinson, University of Akron

Marion M. White, James Madison University

George Yacus, Old Dominion University

Corinne Young, University of Tampa

Zhe Zhang, University of Central Florida–Orlando

Anatoly Zhuplev, Loyola Marymount University

Finally, thanks to the team at McGraw-Hill who worked on this book: Paul Ducham, Managing Director; Anke Weekes, Senior Brand Manager; Kelly Delso, Senior Devel- opmental Editor; Lori Bradshaw, Managing Developmental Editor; Michael Gedatus, Marketing Manager; and Jessica Portz, Project Manager. Last but by no means least, we greatly appreciate the love and support provided by our families.

Fred Luthans and Jonathan P. Doh

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New and Enhanced Themes

• Thoroughly revised and updated chapters to reflect the most critical issues for international managers.

• Greater attention to and focus on global sustainability and sus tainable management practices and their impact on international management.

• New or revised opening World of International Manage- ment features written by the authors on current international management challenges; these mini-cases were prepared expressly for this edition and are not available elsewhere.

• Discussions of the impact of the global economic recession on international management in the opening chapter and throughout the book, and the aftermath and ongoing chal- lenges associated with the “Arab Spring” (in Chapter 2).

• New and updated discussions of project GLOBE and its importance for international management.

• Greater emphasis on emerging markets and developing countries, and the increasing influence of emerging markets multinationals on global competition.

Thoroughly Revised and Updated Chapter Content

• New or revised opening WIM discussions on topics includ- ing the global influences of social media, the role of social networking in the Arab Spring, sustainability as a global competitive advantage, Apple vs. Samsung, Amazon vs. Alibaba, global trends in the automotive and pharmaceuti- cal industries, managing global teams, offshoring and cul- ture, and many other subjects. These features were written expressly for this edition and are not available elsewhere.

• Updated and strengthened emphasis on ethics, social responsibility, and sustainability.

• Extensive coverage of Project GLOBE, its relationship to other cultural frameworks, and its application to inter- national management practice (Chapters 4, 13).

• Revised or new “In the International Spotlight” inserts which profile the key economic and political issues rel- evant to managers in specific countries, including new spotlights on Turkey and Indonesia.

• Greater coverage of the challenges and opportunities for international strategy targeted to the developing “base of the pyramid” economies (Chapter 8, and Tata cases).

LUTHANS Doh

x

DOH

The ninth

edition of

International

Management:

Culture, Strategy, and

Behavior is still

setting the standard.

Current authors Fred

Luthans and

Jonathan P. Doh have

taken care to retain

the effective

foundation gained

from research and

practice over the

past decades. At the

same time, they have

fully incorporated

important new and

emerging

developments that

have changed what

international managers

are currently facing and

likely to face in the

coming years.

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Thoroughly Updated and/or New Cases, Inserts, and Exercises

• New and/or updated country spotlights, “International Management in Action” features.

• Thoroughly updated cases (not available elsewhere): Pharmaceutical Companies, Intellectual Property, and the Global AIDS Epidemic ; Advertising or Free Speech ? The Case of Nike and Human Rights ; Beyond Tokyo: Disney’s Expansion In Asia ; HSBC in China ; Coca Cola in India ; Wa l mart’s Global Strategies ; Can Sony Regain its Innovative Edge? The OLED Project; Tata “ Nano ”: The People’s Car ; The A s cendance of AirAsia : Building a Successful Budget Airline; and Chiquita’s Global Turnaround .

• Brand new end-of-part cases developed exclusively for this edition (not available elsewhere): Dansko puts its Right Foot Forward , Google in China: Protecting Property and Rights; IKEA’s Global Renovations .

Totally Revised Instructor and Student Support

The following instructor and student support materials can be found on the Online Learning Center (OLC) for the Ninth Edition. You can access the OLC at www.mhhe.com/luthans9 e.

• The Instructor’s Manual offers a summary of Learning Objectives and teaching outline with lecture notes and teaching tips, as well as suggested answers to questions found throughout and at the conclu- sion of each chapter. Suggested answers are also provided for all the cases found in the book.

• The TestBank is offered in both Word and EZ Test formats and offers over 1,000 test items consisting of true/false, multiple choice, and essay. Answers are provided for all testbank questions.

• PowerPoint Presentations consisting of 30 slides per chapter give instructors talking points, feature exhibits from the text, and are summarized with a review and discussion slide.

• Student Quizzes are provided for each chapter and give students feedback to help them understand where additional study is required.

• A guide to videos available online, with title, short description, and url. • Create: Instructors can now tailor their teaching resources to match the

way they teach! With McGraw-Hill Create, www.mcgrawhillcreate. com , instructors can easily rearrange chapters, combine material from other content sources, and quickly upload and integrate their own con- tent, like course syllabi or teaching notes. Find the right content in Create by searching through thousands of leading McGraw-Hill text- books. Arrange the material to fit your teaching style. Order a Create book and receive a complimentary print review copy in 3–5 business

xi

CONTINUES TO SET THE STANDARD. . .

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xii Continues to Set the Standard. . .

days or a complimentary electronic review copy (echo) via e-mail within one hour. Go to www.mcgrawhillcreate.com today and register.

McGraw-Hill Campus™

McGraw-Hill Campus is a new one-stop teaching and learning experience available to users of any learning management system. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award-winning McGraw-Hill Connect platform, from directly within the institution’s website. With McGraw-Hill Campus, faculty receive instant access to teaching materials (e.g., eText- books, test banks, PowerPoint slides, learning objectives, etc.), allowing them to browse, search, and use any instructor ancillary content in our vast library at no additional cost to instructor or students. In addition, students enjoy SSO access to a variety of free content and subscription-based products (e.g., McGraw-Hill Connect ). With McGraw-Hill Campus enabled, faculty and students will never need to create another account to access McGraw-Hill products and services. Learn more at www.mhcampus.com.

Assurance of Learning Ready

Many educational institutions today focus on the notion of assurance of learning, an important element of some accreditation standards. International Business is designed specifically to support instructors’ assurance of learning initiatives with a simple yet powerful solution. Each test bank question for International Business maps to a specific chapter learning objective listed in the text. Instructors can use our test bank software, EZ Test and EZ Test Online, to easily query for learning objectives that directly relate to the learning outcomes for their course. Instructors can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

AACSB Tagging

McGraw-Hill Education is a proud corporate member of AACSB International. Under- standing the importance and value of AACSB accreditation, International Business rec- ognizes the curricula guidelines detailed in the AACSB standards for business accredita- tion by connecting selected questions in the text and the test bank to the six general knowledge and skill guidelines in the AACSB standards. The statements contained in International Business are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While the International Business teaching package makes no claim of any specific AACSB qualification or evaluation, we have within International Business labeled selected questions according to the six general knowledge and skills areas.

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xiii

About the Authors

F RED LUTHANS is University and the George Holmes Distinguished Professor of Man- agement at the University of Nebraska–Lincoln. He is also Chair of the Master Research Council for HUMANeX, Inc. He received his BA, MBA, and PhD from the University of Iowa, where he received the Distinguished Alumni Award in 2002. While serving as an officer in the U.S. Army from 1965–1967, he taught leadership at the U.S. Military Acad- emy at West Point. He has been a visiting scholar at a number of colleges and universities and has lectured in most European and Pacific Rim countries. He has taught international management as a visiting faculty member at the universities of Bangkok, Hawaii, Henley in England, Norwegian Management School, Monash in Australia, Macau, Chemnitz in the former East Germany, and Tirana in Albania. A past president of the Academy of Management, in 1997 he received the Academy’s Distinguished Educator Award. In 2000 he became an inaugural member of the Academy’s Hall of Fame for being one of the “Top Five” all-time published authors in the prestigious Academy journals. Currently, he is co- editor-in-chief of the Journal of World Business, editor of Organizational Dynamics , co- editor of Journal of Leadership and Organization Studies, and the author of numerous books. His book Organizational Behavior (Irwin/McGraw-Hill) is now in its 12th edition and the groundbreaking book Psychological Capital (Oxford University Press) with Carolyn Youssef and Bruce Avolio will be out in its second edition in 2014. He is one of very few management scholars who is a Fellow of the Academy of Management, the Decision Sciences Institute, and the Pan Pacific Business Association, and he has been a member of the Executive Committee for the Pan Pacific Conference since its beginning 30 years ago. This committee helps to organize the annual meeting held in Pacific Rim countries. He has been involved with some of the first empirical studies on motivation and behavioral management techniques and the analysis of managerial activities in Russia; these articles have been published in the Academy of Management Journal , Journal of International Business Studies , Journal of World Business, and European Manag e ment Journal . Since the very beginning of the transition to market economies after the fall of communism in Eastern Europe, he has been actively involved in management education programs spon- sored by the U.S. Agency for International Development in Albania and Macedonia, and in U.S. Information Agency programs involving the Central Asian countries of Kazakhstan, Kyrgyzstan, and Tajikistan. For example, Professor Luthans’ recent international research involves his construct of positive psychological capital (PsyCap). He and colleagues have published their research demonstrating the impact of Chinese workers’ PsyCap on their performance in the International Journal of Human R e source Management and Manage- ment and Organization Review. He is applying his positive approach to positive organiza- tional behavior (POB), PsyCap, and authentic leadership to effective global management and has recently been the keynote at programs in China (several times), Malaysia, Korea, Indonesia, England, Norway, Finland, South Africa, and soon Italy.

JONATHAN P. DOH is the Herbert G. Rammrath Chair in International Business, found- ing Director of the Center for Global Leadership, and Professor of Management at the Villanova School of Business. Jonathan teaches, does research, and serves as an executive instructor and consultant in the areas of international strategy and corporate responsibil- ity and serves as an occasional executive educator for the Aresty Institute of Executive Education at the Wharton Business School. Previously, he was on the faculty of American and Georgetown Universities and a senior trade official with the U.S. government. Jonathan is author or co-author of more than 75 refereed articles published in the top international

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xiv About the Authors

business and management journals, 30 chapters in scholarly edited volumes, and more than 75 conference papers. Recent articles have appeared in journals such as Academy of Management Review, California Management Review, Journal of International Busi- ness Studies, Journal of World Business, Organization Science, Sloan Management Review, and Strategic Management Journal . He is co-editor and contributing author of Globalization and NGOs (Praeger, 2003) and Handbook on Responsible Leadership and Governance in Global Business (Elgar, 2005) and co-author of the previous edition of International Management: Culture, Strategy, and Behavior (8th ed., McGraw-Hill/Irwin, 2012), the best-selling international management text. His current research focus is on strategy for emerging markets, global corporate responsibility, and offshore outsourcing of services. His most recent scholarly books are Multinationals and Development (with Alan Rugman, Yale University Press, 2008), NGOs and Corporations: Conflict and Col- laboration (with Michael Yaziji, Cambridge University Press, 2009) and Aligning for Advantage: Competitive Strategy for the Social and Political Arenas (with Tom Lawton and Tazeeb Rajwani, Oxford University Press, 2014). He is co-Editor-in-Chief of MRN International Environment of Global Business (SSRN Journal), Senior Editor of Journal of World Business , Associate Editor of Business & Society , and Consulting Editor of Long Range Planning . Beginning in January of 2015 he will assume the position of Editor-in-Chief of Journal of World Business. Jonathan has also developed more than a dozen original cases and simulations published in books, journals, and case databases and used at many leading global universities. He has been a consultant or executive instructor for ABB, Anglo American, Bodycote, Bosch, China Minsheng Bank, Hana Financial, HSBC, Ingersoll Rand, Medtronic, Shanghai Municipal Government, Siam Cement, the World Economic Forum, and Deloitte Touche, where he served as senior external adviser to the Global Energy Resource Group. Jonathan is part of the Executive Committee of the Academy of Management Organizations and Natural Environment Division with increasing responsibilities culminating in the chair of the division in 2016. He was ranked among the top 15 most prolific international business scholars in the world for the period 2001–2009 (Lahiri and Kumar, 2012). He holds a PhD in strategic and international management from George Washington University.

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xv

Environmental Foundation

1 Globalization and International Linkages 2 2 The Political, Legal, and Technological Environment 36 3 Ethics, Social Responsibility, and Sustainability 62

Brief Integrative Case 1.1: Advertising or Free Speech? The Case of Nike and Human Rights 87 Brief Integrative Case 1.2: Dansko Puts Its Right Foot Forward 89 In-Depth Integrative Case 1.1: Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 92 In-Depth Integrative Case 1.2: Pharmaceutical Companies, Intellectual Property, and the Global AIDS Epidemic 97

The Role of Culture

4 The Meanings and Dimensions of Culture 110 5 Managing Across Cultures 146 6 Organizational Cultures and Diversity 174 7 Cross-Cultural Communication and Negotiation 200

Brief Integrative Case 2.1: Coca-Cola in India 238 Brief Integrative Case 2.2: Danone’s Wrangle with Wahaha 244 In-Depth Integrative Case 2.1a: Euro Disneyland 250 In-Depth Integrative Case 2.1b: Beyond Tokyo: Disney’s Expansion in Asia 260 In-Depth Integrative Case 2.2: Walmart’s Global Strategies 264

International Strategic Management

8 Strategy Formulation and Implementation 274 9 Entry Strategies and Organizational Structures 306 10 Managing Political Risk, Government Relations, and Alliances 342 11 Management Decision and Control 366

Brief Integrative Case 3.1: Google in China : Protecting Property and Rights 392

Brief Contents

Part One

Part Two

Part Three

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xvi Brief Contents

Brief Integrative Case 3.2: Can Sony Regain Its Innovative Edge? The OLED Project 397 In-Depth Integrative Case 3.1: Tata “ Nano ”: The People’s Car 402 In-Depth Integrative Case 3.2: The Ascendance of AirAsia : Building a Successful Budget Airline in Asia 411

Organizational Behavior and Human Resource Management

12 Motivation Across Cultures 422 13 Leadership Across Cultures 454 14 Human Resource Selection and Development Across Cultures 492

Brief Integrative Case 4.1: IKEA’s Global Renovations 537 In-Depth Integrative Case 4.1: HSBC in China 544 In-Depth Integrative Case 4.2: Chiquita’s Global Turnaround 560

Skill-Building and Experiential Exercises

References 587 Endnotes 591 Glossary 631 Indexes 637

Part Four

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xvii

Environmental Foundation

1 Globalization and International Linkages 2 The World of International Management: An Interconnected World 2 Introduction 4 Globalization and Internationalization 6

Globalization, Antiglobalization , and Global Pressures 6

Global and Regional Integration 9

The Shifting Balance of Economic Power in the Global Economy 12

Global Economic Systems 19 Market Economy 19

Comm and Economy 19

Mixed Economy 20

Economic Performance and Issues of Major Regions 20 Established Economies 20

Emerging Economies 22

Developing Economies on the Verge 26

The World of International Management—Revisited 30

Summary of Key Points 32

Key Terms 32

Review and Discussion Questions 32

Answers to the In-Chapter Quiz 33

Internet Exercise: Global Competition in Fast Food 33

In the International Spotlight: India 34

2 The Political, Legal, and Technological Environment 36

The World of International Management: Social Media and the Pace of Change 36

Political Environment 38 Ideologies 39

Political Systems 41

Legal and Regulatory Environment 44 Basic Principles of International Law 44

Examples of Legal and Regulatory Issues 45

Privatization 48

Regulation of Trade and Investment 50

Technological Environment and Global Shifts in Production 51

Trends in Technology, Communication, and Innovation 51

Table of Contents

Part One

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xviii Table of Contents

Biotechnology 53

E-Business 54

Telecommunications 55

Technological Advancements, Outsourcing, and Offshoring 56

The World of International Management—Revisited 58 Summary of Key Points 59 Key Terms 59 Review and Discussion Questions 59 Internet Exercise: Hitachi Goes Worldwide 60 In the International Spotlight: Vietnam 61

3 Ethics, Social Responsibility, and Sustainability 62

The World of International Management: Sustaining Sustainable Companies 62

Ethics and Social Responsibility 64

Ethics and Social Responsibility in International Management 65

Ethics Theories and Philosophy 65

Human Rights 66

Labor, Employment, and Business Practices 68

Environmental Protection and Development 69

Globalization and Ethical Obligations of MNCs 71

Reconciling Ethical Differences across Cultures 73

Corporate Social Responsibility and Sustainability 74

Corporate Governance 78

Corruption 79

International Assistance 81

The World of International Management—Revisited 83 Summary of Key Points 84 Key Terms 84 Review and Discussion Questions 84 Internet Exercise: Social Responsibility at Johnson & Johnson and HP 85 In the International Spotlight: Saudi Arabia 86 Brief Integrative Case 1.1: Advertising or Free Speech? The Case of Nike and Human Rights 87 Brief Integrative Case 1.2: Dansko Puts its Right Foot Forward 89 In-Depth Integrative Case 1.1: Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 92 In-Depth Integrative Case 1.2: Pharmaceutical Companies, Intellectual Property, and the Global AIDS Epidemic 97

The Role of Culture

4 The Meanings and Dimensions of Culture 110

The World of International Management: The Cultural Roots of Toyota’s Quality Crisis 110

Part Two

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The Nature of Culture 112

Cultural Diversity 113

Values in Culture 117 Value Differences and Similarities across Cultures 117

Values in Transition 118

Cultural Dimensions 120

Hofstede 120

Trompenaars 127

Integrating Culture and Management: The GLOBE Project 136 Culture and Management 137

GLOBE’s Cultural Dimensions 138

GLOBE Country Analysis 138

The World of International Management—Revisited 141 Summary of Key Points 141 Key Terms 142 Review and Discussion Questions 142 Internet Exercise: Renault-Nissan in South Africa 143 In the International Spotlight: South Africa 144

5 Managing Across Cultures 146

The World of International Management: Apple v. Samsung: Comparing Corporate Culture 146

The Strategy for Managing across Cultures 148 Strategic Predispositions 149

Meeting the Challenge 150

Cross-Cultural Differences and Similarities 153 Parochialism and Simplification 153

Similarities across Cultures 156

Many Differences across Cultures 156

Cultural Differences in Selected Countries and Regions 160 Doing Business in China 161

Doing Business in Russia 163

Doing Business in India 165

Doing Business in France 166

Doing Business in Brazil 167

Doing Business in Arab Countries 168

The World of International Management—Revisited 170 Summary of Key Points 171 Key Terms 171 Review and Discussion Questions 171 Internet Exercise: Haier’s Approach 171 In the International Spotlight: Mexico 172

6 Organizational Cultures and Diversity 174

The World of International Management: Managing Culture and Diversity in Global Teams 174

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The Nature of Organizational Culture 176 Definition and Characteristics 177

Interaction between National and Organizational Cultures 178

Organizational Cultures in MNCs 182 Family Culture 184

Eiffel Tower Culture 184

Guided Missile Culture 185

Incubator Culture 186

Managing Multiculturalism and Diversity 188 Phases of Multicultural Development 188

Types of Multiculturalism 190

Potential Problems Associated with Diversity 192

Advantages of Diversity 193

Building Multicultural Team Effectiveness 194

The World of International Management—Revisited 196 Summary of Key Points 196 Key Terms 197 Review and Discussion Questions 197 Internet Exercise: Lenovo’s International Focus 197 In the International Spotlight: Japan 199

7 Cross-Cultural Communication and Negotiation 200

The World of International Management: Offshoring Culture and Communication 200 The Overall Communication Process 203

Verbal Communication Styles 203

Interpretation of Communications 206

Communication Flows 207 Downward Communication 207

Upward Communication 209

Communication Barriers 210

Language Barriers 210

Perceptual Barriers 213 The Impact of Culture 215

Nonverbal Communication 217

Achieving Communication Effectiveness 220 Improve Feedback Systems 220

Provide Language Training 220

Provide Cultural Training 221

Increase Flexibility and Cooperation 221

Managing Cross-Cultural Negotiations 223 Types of Negotiation 223

The Negotiation Process 224

Cultural Differences Affecting Negotiations 225

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Negotiation Tactics 228

Negotiating for Mutual Benefit 229

Bargaining Behaviors 231

The World of International Management—Revisited 234 Summary of Key Points 235 Key Terms 235 Review and Discussion Questions 236 Internet Exercise: Working Effectively at Toyota 236 In the International Spotlight: China 237 Brief Integrative Case 2.1: Coca-Cola in India 238 Brief Integrative Case 2.2: Danone’s Wrangle with Wahaha 244 In-Depth Integrative Case 2.1a: Euro Disneyland 250 In-Depth Integrative Case 2.1b: Beyond Tokyo: Disney’s Expansion in Asia 260 In-Depth Integrative Case 2.2: Walmart’s Global Strategies 264

International Strategic Management

8 Strategy Formulation and Implementation 274

The World of International Management: Big Pharma Goes Global 274 Strategic Management 277

The Growing Need for Strategic Management 278

Benefits of Strategic Planning 279

Approaches to Formulating and Implementing Strategy 279

Global and Regional Strategies 283

The Basic Steps in Formulating Strategy 286 Environmental Scanning 286

Internal Resource Analysis 288

Goal Setting for Strategy Formulation 288

Strategy Implementation 290 Location Considerations for Implementation 290

Combining Country and Firm-Specific Factors in International Strategy 292

The Role of the Functional Areas in Implementation 293

Specialized Strategies 295 Strategies for Emerging Markets 295

Entrepreneurial Strategy and New Ventures 301

The World of International Management—Revisited 302 Summary of Key Points 303 Key Terms 303 Review and Discussion Questions 303 Internet Exercise: Infosys’s Global Strategy 304 In the International Spotlight: Poland 305

Part Three

Table of Contents xxi

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9 Entry Strategies and Organizational Structures 306

The World of International Management: Volkswagen’s Comeback: Aligning Strategy and Structure 306 Entry Strategies and Ownership Structures 308

Export/Import 308

Wholly Owned Subsidiary 309

Mergers/Acquisitions 309

Alliances and Joint Ventures 314

Alliances, Joint Ventures, and M&A: The Case of the Automotive Industry 316

Licensing 317

Franchising 320

The Organization Challenge 320

Basic Organizational Structures 321 Initial Division Structure 321

International Division Structure 322

Global Structural Arrangements 324

Transnational Network Structures 328

Nontraditional Organizational Arrangements 330 Organizational Arrangements from Mergers, Acquisitions, Joint Ventures, and Alliances 330

The Emergence of the Network Organizational Forms 332 Organizing for Product Integration 332

Organizational Characteristics of MNCs 334 Formalization 334

Specialization 335

Centralization 336

Putting Organizational Characteristics in Perspective 336

The World of International Management—Revisited 338 Summary of Key Points 338 Key Terms 339 Review and Discussion Questions 339 Internet Exercise: Organizing for Effectiveness 339 In the International Spotlight: Australia 340

10 Managing Political Risk, Government Relations, and Alliances 342

The World of International Management: Shell’s Russian Roulette 342

The Nature and Analysis of Political Risk 344 Macro and Micro Analysis of Political Risk 345

Terrorism and Its Overseas Expansion 349

Analyzing the Expropriation Risk 349

Managing Political Risk and Government Relations 350 Developing a Comprehensive Framework or Quantitative Analysis 350

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Techniques for Responding to Political Risk 352

Relative Bargaining Power Analysis 352

Managing Alliances 357 The Alliance Challenge 357

The Role of Host Governments in Alliances 359

Examples of Challenges and Opportunities in Alliance Management 360

The World of International Management—Revisited 361 Summary of Key Points 362 Key Terms 362 Review and Discussion Questions 362 Internet Exercise: Nokia in China 363 In the International Spotlight: Brazil 364

11 Management Decision and Control 366

The World of International Management: Global Online Retail: Amazon v. Alibaba 366

Decision-Making Process and Challenges 368 Factors Affecting Decision-Making Authority 369

Cultural Differences and Comparative Examples of Decision Making 372

Total Quality Management Decisions 373

Decisions for Attacking the Competition 375

Decision and Control Linkages 376

The Controlling Process 377 Types of Control 378

Approaches to Control 380

Performance Evaluation as a Mechanism of Control 382 Financial Performance 382

Quality Performance 383

Personnel Performance 386

The World of International Management—Revisited 388 Summary of Key Points 389 Key Terms 389 Review and Discussion Questions 389 Internet Exercise: Looking at the Best 390 In the International Spotlight: Turkey 391 Brief Integrative Case 3.1: Google in China : Protecting Property and Rights 392 Brief Integrative Case 3.2: Can Sony Regain Its Innovative Edge? The OLED Project 397 In-Depth Integrative Case 3.1: Tata “ Nano ”: The People’s Car 402 In-Depth Integrative Case 3.2: The Ascendance of AirAsia : Building a Successful Budget Airline in Asia 411

Table of Contents xxiii

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Organizational Behavior and Human Resource Management

12 Motivation Across Cultures 422

The World of International Management: Motivating Employees in a Multicultural Context: Insights from the Emerging Markets 422

The Nature of Motivation 424 The Universalist Assumption 425

The Assumption of Content and Process 426

The Hierarchy-of-Needs Theory 427 The Maslow Theory 427

International Findings on Maslow’s Theory 427

The Two-Factor Theory of Motivation 431 The Herzberg Theory 431

International Findings on Herzberg’s Theory 433

Achievement Motivation Theory 437 The Background of Achievement Motivation Theory 437

International Findings on Achievement Motivation Theory 438

Select Process Theories 439 Equity Theory 439

Goal-Setting Theory 441

Expectancy Theory 441

Motivation Applied: Job Design, Work Centrality, and Rewards 442 Job Design 442

Sociotechnical Job Designs 443

Work Centrality 444

Incentives and Culture 448

The World of International Management—Revisited 450 Summary of Key Points 450 Key Terms 452 Review and Discussion Questions 452 Internet Exercise: Motivating Potential Employees 452 In the International Spotlight: Indonesia 453

13 Leadership Across Cultures 454

The World of International Management: Global Leadership Development: An Emerging Need 454

Foundation for Leadership 456 The Manager-Leader Paradigm 456

Philosophical Background: Theories X, Y, and Z 458

Leadership Behaviors and Styles 461

The Managerial Grid Performance: A Japanese Perspective 462

Leadership in the International Context 465

Part Four

xxiv Table of Contents

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Attitudes of European Managers toward Leadership Practices 465

Japanese Leadership Approaches 467

Differences between Japanese and U.S. Leadership Styles 468

Leadership in China 470

Leadership in the Middle East 471

Leadership Approaches in India 471

Leadership Approaches in Latin America 472

Recent Findings and Insights about Leadership 473 Transformational, Transactional, and Charismatic Leadership 473

Qualities for Successful Leaders 475

Culture Clusters and Leader Effectiveness 477

Leader Behavior, Leader Effectiveness, and Leading Teams 478

Cross-Cultural Leadership: Insights from the GLOBE Study 478

Positive Organizational Scholarship and Leadership 482

Authentic Leadership 482

Ethical, Responsible, and Servant Leadership 485

Entrepreneurial Leadership and Mindset 486

The World of International Management—Revisited 487 Summary of Key Points 487 Key Terms 488 Review and Discussion Questions 489 Internet Exercise: Taking a Closer Look 489 In the International Spotlight: Germany 490

14 Human Resource Selection and Development Across Cultures 492

The World of International Management: The Challenge of Talent Retention in India 492

The Importance of International Human Resources 495 Getting the Employee Perspective 495

Employees as Critical Resources 496

Investing in International Assignments 496

Economic Pressures 496

Sources of Human Resources 498 Home-Country Nationals 498

Host-Country Nationals 498

Third-Country Nationals 499

Subcontracting and Outsourcing 500

Selection Criteria for International Assignments 503 General Criteria 503

Adaptability to Cultural Change 504

Physical and Emotional Health 505

Age, Experience, and Education 505

Language Training 506

Motivation for a Foreign Assignment 506

Table of Contents xxv

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Spouses and Dependents or Work-Family Issues 506

Leadership Ability 507

Other Considerations 507

Economic Pressures and Trends in Expat Assignments 509

International Human Resource Selection Procedures 510 Testing and Interviewing Procedures 510

The Adjustment Process 510

Compensation 512 Common Elements of Compensation Packages 513

Tailoring the Package 515

Individual and Host-Country Viewpoints 516 Candidate Motivations 516

Host-Country Desires 517

Repatriation of Expatriates 518 Reasons for Returning 518

Readjustment Problems 518

Transition Strategies 519

Training in International Management 520 The Impact of Overall Management Philosophy on Training 522

The Impact of Different Learning Styles on Training and Development 523

Reasons for Training 524

Types of Training Programs 526 Standardized vs. Tailor-Made 526

Cultural Assimilators 529 Positive Organizational Behavior 530

Future Trends 531

The World of International Management—Revisited 531 Summary of Key Points 533 Key Terms 534 Review and Discussion Questions 534 Internet Exercise: Going International with Coke 535 In the International Spotlight: Russia 536 Brief Integrative Case 4.1: IKEA’s Global Renovations 537 In-Depth Integrative Case 4.1: HSBC in China 544 In-Depth Integrative Case 4.2: Chiquita’s Global Turnaround 560

Skill-Building and Experiential Exercises

Personal Skill-Building Exercises 569

1. The Culture Quiz 570 2. Using Gung Ho to Understand Cultural Differences 575

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3. “When in Bogotá . . .” 577 4. The International Cola Alliances 580 5. Whom to Hire? 584

In-Class Simulations (available on the Online Learning Center at www.mhhe.com/luthans9e) 1. “ Frankenfoods ” or Rice Bowl for the World: The U.S.–EU Dispute

over Trade in Genetically Modified Organisms 2. Cross-Cultural Conflicts in the Corning–Vitro Joint Venture

References 587

Endnotes 591

Glossary 631

Name and Organization Index 637

Subject Index 649

Table of Contents xxvii

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PART ONE ENVIRONMENTAL FOUNDATION

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2

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H A

PT ER

Chapter 1

GLOBALIZATION AND INTERNATIONAL LINKAGES Globalization is one of the most profound forces in our contemporary economic environment. And its practical impact on international management is substantial. In nearly every country, increasing numbers of large, medium, and even small corporations are going international, and a grow- ing percentage of company revenue is derived from overseas markets. This is even true for U.S.-based companies that historically have relied on the large domestic market. Yet, the reverberations of the financial crisis and global economic recession, and continued economic and political uncertain- ties in many world regions present challenges for govern- ments, corporations, and communities around the world, causing some to question the current system for regulating and overseeing international trade, investments, and global financial flows. Nonetheless, international management—the process of applying management concepts and techniques in a multinational environment—continues to retain importance. Although globalization and international linkages have been part of history for centuries (see the International Man- agement in Action box later in the chapter, “Tracing the Roots of Modern Globalization”), the principal focus of this opening chapter is to examine the process of globalization in the con- temporary world. The rapid integration of countries, advances in information technology, and the explosion in electronic communication have created a new, more integrated world and true global competition. Yet, the complexities of doing business in distinct markets persist. These developments both create and influence the opportunities, challenges, and prob- lems that managers in the international arena will face during the years ahead. Since the environment of international man- agement is all-encompassing, this chapter is mostly con- cerned with the economic dimensions, while the following two chapters are focused on the political, legal, and technological dimensions and ethical and social dimensions, respectively. The specific objectives of this chapter are:

1. ASSESS the implications of globalization for countries, industries, firms, and communities.

2. REVIEW the major trends in global and regional integration.

3. EXAMINE the changing balance of global economic power and trade and investment flows among countries.

4. ANALYZE the major economic systems and recent developments among countries that reflect those systems.

The World of International Management

An Interconnected World

May 18, 2012, marked one of the most highly-anticipated initial public offerings (IPOs) in history. Facebook, which had grown from a college dorm room to a 900-million-member social network in just eight years, was set to offer shares to the public for the first time. As May 18 approached, founder Mark Zuckerberg, wearing his characteristic “hoodie” sweatshirt, embarked on a roadshow to promote the company. Facebook programmers celebrated with all- night “hackathons,” and huge demand for the IPO prompted Facebook to release 25 percent more shares than initially planned. The IPO price was set to $38 per share, valuing Facebook at $104 billion. Many analysts predicted the price would soar as high as $60 on the first day alone. On the morning of May 18, Mark Zuckerberg ceremoniously rang a bell from Facebook’s California campus to celebrate the open- ing of the market at 9:30 A.M. As Wall Street’s clos- ing bell rang just a few hours later, however, the original optimism that started the day had all but faded. The shares were trading only $0.23 above the IPO price—and down $3.82 from the opening bell price. In the following weeks, Facebook’s stock con- tinued its downward trajectory. By mid-August, Face- book stock had decreased to nearly half its original offering price, leaving many to wonder, “Is social net- working really here to stay?”

Social Media Has Changed How We Connect Though some have second-guessed the longevity of online networks, one thing is certain: We currently live in a world interconnected by social media. Through online networking, the way we connect with others has drastically changed. Virtually anyone on the globe is only a few clicks away. In fact, the average number of links separating any two random people on Facebook is now only 4.74. 1 Facebook’s statistics underscore how

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The following year, in 2011, Secret deodorant sales began to drop. In an effort to shift its advertising toward teenage females, P&G created a Facebook marketing cam- paign that addressed the issue of bullying. Titled “Mean Stinks,” the campaign encouraged users to “like” the Facebook page and share stories and videos. This campaign increased activity on Secret’s Facebook page by 25 times, and sales spiked by 9 percent over a six-month period. 8 Through its use of Facebook, P&G has connected with millions of people around the world at little cost to increase sales and enhance its brand. Businesses have gained huge competitive edges by seizing the opportunities inherent in this new global society of online social networks.

Social Media Has Changed How We Do Business In his book Socialnomics: How Social Media Transforms the Way We Live and Do Business , Erik Qualman writes, “Social media platforms like Facebook, YouTube, and Twitter are fundamentally changing the way businesses and consumers behave, connecting hundreds of millions of people to each other via instant communication.” In essence, social media is reshaping how “consumers and companies communicate and interact with each other.” 9 Social media has changed how consumers search for products and services. Qualman gives the example of a woman who wants to take a vacation to South America, but she is not sure which country she wants to visit. In the past, she would have typed in “South American vacation” to Google, which would have brought her to travel websites such as TripAdvisor. After hours of research, she would have picked a destination. Then, after more research, she would pick a place to stay. With social media, this woman’s vaca- tion planning becomes streamlined. When she types “South American vacation” into a social network, she finds that five of her friends have taken a trip to South America in the last year. She notices that two of her friends highly recom- mended their vacations to Chile with GoAhead Tours. She clicks on a link to GoAhead Tours and books her vacation. In a social network, online word of mouth among friends carries great weight for consumers. With the data available from their friends about products and services, consumers know what they want without traditional marketing campaigns. 10 This trend means that marketers must be responsive to social networks. For example, an organization that gives travel tours has a group on Facebook. A marketer at that

social media has connected people across the globe:

• More than one billion people have active accounts on Facebook.

• More than 50 percent of these active users log onto Facebook in any given day. 2

• The average user has 190 friends. 3 • 3.2 billion comments and likes are uploaded

per day. • 18 percent of time spent online is dedicated to

social media. 4 • Over 80 percent of Facebook users are outside

the United States. • More than 70 translations are available on

Facebook. • Over 200 million people from the emerging

nations of Brazil, India, Indonesia, and Mexico are now active Facebook users. 5

Certainly, social networks are a part of many people’s lives. Yet, has the virtual world of social media networks made a permanent impact in the world of international business?

Social Media Has Changed Business Strategy Procter & Gamble (P&G), which owns several of the most recognizable brands on the planet, has strategically lever- aged social media to improve its long-term brand image. In 2010, P&G unveiled a Billion Acts of Green™ Facebook appli- cation which allows people to “make a pledge to lessen their environmental impact and promote environmentally beneficial habits to friends and family via social media chan- nels.” This social media application enables users to share their “act of green” pledges with their Facebook network. As of 2013, there were over one billion acts of green pledged. 6 P&G has also utilized social networking to increase revenue. After stagnant sales in 2010, P&G decided to refocus the advertising of Pepto-Bismol online. By moni- toring Facebook activity, P&G discovered that the most social media buzz regarding Pepto-Bismol was occurring on weekend mornings, likely after customers had overin- dulged the night before. To tap into this market, P&G cre- ated a Facebook initiative called “Celebrate Life.” Within one year, Pepto-Bismol gained 11 percent market share. 7

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4 Part 1 Environmental Foundation

Social networks have rapidly diffused from the United States and Europe to every region of the world, underscoring the inexorable nature of globalization. As individuals who share interests and preferences link up, they are afforded opportunities to connect in ways that were unimaginable just a decade ago. Facebook, Twitter, Linkedin, and others are all providing communication platforms for individuals and groups in disparate—and even isolated—locations around the world. Such networks also offer myriad business opportunities for companies large and small to identify and target discrete groups of consumers or other business partners. These networks are revolutionizing the nature of management—including international management—by allowing producers and consum- ers to interact directly without the usual intermediaries. Networks and the individuals who make them up are bringing populations of the world closer together and further accelerating the already rapid pace of globalization and integration. Though the disappointing Facebook IPO left many to initially question the value and longevity of social media, the pace of interconnectivity across the globe has not slowed. Social media has altered the way that we interact with each other, and businesses, like P&G, have gained real advantages by leveraging online networks. In this chapter, we examine the globalization phenomenon, the growing integration among countries and regions, the chang- ing balance of global economic power, and examples of different economic systems. As you read this chapter, keep in mind that although there are periodic setbacks, such as the recession of 2008–2009, globalization is moving at a rapid pace and that all nations, including the United States, as well as individual companies and their managers, are going to have to keep a close watch on the current environment if they hope to be competitive in the years ahead.

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■ Introduction

Management is the process of completing activities with and through other people. International management is the process of applying management concepts and techniques in a multinational environment and adapting management practices to dif- ferent economic, political, and cultural contexts. Many managers practice some level of international management in today’s increasingly diverse organizations. International management is distinct from other forms of management in that knowledge and insights about global issues and specific cultures are a requisite for success. Today more firms than ever are earning some of their revenue from international operations, even nascent organizations as illustrated in The World of International Management chapter opening.

organization could create a Facebook application that allows its group members to select “places I’d like to visit.” Let’s say that 25 percent of group members who use the applica- tion choose Victoria Falls as a place they would like to visit. The organization could develop a tour to Victoria Falls, and then could send a message to all of its Facebook group members to notify them about this new tour. In this way, a social network serves as an inexpensive, effective means of marketing directly to a business’s target audience.

Social Media Has Impacted Diplomacy In February 2010, Washington sent an unconventional dele- gation to Moscow, which included the creator of Twitter, the chief executive of eBay, and the actor Ashton Kutcher. One of the delegation’s goals was “to persuade Russia’s thriving online social networks to take up social causes like fighting

corruption or human trafficking,” according to Jared Cohen who serves on Secretary of State Hillary Clinton’s policy planning staff. In Russia, the average adult spends 10.4 hours a month on social networking sites, based on comScore market research. This act of diplomacy by Washington underscores how important social networks have become in our world today, a world in which Twitter has helped mobilize people to fight for freedom from corruption. Social media networks have accelerated technological integration among the nations of the world. People across the globe are now linked more closely than ever before. This social phenomenon has implications for businesses as corporations can now leverage networks such as Facebook to achieve greater success. Understanding the global impact of social media is key to understanding our global society today.

management Process of completing activities efficiently and effectively with and through other people.

international management Process of applying management concepts and techniques in a multinational environment and adapting management practices to different economic, political, and cultural contexts.

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Chapter 1 Globalization and International Linkages 5

Many of these companies are multinational corporations (MNCs). An MNC is a firm that has operations in more than one country, international sales, and a mix of nationalities among managers and owners. In recent years such well-known American MNCs as Avon Products, Chevron, Citicorp, Coca-Cola, Colgate Palmolive, Du Pont, ExxonMobil, Eastman Kodak, Gillette, Hewlett-Packard, McDonald’s, Motorola, Ralston Purina, Texaco, the 3M Company, and Xerox have all earned more annual revenue in the international arena than they have stateside. GE, one of the world’s largest companies, with 2012 revenue of more than $147 billion, earned 57 percent of its industrial revenue from overseas that year. Table 1–1 lists the world’s top nonfinancial companies ranked by foreign assets in 2012. In addition, companies from developing economies, such as India, Brazil, and China, are providing formidable competition to their North American, European, and Japanese counterparts. Names like Cemex, Embraer, Haier, Lenovo, LG Electronics, Ping An, Rambaxy, Telefonica, Santander, Reliance, Samsung, Grupo Televisa, Tata, and Infosys are becoming well-known global brands. Globalization and the rise of emerging markets’ MNCs have brought prosperity to many previously underdeveloped parts of the world, notably the emerging markets of Asia. Since 2009, sales of automobiles in China have exceeded those in the United States. Vehicle sales in China reached a record 19.3 million units in 2012, according to the China Association of Automobile Manufacturers, far ahead of the 14.5 million cars and light trucks sold in the U.S. 11 Moreover, a number of Chinese auto companies are becoming global players through their exporting, foreign investment, and international acquisitions, including the purchase by Geely of ailing Ford unit Volvo, Fiat’s investment in Chrysler, and Tata’s purchase of Jaguar-Land Rover. In a striking move, Cisco Systems, one of the world’s largest producers of network equipment, such as routers, announced it would establish a “Globalization Center East” in Bangalore, India. This center includes all the corporate and operational functions of U.S. headquarters, which have been mirrored in India. Under this plan, which includes an invest- ment of over $1.1 billion, one-fifth of Cisco’s senior management will move to Bangalore. 12,13 In September 2012, Procter and Gamble relocated their skin care, cosmetics, and personal care headquarters from Cincinnati to Singapore. According to P&G, Asia accounts for roughly half of the skin care market globally, and, with the growing pros- perity in Asia, is expected to continue to expand. 14 Similarly, citing the massive growth in the healthcare market in Asia, General Electric moved its X-ray business headquarters to China in 2011, and vice chairman John Rice relocated to Hong Kong. 15,16

Table 1–1 The World’s Top Nonfinancial TNCs, Ranked by Foreign Assets, 2012 (in millions of dollars)

Company Home Foreign Total Foreign Total Rank Name Economy Assets Assets Sales Sales

1 General Electric United States $338,157 $685,328 $75,640 $144,796

2 Royal Dutch/ Netherlands/ Shell plc United Kingdom 307,938 360,325 282,930 467,153

3 British Petroleum Company Plc United Kingdom 270,247 300,193 300,216 375,580

4 Toyota Motor Corporation Japan 233,193 376,841 170,486 265,770

5 Total SA France 214,507 227,107 180,440 234,287

6 Exxon Mobil Corporation United States 214,349 333,795 301,840 420,714

7 Vodafone Group Plc United Kingdom 199,003 217,031 62,065 70,224

8 GDF Suez France 175,057 271,607 78,555 124,711

9 Chevron Corporation United States 158,865 232,982 132,743 222,580

10 Volkswagen Group Germany 158,046 409,257 199,129 247,624

Source: UNCTAD World Investment Report 2013, Web Table 28.

MNC A firm having operations in more than one country, international sales, and a nationality mix among managers and owners.

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6 Part 1 Environmental Foundation

Table 1–2 The World’s Top Nonfinancial TNCs from Developing and Transitioning Economies, Ranked by Foreign Assets, 2011 (in millions of dollars)

Company Home Foreign Total Foreign Total Rank Name Economy Assets Assets Sales Sales

1 Hutchison Hong Kong/ Whampoa Limited China $77,291 $92,788 $23,477 $30,023

2 CITIC Group China 71,512 514,847 9,923 51,659

3 Hon Hai Precision Industries Taiwan 52,198 57,451 114,285 117,992

4 Vale SA Brazil 48,045 128,728 49,475 60,389

5 China Ocean Shipping (Group) Company China 40,435 52,230 19,454 29,579

6 Petronas – Petroliam Nasional BhD Malaysia 38,907 150,435 43,228 72,853

7 Cemex S.A.B. de C.V. Mexico 34,601 39,191 11,792 15,208

8 America Movil SAB De CV Mexico 32,694 67,590 38,315 53,553

9 VimpelCom Ltd Russian Federation 29,829 54,039 11,280 20,262

10 China National Offshore Oil Group China 29,802 112,887 19,786 75,518

Source: UNCTAD World Investment Report 2013, Web Table 29.

IBM, another American archetype, had about 433,000 employees globally in 2012, with only about 95,000 in the U.S. This is fewer than in India, which has about 130,000 IBM employees. In 2011, IBM drew 64 percent of its $100 billion in revenue from over- seas. 17 With a focus on large-scale projects in emerging markets, such as building a wireless phone network across Africa, IBM plans to receive 30 percent of its revenue from emerging markets by 2015. 18,19 As of 2012, IBM had operations in over 20 African nations, and, in August 2012, IBM announced the opening of a research lab in Kenya. 20 More than half of IBM’s research staff are currently located outside of the United States. These trends reflect the reality that firms are finding they must develop inter- national management expertise, especially expertise relevant to the increasingly important developing and emerging markets of the world. Managers from today’s MNCs must learn to work effectively with those from many different countries. More- over, more and more small and medium-sized businesses will find that they are being affected by internationalization. Many of these companies will be doing business abroad, and those that do not will find themselves doing business with MNCs operat- ing locally. Table 1–2 lists the world’s top nonfinancial companies from developing countries ranked by foreign assets in 2011.

■ Globalization and Internationalization

International business is not a new phenomenon; however, the volume of international trade has increased dramatically over the last decade. Today, every nation and an increas- ing number of companies buy and sell goods in the international marketplace. A number of developments around the world have helped fuel this activity.

Globalization, Antiglobalization, and Global Pressures Globalization can be defined as the process of social, political, economic, cultural, and technological integration among countries around the world. Globalization is distinct

globalization The process of social, political, economic, cultural, and technological integration among countries around the world.

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International Management in Action

Tracing the Roots of Modern Globalization

Globalization is often presented as a new phenomenon associated with the post–World War II period. In fact, globalization is not new. Rather, its roots extend back to ancient times. Globalization emerged from long- standing patterns of transcontinental trade that devel- oped over many centuries. The act of barter is the forerunner of modern international trade. During differ- ent periods of time, nearly every civilization contributed to the expansion of trade.

Middle Eastern Intercontinental Trade In ancient Egypt, the King’s Highway or Royal Road stretched across the Sinai into Jordan and Syria and into the Euphrates Valley. These early merchants prac- ticed their trade following one of the earliest codes of commercial integrity: Do not move the scales, do not change the weights, and do not diminish parts of the bushel. Land bridges later extended to the Phoenicians, the first middlemen of global trade. Over 2,000 years ago, traders in silk and other rare valued goods moved east out of the Nile basin to Baghdad and Kashmir and linked the ancient empires of China, India, Persia, and Rome. At its height, the Silk Road extended over 4,000 miles, providing a transcontinental conduit for the dis- semination of art, religion, technology, ideas, and culture. Commercial caravans crossing land routes in Arabian areas were forced to pay tribute—a forerunner of custom duties—to those who controlled such territories. In his youth, the Prophet Muhammad traveled with traders, and prior to his religious enlightenment the founder of Islam himself was a trader. Accordingly, the Qur’an instructs followers to respect private property, business agree- ments, and trade.

Trans-Saharan Cross-Continental Trade Early tribes inhabiting the triad cities of Mauritania, in ancient West Africa below the Sahara, embraced car- avan trade with the Berbers of North Africa. Gold from the sub-Saharan area was exchanged for something even more prized—salt, a precious substance needed for retaining body moisture, preserving meat, and fla- voring food. Single caravans, stretching five miles and including nearly 2,500 camels, earned their reputation as ships of the desert as they ferried gold powder, slaves, ivory, animal hides, and ostrich feathers to the northeast and returned with salt, wool, gunpowder, porcelain pottery, silk, dates, millet, wheat, and barley from the East.

China as an Ancient Global Trading Initiator In 1421, a fleet of over 3,750 vessels set sail from China to cultivate trade around the world for the emperor. The voyage reflected the emperor’s desire to collect tribute

in exchange for trading privileges with China and China’s protection. The Chinese, like modern-day multi- nationals, sought to extend their economic reach while recognizing principles of economic equity and fair trade. In the course of their global trading, the Chinese introduced uniform container measurements to enable merchants to transact business using common weight and dimension measurement systems. Like the early Egyptians and later the Romans, they used coinage as an intermediary form of value exchange or specie, thus eliminating complicated barter transactions.

European Trade Imperative The concept of the alphabet came to the Greeks via trade with the Phoenicians. During the time of Alexander the Great, transcontinental trade was extended into Afghanistan and India. With the rise of the Roman Empire, global trade routes stretched from the Middle East through central Europe, Gaul, and across the English Channel. In 1215 King John of England signed the Magna Carta, which stressed the importance of cross- border trade. By the time of Marco Polo’s writing of The Description of the World, at the end of the 13th century, the Silk Road from China to the city-states of Italy was a well-traveled commercial highway. His tales, chronicled journeys with his merchant uncles, gave Europeans a taste for the exotic, further stimulating the consumer appetite that propelled trade and globalization. Around 1340, Francisco Balducci Pegolotti, a Florentine mercan- tile agent, authored Practica Della Mercatura (Practice of Marketing), the first widely distributed reference on inter- national business and a precursor to today’s textbooks. The search for trading routes contributed to the Age of Discovery and encouraged Christopher Columbus to sail west in 1492.

Globalization in U.S. History The Declaration of Independence, which set out griev- ances against the English crown upon which a new nation was founded, cites the desire to “establish Com- merce” as a chief rationale for establishing an inde- pendent state. The king of England was admonished “for cutting off our trade with all parts of the world” in one of the earliest antiprotectionist free-trade state- ments from the New World. Globalization, begun as trade between and across territorial borders in ancient times, was historically and is even today the key driver of world economic devel- opment. The first paths in the creation of civilization were made in the footsteps of trade. In fact the word meaning “footsteps” in the old Anglo-Saxon language is trada, from which the modern English word trade is derived. Contemporary globalization is a new branch of a very old tree whose roots were planted in antiquity.

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8 Part 1 Environmental Foundation

from internationalization in that internationalization is the process of a business crossing national and cultural borders, while globalization is the vision of creating one world unit, a single market entity. Evidence of globalization can be seen in increased levels of trade, capital flows, and migration. Globalization has been facilitated by technological advances in transnational communications, transport, and travel. Thomas Friedman, in his book The World Is Flat, identified 10 “flatteners” that have hastened the globalization trend, including the fall of the Berlin Wall, offshoring , and outsourcing , which have combined to dramatically intensify the effects of increasing global linkages. 21 Hence, in recent years, globalization has accelerated, creating both opportunities and challenges to global business and international management. On the plus side, global trade and investment continue to grow, bringing wealth, jobs, and technology to many regions around the world. While some emerging countries have not benefited from globalization and integration, the emergence of MNCs from developing countries reflects the increasing inclusion of all regions of the world in the benefits of globalization. Yet, as the pace of global integration quickens, so have the cries against globalization and the emergence of new concerns over mounting global pres- sures. 22 These pressures can be seen in protests at the meetings of the World Trade Organization (WTO), International Monetary Fund (IMF), and other global bodies and in the growing calls by developing countries to make the global trading system more responsive to their economic and social needs. These groups are especially concerned about rising inequities between incomes, and nongovernmental organizations (NGOs) have become more active in expressing concerns about the potential shortcomings of economic globalization. 23 Who benefits from globalization? Proponents believe that everyone benefits from globalization, as evidenced in lower prices, greater availability of goods, better jobs, and access to technology. Theoretically, individuals in established markets will strive for bet- ter education and training to be prepared for future positions, while citizens in emerging markets and underdeveloped countries will reap the benefits of large amounts of capital flowing into those countries which will stimulate growth and development. Critics dis- agree, noting that the high number of jobs moving abroad as a result of the offshoring of business services jobs to lower-wage countries does not inherently create greater opportunities at home and that the main winners of globalization are the company exec- utives. Proponents claim that job losses are a natural consequence of economic and technological change and that offshoring actually improves the competitiveness of Amer- ican companies and increases the size of the overall economic pie. 24 Critics point out that growing trade deficits and slow wage growth are damaging economies and that globalization may be moving too fast for some emerging markets, which could result in economic collapse. Moreover, critics argue that when production moves to countries to take advantage of lower labor costs or less regulated environments, it creates a “race to the bottom” in which companies and countries place downward pressure on wages and working conditions. 25 India is one country at the center of the globalization debate. As noted above, India has been the beneficiary of significant foreign investment, especially in services such as software and IT. Limited clean water, power, paved roadways, and modern bridges, how- ever, are making it increasingly difficult for companies to expand. There have even been instances of substantial losses for companies using India as an offshore base, such as occurred when Nokia Corp. experienced the destruction of thousands of cellular phones due to a lack of storage space at an airport during a rainstorm. With India’s public debt at around 70 percent of GDP, the country now stands where China did a decade ago. It is possible that India will follow in China’s footsteps and continue rapid growth in incomes and wealth; however, it is also possible that the challenges India faces are greater than the country’s capacity to respond to them. 26 This example illustrates just one of the ways in which globalization has raised particular concerns over environmental and social impacts. According to antiglobalization activists, if corporations are free to locate anywhere in the world, the world’s poorest

offshoring The process by which companies undertake some activities at offshore locations instead of in their countries of origin.

outsourcing The subcontracting or contracting out of activities to external organizations that had previously been performed by the firm.

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countries will relax or eliminate environmental standards and social services in order to attract first-world investment and the jobs and wealth that come with it. Proponents of globalization contend that even within the developing world, it is protectionist policies, not trade and investment liberalization, that result in environmental and social damage. They believe globalization will force higher-polluting countries such as China and Russia into an integrated global community that takes responsible measures to protect the envi- ronment. However, given the significant changes required in many developing nations to support globalization, such as better infrastructure, greater educational opportunities, and other improvements, most supporters concede that there may be some short-term disrup- tions. Over the long term, globalization supporters believe industrialization will create wealth that will enable new industries to employ more modern, environmentally friendly technology. We discuss the social and environmental aspects of globalization in more detail in Chapter 3. These contending perspectives are unlikely to be resolved anytime soon. Instead, a vigorous debate among countries, MNCs, and civil society will likely continue and affect the context in which firms do business internationally. Business firms operating around the world must be sensitive to different perspectives on the costs and benefits of globalization and adapt and adjust their strategies and approaches to these differences.

Global and Regional Integration One important dimension of globalization is the increasing economic integration among countries brought about by the negotiation and implementation of trade and investment agreements. Here we provide a brief overview of some of the major developments in global and regional integration. Over the past six decades, succeeding rounds of global trade negotiations have resulted in dramatically reduced tariff and nontariff barriers among countries. Table 1–3 shows the history of these negotiation rounds, their primary focus, and the number of countries involved. These efforts reached their crest in 1994 with the conclusion of the Uruguay Round of multilateral trade negotiations under the General Agreement on Tar- iffs and Trade (GATT) and the creation of the World Trade Organization (WTO) to

A Closer Look

Outsourcing and Offshoring

The concepts of outsourcing and offshoring are not new, but these practices are growing at an extreme rate. Off- shoring refers to the process by which companies undertake some activities at offshore locations instead of in their countries of origin. Outsourcing is the subcon- tracting or contracting out of activities to external orga- nizations that had previously been performed within the firm and is a wholly different phenomenon. Often the two combine to create “offshore outsourcing.” Offshoring began with manufacturing operations. Globalization jump-started the extension of offshore outsourcing of services, including call centers, R&D, information ser- vices, and even legal work. During 2006, Du Pont hired attorneys in Manila to oversee documentation in prepa- ration for legal cases. The company hopes to save an estimated $6 million in legal spending by moving off- shore and cutting documentation by 40 to 60 percent once everything is scanned and digitally saved. This is a risky venture as legal practices are not the same across countries, and the documents may be too sensi-

tive to rely on assembly-line lawyers. It also raises the question as to whether or not there are limitations to offshore outsourcing. Many companies, including Deutsche Bank, spread offshore outsourcing opportuni- ties across multiple countries such as India and Russia for economic or political reasons. The advantages, concerns, and issues with offshoring span a variety of subjects. Throughout the text we will revisit the idea of offshore outsourcing as it is relevant. Here in Chapter 1 we see how skeptics of globalization wonder if there are benefits to offshore outsourcing, while in Chapter 2 we see how these are related to technology, and finally in Chapter 14 we see how offshore practices affect human resource management and the global distribu- tion of work.

Source: Pete Engardio and Assif Shameen, “Let’s Offshore the Lawyers,” BusinessWeek, September 18, 2006, p. 42; and Tony Hallett and Andy McCue, “Why Deutsche Bank Spreads Its Outsourcing,” BusinessWeek, March 15, 2007.

9

World Trade Organization (WTO) The global organization of countries that oversees rules and regulations for international trade and investment.

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10 Part 1 Environmental Foundation

oversee the conduct of trade around the world. The WTO is the global organization of countries that oversees rules and regulations for international trade and investment, including agriculture, intellectual property, services, competition, and subsidies. Recently, however, the momentum of global trade agreements has slowed. In December 1999, trade ministers from around the world met in Seattle to launch a new round of global trade talks. In what later became known as the “Battle in Seattle,” protesters disrupted the meeting, and representatives of developing countries who felt their views were being left out of the discussion succeeded in ending the discussions early and postponing a new round of trade talks. Two years later, in November 2001, the members of the WTO met again and successfully launched a new round of negotiations at Doha, Qatar, to be known as the “Development Round,” reflecting the recognition by members that trade agree- ments needed to explicitly consider the needs of and impact on developing countries. 27 However, after a lack of consensus among WTO members regarding agricultural subsi- dies and the issues of competition and government procurement, progress slowed. At a meeting in Cancún in September 2003, a group of 20-plus developing nations, led by Brazil and India, united to press developed countries such as the United States, the European Union (EU), and Japan to reduce barriers to agricultural imports. Failure to reach agreement resulted in another setback, and although there have been attempts to restart the negotiations, they have remained stalled, especially in light of rising protec- tionism in the wake of the global economic crisis. 28 Partly as a result of the slow progress in multilateral trade negotiations, the United States and many other countries have pursued bilateral and regional trade agreements. The United States, Canada, and Mexico make up the North American Free Trade Agreement (NAFTA) , which in essence has removed all barriers to trade among these countries and created a huge North American market. A number of economic develop- ments have occurred because of this agreement which are designed to promote commerce in the region. Some of the more important developments include (1) the elimination of tariffs as well as import and export quotas; (2) the opening of government procurement markets to companies in the other two nations; (3) an increase in the opportunity to make investments in each other’s country; (4) an increase in the ease of travel between coun- tries; and (5) the removal of restrictions on agricultural products, auto parts, and energy

Table 1–3 Completed Rounds of the Negotiations under the GATT and WTO

Year Place (name) Subjects Covered Countries

1947 Geneva Tariffs 23

1949 Annecy Tariffs 13

1951 Torquay Tariffs 38

1956 Geneva Tariffs 26

1960–1961 Geneva Tariffs

(Dillon Round) 26

1964–1967 Geneva Tariffs and antidumping

(Kennedy Round) measures 62

1973–1979 Geneva Tariffs, nontariff measures,

(Tokyo Round) “framework” agreements 102

1986–1994 Geneva Tariffs, nontariff measures,

(Uruguay Round) services, intellectual property,

dispute settlement, textiles,

agriculture, creation of WTO 123

Source: Understanding the WTO (Geneva: World Trade Organization, 2008), http://www. wto.org/english/thewto_e/whatis_e/tif_e/understanding_e.pdf. Reprinted with permission.

North American Free Trade Agreement (NAFTA) A free-trade agreement between the United States, Canada, and Mexico that has removed most barriers to trade and investment.

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Chapter 1 Globalization and International Linkages 11

goods. Many of these provisions were implemented gradually. For example, in the case of Mexico, quotas on Mexican products in the textile and apparel sectors were phased out over time, and customs duties on all textile products were eliminated over 10 years. Negotiations between NAFTA members and many Latin American countries, such as Chile, have concluded, and others are ongoing. Moreover, other regional and bilateral trade agreements, including the U.S.–Singapore Free Trade Agreement, concluded in May 2003, and the U.S.–Central American Free Trade Agreement (CAFTA), later renamed CAFTA-DR to reflect the inclusion of the Dominican Republic in the agreement and concluded in May 2004, were negotiated in the same spirit as NAFTA. The U.S. Congress approved the CAFTA-DR in July 2005, and the president signed it into law on August 2, 2005. The export zone created will be the United States’ second largest free- trade zone in Latin America after Mexico. The United States is implementing the CAFTA-DR on a rolling basis as countries make sufficient progress to complete their commitments under the agreement. The agreement first entered into force between the United States and El Salvador on March 1, 2006, followed by Honduras and Nicaragua on April 1, 2006, Guatemala on July 1, 2006, and the Dominican Republic on March 1, 2007. Implementation by Costa Rica was delayed by concerns over the impact of the opening of Costa Rica’s energy and telecommunications monopoly, and a subsequent election and referendum; however, the agreement finally entered into force for Costa Rica on January 1, 2009. 29 Agreements like NAFTA and CAFTA not only reduce barriers to trade but also require additional domestic legal and business reforms in developing nations to protect property rights. Most of these agreements now include supplemental commitments on labor and the environment to encourage countries to upgrade their working conditions and environmental protections, although some critics believe the agreements do not go far enough in ensuring worker rights and environmental standards. Partly due to the stalled progress with the WTO and FTAA, the United States has pursued bilateral trade agreements with a range of countries, including Australia, Bahrain, Chile, Colombia, Israel, Jordan, Malaysia, Morocco, Oman, Panama, Peru, and Singapore. 30 Economic activity in Latin America continues to be volatile. Despite the continuing political and economic setbacks these countries periodically experience, economic and export growth continue in Brazil, Chile, and Mexico. In addition, while outside MNCs continually target this geographic area, there also is a great deal of cross-border invest- ment between Latin American countries. Regional trade agreements are helping in this cross-border process, including NAFTA, which ties the Mexican economy more closely to the United States. The CAFTA agreement, signed August 5, 2006, between the United States and Central American countries presents new opportunities for bolstering trade, investment, services, and working conditions in the region. Within South America there are Mercosur, a common market created by Argentina, Brazil, Paraguay, Uruguay, and Venezuela, and the Andean Common Market, a subregional free-trade compact that is designed to promote economic and social integration and cooperation between Bolivia, Colombia, Ecuador, and Peru. The European Union (EU) has made significant progress over the past decade in becoming a unified market. In 2003 it consisted of 15 nations: Austria, Belgium, Den- mark, Finland, France, Germany, Great Britain, Greece, the Netherlands, Ireland, Italy, Luxembourg, Portugal, Spain, and Sweden. In May 2004, 10 additional countries joined the EU: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. On January 1, 2007, Romania and Bulgaria acceded to the EU, and on July 1, 2013, Croatia officially became the newest and 28th member of the EU. Not only have most trade barriers between the members been removed, but a subset of European countries have adopted a unified currency called the euro. As a result, it is now possible for customers to compare prices between most countries and for business firms to lower their costs by conducting business in one, uniform currency. With access to the entire pan-European market, large MNCs can now achieve the operational scale and scope necessary to reduce costs and increase efficiencies. Even though long-standing

European Union A political and economic community consisting of 28 member states.

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12 Part 1 Environmental Foundation

cultural differences remain, and the EU has recently experienced some substantial challenges, the EU is more integrated as a single market than NAFTA, CAFTA, or the allied Asian countries. With many additional countries poised to join the EU, the result- ing pan-European market will be one that no major MNC can afford to ignore. Although Japan has experienced economic problems since the early 1990s, it con- tinues to be one of the primary economic forces in the Pacific Rim. Japanese MNCs want to take advantage of the huge, underdeveloped Asian markets. At the same time, China continues to be a major economic force, with many predictions that it will surpass the United States as the largest economy in the world by 2027. 31 Although all the economies in Asia are now feeling the impact of the economic uncertainty of the post-9/11 era and the Asian economic crisis of the late 1990s, Hong Kong, Taiwan, South Korea, and Singapore have been doing relatively well, and the Southeast Asia countries of Malaysia, Thailand, Indonesia, and even Vietnam are bouncing back to become major export-driven economies. The Association of Southeast Asian Nations (ASEAN), made up of Indonesia, Malaysia, the Philippines, Singapore, Brunei, Thailand, and in recent years Cambodia, Myanmar, and Vietnam, is advancing trade and economic integration and now poses chal- lenges to China as a region of relatively low cost production and export. In addition, under the Trans-Pacific Partnership (TPP), Asian facing countries have initiated negotiations to conclude an ambitious, next-generation, Asia-Pacific trade agreement. The TPP group cur- rently includes Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. On April 24, 2013, the U.S. trade represen- tative notified Congress of its intent to include Japan, the world’s third largest economy, in the TPP negotiations, pending the successful conclusion of the domestic procedures of each of the current members. Japan’s entry further distinguishes TPP as the most credible pathway to broader Asia-Pacific regional economic integration. 32 Central and Eastern Europe, Russia, and the other republics of the former Soviet Union currently are still trying to make stable transitions to market economies. Although the Czech Republic, Slovenia, Poland, and Hungary have accelerated this process through their accession to the EU, others (the Balkan countries, Russia, and the other republics of the former Soviet Union) still have a long way to go. However, all remain a target for MNCs looking for expansion opportunities. For example, after the fall of the Berlin Wall in 1989, Coca-Cola quickly began to sever its relations with most of the state-run bottling companies in the former communist-bloc countries. The soft drink giant began investing heavily to import its own manufacturing, distribution, and marketing tech- niques. To date, Coca-Cola has pumped billions into Central and Eastern Europe—and this investment is beginning to pay off. Its business in Central and Eastern Europe has been expanding at twice the rate of its other foreign operations. These are specific, geographic examples of emerging internationalism. Equally impor- tant to this new climate of globalization, however, are broader trends that reflect the emer- gence of developing countries as major players in global economic power and influence.

The Shifting Balance of Economic Power in the Global Economy Economic integration and the rapid growth of emerging markets are creating a shifting international economic landscape. Specifically, the developing and emerging countries of the world are now predicted to occupy increasingly dominant roles in the global eco- nomic system. In a 2004 report, the Goldman Sachs global economics team released a follow-up report to its initial 2001 BRIC study, taking the analysis a step further by focusing on the impact that the growth of these four economies will have on global markets. In this report, they estimated that the BRIC economies’ share of world growth could rise from 20 percent in 2003 to more than 40 percent in 2025. Also, their total weight in the world economy would rise from approximately 10 percent in 2004 to more than 20 percent in 2025. Furthermore, between 2005 and 2015 over 800 million people in these countries will have crossed the annual income threshold of $3,000. In 2025, it is calculated that approximately 200 million people in these economies will have annual

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Chapter 1 Globalization and International Linkages 13

incomes above $15,000. Therefore, the huge pickup in demand will not be restricted to basic goods but will impact higher-priced branded goods as well. 33 In 2011, Goldman Sachs further argued that the economic potential of Brazil, Russia, India, and China (the “BRIC” economies) is growing at an even faster pace such that they may constitute four of the top five most dominant economies by the year 2050, with China surpassing the United States in output by 2027. Additionally, the report estimated that the economies of the four BRIC nations will surpass the collective economies of the G7 nations by 2032. 34 It is notable that the group of BRIC countries has met for an annual summit since 2009 and in 2010, the leaders of the founding members agreed to admit South Africa to the group, making it the BRIC S . Using data from the World Bank, PricewaterhouseCoopers has made estimates about the future growth of emerging versus developed economies, the result of which appear in summary form in Tables 1–4 and 1–5. Table 1–4 shows the world’s largest economies in 2009 and 2050 (projected) using (current) market exchange rates. By this calculation, China would surge past the United States and Japan by 2050, and India would move from eleventh to third. Viewing the data on a purchasing power parity (PPP) basis, a method which adjusts GDP to account for different prices in countries, a more dramatic picture is presented. Using this method, both China and India would surpass the United States as the largest world economic power by 2050. In both the Goldman Sachs and PricewaterhouseCoopers scenarios, global growth over the next decade, and next 40 years, is heavily supported by Asia, as seen in Table 1–6. In addition, China and India will remain the most populous countries in the world in 2050, although India will surpass China as the most populous (Table 1–7). Some analysts, including Goldman Sachs, are beginning to turn their attention to a new group of emerging markets. The N-11 (N stands for “next”) are a group of economies that may constitute the next wave of emerging markets growth. These coun- tries, which include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam, represent a diverse global set, with

Table 1–4 The World’s Largest Economies 2009 and 2050 (Projected) Measured by GDP at Market Exchange Rates (in millions of dollars)

2009 2050

GDP Rank GDP Rank

United States 14,256 1 37,876 2

Japan 5,068 2 7,664 5

China 4,909 3 51,180 1

Germany 3,347 4 5,707 8

France 2,649 5 5,344 11

United Kingdom 2,175 6 5,628 9

Italy 2,113 7 3,798 13

Brazil 1,572 8 9,235 4

Spain 1,460 9 3,195 16

Canada 1,336 10 3,322 15

India 1,296 11 31,313 3

Russia 1,231 12 6,112 6

Australia 925 13 2,486 20

Mexico 875 14 5,800 7

Source: From The World in 2050: The accelerating shift of global economic power: challenges and opportunities. Copyright © 2009 PricewaterhouseCoopers LLP.

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14 Part 1 Environmental Foundation

Table 1–5 The World’s Largest Economies 2009 and 2050 (Projected) Measured by GDP at Purchasing Power Parity (in millions of dollars)

2009 2050

GDP Rank GDP Rank

United States 14,256 1 37,876 3

China 8,888 2 59,475 1

Japan 4,138 3 7,664 5

India 3,752 4 43,180 2

Germany 2,984 5 5,707 9

Russia 2,687 6 7,559 6

United Kingdom 2,257 7 5,628 10

France 2,172 8 5,344 11

Brazil 2,020 9 9,762 4

Italy 1,922 10 3,798 15

Mexico 1,540 11 6,682 7

Spain 1,496 12 3,195 18

South Korea 1,324 13 3,258 17

Canada 1,280 14 3,322 16

Source: From The World in 2050: The accelerating shift of global economic power: challenges and opportunities. Copyright © 2009 PricewaterhouseCoopers LLP.

relative strengths (and weaknesses) in terms of their future potential. The MIST countries (Mexico, Indonesia, South Korea, and Turkey), a subset of the N-11, are sometimes grouped as a particularly attractive subset of the N-11. Goldman views the MIST coun- tries as the most promising and advanced of the N-11, all of which have young, growing populations and other positive good conditions for economic growth. Other groupings of fast-growing developing countries include the CEVITS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), EAGLES (which stands for emerging and growth-leading economies) and includes the original BRIC and MIST plus Egypt and Taiwan. 35 Table 1–8 compares the G-7 (advanced countries), BRIC and N-11 by popu- lation, GDP, and GDP per capita in 2000, 2010, and 2016.

Table 1–6 Countries Expected to Contribute Most to Global Growth 2006–2020 (percent contribution)

China 26.7

United States 15.9

India 12.2

Brazil 2.4

Russia 2.3

Indonesia 2.3

South Korea 2.1

United Kingdom 1.9

Source: From Foresight 2020: Economic, Indus- try and Corporate Trends. Copyright © 2006 The Economist Intelligence Unit. Reprinted with permission of The Economist Intelligence Unit.

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Chapter 1 Globalization and International Linkages 15

Table 1–7 Changing Global Demographics: Developing Countries on the Rise (ranked by size)

1950 2014 2050

1 China China India

2 Soviet Union India China

3 India United States United States

4 United States Indonesia Indonesia

5 Japan Brazil Pakistan

6 Indonesia Pakistan Ethiopia

7 Germany Bangladesh Nigeria

8 Brazil Nigeria Brazil

9 United Kingdom Russia Bangladesh

10 Italy Japan Philippines

11 France Mexico Mexico

12 Bangladesh Philippines Congo

Source: U.S. Census Bureau (IDB). Retrieved September 18, 2012.

Most African countries have not, to date, fully benefited from globalization. How- ever, recent increases in the price of commodities, such as oil and gas, agricultural products, and mineral and mining products, have helped boost incomes and wealth in the African continent. Moreover, rapid population growth in many African countries, similar to growth in India and China in earlier periods, may suggest that African countries could constitute the next wave of dynamic emerging markets. Although the emerging nations have experienced unprecedented GDP growth since the global recession, it is important to note that the growth rates of the developing world are beginning to show signs of a slowdown. In 2013, developed nations contributed more to global GDP growth than emerging nations for the first time in almost a decade. 36 Perhaps the most striking evidence of a pending slowdown is in China, where GDP grew just 7.5 percent—significantly less than its 14.5 percent growth in 2007. Russia, India, and Brazil experienced slower growth rates in 2013 as well. 37 While emerging markets still hold the most potential for growth in the coming years, the rapid rate of expansion that was experienced over the last decade may prove difficult to match. 38 Despite the global recession of 2009, in which merchandise exports fell 23 percent to $12.15 trillion and commercial services exports declined 13 percent to $3.31 trillion in 2009, global trade and investment continues to grow at a healthy rate, outpacing domestic growth in most countries. According to the World Trade Organization, in 2011 merchandise exports reached a record high $18.2 trillion, and commercial services exports have rebounded to $4.2 trillion. 39 Foreign direct investment (FDI) —the term used to indicate the amount invested in property, plant, and equipment in another coun- try—also has been growing at a healthy rate. Despite dropping almost 50 percent in the wake of the global recession to $896 billion in 2009, global  FDI has rebounded to $1.5 trillion in 2011. By 2014, FDI is estimated to reach $1.9 trillion, surpassing the all-time high set in 2007. 40 Interestingly, according to data from the World Bank, in 2010 Hong Kong received more FDI than Germany, and China received eight times as much as Canada, showing the shifting balance of  economic influence among developed and developing countries. Table 1–9 shows  trade flows among major world regions in both absolute and percentage terms. Tables 1–10 and 1–11 show FDI inflows and outflows by leading developed and emerging economies.

foreign direct investment (FDI) Investment in property, plant, or equipment in another country.

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Table 1–8 Population, GDP, and GDP per Capita of G-7, BRIC, and N-11 Countries, 2000, 2010, and 2016 (projection)

2000 2010 2016

Population GDP GDP Population GDP GDP Population GDP GDP Country (millions) (billions) (per cap.) (millions) (billions) (per cap.) (millions) (billions) (per cap.)

Canada 30 $725.0 $23,653 34 $1,577.0 $46,303 36 $2,106.0 $58,674

France 59 1,332.0 22,550 63 2,563.0 40,704 65 3,268.0 50,497

Germany 82 1,892.0 23,051 82 3,286.0 40,274 81 3,929.0 48,731

Italy 57 1,101.0 19,334 60 2,055.0 34,059 62 2,476.0 40,100

Japan 127 4,667.0 36,800 128 5,459.0 42,783 127 6,783.0 53,615

United Kingdom 59 1,481.0 25,142 62 2,250.0 36,164 65 3,224.0 49,777

United States 282 9,951.0 35,252 310 14,527.0 46,860 328 18,251.0 55,622

Total/Average 697 $21,149.0 30,343 739 $31,717.0 42,919 764 $40,037.0 52,404

BRICs

Brazil 171 $642.0 $3,751 193 $2,090.0 $10,816 203 $3,373.0 $16,635

China 1,267 1,198.0 946 1,341 5,878.0 4,382 1,382 11,780.0 8,523

India 1,024 476.0 465 1,191 1,632.0 1,371 1,289 3,027.0 2,349

Russia 146 260.0 1,775 143 1,480.0 10,356 140 3,088.0 22,066

Total/Average 2,608 $2,576.0 $988 2,868 $11,080.0 $3,863 3,014 $21,268.0 $7,056

Next-11

Bangladesh 141 $47.0 $334 164 $106.0 $642 179 $174.0 $973

Egypt 63 99.0 1,566 78 218.0 2,808 88 342.0 3,901

Indonesia 205 166.0 807 238 707.0 2,974 255 1,382.0 5,429

Iran 55 85.0 1,559 75 407.0 5,449 82 630.0 7,702

S. Korea 47 533.0 11,317 49 1,014.0 20,756 50 1,686.0 33,948

Mexico 98 672.0 6,859 109 1,034.0 9,522 115 1,505.0 13,052

Nigeria 119 46.0 390 156 203.0 1,298 184 359.0 1,957

Pakistan 138 74.0 539 172 177.0 1,030 194 303.0 1,566

Philippines 77 81.0 1,053 94 200.0 2,123 106 307.0 2,907

Turkey 66 266.0 4,026 71 735.0 10,309 76 1,133.0 14,839

Vietnam 78 31.0 402 88 104.0 1,174 95 210.0 2,217

Total/Average 1,087 $2,100.0 $2,626 1,294 $4,905.0 5,280 1,424 $8,031.0 $7,056

TOTALS 4,392 $25,825.0 $5,880 4,901 $47,702.0 $9,734 5,202 $69,336.0 $13,329

World 6,115 $32,216.0 $5,268 6,909 $62,911.0 $9,106 7,302 $91,575.0 $12,541

Source: IMF, “World Economic Outlook Database.” September 2011. http://www.imf.org/.

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Chapter 1 Globalization and International Linkages 17

Table 1–9 World Merchandise Trade by Region and Selected Country, 2012 (in US$ billions and percentages)

Exports Imports

Annual Annual Value Percentage Change Value Percentage Change

2012 2005–12 2010 2011 2012 2012 2005–12 2010 2011 2012

World 17,850 8 22 20 0 18,155 8 21 19 0

North America 2,373 7 23 16 4 3,192 5 23 15 3

United States 1,547 8 21 16 5 2,335 4 23 15 3

Canada 455 3 23 17 1 475 6 22 15 2

Mexico 371 8 30 17 6 380 8 28 16 5

South and Central America 749 11 26 27 0 753 14 30 25 3

Brazil 243 11 32 27 25 233 17 43 24 22

Other South and Central America 506 11 22 28 2 520 13 24 25 5

Europe 6,373 5 12 18 24 6,519 5 13 17 26

European Union (27) 5,792 5 12 18 25 5,927 5 13 17 26

Germany 1,407 5 12 17 25 1,167 6 14 19 27

France 569 3 8 14 25 674 4 9 18 26

Netherlands 656 7 15 15 22 591 7 17 16 21

United Kingdom 468 3 15 17 27 680 4 14 14 1

Italy 500 4 10 17 24 486 3 17 15 213

Commonwealth of Independent States (CIS) 804 13 31 34 2 568 15 25 30 5

Russian Federation 529 12 32 30 1 335 15 30 30 4

Africa 626 11 30 17 5 604 13 16 18 8

South Africa 87 8 31 21 211 123 10 27 29 1

Africa less South Africa 539 11 30 16 8 481 14 13 15 9

Oil exporters 370 11 34 15 12 179 14 10 10 8

Non oil exporters 169 11 22 20 21 303 14 15 18 10

Middle East 1,287 13 28 37 3 721 12 13 17 6

Asia 5,640 11 31 18 2 5,795 12 33 23 4

China 2,049 15 31 20 8 1,818 16 39 25 4

Japan 799 4 33 7 23 886 8 26 23 4

India 293 17 37 34 23 489 19 36 33 5

Newly industrialized economies (4) 1,280 8 30 16 21 1,310 9 32 19 0

Memorandum items:

MERCOSUR 340 11 29 26 24 325 16 43 25 23

ASEAN 1,254 10 29 18 1 1,221 11 31 21 6

EU (27) extra-trade 2,166 7 17 21 0 2,301 7 18 18 24

Least developed countries (LDCs) 204 14 27 25 1 223 14 11 22 8

Source: WTO Press Release 688, April 10, 2013, Appendix Table 1. Reprinted with permission.

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18 Part 1 Environmental Foundation

Table 1–10 Foreign Direct Investment Inflows, by Region (in US$ billions)

2012 2011 2010

Developed economies $560.7 $820.0 $696.4

Developing economies 702.8 735.2 637.1

Africa 50.0 47.6 43.6

East and Southeast Asia 326.1 342.9 312.5

South Asia 33.5 44.2 28.7

West Asia 47.1 49.1 59.5

Latin America and the Caribbean 243.9 249.4 189.9

Transition economies 87.4 96.3 87.4

Source: UNCTAD, World Investment Report 2013, Web Table 1.

Table 1–11 Foreign Direct Investment Outflows, by Region (in US$ billions)

2012 2011 2010

Developed economies $909.4 $1,183.1 $1,029.8

Developing economies 426.1 422.1 413.2

Africa 14.3 5.4 9.3

East and Southeast Asia 275.0 271.5 254.2

South Asia 9.2 13.0 16.4

West Asia 23.9 26.2 13.4

Latin America and the Caribbean 103.0 105.2 119.2

Transition economies 55.5 72.9 61.8

Source: UNCTAD, World Investment Report 2013, Web Table 2.

As nations become more affluent, they begin looking for countries with economic growth potential where they can invest. Over the last two decades, for example, Japanese MNCs have invested not only in their Asian neighbors but also in the United States and the EU. European MNCs, meanwhile, have made large financial commitments in Japan and more recently in China and India, because they see Asia as having continued growth potential. American multinationals have followed a similar approach in regard to both Europe and Asia. The following quiz illustrates how transnational today’s MNCs have become. This trend is not restricted to firms in North America, Europe, or Asia. An emerging global community is becoming increasingly interdependent economically. Take the quiz and see how well you do by checking the answers given at the end of the chapter. However, although there may be a totally integrated global market in the near future, at present, regionalization, as represented by North America, Europe, Asia, and the less developed countries, is most descriptive of the world economy.

1. Where is the parent company of Braun household appliances (electric shav- ers, coffee makers, etc.) located?

a. Italy b. Germany c. the United States d. Japan 2. The BIC pen company is

a. Japanese b. British c. U.S.–based d. French

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Chapter 1 Globalization and International Linkages 19

3. The company that owns Jaguar is based in a. Germany b. the United States c. the United d. India

Kingdom

4. RCA television sets are produced by a company based in a. France b. the United States c. Malaysia d. Taiwan

5. The firm that owns Green Giant vegetables is a. U.S.-based b. Canadian c. British d. Italian

6. The owners of Godiva chocolate are a. U.S.-based b. Swiss c. Dutch d. Turkish

7. The company that produces Vaseline is a. French b. Anglo-Dutch c. German d. U.S.-based

8. Wrangler jeans are made by a company that is a. Japanese b. Taiwanese c. British d. U.S.-based

9. The company that owns Holiday Inn is headquartered in a. Saudi Arabia b. France c. the United States d. Britain

10. Tropicana orange juice is owned by a company that is headquartered in a. Mexico b. Canada c. the United States d. Japan

■ Global Economic Systems

The evolution of global economies has resulted in three main systems: market economies, command economies, and mixed economies. Recognizing opportunities in global expan- sion includes understanding the differences in these systems, as they affect issues such as consumer choice and managerial behavior.

Market Economy A market economy exists when private enterprise reserves the right to own property and monitor the production and distribution of goods and services while the state simply sup- ports competition and efficient practices. Management is particularly effective here since private ownership provides local evaluation and understanding, opposed to a nationally standardized archetype. This model contains the least restriction as the allocation of resources is roughly determined by the law of demand. Individuals within the community disclose wants, needs, and desires to which businesses may appropriately respond. A gen- eral balance between supply and demand sustains prices, while an imbalance creates a price fluctuation. In other words, if demand for a good or service exceeds supply, the price will inevitably rise, while an excess supply over consumer demand will result in a price decrease. Since the interaction of the community and firms guides the system, organizations must be as versatile as the individual consumer. Competition is fervently encouraged to promote innovation, economic growth, high quality, and efficiency. The focus on how to best serve the customer is necessary for optimal growth as it ensures a greater penetration of niche markets. 41 The government may prohibit such things as monopolies or restrictive business practices in order to maintain the integrity of the economy. Monopolies are a danger to this system because they tend to stifle economic growth and consumer choice with their power to determine sup- ply. Factors such as efficiency of production and quality and pricing of goods can be chosen arbitrarily by monopolies, leaving consumers without a choice and at the mercy of big business.

Command Economy A command economy is comparable to a monopoly in the sense that the organization, in this case the government, has explicit control over the price and supply of a good or service. The particular goods and services offered are not necessarily in response to

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20 Part 1 Environmental Foundation

consumers’ stated needs but are determined by the theoretical advancement of society. Businesses in this model are owned by the state to ensure that investments and other business practices are done in the best interest of the nation despite the often contradic- tory outcomes. Management within this model ignores demographic information. Gov- ernment subsidies provide firms with enough security so they cannot go out of business, which simply encourages a lack of efficiency or incentive to monitor costs. Devoid of private ownership, a command economy creates an environment where little motivation exists to improve customer service or introduce innovative ideas. 42 History confirms the inefficiency and economic stagnation of this system with the dramatic decline of communism in the 1980s. Communist countries believe that the goals of the so-called “people” take precedence over individualism. While the communist model once dominated countries such as Ethiopia, Bulgaria, Hungary, Poland, and the former U.S.S.R., among others, it survives only in North Korea, Cuba, Laos, Vietnam, and China today, in various degrees or forms. A desire to effectively compete in the global economy has resulted in the attempt to move away from the communist model, especially in China, which will be considered in greater depth later in the chapter.

Mixed Economy A mixed economy is a combination of a market and a command economy. While some sectors of this system reflect private ownership and the freedom and flexibility of the law of demand, other sectors are subject to government planning. The balance allows competition to thrive while the government can extend assistance to individuals or com- panies. Regulations concerning minimum wage standards, social security, environmental protection, and the advancement of civil rights may raise the standard of living and ensure that those who are elderly, sick, or have limited skills are taken care of. Owner- ship of organizations seen as critical to the nation may be transferred to the state to subsidize costs and allow the firms to flourish. 43 Below we discuss general developments in key world regions reflective of these economic systems and the impact of these developments on international management.

■ Economic Performance and Issues of Major Regions

From a vantage point of development, performance, and growth, the world’s economies can be evaluated as established economies, emerging economies, and developing econo- mies (some of which may soon become emerging).

Established Economies North America As noted earlier, North America constitutes one of the four largest trad- ing blocs in the world. The combined purchasing power of the United States, Canada, and Mexico is more than $12 trillion. Even though there will be more and more integration both globally and regionally as time goes on, effective international management still requires knowledge of individual countries. The free-market-based economy of this region allows considerable freedom in deci- sion-making processes of private firms. This allows for greater flexibility and low barriers for other countries to establish business. Despite factors such as the Iraq War beginning in 2003, Hurricane Katrina in 2005, high oil prices through 2005 and 2006, and the global recession in 2009, the U.S. economy continues to grow. U.S. MNCs have holdings through- out the world, and foreign firms are welcomed as investors in the U.S. market. U.S. firms maintain particularly dominant global positions in technology-intensive industries, including computing (hardware and services), telecommunications, media, and biotechnology. At the same time, foreign MNCs are finding the United States to be a lucrative market for expan- sion. Many foreign automobile producers, such as BMW, Honda, Hyundai, Nissan, and Toyota, have established a major manufacturing presence in the United States. Given the near

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Chapter 1 Globalization and International Linkages 21

collapse of the “domestic” automotive industries, North American automotive production will come increasingly from these foreign “transplants.” Canada is the United States’ largest trading partner, a position it has held for many years. The United States also has considerable foreign direct investment in Canada, more than in any other country except the United Kingdom. This helps explain why most of the largest foreign-owned companies in Canada are totally or heavily U.S.-owned. The legal and business environment in Canada is similar to that in the United States, and the similarity helps promote trade between the two countries. Geography, language, and culture also help, as does NAFTA, which will assist Canadian firms in becoming more competitive worldwide. They will have to be able to go head to head with their U.S. and Mexican competitors as trade barriers are removed, which should result in greater effi- ciency and market prowess on the part of the Canadian firms, which must compete successfully or go out of business. In recent years, Canadian firms have begun investing heavily in the United States while gaining international investment from both the United States and elsewhere. Canadian firms also do business in many other countries, including Mexico, Great Britain, Germany, and Japan, where they find ready markets for Canada’s vast natural resources, including lumber, natural gas, crude petroleum, and agriproducts. By the early 1990s Mexico had recovered from its economic problems of the pre- vious decade and had become the strongest economy in Latin America. In 1994, Mexico became part of NAFTA, and it appeared to be on the verge of becoming the major economic power in Latin America. Yet, an assassination that year and related economic crisis underscored that Mexico was still a developing country with considerable economic volatility. Mexico now has free-trade agreements with over 50 countries, including Guatemala, Honduras, El Salvador, the EU, the European Free Trade Area, and Japan. 44 In 2000 the 71-year hold of the Institutional Revolutionary Party on the presidency of the country came to an end, and many investors believe that the administration of Vicente Fox and his successor, Felipe Calderon, have been especially pro-business. Calderon battled Mexico’s narcotics gangs which, unfortunately, have been responsible for an ongoing epidemic of violence and casualties, including those of innocent civilians. In 2012, the Institutional Revolutionary Party returned to power with the election of Peña Nieto as president, who, despite uncertainty from some, promises to continue to advance pro-business initiatives, such as opening the oil industry to the private sector and forcing greater competition in telecommunications, an industry long-dominated by Carlos Slim Hel ú, the world’s richest inidividual. 45 . Because of NAFTA, Mexican businesses are finding themselves able to take advan- tage of the U.S. market by producing goods for that market that were previously pur- chased by the U.S. from Asia. Mexican firms are now able to produce products at highly competitive prices thanks to lower-cost labor and proximity to the American market. Location has helped hold down transportation costs and allows for fast delivery. This development has been facilitated by the maquiladora system, under which materials and equipment can be imported on a duty- and tariff-free basis for assembly or manufactur- ing and re-export mostly in Mexican border towns. Mexican firms, taking advantage of a new arrangement that the government has negotiated with the EU, can also now export goods into the European community without having to pay a tariff. The country’s trade with both the EU and Asia is on the rise, which is important to Mexico as it wants to reduce its overreliance on the U.S. market.

The EU The ultimate objective of the EU is to eliminate all trade barriers among member countries (like between the states in the United States). This economic community eventu- ally will have common custom duties as well as unified industrial and commercial policies regarding countries outside the union. Another goal that has finally largely become a real- ity is a single currency and a regional central bank. With the addition of Croatia in 2013, 28 countries now comprise the EU, with 17 having adopted the euro. Another 9 countries, having joined the EU in either 2004, 2007, or 2013, are legally bound to adopt the euro upon meeting the monetary convergence criteria. 46

maquiladora Factory, mostly located in Mexican border towns, that imports materials and equipment on a duty- and tariff-free basis for assembly or manufacturing and re-export.

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Such developments will allow companies based in EU nations that are able to manu- facture high-quality, low-cost goods to ship them anywhere within the EU without paying duties or being subjected to quotas. This helps explain why many North American and Pacific Rim firms have established operations in Europe; however, all these outside firms are finding their success tempered by the necessity to address local cultural differences. The challenge for the future of the EU is to absorb its eastern neighbors, the for- mer communist-bloc countries. This could result in a giant, single European market. In fact, a unified Europe could become the largest economic market in terms of purchasing power in the world. Between 2004 and 2007, Poland, the Czech Republic, Hungary, Bulgaria, and Romania all joined the EU, improving economic growth, inflation, and employment rates throughout. Such a development is not lost on Asian and U.S. firms, which are working to gain a stronger foothold in Eastern European countries as well as the existing EU. In recent years, foreign governments have been very active in helping to stimulate and develop the market economies of Central and Eastern Europe to enhance their economic growth as well as world peace. Since 2009, the EU has faced one of the most severe challenges of its short tenure. Several European governments, including Greece, Portugal, Spain, and Ireland, have found themselves with dangerously large deficits that resulted from both structural con- ditions (stagnant population growth, overly generous pension systems, early retirements) and shorter-term economic pressures. These conditions have placed pressure on the euro, the currency adopted by most EU countries, and have forced substantial rescue packages led by Germany and France. 47

Japan During the 1970s and 1980s, Japan’s economic success had been without prece- dent. The country had a huge positive trade balance, the yen was strong, and the Japanese became recognized as the world leaders in manufacturing and consumer goods. Analysts ascribe Japan’s phenomenal success to a number of factors. Some areas that have received a lot of attention are the Japanese cultural values supporting a strong work ethic and group/team effort, consensus decision making, the motivational effects of guaran- teed lifetime employment, and the overall commitment that Japanese workers have to their organizations. However, at least some of these assumptions about the Japanese work- force have turned out to be more myth than reality, and some of the former strengths have become weaknesses in the new economy. For example, consensus decision making turns out to be too time-consuming in the new speed-based economy. Also, there has been a steady decline in Japan’s overseas investments since the 1990s due to a slowing Japanese economy, poor management decisions, and competition from emerging economies, such as China. Some of the early success of the Japanese economy can be attributed to the Ministry of International Trade and Industry (MITI) . This is a governmental agency that identi- fies and ranks national commercial pursuits and guides the distribution of national resources to meet these goals. In recent years, MITI has given primary attention to the so-called ABCD industries: automation, biotechnology, computers, and data processing. Another major reason for Japanese success may be the use of keiretsus . This Japanese term stands for the large, vertically integrated corporations whose holdings supply much of the assistance needed in providing goods and services to end users. Being able to draw from the resources of the other parts of the keiretsu, a Japanese MNC often can get things done more quickly and profitably than its international competitors. Despite setbacks, Japan remains a formidable international competitor and is well poised in all three major economic regions: the Pacific Rim, North America, and Europe.

Emerging Economies In contrast to the fully developed countries of North America, Europe, and Asia are the less developed countries (LDCs) around the world. An LDC typically is characterized by two or more of the following: low GDP, slow (or negative) GDP growth per capita, high unemployment, high international debt, a large population, and a workforce that is

Ministry of International Trade and Industry (MITI) A Japanese government agency that identifies and ranks national commercial pursuits and guides the distribution of national resources to meet these goals.

keiretsu An organizational arrangement in Japan in which a large group of vertically integrated companies bound together by cross-ownership, interlocking directorates, and social ties provide goods and services to end users.

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either unskilled or semiskilled. In some cases, such as in the Middle East, there also is considerable government intervention in economic affairs. Emerging markets are devel- oping economies that exhibit sustained economic reform and growth.

Central and Eastern Europe In 1991, the Soviet Union ceased to exist. Each of the indi- vidual republics that made up the U.S.S.R. in turn declared their independence and now are attempting to shift from a centrally planned to a market-based economy. The Russian Repub- lic has the largest population, territory, and influence, but others, such as Ukraine, also are industrialized and potentially important in the global economy. Of most importance to the study of international management are the Russian economic reforms, the dismantling of Russian price controls (allowing supply and demand to determine prices), and privatization (converting the old communist-style public enterprises to private ownership). Russia’s economy continues to grow as poverty declines and the middle class expands. Direct investment in Russia, along with its membership in the International Monetary Fund (IMF), is helping to raise GDP and decrease inflation, offsetting the hyperinflation created from the initial attempt at transitioning to a market-based econ- omy. In addition, the Group of Seven (the United States, Germany, France, England, Canada, Japan, and Italy) has pledged billions of dollars for humanitarian and other types of assistance. So while the Russian economy likely will have a number of years of pain- fully slow economic recovery and many recurrent problems, most economic experts predict that, if the Russians can hold things together politically and maintain social order, the situation could improve in the long run. Although these economic reforms are being implemented slowly, there are significant problems in Russia associated with growing crime of all kinds as well as political uncertainty.

International Management in Action

Recognizing Cultural Differences www.usrbc.org, www.careerwatch.com

One objective of multicultural research is to learn more about the customs, cultures, and work habits of people in other countries. After all, a business can hardly expect to capture an overseas market without knowledge of the types of goods and services the people there want to buy. Equally important is the need to know the manage- ment styles that will be effective in running a foreign operation. Sometimes this information can change quite rapidly. For example, as Russia continues to move from a central to a market economy, management is con- stantly changing as the country attempts to adjust to increased exposure in the global environment. Russia entered into a strategic partnership with the United States in 2002. However, while U.S. perspectives of “partnerships” are flexible they are generally seen as inherently having some hierarchical structure. Russia, on the other hand, sees “partnerships” as entailing equality, especially in the decision-making process. This may be a part of the reason Russia formed a strategic partner- ship with China in 2005, since both countries emerged from a communist regime and can understand similar struggles. Regardless, as Russia moves to privatize its organizations, the new partnership may pose a threat to the Americas and the West if efforts to understand each other and work together are abandoned. It is evident that the United States and Russia differ on many horizons. Russian management is still based

on authoritarian styles, where the managerial role is to pass orders down the chain of command, and there is little sense of responsibility, open communication, or voice in the decision-making process. Furthermore, while 64 percent of U.S. employees see retirement as an opportunity for a new chapter in life, only 15 percent of Russian employees feel that way, and another 23 percent see retirement as “the beginning of the end.” Despite such differences, there are points of similarity that a U.S. firm can use as leverage when considering opening a business in Russia. About 46 percent of employees in both the United States and Russia would prefer a work schedule that fluctuates between work and leisure, mirroring a pattern of recur- ring sabbaticals. Also, Russia currently has a post– Cold War mentality, much like the United States experienced after the Great Depression of the 1930s. Looking back at history and incorporating the evolu- tionary knowledge can assist in understanding emerg- ing economies. These examples show the importance of studying international management and learning via systematic analysis of culture and history and firsthand informa- tion how managers in other countries really do behave toward their employees and their work. Such analysis is critical in a firm’s ensuring a strong foothold in effec- tive international management.

23

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24 Part 1 Environmental Foundation

Many foreign investors feel that the risk is still too high. Russia is such a large market, however, and has so much potential for the future that many MNCs feel they must get involved, especially with a promising rise in GDP. There also has been a movement toward teaching Western-style business courses, as well as MBA programs, in all the Central European countries, creating a greater preparation for trends in globalization. In Hungary, state-owned hotels have been privatized, and Western firms, attracted by the low cost of highly skilled, professional labor, have been entering into joint ven- tures with local companies. MNCs also have been making direct investments, as in the case of General Electric’s purchase of Tungsram, the giant Hungarian electric company. Another example is Britain’s Telfos Holdings, which paid $19 million for 51 percent of Ganz, a Hungarian locomotive and rolling stock manufacturer. Still others include Suzu- ki’s investment of $110 million in a partnership arrangement to produce cars with local manufacturer Autokonzern, Ford Motor’s construction of a new $80 million car compo- nent plant, and Italy’s Ilwa’s $25 million purchase of the Salgotarjau Iron Works. Poland had a head start on the other former communist-bloc countries. General political elections were held in June 1989, and the first noncommunist government was established well before the fall of the Berlin Wall. In 1990, the Communist Polish United Workers Party dissolved, and Lech Walesa was elected president. Earlier than its neigh- bors, Poland instituted radical economic reforms (characterized as “shock therapy”). Although the relatively swift transition to a market economy has been very difficult for the Polish people, with very high inflation initially, continuing unemployment, and the decline of public services, Poland’s economy has done relatively well. In fact, Poland’s economy was the only economy in the EU to continue to grow during the global reces- sion of 2008-2009. In 2011, Poland’s GDP grew by over 4 percent. However, political instability and risk, large external debts, a deteriorating infrastructure, and only modest education levels have led to continuing economic problems. Although Russia, the Czech Republic, Hungary, and Poland receive the most media coverage and are among the largest of the former communist countries, others also are struggling to right their economic ships. A small but particularly interesting example is Albania. Ruled ruthlessly by the Stalinist-style dictator Enver Hoxha for over four decades following World War II, Albania was the last, but most devastated, Eastern European coun- try to abandon communism and institute radical economic reforms. At the beginning of the 1990s, Albania started from zero. Industrial output initially fell over 60 percent, and inflation reached 40 percent monthly. Today, Albania still struggles but is slowly making progress. The key for Albania and the other Eastern European countries is to maintain the social order, establish the rule of law, rebuild the collapsed infrastructure, and get facto- ries and other value-added, job-producing firms up and running. Foreign investment must be forthcoming for these countries to join the global economy. A key challenge for Albania and the other “have-not” Eastern European countries will be to make themselves less risky and more attractive for international business.

China China’s GDP has remained strong, growing at 9.1 percent in 2009, 10.4 percent in 2010, 9.3 percent in 2011, and 8.0 percent in 2012, despite the global economic crisis. 48 China faces other formidable challenges, including a massive savings glut in the corporate sector, the globalization of manufacturing networks, vast developmental needs, and the requirement for 15–20 million new jobs annually to avoid joblessness and social unrest. China also remains a major risk for investors. The one country, two systems (com- munism and capitalism) balance is a delicate one to maintain, and foreign businesses are often caught in the middle. Most MNCs find it very difficult to do business in and with China. Concerns about undervaluation of China’s currency, the remnimbi (also know as the yuan), and continued policies that favor domestic companies over foreign ones, make China a complicated and high-risk venture. 49 Even so, MNCs know that China with its 1.3 billion people will be a major world market and that they must have a presence there. Trade relations between China and developed countries and regions, such as the United States and the EU, remain tense. Many in the United States argue that the value of the Chinese currency is kept artificially low, giving China an unfair advantage in selling

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Chapter 1 Globalization and International Linkages 25

its exports. In early 2012, the Chinese premier Wen Jiabao insisted that the yuan’s exchange rate was close to an equilibrium level, despite estimates released by the Peterson Institute that suggest that the currency is still undervalued by at least 24 percent. 50,51 In addition, China’s policy toward foreign investors continues to be fluid and sometimes unpredictable. Both Walmart and Yum Brands found themselves accused of improper business practices and each had to close stores and issues public apologies. Walmart stores in southwest China’s Chongqing have been forced to close following allegations that they have been labeling non organic pork as organic. Yum Brands suffered a 29 percent drop in same store sales in China in April of 2013 after concerns about the safety of some chicken and the spread of Avian flu caused customers to stay away from the outlets. 52,53

Other Emerging Markets of Asia In addition to Japan and China, there are a number of other important economies in the region, including South Korea, Hong Kong, Singapore, and Taiwan. Together, the countries of the ASEAN bloc are also fueling growth and devel- opment in the region. In South Korea, the major conglomerates, called chaebols , include such interna- tionally known firms as Samsung, Daewoo, Hyundai, and the LG Group. Many key managers in these huge firms have attended universities in the West, where in addition to their academic programs they learned western culture, customs, and language. Now they are able to use this information to help formulate competitive international strategies for their firms. This will be very helpful for South Korea, which has shifted to privatiz- ing a wide range of industries and withdrawing some of the restrictions on overall foreign ownership. Like other Asian economies, Korea fared reasonably well throughout the recession of 2008–2009, with a solid economy with moderate growth, moderate inflation, low unemployment, an export surplus, and fairly equal distribution of income. Bordering southeast China and now part of the People’s Republic of China (PRC), Hong Kong has been the headquarters for some of the most successful multinational operations in Asia. Although it can rely heavily on southeast China for manufacturing, there is still uncertainty about the future and the role that the Chinese government intends to play in local governance. Singapore is a major success story. Its solid foundation leaves only the question of how to continue expanding in the face of increasing international competition. To date, however, Singapore has emerged as an urban planner’s ideal model and the leader and financial center of Southeast Asia. Taiwan has progressed from a labor-intensive economy to one that is dominated by more technologically sophisticated industries, including banking, electricity genera- tion, petroleum refining, and computers. Although its economy has also been hit by the downturn in Asia, it continues to steadily grow. Besides South Korea, Singapore, and Taiwan, other countries of Southeast Asia are also becoming dynamic platforms for growth and development. Thailand, Malaysia, Indo- nesia, and now Vietnam (see In the International Spotlight at the end of Chapter 2) have developed economically with a relatively large population base and inexpensive labor despite the lack of considerable natural resources. These countries have been known to have social stability, but in the aftermath of the recent economic crisis there has been considerable turmoil in this part of the world. This instability first occurred in Indonesia, the fourth most populous country in the world, and more recently in Thailand, where supporters of exiled former Prime Minister Thaksin, who left the country in the face of corruption charges, engaged in sometimes violent protests that have caused real concern over the stability of the country. After the Thaksin’s party returned to power in a landslide victory in 2011, with Thaksin’s sister winning the presidency, the country appeared to return to a more stable environment and outlook. 54 On balance, these export-driven Southeast Asian countries remain attractive to outside investors.

India With a population of about 1 billion and growing, India has traditionally had more than its share of political and economic problems. The recent trend of locating software and other higher-value-added services has helped to bolster a large middle- and upper-class market

chaebols Very large, family-held Korean conglomerates that have considerable political and economic power.

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for goods and services and a GDP that is quickly reaching the level of China. India may soon be viewed as a fully developed country if it can withstand the intense growth period. For a number of reasons, India is attractive to multinationals, especially U.S. and British firms. Many Indian people speak English, are very well educated, and are known for advanced information technology expertise. Also, the Indian government is providing funds for economic development. For example, India is expanding its telecommunication systems and increasing the number of phone lines fivefold, a market that AT&T is vigor- ously pursuing. Many frustrations remain in doing business in India (see In the Interna- tional Spotlight at the end of this chapter), but there is little question that the country will receive increased attention in the years ahead.

Developing Economies on the Verge Around the world there are many economies that can be considered developing (what might formally have been termed “less developed” or in some cases “least developed”) that are worthy of attention and understanding. Some of these economies are on the verge of emerging as impressive contributors to global growth and development.

South America Over the years, countries in South America have had difficult economic problems. They have accumulated heavy foreign debt obligations and experienced severe inflation. Although most have tried to implement economic reforms reducing their debt, periodic economic instability and the emergence of populist leaders have had an impact on the attractiveness of countries in this region. Brazil’s economy has evolved into a flourishing system. Though Brazil’s GDP has slowed somewhat since 2011, its growth continues to outpace most developed nations. This economy outweighs that of any other South American country and is quickly becom- ing a worldwide presence. Brazil continues to attract outside investors, partly drawn to opportunities created by Brazil’s privatization of power, telecommunications, and other infrastructure sectors. (See the International Management in Action box: Brazilian Eco- nomic Reform.) Power companies such as AES and General Electric have constructed more than $20 billion worth of electricity plants throughout the country. At the same time, many other well-known companies have set up operations in Brazil, including Arby’s, JCPenney, Kentucky Fried Chicken, McDonald’s, and Walmart. All this international busi- ness activity should spell success. Brazil has benefited from one of the most stable gov- ernments throughout Latin America, which has helped secure the country’s place today as the undisputed economic leader of South America. Chile’s market-based economic growth has fluctuated between 3 and 6 percent over the last decade, one of the best performances in Latin America. Chile attracts a lot of foreign direct investment, mainly dealing with gas, water, electricity, and mining. It continues to participate in globalization by engaging in further trade agreements, includ- ing those with Mercosur, China, India, the EU, South Korea, and Mexico. Argentina has one of the strongest economies overall with abundant natural resources, a highly literate population, an export-oriented agricultural sector, and a diver- sified industrial base; however, it has suffered the recurring economic problems of infla- tion, external debt, capital flight, and budget deficits. While Argentina’s GDP slowed to .09 percent in 2009 due to the global recession, growth has since rebounded, with GDP growth at 8.9 percent in 2011. Despite the ups and downs, a major development in South America is the growth of intercountry trade, spurred on by the progress toward free-market policies. For example, beginning in 1995, 90 percent of trade among Mercosur members was duty-free. At the same time, South American countries are increasingly looking to do business with the United States. In fact, a survey of businesspeople from Argentina, Brazil, Chile, Colombia, and Venezuela found that the U.S. market, on average, was more important for them than any other. Some of these countries, however, also are looking outside the Americas for growth opportunities. Mercosur continues talks with the EU to create free trade between

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International Management in Action

Brazilian Economic Reform http://en.wikipedia.org/wiki/Economic_history_of_Brazil http://www.wto.org/english/tratop_e/tpr_e/tp312_e.htm

Over the past two decades, Brazil’s economic reform and progress have been nothing short of spectacular. Begin- ning with a comprehensive privatization program in the early and mid-1990s under which dozens of state-owned enterprises were sold to commercial interests, Brazil has transformed itself from a relatively closed and frequently unstable economy to one of the global leading “BRIC” countries and the anchor of South American economic development. Brazil’s reform, which has included macro- economic stabilization, liberalization of import and export restrictions, and improved fiscal and monetary manage- ment, reflects a definitive break from past inward-looking policies that characterized much of Latin America in the 1960s and 1970s. A critical milestone was the introduc- tion of the Plano Real (“Real Plan”), instituted in the spring of 1994, which sought to break inflationary expec- tations by pegging the real to the U.S. dollar. Inflation was brought down to single digit annual figures, but not fast enough to avoid substantial real exchange rate appre- ciation during the transition phase of the Plano Real. This appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits. However, no shortage of foreign currency ensued because of the financial community’s renewed interest in Brazilian mar- kets as inflation rates stabilized and memories of the debt crisis of the 1980s faded. The Real Plan successfully eliminated inflation, after many failed attempts to control it. Almost 25 million peo- ple turned into consumers. The maintenance of large current account deficits via capital account surpluses became problematic as investors became more risk averse to emerging market exposure as a consequence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international sup- port program in November 1998. In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S. dollar. This devalua- tion helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998. Brazil’s debt to GDP ratio of 48 percent for 1999 beat the IMF target and helped reassure investors that Brazil will maintain tight fiscal and monetary policy even with a floating currency.

The economy grew 4.4 percent in 2000, but problems in Argentina in 2001, and growing concerns that the presidential candidate considered most likely to win, left- ist Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. Poverty was down to near 16 percent. In 2002, Luis Inácio Lula da Silva won the presiden- tial elections, and he was re-elected in 2006. During his government, the economy began to grow more rap- idly. In 2004 Brazil saw promising growth of 5.7 percent in GDP; following in 2005 with 3.2 percent growth; in 2006, 4.0 percent; in 2007, 6.1 percent; and in 2008, 5.1 percent growth. Although the financial crisis caused some slowdown in Brazil’s economy, it has weathered the period much better than nearly every other econ- omy in the Western Hemisphere. Indeed, confidence in Brazil’s economic performance, and the relatively smooth presidential election and transition in 2010, have resulted in an appreciation of the real in relation to other global currencies, a dramatic turnaround from an earlier era when currency concerns were almost always on the side of depreciation. Although Brazil remains the world’s largest exporter of several agricultural products including beef, chicken, cof- fee, orange juice, and sugar, the country’s international trade and investment relationships have diversified con- siderably to include manufacturing and services. Brazil has become the second-biggest destination for foreign direct investment into developing countries after China. For the past two years, Brazil has been the world’s fastest-growing car market. Vale (VALE) has become one of the world’s biggest mining companies and exports virtually all of its iron ore production to China. Embraer (ERJ) jet, the global leader in small and medium-sized airplanes, is now the world’s third- largest manufacturer of passenger jets after Boeing and Airbus. Petrobras is one of the world’s largest oil and gas companies and has recently discovered major deposits of both oil and gas off the Brazilian coast. Odebrecht is a Brazilian business conglomerate in the fields of Engineering and Construction and Chemicals and Petrochemicals and is responsible for building a number of large infrastructure projects around the world, including roads, bridges, mass transit systems, more than 30 airports, and sports stadiums such as Florida International University’s FIU stadium.

the two blocs, and Chile has joined the Asia-Pacific Economic Cooperation group and the TPP negotiations described above. These developments help illustrate the economic dyna- mism of South America and, especially in light of Asia’s recent economic problems, explain why so many multinationals are interested in doing business with this part of the world.

Middle East and Central Asia Israel, the Arab countries, Iran, Turkey, and the Central Asian countries of the former Soviet Union are a special group of emerging countries.

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28 Part 1 Environmental Foundation

Because of their oil, however, some of these countries are considered to be economically rich. Recently, this region has been in the world news because of the wars and terrorism concerns in the aftermath of the September 11, 2001, terrorist attack on the United States. However, these countries continue to try to balance geopolitical/religious forces with economic viability and activity in the international business arena. Students of international management should have a working knowledge of these countries’ customs, culture, and management practices since most industrial nations rely, at least to some degree, on imported oil and since many people around the world work for international, and specifically Arab, employers. The Arab and Central Asian countries rely almost exclusively on oil production. The price of oil greatly fluctuates, and the Organization of Petroleum Exporting Coun- tries (OPEC) has trouble holding together its cartel. In recent years the price has been relatively high, and world demand is likely to keep it there. Arab countries have invested billions of dollars in U.S. property and businesses. Many people around the world, including those in the West, work for Arab employers. For example, the bankrupt United Press International was purchased by the Middle East Broadcasting Centre, a London- based MNC owned by the Saudis. The “Arab Spring,” described in the next chapter, has had a profound impact on the political and economic environment of many countries in this region.

Africa Even though they have considerable natural resources, many African nations re- main very poor and undeveloped, and international trade is only beginning to serve as a major source of income. One major problem of doing business in the African continent is the overwhelming diversity of approximately one-billion people, divided into 3,000 tribes, that speak 1,000 languages and dialects. Also, political instability is pervasive, and this instability generates substantial risks for foreign investors. In recent years, Africa, especially sub-Saharan Africa, has had a number of severe problems. In addition to tragic tribal wars, there has been the spread of terrible diseases such as AIDS and Ebola. In 2002–2003, the WTO agreed to relax intellectual property rights (IPR) rules to allow for greater and less costly access by African countries to anti- viral AIDS medications (see the In-Depth Integrative Case at the end of Part One of this text). While globalization has opened up new markets for developed countries, developing nations in Africa lack the institutions, infrastructure, and economic capacity to take full advantage of globalization. Other big problems include poverty, malnutrition, illiteracy, corruption, social breakdown, vanishing resources, overcrowded cities, drought, and homeless refugees. There is still hope in the future for Africa despite this bleak situation, because the potential of African countries remains virtually untapped. Not only are there considerable natural resources, but the diversity itself can also be used to advantage. For example, many African people are familiar with the European cultures and languages of the former colonial powers (e.g., English, French, Dutch, and Portuguese), and this can serve them well in international business as they strive for continued growth. Uncertain times are ahead, but a growing number of MNCs are attempting to make headway in this vast continent. Also, the spirit of these emerging countries has not been broken. There are continuing efforts to stimulate economic growth. Examples of what can be done include Togo, which has sold off many of its state-owned operations and leased a steel-rolling mill to a U.S. investor, and Guinea, which has sold off some of its state-owned enterprises and cut its civil service force by 30 percent. A special case is South Africa, where apart- heid, the former white government’s policies of racial segregation and oppression, has been dismantled and the healing process is progressing. Long-jailed former black president Nelson Mandela is recognized as a world leader. These significant developments have led to an increasing number of the world’s MNCs returning to South Africa; however, there continue to be both social and economic problems that, despite Mandela’s and his suc- cessors’ best efforts, signal uncertain times for the years ahead. One major initiative is the country’s Black Economic Empowerment (BEE) program, designed to reintegrate the disenfranchised majority into business and economic life. Africa’s economic growth and dynamism have accelerated in recent years. Real GDP rose by 4.9 percent a year from 2000 through 2008, more than twice its pace in the 1980s

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Chapter 1 Globalization and International Linkages 29

and 90s. Telecommunications, banking, and retailing are all flourishing. Many African economies saw their growth accelerate in 2006–2008 due in part to higher commodity prices. While growth in sub-Saharan Africa slowed to 2.1 percent in 2009, growth rebounded to about 5 percent in 2011 and 2012, and the World Bank predicts that output will continue to grow at a similar pace in 2013 and 2014 (see Table 1–12). McKinsey, the global consultancy,

Table 1–12 Overview of the World Economic Outlook; Projections (percentage change, unless otherwise noted)

Year over Year Q4 over Q4

Projections Estimates Projections

2011 2012 2013 2014 2012 2013 2014

World Output 3.9 3.2 3.5 4.1 2.9 3.8 4.0 Advanced Economies 1.6 1.3 1.4 2.2 0.9 2.0 2.1 United States 1.8 2.3 2.0 3.0 1.9 2.4 3.2 Euro Area 1.4 20.4 20.2 1.0 20.7 0.5 1.0 Germany 3.1 0.9 0.6 1.4 0.6 1.3 1.1 France 1.7 0.2 0.3 0.9 0.3 0.3 1.2 Italy 0.4 22.1 21.0 0.5 22.4 0.1 0.4 Spain 0.4 21.4 21.5 0.8 21.9 20.3 0.8 Japan 20.6 2.0 1.2 0.7 0.2 2.6 20.1 United Kingdom 0.9 20.2 1.0 1.9 0.0 1.4 2.0 Canada 2.6 2.0 1.8 2.3 1.3 2.2 2.3 Other Advanced Economies 3.3 1.9 2.7 3.3 2.0 3.5 3.2 Newly Industrialized Asian Economies 4.0 1.8 3.2 3.9 2.4 3.9 3.8 Emerging and Developing Economies 6.3 5.1 5.5 5.9 5.5 5.9 6.2 Central and Eastern Europe 5.3 1.8 2.4 3.1 1.6 3.2 3.1 Commonwealth of Independent States 4.9 3.6 3.8 4.1 2.4 4.3 3.4 Russia 4.3 3.6 3.7 3.8 2.4 4.4 3.4 Excluding Russia 6.2 3.9 4.3 4.7 … … … Developing Asia 8.0 6.6 7.1 7.5 7.3 7.1 7.8 China 9.3 7.8 8.2 8.5 8.1 7.9 8.8 India 7.9 4.5 5.9 6.4 5.4 6.0 6.4 ASEAN25 4.5 5.7 5.5 5.7 7.7 5.8 5.5 Latin America and the Caribbean 4.5 3.0 3.6 3.9 3.1 4.2 3.6 Brazil 2.7 1.0 3.5 4.0 2.1 4.0 4.1 Mexico 3.9 3.8 3.5 3.5 2.8 4.9 2.5 Middle East and North Africa (MENA) 3.5 5.2 3.4 3.8 … … … Sub-Saharan Africa 5.3 4.8 5.8 5.7 … … … South Africa 3.5 2.3 2.8 4.1 1.5 4.2 4.1 Memorandum European Union 1.6 20.2 0.2 1.4 20.3 1.0 1.2 World Growth Based on Market

Exchange Rates 2.9 2.5 2.7 3.4 2.1 3.1 3.3 World Trade Volume (goods and services) 5.9 2.8 3.8 5.5 … … … Imports Advanced Economies 4.6 1.2 2.2 4.1 … … … Emerging and Developing Economies 8.4 6.1 6.5 7.8 … … … Exports Advanced Economies 5.6 2.1 2.8 4.5 … … … Emerging and Developing Economies 6.6 3.6 5.5 6.9 … … …

Source: IMF World Economic Outlook, January 2013.

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30 Part 1 Environmental Foundation

has found that the rate of return on foreign investment in Africa is actually higher than any other region, offering positive prospects for this historically struggling region. 55 Table 1–12 shows economic growth rates and projections for major world regions and countries from 2011 to 2014. Of note is the fact that a number of emerging regions and countries are growing faster than developed countries; notably, China, India, and other Asian economies. Table 1–13 ranks the top 10 countries globally on their “com- petitiveness” as reported by the World Economic Forum. For 2013, Hong Kong and Singapore were ranked third and fifth, respectively. Table 1–14 ranks emerging markets according to several key indicators.

■ The World of International Management—Revisited

In the World of International Management at the start of the chapter you read about how social media is changing how we connect, shaping business strategy and operations, and even affecting diplomacy. Social media and social networks are revolutionizing the nature of international management by allowing producers and consumers to interact directly and bringing populations of the world closer together. Having read this chapter, you should now be more cognizant of the impacts of globalization and many international linkages among countries, firms, and societies on international management. Although controversial, globalization appears unstoppable. The creation of free-trade agreements worldwide has helped to trigger economic gains in many developing nations. The con- solidation and expansion of the EU will continue to open up borders and make it easier and more cost-effective for exporters from less developed countries to do business there. In Asia, formerly closed economies such as India and China have opened up, and other emerging Asian countries such as Indonesia, Malaysia, the Philippines, and Thailand are becoming important emerging economies in their own right. Continued efforts to priva- tize, deregulate, and liberalize many industries will increase consumer choice and lower prices as competition increases. The rapid growth of social media networks around the world is but one reflection of the interconnected nature of global economies and indi- viduals. In some ways, social media are transcending traditional barriers and impedi- ments to global integration; however, differences in economic systems and approaches persist, making international management an ongoing challenge. In light of these developments, answer the following questions: (1) What are some of the pros and cons of globalization and free trade? (2) How might the rise of social media result in closer connections (and fewer conflicts) among nations? (3) Which regions of the world are most likely to benefit from globalization and integration in the years to come, and which may experience dislocations or setbacks?