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Review the textbook regarding the research term

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Page i
Charles W. L. Hill
University of Washington
G. Tomas M. Hult
Michigan State University
Page ii
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY
10121. Copyright © 2020 by McGraw-Hill Education. All rights
reserved. Printed in the United States of America. Previous editions
© 2018, 2016, and 2014. No part of this publication may be
reproduced or distributed in any form or by any means, or stored in a
database or retrieval system, without the prior written consent of
McGraw-Hill Education, including, but not limited to, in any network
or other electronic storage or transmission, or broadcast for distance
Some ancillaries, including electronic and print components, may not
be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 22 21 20 19
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MHID 1-260-08837-5 (bound edition)
ISBN 978-1-260-78061-1 (loose-leaf edition)
MHID 1-260-78061-9 (loose-leaf edition)
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Library of Congress Cataloging-in-Publication Data
Names: Hill, Charles W. L., author. | Hult, G. Tomas M., author.
Title: Global business today / Charles W.L. Hill, University of
G. Tomas M. Hult, Michigan State University.
Description: 11e [edition]. | New York, NY : McGraw-Hill Education,
Identifiers: LCCN 2018050510| ISBN 9781260088373 (alk. paper) |
1260088375 (alk. paper)
Subjects: LCSH: International business enterprises—Management. |
International trade. | Investments, Foreign. | Capital market.
Classification: LCC HD62.4 .H548 2020 | DDC 658/.049—dc23 LC
record available
at https://lccn.loc.gov/2018050510
The Internet addresses listed in the text were accurate at the time of
publication. The inclusion of a website does not indicate an
endorsement by the authors or McGraw-Hill Education, and
McGraw-Hill Education does not guarantee the accuracy of the
information presented at these sites.
For my mother June Hill, and the memory of my
father, Mike Hill
—Charles W. L. Hill
For Gert & Margareta Hult, my parents
—G. Tomas M. Hult
Page iii
Page iv
about the authors
University of Washington
Charles W. L. Hill is the Hughes M. and Katherine Blake Professor
of Strategy and International Business at the Foster School of
Business, University of Washington. Professor Hill has taught in the
MBA, Executive MBA, Technology Management MBA, Management,
and PhD programs at the University of Washington. During his time
at the University of Washington, he has received over 25 awards for
teaching excellence, including the Charles E. Summer Outstanding
Teaching Award. The Foster School is consistently ranked as a Top25 business school. Learn more about Professor Hill at

Charles Hill

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