“The Role of MNCs in International Business” Please respond to the following:Examine two (2) current trends in international business discussed in the text in chapter 1. Compare and contrast the chosen trends in terms of their suspected catalyst, their impact on their global economy, and their anticipated duration.From the e-Activity, analyze the potential benefit of McDonald’s global expansion to Vietnam. Predict key ways in which the new local brand of the McPork line of burgers may provide an advantage over other similar MNCs throughout Asia. Support your response with specific examples of such potential advantages for McDonald’s.\e-ActivityGo to McDonald’s Website and read the article titled, “McDonald’s Announces Official Opening of First Restaurant in Vietnam”, located athttp://news.mcdonalds.com/Corporate/news-stories/McDonald-s-Announces-Official-Opening-of-First-Res. Be prepared to discuss.Course
International Management 9e
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Copyright 2014 by McGraw-Hill Education. All rights
reserved. Printed in the United States of America. Except as
permitted under the United States Copyright Act of 1976, no part
of this publication may be reproduced or distributed in any form
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ISBN-10: 1308207840
ISBN-13: 9781308207841
Contents
1. Globalization and International Linkages 2
2. The Political, Legal, and Technological Environment 36
3. Ethics, Social Responsibility, and Sustainability 62
4. The Meanings and Dimensions of Culture 88
5. Managing Across Cultures 124
6. Organizational Cultures and Diversity 152
7. Cross-Cultural Communication and Negotiation 178
8. Strategy Formulation and Implementation 216
9. Entry Strategies and Organizational Structures 248
iii
Credits
1. Globalization and International Linkages: Chapter 1 from International Management: Culture, Strategy, and
Behavior, Ninth Edition by Luthans, Doh, 2015 2
2. The Political, Legal, and Technological Environment: Chapter 2 from International Management: Culture,
Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 36
3. Ethics, Social Responsibility, and Sustainability: Chapter 3 from International Management: Culture,
Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 62
4. The Meanings and Dimensions of Culture: Chapter 4 from International Management: Culture, Strategy, and
Behavior, Ninth Edition by Luthans, Doh, 2015 88
5. Managing Across Cultures: Chapter 5 from International Management: Culture, Strategy, and Behavior, Ninth
Edition by Luthans, Doh, 2015 124
6. Organizational Cultures and Diversity: Chapter 6 from International Management: Culture, Strategy, and
Behavior, Ninth Edition by Luthans, Doh, 2015 152
7. Cross-Cultural Communication and Negotiation: Chapter 7 from International Management: Culture,
Strategy, and Behavior, Ninth Edition by Luthans, Doh, 2015 178
8. Strategy Formulation and Implementation: Chapter 8 from International Management: Culture, Strategy, and
Behavior, Ninth Edition by Luthans, Doh, 2015 216
9. Entry Strategies and Organizational Structures: Chapter 9 from International Management: Culture, Strategy,
and Behavior, Ninth Edition by Luthans, Doh, 2015 248
iv
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Chapter 1
OBJECTIVES OF THE CHAPTER
GLOBALIZATION AND
INTERNATIONAL LINKAGES
Globalization is one of the most profound forces in our
contemporary economic environment. And its practical
impact on international management is substantial. In nearly
every country, increasing numbers of large, medium, and
even small corporations are going international, and a growing percentage of company revenue is derived from overseas
markets. This is even true for U.S.-based companies that
historically have relied on the large domestic market. Yet, the
reverberations of the financial crisis and global economic
recession, and continued economic and political uncertainties in many world regions present challenges for governments, corporations, and communities around the world,
causing some to question the current system for regulating
and overseeing international trade, investments, and global
financial flows. Nonetheless, international management—the
process of applying management concepts and techniques in
a multinational environment—continues to retain importance.
Although globalization and international linkages have
been part of history for centuries (see the International Management in Action box later in the chapter, “Tracing the Roots
of Modern Globalization”), the principal focus of this opening
chapter is to examine the process of globalization in the contemporary world. The rapid integration of countries, advances
in information technology, and the explosion in electronic
communication have created a new, more integrated world
and true global competition. Yet, the complexities of doing
business in distinct markets persist. These developments both
create and influence the opportunities, challenges, and problems that managers in the international arena will face during
the years ahead. Since the environment of international management is all-encompassing, this chapter is mostly concerned with the economic dimensions, while the following
two chapters are focused on the political, legal, and
technological dimensions and ethical and social dimensions,
respectively. The specific objectives of this chapter are:
1. ASSESS the implications of globalization for
countries, industries, firms, and communities.
2. REVIEW the major trends in global and regional
integration.
3. EXAMINE the changing balance of global economic
power and trade and investment flows among countries.
4. ANALYZE the major economic systems and recent
developments among countries that reflect those systems.
2
The World of International
Management
An Interconnected World
ay 18, 2012, marked one of the most highlyanticipated initial public offerings (IPOs) in
history. Facebook, which had grown from a college
dorm room to a 900-million-member social network in
just eight years, was set to offer shares to the public
for the first time. As May 18 approached, founder
Mark Zuckerberg, wearing his characteristic “hoodie”
sweatshirt, embarked on a roadshow to promote the
company. Facebook programmers celebrated with allnight “hackathons,” and huge demand for the IPO
prompted Facebook to release 25 percent more
shares than initially planned. The IPO price was set
to $38 per share, valuing Facebook at $104 billion.
Many analysts predicted the price would soar as high
as $60 on the first day alone. On the morning of May
18, Mark Zuckerberg ceremoniously rang a bell from
Facebook’s California campus to celebrate the opening of the market at 9:30 A.M. As Wall Street’s closing bell rang just a few hours later, however, the
original optimism that started the day had all but
faded. The shares were trading only $0.23 above the
IPO price—and down $3.82 from the opening bell
price. In the following weeks, Facebook’s stock continued its downward trajectory. By mid-August, Facebook stock had decreased to nearly half its original
offering price, leaving many to wonder, “Is social networking really here to stay?”
M
Social Media Has Changed
How We Connect
Though some have second-guessed the longevity of
online networks, one thing is certain: We currently live
in a world interconnected by social media. Through
online networking, the way we connect with others has
drastically changed. Virtually anyone on the globe is
only a few clicks away. In fact, the average number of
links separating any two random people on Facebook
is now only 4.74.1 Facebook’s statistics underscore how
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social media has connected people across
the globe:
•
•
•
•
•
•
•
•
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International Management: Culture, Strategy, and Behavior, Ninth Edition
More than one billion people have active
accounts on Facebook.
More than 50 percent of these active users log
onto Facebook in any given day.2
The average user has 190 friends.3
3.2 billion comments and likes are uploaded
per day.
18 percent of time spent online is dedicated to
social media.4
Over 80 percent of Facebook users are outside
the United States.
More than 70 translations are available on
Facebook.
Over 200 million people from the emerging
nations of Brazil, India, Indonesia, and Mexico
are now active Facebook users.5
Certainly, social networks are a part of many people’s lives.
Yet, has the virtual world of social media networks made a
permanent impact in the world of international business?
Social Media Has Changed Business Strategy
Procter & Gamble (P&G), which owns several of the most
recognizable brands on the planet, has strategically leveraged social media to improve its long-term brand image. In
2010, P&G unveiled a Billion Acts of Green™ Facebook application which allows people to “make a pledge to lessen
their environmental impact and promote environmentally
beneficial habits to friends and family via social media channels.” This social media application enables users to share
their “act of green” pledges with their Facebook network. As
of 2013, there were over one billion acts of green pledged.6
P&G has also utilized social networking to increase
revenue. After stagnant sales in 2010, P&G decided to
refocus the advertising of Pepto-Bismol online. By monitoring Facebook activity, P&G discovered that the most
social media buzz regarding Pepto-Bismol was occurring
on weekend mornings, likely after customers had overindulged the night before. To tap into this market, P&G created a Facebook initiative called “Celebrate Life.” Within
one year, Pepto-Bismol gained 11 percent market share.7
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The following year, in 2011, Secret deodorant sales
began to drop. In an effort to shift its advertising toward
teenage females, P&G created a Facebook marketing campaign that addressed the issue of bullying. Titled “Mean
Stinks,” the campaign encouraged users to “like” the
Facebook page and share stories and videos. This campaign
increased activity on Secret’s Facebook page by 25 times,
and sales spiked by 9 percent over a six-month period.8
Through its use of Facebook, P&G has connected with
millions of people around the world at little cost to increase
sales and enhance its brand. Businesses have gained huge
competitive edges by seizing the opportunities inherent in
this new global society of online social networks.
Social Media Has Changed How We Do Business
In his book Socialnomics: How Social Media Transforms
the Way We Live and Do Business, Erik Qualman writes,
“Social media platforms like Facebook, YouTube, and
Twitter are fundamentally changing the way businesses
and consumers behave, connecting hundreds of millions
of people to each other via instant communication.” In
essence, social media is reshaping how “consumers and
companies communicate and interact with each other.”9
Social media has changed how consumers search for
products and services. Qualman gives the example of a
woman who wants to take a vacation to South America, but
she is not sure which country she wants to visit. In the past,
she would have typed in “South American vacation” to
Google, which would have brought her to travel websites
such as TripAdvisor. After hours of research, she would have
picked a destination. Then, after more research, she would
pick a place to stay. With social media, this woman’s vacation planning becomes streamlined. When she types “South
American vacation” into a social network, she finds that five
of her friends have taken a trip to South America in the last
year. She notices that two of her friends highly recommended their vacations to Chile with GoAhead Tours. She
clicks on a link to GoAhead Tours and books her vacation. In
a social network, online word of mouth among friends carries
great weight for consumers. With the data available from
their friends about products and services, consumers know
what they want without traditional marketing campaigns.10
This trend means that marketers must be responsive to
social networks. For example, an organization that gives
travel tours has a group on Facebook. A marketer at that
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Part 1 Environmental Foundation
organization could create a Facebook application that allows
its group members to select “places I’d like to visit.” Let’s
say that 25 percent of group members who use the application choose Victoria Falls as a place they would like to visit.
The organization could develop a tour to Victoria Falls, and
then could send a message to all of its Facebook group
members to notify them about this new tour. In this way, a
social network serves as an inexpensive, effective means of
marketing directly to a business’s target audience.
Social Media Has Impacted Diplomacy
In February 2010, Washington sent an unconventional delegation to Moscow, which included the creator of Twitter, the
chief executive of eBay, and the actor Ashton Kutcher. One
of the delegation’s goals was “to persuade Russia’s thriving
online social networks to take up social causes like fighting
corruption or human trafficking,” according to Jared Cohen
who serves on Secretary of State Hillary Clinton’s policy
planning staff. In Russia, the average adult spends 10.4 hours
a month on social networking sites, based on comScore
market research. This act of diplomacy by Washington
underscores how important social networks have become in
our world today, a world in which Twitter has helped
mobilize people to fight for freedom from corruption.
Social media networks have accelerated technological
integration among the nations of the world. People across
the globe are now linked more closely than ever before.
This social phenomenon has implications for businesses
as corporations can now leverage networks such as
Facebook to achieve greater success. Understanding the
global impact of social media is key to understanding our
global society today.
Social networks have rapidly diffused from the United States and Europe to every region
of the world, underscoring the inexorable nature of globalization. As individuals who
share interests and preferences link up, they are afforded opportunities to connect in ways
that were unimaginable just a decade ago. Facebook, Twitter, Linkedin, and others are
all providing communication platforms for individuals and groups in disparate—and
even isolated—locations around the world. Such networks also offer myriad business
opportunities for companies large and small to identify and target discrete groups of
consumers or other business partners. These networks are revolutionizing the nature of
management—including international management—by allowing producers and consumers to interact directly without the usual intermediaries. Networks and the individuals
who make them up are bringing populations of the world closer together and further
accelerating the already rapid pace of globalization and integration.
Though the disappointing Facebook IPO left many to initially question the value and
longevity of social media, the pace of interconnectivity across the globe has not slowed.
Social media has altered the way that we interact with each other, and businesses, like P&G,
have gained real advantages by leveraging online networks. In this chapter, we examine the
globalization phenomenon, the growing integration among countries and regions, the changing balance of global economic power, and examples of different economic systems. As you
read this chapter, keep in mind that although there are periodic setbacks, such as the recession
of 2008–2009, globalization is moving at a rapid pace and that all nations, including the
United States, as well as individual companies and their managers, are going to have to keep
a close watch on the current environment if they hope to be competitive in the years ahead.
management
Process of completing
activities efficiently and
effectively with and
through other people.
international management
Process of applying
management concepts and
techniques in a multinational
environment and adapting
management practices to
different economic, political,
and cultural contexts.
■ Introduction
Management is the process of completing activities with and through other people.
International management is the process of applying management concepts and
techniques in a multinational environment and adapting management practices to different economic, political, and cultural contexts. Many managers practice some level
of international management in today’s increasingly diverse organizations. International
management is distinct from other forms of management in that knowledge and
insights about global issues and specific cultures are a requisite for success. Today
more firms than ever are earning some of their revenue from international operations,
even nascent organizations as illustrated in The World of International Management
chapter opening.
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Chapter 1 Globalization and International Linkages
5
Table 1–1
The World’s Top Nonfinancial TNCs, Ranked by Foreign Assets, 2012
(in millions of dollars)
Company
Name
Home
Economy
4
5
General Electric
Royal Dutch/
Shell plc
British Petroleum
Company Plc
Toyota Motor Corporation
Total SA
6
7
8
9
10
Exxon Mobil Corporation
Vodafone Group Plc
GDF Suez
Chevron Corporation
Volkswagen Group
Rank
1
2
3
5
International Management: Culture, Strategy, and Behavior, Ninth Edition
Foreign
Assets
Total
Assets
Foreign
Sales
Total
Sales
United States
Netherlands/
United Kingdom
$338,157
$685,328
$75,640
$144,796
307,938
360,325
282,930
467,153
United Kingdom
Japan
France
270,247
233,193
214,507
300,193
376,841
227,107
300,216
170,486
180,440
375,580
265,770
234,287
United States
United Kingdom
France
United States
Germany
214,349
199,003
175,057
158,865
158,046
333,795
217,031
271,607
232,982
409,257
301,840
62,065
78,555
132,743
199,129
420,714
70,224
124,711
222,580
247,624
Source: UNCTAD World Investment Report 2013, Web Table 28.
Many of these companies are multinational corporations (MNCs). An MNC is a firm
that has operations in more than one country, international sales, and a mix of nationalities
among managers and owners. In recent years such well-known American MNCs as Avon
Products, Chevron, Citicorp, Coca-Cola, Colgate Palmolive, Du Pont, ExxonMobil, Eastman
Kodak, Gillette, Hewlett-Packard, McDonald’s, Motorola, Ralston Purina, Texaco, the 3M
Company, and Xerox have all earned more annual revenue in the international arena than
they have stateside. GE, one of the world’s largest companies, with 2012 revenue of more
than $147 billion, earned 57 percent of its industrial revenue from overseas that year. Table
1–1 lists the world’s top nonfinancial companies ranked by foreign assets in 2012.
In addition, companies from developing economies, such as India, Brazil, and China,
are providing formidable competition to their North American, European, and Japanese
counterparts. Names like Cemex, Embraer, Haier, Lenovo, LG Electronics, Ping An,
Rambaxy, Telefonica, Santander, Reliance, Samsung, Grupo Televisa, Tata, and Infosys are
becoming well-known global brands. Globalization and the rise of emerging markets’
MNCs have brought prosperity to many previously underdeveloped parts of the world,
notably the emerging markets of Asia. Since 2009, sales of automobiles in China have
exceeded those in the United States. Vehicle sales in China reached a record 19.3 million
units in 2012, according to the China Association of Automobile Manufacturers, far ahead
of the 14.5 million cars and light trucks sold in the U.S.11 Moreover, a number of Chinese
auto companies are becoming global players through their exporting, foreign investment,
and international acquisitions, including the purchase by Geely of ailing Ford unit Volvo,
Fiat’s investment in Chrysler, and Tata’s purchase of Jaguar-Land Rover.
In a striking move, Cisco Systems, one of the world’s largest producers of network
equipment, such as routers, announced it would establish a “Globalization Center East” in
Bangalore, India. This center includes all the corporate and operational functions of U.S.
headquarters, which have been mirrored in India. Under this plan, which includes an investment of over $1.1 billion, one-fifth of Cisco’s senior management will move to Bangalore.12,13
In September 2012, Procter and Gamble relocated their skin care, cosmetics, and
personal care headquarters from Cincinnati to Singapore. According to P&G, Asia
accounts for roughly half of the skin care market globally, and, with the growing prosperity in Asia, is expected to continue to expand.14 Similarly, citing the massive growth
in the healthcare market in Asia, General Electric moved its X-ray business headquarters
to China in 2011, and vice chairman John Rice relocated to Hong Kong.15,16
MNC
A firm having operations
in more than one country,
international sales, and a
nationality mix among
managers and owners.
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Part 1 Environmental Foundation
Table 1–2
The World’s Top Nonfinancial TNCs from Developing and Transitioning Economies,
Ranked by Foreign Assets, 2011
(in millions of dollars)
Rank
1
2
3
4
5
6
7
8
9
10
Company
Name
Home
Economy
Foreign
Assets
Total
Assets
Foreign
Sales
Total
Sales
Hutchison
Whampoa Limited
CITIC Group
Hon Hai Precision
Industries
Vale SA
Hong Kong/
China
China
$77,291
71,512
$92,788
514,847
$23,477
9,923
$30,023
51,659
Taiwan
Brazil
52,198
48,045
57,451
128,728
114,285
49,475
117,992
60,389
China
40,435
52,230
19,454
29,579
Malaysia
38,907
Mexico
34,601
Mexico
32,694
Russian Federation 29,829
150,435
39,191
67,590
54,039
43,228
11,792
38,315
11,280
72,853
15,208
53,553
20,262
China
112,887
19,786
75,518
China Ocean Shipping
(Group) Company
Petronas – Petroliam
Nasional BhD
Cemex S.A.B. de C.V.
America Movil SAB De CV
VimpelCom Ltd
China National
Offshore Oil Group
29,802
Source: UNCTAD World Investment Report 2013, Web Table 29.
IBM, another American archetype, had about 433,000 employees globally in 2012,
with only about 95,000 in the U.S. This is fewer than in India, which has about 130,000
IBM employees. In 2011, IBM drew 64 percent of its $100 billion in revenue from overseas.17 With a focus on large-scale projects in emerging markets, such as building a wireless
phone network across Africa, IBM plans to receive 30 percent of its revenue from emerging
markets by 2015.18,19 As of 2012, IBM had operations in over 20 African nations, and, in
August 2012, IBM announced the opening of a research lab in Kenya.20 More than half of
IBM’s research staff are currently located outside of the United States.
These trends reflect the reality that firms are finding they must develop international management expertise, especially expertise relevant to the increasingly
important developing and emerging markets of the world. Managers from today’s
MNCs must learn to work effectively with those from many different countries. Moreover, more and more small and medium-sized businesses will find that they are being
affected by internationalization. Many of these companies will be doing business
abroad, and those that do not will find themselves doing business with MNCs operating locally. Table 1–2 lists the world’s top nonfinancial companies from developing
countries ranked by foreign assets in 2011.
■ Globalization and Internationalization
globalization
The process of social,
political, economic,
cultural, and technological
integration among
countries around the world.
International business is not a new phenomenon; however, the volume of international
trade has increased dramatically over the last decade. Today, every nation and an increasing number of companies buy and sell goods in the international marketplace. A number
of developments around the world have helped fuel this activity.
Globalization, Antiglobalization, and Global Pressures
Globalization can be defined as the process of social, political, economic, cultural, and
technological integration among countries around the world. Globalization is distinct
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International Management in Action
Tracing the Roots of Modern Globalization
Globalization is often presented as a new phenomenon
associated with the post–World War II period. In fact,
globalization is not new. Rather, its roots extend back
to ancient times. Globalization emerged from longstanding patterns of transcontinental trade that developed over many centuries. The act of barter is the
forerunner of modern international trade. During different periods of time, nearly every civilization contributed
to the expansion of trade.
Middle Eastern Intercontinental Trade
In ancient Egypt, the King’s Highway or Royal Road
stretched across the Sinai into Jordan and Syria and
into the Euphrates Valley. These early merchants practiced their trade following one of the earliest codes of
commercial integrity: Do not move the scales, do not
change the weights, and do not diminish parts of the
bushel. Land bridges later extended to the Phoenicians,
the first middlemen of global trade. Over 2,000 years
ago, traders in silk and other rare valued goods moved
east out of the Nile basin to Baghdad and Kashmir and
linked the ancient empires of China, India, Persia, and
Rome. At its height, the Silk Road extended over 4,000
miles, providing a transcontinental conduit for the dissemination of art, religion, technology, ideas, and culture.
Commercial caravans crossing land routes in Arabian
areas were forced to pay tribute—a forerunner of custom
duties—to those who controlled such territories. In his
youth, the Prophet Muhammad traveled with traders, and
prior to his religious enlightenment the founder of Islam
himself was a trader. Accordingly, the Qur’an instructs
followers to respect private property, business agreements, and trade.
Trans-Saharan Cross-Continental Trade
Early tribes inhabiting the triad cities of Mauritania, in
ancient West Africa below the Sahara, embraced caravan trade with the Berbers of North Africa. Gold from
the sub-Saharan area was exchanged for something
even more prized—salt, a precious substance needed
for retaining body moisture, preserving meat, and flavoring food. Single caravans, stretching five miles and
including nearly 2,500 camels, earned their reputation
as ships of the desert as they ferried gold powder,
slaves, ivory, animal hides, and ostrich feathers to the
northeast and returned with salt, wool, gunpowder,
porcelain pottery, silk, dates, millet, wheat, and barley
from the East.
China as an Ancient Global Trading Initiator
In 1421, a fleet of over 3,750 vessels set sail from China
to cultivate trade around the world for the emperor. The
voyage reflected the emperor’s desire to collect tribute
in exchange for trading privileges with China and
China’s protection. The Chinese, like modern-day multinationals, sought to extend their economic reach while
recognizing principles of economic equity and fair
trade. In the course of their global trading, the Chinese
introduced uniform container measurements to enable
merchants to transact business using common weight
and dimension measurement systems. Like the early
Egyptians and later the Romans, they used coinage as
an intermediary form of value exchange or specie, thus
eliminating complicated barter transactions.
European Trade Imperative
The concept of the alphabet came to the Greeks via
trade with the Phoenicians. During the time of Alexander
the Great, transcontinental trade was extended into
Afghanistan and India. With the rise of the Roman Empire,
global trade routes stretched from the Middle East
through central Europe, Gaul, and across the English
Channel. In 1215 King John of England signed the
Magna Carta, which stressed the importance of crossborder trade. By the time of Marco Polo’s writing of The
Description of the World, at the end of the 13th century,
the Silk Road from China to the city-states of Italy was a
well-traveled commercial highway. His tales, chronicled
journeys with his merchant uncles, gave Europeans a
taste for the exotic, further stimulating the consumer
appetite that propelled trade and globalization. Around
1340, Francisco Balducci Pegolotti, a Florentine mercantile agent, authored Practica Della Mercatura (Practice of
Marketing), the first widely distributed reference on international business and a precursor to today’s textbooks.
The search for trading routes contributed to the Age of
Discovery and encouraged Christopher Columbus to sail
west in 1492.
Globalization in U.S. History
The Declaration of Independence, which set out grievances against the English crown upon which a new
nation was founded, cites the desire to “establish Commerce” as a chief rationale for establishing an independent state. The king of England was admonished
“for cutting off our trade with all parts of the world” in
one of the earliest antiprotectionist free-trade statements from the New World.
Globalization, begun as trade between and across
territorial borders in ancient times, was historically and
is even today the key driver of world economic development. The first paths in the creation of civilization
were made in the footsteps of trade. In fact the word
meaning “footsteps” in the old Anglo-Saxon language
is trada, from which the modern English word trade is
derived. Contemporary globalization is a new branch
of a very old tree whose roots were planted in antiquity.
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offshoring
The process by which
companies undertake some
activities at offshore
locations instead of in their
countries of origin.
outsourcing
The subcontracting or
contracting out of activities
to external organizations
that had previously been
performed by the firm.
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Part 1 Environmental Foundation
from internationalization in that internationalization is the process of a business crossing
national and cultural borders, while globalization is the vision of creating one world unit,
a single market entity. Evidence of globalization can be seen in increased levels of trade,
capital flows, and migration. Globalization has been facilitated by technological advances
in transnational communications, transport, and travel. Thomas Friedman, in his book
The World Is Flat, identified 10 “flatteners” that have hastened the globalization trend,
including the fall of the Berlin Wall, offshoring, and outsourcing, which have combined
to dramatically intensify the effects of increasing global linkages.21 Hence, in recent
years, globalization has accelerated, creating both opportunities and challenges to global
business and international management.
On the plus side, global trade and investment continue to grow, bringing wealth,
jobs, and technology to many regions around the world. While some emerging countries
have not benefited from globalization and integration, the emergence of MNCs from
developing countries reflects the increasing inclusion of all regions of the world in the
benefits of globalization. Yet, as the pace of global integration quickens, so have the cries
against globalization and the emergence of new concerns over mounting global pressures.22 These pressures can be seen in protests at the meetings of the World Trade
Organization (WTO), International Monetary Fund (IMF), and other global bodies and
in the growing calls by developing countries to make the global trading system more
responsive to their economic and social needs. These groups are especially concerned
about rising inequities between incomes, and nongovernmental organizations (NGOs)
have become more active in expressing concerns about the potential shortcomings of
economic globalization.23
Who benefits from globalization? Proponents believe that everyone benefits from
globalization, as evidenced in lower prices, greater availability of goods, better jobs, and
access to technology. Theoretically, individuals in established markets will strive for better education and training to be prepared for future positions, while citizens in emerging
markets and underdeveloped countries will reap the benefits of large amounts of capital
flowing into those countries which will stimulate growth and development. Critics disagree, noting that the high number of jobs moving abroad as a result of the offshoring
of business services jobs to lower-wage countries does not inherently create greater
opportunities at home and that the main winners of globalization are the company executives. Proponents claim that job losses are a natural consequence of economic and
technological change and that offshoring actually improves the competitiveness of American companies and increases the size of the overall economic pie.24 Critics point out
that growing trade deficits and slow wage growth are damaging economies and that
globalization may be moving too fast for some emerging markets, which could result in
economic collapse. Moreover, critics argue that when production moves to countries to
take advantage of lower labor costs or less regulated environments, it creates a “race to
the bottom” in which companies and countries place downward pressure on wages and
working conditions.25
India is one country at the center of the globalization debate. As noted above, India
has been the beneficiary of significant foreign investment, especially in services such as
software and IT. Limited clean water, power, paved roadways, and modern bridges, however, are making it increasingly difficult for companies to expand. There have even been
instances of substantial losses for companies using India as an offshore base, such as
occurred when Nokia Corp. experienced the destruction of thousands of cellular phones
due to a lack of storage space at an airport during a rainstorm. With India’s public debt
at around 70 percent of GDP, the country now stands where China did a decade ago. It
is possible that India will follow in China’s footsteps and continue rapid growth in
incomes and wealth; however, it is also possible that the challenges India faces are greater
than the country’s capacity to respond to them.26
This example illustrates just one of the ways in which globalization has raised
particular concerns over environmental and social impacts. According to antiglobalization
activists, if corporations are free to locate anywhere in the world, the world’s poorest
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A Closer Look
Outsourcing and Offshoring
The concepts of outsourcing and offshoring are not new,
but these practices are growing at an extreme rate. Offshoring refers to the process by which companies
undertake some activities at offshore locations instead
of in their countries of origin. Outsourcing is the subcontracting or contracting out of activities to external organizations that had previously been performed within the
firm and is a wholly different phenomenon. Often the two
combine to create “offshore outsourcing.” Offshoring
began with manufacturing operations. Globalization
jump-started the extension of offshore outsourcing of
services, including call centers, R&D, information services, and even legal work. During 2006, Du Pont hired
attorneys in Manila to oversee documentation in preparation for legal cases. The company hopes to save an
estimated $6 million in legal spending by moving offshore and cutting documentation by 40 to 60 percent
once everything is scanned and digitally saved. This is
a risky venture as legal practices are not the same
across countries, and the documents may be too sensi-
tive to rely on assembly-line lawyers. It also raises the
question as to whether or not there are limitations to
offshore outsourcing. Many companies, including
Deutsche Bank, spread offshore outsourcing opportunities across multiple countries such as India and Russia
for economic or political reasons. The advantages,
concerns, and issues with offshoring span a variety of
subjects. Throughout the text we will revisit the idea of
offshore outsourcing as it is relevant. Here in Chapter 1
we see how skeptics of globalization wonder if there
are benefits to offshore outsourcing, while in Chapter 2
we see how these are related to technology, and finally
in Chapter 14 we see how offshore practices affect
human resource management and the global distribution of work.
Source: Pete Engardio and Assif Shameen, “Let’s Offshore
the Lawyers,” BusinessWeek, September 18, 2006, p. 42;
and Tony Hallett and Andy McCue, “Why Deutsche Bank
Spreads Its Outsourcing,” BusinessWeek, March 15, 2007.
countries will relax or eliminate environmental standards and social services in order to
attract first-world investment and the jobs and wealth that come with it. Proponents of
globalization contend that even within the developing world, it is protectionist policies,
not trade and investment liberalization, that result in environmental and social damage.
They believe globalization will force higher-polluting countries such as China and Russia
into an integrated global community that takes responsible measures to protect the environment. However, given the significant changes required in many developing nations to
support globalization, such as better infrastructure, greater educational opportunities, and
other improvements, most supporters concede that there may be some short-term disruptions. Over the long term, globalization supporters believe industrialization will create
wealth that will enable new industries to employ more modern, environmentally friendly
technology. We discuss the social and environmental aspects of globalization in more
detail in Chapter 3.
These contending perspectives are unlikely to be resolved anytime soon. Instead,
a vigorous debate among countries, MNCs, and civil society will likely continue and
affect the context in which firms do business internationally. Business firms operating
around the world must be sensitive to different perspectives on the costs and benefits of
globalization and adapt and adjust their strategies and approaches to these differences.
Global and Regional Integration
One important dimension of globalization is the increasing economic integration among
countries brought about by the negotiation and implementation of trade and investment
agreements. Here we provide a brief overview of some of the major developments in
global and regional integration.
Over the past six decades, succeeding rounds of global trade negotiations have
resulted in dramatically reduced tariff and nontariff barriers among countries. Table 1–3
shows the history of these negotiation rounds, their primary focus, and the number of
countries involved. These efforts reached their crest in 1994 with the conclusion of the
Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT) and the creation of the World Trade Organization (WTO) to
World Trade
Organization (WTO)
The global organization of
countries that oversees
rules and regulations for
international trade and
investment.
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Table 1–3
Completed Rounds of the Negotiations under the GATT and WTO
Year
Place (name)
Subjects Covered
1947
1949
1951
Geneva
Annecy
Torquay
Tariffs
Tariffs
Tariffs
23
13
38
1956
1960–1961
Geneva
Geneva
(Dillon Round)
Tariffs
Tariffs
26
1964–1967
Geneva
(Kennedy Round)
Geneva
(Tokyo Round)
Tariffs and antidumping
measures
Tariffs, nontariff measures,
“framework” agreements
102
Geneva
(Uruguay Round)
Tariffs, nontariff measures,
services, intellectual property,
dispute settlement, textiles,
agriculture, creation of WTO
123
1973–1979
1986–1994
Countries
26
62
Source: Understanding the WTO (Geneva: World Trade Organization, 2008), http://www.
wto.org/english/thewto_e/whatis_e/tif_e/understanding_e.pdf. Reprinted with permission.
North American Free
Trade Agreement
(NAFTA)
A free-trade agreement
between the United States,
Canada, and Mexico that
has removed most barriers
to trade and investment.
oversee the conduct of trade around the world. The WTO is the global organization of
countries that oversees rules and regulations for international trade and investment,
including agriculture, intellectual property, services, competition, and subsidies. Recently,
however, the momentum of global trade agreements has slowed. In December 1999, trade
ministers from around the world met in Seattle to launch a new round of global trade
talks. In what later became known as the “Battle in Seattle,” protesters disrupted the
meeting, and representatives of developing countries who felt their views were being left
out of the discussion succeeded in ending the discussions early and postponing a new
round of trade talks. Two years later, in November 2001, the members of the WTO met
again and successfully launched a new round of negotiations at Doha, Qatar, to be known
as the “Development Round,” reflecting the recognition by members that trade agreements needed to explicitly consider the needs of and impact on developing countries.27
However, after a lack of consensus among WTO members regarding agricultural subsidies and the issues of competition and government procurement, progress slowed. At a
meeting in Cancún in September 2003, a group of 20-plus developing nations, led by
Brazil and India, united to press developed countries such as the United States, the
European Union (EU), and Japan to reduce barriers to agricultural imports. Failure to
reach agreement resulted in another setback, and although there have been attempts to
restart the negotiations, they have remained stalled, especially in light of rising protectionism in the wake of the global economic crisis.28
Partly as a result of the slow progress in multilateral trade negotiations, the United
States and many other countries have pursued bilateral and regional trade agreements.
The United States, Canada, and Mexico make up the North American Free Trade
Agreement (NAFTA), which in essence has removed all barriers to trade among these
countries and created a huge North American market. A number of economic developments have occurred because of this agreement which are designed to promote commerce
in the region. Some of the more important developments include (1) the elimination of
tariffs as well as import and export quotas; (2) the opening of government procurement
markets to companies in the other two nations; (3) an increase in the opportunity to make
investments in each other’s country; (4) an increase in the ease of travel between countries; and (5) the removal of restrictions on agricultural products, auto parts, and energy
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goods. Many of these provisions were implemented gradually. For example, in the case
of Mexico, quotas on Mexican products in the textile and apparel sectors were phased
out over time, and customs duties on all textile products were eliminated over 10 years.
Negotiations between NAFTA members and many Latin American countries, such as
Chile, have concluded, and others are ongoing. Moreover, other regional and bilateral
trade agreements, including the U.S.–Singapore Free Trade Agreement, concluded in
May 2003, and the U.S.–Central American Free Trade Agreement (CAFTA), later
renamed CAFTA-DR to reflect the inclusion of the Dominican Republic in the agreement
and concluded in May 2004, were negotiated in the same spirit as NAFTA. The U.S.
Congress approved the CAFTA-DR in July 2005, and the president signed it into law on
August 2, 2005. The export zone created will be the United States’ second largest freetrade zone in Latin America after Mexico. The United States is implementing the
CAFTA-DR on a rolling basis as countries make sufficient progress to complete their
commitments under the agreement. The agreement first entered into force between the
United States and El Salvador on March 1, 2006, followed by Honduras and Nicaragua
on April 1, 2006, Guatemala on July 1, 2006, and the Dominican Republic on March 1,
2007. Implementation by Costa Rica was delayed by concerns over the impact of the
opening of Costa Rica’s energy and telecommunications monopoly, and a subsequent
election and referendum; however, the agreement finally entered into force for Costa
Rica on January 1, 2009.29
Agreements like NAFTA and CAFTA not only reduce barriers to trade but also
require additional domestic legal and business reforms in developing nations to protect
property rights. Most of these agreements now include supplemental commitments on
labor and the environment to encourage countries to upgrade their working conditions
and environmental protections, although some critics believe the agreements do not go
far enough in ensuring worker rights and environmental standards. Partly due to the
stalled progress with the WTO and FTAA, the United States has pursued bilateral trade
agreements with a range of countries, including Australia, Bahrain, Chile, Colombia,
Israel, Jordan, Malaysia, Morocco, Oman, Panama, Peru, and Singapore.30
Economic activity in Latin America continues to be volatile. Despite the continuing
political and economic setbacks these countries periodically experience, economic and
export growth continue in Brazil, Chile, and Mexico. In addition, while outside MNCs
continually target this geographic area, there also is a great deal of cross-border investment between Latin American countries. Regional trade agreements are helping in this
cross-border process, including NAFTA, which ties the Mexican economy more closely
to the United States. The CAFTA agreement, signed August 5, 2006, between the United
States and Central American countries presents new opportunities for bolstering trade,
investment, services, and working conditions in the region. Within South America there
are Mercosur, a common market created by Argentina, Brazil, Paraguay, Uruguay, and
Venezuela, and the Andean Common Market, a subregional free-trade compact that is
designed to promote economic and social integration and cooperation between Bolivia,
Colombia, Ecuador, and Peru.
The European Union (EU) has made significant progress over the past decade in
becoming a unified market. In 2003 it consisted of 15 nations: Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, the Netherlands, Ireland, Italy,
Luxembourg, Portugal, Spain, and Sweden. In May 2004, 10 additional countries joined
the EU: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Slovakia, and Slovenia. On January 1, 2007, Romania and Bulgaria acceded to the EU,
and on July 1, 2013, Croatia officially became the newest and 28th member of the EU.
Not only have most trade barriers between the members been removed, but a subset of
European countries have adopted a unified currency called the euro. As a result, it is
now possible for customers to compare prices between most countries and for business
firms to lower their costs by conducting business in one, uniform currency. With access
to the entire pan-European market, large MNCs can now achieve the operational scale
and scope necessary to reduce costs and increase efficiencies. Even though long-standing
11
European Union
A political and economic
community consisting of
28 member states.
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cultural differences remain, and the EU has recently experienced some substantial
challenges, the EU is more integrated as a single market than NAFTA, CAFTA, or the
allied Asian countries. With many additional countries poised to join the EU, the resulting pan-European market will be one that no major MNC can afford to ignore.
Although Japan has experienced economic problems since the early 1990s, it continues to be one of the primary economic forces in the Pacific Rim. Japanese MNCs want
to take advantage of the huge, underdeveloped Asian markets. At the same time, China
continues to be a major economic force, with many predictions that it will surpass the
United States as the largest economy in the world by 2027.31 Although all the economies
in Asia are now feeling the impact of the economic uncertainty of the post-9/11 era and
the Asian economic crisis of the late 1990s, Hong Kong, Taiwan, South Korea, and
Singapore have been doing relatively well, and the Southeast Asia countries of Malaysia,
Thailand, Indonesia, and even Vietnam are bouncing back to become major export-driven
economies. The Association of Southeast Asian Nations (ASEAN), made up of Indonesia,
Malaysia, the Philippines, Singapore, Brunei, Thailand, and in recent years Cambodia,
Myanmar, and Vietnam, is advancing trade and economic integration and now poses challenges to China as a region of relatively low cost production and export. In addition, under
the Trans-Pacific Partnership (TPP), Asian facing countries have initiated negotiations to
conclude an ambitious, next-generation, Asia-Pacific trade agreement. The TPP group currently includes Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand,
Peru, Singapore, the United States, and Vietnam. On April 24, 2013, the U.S. trade representative notified Congress of its intent to include Japan, the world’s third largest economy, in
the TPP negotiations, pending the successful conclusion of the domestic procedures of each
of the current members. Japan’s entry further distinguishes TPP as the most credible pathway
to broader Asia-Pacific regional economic integration.32
Central and Eastern Europe, Russia, and the other republics of the former Soviet
Union currently are still trying to make stable transitions to market economies. Although
the Czech Republic, Slovenia, Poland, and Hungary have accelerated this process through
their accession to the EU, others (the Balkan countries, Russia, and the other republics
of the former Soviet Union) still have a long way to go. However, all remain a target
for MNCs looking for expansion opportunities. For example, after the fall of the Berlin
Wall in 1989, Coca-Cola quickly began to sever its relations with most of the state-run
bottling companies in the former communist-bloc countries. The soft drink giant began
investing heavily to import its own manufacturing, distribution, and marketing techniques. To date, Coca-Cola has pumped billions into Central and Eastern Europe—and
this investment is beginning to pay off. Its business in Central and Eastern Europe has
been expanding at twice the rate of its other foreign operations.
These are specific, geographic examples of emerging internationalism. Equally important to this new climate of globalization, however, are broader trends that reflect the emergence of developing countries as major players in global economic power and influence.
The Shifting Balance of Economic Power in the Global Economy
Economic integration and the rapid growth of emerging markets are creating a shifting
international economic landscape. Specifically, the developing and emerging countries of
the world are now predicted to occupy increasingly dominant roles in the global economic system. In a 2004 report, the Goldman Sachs global economics team released a
follow-up report to its initial 2001 BRIC study, taking the analysis a step further by
focusing on the impact that the growth of these four economies will have on global
markets. In this report, they estimated that the BRIC economies’ share of world growth
could rise from 20 percent in 2003 to more than 40 percent in 2025. Also, their total
weight in the world economy would rise from approximately 10 percent in 2004 to more
than 20 percent in 2025. Furthermore, between 2005 and 2015 over 800 million people
in these countries will have crossed the annual income threshold of $3,000. In 2025, it
is calculated that approximately 200 million people in these economies will have annual
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13
incomes above $15,000. Therefore, the huge pickup in demand will not be restricted to
basic goods but will impact higher-priced branded goods as well.33 In 2011, Goldman
Sachs further argued that the economic potential of Brazil, Russia, India, and China (the
“BRIC” economies) is growing at an even faster pace such that they may constitute four
of the top five most dominant economies by the year 2050, with China surpassing the
United States in output by 2027. Additionally, the report estimated that the economies
of the four BRIC nations will surpass the collective economies of the G7 nations by
2032.34 It is notable that the group of BRIC countries has met for an annual summit
since 2009 and in 2010, the leaders of the founding members agreed to admit South
Africa to the group, making it the BRICS.
Using data from the World Bank, PricewaterhouseCoopers has made estimates
about the future growth of emerging versus developed economies, the result of which
appear in summary form in Tables 1–4 and 1–5. Table 1–4 shows the world’s largest
economies in 2009 and 2050 (projected) using (current) market exchange rates. By this
calculation, China would surge past the United States and Japan by 2050, and India
would move from eleventh to third. Viewing the data on a purchasing power parity (PPP)
basis, a method which adjusts GDP to account for different prices in countries, a more
dramatic picture is presented. Using this method, both China and India would surpass
the United States as the largest world economic power by 2050. In both the Goldman
Sachs and PricewaterhouseCoopers scenarios, global growth over the next decade, and
next 40 years, is heavily supported by Asia, as seen in Table 1–6. In addition, China and
India will remain the most populous countries in the world in 2050, although India will
surpass China as the most populous (Table 1–7).
Some analysts, including Goldman Sachs, are beginning to turn their attention to
a new group of emerging markets. The N-11 (N stands for “next”) are a group of
economies that may constitute the next wave of emerging markets growth. These countries, which include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan,
Philippines, Turkey, South Korea, and Vietnam, represent a diverse global set, with
Table 1–4
The World’s Largest Economies 2009 and 2050 (Projected) Measured by GDP
at Market Exchange Rates
(in millions of dollars)
2009
2050
GDP
Rank
GDP
Rank
14,256
5,068
4,909
1
2
3
37,876
7,664
51,180
2
5
1
Germany
France
United Kingdom
3,347
2,649
2,175
4
5
6
5,707
5,344
5,628
8
11
9
Italy
Brazil
Spain
Canada
2,113
1,572
1,460
1,336
7
8
9
10
3,798
9,235
3,195
3,322
13
4
16
15
India
Russia
Australia
1,296
1,231
925
11
12
13
31,313
6,112
2,486
3
6
20
875
14
5,800
7
United States
Japan
China
Mexico
Source: From The World in 2050: The accelerating shift of global economic power: challenges and opportunities.
Copyright © 2009 PricewaterhouseCoopers LLP.
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Table 1–5
The World’s Largest Economies 2009 and 2050 (Projected) Measured by GDP
at Purchasing Power Parity
(in millions of dollars)
2009
2050
GDP
Rank
GDP
14,256
1
37,876
3
China
Japan
India
Germany
8,888
4,138
3,752
2,984
2
3
4
5
59,475
7,664
43,180
5,707
1
5
2
9
Russia
United Kingdom
France
Brazil
Italy
Mexico
Spain
South Korea
Canada
2,687
2,257
2,172
2,020
1,922
1,540
1,496
1,324
1,280
6
7
8
9
10
11
12
13
14
7,559
5,628
5,344
9,762
3,798
6,682
3,195
3,258
3,322
6
10
11
4
15
7
18
17
16
United States
Rank
Source: From The World in 2050: The accelerating shift of global economic power: challenges and opportunities.
Copyright © 2009 PricewaterhouseCoopers LLP.
relative strengths (and weaknesses) in terms of their future potential. The MIST countries
(Mexico, Indonesia, South Korea, and Turkey), a subset of the N-11, are sometimes
grouped as a particularly attractive subset of the N-11. Goldman views the MIST countries as the most promising and advanced of the N-11, all of which have young, growing
populations and other positive good conditions for economic growth. Other groupings
of fast-growing developing countries include the CEVITS (Colombia, Indonesia,
Vietnam, Egypt, Turkey and South Africa), EAGLES (which stands for emerging and
growth-leading economies) and includes the original BRIC and MIST plus Egypt and
Taiwan.35 Table 1–8 compares the G-7 (advanced countries), BRIC and N-11 by population, GDP, and GDP per capita in 2000, 2010, and 2016.
Table 1–6
Countries Expected to Contribute
Most to Global Growth 2006–2020
(percent contribution)
China
United States
26.7
15.9
India
Brazil
Russia
12.2
2.4
2.3
Indonesia
South Korea
United Kingdom
2.3
2.1
1.9
Source: From Foresight 2020: Economic, Industry and Corporate Trends. Copyright © 2006
The Economist Intelligence Unit. Reprinted with
permission of The Economist Intelligence Unit.
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Table 1–7
Changing Global Demographics: Developing
Countries on the Rise (ranked by size)
1950
2014
2050
1
2
China
Soviet Union
China
India
India
China
3
4
5
India
United States
Japan
United States
Indonesia
Brazil
United States
Indonesia
Pakistan
6
7
8
9
Indonesia
Germany
Brazil
United Kingdom
Pakistan
Bangladesh
Nigeria
Russia
Ethiopia
Nigeria
Brazil
Bangladesh
Italy
France
Bangladesh
Japan
Mexico
Philippines
Philippines
Mexico
Congo
10
11
12
Source: U.S. Census Bureau (IDB). Retrieved September 18, 2012.
Most African countries have not, to date, fully benefited from globalization. However, recent increases in the price of commodities, such as oil and gas, agricultural
products, and mineral and mining products, have helped boost incomes and wealth in
the African continent. Moreover, rapid population growth in many African countries,
similar to growth in India and China in earlier periods, may suggest that African countries
could constitute the next wave of dynamic emerging markets.
Although the emerging nations have experienced unprecedented GDP growth since
the global recession, it is important to note that the growth rates of the developing world
are beginning to show signs of a slowdown. In 2013, developed nations contributed more
to global GDP growth than emerging nations for the first time in almost a decade.36
Perhaps the most striking evidence of a pending slowdown is in China, where GDP grew
just 7.5 percent—significantly less than its 14.5 percent growth in 2007. Russia, India,
and Brazil experienced slower growth rates in 2013 as well.37 While emerging markets
still hold the most potential for growth in the coming years, the rapid rate of expansion
that was experienced over the last decade may prove difficult to match.38
Despite the global recession of 2009, in which merchandise exports fell 23 percent
to $12.15 trillion and commercial services exports declined 13 percent to $3.31 trillion
in 2009, global trade and investment continues to grow at a healthy rate, outpacing
domestic growth in most countries. According to the World Trade Organization, in 2011
merchandise exports reached a record high $18.2 trillion, and commercial services
exports have rebounded to $4.2 trillion.39 Foreign direct investment (FDI)—the term
used to indicate the amount invested in property, plant, and equipment in another country—also has been growing at a healthy rate. Despite dropping almost 50 percent in the
wake of the global recession to $896 billion in 2009, global FDI has rebounded to
$1.5 trillion in 2011. By 2014, FDI is estimated to reach $1.9 trillion, surpassing the
all-time high set in 2007.40 Interestingly, according to data from the World Bank, in 2010
Hong Kong received more FDI than Germany, and China received eight times as much
as Canada, showing the shifting balance of economic influence among developed and
developing countries. Table 1–9 shows trade flows among major world regions in both
absolute and percentage terms. Tables 1–10 and 1–11 show FDI inflows and outflows
by leading developed and emerging economies.
foreign direct investment
(FDI)
Investment in property,
plant, or equipment in
another country.
141
63
205
55
47
98
119
138
77
66
78
1,087
4,392
6,115
Next-11
Bangladesh
Egypt
Indonesia
Iran
S. Korea
Mexico
Nigeria
Pakistan
Philippines
Turkey
Vietnam
Total/Average
TOTALS
World
$32,216.0
$25,825.0
$47.0
99.0
166.0
85.0
533.0
672.0
46.0
74.0
81.0
266.0
31.0
$2,100.0
$642.0
1,198.0
476.0
260.0
$2,576.0
1,892.0
1,101.0
4,667.0
1,481.0
9,951.0
$21,149.0
$725.0
1,332.0
$5,268
$5,880
$334
1,566
807
1,559
11,317
6,859
390
539
1,053
4,026
402
$2,626
$3,751
946
465
1,775
$988
23,051
19,334
36,800
25,142
35,252
30,343
$23,653
22,550
GDP
(per cap.)
6,909
4,901
164
78
238
75
49
109
156
172
94
71
88
1,294
193
1,341
1,191
143
2,868
82
60
128
62
310
739
34
63
Population
(millions)
2010
$62,911.0
$47,702.0
$106.0
218.0
707.0
407.0
1,014.0
1,034.0
203.0
177.0
200.0
735.0
104.0
$4,905.0
$2,090.0
5,878.0
1,632.0
1,480.0
$11,080.0
3,286.0
2,055.0
5,459.0
2,250.0
14,527.0
$31,717.0
$1,577.0
2,563.0
GDP
(billions)
Source: IMF, “World Economic Outlook Database.” September 2011. http://www.imf.org/.
171
1,267
1,024
146
2,608
BRICs
Brazil
China
India
Russia
Total/Average
82
57
127
59
282
697
30
59
GDP
(billions)
2000
$9,106
$9,734
$642
2,808
2,974
5,449
20,756
9,522
1,298
1,030
2,123
10,309
1,174
5,280
$10,816
4,382
1,371
10,356
$3,863
40,274
34,059
42,783
36,164
46,860
42,919
$46,303
40,704
GDP
(per cap.)
7,302
5,202
179
88
255
82
50
115
184
194
106
76
95
1,424
203
1,382
1,289
140
3,014
81
62
127
65
328
764
36
65
Population
(millions)
$91,575.0
$69,336.0
$174.0
342.0
1,382.0
630.0
1,686.0
1,505.0
359.0
303.0
307.0
1,133.0
210.0
$8,031.0
$3,373.0
11,780.0
3,027.0
3,088.0
$21,268.0
3,929.0
2,476.0
6,783.0
3,224.0
18,251.0
$40,037.0
$2,106.0
3,268.0
GDP
(billions)
2016
$12,541
$13,329
$973
3,901
5,429
7,702
33,948
13,052
1,957
1,566
2,907
14,839
2,217
$7,056
$16,635
8,523
2,349
22,066
$7,056
48,731
40,100
53,615
49,777
55,622
52,404
$58,674
50,497
GDP
(per cap.)
16
Germany
Italy
Japan
United Kingdom
United States
Total/Average
Canada
France
Country
Population
(millions)
Table 1–8
Population, GDP, and GDP per Capita of G-7, BRIC, and N-11 Countries, 2000, 2010, and 2016 (projection)
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17
Table 1–9
World Merchandise Trade by Region and Selected Country, 2012
(in US$ billions and percentages)
Exports
Value
2012
World
North America
United States
Canada
Mexico
South and Central
America
Brazil
Other South and
Central America
Europe
European Union (27)
Germany
France
Netherlands
United Kingdom
Italy
Commonwealth of
Independent
States (CIS)
Russian Federation
Africa
South Africa
Africa less South Africa
Oil exporters
Non oil exporters
Middle East
Asia
China
Japan
India
Newly industrialized
economies (4)
Memorandum
items:
MERCOSUR
ASEAN
EU (27) extra-trade
Least developed
countries (LDCs)
Imports
Annual
Percentage Change
2005–12
Value
2012
2012
Annual
Percentage Change
2010
2011
2010
2011
2012
17,850
2,373
1,547
8
7
8
22
23
21
20
16
16
0
4
5
18,155
3,192
2,335
2005–12
8
5
4
21
23
23
19
15
15
0
3
3
455
371
3
8
23
30
17
17
1
6
475
380
6
8
22
28
15
16
2
5
749
243
11
11
26
32
27
27
0
25
753
233
14
17
30
43
25
24
3
22
506
6,373
5,792
1,407
569
656
468
500
11
5
5
5
3
7
3
4
22
12
12
12
8
15
15
10
28
18
18
17
14
15
17
17
2
24
25
25
25
22
27
24
520
6,519
5,927
1,167
674
591
680
486
13
5
5
6
4
7
4
3
24
13
13
14
9
17
14
17
25
17
17
19
18
16
14
15
5
26
26
27
26
21
1
213
804
529
626
87
539
370
169
1,287
5,640
2,049
13
12
11
8
11
11
11
13
11
15
31
32
30
31
30
34
22
28
31
31
34
30
17
21
16
15
20
37
18
20
2
1
5
211
8
12
21
3
2
8
568
335
604
123
481
179
303
721
5,795
1,818
15
15
13
10
14
14
14
12
12
16
25
30
16
27
13
10
15
13
33
39
30
30
18
29
15
10
18
17
23
25
5
4
8
1
9
8
10
6
4
4
799
293
4
17
33
37
7
34
23
23
886
489
8
19
26
36
23
33
4
5
1,280
8
30
16
21
1,310
9
32
19
0
340
11
29
26
24
325
16
43
25
23
1,254
2,166
10
7
29
17
18
21
1
0
1,221
2,301
11
7
31
18
21
18
6
24
204
14
27
25
1
223
14
11
22
8
Source: WTO Press Release 688, April 10, 2013, Appendix Table 1. Reprinted with permission.
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Table 1–10
Foreign Direct Investment Inflows, by Region
(in US$ billions)
Developed economies
Developing economies
Africa
East and Southeast Asia
South Asia
West Asia
Latin America and the Caribbean
Transition economies
2012
2011
2010
$560.7
702.8
50.0
$820.0
735.2
47.6
$696.4
637.1
43.6
326.1
33.5
47.1
243.9
342.9
44.2
49.1
249.4
312.5
28.7
59.5
189.9
87.4
96.3
87.4
Source: UNCTAD, World Investment Report 2013, Web Table 1.
As nations become more affluent, they begin looking for countries with economic
growth potential where they can invest. Over the last two decades, for example, Japanese
MNCs have invested not only in their Asian neighbors but also in the United States and the
EU. European MNCs, meanwhile, have made large financial commitments in Japan and more
recently in China and India, because they see Asia as having continued growth potential.
American multinationals have followed a similar approach in regard to both Europe and Asia.
The following quiz illustrates how transnational today’s MNCs have become. This
trend is not restricted to firms in North America, Europe, or Asia. An emerging global
community is becoming increasingly interdependent economically. Take the quiz and see
how well you do by checking the answers given at the end of the chapter. However,
although there may be a totally integrated global market in the near future, at present,
regionalization, as represented by North America, Europe, Asia, and the less developed
countries, is most descriptive of the world economy.
1.
2.
Where is the parent company of Braun household appliances (electric shavers, coffee makers, etc.) located?
a. Italy
b. Germany
c. the United States d. Japan
The BIC pen company is
a. Japanese
b. British
c. U.S.–based
d. French
Table 1–11
Foreign Direct Investment Outflows, by Region
(in US$ billions)
Developed economies
Developing economies
Africa
East and Southeast Asia
South Asia
West Asia
Latin America and the Caribbean
Transition economies
2012
2011
2010
$909.4
426.1
14.3
$1,183.1
422.1
5.4
$1,029.8
413.2
9.3
275.0
9.2
271.5
13.0
254.2
16.4
23.9
103.0
55.5
26.2
105.2
72.9
13.4
119.2
61.8
Source: UNCTAD, World Investment Report 2013, Web Table 2.
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Chapter 1 Globalization and International Linkages
3.
4.
5.
6.
7.
8.
9.
10.
19
International Management: Culture, Strategy, and Behavior, Ninth Edition
The company that owns Jaguar is based in
a. Germany
b. the United States c. the United
d. India
Kingdom
RCA television sets are produced by a company based in
a. France
b. the United States c. Malaysia
d. Taiwan
The firm that owns Green Giant vegetables is
a. U.S.-based
b. Canadian
c. British
d. Italian
The owners of Godiva chocolate are
a. U.S.-based
b. Swiss
c. Dutch
d. Turkish
The company that produces Vaseline is
a. French
b. Anglo-Dutch
c. German
d. U.S.-based
Wrangler jeans are made by a company that is
a. Japanese
b. Taiwanese
c. British
d. U.S.-based
The company that owns Holiday Inn is headquartered in
a. Saudi Arabia b. France
c. the United States d. Britain
Tropicana orange juice is owned by a company that is headquartered in
a. Mexico
b. Canada
c. the United States d. Japan
■ Global Economic Systems
The evolution of global economies has resulted in three main systems: market economies,
command economies, and mixed economies. Recognizing opportunities in global expansion includes understanding the differences in these systems, as they affect issues such
as consumer choice and managerial behavior.
Market Economy
A market economy exists when private enterprise reserves the right to own property and
monitor the production and distribution of goods and services while the state simply supports competition and efficient practices. Management is particularly effective here since
private ownership provides local evaluation and understanding, opposed to a nationally
standardized archetype. This model contains the least restriction as the allocation of
resources is roughly determined by the law of demand. Individuals within the community
disclose wants, needs, and desires to which businesses may appropriately respond. A general balance between supply and demand sustains prices, while an imbalance creates a price
fluctuation. In other words, if demand for a good or service exceeds supply, the price will
inevitably rise, while an excess supply over consumer demand will result in a price decrease.
Since the interaction of the community and firms guides the system, organizations must
be as versatile as the individual consumer. Competition is fervently encouraged to promote
innovation, economic growth, high quality, and efficiency. The focus on how to best serve the
customer is necessary for optimal growth as it ensures a greater penetration of niche markets.41
The government may prohibit such things as monopolies or restrictive business practices in
order to maintain the integrity of the economy. Monopolies are a danger to this system because
they tend to stifle economic growth and consumer choice with their power to determine supply. Factors such as efficiency of production and quality and pricing of goods can be chosen
arbitrarily by monopolies, leaving consumers without a choice and at the mercy of big business.
Command Economy
A command economy is comparable to a monopoly in the sense that the organization,
in this case the government, has explicit control over the price and supply of a good or
service. The particular goods and services offered are not necessarily in response to
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consumers’ stated needs but are determined by the theoretical advancement of society.
Businesses in this model are owned by the state to ensure that investments and other
business practices are done in the best interest of the nation despite the often contradictory outcomes. Management within this model ignores demographic information. Government subsidies provide firms with enough security so they cannot go out of business,
which simply encourages a lack of efficiency or incentive to monitor costs. Devoid of
private ownership, a command economy creates an environment where little motivation
exists to improve customer service or introduce innovative ideas.42
History confirms the inefficiency and economic stagnation of this system with the
dramatic decline of communism in the 1980s. Communist countries believe that the goals
of the so-called “people” take precedence over individualism. While the communist
model once dominated countries such as Ethiopia, Bulgaria, Hungary, Poland, and the
former U.S.S.R., among others, it survives only in North Korea, Cuba, Laos, Vietnam,
and China today, in various degrees or forms. A desire to effectively compete in the
global economy has resulted in the attempt to move away from the communist model,
especially in China, which will be considered in greater depth later in the chapter.
Mixed Economy
A mixed economy is a combination of a market and a command economy. While some
sectors of this system reflect private ownership and the freedom and flexibility of the
law of demand, other sectors are subject to government planning. The balance allows
competition to thrive while the government can extend assistance to individuals or companies. Regulations concerning minimum wage standards, social security, environmental
protection, and the advancement of civil rights may raise the standard of living and
ensure that those who are elderly, sick, or have limited skills are taken care of. Ownership of organizations seen as critical to the nation may be transferred to the state to
subsidize costs and allow the firms to flourish.43
Below we discuss general developments in key world regions reflective of these
economic systems and the impact of these developments on international management.
■ Economic Performance and Issues of Major Regions
From a vantage point of development, performance, and growth, the world’s economies
can be evaluated as established economies, emerging economies, and developing economies (some of which may soon become emerging).
Established Economies
North America As noted earlier, North America constitutes one of the four largest trading blocs in the world. The combined purchasing power of the United States, Canada, and
Mexico is more than $12 trillion. Even though there will be more and more integration
both globally and regionally as time goes on, effective international management still
requires knowledge of individual countries.
The free-market-based economy of this region allows considerable freedom in decision-making processes of private firms. This allows for greater flexibility and low barriers
for other countries to establish business. Despite factors such as the Iraq War beginning in
2003, Hurricane Katrina in 2005, high oil prices through 2005 and 2006, and the global
recession in 2009, the U.S. economy continues to grow. U.S. MNCs have holdings throughout the world, and foreign firms are welcomed as investors in the U.S. market. U.S. firms
maintain particularly dominant global positions in technology-intensive industries, including
computing (hardware and services), telecommunications, media, and biotechnology. At the
same time, foreign MNCs are finding the United States to be a lucrative market for expansion. Many foreign automobile producers, such as BMW, Honda, Hyundai, Nissan, and
Toyota, have established a major manufacturing presence in the United States. Given the near
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collapse of the “domestic” automotive industries, North American automotive production will
come increasingly from these foreign “transplants.”
Canada is the United States’ largest trading partner, a position it has held for many
years. The United States also has considerable foreign direct investment in Canada, more
than in any other country except the United Kingdom. This helps explain why most of
the largest foreign-owned companies in Canada are totally or heavily U.S.-owned. The
legal and business environment in Canada is similar to that in the United States, and the
similarity helps promote trade between the two countries. Geography, language, and
culture also help, as does NAFTA, which will assist Canadian firms in becoming more
competitive worldwide. They will have to be able to go head to head with their U.S. and
Mexican competitors as trade barriers are removed, which should result in greater efficiency and market prowess on the part of the Canadian firms, which must compete
successfully or go out of business. In recent years, Canadian firms have begun investing
heavily in the United States while gaining international investment from both the United
States and elsewhere. Canadian firms also do business in many other countries, including
Mexico, Great Britain, Germany, and Japan, where they find ready markets for Canada’s
vast natural resources, including lumber, natural gas, crude petroleum, and agriproducts.
By the early 1990s Mexico had recovered from its economic problems of the previous decade and had become the strongest economy in Latin America. In 1994, Mexico
became part of NAFTA, and it appeared to be on the verge of becoming the major
economic power in Latin America. Yet, an assassination that year and related economic
crisis underscored that Mexico was still a developing country with considerable economic
volatility. Mexico now has free-trade agreements with over 50 countries, including
Guatemala, Honduras, El Salvador, the EU, the European Free Trade Area, and Japan.44
In 2000 the 71-year hold of the Institutional Revolutionary Party on the presidency of
the country came to an end, and many investors believe that the administration of Vicente
Fox and his successor, Felipe Calderon, have been especially pro-business. Calderon
battled Mexico’s narcotics gangs which, unfortunately, have been responsible for an
ongoing epidemic of violence and casualties, including those of innocent civilians. In
2012, the Institutional Revolutionary Party returned to power with the election of Peña
Nieto as president, who, despite uncertainty from some, promises to continue to advance
pro-business initiatives, such as opening the oil industry to the private sector and forcing
greater competition in telecommunications, an industry long-dominated by Carlos Slim
Helú, the world’s richest inidividual.45.
Because of NAFTA, Mexican businesses are finding themselves able to take advantage of the U.S. market by producing goods for that market that were previously purchased by the U.S. from Asia. Mexican firms are now able to produce products at highly
competitive prices thanks to lower-cost labor and proximity to the American market.
Location has helped hold down transportation costs and allows for fast delivery. This
development has been facilitated by the maquiladora system, under which materials and
equipment can be imported on a duty- and tariff-free basis for assembly or manufacturing and re-export mostly in Mexican border towns. Mexican firms, taking advantage of
a new arrangement that the government has negotiated with the EU, can also now export
goods into the European community without having to pay a tariff. The country’s trade
with both the EU and Asia is on the rise, which is important to Mexico as it wants to
reduce its overreliance on the U.S. market.
The EU The ultimate objective of the EU is to eliminate all trade barriers among member
countries (like between the states in the United States). This economic community eventually will have common custom duties as well as unified industrial and commercial policies
regarding countries outside the union. Another goal that has finally largely become a reality is a single currency and a regional central bank. With the addition of Croatia in 2013,
28 countries now comprise the EU, with 17 having adopted the euro. Another 9 countries,
having joined the EU in either 2004, 2007, or 2013, are legally bound to adopt the euro
upon meeting the monetary convergence criteria.46
21
maquiladora
Factory, mostly located in
Mexican border towns, that
imports materials and
equipment on a duty- and
tariff-free basis for
assembly or manufacturing
and re-export.
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Such developments will allow companies based in EU nations that are able to manufacture high-quality, low-cost goods to ship them anywhere within the EU without paying
duties or being subjected to quotas. This helps explain why many North American and
Pacific Rim firms have established operations in Europe; however, all these outside firms
are finding their success tempered by the necessity to address local cultural differences.
The challenge for the future of the EU is to absorb its eastern neighbors, the former communist-bloc countries. This could result in a giant, single European market. In
fact, a unified Europe could become the largest economic market in terms of purchasing
power in the world. Between 2004 and 2007, Poland, the Czech Republic, Hungary,
Bulgaria, and Romania all joined the EU, improving economic growth, inflation, and
employment rates throughout. Such a development is not lost on Asian and U.S. firms,
which are working to gain a stronger foothold in Eastern European countries as well as
the existing EU. In recent years, foreign governments have been very active in helping
to stimulate and develop the market economies of Central and Eastern Europe to enhance
their economic growth as well as world peace.
Since 2009, the EU has faced one of the most severe challenges of its short tenure.
Several European governments, including Greece, Portugal, Spain, and Ireland, have
found themselves with dangerously large deficits that resulted from both structural conditions (stagnant population growth, overly generous pension systems, early retirements)
and shorter-term economic pressures. These conditions have placed pressure on the euro,
the currency adopted by most EU countries, and have forced substantial rescue packages
led by Germany and France.47
Japan During the 1970s and 1980s, Japan’s economic success had been without prece-
Ministry of International
Trade and Industry (MITI)
A Japanese government
agency that identifies and
ranks national commercial
pursuits and guides the
distribution of national
resources to meet these
goals.
keiretsu
An organizational
arrangement in Japan in
which a large group of
vertically integrated
companies bound together
by cross-ownership,
interlocking directorates, and
social ties provide goods
and services to end users.
dent. The country had a huge positive trade balance, the yen was strong, and the Japanese
became recognized as the world leaders in manufacturing and consumer goods.
Analysts ascribe Japan’s phenomenal success to a number of factors. Some areas that
have received a lot of attention are the Japanese cultural values supporting a strong work
ethic and group/team effort, consensus decision making, the motivational effects of guaranteed lifetime employment, and the overall commitment that Japanese workers have to their
organizations. However, at least some of these assumptions about the Japanese workforce have turned out to be more myth than reality, and some of the former strengths have
become weaknesses in the new economy. For example, consensus decision making turns
out to be too time-consuming in the new speed-based economy. Also, there has been a steady
decline in Japan’s overseas investments since the 1990s due to a slowing Japanese economy,
poor management decisions, and competition from emerging economies, such as China.
Some of the early success of the Japanese economy can be attributed to the Ministry
of International Trade and Industry (MITI). This is a governmental agency that identifies and ranks national commercial pursuits and guides the distribution of national resources
to meet these goals. In recent years, MITI has given primary attention to the so-called
ABCD industries: automation, biotechnology, computers, and data processing.
Another major reason for Japanese success may be the use of keiretsus. This
Japanese term stands for the large, vertically integrated corporations whose holdings
supply much of the assistance needed in providing goods and services to end users. Being
able to draw from the resources of the other parts of the keiretsu, a Japanese MNC often
can get things done more quickly and profitably than its international competitors.
Despite setbacks, Japan remains a formidable international competitor and is well
poised in all three major economic regions: the Pacific Rim, North America, and Europe.
Emerging Economies
In contrast to the fully developed countries of North America, Europe, and Asia are the
less developed countries (LDCs) around the world. An LDC typically is characterized
by two or more of the following: low GDP, slow (or negative) GDP growth per capita,
high unemployment, high international debt, a large population, and a workforce that is
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International Management in Action
Recognizing Cultural Differences
One objective of multicultural research is to learn more
about the customs, cultures, and work habits of people
in other countries. After all, a business can hardly expect
to capture an overseas market without knowledge of the
types of goods and services the people there want to
buy. Equally important is the need to know the management styles that will be effective in running a foreign
operation. Sometimes this information can change quite
rapidly. For example, as Russia continues to move from
a central to a market economy, management is constantly changing as the country attempts to adjust to
increased exposure in the global environment. Russia
entered into a strategic partnership with the United
States in 2002. However, while U.S. perspectives of
“partnerships” are flexible they are generally seen as
inherently having some hierarchical structure. Russia, on
the other hand, sees “partnerships” as entailing equality,
especially in the decision-making process. This may be
a part of the reason Russia formed a strategic partnership with China in 2005, since both countries emerged
from a communist regime and can understand similar
struggles. Regardless, as Russia moves to privatize its
organizations, the new partnership may pose a threat to
the Americas and the West if efforts to understand each
other and work together are abandoned.
It is evident that the United States and Russia differ
on many horizons. Russian management is still based
www.usrbc.org, www.careerwatch.com
on authoritarian styles, where the managerial role is to
pass orders down the chain of command, and there is
little sense of responsibility, open communication, or
voice in the decision-making process. Furthermore,
while 64 percent of U.S. employees see retirement as
an opportunity for a new chapter in life, only 15 percent
of Russian employees feel that way, and another
23 percent see retirement as “the beginning of the
end.” Despite such differences, there are points of
similarity that a U.S. firm can use as leverage when
considering opening a business in Russia. About
46 percent of employees in both the United States and
Russia would prefer a work schedule that fluctuates
between work and leisure, mirroring a pattern of recurring sabbaticals. Also, Russia currently has a post–
Cold War mentality, much like the United States
experienced after the Great Depression of the 1930s.
Looking back at history and incorporating the evolutionary knowledge can assist in understanding emerging economies.
These examples show the importance of studying
international management and learning via systematic
analysis of culture and history and firsthand information how managers in other countries really do behave
toward their employees and their work. Such analysis
is critical in a firm’s ensuring a strong foothold in effective international management.
either unskilled or semiskilled. In some cases, such as in the Middle East, there also is
considerable government intervention in economic affairs. Emerging markets are developing economies that exhibit sustained economic reform and growth.
Central and Eastern Europe In 1991, the Soviet Union ceased to exist. Each of the individual republics that made up the U.S.S.R. in turn declared their independence and now are
attempting to shift from a centrally planned to a market-based economy. The Russian Republic has the largest population, territory, and influence, but others, such as Ukraine, also are
industrialized and potentially important in the global economy. Of most importance to the
study of international management are the Russian economic reforms, the dismantling of
Russian price controls (allowing supply and demand to determine prices), and privatization
(converting the old communist-style public enterprises to private ownership).
Russia’s economy continues to grow as poverty declines and the middle class
expands. Direct investment in Russia, along with its membership in the International
Monetary Fund (IMF), is helping to raise GDP and decrease inflation, offsetting the
hyperinflation created from the initial attempt at transitioning to a market-based economy. In addition, the Group of Seven (the United States, Germany, France, England,
Canada, Japan, and Italy) has pledged billions of dollars for humanitarian and other types
of assistance. So while the Russian economy likely will have a number of years of painfully slow economic recovery and many recurrent problems, most economic experts
predict that, if the Russians can hold things together politically and maintain social order,
the situation could improve in the long run.
Although these economic reforms are being implemented slowly, there are significant
problems in Russia associated with growing crime of all kinds as well as political uncertainty.
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Many foreign investors feel that the risk is still too high. Russia is such a large market,
however, and has so much potential for the future that many MNCs feel they must get
involved, especially with a promising rise in GDP. There also has been a movement toward
teaching Western-style business courses, as well as MBA programs, in all the Central
European countries, creating a greater preparation for trends in globalization.
In Hungary, state-owned hotels have been privatized, and Western firms, attracted
by the low cost of highly skilled, professional labor, have been entering into joint ventures with local companies. MNCs also have been making direct investments, as in the
case of General Electric’s purchase of Tungsram, the giant Hungarian electric company.
Another example is Britain’s Telfos Holdings, which paid $19 million for 51 percent of
Ganz, a Hungarian locomotive and rolling stock manufacturer. Still others include Suzuki’s investment of $110 million in a partnership arrangement to produce cars with local
manufacturer Autokonzern, Ford Motor’s construction of a new $80 million car component plant, and Italy’s Ilwa’s $25 million purchase of the Salgotarjau Iron Works.
Poland had a head start on the other former communist-bloc countries. General
political elections were held in June 1989, and the first noncommunist government was
established well before the fall of the Berlin Wall. In 1990, the Communist Polish United
Workers Party dissolved, and Lech Walesa was elected president. Earlier than its neighbors, Poland instituted radical economic reforms (characterized as “shock therapy”).
Although the relatively swift transition to a market economy has been very difficult for
the Polish people, with very high inflation initially, continuing unemployment, and the
decline of public services, Poland’s economy has done relatively well. In fact, Poland’s
economy was the only economy in the EU to continue to grow during the global recession of 2008-2009. In 2011, Poland’s GDP grew by over 4 percent. However, political
instability and risk, large external debts, a deteriorating infrastructure, and only modest
education levels have led to continuing economic problems.
Although Russia, the Czech Republic, Hungary, and Poland receive the most media
coverage and are among the largest of the former communist countries, others also are
struggling to right their economic ships. A small but particularly interesting example is
Albania. Ruled ruthlessly by the Stalinist-style dictator Enver Hoxha for over four decades
following World War II, Albania was the last, but most devastated, Eastern European country to abandon communism and institute radical economic reforms. At the beginning of the
1990s, Albania started from zero. Industrial output initially fell over 60 percent, and inflation
reached 40 percent monthly. Today, Albania still struggles but is slowly making progress.
The key for Albania and the other Eastern European countries is to maintain the
social order, establish the rule of law, rebuild the collapsed infrastructure, and get factories and other value-added, job-producing firms up and running. Foreign investment must
be forthcoming for these countries to join the global economy. A key challenge for
Albania and the other “have-not” Eastern European countries will be to make themselves
less risky and more attractive for international business.
China China’s GDP has remained strong, growing at 9.1 percent in 2009, 10.4 percent in
2010, 9.3 percent in 2011, and 8.0 percent in 2012, despite the global economic crisis.48
China faces other formidable challenges, including a massive savings glut in the corporate
sector, the globalization of manufacturing networks, vast developmental needs, and the
requirement for 15–20 million new jobs annually to avoid joblessness and social unrest.
China also remains a major risk for investors. The one country, two systems (communism and capitalism) balance is a delicate one to maintain, and foreign businesses are
often caught in the middle. Most MNCs find it very difficult to do business in and with
China. Concerns about undervaluation of China’s currency, the remnimbi (also know as
the yuan), and continued policies that favor domestic companies over foreign ones, make
China a complicated and high-risk venture.49 Even so, MNCs know that China with its
1.3 billion people will be a major world market and that they must have a presence there.
Trade relations between China and developed countries and regions, such as the
United States and the EU, remain tense. Many in the United States argue that the value of
the Chinese currency is kept artificially low, giving China an unfair advantage in selling
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its exports. In early 2012, the Chinese premier Wen Jiabao insisted that the yuan’s exchange
rate was close to an equilibrium level, despite estimates released by the Peterson Institute
that suggest that the currency is still undervalued by at least 24 percent.50,51 In addition,
China’s policy toward foreign investors continues to be fluid and sometimes unpredictable.
Both Walmart and Yum Brands found themselves accused of improper business practices
and each had to close stores and issues public apologies. Walmart stores in southwest
China’s Chongqing have been forced to close following allegations that they have been
labeling non organic pork as organic. Yum Brands suffered a 29 percent drop in same store
sales in China in April of 2013 after concerns about the safety of some chicken and the
spread of Avian flu caused customers to stay away from the outlets.52,53
Other Emerging Markets of Asia In addition to Japan and China, there are a number of
other important economies in the region, including South Korea, Hong Kong, Singapore,
and Taiwan. Together, the countries of the ASEAN bloc are also fueling growth and development in the region.
In South Korea, the major conglomerates, called chaebols, include such internationally known firms as Samsung, Daewoo, Hyundai, and the LG Group. Many key
managers in these huge firms have attended universities in the West, where in addition
to their academic programs they learned western culture, customs, and language. Now
they are able to use this information to help formulate competitive international strategies
for their firms. This will be very helpful for South Korea, which has shifted to privatizing a wide range of industries and withdrawing some of the restrictions on overall foreign
ownership. Like other Asian economies, Korea fared reasonably well throughout the
recession of 2008–2009, with a solid economy with moderate growth, moderate inflation,
low unemployment, an export surplus, and fairly equal distribution of income.
Bordering southeast China and now part of the People’s Republic of China (PRC),
Hong Kong has been the headquarters for some of the most successful multinational
operations in Asia. Although it can rely heavily on southeast China for manufacturing,
there is still uncertainty about the future and the role that the Chinese government intends
to play in local governance.
Singapore is a major success story. Its solid foundation leaves only the question
of how to continue expanding in the face of increasing international competition. To date,
however, Singapore has emerged as an urban planner’s ideal model and the leader and
financial center of Southeast Asia.
Taiwan has progressed from a labor-intensive economy to one that is dominated
by more technologically sophisticated industries, including banking, electricity generation, petroleum refining, and computers. Although its economy has also been hit by the
downturn in Asia, it continues to steadily grow.
Besides South Korea, Singapore, and Taiwan, other countries of Southeast Asia are
also becoming dynamic platforms for growth and development. Thailand, Malaysia, Indonesia, and now Vietnam (see In the International Spotlight at the end of Chapter 2) have
developed economically with a relatively large population base and inexpensive labor
despite the lack of considerable natural resources. These countries have been known to
have social stabili…
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