Objectives 3. Opening Case 3. Today’s World of Business 6. What is International Business? 9. Why Do Companies Go International? 12. The Participants in International Business 15. The Global Perspective of International Business 19. Why Study International Business? 21. Practical Tips 24. Closing Case 26. Chapter Summary 28. Review and Discussion Questions 28. Endnotes 29.
The Culture Challenge in International Business . . . . . . . . . . . . . . . . . . . . . . . 31 Objectives 31. Opening Case 31. What Is Culture? 34. Culture and its Elements 38. The Study of Cultural Differences 50. Culture in the Workplace 53. Crosscultural Management and Training 55. Practical Tips 57. Closing Case 60. Chapter Summary 61. Review and Discussion Questions 62. Endnotes 62.
Theories of International Trade and International Investment . . . . . . . . . . 65 Objectives 65. Opening Case 65. International Trade in General and its Importance 68. Mercantilism 69. Adam Smith and the Theory of Absolute Advantage 71. David Ricardo and the Theory of Comparative Advantage 73. The Heckscher–Ohlin (Factor Proportions) Model 75. Raymond Vernon and the Product Life Cycle Theory of Trade 78. Contemporary Trade Theories 82. Practical Tips 90. Closing Case 92. Chapter Summary 94. Review and Discussion Questions 95. Endnotes 95.
The Monetary System in the International Arena . . . . . . . . . . . . . . . . . . . . . . 97 Objectives 97. Opening Case 97. International Transactions 98. Balance of Payments 99. The Foreign Exchange Market 104. The International Monetary System 125. The Gold Standard 126. Closing Case 129. Chapter Summary 130. Review and Discussion Questions 131. Endnotes 132.
International Economic Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Objectives 135. Opening Case 135. The Changing World Context 138. Globalization and Economic Activity 140. Economic Integration 150. Economic Integration in Europe: The European Union 153. Economic Integration in North America—NAFTA 167. Economic Integration among Developing Countries 168. Closing Case 173. Chapter Summary 174. Review and Discussion Questions 175. Endnotes 175.
Government, Law, and Political Risk in International Business . . . . . . . 181 Objectives 181. Opening Case 181. Washington’s Worries and Mont’s Defense 183. Introduction 184. The Political Environment 184. Closing Case 205. Chapter Summary 206. Review and Discussion Questions 206. Endnotes 206.
Global Strategic Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Objectives 209. Opening Case 209. Introduction 211. Overview on Global Strategic Planning 211. The Strategic Planner in a Global Multicultural Environment 226. Closing Case 230. Chapter Summary 232. Review and Discussion Questions 232. Endnotes 233.
Entering the International Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Objectives 235. Opening Case 235. Concerns and Issues of Going International 236. International Business Research: Determining International Business Research Objectives 240. Distribution and Sales Channel Identiﬁcation 241. Foreign Market Entry Strategies 242. International Logistics and Transportation Issues Related to Foreign Market Entry 258. Closing Case 259. Chapter Summary 260. Review and Discussion Questions 262. Endnotes 262.
International Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 Objectives 265. Opening Case 265. Sports Marketing/Advertisement Revolution by Nike 266. Vision and Global Strategy 267. Nike Constantly Strives for Innovation 268. Innovative Communication 268. Innovation through Integration Logistics and Supply Chain Management 268. Nike Activities in Southeast Asia: Ethical Dilemmas and Social Responsibility Policies 269. The Global Environment 269. International Market Assessment 272. The Global Marketing Environment 272. The National Marketing Environment 274. Market Information 279. International Marketing Strategy and Management 282. The International Marketing Mix: Product, Promotion, Pricing, and Placing Strategies 285. Cross-cultural Consumer Marketing 293. Industrial Marketing 294. Industrial International Marketing Applications 295. Vertical Coordination in the Retailing Sector 295. Chain Marketing 296. Supply Chain Strategy and Management 297. International Marketing Implementation in Challenging Areas of the Global Economy 298. Marketing in the Newly Emerging and Former Eastern Bloc Economies 299. Closing Case 302. “The Greenery”: How Dutch Fresh Vegetable Growers Develop their International Marketing Organization 302. Chapter Summary 306. Review and Discussion Questions 307. Endnotes 308.
International Accounting, Finance, and Taxation. . . . . . . . . . . . . . . . . . . . . 311 Objectives 311. Opening Case 311. Introduction 313. The Environment of Global Financial Markets 313. Global Equity Markets 315. Some Trends 321. The Environment of International Financial Accounting 322. International Financial Reporting 332. Auditing in an International Environment 339. International Taxation and International Transfer Prices 345. International Transfer Pricing 347. Closing Case 351. Chapter Summary 352. Review and Discussion Questions 353. Endnotes 354.
International Operations Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 Objectives 355. Opening Case 355. Production and Operations 357. What is Operations Management? 358. What Do Operations Managers Do? 362. Operations Management in the International Arena 366. Operations Management at Easyjet Airlines 368. Operations Management Applications 369. Project Management 375. Closing Case 381. Chapter Summary 382. Review and Discussion Questions 383. Problems 383. Endnotes 384.
Strategic Human Resource Management of International Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Objectives 387. Opening Case 388. Functions of International Assignments 392. Fulﬁlling a Speciﬁc Need for Personnel and Know-how 392. The Development of Managers and their Implication Toward the Organization 393. Types of International Personnel 394. Strategic Planning and Job Analysis 402. Recruitment of international employees 403. Selection of International Employees 405. Preparation to Transfer 410. Pre-departure Cross-cultural Training Effectiveness 413. Adjustment of the Expatriate Manager: Organization Support upon Arrival and during the Assignment 415. The Process of Cross-cultural Adjustment 415. The Integrated Cross-cultural Adjustment Model 417. Compensation of International Employees 426. Repatriation and Retention 428. Potential Problems Faced by the Expatriates 428. Women in the Global Arena 431. Closing Case 433. Chapter Summary 433. Review and Discussion Questions 434. Endnotes 434.
Doing Business in the Industrialized Countries . . . . . . . . . . . . . . . . . . . . . . . 439 Objectives 439. Opening Case 440. Introduction—About the Industrialized Countries 441. A Changing World—The Role of the Industrialized Countries 442. Economic and Demographic Forces 443. A New World Economy 443. Demographic Forces 444. Income and Purchasing Power 446. Labor Forces 447. Nature of the Economy and other Characteristics 448. Political, Legal, and Regulatory Forces 450. International Political/Economic Agreements and Cooperation 452. The Technological Forces 453. The Natural Forces 457. Social and Cultural Forces 458. Consumer Behavior in the Industrialized Countries 459. The Individual Determinants of Consumer Behavior 463. Environmental Determinants of Consumer Behavior 464. Cultural and Social Factors 465. Business Social Responsibility and Ethics 466. Communication and Media 467. Inﬂuencing Consumer Behavior 468. Other Issues 469. The Future 475. Closing Case 476. Chapter Summary 478. Review and Discussion Questions 479. Endnotes 479.
Doing Business in the Newly Emerging Economies . . . . . . . . . . . . . . . . . . . 483 Objectives 483. Opening Case 483. Introduction 484. Business Opportunities in the Financial Markets 486. Foreign Direct Investments 493. Foreign Trade Potential of the Emerging Economies 497. Growing Potential of the Market of Services 502. Closing Case 505. Chapter Summary 507. Review and Discussion Questions 507. Endnotes 508.
Business Behavior in Europe’s Single Market . . . . . . . . . . . . . . . . . . . . . . . . . 509 Objectives 509. Opening Case 510. The Issue 510. Description 510. Introduction: What is Inﬂuencing Business Behavior in Europe’s Single Market? 512. The Challenges in the European Continent in the Aftermath of World War II 513. The First Steps: The Origins of Cooperation in Europe 514. The Deepening of European Integration: The Evolution of the EU through Treaties 514. The Institutional Design of the EU: How Europe is Governed 518. The Widening of the EU: The Policy of Enlargement 520. National and Cultural Differences within the EU: The Importance of Diversity 521. The Impact of National Diversity on Business Behavior 524. The Signiﬁcance of Europe’s Single Market: The Four Freedoms of Movement 527. The European Monetary Union: Conducting Business in the Euro-Zone 538. The Need for Regulation in Europe’s Business Environment: The EU’s Competition Policy 539. Closing Case 541. Chapter Summary 544. Review and Discussion Questions 545. Endnotes 545.
Doing Business in the Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . 547 Objectives 547. Opening Case 547. Introduction 548. Classification of the Developing Countries 549. Cultural and Political Factors 558. Entry Strategies in the LDCs 563. Interaction with the World Market: Forms, Dependences, and Basic Trends 571. Closing Case 581. Chapter Summary 582. Review and Discussion Questions 583. Endnotes 584. Part B: A Potpourri of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Air Arabia: Seeking Success in an Open Skies Market . . . . . . . . . . . . . . . . . . . . . . . Can Personal Agendas Produce Good Business Decisions: The Case of KYT Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chicago Food and Beverage Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Making the Product-to-Service Transition in International Markets . . . . . . . . . The Misadventures of an American Expatriate in Europe . . . . . . . . . . . . . . . . . . . The UAE: An Information Society for Growth and Employment . . . . . . . . . . . .
In the shadow of globalization and all the other world developments we have decided to write a book on international business from a global perspective, and not just from the European, the American, the German, or the Japanese point of view. We have included a lot of primary information that were based on interviews of several individuals from around the world, and also from our own international experience as educators, researchers, and consultants. Several chapters were written by specialists in their own ﬁeld and their contributions are extremely valuable to the ﬁnal version of the book. The book consists of two parts. The ﬁrst part consists of sixteen chapters, with the last four being a practical application of how it is to do business in certain regions of the world. Each chapter begins with an Opening Case and a stimulating question. The main body of each chapter consists of a theoretical framework that results from primary and/or secondary data, and the chapter ends with a Closing Case with a stimulating question. Chapter summary and review and discussion questions are found at the end of each chapter, and practical tips are found in some chapters, wherever appropriate. The second part consists of six comprehensive cases addressing international issues ranging from human resources management, culture, to marketing, family businesses and national development. The book is accompanied by an instructor’s manual with PowerPoint presentation slides, and a test bank with true or false, multiple choice, and critical thinking questions. The unique features of the book are: • the opening and closing cases in each chapter with one OR MORE thought provoking question for each case; • the answers in some chapters of people interviewed from the government, business, and other sectors; • the reference on women issues and their contribution to international business issues in some chapters; • the global approach found throughout the book;
• the last four chapters which address international business issues in various geographic areas of the world; and • the length of the book which consists of sixteen chapters. This book is an anthology of chapters written by a number of experts in their respective ﬁelds and we are sincerely grateful and thankful for their contribution. These colleagues are: • Dr George Baourakis of the Mediterranean Agronomic Institute of Chania, Crete-Greece, responsible for Chapters 8 and 9. • Dr John L. Haverty of Saint Joseph’s University, Philadelphia, USA, responsible for Chapter 10. • Professor Harry Kogetsidis of Intercollege, Nicosia, Cyprus, responsible for Chapter 11. • Dr Marie-France Waxin of the American University of Sharjah, Sharjah, UAE, responsible for Chapter 12. • Dr Alkis Thrasou of Intercollege, Nicosia, Cyprus, responsible for Chapter 13. • Dr Rumen Gechev of the University of National and World Economy, Soﬁa, Bulgaria, responsible for Chapters 14 and 16. • Professor Christina Ioannou of Intercollege, Nicosia, Cyprus, responsible for Chapter 15. Our gratitude goes to the following people who have contributed their case studies: Dr Marie-France Waxin; Dr Robert Bateman; Dr Donelda McKechnie; Dr James Grant; Dr Zeinab Karake-Shalhoub; and Ms Mona Fahmi all of the American University of Sharjah, UAE; Dr Gary Kritz of Seton Hall University and Dr Samuel Wathen of Coastal Carolina University, USA and Dr Virginia Bodolica of the Université du Québec en Outaouais, Canada. Special thanks go to Mr Anthos Shiekkeris and Dr Maria Michaelidis, both at Intercollege, Nicosia, Cyprus, for their contributions in earlier versions of Chapter 12. Special thanks also go to Michael G. Papaioannou of International Capital Markets Department, International Monetary Fund, who has endorsed our book. Furthermore, our sincere and honest appreciation goes to Maggie Smith and Dennis McGonagle, of the Elsevier Group, for their patience, guidance and, above all, professionalism throughout this project. Our thanks go to all the anonymous reviewers of the manuscript and all the interviewees who have been very willing to provide us with useful information for inclusion in some chapters. Finally, we would also like to thank the project manager,
Kalpalathika Rajan, and the copy editor Abiramavalli R. of Integra Software Services, India for the successful completion of this book. Dr Marios I. Katsioloudes, American University of Sharjah, UAE Dr Spyros Hadjidakis, Intercollege, Nicosia-Cyprus June 2006
Objectives Through this chapter, the student will be exposed to: • • • • • • •
Today’s world of business What is international business Why companies go international The participants in international business The global perspective of international business Why study international business The framework of this textbook.
Opening Case FAMAGUSTA, Inc. in Manila, Philippines FAMAGUSTA, Inc. (a ﬁctitious name) is a large, non-US-based multinational corporation (MNC) that has set up its new ofﬁce in Manila. With the help of a few previous connections and more than a little good fortune, you land your ﬁrst contract within a relatively short period of time. The job involves providing professional consultation and technical support on a joint venture project with a local corporation. You will be working in the ofﬁces of the Philippine company, scoping and designing the project, managing the implementation phase, and working with their domestic personnel to get the job done. Your contract speciﬁes an interim review after the design phase is
completed, but top management assures you that it is just a formality—they deﬁnitely want to work with you for the whole project. You review the facilities and résumés of both management and technical staff and everything looks ﬁne. No problem, you tell yourself as you tackle the project enthusiastically. At ﬁrst everything is great. You are given your own ofﬁce and are told by the chief executive ofﬁcer (CEO) to work directly with the executive vice president (EVP) for the division; he seems highly supportive and tells you to call on him at any time for whatever you might need. Although the working environment is relaxed by American and European standards, the staff works long hours and everyone is unfailingly polite. You soon ﬁnd yourself enjoying the change of pace and the congenial aspects of the Filipino workplace. Until, that is, you become aware that the project is slowly but surely falling behind schedule. Being the accountable party, you know it is up to you to address the problem. After some quiet background investigation, you pinpoint the source of the problem: the manager of a mission-critical department who appears to be horrendously incompetent. An old lady nearing retirement by the name of Mrs. Santos has been with the company her entire career. The analysis shows clearly that the problem lies in her use of outdated methods and her resistance to certain innovative aspects of the project. Although your interactions with her have always been courteous, you begin to wonder if she’s trying to sabotage your efforts. In an effort to attack the problem you approach the EVP to discuss the issue. You come in well prepared for the meeting, with hard copy documentation tracing the bottleneck to Mrs. Santos’s inept management. Thus, you are a bit surprised that he doesn’t seem to share your concern for the issue. Although he listens intently to what you have to say, he gives oblique answers to your questions and seems to be avoiding the issue. But you know better than to press too hard and quickly back off. At the end of the meeting, which was much shorter than you anticipated, it is clear that he thinks you can work around Mrs. Santos and that he does not share your concern about the problem. You do your best to keep the project on track, and keep looking the other way. However, the problems continue to pile up and get even worse over the next few weeks. Murphy seems to lurk around every corner, and every time you have to put out a ﬁre the origin seems to lie in the same place: the inefﬁcient department head. You have lunch with a couple of her key employees and pump them for information. Although what they tell you about operational matters conﬁrms what you already know about inefﬁciency, it also becomes clear that they see no way of changing dear old Mrs. Santos’s way of doing things. When asked hard questions about project
objectives and what could be done to ease the bottlenecks, they shrug their shoulders and laugh in a nervous, almost incongruous fashion. Finally, at a key staff meeting just before you must ﬁle your interim report, the issue comes to a head. The EVP is there, but primarily as an observer—as the big shot expat consultant, you are chairing the meeting. You present the project as it has proceeded to date, doing your best to paint a positive picture, even going out of your way to compliment some of the technical staff who have done outstanding jobs. But you feel that you can no longer avoid the hard fact that important deadlines are about to be missed. It also seems clear to you that 90 percent of the problems lie in that one particular department. When Mrs. Santos takes the ﬂoor to summarize her department’s work on the project, however, she paints a glowing picture. Things are really moving along, targets are being met and exceeded, everything is copacetic indeed. You can’t believe what you are hearing! You know that everyone in the room must know that she is basically covering up, and can’t help being upset in that she is downright contradicting what you have been saying and trying to bring to everyone’s attention. Responding to your gut instincts and knowing for a fact that the data support your position, you take a deep breath before asking a series of hard questions that leave Mrs. Santos with very little wriggle room. She gives evasive answers, and everyone else around the table suddenly becomes quite uncomfortable. People are shifting around in their chairs and looking out of the windows—a drastic shift in mood. You immediately realize that you have made a major blunder, but it’s too late to back off, so you press ahead. After her third circular and evasive answer, the EVP clears his throat rather loudly, then interrupts: “Perhaps we should move on with the meeting. These little details can be worked out later.” Within a month the project has fallen completely off track, precisely as you would have predicted. However, rather than taking action to put things back on track, top management decides to rethink the whole project, including their collaboration with the outside consultant (that being you). At the recommendation of the EVP, they pull the plug entirely after the design phase. They thank you for doing such a good job on the project design, reassure you they are anxious to work with you in the future, and cancel the project as it was their contractual prerogative to do. In parting, the EVP tells you: “Our staff feels that they can really carry this out on our own, and management agrees. Your work has been ﬁrst-rate, but you know things can change. Call me if you ever need a reference.” Note: The case is strategically placed in this chapter for the simple reason of sensitizing and exposing the readers very early on to international business with the cultural perspective in mind. More in-depth discussion on culture will take place in Chapter 2.
Question: What do you think really happened in this case? What is Mrs. Santos’s position in the company? What issues of international business are found in this case? What do you think the consultant should have done? Source: The case was compiled by the author.
Today’s World of Business International business differs from domestic business by degrees. Although laws, cultures, and economic conditions differ within countries, such differences are usually less marked than those among countries. Even though there are limitations on the movement of goods and services and the resources to produce them within countries, these limitations are usually less pronounced within than among countries. Most countries vary internally, causing companies to alter their business practices from one region to another. Take the United States, where taxes and legal requirements differ among states and municipalities. This is why many companies place their headquarters in the business-friendly state of Delaware. Certain products also enjoy greater acceptance in some areas than in others, as seen in the higher per capita demand for bottled water in California than in the Midwest. Some tastes differ regionally as well; for instance, people in parts of the Midwest prefer white-looking dressed chickens to the yellow-looking ones that people prefer elsewhere. In some areas of the United States, there are non-English-language radio and television programs. And because income levels vary, purchasing power is higher in some areas than in others. But some countries have much greater internal variation than do others. Geographic and economic barriers in some countries can inhibit people’s movements from one region to another, thus limiting their personal interactions. Decentralized laws and government programs may increase regional separation. Linguistic, religious, and ethnic differences within a country usually preclude the fusing of the population into a homogeneous state, which means that business cannot be conducted in the same way throughout the country. For example, for all the reasons just given, India is a much more diverse country to do business in than Denmark. Despite all the differences among regions within countries, this diversity is small when compared to the differences among countries. To successfully conduct business abroad, companies must often adopt practices other than what they are accustomed to domestically. Differences in the legal—political, economic, and cultural environment all may necessitate a company’s altering every type of business activity, from production and accounting to ﬁnance and marketing.
Legal–Political Environment. Despite some differences in regional or municipal laws within a country, overriding national laws link a whole country together. Yes, different countries adhere to various treaties; still, every country in the world is a sovereign entity with its own laws and political systems. These laws dictate what businesses can exist, how they can be organized, their tax liabilities, the minimum wages they must pay to employees, how much they may cooperate with competitors, and how they must price their goods and services. Companies that do business internationally are subject to the laws of each country in which they operate. When laws differ greatly from those at home, a ﬁrm may encounter substantial operating problems abroad. For example, Blockbuster Video closed down its German operations because of the strict laws prohibiting retail establishments from being open Saturday afternoons, Sundays, and all evenings. These limitations reduced the company’s ability to generate sufﬁcient revenue through impulse rentals from people who do not plan well ahead to view a videotape.1 Political relationships between countries also inﬂuence what companies can do internationally. For example, China forced Coca-Cola to drop a multi-million-dollar advertising campaign because the ads used the voice of a Taiwanese singer who publicly supports Taiwanese independence.2 In some areas of the world most laws are codiﬁed. In others, such as the United Kingdom, there is a common law heritage in which precedents set the rules. In still other countries, like Saudi Arabia, a state religion dictates what is legal. Political systems range across a spectrum from dictatorships to democracies, and democracies vary substantially. For instance, Switzerland and the United States are both frequently held to be models of democracy. In the former, however, the general population votes on most legislation, whereas in the latter, representatives enact legislation. In terms of business operations, companies wishing to have speciﬁc legislation enacted may thus lobby public ofﬁcials in the United States but must inﬂuence general public opinion in Switzerland. Economic Environment. People in rich countries, such as the United States, Canada, and Sweden, earn on average about 100 times more than those in such poor countries as Burkina Faso, Bangladesh, and the Democratic Republic of Congo. In fact, the average income in most of the countries is very low. A number of conditions correlate substantially with countries’ economic levels, even though some countries are exceptions. Generally, poor countries have smaller markets on a per capita basis, less educated populations, higher unemployment or underemployment, poor health conditions, greater supply problems, higher political risk, and more foreign exchange problems. We shall offer just a few examples of how these conditions affect international business.
In terms of market size on a per capita basis, the United States has almost 100 times as many cars as India has, despite India’s much larger population. Where much of a nation’s population is uneducated (e.g., in Bhutan, Chad, and Ethiopia, less than 25 percent of children between the ages of 6 and 17 are enrolled in school), companies often have to respond by providing workers with additional training, using more supervisors, depending more on the transfer of management personnel from abroad, and simplifying workrelated duties. They may also have to alter and simplify instructions for the use of products, and they may have very little market for certain types of products, such as books and magazines. The life expectancy in the richer countries is more than 70 years whereas that in poorer countries is less than 50 years. Among the reasons for the difference are inadequate access to food, nutritional education, and medical care. The situation in poor countries affects companies’ productivity through employee work absences and lack of stamina on the job. Inadequate infrastructure (such as roads, ports, electrical power, and communications facilities) in poor countries causes supply problems. The problems occur because countries sell too little abroad to earn enough to buy all the needed machinery and replacement parts abroad. In turn, companies therein incur added production costs because of production downtime and the longer time required to transport their supplies and ﬁnished goods. Because of poverty in poorer countries, there is a greater incidence of civil disorder and a greater tendency for governments to treat foreign ﬁrms as scapegoats for the economic ills their citizens face. Finally, poorer countries are more apt than richer countries to depend on primary goods, such as raw materials and agricultural products, to earn income abroad. The prices of these primary products have not risen as rapidly as have prices of services and manufactured products. Further, the prices tend to ﬂuctuate greatly from one year to another because of climatic conditions and business cycles. Exporters to these economies thus face variations from year to year in their ability to sell and receive payment for goods and services. Cultural Environment. “Culture” refers to the speciﬁc learned norms of society based on attitudes, values, beliefs, and frameworks for processing information and tasks. These norms vary from one country to another, and they are reﬂected in attitudes toward certain products, advertising, work and relationships among the people of a given society. For example, different countries have different norms regarding the extent of worker participation and decision making within their organizations. Cultural differences are also reﬂected in the acceptance of certain products. Pork products, for instance, have almost no acceptance in predominantly Muslim societies, nor do meats of any kind in predominantly Hindu societies. Cold cereals are extremely popular in Ireland, but not in Spain. It is interesting to note the international trade activity with the major importers and exporters as evidence of intense international business