Wright State University Interest Rates and Exchange Rates of Foreign Market Research Paper

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Read Chapter 10: The Foreign Exchange Market. Now research topic "Interest Rates and Exchange Rates"

Read Chapter 10: The Foreign Exchange Market. Now research topic "Interest Rates and Exchange Rates"

You will need at least three journal references and the textbook. Start your research with the textbook so it always grounds your topic.

When your research is complete write a discussion post of atleast 750 words (2 pages).

Instructions :

It’s so important that you ground your topic with the textbook. So, please start with the text book and then 3 journal references.

Need at least three journal references

70% should be from text book, remaining 30% should be from three journal references

Textbook and 3 journal references are must and should

EVERYTHING SHOULD BE IN APA FORMAT

EVERYTHING SHOULD BE PLAGIARISM FREE. PLEASE POST PLAGIARISM RESULT.

CITE ALL THE REFERENCES

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Page i 11e GLOBAL BUSINESS TODAY Charles W. L. Hill University of Washington G. Tomas M. Hult Michigan State University Page ii GLOBAL BUSINESS TODAY, ELEVENTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2018, 2016, and 2014. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 22 21 20 19 ISBN 978-1-260-08837-3 (bound edition) MHID 1-260-08837-5 (bound edition) ISBN 978-1-260-78061-1 (loose-leaf edition) MHID 1-260-78061-9 (loose-leaf edition) Director, Business, Economics, and Computing: Anke Weekes Portfolio Manager: Peter Jurmu Lead Product Developer: Kelly Delso Product Developer: Haley Burmeister Senior Marketing Manager: Nicole Young Content Project Managers: Harvey Yep (Core), Keri Johnson (Assessment) Buyer: Laura M. Fuller Design: Egzon Shaqiri Content Licensing Specialists: Traci Vaske (Image and Text) Cover Image: © VIPRESIONA/Shutterstock Compositor: Aptara®, Inc. Printer: LSC Communications All credits appearing on page are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Hill, Charles W. L., author. | Hult, G. Tomas M., author. Title: Global business today / Charles W.L. Hill, University of Washington, G. Tomas M. Hult, Michigan State University. Description: 11e [edition]. | New York, NY : McGraw-Hill Education, [2020] Identifiers: LCCN 2018050510| ISBN 9781260088373 (alk. paper) | ISBN 1260088375 (alk. paper) Subjects: LCSH: International business enterprises—Management. | International trade. | Investments, Foreign. | Capital market. Classification: LCC HD62.4 .H548 2020 | DDC 658/.049—dc23 LC record available at https://lccn.loc.gov/2018050510 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered For my mother June Hill, and the memory of my father, Mike Hill —Charles W. L. Hill For Gert & Margareta Hult, my parents —G. Tomas M. Hult Page iii Page iv about the authors CHARLES W. L. HILL University of Washington Charles W. L. Hill is the Hughes M. and Katherine Blake Professor of Strategy and International Business at the Foster School of Business, University of Washington. Professor Hill has taught in the MBA, Executive MBA, Technology Management MBA, Management, and PhD programs at the University of Washington. During his time at the University of Washington, he has received over 25 awards for teaching excellence, including the Charles E. Summer Outstanding Teaching Award. The Foster School is consistently ranked as a Top25 business school. Learn more about Professor Hill at http://foster.uw.edu/faculty-research/directory/charles-hill. A native of the United Kingdom, Professor Hill received his PhD from the University of Manchester, UK. In addition to the University of Washington, he has served on the faculties of the University of Manchester, Texas A&M University, and Michigan State University. Professor Hill has published over 50 articles in top academic journals, including the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, and Organization Science. Professor Hill has also published several textbooks, including International Business (McGraw-Hill) and Global Business Today (McGraw-Hill). His work is among the most widely cited in international business and strategic management. Beginning in 2014, Dr. Hill partnered with Dr. Tomas Hult in a formidable co-authorship of the International Business franchise of textbooks (International Business and Global Business Today).This brought together two of the most cited international business scholars in history. Professor Hill works on a private basis with a number of organizations. His clients have included Microsoft, where he has been teaching in-house executive education courses for two decades. He has also consulted for a variety of other large companies (e.g., AT&T Wireless, Boeing, BF Goodrich, Group Health, Hexcel, Microsoft, Philips Healthcare, Philips Medical Systems, Seattle City Light, Swedish Health Services, Tacoma City Light, Thompson Financial Services, WRQ, and Wizards of the Coast). Professor Hill has also served on the advisory board of several start-up companies. For recreation, Professor Hill enjoys skiing and competitive sailing! Page v G. TOMAS M. HULT Michigan State University Dr. Tomas Hult is Professor of Marketing, Byington Endowed Chair, and Director of the International Business Center in the Department of Marketing in the Eli Broad College of Business at Michigan State University. He also teaches for the Broad College’s Department of Supply Chain Management and Department of Management. Learn more about Professor Hult at http://broad.msu.edu/facultystaff/hult. A native of Sweden, Dr. Hult received a mechanical engineer degree in Sweden before obtaining Bachelor and MBA degrees in the United States, followed by a PhD at The University of Memphis. In addition to Michigan State University, he has served on the faculties of Florida State University and the University of Arkansas at Little Rock. Dr. Hult holds visiting professorships in the International Business Group of his native Uppsala University, Sweden, and the International Business Division of Leeds University, United Kingdom. Michigan State, Uppsala, and Leeds are all ranked in the top 10 in the world in international business research. Dr. Hult serves as Executive Director and Board Member of the Academy of International Business (AIB), President and Board Member of the Sheth Foundation, and serves on the U.S. District Export Council. Tomas Hult hosts the radio show globalEDGE Business Beat on the Michigan Business Network. Hult is one of the world’s leading academic authorities (citations, publications) in marketing strategy, international business, international marketing, strategic management, global supply chains, and complex multinational corporations. He is one of only about 100 Elected Fellows of the Academy of International Business, an accolade achieved by only the elite international business scholars. Dr. Hult was also selected in 2016 as the Academy of Marketing Science/CUTCO-Vector Distinguished Marketing Educator. He regularly speaks at high profile events (e.g., European Commission, Swedish Entrepreneurship Forum, United Nation's Conference on Trade and Development, U.S. Department of Education, World Investment Forum) and publishes influential op-ed articles (e.g., Time, Fortune, Fortune, World Economic Forum, The Conversation). Tomas has developed a large clientele of the world’s top corporations (e.g., ABB, Albertsons, Avon, BG, Bechtel, Bosch, BP, Defense Logistics Agency, Domino’s, FedEx, Ford, FreshDirect, General Motors, GroceryGateway, HSBC, IBM, Michigan Economic Development Corporation, Masco, NASA, Raytheon, Shell, Siemens, State Farm, Steelcase, Tech Data, and Xerox). In addition to co-authoring with Charles W. L. Hill the marketshare leading textbooks in international business (Global Business Today, now in its 11th edition, and International Business, now in its 12th edition), Dr. Hult has written several popular business trade books (e.g., Second Shift; Global Supply Chain Management; Extending the Supply Chain; and Total Global Strategy). Tennis, golf, and traveling are his favorite recreational activities. Page vi brief contents PART ONE Introduction and Overview Chapter One PART TWO Globalization 2 National Differences Chapter Two National Differences in Political, Economic, and Legal Systems 36 Chapter Three Development 58 Chapter Four National Differences in Economic Differences in Culture 86 Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 122 PART THREE The Global Trade and Investment Environment Chapter Six International Trade Theory 150 Chapter Seven 184 Government Policy and International Trade Chapter Eight Foreign Direct Investment 212 Chapter Nine PART FOUR Regional Economic Integration 240 The Global Monetary System Chapter Ten The Foreign Exchange Market 270 Chapter Eleven PART FIVE The International Monetary System 294 The Strategy of International Business Chapter Twelve The Strategy of International Business 320 Chapter Thirteen Markets 356 PART SIX Entering Developed and Emerging International Business Functions Chapter Fourteen 382 Exporting, Importing, and Countertrade Chapter Fifteen Management 408 Global Production and Supply Chain Chapter Sixteen 438 Global Marketing and Business Analytics Chapter Seventeen 474 Global Human Resource Management GLOSSARY 503 NAME INDEX 511 SUBJECT INDEX 513 ACRONYMS 531 COUNTRIES AND THEIR CAPITALS 532 Page vii the proven choice for international business Current. Application Rich, Relevant. Accessible and Student Focused. Global Business Today (GBT), the worldwide market leader among international business products, has set a new standard for international business teaching. We have focused on creating resources that Are comprehensive, state of the art, and timely. Are theoretically sound and practically relevant. Focus on applications of international business concepts. Tightly integrate the chapter topics throughout. Are fully integrated with results-driven technology. Take full and integrative advantage of globalEDGE.msu.edu— the Google-ranked #1 web resource for “international business resources.” International Business (now in its 12th edition, 2019), also coauthored by Charles W. L. Hill and G. Tomas M. Hult, is a more comprehensive and case-oriented version that lends itself to the core course in international business for those that want a deeper focus on the global monetary system, structure of international business, international accounting, and international finance. GBT has always endeavored to be current, relevant, application rich, accessible, and student-focused. Our goal has always been to cover macro and micro issues equally and in a relevant, practical, accessible, and student-focused approach. We believe that anything short of such a breadth and depth of coverage is a serious deficiency. Many of the students in these international business courses will soon be working in global businesses, and they will be expected to understand the implications of international business for their organization’s strategy, structure, and functions in the context of the global marketplace. We are proud and delighted to have put together this international business learning experience for the leaders of tomorrow. Over the years, and now through 11 editions, Dr. Charles Hill has worked hard to adhere to these goals. Since the ninth edition, Charles’ co-author, Dr. Tomas Hult, has followed the same approach. In deciding what changes to make, we have been guided not only by our own reading, teaching, and research but also by the invaluable feedback we received from professors and students around the world, from reviewers, and from the editorial staff at McGraw-Hill Education. Our thanks go out to all of them. Comprehensive and Up-to-Date To be relevant and comprehensive, an international business package must Explain how and why the world’s cultures, countries, and regions differ. Cover economics and politics of international trade and investment. Tackle international issues related to ethics, corporate social responsibility, and sustainability. Explain the functions and form of the global monetary system. Examine the strategies and structures of international businesses. Assess the special roles of the various functions of an international business. Relevance and comprehensiveness also require coverage of the major theories. It has always been a goal to incorporate the insights gleaned from recent academic scholarship into the book. Page viii Consistent with this goal, insights from the following research, as a sample of theoretical streams used in the book, have been incorporated: New trade theory and strategic trade policy. The work of Nobel Prize–winning economist Amartya Sen on economic development. Samuel Huntington’s influential thesis on the “clash of civilizations.” Growth theory of economic development championed by Paul Romer and Gene Grossman. Empirical work by Jeffrey Sachs and others on the relationship between international trade and economic growth. Michael Porter’s theory of the competitive advantage of nations. Robert Reich’s work on national competitive advantage. The work of Nobel Prize–winner Douglass North and others on national institutional structures and the protection of property rights. The market imperfections approach to foreign direct investment that has grown out of Ronald Coase and Oliver Williamson’s work on transaction cost economics. Bartlett and Ghoshal’s research on the transnational corporation. The writings of C. K. Prahalad and Gary Hamel on core competencies, global competition, and global strategic alliances. Insights for international business strategy that can be derived from the resource-based view of the firm and complementary theories. Paul Samuelson’s critique of free trade theory. Conceptual and empirical work on global supply chain management—logistics, purchasing (sourcing), operations, and marketing channels. In addition to including leading-edge theory, in light of the fastchanging nature of the international business environment, we have made every effort to ensure that this product is as up-to-date as possible. A significant amount has happened in the world since we began revisions of this book. By 2016, almost $4 trillion per day were flowing across national borders. The size of such flows fueled concern about the ability of short-term speculative shifts in global capital markets to destabilize the world economy. The world continued to become more global. As you can see in Chapter 1 on Globalization, trade across country borders has almost exponentially escalated in the last few years. Several Asian economies, most notably China and India, continued to grow their economies at a rapid rate. New multinationals continued to emerge from developing nations in addition to the world’s established industrial powers. Increasingly, the globalization of the world economy affected a wide range of firms of all sizes, from the very large to the very small. We take great pride in covering international business for small- and medium-sized enterprises (SMEs), as well as larger multinational corporations. We also take great pride in covering firms from all around the world. Some sixty SMEs and multinational corporations from all six core continents are covered in the chapters’ opening cases, closing cases, and/or Management Focus boxes. And unfortunately, global terrorism and the attendant geopolitical risks keep emerging in various places globally, many new and inconceivable just a decade ago. These represent a threat to global economic integration and activity. Plus, with the United Kingdom opting to leave the European Union (Brexit), which has implications past 2019, the election of President Donald Trump in the United States (who espouses views on international trade that break with the long established consensus), and several elections around the world, the globe—in many ways—has paid more attention to nationalistic issues over trade. These topics and many more are integrated into this text for maximum learning opportunities. WHAT’S NEW IN THE 11TH EDITION The success of the first ten editions of Global Business Today (and its longer, more in-depth textbook option and companion, International Business, now in the 12th edition) was based in part on the incorporation of leading-edge research into the text, the use of the up-to-date examples and statistics to illustrate global trends and enterprise strategy, and the discussion of current events within the context of the appropriate theory. Building on these strengths, our goals for the 11th edition have focused on the following: 1. Incorporate new insights from scholarly research. 2. Make sure the content covers all appropriate issues. Page ix 3. Make sure the text is up-to-date with current events, statistics, and examples. 4. Add new and insightful opening and closing cases in most chapters. 5. Incorporate value-added globalEDGETM features in every chapter. 6. Connect every chapter to a focus on managerial implications. As part of the overall revision process, changes have been made to every chapter in the book. All statistics have been updated to incorporate the most recently available data. As before, we provide the only textbook in International Business that ensures that all material is up-to-date on virtually a daily basis. The copyright for the book is 2020, but you are likely using the text somewhere between the years 2019 to 2022. We keep the textbook updated to each semester you use the text in your course! We do this by integrating Connect and globalEDGETM features in every chapter. Specifically, combining McGraw Hill’s Connect platform with the Google number-one-ranked globaledge.msu.edu site (for “international business resources”), we can add up-to-date materials and exercises to each chapter to add value to the material and provide relevant data and information. This keeps chapter material constantly and dynamically updated for teachers who want to infuse Connect and globalEDGETM material into the chapter topics, and it keeps students abreast of current developments in international business. In addition to updating all statistics, figures, and maps to incorporate most recently published data, a chapter-by-chapter selection of changes for the 10th edition include the following: CHAPTER 1: GLOBALIZATION New opening case: GM and Its Chevrolet Supercar, The Corvette ZR1 New materials on international trade, trade agreements, world production, and world population Explanations of differences in cross-border trade and in-country production; the value of trade agreements; and population implications related to resource constraints Revised Management Focus: Boeing’s Global Production System Revised Management Focus: Wanda Group New closing case: Globalization of BMW, Rolls-Royce, and the MINI CHAPTER 2: NATIONAL DIFFERENCES IN POLITICAL, ECONOMIC, AND LEGAL SYSTEMS New opening case: Transformation in Saudi Arabia New Country Focus: Putin’s Russia Updated data on corruption Updated Country Focus: Corruption in Brazil New closing case: The Decline of Zimbabwe CHAPTER 3: NATIONAL DIFFERENCES IN ECONOMIC DEVELOPMENT New opening case: Brazil’s Struggling Economy Updated statistics and discussion in section Differences in Economic Development Updated Country Focus: Property Rights in China Updated statistics and discussion in section States in Transition New closing case: Economic Development in Bangladesh CHAPTER 4: DIFFERENCES IN CULTURE New opening case: China, Hong Kong, Macau, and Taiwan Deeper treatment of culture, values, and norms Revised the foundation that most religions are now pro-business Updated the Hofstede culture framework with new research New Country Focus: Determining Your Social Class by Birth New Country Focus: Turkey, Its Religion, and Politics New Management Focus: China and Its Guanxi New closing case: The Swatch Group and Cultural Uniqueness Page x CHAPTER 5: ETHICS, CORPORATE SOCIAL RESPONSIBILITY, AND SUSTAINABILITY New opening case: Sustainability Initiatives at Natura, the Bodyshop, and Aesop Deeper focus on corporate social responsibility and sustainability at the country, company, and customer levels New Management Focus: “Emissionsgate” at Volkswagen New closing case: Woolworths’s Corporate Responsibility Strategy CHAPTER 6: INTERNATIONAL TRADE THEORY New opening case: “Trade Wars Are Good and Easy to Win” Discussion of President Donald Trump’s approach to international trade Updated Country Focus: Is China Manipulating Its Currency in Pursuit of a Neo-Mercantilist Policy? New closing case: The Trans Pacific Partnership (TPP) Is Dead; Long Live the CPTPP! Updated Appendix: International Trade and the Balance of Payments with new data and revised discussion CHAPTER 7: GOVERNMENT POLICY AND INTERNATIONAL TRADE New opening case: U.S. and South Korea Strike a Revised Trade Deal New section: The World Trading System Under Threat, which discusses the potential ramifications of Brexit and the trade policies of the Trump administration New Closing Case: Boeing and Airbus Are in a Dogfight over Illegal Subsidies CHAPTER 8: FOREIGN DIRECT INVESTMENT New opening case: Geely Goes Global Updated statistics and discussion in the section Foreign Direct Investment in the World Economy New Management Focus: Burberry Shifts Its Entry Strategy in Japan New closing case: FDI in the Indian Retail Sector CHAPTER 9: REGIONAL ECONOMIC INTEGRATIONS New opening case: NAFTA 2.0? Extended discussion of Brexit and its ramifications New section The Future of NAFTA, which discusses the renegotiation of NAFTA by the Trump administration New closing case: Free Trade in Africa: TFTA and CFTA CHAPTER 10: THE FOREIGN EXCHANGE MARKET New opening case: The Fluctuating Value of the Yuan Gives Chinese Business a Lesson in Foreign Exchange Risk New closing case: The Mexican Peso, the Japanese Yen, and Pokemon Go CHAPTER 11: THE INTERNATIONAL MONETARY SYSTEM New opening case: Can Dollarization Save Venezuela? Updated statistics discussion of floating exchange rates through to early 2018 New Country Focus: China’s Exchange Rate Regime New Closing Case: Egypt and the IMF CHAPTER 12: THE STRATEGY OF INTERNATIONAL BUSINESS New opening case: Red Bull, a Leader in International Strategy Deeper discussion of the rise of regionalism Integration of global strategy thoughts New Management Focus: IKEA’s Global Strategy New Management Focus: Unilever’s Global Organization New closing case: Sony Corporation: An International Innovator? Page xi CHAPTER 13: ENTERING DEVELOPED AND EMERGING MARKETS New opening case: IKEA Entering India, Finally! New scope of the chapter to include entering developed and emerging markets, as well as aspects of less developed markets New closing case: Cutco Corporation—Sharpening Your Market Entry CHAPTER 14: EXPORTING, IMPORTING, AND COUNTERTRADE New opening case: Spotify and SoundCloud New material on company readiness to export and import material New and revised material on globalEDGETM Diagnostic Tools, with a focus on Company Readiness to Export (CORE) New Management Focus: Embraer and Brazilian Importing New Management Focus: Exporting Desserts by a Hispanic Entrepreneur New Management Focus: Two Men and a Truck New closing case: Tata Motors and Exporting CHAPTER 15: GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT New opening case: Procter & Gamble Remakes Its Global Supply Chains Revised and new material on global logistics, global purchasing, and global operations Revised sections Strategic Roles for Production Facilities, Make-or-Buy Decisions, and Global Supply Chain Functions New material in the sections Role of Information Technology, Coordination in Global Supply Chains, and Interorganizational Relationships New Management Focus: IKEA Production in China New Management Focus: Amazon’s Global Supply Chains New closing case: Alibaba and Global Supply Chains CHAPTER 16: GLOBAL MARKETING AND BUSINESS ANALYTICS New opening case: Fake News and Alternative Facts Revised section Globalization of Markets and Brands New section on Business Analytics; reordered with International Marketing Research to provide a better flow of the chapter material Revised section International Marketing Research Inclusion of more social media topics throughout Revised positioning of the Product Development and R&D section New Management Focus: Global Branding, Marvel Studios, and Walt Disney Company New Management Focus: Burberry’s Social Media Marketing New closing case: ACSI and Satisfying Global Customers CHAPTER 17: GLOBAL HUMAN RESOURCE MANAGEMENT New opening case: Global Mobility at Shell New section: Building a Diverse Global Workforce, which looks at the benefits, challenges, and policies for building a diverse global workforce in a multinational enterprise New Closing Case: Sodexo: Building a Diverse Global Workforce Beyond Uncritical Presentation and Shallow Explanation Many issues in international business are complex and thus necessitate considerations of pros and cons. To demonstrate this to students, we have adopted a critical approach that presents the arguments for and against economic theories, government policies, business strategies, organizational structures, and so on. Related to this, we have attempted to explain the complexities of the many theories and phenomena unique to international business so the student might fully comprehend the statements of a theory or the reasons a phenomenon is the way it is. We believe that these theories and phenomena are explained in more depth in this Page xii work than they are in the competition, which seem to use the rationale that a shallow explanation is little better than no explanation. In international business, a little knowledge is indeed a dangerous thing. Practical and Rich Applications We have always believed that it is important to show students how the material covered in the text is relevant to the actual practice of international business. This is explicit in the later chapters of the book, which focus on the practice of international business, but it is not always obvious in the first half of the book, which considers macro topics. Accordingly, at the end of each chapter in Parts Two, Three, and Four—where the focus is on the environment of international business, as opposed to particular firms—there is a section titled Focus on Managerial Implications. In this section, the managerial implications of the material discussed in the chapter are clearly explained. Additionally, most chapters have at least one Management Focus box. The purpose of these boxes is to illustrate the relevance of chapter material for the practice of international business. A Did You Know? feature in each chapter challenges students to view the world around them through the lens of international business (e.g., Did you know that sugar prices in the United States are much higher than sugar prices in the rest of the world?). The authors recorded short videos explaining the phenomenon. In addition, each chapter begins with an opening case that sets the stage for the chapter and ends with a closing case that illustrates the relevance of chapter material for the practice of international business. To help students go a step further in expanding their applicationlevel understanding of international business, each chapter incorporates two globalEDGETM research tasks designed and written by Tomas Hult. The exercises dovetail with the content just covered. Integrated Progression of Topics A weakness of many texts is that they lack a tight, integrated flow of topics from chapter to chapter. This book explains to students in Chapter 1 how the book’s topics are related to each other. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous ones in a logical fashion. PART ONE Chapter 1 provides an overview of the key issues to be addressed and explains the plan of the book. Globalization of markets and globalization of production is the core focus. PART TWO Chapters 2 through 4 focus on country differences in political economy and culture, and Chapter 5 on ethics, corporate social responsibility, and sustainability issues in international business. Most international business textbooks place this material at a later point, but we believe it is vital to discuss national differences first. After all, many of the central issues in international trade and investment, the global monetary system, international business strategy and structure, and international business functions arise out of national differences in political economy and culture. PART THREE Chapters 6 through 9 investigate the political economy of global trade and investment. The purpose of this part is to describe and explain the trade and investment environment in which international business occurs. PART FOUR Chapters 10 and 11 describe and explain the global monetary system, laying out in detail the monetary framework in which international business transactions are conducted. PART FIVE In Chapters 12 and 13, attention shifts from the environment to the firm. In other words, we move from a macro focus to a micro focus at this stage of the book. We examine strategies that firms adopt to compete effectively in the international business environment. PART SIX In Chapters 14 through 17, the focus narrows further to investigate business functions and related operations. These chapters explain how firms can perform their key functions—exporting, importing, and countertrade; global production; global supply chain management; global marketing; global research and development (R&D); human resource management—to compete and succeed in the international business environment. Throughout the book, the relationship of new material to topics discussed in earlier chapters is pointed out to the students to reinforce their understanding of how the material comprises an integrated whole. We deliberately bring a management focus to the macro chapters (Chapters 1 through 11). We also integrate macro themes in covering the micro chapters (Chapters 12 through 17). Page xiii Acknowledgments Numerous people deserve to be thanked for their assistance in preparing this book. First, thank you to all the people at McGraw-Hill Education who have worked with us on this project: Anke Braun Weekes, Executive Brand Manager Gabriela G. Velasco, Product Developer Michael Gedatus, Senior Marketing Manager Brittany Bernholdt, Marketing Coordinator Mary Powers, Content Project Manager (Core) Evan Roberts, Content Project Manager (Assessment) Jennifer Pickel, Senior Buyer Srdjan Savanovic, Designer Lori Hancock, Content Licensing Specialist (Image) DeAnna Dausener, Content Licensing Specialist (Text) Second, our thanks go to the reviewers who provided good feedback that helped shape this book: Ratee Apana, University of Cincinnati Michael Ba Banutu-Gomez, Rowan University – Glassboro New Jersey Constant Cheng, George Mason University Jeongho Choi, St. John Fisher College, Rochester, NY Susan Dragotta, Waukesha County Technical College Wade Hampton Britt, IV, Drake University Ralph Haug, Roosevelt University, Schaumburg, IL Reinhard Janson, University of Texas Arlington C. Jayachandran, Montclair State University David Kelson, Ferris State University Stephanie E. Kontrim-Baumann, Missouri Baptrist University, Saint Louis Kim LaFevor, Athens State University-Athens, Alabama Yunshan Lian, University of Wisconsin-Platteville Manveer K. Mann, Montclair State University John P. Marr, Boise State University Lilac Nachum, Baruch College J. Timothy Nolan, SUNY Buffalo State Louis I. Nzegwu, University of Wisconsin-Platteville Kathy Pennington, San Diego State University Jim Ryan, Bradley University Wayne H. Stewart Jr., Clemson University Vas Taras, University of North Carolina at Greensboro Siri Terjesen, American U & NHH William H. Toel, Bradley University – Peoria, Illinois A special thanks to David Closs and David Frayer for allowing us to borrow elements of the sections on Strategic Roles for Production Facilities; Make-or-Buy Decisions; Global Supply Chain Functions; Coordination in Global Supply Chains; and Interorganizational Relationships for Chapter 15 of this text from Tomas Hult, David Closs, and David Frayer (2014), Global Supply Chain Management, New York: McGraw-Hill. Page xiv Page xv Page xvi contents PART ONE Introduction and Overview Chapter one Globalization 2 Opening Case: GM and Its Chevrolet Supercar, the Corvette ZR1 3 Introduction 4 What Is Globalization? 6 The Globalization of Markets 6 The Globalization of Production 8 Management Focus: Boeing’s Global Production System 9 The Emergence of Global Institutions 9 Drivers of Globalization 11 Declining Trade and Investment Barriers 11 Role of Technological Change 15 The Changing Demographics of the Global Economy 16 The Changing World Output and World Trade Picture 17 Country Focus: India’s Software Sector 18 The Changing Foreign Direct Investment Picture 18 The Changing Nature of the Multinational Enterprise 20 Management Focus: Wanda Group 21 The Changing World Order 21 Global Economy of the Twenty-First Century 22 The Globalization Debate 23 Antiglobalization Protests 23 Country Focus: Protesting Globalization in France 24 Globalization, Jobs, and Income 24 Globalization, Labor Policies, and the Environment 26 Globalization and National Sovereignty 28 Globalization and the World’s Poor 28 Managing in the Global Marketplace 30 Summary 31 Critical Thinking and Discussion Questions 32 Research Task 33 Closing Case: Globalization of BMW, Rolls-Royce, and the MINI 33 Endnotes 34 PART TWO National Differences Chapter Two National Differences in Political, Economic, and Legal Systems 36 Opening Case: Transformation in Saudi Arabia 37 Introduction 38 Political Systems 39 Collectivism and Individualism 39 Democracy and Totalitarianism 41 Country Focus: Putin’s Russia 42 Economic Systems 44 Market Economy 44 Command Economy 45 Mixed Economy 45 Legal Systems 46 Different Legal Systems 46 Differences in Contract Law 47 Property Rights and Corruption 48 Country Focus: Corruption in Brazil 50 Management Focus: Did Walmart Violate the Foreign Corrupt Practices Act? 51 The Protection of Intellectual Property 51 Management Focus: Starbucks Wins Key Trademark Case in China 53 Product Safety and Product Liability 53 Focus on Managerial Implications:The Macro Environment Influences Market Attractiveness 54 Summary 55 Critical Thinking and Discussion Questions 55 Research Task 55 Closing Case: The Decline of Zimbabwe 56 Endnotes 57 Page xvii Chapter Three National Differences in Economic Development 58 Opening Case: Brazil’s Struggling Economy 59 Introduction 60 Differences in Economic Development 60 Broader Conceptions of Development: Amartya Sen 64 Political Economy and Economic Progress 65 Innovation and Entrepreneurship are the Engines of Growth 65 Innovation and Entrepreneurship Require a Market Economy 66 Innovation and Entrepreneurship Require Strong Property Rights 66 Country Focus: Property Rights in China 67 The Required Political System 68 Economic Progress Begets Democracy 68 Geography, Education, and Economic Development 68 States in Transition 69 The Spread of Democracy 69 The New World Order and Global Terrorism 72 The Spread of Market-Based Systems 73 The Nature of Economic Transformation 74 Deregulation 74 Country Focus: India’s Economic Transformation 75 Privatization 76 Legal Systems 76 Implications of Changing Political Economy 77 Focus on Managerial Implications: Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally 78 Summary 82 Critical Thinking and Discussion Questions 82 Research Task 82 Closing Case: Economic Development in Bangladesh 83 Endnotes 84 Chapter Four Differences in Culture 86 Opening Case: China, Hong Kong, Macau, and Taiwan 87 Introduction 88 What Is Culture? 90 Values and Norms 91 Culture, Society, and the Nation-State 92 Determinants of Culture 93 Social Structure 93 Individuals and Groups 94 Social Stratification 96 Country Focus: Determining Your Social Class by Birth 97 Religious and Ethical Systems 98 Christianity 100 Islam 101 Country Focus: Turkey, Its Religion, and Politics 103 Hinduism 104 Buddhism 105 Confucianism 105 Management Focus: China and Its Guanxi 107 Language 107 Spoken Language 107 Unspoken Language 108 Education 109 Culture and Business 109 Cultural Change 113 Focus on Managerial Implications:Cultural Literacy and Competitive Advantage 114 Summary 116 Critical Thinking and Discussion Questions 117 Research Task 117 Closing Case: The Swatch Group and Cultural Uniqueness 118 Endnotes 119 Chapter Five Ethics, Corporate Social Responsibility, and Sustainability 122 Opening Case: Sustainability Initiatives at Natura, the Bodyshop, and Aesop 123 Introduction 124 Ethics and International Business 126 Employment Practices 126 Management Focus: “Emissionsgate” at Volkswagen 127 Human Rights 127 Environmental Pollution 129 Corruption 130 Ethical Dilemmas 131 Roots of Unethical Behavior 132 Personal Ethics 133 Decision-Making Processes 133 Organizational Culture 133 Unrealistic Performance Goals 134 Leadership 134 Societal Culture 134 Page xviii Philosophical Approaches to Ethics 134 Straw Men 135 Utilitarian and Kantian Ethics 137 Rights Theories 138 Justice Theories 139 Focus on Managerial Implications: Making Ethical Decisions Internationally 140 Management Focus: Corporate Social Responsibility at Stora Enso 144 Summary 146 Critical Thinking and Discussion Questions 146 Research Task 147 Closing Case: Woolworths’ Corporate Responsibility Strategy 147 Endnotes 148 PART THREE The Global Trade and Investment Environment Chapter Six International Trade Theory 150 Opening Case: “Trade Wars are Good and Easy to Win” 151 Introduction 152 An Overview of Trade Theory 153 The Benefits of Trade 153 The Pattern of International Trade 154 Trade Theory and Government Policy 155 Mercantilism 155 Country Focus: Is China Manipulating Its Currency in Pursuit of a Neo-Mercantilist Policy? 156 Absolute Advantage 157 Comparative Advantage 159 The Gains from Trade 159 Qualifications and Assumptions 160 Extensions of the Ricardian Model 161 Country Focus: Moving U.S. White-Collar Jobs Offshore 164 Heckscher–Ohlin Theory 165 The Leontief Paradox 166 The Product Life-Cycle Theory 167 Product Life-Cycle Theory in the Twenty-First Century 168 New Trade Theory 168 Increasing Product Variety and Reducing Costs 169 Economies of Scale, First-Mover Advantages, and the Pattern of Trade 169 Implications of New Trade Theory 170 National Competitive Advantage: Porter’s Diamond 171 Factor Endowments 172 Demand Conditions 172 Related and Supporting Industries 173 Firm Strategy, Structure, and Rivalry 173 Evaluating Porter’s Theory 174 Focus on Managerial Implications: Location, First-Mover Advantages, and Government Policy 174 Summary 176 Critical Thinking and Discussion Questions 177 Research Task 177 Closing Case: The Trans Pacific Partnership (TPP) Is Dead; Long Live the CPTPP! 177 Appendix: International Trade and the Balance of Payments 179 Endnotes 182 Chapter Seven Government Policy and International Trade 184 Opening Case: U.S. and South Korea Strike a Revised Trade Deal 185 Introduction 186 Instruments of Trade Policy 187 Tariffs 187 Subsidies 188 Country Focus: Are the Chinese Illegally Subsidizing Auto Exports? 188 Import Quotas and Voluntary Export Restraints 189 Export Tariffs and Bans 190 Local Content Requirements 190 Administrative Policies 191 Antidumping Policies 191 Management Focus: Protecting U.S. Magnesium 192 The Case for Government Intervention 192 Political Arguments for Intervention 192 Economic Arguments for Intervention 195 The Revised Case for Free Trade 197 Retaliation and Trade War 197 Domestic Policies 197 Development of the World Trading System 198 From Smith to the Great Depression 198 1947–1979: GATT, Trade Liberalization, and Economic Growth 199 1980–1993: Protectionist Trends 199 The Uruguay Round and the World Trade Organization 199 WTO: Experience to Date 200 The Future of the WTO: Unresolved Issues and the Doha Round 201 Page xix Country Focus: Estimating the Gains from Trade for America 204 Multilateral and Bilateral Trade Agreements 205 The World Trading System under Threat 205 Focus on Managerial Implications: Trade Barriers, Firm Strategy, and Policy implications 206 Summary 208 Critical Thinking and Discussion Questions 209 Research Task 209 Closing Case: Boeing and Airbus are in a Dogfight over Illegal Subsidies 209 Endnotes 210 Chapter Eight Foreign Direct Investment 212 Opening Case: Geely Goes Global 213 Introduction 214 Foreign Direct Investment in the World Economy 214 Trends in FDI 214 The Direction of FDI 215 The Source of FDI 216 Country Focus: Foreign Direct Investment in China 216 The Form of FDI: Acquisitions versus Greenfield Investments 217 Theories of Foreign Direct Investment 218 Why Foreign Direct Investment? 218 Management Focus: Burberry Shifts Its Entry Strategy in Japan 219 The Pattern of Foreign Direct Investment 221 The Eclectic Paradigm 222 Political Ideology and Foreign Direct Investment 223 The Radical View 223 The Free Market View 224 Pragmatic Nationalism 224 Shifting Ideology 225 Benefits and Costs of FDI 225 Host-Country Benefits 225 Host-Country Costs 228 Home-Country Benefits 229 Home-Country Costs 229 International Trade Theory and FDI 230 Government Policy Instruments and FDI 230 Home-Country Policies 230 Host-Country Policies 231 International Institutions and the Liberalization of FDI 232 Focus on Managerial Implications: FDI and Government Policy 232 Summary 235 Critical Thinking and Discussion Questions 235 Research Task 236 Closing Case: FDI in the Indian Retail Sector 236 Endnotes 237 Chapter Nine Regional Economic Integration 240 Opening Case: NAFTA 2.0: The USMCA 241 Introduction 242 Levels of Economic Integration 243 The Case for Regional Integration 245 The Economic Case for Integration 245 The Political Case for Integration 245 Impediments to Integration 246 The Case against Regional Integration 246 Regional Economic Integration in Europe 247 Evolution of the European Union 247 Political Structure of the European Union 248 Management Focus: The European Commission and Intel 249 The Single European Act 250 The Establishment of the Euro 251 Enlargement of the European Union 254 Country Focus: The Greek Sovereign Debt Crisis 255 British Exit from the European Union (Brexit) 256 Regional Economic Integration in the Americas 257 The North American Free Trade Agreement 257 The Andean Community 260 Mercosur 260 Central American Common Market, CAFTA, and CARICOM 261 Regional Economic Integration Elsewhere 262 Association of Southeast Asian Nations 262 Regional Trade Blocs in Africa 262 Other Trade Agreements 264 Focus on Managerial Implications: Regional Economic Integration Threats 264 Summary 266 Critical Thinking and Discussion Questions 267 Research Task 267 Closing Case: Free Trade in Africa: TFTA and CFTA 267 Endnotes 268 PART FOUR Page xx The Global Monetary System Chapter Ten The Foreign Exchange Market 270 Opening Case: The Fluctuating Value of the Yuan gives Chinese Business a Lesson in Foreign Exchange Risk 271 Introduction 272 The Functions of the Foreign Exchange Market 273 Currency Conversion 273 Insuring against Foreign Exchange Risk 275 Management Focus: Embraer and the Gyrations of the Brazilian Real 276 The Nature of the Foreign Exchange Market 277 Economic Theories of Exchange Rate Determination 278 Prices and Exchange Rates 278 Country Focus: Quantitative Easing, Inflation, and the Value of the U.S. Dollar 282 Interest Rates and Exchange Rates 283 Investor Psychology and Bandwagon Effects 284 Summary of Exchange Rate Theories 284 Exchange Rate Forecasting 285 The Efficient Market School 285 The Inefficient Market School 285 Approaches to Forecasting 285 Currency Convertibility 286 Focus on Managerial Implications: Foreign Exchange Rate Risk 287 Reducing Translation and Transaction Exposure 288 Reducing Economic Exposure 289 Other Steps for Managing Foreign Exchange Risk 289 Summary 290 Critical Thinking and Discussion Questions 291 Research Task 291 Closing Case: The Mexican Peso, the Japanese Yen, and Pokemon Go 292 Endnotes 292 Chapter Eleven The International Monetary System 294 Opening Case: Can Dollarization Save Venezuela? 295 Introduction 296 The Gold Standard 297 Mechanics of the Gold Standard 298 Strength of the Gold Standard 298 The Period between the Wars: 1918–1939 298 The Bretton Woods System 299 The Role of the IMF 299 The Role of the World Bank 300 The Collapse of the Fixed Exchange Rate System 301 The Floating Exchange Rate Regime 302 The Jamaica Agreement 302 Exchange Rates Since 1973 302 Fixed versus Floating Exchange Rates 305 The Case for Floating Exchange Rates 305 The Case for Fixed Exchange Rates 306 Who Is Right? 307 Exchange Rate Regimes in Practice 307 Pegged Exchange Rates 307 Country Focus: China’s Exchange Rate Regime 308 Currency Boards 309 Crisis Management by the IMF 309 Financial Crises in the Post–Bretton Woods Era 310 Country Focus: The IMF and Iceland’s Economic Recovery 310 Evaluating the IMF’s Policy Prescriptions 312 Focus on Managerial Implications: Currency Management, Business Strategy, and Government Relations 314 Management Focus: Airbus and the Euro 315 Summary 316 Critical Thinking and Discussion Questions 317 Research Task 318 Closing Case: Egypt and the IMF 318 Endnotes 319 PART FIVE The Strategy of International Business Chapter Twelve The Strategy of International Business 320 Opening Case: Red Bull, A Leader in International Strategy 321 Introduction 322 Strategy and the Firm 323 Value Creation 324 Strategic Positioning 325 Management Focus: AB InBev, Beer Globally, and Creating Value 326 Operations: The Firm as a Value Chain 327 Global Expansion, Profitability, and Profit Growth 331 Expanding the Market: Leveraging Products and Competencies 331 Page xxi Location Economies 332 Experience Effects 334 Leveraging Subsidiary Skills 336 Profitability and Profit Growth Summary 336 Cost Pressures and Pressures for Local Responsiveness 337 Pressures for Cost Reductions 337 Pressures for Local Responsiveness 338 Management Focus: IKEA’s Global Strategy 339 Choosing a Strategy 341 Global Standardization Strategy 342 Management Focus: Unilever’s Global Organization 343 Localization Strategy 343 Transnational Strategy 344 International Strategy 345 The Evolution of Strategy 345 Management Focus: Evolution of Strategy at Procter & Gamble 346 Strategic Alliances 347 The Advantages of Strategic Alliances 347 The Disadvantages of Strategic Alliances 348 Making Alliances Work 348 Summary 351 Critical Thinking and Discussion Questions 352 Research Task 352 Closing Case: Sony Corporation: An International Innovator? 352 Endnotes 353 Chapter Thirteen Entering Developed and Emerging Markets 356 Opening Case: IKEA Entering India, Finally! 357 Introduction 358 Basic Entry Decisions 359 Which Foreign Markets? 359 Timing of Entry 360 Management Focus: Tesco’s International Growth Strategy 361 Scale of Entry and Strategic Commitments 362 Market Entry Summary 363 Management Focus: The Jollibee Phenomenon 364 Entry Modes 364 Exporting 364 Turnkey Projects 365 Licensing 366 Franchising 367 Joint Ventures 368 Wholly Owned Subsidiaries 369 Selecting an Entry Mode 370 Core Competencies and Entry Mode 370 Pressures for Cost Reductions and Entry Mode 372 Management Focus: General Motors on the Upswing 372 Greenfield Venture or Acquisition? 373 Pros and Cons of Acquisitions 373 Pros and Cons of Greenfield Ventures 375 Which Choice? 375 Summary 376 Critical Thinking and Discussion Questions 377 Research Task 377 Closing Case: Cutco Corporation—Sharpening Your Market Entry 378 Endnotes 379 PART SIX International Business Functions Chapter Fourteen Exporting, Importing, and Countertrade 382 Opening Case: Spotify and SoundCloud 383 Introduction 384 The Promise and Pitfalls of Exporting 386 Management Focus: Embraer and Brazilian Importing 388 Improving Export Performance 388 International Comparisons 388 Information Sources 389 Management Focus: Exporting Desserts by a Hispanic Entrepreneur 390 Service Providers 391 Export Strategy 391 Management Focus: Two Men and a Truck 392 The globalEDGE™ Exporting Tool 393 Export and Import Financing 394 Lack of Trust 394 Letter of Credit 396 Draft 396 Bill of Lading 397 A Typical International Trade Transaction 397 Export Assistance 398 Export-Import Bank 398 Export Credit Insurance 399 Countertrade 400 The Popularity of Countertrade 400 Types of Countertrade 401 Pros and Cons of Countertrade 402 Summary 403 Critical Thinking and Discussion Questions 403 Research Task 404 Closing Case: Tata Motors and Exporting 404 Endnotes 405 Page xxii Chapter Fifteen Global Production and Supply Chain Management 408 Opening Case: Procter & Gamble Remakes Its Global Supply Chains 409 Introduction 410 Strategy, Production, and Supply Chain Management 411 Where to Produce 414 Country Factors 414 Management Focus: IKEA Production in China 414 Technological Factors 415 Production Factors 418 The Hidden Costs of Foreign Locations 420 Management Focus: Amazon’s Global Supply Chains 421 Make-or-Buy Decisions 422 Global Supply Chain Functions 425 Global Logistics 425 Global Purchasing 427 Managing a Global Supply Chain 427 Role of Just-in-Time Inventory 428 Role of Information Technology 429 Coordination in Global Supply Chains 429 Interorganizational Relationships 430 Summary 432 Critical Thinking and Discussion Questions 433 Research Task 433 Closing Case: Alibaba and Global Supply Chains 434 Endnotes 435 Chapter Sixteen Global Marketing and Business Analytics 438 Opening Case: Fake News and Alternative Facts 439 Introduction 440 Globalization of Markets and Brands 442 Market Segmentation 443 Management Focus: Global Branding, Marvel Studios, and Walt Disney Company 444 Business Analytics 445 International Marketing Research 446 Product Attributes 449 Cultural Differences 449 Economic Development 450 Product and Technical Standards 450 Distribution Strategy 450 Differences Between Countries 451 Choosing a Distribution Strategy 453 Communication Strategy 453 Management Focus: Burberry’s Social Media Marketing 454 Barriers to International Communication 455 Push versus Pull Strategies 456 Global Advertising 457 Pricing Strategy 458 Price Discrimination 458 Strategic Pricing 459 Regulatory Influences on Prices 460 Configuring the Marketing Mix 461 Product Development and R&D 463 The Location of R&D 463 Integrating R&D, Marketing, and Production 464 Cross-Functional Teams 465 Building Global R&D Capabilities 466 Summary 467 Critical Thinking and Discussion Questions 468 Research Task 469 Closing Case: ACSI and Satisfying Global Customers 469 Endnotes 470 Chapter Seventeen Global Human Resource Management 474 Opening Case: Global Mobility at Shell 475 Introduction 476 Strategic Role of Global HRM: Managing a Global Workforce 477 Staffing Policy 478 Types of Staffing Policies 479 Expatriate Managers 482 Global Mindset 485 Training and Management Development 486 Training for Expatriate Managers 486 Repatriation of Expatriates 487 Management Focus: Monsanto’s Repatriation Program 488 Management Development and Strategy 488 Performance Appraisal 489 Performance Appraisal Problems 489 Guidelines for Performance Appraisal 489 Compensation 490 National Differences in Compensation 490 Expatriate Pay 490 Management Focus: McDonald’s Global Compensation Practices 491 Building a Diverse Global Workforce 493 Page xxiii International Labor Relations 494 The Concerns of Organized Labor 494 The Strategy of Organized Labor 495 Approaches to Labor Relations 495 Summary 496 Critical Thinking and Discussion Questions 497 Research Task 497 Closing Case: Sodexo: Building a Diverse Global Workforce 498 Endnotes 499 GLOSSARY 503 NAME INDEX 511 SUBJECT INDEX 513 ACRONYMS 531 COUNTRIES AND THEIR CAPITALS 532 Part 1 Introduction and Overview Page 2 1 Globalization Learning Objectives After reading this chapter, you will be able to: LO1-1 Understand what is meant by the term globalization. LO1-2 Recognize the main drivers of globalization. LO1-3 Describe the changing nature of the global economy. LO1-4 Explain the main arguments in the debate over the impact of globalization. LO1-5 Understand how the process of globalization is creating opportunities and challenges for management practice. Page 3 GM and Its Chevrolet Supercar, the Corvette ZR1 opening case The General Motors Company (gm.com), commonly abbreviated as GM (which is also the company’s symbol on the New York Stock Exchange), is an American multinational corporation headquartered in Detroit, Michigan, that designs, manufactures, markets, and distributes vehicles and vehicle parts. GM was founded in Flint, Michigan, on September 16, 1908. In addition, to support its auto operations, GM Financial is a wholly owned captive finance subsidiary of General Motors, albeit headquartered in Fort Worth, Texas (and not at the main headquarters location in Detroit). Interestingly, GM is a large conglomerate with a one-industry focus on automobiles that operates as a holding company for various vehicle brands. Consequently, there are no General Motors, or GM, branded cars. But the company has been around for more than 100 years making vehicles. Today, there are eight distinctive automotive brands under the General Motors umbrella: Chevrolet, Buick, GMC, Cadillac, Holden, Baojun, Wuling, and Jiefang. At one point the company owned more than 20 automobile brands (e.g., Hummer, McLaughlin, Oakland, Oldsmobile, Opel, Pontiac, Saab, Saturn, and Vauxhall). Within its current brand umbrella, GM is served by about 180,000 employees who speak some 70 different languages, and operate on five continents across 23 time zones. GM delivers about 9 million vehicles via 12,450 dealers in 125 countries annually. China has become critical to GM’s operations as one of the company’s top markets in recent years, now accounting for about 5 million of the 9 million vehicles sold globally on an annual basis. To support this heavy Chinese focus, GM is building an additional five new manufacturing plants in the country (adding to its already strong Chinese presence of 10 joint ventures and two wholly owned enterprises and more than 58,000 employees). Within GM, the Chevrolet brand, or vehicle line, occupies a distinctive position for its range of car makes. Amazingly, a Chevrolet is sold somewhere in the world every 8.33 seconds! Louis Chevrolet and then ousted GM founder William C. Durant started Chevrolet in 1911 as the Chevrolet Motor Car Company, and it became part of the General Motors Company in 1918. As of today, Chevrolet-branded vehicles are sold in all markets worldwide. Until 2017, Oceania had been an exception since GM had been represented in that part of the world since the 1980s by its Australian subsidiary, Holden. However, GM has also decided to focus its India manufacturing on producing vehicles for export only and will transition its South Africa manufacturing to Isuzu Motors. Consequently, GM’s Chevrolet brand was phased out of both country markets by the end of 2017. What is not phased out is the Corvette! Chevrolet’s sports car, Corvette, has been around since it was introduced at the GM Motorama at the New York Auto Show in 1953. Myron Scott is credited for naming the sports car after a relatively small, maneuverable warship called a corvette. As any automobile brand, the Page 4 “Vette” or “Chevy Corvette,” has several different brand designations, and the car models are priced from a low of about $60,000 to a high of $160,000. Uniquely, the Corvette ZR1 was again introduced in 2019 (produced from mid-year 2018). This particular Corvette designation, ZR1, had been in production from 1969– 1971, 1990–1995, and 2009–2013 before it again made a comeback in 2019. “ZR1 has returned to the throne to push the Corvette legacy to its highest point ever. It’s a supercar that’s at once luxurious and overwhelmingly capable, delivering the icon’s fastest, most powerful, most advanced performance in a production Corvette to date. Drivers, hail the new King.” In much of the world, the Chevrolet Corvette is an instantly recognizable sports car. The pinnacle of its lineup is the ZR1, an extraordinary engine and performance pack that dates back to the 1969 model. But for the 2019 model and on, only 2,000 to 3,000 ZR1s are expected to be produced each year. The car has 755 horsepower, does zero to 60 miles per hour (about 97 kmh) in under 2.85 seconds, and has a top speed of 212 mph (about 341 kmh). The 2019 ZR1’s aerodynamics benefited in design from Corvette’s racing teams that compete in races around the world (e.g., the annual 24 Hours of Le Mans endurance race in France). The new version has more carbon fiber parts than any Corvette before it. This includes an optional high wing rising from the rear deck that generates such a powerful downforce that it had to be mounted on the Vette’s frame since the trunk would buckle under the pressure. The wing is needed to help keep the car planted solidly on the road at speeds where it might otherwise leave the ground. Given its periodic dormant production within the Chevrolet Corvette product family, the Corvette ZR1 is a global phenomenon. It is the top of the line Corvette, produced in small numbers, and produced only periodically (and not every year as most other cars). The Corvette is a globally recognizable brand that inspires true passion, engagement, and commitment from its owners. The global branding and a testament to its staying power are nicely exemplified by the first 2019 Corvette ZR1 having been sold for $925,000 at a Barrett-Jackson auction in Scottsdale, Arizona. It was sold to Rick Hendrick, Chairman of Hendrick Automotive Group and owner of the Hendrick Motorsports NASCAR team. The price was a hefty markup paid to be first to get the new 2019 version of ZR1, since the Corvette ZR1 starts at about $120,000. However, the full sales price benefited the Stephen Siller Tunnel to Towers Foundation—a charitable foundation—and so the high sticker price went to a good cause. • Sources: “Corvette ZR-1: Consider the Pace Set,” Chevrolet, www.chevrolet.com/performance/corvette-zr1-supercar (accessed April 16, 2018); Hannah Elliott, “GM Takes On Ferrari and Lamborghini with the 2019 Corvette ZR1,” Bloomberg BusinessWeek, November 29, 2017; Bradley Brownell, “The First Corvette ZR1 Just Sold For $925,000,” Jalopnik, January 21, 2018; Mark Phelan, “First Look: 2019 Chevy Corvette ZR1 Convertible Is Faster and More Powerful than Ever,” Detroit Free Press, November 29, 2017; David Hollister, Ray Tadgerson, David Closs, and Tomas Hult, “Second Shift: The Inside Story of the Keep GM Movement,” McGraw-Hill Professional, 2016; and Chris Davies, “2019 Corvette ZR1: 5 Fast Facts About Chevy’s New Supercar,” Slash Gear, November 13, 2017. Introduction Over the past five decades, a fundamental shift has been occurring in the world economy. We have been moving away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. As we will see later on in this chapter and throughout the text, international trade across country borders has become the norm, with an almost exponential increase in trade during the last decade. We are moving toward a world in which barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent, integrated global economic system. The process by which this transformation is occurring is commonly referred to as globalization. At the same time, recent political Page 5 world events (e.g., increase of terrorism in many parts of the world, the United Kingdom leaving the European Union, and elections globally of nationalistic politicians) create tension and uncertainty regarding the future of global trade activities. These political swings usually temper, or even out, over time in democratic societies, and longterm indications generally are for stability in the marketplace. We are unlikely to backtrack on globalization and global companies’ willingness to satisfy the needs and wants of global customers. For example, as described in the opening case, General Motors and its Chevrolet brand are an illustration of the trend toward the unique opportunities that globalization can present to a company. It is pretty amazing to think that a Chevrolet is sold somewhere in the world every 8.33 seconds! However, it is clear that within GM’s global product portfolio (Chevrolet, Buick, GMC, Cadillac, Holden, Baojun, Wuling, and Jiefang), the Chevrolet brand occupies a distinctive position. People in the U.S. know Chevrolet along with GM’s other core brands (Buick, GMC, and Cadillac) well but have not been exposed so much to Holden, Baojun, Wuling, and Jiefang. GM uses Holden to focus on Oceania and also manufactures and sells numerous Baojun, Wuling, and Jiefang vehicles in the important Chinese market. As we’ve mentioned, five million of GM’s nine million annual vehicle sales are in the Chinese market. Proponents of increased global trade argue that cross-cultural engagement and trade across country borders is the future and that returning back to a nationalistic perspective is the past. On the other hand, the nationalistic argument rests in citizens wanting their country to be sovereign, self-sufficient as much as possible, and basically in charge of their own economy and country environment. As with any debate, both sides of the argument have merit. We will explore many aspects of today’s global marketplace in this text’s 17 integrated and topical chapters. Globalization now has an impact on almost everything we do. For example, an American medical doctor—let’s call her Laurie—might drive to work at her pediatric office in a sports utility vehicle (SUV) that was designed in Stuttgart, Germany, and assembled in Leipzig, Germany, and Bratislava, Slovakia, by Porsche from components from parts suppliers worldwide, which in turn were fabricated from Korean steel and Malaysian rubber. Laurie may have filled her car with gasoline at a Shell service station owned by a British-Dutch multinational company. The gasoline could have been made from oil pumped out of a well off the coast of Africa by a French oil company that transported it to the United States in a ship owned by a Greek shipping line. While driving to work, Laurie might talk to her stockbroker (using a hands-free, in-car speaker) on an Apple iPhone that was designed in California and assembled in China using chip sets produced in Japan and Europe, glass made by Corning in Kentucky, and memory chips from South Korea. Perhaps on her way Laurie might tell the stockbroker to purchase shares in Lenovo, a multinational Chinese PC manufacturer whose operational headquarters is in North Carolina and whose shares are listed on the New York Stock Exchange. This is the world in which we live. In many cases we simply do not know or perhaps even care where a product was designed and where it was made. Just a couple of decades ago, “Made in the USA” or “Made in Germany” (or “Made in the United Kingdom” for Charles W. L. Hill, the first author of this textbook, or “Made in Sweden” for G. Tomas M. Hult, the second author of this textbook) had strong meaning and referred to something. The U.S. often stood for quality and Germany often stood for sophisticated engineering. Now the country of origin for a product has given way to, for example, “Made by BMW,” and the company is the quality assurance platform, not the country. In many cases, it goes even beyond the company to the personal relationship a customer has developed with a representative of the company, and so we focus on what has become known as CRM (Customer Relationship Management). Whether it is still the quality associated with the country of origin of a product, or the assurance given by a specific company regardless of where they manufacture their product, we live in a world where the volume of goods, services, and investments crossing national borders has expanded faster than world output for more than half a century. It is a world in which international institutions such as the World Trade Organization and gatherings of leaders from the world’s most powerful economies continue to work for even lower barriers to cross-border trade and investment. The symbols of material culture and popular culture are increasingly global, from Coca-Cola and Starbucks, to Sony PlayStation, Facebook, Netflix video streaming service, IKEA stores, and Apple iPads and iPhones. Vigorous and vocal groups protest against globalization, which they blame for a list of ills from unemployment in developed nations to environmental degradation and the Westernization or Page 6 Americanization of local cultures. These protesters come from environmental groups, which have been around for some time, but more recently also from nationalistic groups focused on their countries being more sovereign. Will the United States Produce Just Services? The United States has the largest and most technologically powerful economy in the world, with a per capita GDP (gross domestic product) of $57,466. The country’s overall GDP is valued at $18.57 trillion. Most of the labor force (80 percent) is employed in the services sector, with 19 percent employed in manufacturing industries, and only 1 percent in the agricultural area. China, India, and the European Union have labor forces larger than that of the United States. Data show that the United States has become much more of a service economy over the years. Will the United States continue to increase its service sector at the cost of manufacturing and agriculture? Source: U.S. Central Intelligence Agency, World Factbook, 2019. www.cia.gov. For businesses, the globalization process has many opportunities. Firms can expand their revenues by selling around the world and/or reduce their costs by producing in nations where key inputs, including labor, are cheap. The global expansion of enterprises has been facilitated by generally favorable political and economic trends. This has allowed businesses both large and small, from both advanced nations and developing nations, to expand internationally. As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition. Advances in technology, lower transportation costs, and the rise of skilled workers in developing countries imply that many services no longer need to be performed where they are delivered. As best-selling author Thomas Friedman has argued, the world is becoming “flat.”1 People living in developed nations no longer have the playing field tilted in their favor. Increasingly, enterprising individuals based in India, China, or Brazil have the same opportunities to better themselves as those living in Western Europe, the United States, or Canada. In this text, we will take a close look at these issues and many more. We will explore how changes in regulations governing international trade and investment, when coupled with changes in political systems and technology, have dramatically altered the competitive playing field confronting many businesses. We will discuss the resulting opportunities and threats and review the strategies that managers can pursue to exploit the opportunities and counter the threats. We will consider whether globalization benefits or harms national economies. We will look at what economic theory has to say about the outsourcing of manufacturing and service jobs to places such as India and China and look at the benefits and costs of outsourcing, not just to business firms and their employees but to entire economies. First, though, we need to get a better overview of the nature and process of globalization, and that is the function of this first chapter. What Is Globalization? LO 1-1 Understand what is meant by the term globalization. As used in this text, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the globalization of markets and the globalization of production. THE GLOBALIZATION OF MARKETS The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade and investment have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping create a global market.2 Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony video games, McDonald’s hamburgers, Starbucks coffee, IKEA furniture, and Apple iPhones are frequently held up as prototypical examples of this trend. The firms that produce these products are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help create a global market. A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets. In the United States, for example, according to the International Trade Administration, more than 300,000 small- and medium-size firms with fewer than 500 employees export, accounting for 98 percent of the companies that export. More generally, exports from small- and medium-size Page 7 companies account for 33 percent of the value of U.S. exports of manufactured goods.3 Typical of these is B&S Aircraft Alloys, a New York company whose exports account for 40 percent of its $8 million annual revenues.4 The situation is similar in several other nations. For example, in Germany, a staggering 98 percent of small and midsize companies have exposure to international markets, via either exports or international production. Since 2009, China has been the world’s largest exporter, sending more than $2 trillion worth of products and services last year to the rest of the world. globalEDGE™ has been the world’s go-to site online for global International Business Resources business knowledge since 2001. Google ranks the site number 1 in the world for “international business resources.” Created by a 30-member team in the International Business Center in the Eli Broad College of Business at Michigan State University under the supervision of Dr. Tomas Hult, Dr. Tunga Kiyak, and Dr. Sarah Singer, globalEDGE™ is a knowledge resource that connects international business professionals worldwide to a wealth of information, insights, and learning resources on global business activities. The site offers the latest and most comprehensive international business and trade content for a wide range of topics. Whether conducting extensive market research, looking to improve your international knowledge, or simply browsing, you’re sure to find what you need to sharpen your competitive edge in today’s rapidly changing global marketplace. The easy, convenient, and free globalEDGE™ website’s tagline is “Your Source for Global Business Knowledge.” Take a look at the site at globaledge.msu.edu. We will use globalEDGE throughout this text for exercises, information, data, and to keep every facet of the text up-to-date on a daily basis! Despite the global prevalence of Citigroup credit cards, McDonald’s hamburgers, Starbucks coffee, and IKEA stores, for example, it is important not to push too far the view that national markets are giving way to the global market. As we shall see in later chapters, significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. Uber, for example, the fast-growing ride-for-hire service, is finding that it needs to refine its entry strategy in many foreign cities in order to take differences in the regulatory regime into account. Such differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country. The most global of markets are not typically markets for consumer products—where national differences in tastes and preferences can still be important enough to act as a brake on globalization—but markets for industrial goods and materials that serve universal needs the world over. These include the markets for commodities such as aluminum, oil, and wheat; for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; for computer software; and for financial assets from U.S. Treasury bills to Eurobonds and futures on the Nikkei index or the euro. That being said, it is increasingly evident that many newer high-technology consumer products, such as Apple’s iPhone, are being successfully sold the same way the world over. In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the rivalries between Ford and Toyota; Boeing and Airbus; Caterpillar and Komatsu in earthmoving equipment; General Electric and Rolls-Royce in aero engines; Sony, Nintendo, and Microsoft in video-game consoles; and Samsung and Apple in smartphones. If a firm moves into a nation not currently served by its rivals, many of those rivals are sure to follow to prevent their competitor from gaining an advantage.5 As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets— their products, operating strategies, marketing strategies, and brand names—creating some homogeneity across markets. Thus, greater uniformity replaces diversity. In an increasing number of industries, it is no longer meaningful to talk about “the German market,” “the American market,” “the Brazilian market,” or “the Japanese market”; for many firms, there is only the global market. Page 8 THE GLOBALIZATION OF PRODUCTION The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. For example, Boeing has made extensive use of outsourcing to foreign suppliers. Consider Boeing’s 777: eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.6 In total, some 30 percent of the 777, by value, is built by foreign companies. And for its most recent jet airliner, the 787, Boeing has pushed this trend even further; some 65 percent of the total value of the aircraft is outsourced to foreign companies, 35 percent of which goes to three major Japanese companies. Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at their particular activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country. For a more detailed look at the globalization of production at Boeing, see the accompanying Management Focus. Did You Know? Did you know why your iPhone was assembled in China? It’s not what you might think. Visit your instructor’s Connect® course and click on your eBook or SmartBook® to view a short video explanation from the authors. Early outsourcing efforts were primarily confined to manufacturing activities, such as those undertaken by Boeing and Apple. Increasingly, however, companies are taking advantage of modern communications technology, particularly the Internet, to outsource service activities to lowcost producers in other nations. The Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep; the results are ready for them in the morning. Many software companies, including Microsoft, now use Indian engineers to perform test functions on software designed in the United States. The time difference allows Indian engineers to run debugging tests on software written in the United States when U.S. engineers sleep, transmitting the corrected code back to the United States over secure Internet connections so it is ready for U.S. engineers to work on the following day. Dispersing value-creation activities in this way can compress the time and lower the costs required to develop new software programs. Other companies, from computer makers to banks, are outsourcing customer service functions, such as customer call centers, to developing nations where labor is cheaper. In another example from health care, workers in the Philippines transcribe American medical files (such as audio files from doctors seeking approval from insurance companies for performing a procedure). Some estimates suggest the outsourcing of many administrative procedures in health care, such as customer service and claims processing, could reduce health care costs in America by more than $100 billion. The economist Robert Reich has argued that as a consequence of the trend exemplified by companies such as Boeing, Apple, and Microsoft, in many cases it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, the outsourcing of productive activities to different suppliers results in the creation of products that are global in nature, that is, “global products.”7 But as with the globalization of markets, companies must be careful not to push the globalization of production too far. As we will see in later chapters, substantial impediments still make it difficult for firms to achieve the optimal dispersion of their productive activities to locations around the globe. These impediments include formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs, issues associated with economic and political risk, and the sheer managerial challenge of coordinating a globally dispersed supply chain (an issue for Boeing with the 787 Dreamliner, as discussed in the Management Focus). For example, government regulations ultimately limit the ability of hospitals to outsource the process of interpreting MRI scans to developing nations where radiologists are cheaper. test PREP Use SmartBook to help retain what you have learned. Access your Instructor’s Connect course to check out SmartBook or go to learnsmartadvantage.com for help. Nevertheless, the globalization of markets and production will probably continue. Modern firms are important actors in this trend, their very actions fostering increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment—as well they should. Page 9 management FOCUS Boeing’s Global Production System Executives at the Boeing Corporation, America’s largest exporter, say that building a large commercial jet aircraft like the 787 Dreamliner involves bringing together more than a million parts in flying formation. Half a century ago, when the early models of Boeing’s venerable 737 and 747 jets were rolling off the company’s Seattle-area production lines, foreign suppliers accounted for only 5 percent of those parts on average. Boeing was vertically integrated and manufactured many of the major components that went into the planes. The largest parts produced by outside suppliers were the jet engines, where two of the three suppliers were American companies. The lone foreign engine manufacturer was the British company RollsRoyce. Fast-forward to the modern era, and things look very different. In the case of Boeing’s super-efficient 787 Dreamliner, 50 outside suppliers spread around the world account for 65 percent of the value of the aircraft. Italian firm Alenia Aeronautica makes the center fuselage and horizontal stabilizer. Kawasaki of Japan makes part of the forward fuselage and the fixed trailing edge of the wing. French firm MessierDowty makes the aircraft’s landing gear. German firm Diehl Luftahrt Elektronik supplies the main cabin lighting. Sweden’s Saab Aerostructures makes the access doors. Japanese company Jamco makes parts for the lavatories, flight deck interiors, and galleys. Mitsubishi Heavy Industries of Japan makes the wings. KAA of Korea makes the wing tips. And so on. Why the change? One reason is that 80 percent of Boeing’s customers are foreign airlines, and to sell into those nations, it often helps to be giving business to those nations. The trend started in 1974 when Mitsubishi of Japan was given contracts to produce inboard wing flaps for the 747. The Japanese reciprocated by placing big orders for Boeing jets. A second rationale was to disperse component part production to those suppliers who are the best in the world at their particular activity. Over the years, for example, Mitsubishi has acquired considerable expertise in the manufacture of wings, so it was logical for Boeing to use Mitsubishi to make the wings for the 787. Similarly, the 787 is the first commercial jet aircraft to be made almost entirely out of carbon fiber, so Boeing tapped Japan’s Toray Industries, a world-class expert in sturdy but light carbon-fiber composites, to supply materials for the fuselage. A third reason for the extensive outsourcing on the 787 was that Boeing wanted to unburden itself of some of the risks and costs associated with developing production facilities for the 787. By outsourcing, it pushed some of those risks and costs onto suppliers, who had to undertake major investments in capacity to ramp up to produce for the 787. So what did Boeing retain for itself? Engineering design, marketing and sales, and final assembly are done at its Everett plant north of Seattle, all activities where Boeing maintains it is the best in the world. Of major component parts, Boeing made only the tail fin and wing to body fairing (which attaches the wings to the fuselage of the plane). Everything else was outsourced. As the 787 moved through development, it became clear that Boeing had pushed the outsourcing paradigm too far. Coordinating a globally dispersed production system this extensive turned out to be very challenging. Parts turned up late, some parts didn’t “snap together” the way Boeing had envisioned, and several suppliers ran into engineering problems that slowed down the entire production process. As a consequence, the date for delivery of the first jet was pushed back more than four years, and Boeing had to take millions of dollars in penalties for late deliveries. The problems at one supplier, Vought Aircraft in North Carolina, were so severe that Boeing ultimately agreed to acquire the company and bring its production in-house. Vought was co-owned by Alenia of Italy and made parts of the main fuselage. There are now signs that Boeing is rethinking some of its global outsourcing policy. For its next jet, a new version of its popular wide-bodied 777 jet, the 777X, which will use the same carbon-fiber technology as the 787, Boeing will bring wing production back in-house. Mitsubishi and Kawasaki of Japan produce much of the wing structure for the 787 and for the original version of the 777. However, recently Japan’s airlines have been placing large orders with Airbus, breaking with their traditional allegiance to Boeing. This seems to have given Boeing an opening to bring wing production back in-house. Boeing executives also note that Boeing has lost much of its expertise in wing production over the last 20 years due to outsourcing, and bringing it back inhouse for new carbon-fiber wings might enable Boeing to regain these important core skills and strengthen the company’s competitive position. Sources: M. Ehrenfreund, “The Economic Reality Behind the Boeing Plane Trump Showed Off,” The Washington Post, February 17, 2017; K. Epstein and J. Crown, “Globalization Bites Boeing,” Bloomberg Businessweek, March 12, 2008; H. Mallick, “Out of Control Outsourcing Ruined Boeing’s Beautiful Dreamliner,” The Star, February 25, 2013; P. Kavilanz, “Dreamliner: Where in the World Its Parts Come From,” CNN Money, January 18, 2013; S. Dubois, “Boeing’s Dreamliner Mess: Simply Inevitable?” CNN Money, January 22, 2013; and A. Scott and T. Kelly, “Boeing’s Loss of a $9.5 Billion Deal Could Bring Jobs Back to the U.S.,” Business Insider, October 14, 2013. The Emergence of Global Institutions As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system. Over the past half-century, a number of important global institutions have been created to help perform these functions, including the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization; the International Monetary Fund and its sister institution, the World Bank; and the United Nations. All these institutions were created by voluntary agreement between individual nation-states, and their functions are enshrined in international treaties. The World Trade Organization (WTO) (like the GATT before it) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties Page 10 signed by WTO member states. As of 2017, 164 nations that collectively accounted for 98 percent of world trade were WTO members, thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements among WTO member states. Over its entire history, and that of the GATT before it, the WTO has promoted the lowering of barriers to cross-border trade and investment. In doing so, the WTO has been the instrument of its member states, which have sought to create a more open global business system unencumbered by barriers to trade and investment between countries. Without an institution such as the WTO, the globalization of markets and production is unlikely to have proceeded as far as it has. However, as we shall see in this chapter and in Chapter 7 when we look closely at the WTO, critics charge that the organization is usurping the national sovereignty of individual nationstates. Can the International Court of Justice Be Effective? The International Court of Justice (www.icj-cij.org) is the principal judicial organ of the United Nations (UN). Of the six principal organs of the UN, it is the only one not located in New York (United States); instead, the seat of the Court is at the Peace Palace in The Hague (Netherlands). The court’s role is to settle, in accordance with international law, legal disputes submitted to it by countries and to give advisory opinions on legal questions referred to it by authorized United Nations organs and specialized agencies. But how effective can the UN International Court of Justice really be in the global marketplace with its many legal systems? Source: www.icj-cij.org/en/court. The International Monetary Fund (IMF) and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the international monetary system; the World Bank was set up to promote economic development. In the more than seven decades since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the two sister institutions. It has focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads). The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against those of other nations. During the past two decades, for example, the IMF has lent money to the governments of troubled states including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey. More recently, the IMF took a proactive role in helping countries cope with some of the effects of the 2008–2009 global financial crisis. IMF loans come with strings attached, however; in return for loans, the IMF requires nation-states to adopt specific economic policies aimed at returning their troubled economies to stability and growth. These requirements have sparked controversy. Some critics charge that the IMF’s policy recommendations are often inappropriate; others maintain that by telling national governments what economic policies they must adopt, the IMF, like the WTO, is usurping the sovereignty of nation-states. We will look at the debate over the role of the IMF in Chapter 11. The United Nations (UN) was established October 24, 1945, by 51 countries committed to preserving peace through international cooperation and collective security. Today, nearly every nation in the world belongs to the United Nations; membership now totals 193 countries. When states become members of the United Nations, they agree to accept the obligations of the UN Charter, an international treaty that establishes basic principles of international relations. According to the charter, the UN has four purposes: to maintain international peace and security, to develop friendly relations among nations, to cooperate in solving international problems and in promoting respect for human rights, and to be a center for harmonizing the actions of nations. Although the UN is perhaps best known for its peacekeeping role, one of the organization’s central mandates is the promotion of higher standards of living, full employment, and conditions of economic and social progress and development—all issues that are central to the creation of a vibrant global economy. As much as 70 percent of the work of the UN system is devoted to accomplishing this mandate. To do so, the UN works closely with other international institutions such as the World Bank. Guiding the work is the belief that eradicating poverty and improving the well-being of people everywhere are necessary steps in creating conditions for lasting world peace.8 Another institution in the news is the Group of Twenty (G20). Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus Page 11 representatives from the European Union and the European Central Bank. Collectively, the G20 represents 90 percent of global GDP and 80 percent of international global trade. Originally established to formulate a coordinated policy response to financial crises in developing nations, in 2008 and 2009 it became the forum through which major nations attempted to launch a coordinated policy response to the global financial crisis that started in America and then rapidly spread around the world, ushering in the first serious global economic recession since 1981. How Important is the European Union Among the Group of Twenty (G20)? There have been twelve G20 Leaders’ Summits since they started in 2008. The Group of Twenty includes 19 prominent countries and the European Union (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union). G20 members represent about 85 percent of global GDP, 80 percent of global trade, and about two-thirds of the world’s population. Now, is it really right for the G20 to include 19 countries and one union entity (the European Union), or should the European Union countries be selected individually (as some already are)? Source: www.g20.org/en. Drivers of Globalization LO 1-2 Recognize the main drivers of globalization. Two macro factors underlie the trend toward greater globalization.9 The first is the decline in barriers to the free flow of goods, services, and capital that has occurred in recent decades. The second factor is technological change, particularly the dramatic developments in communication, information processing, and transportation technologies. DECLINING TRADE AND INVESTMENT BARRIERS During the 1920s and 1930s, many of the world’s nation-states erected formidable barriers to international trade and foreign direct investment. International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition. One consequence, however, was “beggar thy neighbor” retaliatory trade policies, with countries progressively raising trade barriers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s. Having learned from this experience, the advanced industrial nations of the West committed themselves after World War II to progressively reducing barriers to the free flow of goods, services, and capital among nations.10 This goal was enshrined in the General Agreement on Tariffs and Trade. Under the umbrella of GATT, eight rounds of negotiations among member states worked to lower barriers to the free flow of goods and services. The first round of negotiations went into effect in 1948. The most recent negotiations to be completed, known as the Uruguay Round, were finalized in December 1993. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the World Trade Organization to police the international trading system.11 Table 1.1 summarizes the impact of GATT agreements on average tariff rates for manufactured goods among several developed nations. As can be seen, average tariff rates Page 12 have fallen significantly since 1950 and now stand at about 2.0– 3.0 percent. Comparable tariff rates in 2017 for China and India were about 8 percent. However, it should be noted that while the long term trend has been towards lower tariff rates, it is possible that recent increases in tariff rates imposed by the Trump Administration in the U.S. could signify a reversal of this trend. 1.1 TABLE Average Tariff Rates on Manufactured Products as Percentage of Value Sources: The 1913–1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3–4. The 2017 data are from the World Development Indicators, World Bank. Knowledge Society and Trade Agreements Figure 1.1 reports on the value of world trade, world production, and active regional trade agreements in the world along with the world population from 1960 to 2020 (the last three years being forecast data). Trade and production are indexed to 100 in 1960 (the index calculation is based on current prices and not adjusted for inflation). The figure illustrates some interesting changing globalization trends. For example, according to the World Trade Organization, the value of world trade in merchandised goods has grown consistently faster than the world economy since 1960, and the chart shows that this growth has been markedly higher since the turn of the century (note that the index values in the chart are based on current prices, and are not adjusted for inflation). 1.1 FIGURE Index value of world trade and world production (1960=100), world population (billions), and number of regional trade agreements. Sources: World Bank, 2018; World Trade Organization, 2018; United Nations, 2018. As a consequence, when adjusted for inflation, by 2020 the value of world trade is expected to be around 21 times larger than it was in 1960, whereas the world economy will be around 9.3 times larger. This trend has continued into the modern era. Between 2000 and 2017, the value of world trade increased 98 percent whereas the world economy has increased by 74 percent in real terms (adjusted for inflation). The forecast is that world trade will continue to increase more rapidly than world production for the foreseeable future. The difference in the growth rates of world production and world trade is why studying international business is so important. While we produce more goods and services today compared with before, a far greater proportion of that production is being traded across national borders than at any time in modern history. Moreover, the knowledge society that we live in has resulted in consumers knowing more than ever about goods and services being produced worldwide. From a customer perspective, this is driving demand for internationally traded goods. Thus, the larger the difference between the growth rates of world trade and world production, the greater the extent of globalization and the more important it becomes to understand international business. Page 13 Additionally, despite the recent wave of nationalism around the world (e.g., Brexit, the 2016 U.S. presidential election), many countries have been progressively removing restrictions to foreign direct investment over the past 20 years. According to the United Nations, some 80 percent of the 1,440 changes made worldwide since 2000 in the laws governing foreign direct investment created a more favorable environment for FDI. Basically, the pressure from customers to make available any goods and services anywhere for their needs and wants has been facilitated by country governments removing restrictions on imports to their countries. Such customer pressures and restrictions removal by countries have been driving both the glob...
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Running head: FOREIGN EXCHANGE

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THE FOREIGN EXCHANGE MARKET
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Course
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FOREIGN EXCHANGE

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Interest rates and exchange rates
With the growth in globalization and technologies in most countries worldwide, there
are various forms of economic practices practiced based on varying business operations. The
exchange rate refers to the conversion of currencies from one way to another. The different
country currencies are transformed into other forms in the foreign exchange market. It offers
insurance against any unpredictable changes in the market that arises from fluctuations and
volatile changes. The exchange rate market has a role in ensuring that it provides coverage
from the adverse effects of the foreign exchange risk as well as offer currency conversion
services in the market (Hult, 2018). Exchange rates enable consumers to compare the
different prices of commodities in various countries. Stakeholders in the foreign exchange
market include tourists and businesses which participate in international trades or
investments.
The financial markets are quite volatile and fluctuate, and this enables individuals or
businesses to carry out currency speculations by transferring funds to profit from the
differences in exchange rates. Interest rates impact on the predictions through a carry trade
where buyers borrow currencies when interest rates decrease and invest them in other
currencies whose interest rat...


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