The Role of Technology on MNCs, week 2 discussion help

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"The Role of Technology on MNCs" Please respond to the following:

  • Specify the fundamental manner in which the technological environment discussed in the text is compelling MNCs to explore outsourcing and offshoring opportunities. Provide at least two (2) examples of such exploration to support your response. (Chapter 2 and 3)
  • Examine the primary manner in which the emergence of technology may result in greater integration and dependencies among economies, political systems, and financial markets. Formulate at least two (2) examples of such results to support your response.

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Course International Management 9e http://create.mcgraw-hill.com Copyright 2014 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, 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 prior written permission of the publisher. This McGraw-Hill Create text may include materials submitted to McGraw-Hill for publication by the instructor of this course. The instructor is solely responsible for the editorial content of such materials. Instructors retain copyright of these additional materials. ISBN-10: 1308207840 ISBN-13: 9781308207841 Contents 1. Globalization and International Linkages 2 2. The Political, Legal, and Technological Environment 36 3. Ethics, Social Responsibility, and Sustainability 62 4. The Meanings and Dimensions of Culture 88 5. Managing Across Cultures 124 6. Organizational Cultures and Diversity 152 7. Cross-Cultural Communication and Negotiation 178 8. Strategy Formulation and Implementation 216 9. Entry Strategies and Organizational Structures 248 iii Credits 1. Globalization and International Linkages: Chapter 1 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 2 2. The Political, Legal, and Technological Environment: Chapter 2 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 36 3. Ethics, Social Responsibility, and Sustainability: Chapter 3 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 62 4. The Meanings and Dimensions of Culture: Chapter 4 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 88 5. Managing Across Cultures: Chapter 5 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 124 6. Organizational Cultures and Diversity: Chapter 6 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 152 7. Cross-Cultural Communication and Negotiation: Chapter 7 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 178 8. Strategy Formulation and Implementation: Chapter 8 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 216 9. Entry Strategies and Organizational Structures: Chapter 9 from International Management: Culture, Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 248 iv 2 International Management 9e Lut62449_ch01_001-035.indd Page 2 12/11/13 5:53 AM user-1 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Chapter 1 OBJECTIVES OF THE CHAPTER 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 growing 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 uncertainties in many world regions present challenges for governments, 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 Management 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 contemporary 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 problems that managers in the international arena will face during the years ahead. Since the environment of international management is all-encompassing, this chapter is mostly concerned 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. 2 The World of International Management An Interconnected World ay 18, 2012, marked one of the most highlyanticipated 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 allnight “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 opening of the market at 9:30 A.M. As Wall Street’s closing 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 continued its downward trajectory. By mid-August, Facebook stock had decreased to nearly half its original offering price, leaving many to wonder, “Is social networking really here to stay?” M 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 Lut62449_ch01_001-035.indd Page 3 12/11/13 5:53 AM user-1 social media has connected people across the globe: • • • • • • • • 3 International Management: Culture, Strategy, and Behavior, Ninth Edition 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 leveraged social media to improve its long-term brand image. In 2010, P&G unveiled a Billion Acts of Green™ Facebook application which allows people to “make a pledge to lessen their environmental impact and promote environmentally beneficial habits to friends and family via social media channels.” 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 monitoring Facebook activity, P&G discovered that the most social media buzz regarding Pepto-Bismol was occurring on weekend mornings, likely after customers had overindulged the night before. To tap into this market, P&G created a Facebook initiative called “Celebrate Life.” Within one year, Pepto-Bismol gained 11 percent market share.7 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 campaign 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 vacation 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 recommended 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 3 4 International Management 9e Lut62449_ch01_001-035.indd Page 4 12/11/13 5:53 AM user-1 4 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Part 1 Environmental Foundation 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 application 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 delegation 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. 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 consumers 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 changing 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. 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. ■ 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 different 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. Lut62449_ch01_001-035.indd Page 5 12/11/13 5:53 AM user-1 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Chapter 1 Globalization and International Linkages 5 Table 1–1 The World’s Top Nonfinancial TNCs, Ranked by Foreign Assets, 2012 (in millions of dollars) Company Name Home Economy 4 5 General Electric Royal Dutch/ Shell plc British Petroleum Company Plc Toyota Motor Corporation Total SA 6 7 8 9 10 Exxon Mobil Corporation Vodafone Group Plc GDF Suez Chevron Corporation Volkswagen Group Rank 1 2 3 5 International Management: Culture, Strategy, and Behavior, Ninth Edition Foreign Assets Total Assets Foreign Sales Total Sales United States Netherlands/ United Kingdom $338,157 $685,328 $75,640 $144,796 307,938 360,325 282,930 467,153 United Kingdom Japan France 270,247 233,193 214,507 300,193 376,841 227,107 300,216 170,486 180,440 375,580 265,770 234,287 United States United Kingdom France United States Germany 214,349 199,003 175,057 158,865 158,046 333,795 217,031 271,607 232,982 409,257 301,840 62,065 78,555 132,743 199,129 420,714 70,224 124,711 222,580 247,624 Source: UNCTAD World Investment Report 2013, Web Table 28. 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 investment 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 prosperity 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 MNC A firm having operations in more than one country, international sales, and a nationality mix among managers and owners. 6 International Management 9e Lut62449_ch01_001-035.indd Page 6 12/11/13 5:53 AM user-1 6 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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) Rank 1 2 3 4 5 6 7 8 9 10 Company Name Home Economy Foreign Assets Total Assets Foreign Sales Total Sales Hutchison Whampoa Limited CITIC Group Hon Hai Precision Industries Vale SA Hong Kong/ China China $77,291 71,512 $92,788 514,847 $23,477 9,923 $30,023 51,659 Taiwan Brazil 52,198 48,045 57,451 128,728 114,285 49,475 117,992 60,389 China 40,435 52,230 19,454 29,579 Malaysia 38,907 Mexico 34,601 Mexico 32,694 Russian Federation 29,829 150,435 39,191 67,590 54,039 43,228 11,792 38,315 11,280 72,853 15,208 53,553 20,262 China 112,887 19,786 75,518 China Ocean Shipping (Group) Company Petronas – Petroliam Nasional BhD Cemex S.A.B. de C.V. America Movil SAB De CV VimpelCom Ltd China National Offshore Oil Group 29,802 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 overseas.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 international 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. Moreover, 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 operating locally. Table 1–2 lists the world’s top nonfinancial companies from developing countries ranked by foreign assets in 2011. ■ Globalization and Internationalization globalization The process of social, political, economic, cultural, and technological integration among countries around the world. 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 increasing 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 Lut62449_ch01_001-035.indd Page 7 12/11/13 5:53 AM user-1 7 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 longstanding patterns of transcontinental trade that developed over many centuries. The act of barter is the forerunner of modern international trade. During different 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 practiced 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 dissemination 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 agreements, and trade. Trans-Saharan Cross-Continental Trade Early tribes inhabiting the triad cities of Mauritania, in ancient West Africa below the Sahara, embraced caravan 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 flavoring 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 multinationals, 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 crossborder 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 mercantile agent, authored Practica Della Mercatura (Practice of Marketing), the first widely distributed reference on international 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 grievances against the English crown upon which a new nation was founded, cites the desire to “establish Commerce” as a chief rationale for establishing an independent 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 statements 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 development. 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. 7 8 International Management 9e Lut62449_ch01_001-035.indd Page 8 12/11/13 5:53 AM user-1 8 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. /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 pressures.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 better 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 disagree, 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 executives. Proponents claim that job losses are a natural consequence of economic and technological change and that offshoring actually improves the competitiveness of American 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, however, 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 Lut62449_ch01_001-035.indd Page 9 12/11/13 5:53 AM user-1 9 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles A Closer Look Outsourcing and Offshoring The concepts of outsourcing and offshoring are not new, but these practices are growing at an extreme rate. Offshoring refers to the process by which companies undertake some activities at offshore locations instead of in their countries of origin. Outsourcing is the subcontracting or contracting out of activities to external organizations 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 services, and even legal work. During 2006, Du Pont hired attorneys in Manila to oversee documentation in preparation for legal cases. The company hopes to save an estimated $6 million in legal spending by moving offshore 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 opportunities 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 distribution 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. 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 environment. 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 disruptions. 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 Tariffs and Trade (GATT) and the creation of the World Trade Organization (WTO) to World Trade Organization (WTO) The global organization of countries that oversees rules and regulations for international trade and investment. 9 International Management 9e 10 Lut62449_ch01_001-035.indd Page 10 20/12/13 9:33 PM user 10 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Part 1 Environmental Foundation Table 1–3 Completed Rounds of the Negotiations under the GATT and WTO Year Place (name) Subjects Covered 1947 1949 1951 Geneva Annecy Torquay Tariffs Tariffs Tariffs 23 13 38 1956 1960–1961 Geneva Geneva (Dillon Round) Tariffs Tariffs 26 1964–1967 Geneva (Kennedy Round) Geneva (Tokyo Round) Tariffs and antidumping measures Tariffs, nontariff measures, “framework” agreements 102 Geneva (Uruguay Round) Tariffs, nontariff measures, services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO 123 1973–1979 1986–1994 Countries 26 62 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. 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 agreements needed to explicitly consider the needs of and impact on developing countries.27 However, after a lack of consensus among WTO members regarding agricultural subsidies 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 protectionism 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 developments 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 countries; and (5) the removal of restrictions on agricultural products, auto parts, and energy Lut62449_ch01_001-035.indd Page 11 12/11/13 5:53 AM user-1 11 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Chapter 1 Globalization and International Linkages 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 freetrade 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 investment 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, Denmark, 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 11 European Union A political and economic community consisting of 28 member states. International Management 9e 12 Lut62449_ch01_001-035.indd Page 12 12/11/13 5:53 AM user-1 12 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 resulting 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 continues 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 challenges 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 currently 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 representative 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 techniques. 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 important to this new climate of globalization, however, are broader trends that reflect the emergence 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 economic 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 Lut62449_ch01_001-035.indd Page 13 12/11/13 5:53 AM user-1 13 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 BRICS. 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 countries, 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 14,256 5,068 4,909 1 2 3 37,876 7,664 51,180 2 5 1 Germany France United Kingdom 3,347 2,649 2,175 4 5 6 5,707 5,344 5,628 8 11 9 Italy Brazil Spain Canada 2,113 1,572 1,460 1,336 7 8 9 10 3,798 9,235 3,195 3,322 13 4 16 15 India Russia Australia 1,296 1,231 925 11 12 13 31,313 6,112 2,486 3 6 20 875 14 5,800 7 United States Japan China Mexico Source: From The World in 2050: The accelerating shift of global economic power: challenges and opportunities. Copyright © 2009 PricewaterhouseCoopers LLP. International Management 9e 14 Lut62449_ch01_001-035.indd Page 14 30/01/14 9:57 PM user 14 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 14,256 1 37,876 3 China Japan India Germany 8,888 4,138 3,752 2,984 2 3 4 5 59,475 7,664 43,180 5,707 1 5 2 9 Russia United Kingdom France Brazil Italy Mexico Spain South Korea Canada 2,687 2,257 2,172 2,020 1,922 1,540 1,496 1,324 1,280 6 7 8 9 10 11 12 13 14 7,559 5,628 5,344 9,762 3,798 6,682 3,195 3,258 3,322 6 10 11 4 15 7 18 17 16 United States Rank 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 countries 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 population, 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 United States 26.7 15.9 India Brazil Russia 12.2 2.4 2.3 Indonesia South Korea United Kingdom 2.3 2.1 1.9 Source: From Foresight 2020: Economic, Industry and Corporate Trends. Copyright © 2006 The Economist Intelligence Unit. Reprinted with permission of The Economist Intelligence Unit. Lut62449_ch01_001-035.indd Page 15 20/12/13 9:33 PM user 15 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 2 China Soviet Union China India India China 3 4 5 India United States Japan United States Indonesia Brazil United States Indonesia Pakistan 6 7 8 9 Indonesia Germany Brazil United Kingdom Pakistan Bangladesh Nigeria Russia Ethiopia Nigeria Brazil Bangladesh Italy France Bangladesh Japan Mexico Philippines Philippines Mexico Congo 10 11 12 Source: U.S. Census Bureau (IDB). Retrieved September 18, 2012. Most African countries have not, to date, fully benefited from globalization. However, 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 country—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. 141 63 205 55 47 98 119 138 77 66 78 1,087 4,392 6,115 Next-11 Bangladesh Egypt Indonesia Iran S. Korea Mexico Nigeria Pakistan Philippines Turkey Vietnam Total/Average TOTALS World $32,216.0 $25,825.0 $47.0 99.0 166.0 85.0 533.0 672.0 46.0 74.0 81.0 266.0 31.0 $2,100.0 $642.0 1,198.0 476.0 260.0 $2,576.0 1,892.0 1,101.0 4,667.0 1,481.0 9,951.0 $21,149.0 $725.0 1,332.0 $5,268 $5,880 $334 1,566 807 1,559 11,317 6,859 390 539 1,053 4,026 402 $2,626 $3,751 946 465 1,775 $988 23,051 19,334 36,800 25,142 35,252 30,343 $23,653 22,550 GDP (per cap.) 6,909 4,901 164 78 238 75 49 109 156 172 94 71 88 1,294 193 1,341 1,191 143 2,868 82 60 128 62 310 739 34 63 Population (millions) 2010 $62,911.0 $47,702.0 $106.0 218.0 707.0 407.0 1,014.0 1,034.0 203.0 177.0 200.0 735.0 104.0 $4,905.0 $2,090.0 5,878.0 1,632.0 1,480.0 $11,080.0 3,286.0 2,055.0 5,459.0 2,250.0 14,527.0 $31,717.0 $1,577.0 2,563.0 GDP (billions) Source: IMF, “World Economic Outlook Database.” September 2011. http://www.imf.org/. 171 1,267 1,024 146 2,608 BRICs Brazil China India Russia Total/Average 82 57 127 59 282 697 30 59 GDP (billions) 2000 $9,106 $9,734 $642 2,808 2,974 5,449 20,756 9,522 1,298 1,030 2,123 10,309 1,174 5,280 $10,816 4,382 1,371 10,356 $3,863 40,274 34,059 42,783 36,164 46,860 42,919 $46,303 40,704 GDP (per cap.) 7,302 5,202 179 88 255 82 50 115 184 194 106 76 95 1,424 203 1,382 1,289 140 3,014 81 62 127 65 328 764 36 65 Population (millions) $91,575.0 $69,336.0 $174.0 342.0 1,382.0 630.0 1,686.0 1,505.0 359.0 303.0 307.0 1,133.0 210.0 $8,031.0 $3,373.0 11,780.0 3,027.0 3,088.0 $21,268.0 3,929.0 2,476.0 6,783.0 3,224.0 18,251.0 $40,037.0 $2,106.0 3,268.0 GDP (billions) 2016 $12,541 $13,329 $973 3,901 5,429 7,702 33,948 13,052 1,957 1,566 2,907 14,839 2,217 $7,056 $16,635 8,523 2,349 22,066 $7,056 48,731 40,100 53,615 49,777 55,622 52,404 $58,674 50,497 GDP (per cap.) 16 Germany Italy Japan United Kingdom United States Total/Average Canada France Country Population (millions) Table 1–8 Population, GDP, and GDP per Capita of G-7, BRIC, and N-11 Countries, 2000, 2010, and 2016 (projection) International Management 9e 16 Lut62449_ch01_001-035.indd Page 16 12/11/13 5:53 AM user-1 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Part 1 Environmental Foundation Lut62449_ch01_001-035.indd Page 17 20/12/13 9:33 PM user 17 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Chapter 1 Globalization and International Linkages 17 Table 1–9 World Merchandise Trade by Region and Selected Country, 2012 (in US$ billions and percentages) Exports Value 2012 World North America United States Canada Mexico South and Central America Brazil Other South and Central America Europe European Union (27) Germany France Netherlands United Kingdom Italy Commonwealth of Independent States (CIS) Russian Federation Africa South Africa Africa less South Africa Oil exporters Non oil exporters Middle East Asia China Japan India Newly industrialized economies (4) Memorandum items: MERCOSUR ASEAN EU (27) extra-trade Least developed countries (LDCs) Imports Annual Percentage Change 2005–12 Value 2012 2012 Annual Percentage Change 2010 2011 2010 2011 2012 17,850 2,373 1,547 8 7 8 22 23 21 20 16 16 0 4 5 18,155 3,192 2,335 2005–12 8 5 4 21 23 23 19 15 15 0 3 3 455 371 3 8 23 30 17 17 1 6 475 380 6 8 22 28 15 16 2 5 749 243 11 11 26 32 27 27 0 25 753 233 14 17 30 43 25 24 3 22 506 6,373 5,792 1,407 569 656 468 500 11 5 5 5 3 7 3 4 22 12 12 12 8 15 15 10 28 18 18 17 14 15 17 17 2 24 25 25 25 22 27 24 520 6,519 5,927 1,167 674 591 680 486 13 5 5 6 4 7 4 3 24 13 13 14 9 17 14 17 25 17 17 19 18 16 14 15 5 26 26 27 26 21 1 213 804 529 626 87 539 370 169 1,287 5,640 2,049 13 12 11 8 11 11 11 13 11 15 31 32 30 31 30 34 22 28 31 31 34 30 17 21 16 15 20 37 18 20 2 1 5 211 8 12 21 3 2 8 568 335 604 123 481 179 303 721 5,795 1,818 15 15 13 10 14 14 14 12 12 16 25 30 16 27 13 10 15 13 33 39 30 30 18 29 15 10 18 17 23 25 5 4 8 1 9 8 10 6 4 4 799 293 4 17 33 37 7 34 23 23 886 489 8 19 26 36 23 33 4 5 1,280 8 30 16 21 1,310 9 32 19 0 340 11 29 26 24 325 16 43 25 23 1,254 2,166 10 7 29 17 18 21 1 0 1,221 2,301 11 7 31 18 21 18 6 24 204 14 27 25 1 223 14 11 22 8 Source: WTO Press Release 688, April 10, 2013, Appendix Table 1. Reprinted with permission. International Management 9e 18 Lut62449_ch01_001-035.indd Page 18 12/11/13 5:53 AM user-1 18 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Part 1 Environmental Foundation Table 1–10 Foreign Direct Investment Inflows, by Region (in US$ billions) Developed economies Developing economies Africa East and Southeast Asia South Asia West Asia Latin America and the Caribbean Transition economies 2012 2011 2010 $560.7 702.8 50.0 $820.0 735.2 47.6 $696.4 637.1 43.6 326.1 33.5 47.1 243.9 342.9 44.2 49.1 249.4 312.5 28.7 59.5 189.9 87.4 96.3 87.4 Source: UNCTAD, World Investment Report 2013, Web Table 1. As nations become more affluent, they begin looking for countries with economic growth potential where they can invest. Over the last two decades, for example, Japanese MNCs have invested not only in their Asian neighbors but also in the United States and the EU. European MNCs, meanwhile, have made large financial commitments in Japan and more recently in China and India, because they see Asia as having continued growth potential. American multinationals have followed a similar approach in regard to both Europe and Asia. The following quiz illustrates how transnational today’s MNCs have become. This trend is not restricted to firms in North America, Europe, or Asia. An emerging global community is becoming increasingly interdependent economically. Take the quiz and see how well you do by checking the answers given at the end of the chapter. However, although there may be a totally integrated global market in the near future, at present, regionalization, as represented by North America, Europe, Asia, and the less developed countries, is most descriptive of the world economy. 1. 2. Where is the parent company of Braun household appliances (electric shavers, coffee makers, etc.) located? a. Italy b. Germany c. the United States d. Japan The BIC pen company is a. Japanese b. British c. U.S.–based d. French Table 1–11 Foreign Direct Investment Outflows, by Region (in US$ billions) Developed economies Developing economies Africa East and Southeast Asia South Asia West Asia Latin America and the Caribbean Transition economies 2012 2011 2010 $909.4 426.1 14.3 $1,183.1 422.1 5.4 $1,029.8 413.2 9.3 275.0 9.2 271.5 13.0 254.2 16.4 23.9 103.0 55.5 26.2 105.2 72.9 13.4 119.2 61.8 Source: UNCTAD, World Investment Report 2013, Web Table 2. Lut62449_ch01_001-035.indd Page 19 12/11/13 5:53 AM user-1 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Chapter 1 Globalization and International Linkages 3. 4. 5. 6. 7. 8. 9. 10. 19 International Management: Culture, Strategy, and Behavior, Ninth Edition The company that owns Jaguar is based in a. Germany b. the United States c. the United d. India Kingdom RCA television sets are produced by a company based in a. France b. the United States c. Malaysia d. Taiwan The firm that owns Green Giant vegetables is a. U.S.-based b. Canadian c. British d. Italian The owners of Godiva chocolate are a. U.S.-based b. Swiss c. Dutch d. Turkish The company that produces Vaseline is a. French b. Anglo-Dutch c. German d. U.S.-based Wrangler jeans are made by a company that is a. Japanese b. Taiwanese c. British d. U.S.-based The company that owns Holiday Inn is headquartered in a. Saudi Arabia b. France c. the United States d. Britain 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 expansion 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 supports 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 general 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 supply. 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 19 International Management 9e 20 Lut62449_ch01_001-035.indd Page 20 12/11/13 5:53 AM user-1 20 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 contradictory outcomes. Management within this model ignores demographic information. Government 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 companies. 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. Ownership 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 economies (some of which may soon become emerging). Established Economies North America As noted earlier, North America constitutes one of the four largest trading 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 decision-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 throughout 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 expansion. 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 Lut62449_ch01_001-035.indd Page 21 12/11/13 5:53 AM user-1 21 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Chapter 1 Globalization and International Linkages 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 efficiency 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 previous 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 Helú, the world’s richest inidividual.45. Because of NAFTA, Mexican businesses are finding themselves able to take advantage of the U.S. market by producing goods for that market that were previously purchased 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 manufacturing 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 eventually 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 reality 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 21 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. International Management 9e 22 Lut62449_ch01_001-035.indd Page 22 12/11/13 5:53 AM user-1 22 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles Part 1 Environmental Foundation Such developments will allow companies based in EU nations that are able to manufacture 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 former 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 conditions (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- 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. 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 guaranteed lifetime employment, and the overall commitment that Japanese workers have to their organizations. However, at least some of these assumptions about the Japanese workforce 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 identifies 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 Lut62449_ch01_001-035.indd Page 23 12/11/13 5:53 AM user-1 23 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles International Management in Action Recognizing Cultural Differences 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 management 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 constantly 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 partnership 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 www.usrbc.org, www.careerwatch.com 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 recurring 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 evolutionary knowledge can assist in understanding emerging economies. These examples show the importance of studying international management and learning via systematic analysis of culture and history and firsthand information 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 effective international management. 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 developing economies that exhibit sustained economic reform and growth. Central and Eastern Europe In 1991, the Soviet Union ceased to exist. Each of the individual 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 Republic 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 economy. 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 painfully 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. 23 International Management 9e 24 Lut62449_ch01_001-035.indd Page 24 12/11/13 5:53 AM user-1 24 /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 ventures 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 Suzuki’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 component 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 neighbors, 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 recession 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 country 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 factories 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 (communism 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 Lut62449_ch01_001-035.indd Page 25 12/11/13 5:53 AM user-1 25 International Management: Culture, Strategy, and Behavior, Ninth Edition /203/MH02020/Lut62449_disk1of1/0077862449/Lut62449_pagefiles 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 development in the region. In South Korea, the major conglomerates, called chaebols, include such internationally 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 privatizing 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 generation, 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, Indonesia, 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 stabili...
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Running head: THE ROLE OF TECHNOLOGY ON MNCs

The Role of Technology on MNCs
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Institution

1

THE ROLE OF TECHNOLOGY ON MNCs

2

The Role of Technology on MNCs
Multinational corporations (MNCs) are organizations or companies that cover a global
scope of their operations in terms of sales and diversity (Luthans & Doh, 2012). This strategy is
effective because it enables them to increase their revenues significantly and to achieve great
brand recognition. In this regard, technological developments continue to facilitate globalization
and internationalization for major and growing companies in their particu...


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