International Business - Environments and Operations
Part One
Background For International Business
Chapter 1
Globalization and International Business
Introduction
Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries. International Business is a mechanism to bring about globalization.
(The term sometimes refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout recorded history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets. Today, so many different components, ingredients, and specialized business activities go into products that we’re often challenged to say exactly where they were made. Example: Japanese firm Matsushita furnishes the CD player in the Korean-manufactured Kia Sorento.)
International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries
Increasingly foreign countries are a source of both production and sales for domestic companies
(These global activities enable us to get more variety, better quality, or lower prices. Private companies undertake such transactions for profit while governments may undertake them either for profit or for political reasons.)
Studying International Business is Important * Most companies are either international or compete with international companies * Modes of operations may differ from those used domestically * The best way of conducting business may differ by country * An understanding helps you make better career decisions * An understanding helps you decide what government policies to support
(Global events affect companies of all sizes and industries. As a manager in almost any industry, you’ll need to consider both (1) where to obtain the inputs you need of the required quality and at the best possible price and (2) where you can best sell the product or service that you’ve put together from those inputs. Competitive gains can be obtained by engaging in global business transactions.
The best way of doing business abroad may not be the same as the best way at home because (1) when a company operates internationally, it will engage in modes of business such as exporting and importing that differ from those in which it engages domestically and (2) physical, social, and competitive conditions differ among countries and affect the optimum ways to conduct business. Thus companies operating internationally have more diverse and complex operating environments than those that conduct business only at home.
It is important to understand some international business complexities since company international operations, and government regulations of those operations affect overall national conditions—profits, employment security and wages, consumer prices, and national security.)
Factors Contributing to Rapid Growth of International Business 1. Increase in and expansion of technology 2. Liberalization of cross-border trade and resource movements * Reasons: 1. Citizens want a greater variety of goods and services at lower prices. 2. Competition spurs domestic producers to become more efficient. 3. Induce other countries to lower their barriers in turn 3. Development of services that support international business 4. Growing consumer pressures 5. Increased global competition * born-global companies * clustering 6. Changing political situations 7. Expanded cross-national cooperation * To satisfy three main needs: 4. Reciprocal advantages 5. Attack problems jointly 6. Deal with areas of concern that lie outside the territory of any nation
(1. Population and economic growth allows for a larger portion of development to take place while advances in technology allow for increases in productivity using the same amount of inputs.
Reducing costs and speeding up transactions, advances in communication and transportation allow more companies to expand their market base as well as obtain global resources and oversee foreign operations.
2. Most governments have reduced restrictions of cross-border trade for three reasons: -Their citizens want a greater variety of goods and services at lower prices. -Competition spurs domestic producers to become more efficient. -They hope to induce other countries to lower their barriers in turn.
3. As international business transactions have increased, so have services that help those transactions take place more quickly and easily.
4. Consumers today are more informed about foreign products and services and are better able to afford more luxury items. More consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China.
5. Companies continually look abroad to increase market share and reduce costs in order to better compete with other firms.
Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders’ international experience and because advances in communications give them a good idea of where global markets and supplies are. Related to this, many new companies locate in areas where there are many competitors and suppliers—a situation known as clustering—which helps them to become quickly aware of foreign opportunities and to gain easier access to the resources needed to move internationally.
6. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure which increases the ease of transporting goods and resources.
7. Governments engage in international cooperation in order to satisfy three main needs: 1. Reciprocal advantages 2. To attack problems jointly that one country acting alone cannot solve 3. To deal with areas of concern that lie outside the territory of any nation
Governments participate in treaties and trade agreements with other countries on behalf of their companies to ensure reciprocal advantages such as the use of certain ports and air-space as well as protection of intellectual property and lowering of trade restrictions to make it easier for their companies to operate internationally. Agreements may be bilateral or multilateral.
Countries will share in activities along mutual borders that will benefit all parties. They also cooperate to solve problems they either cannot or will not solve on their own. One of the main reasons for this is because the amount of resources needed to solve the problem may be too great for one country to manage. Furthermore, the project or problem may affect more than one country and would require negotiation and possibly contribution of resources from all parties. Examples: Global warming, over-fishing, spread of disease (H1N1 virus, Avian Flue, Malaria…etc.), natural disasters.)
What’s Wrong with Globalization * Threats to national sovereignty * Economic growth and environmental stress * Growing income inequality and personal stress * Offshoring – the transferring of production abroad – is controversial in terms of who benefits when costs are reduced and whether the process exchanges good jobs for bad ones.
(Threats to National Sovereignty
Some observers worry that the proliferation of international agreements, particularly those that undermine local restrictions on how goods are bought and sold, will diminish a nation’s sovereignty—that is, a nation’s freedom to “act locally” and without externally imposed restrictions. In addition, critics say that small economies depend so much on larger economies for supplies and sales that they are vulnerable to foreign demands. Finally, critics charge that globalization homogenizes products, companies, work methods, social structures, and even language, thus undermining the cultural foundation of sovereignty.
Economic Growth and Environmental Stress:
According to one argument, as globalization brings growth, it consumes more nonrenewable natural resources and increases environmental damage—despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate. Others argue that global cooperation fosters superior and uniform standards for combating environmental problems. Further, global competition encourages companies to seek resource-saving and environmentally friendly technologies, such as automobile engines that use less gas and emit fewer pollutants. However, unless the positive results of globalization outpace the negative consequences of growth, sustaining economic growth will remain a problem in the future.
Growing Income Inequality:
By various measurements, income inequality has been growing in a number of countries. Critics claim that globalization has affected this disparity by helping to develop a global superstar system, creating access to a greater supply of low-skilled and low-cost labor and speeding competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status but also with costly social unrest.)
Companies Engage in International Business * To Expand Sales: pursuing international sales increases the potential market and potential profits * To Acquire Resources: may give companies lower costs, new and better products, additional operating knowledge * To Diversify or Reduce Risks: international operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage
Modes of Operation in International Business * Merchandise exports and imports * Service exports and imports * Tourism and Transportation * Service Performance * Asset Use * Investments * Foreign Direct Investment (FDI) * Portfolio Investment
Merchandise exports and imports are usually a country’s most common international economic transactions.
Service exports and imports are international nonproduct sales and purchases.
• Examples of services are travel, transportation, banking, insurance, and the use of assets such as trademarks, patents, and copyrights.
• Service exports and imports are very important for some countries.
• They include many specialized international business operating modes.
Service Performance Example: Turnkey Projects and Management Contracts
Asset Use Example: One company allows another to use its trademarks, patents, logo…etc. This occurs through licensing agreements and franchising.
Investments: another form of asset use. There are two types; direct investment (FDI and Joint Venture) and no controlling financial interest (portfolio investment). Direct investment is characterized by the investor having a controlling interest in a foreign firm. Portfolio investment or no controlling financial interest includes owning shares of company stock or providing loans to a company.
Difference Between International and Domestic Operations
When operating abroad companies may have to adjust their usual methods of carrying out business. Foreign conditions often dictate a more suitable method, and the operating modes used for international business differ from those used on a domestic level.
Physical and Social Factors Affecting International Business Operations
To operate within a company’s external environment, its managers must have knowledge of business operations and a working knowledge of social sciences, and how they affect all functional business fields.
Geographical Influences: Managers who are knowledgeable about geography are in a position to determine the location, quantity, quality, and availability of the world’s resources, as well as the best way to exploit them. The uneven distribution of resources throughout the world accounts in large part for the fact that different products and services are produced in different parts of the world. Geographic barriers—mountains, deserts, jungles, and so forth—often affect communications and distribution channels in many countries. And the chance of natural disasters and adverse climatic conditions (hurricanes, floods, earthquakes, tsunamis) can make investments riskier in some areas than in others, while affecting global supplies and prices.
Political Policies: A large part of international business depends on government policies and receptiveness to foreign investment.
Legal Practices: Companies must adhere to both domestic and international laws. Host country laws and the ways in which those laws are enforced affect the way companies conduct business in those countries.
Behavioral Factors: The interpersonal norms of a country may necessitate a company’s alteration of operations.
Economic Forces: Economics explains country differences in costs, currency values, and market size.
Competitive Factors Affecting International Business * A company’s competitive strategy influences how and where it can best operate. * A company’s competitive situation may differ in terms of its relative strength and which competitors it faces.
Companies must also analyze the competitive environment in order to come up with an appropriate strategy for marketing its products or services in different countries. Most companies compete based on cost efficiency or product differentiation. Some strategies work best in certain countries where others would not. Example: Fiat uses a cost strategy in most situations but operates using a focus strategy in the U.S. where the market is not conducive to a mass-market Fiat brand strategy. Fiat sells over a quarter of all its Ferraris in the United States.
Operating tactics will also depend on the size of the company, the amount of company resources available, the size of the market and the company’s share in that market. Likewise, the amount of resources a company must use and the type of competitive strategy employed will also depend on how well established the competition is in the market and whether they are also international or local.

International Business
Environments and Operations
Part Two
Comparative Environmental Frameworks
Chapter 2
The Cultural Environments Facing Business
Culture
Learned norms based on values, attitudes, and beliefs of a group of people.
Culture can be based on nationality, ethnicity, gender, religion, work organization, profession, age, political party membership, income level…etc. International business activities incorporate people from all different groups and backgrounds, thus, every business function is subject to cultural difference.
Cultural Diversity
A means of gaining global competitive advantage by bringing together people of diverse backgrounds and experience
By bringing together people of diverse backgrounds and experience, companies often gain a deeper knowledge about products and services and ways in which to produce and deliver them.
Chapter 1 identified two means of gaining useful knowledge from overseas activities: (1) Learning from foreign operating experiences and (2) tapping into foreign intellectual competencies.
Cultural Collision * Occurs in international business when: * A company implements practices that are less effective * Employees encounter distress because of difficulty in accepting or adjusting to foreign behaviors
An international firm doing business in another country must determine which of that nation’s business practices differ from its own and then decide what adjustments, if any, are necessary if it is to operate efficiently.
Cultural Awareness * Problem areas that can hinder managers’ cultural awareness… * Subconscious reactions to circumstances * The assumption that all societal subgroups are similar
Businesspeople can learn to improve awareness and sensitivity and, by educating themselves, enhance the likelihood of succeeding abroad. Gathering some basic research on another culture can be instructive. In addition, managers must assess the information they gather to determine if it perpetuates unwarranted stereotypes, covers only limited facets of a country and its culture, or relies on outdated data. They should also observe the behavior of those people who have garnered the kind of respect and confidence they themselves will need.
The Idea of a “Nation” – Delineating Cultures
The nation is a useful definition of society because: * Similarity among people is a cause and an effect of national boundaries * Laws apply primarily along national lines
Within its borders, a nation’s people largely share such essential attributes as values, language, and race. There is a feeling of “we” that casts foreigners as “they.” National identity is perpetuated through rites and symbols—flags, parades, rallies—and the preservation of national sites, documents, monuments, and museums promotes a common perception of history.
The Nation as a Cultural Mediator * A national culture must be flexible enough to accommodate the diversity of various subcultures, ethnic groups, races, and classes * Yet every nation boasts certain human, demographic, and behavioral characteristics that constitute its national identity
When international businesspeople compare nations, they must be careful to examine relevant groups—differentiating, for example, between the typical attitudes of rural dwellers and those of urban dwellers, or those of young people versus old people.
Certain cultural attributes can link groups of different countries, sometimes even more closely than with groups of a given nation.
Country-By-Country Analysis * Managers find this difficult to implement because: * Subcultures exist within nations * Similarities link groups from different countries
How Cultures Form and Change * Change by Choice * Reaction to social and economic situations * Change by Imposition * Imposed introduction into a culture of certain elements from an alien culture
As a rule, contact among countries brings change—a process known as cultural diffusion. When this change results in mixing cultural elements, the process is known as creolization.
Language as Both a Diffuser and Stabilizer of Culture * A common language within a country is a unifying force * A shared language between nations facilitates international business * Native English speaking countries account for a third of the world’s production
English is the international language of business When people from different areas speak the same language, culture spreads more easily. That fact helps explain why there’s greater cultural homogeneity among all English-speaking countries or among all Spanish-speaking countries than between English-speaking countries and Spanish-speaking countries. Among nations that share a same language, commerce is easier because translating everything (which can be both time consuming and expensive) isn’t necessary. Thus when people study second languages, they usually choose the ones that are most useful in interacting with other countries, especially in the realm of commerce.
Religion As A Cultural Stabilizer
Centuries of profound religious influence continue to play a major role in shaping cultural values and behavior
Many of these religions—Buddhism, Christianity, Hinduism, Islam, and Judaism—influence specific beliefs that may affect business, such as inhibiting the sale of certain products or the performance of work at certain times. McDonald’s, for example, serves neither beef nor pork in India so as not to offend either its Hindu or Muslim populations, and El Al, the Israeli national airline, does not fly on Saturday, the Jewish Sabbath.
In places where rival religions or factions are vying for political control, the resulting strife can cause so much upheaval that business activity suffers, whether from property damage, broken supply chains, or breaches in connections with customers.
Behavioral Practices Affecting Business * Issues in Social Stratification * Social ranking is determined by: * Factors pertaining to you as an individual * Factors pertaining to your affiliation with certain groups
Group Affiliations Can Be: * Ascribed or Acquired * Include those based on gender, family, age, caste, ethnic, racial, or national origin * A reflection of class and status * Include those based on religion, political affiliation, and professional and other associations
Social Stratification and Employment Practices * Performance Orientation * Open and Closed Societies * Gender-Based Groups * Age-Based Groups * Family-Based Groups
Social stratification also affects employment practices.
Performance Orientation: companies tend to base a person’s eligibility for employment and promotion primarily on competence, thereby fostering work environments driven more by competition than by cooperation.
Open and Closed Societies: The more egalitarian, or “open,” a society, the less the importance of ascribed group membership in determining rewards. In other cases, ascribed group memberships deny large numbers of people equal access to the preparation needed to qualify for jobs. In much of sub-Saharan Africa, for instance, the literacy rate for women is much lower than that for men.
Gender-Based Groups: Countries differ in tradition and attitude toward gender equality. In many parts of the world, however, barriers to gender-based employment practices are coming down, due to changes in both attitudes and work requirements. In the United States, one noticeable change in attitudes has been reflected in the number of people of one gender employed in occupations previously dominated by the other, such as the increase in male nurses. Further, there’s been a decrease in production jobs requiring brawn and an increase in jobs for people with specialized education.
Age-Based Groups: Country differences in attitudes concerning age can affect business operations. For example, the Japanese hold strongly to the assumption that there’s a significant correlation between age and wisdom. That’s why the seniority system, although now declining in importance, plays a key role in promotion and compensation decisions in Japan—much more so than in Western countries.
Family-Based Groups: In some cultures—say, much of Latin America—the most important group membership is the family. An individual’s position in society at large depends heavily on the family’s social status or “respectability” rather than on individual achievement. Because family ties are so strong, there may also be a tendency to cooperate more closely within the family unit than in other relationships.
Work Motivation * The motivation to work differs across cultures * Studies show * the desire for material wealth is a prime motivation to work * promotes economic development * people are more eager to work when the rewards for success are high * masculinity-femininity index * high masculinity score prefers “to live to work” than “to work to live”
The desire to work differs across cultures. In countries where material wealth is valued, there is generally a greater motivation to work. This of course, also helps to promote economic development. In fact, the higher level of development that exists in some countries can be explained by the work of Max Weber who suggested that self-discipline, hard work, honesty, and a belief in a just world foster work motivation and, thus, economic growth.
Typically, people are also more eager to work when the potential rewards are high.
We can also measure attitudes toward work and achievement using the masculinity-femininity index. The degree to which individuals are assertive, confrontational, and aggressive in their relationships with others varies across borders. These attitudinal differences help explain why an international company may encounter managers abroad who behave differently from what it expects or prefers.
Work Motivation * Hierarchy of needs theory * fill lower-level needs before moving to higher level needs * The ranking of needs differs among cultures
The hierarchy-of-needs theory suggests that people fill lower-level needs before filling higher level needs. An understanding of this theory is helpful to managers as they make decisions regarding reward preferences of employees in different countries. In very poor countries, for example, workers might be motivated with enough compensation to simply satisfy their needs for food and shelter. Workers in other countries may be motivated by other needs. * The motivation to work differs across cultures * Studies show * the desire for material wealth is a prime motivation to work * promotes economic development * people are more eager to work when the rewards for success are high * masculinity-femininity index * high masculinity score prefers “to live to work” than “to work to live”
The desire to work differs across cultures. In countries where material wealth is valued, there is generally a greater motivation to work. This of course, also helps to promote economic development. In fact, the higher level of development that exists in some countries can be explained by the work of Max Weber who suggested that self-discipline, hard work, honesty, and a belief in a just world foster work motivation and, thus, economic growth.
Typically, people are also more eager to work when the potential rewards are high.
We can also measure attitudes toward work and achievement using the masculinity-femininity index. The degree to which individuals are assertive, confrontational, and aggressive in their relationships with others varies across borders. These attitudinal differences help explain why an international company may encounter managers abroad who behave differently from what it expects or prefers. * Hierarchy of needs theory * fill lower-level needs before moving to higher level needs
The ranking of needs differs among cultures
The hierarchy-of-needs theory suggests that people fill lower-level needs before filling higher level needs. An understanding of this theory is helpful to managers as they make decisions regarding reward preferences of employees in different countries. In very poor countries, for example, workers might be motivated with enough compensation to simply satisfy their needs for food and shelter. Workers in other countries may be motivated by other needs.
This Figure shows the hierarchy of needs and need-hierarchy combinations. Note that needs are broken down into physiological needs, security needs, affiliation needs, esteem needs, and self-actualization needs. The way in which these needs are ranked differs among countries
Relationship Preferences * Power Distance * Individualism Versus Collectivism * Masculinity Versus Femininity * Uncertainty avoidance
From country to country, likely employee preferences differ in terms of interacting with bosses, subordinates, and peers.
Power distance refers to the general relationship between superiors and subordinates. Where power distance is high, people prefer little consultation between superiors and subordinates. Employees usually prefer one of two management styles: autocratic (ruling with unlimited authority) or paternalistic (regulating conduct by supplying needs). Where power distance is low, they prefer “consultative” styles.
Individualism is characterized by a preference for fulfilling leisure time and improving skills outside the organization. It also implies a low preference for receiving compensation in the form of benefits and a high preference for personal decision making and on-the-job challenges.
Collectivism, in contrast, encourages dependence on the organization and a preference for thorough training, satisfactory workplace conditions, and good benefits.
Risk Taking Behavior * Risk taking behavior differs across cultures * Uncertainty avoidance * handling uncertainty * Trust * degree of trust among people * Future orientation * delaying gratification * Fatalism * attitudes of self-determination
How people approach risk also varies from country to country. Four types of risks are important: uncertainty avoidance, trust, future orientation, and fatalism.
In cultures where there is high uncertainty avoidance employees prefer following set rules even if breaking them may be in the company’s best interest. Similarly, many consumers are not prepared to risk being early adopters of products.
In cultures where trust is high, the cost of doing business tends to be lower because managers don’t spend much time fussing over every possible contingency and monitoring every action for compliance with certain business principles.
Business decisions can also be influenced by a culture’s attitude toward the future and whether it’s worthwhile to delay gratification in order to invest for the future.
Finally, if people believe strongly in self-determination, they may be willing to work hard to achieve goals and take responsibility for performance. But if they’re fatalistic and believe every event in life is inevitable, they’re less likely to accept the basic cause-and-effect relationship between work and reward.
Information and Task Processing * Cultures handle information in different ways * Perception of cues * Obtaining information * low context versus high context cultures * Information processing * Monochronic versus polychronic cultures * Idealism versus pragmatism
How information is perceived, obtained, and processed differs from country to country.
In low context cultures people generally regard only firsthand information that bears directly on the subject at hand as being relevant. Managers typically spend little time on small talk and tend to get to the point. In contrast, in high-context cultures people see seemingly peripheral information as pertinent and infer meanings from things said either indirectly or casually.
In monochronic cultures people prefer to work sequentially. So, for example, a transaction with one customer is completed before dealing with another. But in a polychronic culture, people often feel more comfortable working simultaneously on a variety of tasks, such as dealing immediately with multiple customers who need service.
Cultures that prefer to establish overall principles before tackling smaller details take an approach called idealism, while those that focus more on details than on abstract principles take a pragmatic approach.
Keep in mind that an individual’s approach to information processing can affect business in a number of ways. In a culture of pragmatists like the United States, for example, labor negotiations tend to focus on well-defined issues—say, hourly pay increases for a specific bargaining unit. However, in an idealist culture like that of Argentina, labor disputes tend to blur the focus on specific demands as workers tend to rely first on mass action—such as general strikes or political activities—to publicize basic principles.
Communications
* Cross border communications do not always translate as intended * Spoken and written language * Silent language * Color * Distance * Time and punctuality * Body language * Prestige
Communication across cultures can be problematic when communications are not translated with the same meaning as intended. This problem can occur with not only with spoken and written language and but also with silent language.
Even a slight misuse of words or phrases can have a significant impact on the meaning of a message. Moreover, it’s important to recognize that even when two countries share a language problems can exist. For example, some 4,000 words have different meanings in British and American English.
Silent language refers to a host of nonverbal cues. How these physical cues or “body language” are perceived and interpreted varies between cultures. Many Western countries, for instance, associate black with death ,while white has the same connotation in some parts of Asia. Similar differences exist with perceptions of time and punctuality. In the United States, people usually arrive early for business appointments, a few minutes late for dinner at someone’s home, and a bit later still for large social gatherings. In other countries though, the concept of punctuality in any or all of these situations may be different.
The appropriate distance people maintain during conversations and prestige also differs between countries. For Americans, the customary distance for a business discussion is 5 to 8 feet; for personal business, it’s 18 inches to 3 feet. The much smaller distances common in Latin America can make many Americans quite uncomfortable. Likewise, a U.S. manager who places great faith in objects as cues to prestige may underestimate the status of foreign counterparts who don’t value large, plush offices on high floors. A foreigner may underestimate U.S. counterparts who perform their own services, such as opening their own doors, fetching their own coffee, and answering unscreened phone calls.
Body Language Is Not A Universal Language * Nod head up and down to say “Yes.” In Bulgaria and Greece, this gesture means “No.” * Pass an item to someone with one hand. - In Japan this is very rude. In many Middle and Far Eastern countries it is rude to pass something with your left hand which is considered “unclean.”
Sit with soles shoes showing. In Thailand, Japan and France as well as countries of the Middle and Near East demonstrates disrespect. You are exposing the lowest and dirtiest part of your body so this is insulting.
Degree of Cultural Differences
Cultural Distance When a company moves within a cluster of culturally similar countries, it should expect to encounter fewer cultural differences and to face fewer cultural adjustments.
Cultural Friction A business interaction may be viewed negatively because of possible changes in power relationships and the sovereignty that sets countries apart.
Regarding cultural distance, even within clusters, there may still be significant cultural differences that could affect business dealings. Moreover, managers may assume that closely clustered countries are more alike than they really are, and if they become too confident about the fit between their own and another nation, they may well overlook important subtleties. Women’s roles and behavior, for example, differ substantially from one Arab country to another even though Arab countries overall are similar culturally.
There are cultural practices all over the world that many outsiders consider downright wrong, ranging from polygamy and child marriage to concubinage, slavery, and burning of widows. Both companies and individuals must decide if they’re ready to carry on business in places that countenance such practices.
Workers who go abroad often encounter something called culture shock—the frustration that results from having to absorb a vast array of new cultural cues and expectations.
Company and Management Orientations * Polycentrism * belief that business units in different countries should act like local companies * Ethnocentrism * conviction that one’s own culture is superior to that of other countries * Geocentrism * requires companies to balance knowledge of their own organizational cultures with both home and host country needs, capabilities, and constraints
Polycentrism may be an overly cautious response to cultural variety. How so? A firm whose outlook is too rigidly polycentric may shy away from certain countries or avoid transferring home country practices or resources that will actually work well abroad.
Ethnocentrist management overlooks national differences and Ignores important factors because they’ve become accustomed to certain cause-and-effect relationships in the home country.
Believes home-country objectives should prevail.
Thinks change is easy.
Strategies for Instituting Change * Value Systems * Cost-Benefit Analysis of change * Resistance to too much change * Participation * Reward Sharing * Opinion Leadership * Timing * Learning Abroad
When companies expand abroad, they introduce some degree of change into the foreign markets in which they operate. Thus they need to bear in mind that people don’t normally accept change very readily, either in the home- or host-country market. The methods that companies choose for managing such changes are important for ensuring success.

International Business
Environments and Operations
Part Two
Chapter 3
Comparative Environmental Frameworks
Introduction
* Every country has its own political and legal environment * Companies must determine where, when, and how to adjust their business practices without undermining the basis for success
Companies doing business internationally must navigate different philosophies, laws, and attitudes concerning political freedom, property rights, and social responsibility. Managers that understand the differences between countries are in a better position to compete.
The Political Environment * Managers evaluate, monitor, and forecast political environments * A country’s political system refers to the structural dimensions and power dynamics of its government that specify institutions, organizations, and interest groups, and define the norms that govern political activities
The goal of a country’s political system is to integrate the diverse elements of a society. A successful political system unites a society in the face of differing viewpoints. So for example, the peace and prosperity that exists in countries like Sweden and Australia illustrate the success of the political systems in those countries, while the instability and insurrection of Libya’s political system shows its failings.
Individualism vs. Collectivism * Individualism * primacy of the rights and role of the individual * Collectivism * primacy of the rights and role of the community
One standard way to assess a political system is exploring the degree to which it emphasizes individualism versus collectivism.
Individualism champions the rights of the individual over those of society. From a business perspective, this suggests that managers have the right to make economic decisions largely free of rules and regulations. You might be aware that countries that have an individualist orientation shape their marketplace with the idea of laissez-faire and support the idea that government should not interfere in business affairs. Under this perspective, individuals are presumed to be self-regulating in promoting economic prosperity and growth, acting fairly and justly to maximize personal performance without threatening the welfare of society.
In contrast, collectivism encourages the government to intervene to improve the welfare of the group at the expense of the individual. For business, this means that the ownership of assets, the structure of industries, the conduct of companies, and the actions of managers must improve the welfare of society. Therefore, group members accept the responsibility for making decisions that will benefit everyone. Countries taking a collectivist orientation hold that government will intervene in market situations to ensure that business practices benefit society.
Political Ideology * A political ideology stipulates how society ought to function and outlines the methods by which it will do so * Most modern societies are pluralistic * different groups champion competing political ideologies * Democrats vs. Republicans in the United States * Democratic Party vs. Liberal Party in Japan * Most countries have competing ideologies. In the United States for example, the Democratic Party competes with the Republican Party to not only describe a vision for the future, but also the means of achieving that future. Most societies today are pluralistic – they have different groups championing different ideologies.
Spectrum Analysis * A political spectrum outlines the various forms of political ideology * Political freedom measures * the degree to which fair and competitive elections occur * the extent to which individual and group freedoms are guaranteed * the legitimacy ascribed to the general rule of law * the freedom of the press
A political spectrum outlines the various forms of political ideology including anarchism, conservatism, secularism, environmentalism, liberalism, feminism, nationalism, socialism, and theocracy.
Managers are concerned with the degree of political freedom in a country and its effect on investment choices and operations decisions.
Spectrum Analysis
This Figure shows a political spectrum of the various forms of political ideologies. By configuring ideologies along the central axis we can model different political ideologies in relation to each other. The goal of relativity depends on specifying credible ideas to anchor the endpoints of the axis; reasonably set, one can then position alternative ideas.
In practice, purely democratic and totalitarian systems are extreme exceptions. Looking around the world, one finds that there are variations of each political ideology. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize different degrees of state control; fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state. This Figure shows that the majority of political ideologies fall between democracy and totalitarianism.
Democracy
* In a democracy * all citizens are politically and legally equal * all are equally entitled to freedom of thought, opinion, belief, speech, and association * all equally command sovereign power over public officials * Prominent types of democracy include * Representative * Multiparty * Parliamentary * Social
Understanding the ideals and means of democracy and totalitarianism can help explain the other points on the political spectrum. Democracy calls for participation by citizens in a fair and just decision-making process. Since it supports individualism, companies can make investment and operational decisions based on economic rather than political standards. Under a democracy, commerce and trade is promoted.
Totalitarianism
* A totalitarian system subordinates the individual to the interests of the collective * dissent is eliminated through indoctrination, persecution, surveillance, propaganda, censorship, and violence * Prominent types of totalitarianism include * Authoritarianism * Fascism * Secular * Theocratic A totalitarian system champions the power of a few over the many. Under a totalitarian system, the government maintains control over many aspects of life, the individual is subordinated to the state, and all opposing political and cultural expression is suppressed. Managers operating in a totalitarian state must make decisions based on political rather than economic standards. Typically, local companies are favored over foreign firms forcing multinational companies to make business deals that would not occur in a democratic environment.
The Standard of Freedom * Freedom House assesses political and civil freedom around the world * Freedom House recognizes three types of political systems * Free * Partly free * Not free
Freedom House classifies countries according to their political and civil freedom. A free country has open political competition, respect for civil liberties, independent civic life, and independent media. A partly free country has limited political rights and civil liberties, corruption, weak rules of law, ethnic and religious strife, unfair elections, and censorship. A not free country has few or no political rights and civil liberties.
Democracy:
Recession and Retreat * Democracy’s retreat * just 26 of the world’s democracies are full democracies * Worlds Population * 12 % lives in a full democracy * 37 % lives in a flawed democracy * 14% lives in a hybrid regime * 37% lives in an authoritarian regime
While democracy still retains its appeal worldwide, there are signs that it may actually be in retreat. According to the Economist Intelligence Unit many countries are democracies in name only. The EIU classifies four types of political systems – full democracy, flawed democracy, hybrid regime, and authoritarian regime.
Today, 12 percent of the world’s population lives in a full democracy, 37 percent in a flawed democracy, 14 percent in a hybrid regime, and 37 percent in an authoritarian regime.
What’s fueling this trend? Several things. One is the growing uncertainty of the relationship between democracy and levels of economic development. A second involves the democracy setbacks in several European countries. Third, the economic problems and in particular the global financial crisis that has plagued the world over the last few years. Finally is the question of just how democracy should be defined and what its standards should be.
Political Ideology and the MNE * What will the political map look like in the future? * The Washington Consensus * Champions democracy, freedom, the rule of law, and human rights * The Beijing Consensus * One-party system oversee a nominal democratic system whose citizens, cannot participate in decision making * The Clash of Civilizations * Irreconcilable cultural and religious differences between Islam and the West will trigger a backlash
What happens in the future? Managers must watch carefully and adapt their operations and decisions accordingly.
The Washington Consensus champions democracy, freedom, the rule of law, and human rights.
The Beijing Consensus calls for a one-party system in which elected representatives, preapproved by the ruling party, oversee a nominal democratic system whose citizens, though granted the right to vote, cannot participate in decision making.
Under the Clash of Civilizations scenario irreconcilable cultural and religious differences between Islam and the West will trigger a backlash against Western political ideals and their crystallization in the ideologically interventionist Washington Consensus.
Political Risk * Political risk refers to the risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment * Types: * Systemic * Procedural * Distributive * Catastrophic
Political risk represents a very real threat for companies today especially in fast-growing, emerging markets where weak legal systems, makeshift institutions, volatile cities, and fragile regimes complicate the business environment. Moreover, the global credit crisis has aggravated political risk across both developed and developing markets.
There are four categories of political risk.
Systemic Risks are risks that impact all firms that operate in the particular political system.
Procedural Risk refers to the risk evolving from the daily movement of people, products, and funds from point to point in the global market. Each move creates a procedural transaction between the units involved, whether units of a company or units of a country. Political actions sometimes create frictions that interfere with these transactions.
Distributive Risk is a result of the profits generated by foreign companies in the local economy. If the host country questions the distributive justice of the rewards of operating in its market, it may wonder whether, as the business grows more successful, it is receiving its “fair” share of the growing profits.
Finally, Catastrophic Risk includes random political developments that adversely affect the operations of every company in a country. Typically, it arises from specific flash points, such as ethnic discord, illegal regime change, civil disorder, or insurrection. It disrupts the business environment in a way that affects every firm in the country. If such disruptions spiral out of control, they devastate companies and nations.
The Legal Environment * The legal system is the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction * Types: * Common law * Civil law * Theocratic law * Customary law * Mixed systems
International managers must be aware of how a country develops, interprets, and enforces its laws. Legal systems vary across counties because of variations in traditions, precedent, usage, custom, and religious precepts.
Modern legal systems are composed of constitutional law which preserves an open and just political order, criminal law which safeguards the social order, and civil and commercial laws which promote fairness.
There are five types of legal systems. A common law system is based on tradition, precedent, custom, usage, and interpretation by the courts. A civil law system relies on a systematic collection of codes and statues that judges must follow. A theocratic system is based on religious precepts. A customary legal system follows the wisdom of daily experience. Finally, a mixed legal system combines elements of the other systems.
Trends in Legal Systems * What is the basis of rule in a country? * The rule of man * legal rights derive from the individual who commands the power to impose them * associated with a totalitarian system * The rule of law * systematic and objective laws applied by public officials who are held accountable for their administration * associated with a democratic system
The retreat of democracy is also changing the legal environment. As countries shift toward totalitarian regimes, the legal system changes to one in which business activity is regulated by the government to support state objectives.
Managers must determine what the basis of rule is in a given country – the rule of man or the rule of law. The rule of man is the basis of a totalitarian system, while the rule of law is the basis of democracy.
Operational Concerns * Operational issues * Starting a business * Entering and enforcing contracts * Hiring and firing local workers * Closing down the business * In general * rich countries regulate less * poor countries regulate more
Managers doing business abroad face a complex political and legal environment that makes decision- making in the multinational company challenging.
Just starting a new business creates several concerns related to registering the new company’s name, choosing the appropriate tax structure, getting licenses and permits, arranging credit, and securing insurance. Some countries facilitate this process, while others do not.
Managers must also be aware of how a country’s political and legal environment affects both entering and enforcing contracts. A contract, which is essential to business transactions, is a binding legal agreement that formally exchanges promises, the breach of which triggers legal proceedings. Countries with common law systems tend to encourage precise, detailed contracts, but countries with civil law systems where the civil code deals with many pertinent issues, encourage shorter and less specific contracts.
Another area that managers must explore is related to hiring and firing local workers. However, laws and practices in this area vary greatly across the world. Singapore, New Zealand, and the United States are among the countries with the most flexible labor-regulation statutes. China has the most flexibility in hiring and firing plus the greatest discretion in setting employment conditions, but, Angola, Belarus, and Paraguay place rigid restrictions on firing.
Finally, how a business is closed down must be explored. Some countries make the process quite difficult. In the United States, for example, the Internal Revenue Service requires completing a series of forms that report, among many others points, changes in the business structure, the sale of assets, payments to subcontractors, and termination of a retirement plan. Other countries like Ireland, Japan, and Canada allow companies to close their doors much more easily.
In general we say that there is an inverse relationship between a nation’s wealth and its tendency to regulate business.
Intellectual Property:
Rights and Protection * Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage * Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers * no “global” patent, trademark or copyright exists
The protection of intellectual property has become a hot topic in today’s global economy. Product piracy has become common, and many countries feel that others are not doing enough to safeguard the rights of those who own intellectual property.
It is difficult for companies to maintain control over their intellectual property because no “global” patent, trademark, or copyright exists. Therefore, managers must be especially vigilant to ensure that product piracy does not occur. Yet, it can be exceedingly difficult to do so. The business of intellectual property theft is huge. Some estimates suggest that international trade in pirated goods is more than $600 billion a year.

Chapter 4
Cross-National Cooperation and Agreements
Economic Integration
Approaches to economic integration may be:
• Bilateral integration-two countries cooperate closely, usually in the form of tariff reductions.
• Regional integration-a group of countries located in the same geographic proximity decide to cooperate, i.e. the European Union.
• Global integration-countries worldwide cooperate through the WTO.

Economic integration is the political and economic agreements among countries in which preference is given to member countries.
Trading groups, whether bilateral, regional, or global, are an important influence on the strategies of MNEs. Such groups can define the size of the regional market and the rules under which companies must operate.
As companies expand internationally, they must change their organizational structure and operating strategies to take advantage of regional trading groups.
MNEs are interested in regional trade groups because the MNEs themselves tend to be regional as well. Although we often think of MNEs as companies that do business in all of the triad regions of the world—Europe, North America, and Asia—current research demonstrates that most MNEs generate a majority of their revenues in their home regions.
The World Trade Organization * World Trade Organization (WTO) * The major body for * reciprocal trade negotiations * enforcement of trade agreements * General Agreement on Tariffs and Trade (GATT)
The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT.
GATT: Predecessor to the WTO * GATT * formed in 1947 to abolish quotas and reduce tariffs * Most favored nation (MFN) clause * trade without discrimination * Succeeded by WTO in 1995
The GATT was formed by 23 countries in 1947 as mechanism for negotiating the reduction and elimination of trade barriers and for agreeing on the conduct of international trade. The central tenet of GATT was the MFN clause that required members to open their markets equally to all other members.
What Does The WTO Do? * WTO * continues clause of GATT * provides a mechanism for dispute settlement * Doha Round * agricultural subsidies * Criticized for * failing to pay enough attention to labor and environmental concerns * undermining global diversity * benefitting rich at the expense of the poor
The WTO, which has 153 members, follows the MFN principle of GATT and strives to provide a better means of mediating trade disputes and of enforcing agreements.
The WTO does make some exceptions to the MFN principle. For example, developing countries’ manufactured products have been given preferential treatment over those from industrial countries, concessions granted to members within a regional trading alliance, such as the EU, have not been extended to countries outside the alliance, and countries are permitted to raise barriers against member countries which they feel are trading unfairly.
The most recent set of negotiations for the WTO began in 2001 in Doha, Qatar. The Doha Round, which focuses on giving a boost to developing nations, has been challenging and has stalled numerous times. One of the major sources of tension involves agricultural subsidies.
The WTO has been the subject of much criticism in the past.
The Rise Of Bilateral Agreements * Bilateral agreements * can be between two individual countries or can involve one country dealing with a group of other countries * Also known as * Preferential trade agreements (PTAs) * Free trade agreements (FTAs)
Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives.
Regional Economic Integration * Regional trade agreements * integration confined to a region and involving more than two countries * Examples include * European Union (EU) * European Free Trade Area (EFTA) * North American Free Trade Area (NAFTA) * Association of Southeast Asian Nations (ASEAN) * Common Market of Eastern and Southern Africa (COMESA)
Regional trade agreements or RTAs, also known preferential trade agreements, give member countries special treatment. They began to emerge after World War II when nations saw the benefits of cooperation and larger market sizes.
Major Types of Economic Integration
• Free trade area no internal tariffs.
• Customs union no internal tariffs plus common external tariffs.
• Common market customs union plus factor mobility.
Major Regional Trading Groups * European Union * North American Free Trade Agreement * The Americas: CARICOM, MERCOSUR, CAN, LAIA * ASEAN * APEC * The African Union
The Effects Of Integration * Effects of regional integration * Static effects * trade creation * trade diversion * Dynamic effects
Economies of scale
Regional economic integration has social, cultural, political, and economic effects.
The static effects of integration are the shifting of resources from inefficient to efficient companies as trade barriers fall.
Static effects can develop when there is trade creation or trade diversion. Trade creation occurs when production shifts to more efficient producers for reasons of comparative advantage, while trade diversion occurs when trade shifts to countries in the group at the expense of trade with countries not in the group.
Static effects improve the efficiency of resource allocation and affect both production and consumption.
Dynamic effects of integration are the overall growth in the market and the impact on a company caused by expanding production and by the company’s ability to achieve greater economies of scale.
Economies of scale occur when the average cost per unit falls as the number of units produced rises.
Keep in mind that regional economic integration allows for specialization and trade based on comparative advantage.
The European Union * European Union (EU) * changed from the European Economic Community to the European Community to the European Union * the largest and most successful regional trade group in the world * provides free trade of goods, capital, and people * uses common external tariffs * has a common currency
It’s much easier to form regional trading groups than larger ones. One of the most comprehensive and successful regional groups is the European Union which began as a free trade agreement and has since expanded to become a common market that has abolished restrictions on factor mobility and harmonized national, political, economic, and social policies.
The EU has 27 members some of which have joined forces on the bloc’s common currency, the euro.
This Map shows the members of the European Union and other important groups.
The EU has expanded several times over the years to reach its current 27 members. * European Commission * provides political leadership, drafts laws, and runs the various daily programs of the EU * Council of the EU * composed of the heads of state of each member country * European Parliament * has legislative power, control over the budget, and is supervisor of executive decisions * European Court of Justice interprets and applies EU treaties
Companies need to understand the political environment in the European Union. It has many governing bodies including the European Commission, the Council of the European Union, the European Parliament, the European Court of Justice, and the European Central Bank. * Single European Act * designed to eliminate the remaining nontariff barriers to trade in Europe * Lisbon Treaty * strengthens the EU’s governance process and improves the ability of the EU to make and implement decisions * Treaty of Maastricht * fostered political and monetary union in 1992 * the euro
The Single European Act was designed to eliminate the remaining nontariff barriers to trade in Europe.
In 1992, the members of the EU signed the Treaty of Maastricht in part to establish a monetary union.
The decision to move to a common currency, the euro, in Europe has eliminated currency as a barrier to trade for member countries.
The euro
• Is a common currency in Europe.
• Is administered by the European Central Bank.
• Was established on January 1,1999.
• Resulted in new bank notes in 2002.
• Does not include the United Kingdom, Denmark, Sweden, or eight of the new entrants to the EU.
Companies doing business in the EU need to * determine where to produce products * determine what their entry strategy will be * balance the commonness of the EU with national differences
Multinationals need to understand how the EU can influence their corporate strategy. For example, should they produce in a central location and incur the cost and time to move products from country to country? Should they acquire a local company as a way to get into the market? What do the different growth rates across member countries mean?
NAFTA
* The North American Free Trade Agreement (NAFTA) * includes Canada, the U.S., and Mexico * involves free trade in goods, services, and investments * includes countries of different sizes and wealth * Some U.S. trade and investment has been diverted to Mexico * Free trade area * rules of origin
The North American Free Trade Area, or NAFTA, went into effect in 1994, and is the largest bilateral trade agreement in the world. It’s designed to eliminate tariff barriers and liberalize investment opportunities and trade in services. Today, the U.S. is Mexico’s and Canada’s largest trading partner.
Under the rules of origin provision of NAFTA, goods and services must originate in North America to get access to lower tariffs.
Regional Economic Integration In Asia * Regional integration in Asia includes * the Association of Southeast Asian Nations (ASEAN) * ASEAN Free Trade Area * the Asia Pacific Economic Cooperation (APEC) * open regionalism * ASEAN is the fourth largest free trade area in the world. While the ASEAN free trade area has been very successful, other efforts in the region have not.
APEC for example, has had less success in achieving its goals. The group is not only large and geographically distant, it also lacks a treaty. However, because it generates such a large percentage of the world’s output and merchandise trade, it’s potential is large. A key goal for the bloc is to establish open regionalism whereby member countries decide whether to apply trade liberalization to non-APEC countries on an unconditional MFN basis or on a reciprocal FTA basis. * Regional Economic Integration In Africa * Several efforts at economic integration exist * Pan Arab Free Trade Area (PAFTA) * Arab League * Gulf Cooperation Council (GCC) * African Union (AU)
The large number of nations combined with the region’s three monetary unions and five regional trade associations make things complex when it comes to economic integration in Africa. Several African trade groups have been established, however, they rely more on their former colonial powers and other developed markets for trade than they do on each other.
Other Forms Of International Cooperation * The United Nations (UN) * established in 1945 * promotes peace and security * UNCTAD - United Nations Conference on Trade and Development * helps developing countries participate in international trade * Nongovernmental Organizations (NGOs) * private, nonprofit institutions that are independent of the government
Other forms of cooperation can also influence the strategies of multinationals.
The United Nations focuses on economic development, antiterrorism, and humanitarian movements. One organization in the UN is the United Nations Conference on Trade and Development, or UNCTAD. NGOs like the Red Cross and Doctors without Borders focus on humanitarian issues, while others like Africa Now and Save the Children focus on workers’ rights.
Commodities And The World Economy * Commodities * raw materials or primary products that enter into trade * Many commodity agreements exist to * discuss issues * disseminate information * improve product safety * OPEC
Developing countries frequently rely on commodity exports for the hard currency they need for economic development. If commodity prices aren’t stable, then earnings aren’t stable either.
To try to ensure greater stability in commodity prices, various agreements have been established. Most haven’t been very successful, but one, OPEC, has been.
Organization Of The Petroleum Exporting Countries * OPEC * producer cartel that relies on quotas to influence prices * establishes production quotas for member countries * Saudi Arabia * produces about 42% of the world’s crude and 18% of its natural gas * Downside of high prices * incentive to invest in non-OPEC countries * balancing social, political, and economic objectives
OPEC has been successful in terms of attempting to stabilize supply and price, but member countries often cheat in order to produce more revenues, and outside events like the civil war in Libya can interfere with the group’s objectives.

Part Three
Theories and Institutions: Trade and Investment
Chapter 5
International Trade and Factor Mobility Theory
Laissez-Faire vs. Intervention * Trade theory helps answer * What products should we import and export? * How much should we trade? * With whom should we trade? * Laissez-faire approach * Free trade theories – absolute advantage and comparative advantage * Intervention approach * Mercantilism and neomercantilism
Why do countries trade? Countries trade in order to meet certain economic objectives, but they struggle with questions on what, how much, and with whom they should trade. They need to ensure that their decisions on what to produce make sense from an efficiency standpoint, and whether there are ways to improve competitiveness.
Some countries allow market forces to determine trade relations, others intervene to control the process.
Interventionist Theories * Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) * Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective
To export more than they imported, governments restricted imports and subsidized production that could otherwise not compete in domestic or export markets. Some countries used their colonies to support this trade objective by having them supply commodities that would otherwise have to be purchased from a non-associated country and by running trade surpluses with them as an additional way of obtaining gold. They did this not only by monopolizing colonial trade but also by forcing the colonies to export less highly valued raw materials to them and import more highly valued manufactured products from them.
It is not necessarily beneficial to run a trade surplus nor is it necessarily disadvantageous to run a trade deficit. A country that is running a surplus, or a favorable balance of trade, is, for the time being, importing goods and services of less value than those it is exporting.
In the mercantilist period, the difference was made up by a transfer of gold, but today it is made up by holding the deficit country’s currency or investments denominated in that currency. In effect, the surplus country is granting credit to the deficit country. If that credit cannot eventually buy sufficient goods and services, the so-called favorable trade balance actually may turn out to be disadvantageous for the country with the surplus.
Free Trade Theories * Absolute Advantage * Suggests specialization through free trade because consumers will be better off buying foreign-made products priced more cheaply than domestic ones * Comparative Advantage * Also proposes specialization through free trade based on the belief that total global output can increase even if one country has an absolute advantage in the production of all products
Both theories hold that nations should neither artificially limit imports nor promote exports. The market will determine which producers survive as consumers buy those products that best serve their needs. Both free trade theories imply specialization. Just as individuals and families produce some things that they exchange for things that others produce, national specialization means producing some things for domestic consumption and export while using the export earnings to buy imports of products and services produced abroad.
In 1776, Adam Smith questioned the mercantilists’ assumptions by stating that the real wealth of a country consists of the goods and services available to its citizens rather than its holdings of gold. Smith’s theory of absolute advantage holds that different countries produce some goods more efficiently than others and questions why the citizens of any country should have to buy domestically produced goods when they can buy them more cheaply from abroad. Smith reasoned that if trade were unrestricted, each country would specialize in those products that gave it a competitive advantage. Although Smith believed the marketplace would make the determination, he thought that a country’s advantage would be either natural or acquired. Natural advantage considers climate, natural resources, and labor force availability. Acquired advantage consists of either product or process technology.
Comparative Advantage theory suggests Gains from trade will occur even in a country that has absolute advantage in all products, because the country must give up less efficient output to produce more efficient output. Most economists accept the comparative advantage theory, and it’s influential in promoting policies for freer trade. Nevertheless, many government policymakers, journalists, managers, and workers confuse comparative advantage with absolute advantage and do not understand how a country can simultaneously have a comparative advantage and absolute disadvantage in the production of a given product.

Trade Pattern Theories * Theory of Country Size * Factor-Proportions Theory * Country Similarity Theory * Product Life Cycle Theory * Diamond of National Advantage
Theory Of Country Size * Countries with large land areas are apt to have varied climates and natural resources * They are generally more self-sufficient than smaller countries * Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade
Although land area is the most obvious way of measuring a country’s size, countries can also be compared on the basis of economic size. The world’s top 10 exporters and importers are all developed countries except for China. China, although not a developed country, has a very large economy by virtue of its large population. The 10 countries account for over half the world’s exports and imports.
Factor-Proportions Theory * A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors * Factor costs will determine which goods the country can produce most efficiently * According to the factor proportions theory, factors in relative abundance are cheaper than factors in relative scarcity.
Country-Similarity Theory * Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies * Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them
Specialization and Acquired Advantage: In order to export, a company must provide consumers abroad with an advantage over what they could buy from their domestic producers. Trade occurs because countries specialize to gain acquired advantage—for example, by apportioning their research efforts more strongly to some sectors than to others.
Product Differentiation: Trade also occurs because companies differentiate products, thus creating two-way trade in what seem like similar products. For example, the United States is both a major exporter and a major importer of tourist services, vehicles, and passenger aircraft because different companies from different countries have developed product variations with different appeals.
Effects of Cultural Similarity: Importers and exporters find it easier to do business in countries they perceive as being culturally similar to their home countries, such as those that speak a common language. Likewise, historic colonial relationships explain much of the trade between specific developed and developing economies. For instance, France’s colonial history in Africa has given Air France an edge in serving those former colonies’ international air passenger markets.
Political Relationships and Economic Agreements: Political relationships and economic agreements among countries may discourage or encourage trade between them.
Effects of Distance: The theories regarding country differences and similarities help explain broad world trade patterns, such as those that link developed countries and developing countries, but they do not fully explain specific pairs of trading relationships. Although no single answer does, the geographic distance between two countries accounts for many of these world trade relationships.
Product Life Cycle (PLC) Theory * Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries * Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline
Life Cycle of the International Product
The introduction stage is marked by
• Innovation in response to observed need
• Exporting by the innovative country
• Evolving product characteristics
Growth is characterized by
• Increases in exports by the innovating country
• More competition
• Increased capital intensity
• Some foreign production
Maturity is characterized by
• A decline in exports from the innovating country
• More product standardization
• More capital intensity
• Increased competitiveness of price
• Production start-ups in emerging economies
Decline is characterized by
• A concentration of production in developing countries
• An innovating country becoming a net importer
Limitations: Not all products conform to the dynamics of the PLC.
There are many types of products for which shifts in production location do not usually take place. In these cases, the innovating country may maintain its export ability throughout the product’s life cycle. These exceptions include the following:
• Products with high transport costs may have to be produced close to the market, thus never becoming significant exports.
• Products that, because of very rapid innovation, have extremely short life cycles—a factor that makes it impossible to achieve cost reductions by moving production from one country to another. Some fashion items fit this category.
• Luxury products for which cost is of little concern to the consumer. In fact, production in a developing country may make the product seem less luxurious than it really is.
• Products for which a company can use a differentiation strategy, perhaps through advertising, to maintain consumer demand without competing on the basis of price.
• Products that require nearby specialized technical labor to evolve into their next generation. This seems to explain the long-term U.S. dominance of medical equipment production and German dominance in rotary printing presses.
The Diamond of National Advantage * Four conditions are important for competitive superiority: * demand conditions * factor conditions * related and supporting industries * firm strategy, structure, and rivalry
Diamond of National Advantage
This Figure provides more details on each factor that makes up the diamond of national advantage. Keep in mind though, that the existence of all four factors does not guarantee that an industry will develop, nor is it necessary given globalization. For example, today, because capital and managers are internationally mobile, it may not be necessary to depend on domestic factor conditions. Similarly, thanks to freer trade and advances in transportation, local related and supporting are not as important.
Limitations of the Diamond of National Advantage * Domestic existence of all conditions: * Does not guarantee an industry will develop * Is not necessary with globalization
The existence of the four favorable conditions does not guarantee that an industry will develop in a given locale. Entrepreneurs may face favorable conditions for many different lines of business. In fact, comparative advantage theory holds that resource limitations may cause a country’s companies to avoid competing in some industries even though they may have an absolute advantage.
A second limitation concerns the growth of globalization. The industries on which this theory is premised grew when companies’ access to competitive capabilities was decidedly more domestically focused. We can see how globalization affects each of the four conditions:
1. Observations of foreign or foreign-plus-domestic, rather than just domestic, demand conditions have spurred much of the recent growth in Asian exports. In fact, such Japanese companies as Uniden and Fujitech target their sales almost entirely to foreign markets.
2. Companies and countries are not dependent entirely on domestic factor conditions. For example, capital and managers are now internationally mobile.
3. If related and supporting industries are not available locally, materials and components are now more easily brought in from abroad because of advancements in transportation and the relaxation of import restrictions. In fact, many MNEs now assemble products with parts supplied from a variety of countries.
4. Companies react not only to domestic rivals but also to foreign-based rivals they compete with at home and abroad. Thus the absence of any of the four conditions from the diamond domestically may not inhibit companies and industries from becoming globally competitive.
Factor Mobility Theory
Capital and labor move internationally to:
• Gain more income * Flee adverse political situations
Capital, especially short-term capital, is the most internationally mobile production factor.
Companies and private individuals primarily transfer capital because of differences in expected return (accounting for risk).
Political and economic conditions affect investors’ perceptions of risk and where they prefer to put their capital. At the same time, companies invest long term abroad to tap markets and lower operating costs. However, businesses do not make all the international capital movements.
Governments give foreign aid and loans. Not-for-profit organizations donate money abroad to relieve worrisome economic and social conditions. Individuals remit funds to help their families and friends in foreign countries. Regardless of the donor or motive, the result affects factor endowments.
People are also internationally mobile, but less so than capital. Unlike funds that can be cheaply transferred by wire, people must usually incur high transportation costs to work in another country.
Finally, such people may have to learn another language and adjust to a different culture away from their families and friends who serve as their customary support groups.
Despite the barriers, people endure hardships and risks to move to another country.
Effects of Factor Movements * Factor movements alter factor endowments. * Factor movements are substantial for many countries and insignificant for others. * Although labor and capital are different production factors, they are intertwined. * Pros and cons of outward and inward migration
A controversial issue is the effect on countries of outward migration. On the one hand, countries lose potentially productive resources when educated people leave—a situation known as a brain drain. On the other hand, they may receive money from the people who leave. For example, Ecuador lost almost 5 percent of its population between 1999 and 2001, including 10,000 teachers and many other people with substantial work skills. However, many of these people are now sending remittances back to Ecuador. In fact, remittance flows to all countries for 2007 were estimated at U.S. $337 billion, and the inflows for several countries amounted to more than 15 percent of their GDP.
There is also evidence that the outward movement of people leads to an increase in start-up companies in their home countries. Their remittances increase capital available at home. Further, the immigrants learn abroad and transfer ideas back to their home countries.
Finally, countries receiving productive human resources also incur costs by providing social services and acculturating people to a new language and culture. Further, the unskilled workers who take jobs that native-born workers don’t want—like dishwashing, maintaining grounds, and picking agricultural produce—have children who eventually enter the workforce.
The Relationship between Trade and Factor Mobility * Capital and labor move internationally to gain more income and flee adverse political situations * Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products
When the factor proportions vary widely among countries, pressures exist for the most abundant factors to move to countries with greater scarcity—where they can command a better return.
Similarly, capital tends to move away from countries in which it is abundant to those in which it is scarce. For example, Mexico gets capital from the United States, and the United States gets labor from Mexico. However, as is true of trade, there are restrictions on factor movements that make them only partially mobile internationally—such as both U.S. immigration restrictions that limit the legal and illegal influx of Mexican workers and Mexican ownership restrictions in the petroleum industry that limit U.S. capital movements to invest in that industry.
The lowest costs occur when trade and production factors are both mobile.

Part Five
Global Strategy, Structure, and Implementation
Chapter 6
The Strategy of International Business
The Role of Strategy in International Business
Strategy is the framework that managers apply to determine the competitive moves and business approaches that run the company.
Strategy is management’s idea on how to best:
• Attract customers
• Operate efficiently
• Compete effectively
• Create value
Industry, Strategy ,and Firm Performance * Industry organization paradigm leading strategy perspectives * The exceptions of imperfect competition * The idea of industry structure: The Five Forces Model
An industry is composed of the companies engaged in a particular kind of commercial enterprise.
The IO paradigm presumes that markets demonstrate perfect competition.
Perfect competition presumes:
• Many buyers and sellers such that no individual affects price or quantity
• Perfect information for both producers and consumers
• Few, if any, barriers to market entry and exit
• Full mobility of resources
• Perfect knowledge among firms and buyers
The IO paradigm assumes that firm performance is a function of its conduct, which is ultimately determined by industry factors that shape the corresponding pattern of competition.
Firm conduct refers to the strategic and tactical choices a company makes regarding research and innovation, product strategy, plant investment, pricing behavior, and the like that influence its profitability.
These two anomalies—markets are not always perfectly competitive and some firms consistently outperform industry averages—suggest that industry structure is not entirely deterministic of firm performance. Instead, firm performance is influenced by the presence of bright, motivated managers and their keen sense of innovative products or processes.
The idea of industry structure helps explain the functions, form, and interrelationships among:
• Suppliers of inputs
• Buyers of outputs
• Substitute products
• Potential new entrants
• Rivalry among competing sellers
Industry Change
Industry structure changes because of events like
• Competitors’ moves
• Government policies
• Changes in economics
• Shifting buyer preferences
• Technological developments
• Rate of market growth
New products, new firms, new markets, and new managers trigger new developments in rivalry, pricing, substitutes, buyers, and suppliers. These developments often change a minor feature of the industry, such as the expansion of an existing distribution channel. More recently, changes due to the global economic crisis are resetting the structure of most industries.
Strategy and Value * Strategy helps managers assess the company’s present situation, identify the direction the company should go, and determine how the company will get there. * Creating Value * Cost Leadership * Differentiation
Creating value spurs the firm to develop a compelling value proposition (why a consumer should buy its goods or use its services) that specifies its targeted customer markets (those consumers for whom a firm creates goods or services).
Value is what remains after costs have been deducted from the revenues of a firm. Cost leadership emphasizes high production volumes, low costs, and low prices. Firms that choose this strategy strive to be the low-cost producer in an industry for a given level of quality. This strategy requires that a firm sell its products at the average industry price to earn a profit higher than that of rivals or below the average industry prices to capture market share.
Differentiation spurs the company to provide a unique product that customers value and that rivals find hard, if not impossible, to match or copy.
The Firm as Value Chain * What is the value chain? * Using the value chain * Configuration * Macro Cost Factors * Cluster Effects * Logistics * Digitization * Economies of Scale * Business Environment
The value chain is the set of linked value-creating activities the company performs to design, produce, market, distribute, and support a product. Value-chain analysis helps managers understand the behavior of costs and existing and potential sources of differentiation.
A value chain disaggregates a firm into:
Primary activities that create and deliver the product
Support activities that aid the individuals and groups engaged in primary activities
Value chains identify the format and interactions between different activities of the company.
Configuration is the way in which managers arrange the activities of the value chain.
Manufacturing costs vary from country to country because of wage rates, worker productivity, resource availability, and fiscal and monetary policies.
An industry cluster is a system of businesses and institutions engaged with one another at various levels.
Logistics entails how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper value activity.
The process of digitization involves converting an analog product into a string of zeros and ones. Increasingly, products like software, music, and books, as well as services like call centers, application processing, and financial consolidation, can be digitized and, hence, located virtually anywhere. Equipped with networked computers, workers can move goods and services anywhere in the world at negligible cost and complication. Consequently, the potential for digitization of goods or services influences how a company configures its value chain.
The concept of economies of scale refers to a situation wherein a firm doubles its cumulative output yet total cost less than doubles due to efficiency gains. Effectively, reductions in the unit cost of a product result from the increasing efficiency that comes with larger operations.
Global Integration versus Local Responsiveness * Pressures for Global Integration * Globalization of Markets * Efficiency Gains of Standardization * Pressures for Local Responsiveness * Consumer Divergence * Host Government Policies
Integration is the process of combining differentiated parts into a standardized whole.
Responsiveness is the process of disaggregating a standardized whole into differentiated parts.
The convergence of national markets, standardization of business processes, and the drive to maximize production efficiency push for the integration of value activities. A provocative thesis, increasingly supported by global buying patterns and companies’ strategies, suggests that consumers worldwide seek global products—whether they are Apple iPods, Samsung plasma screens, Facebook connections, Starbucks espressos, Google searches, or Zara blouses. Two conditions—one demand-pull, the other supply-push—influence this trend. Powering demand-pull conditions are the intrinsic functions of money.
Money has three inalienable features:
• difficult to acquire
• scarce
• transient
Global and local pressures challenge how the firm configures and coordinates its value chain. The convergence of national markets and quest for production efficiency push for the global integration of value activities.
Standardization is the handmaiden of globalization, encouraging supply conditions that produce volumes of low-cost, high-quality products. That is, standardization is the push dynamic that drives supply, whereas the globalization of markets represents the pull dynamic that converges consumer preferences. The logic of standardization is straightforward. Repeatedly doing the same task the same way improves the efficiency of effort. Improving efficiency in the value chain, in turn, supports aggressive product development, lower-cost production processes, and lower prices.
Prominent pressures for local responsiveness are consumer divergence and host-government policies.
Contrary to the globalization-of-markets thesis, others argue that divergences in consumer preferences across countries necessitate locally responsive value chains.
Differences in local consumers’ preferences endure due to cultural predisposition, historical legacy, and endemic nationalism. Regardless of the cause, consumers often prefer goods that are sensitive to the particular idiosyncrasies of their daily life. Consequently, cross-national divergence presses MNEs to adapt value activities to the demands of local markets. The source of many variations is the policies, or the lack thereof, mandated by host-country governments. Prior to the economic crisis, companies confronted policy differences as they moved from country to country. However, these differences had been narrowing as capitalism and economic freedom shaped policy in a growing number of countries. Now, in the early phases of the crisis, governments’ distrust of market mechanisms spurs revising the rules of the market. Moreover, despite calls for coordinated policy initiatives, different countries have taken different paths to reset fiscal, monetary, and business policies. Collectively, these trends required companies to rethink their value chains. Constrained options for standardization and wavering momentum of globalization spotlight the sustainability of value chains biased toward local responsiveness.
Managing the Value Chain * Configuration * distributing value chain activities around the world * concentrated * putting all value chain activities in one location * dispersed * performing different value chain activities in different locations * location economies
Multinational companies have to efficiently distribute value activities and link them effectively. This can be done using a concentrated strategy or using a dispersed approach. The goal is to put value activities in the optimal location in the world to exploit location economies - the economies that arise from performing a value activity in the most productive location or locations given prevailing economic, political, legal, and cultural conditions. * When configuring the value, consider * The business environment * Innovation context * Resource costs * Logistics * Digitization * Scale economies
What influences the configuration of the value chain? Several things do including the quality of the business environment, innovation context, resource costs, logistics, digitization, and scale economies.
The business environment can affect the ease of doing business. Generally, it easiest to do business in high income countries.
Innovation context is important because going forward, the pace of innovation accelerates. In fact, the singularity principle suggests that the change will be so fast that it will seem to be expanding at infinite speed.
Resource costs like wage rates, worker productivity, resource availability and so on can also affect the configuration of the value chain.
Logistics refers to how companies obtain, produce, and exchange material and services in the proper place and in proper quantities for the proper activity. Companies try to minimize the expense associated with logistics. * Digitization involves converting an analog product into a string of zeros and ones. Digital activities can be located just about anywhere, and in fact today it’s allowing activities to be dispersed that had always been concentrated in a few locations. X-rays can now be taken in one country and read in another. Similarly, legal services can be outsourced to optimal locations. * Finally, firms want to gain economies of scale where possible. This often requires companies to concentrate the value chain. * The configuration and coordination of a value chain responds to changes in customers, competitors, industries, and environments * Even a well configured and coordinated value chain can become obsolete * So, designing and delivering a strategy should be an ongoing process
Once the value chain is configured and coordinated, it’s time to consider change. Managers need to view the value chain and its configuration as a fluid concept – one that could change at any point depending on the factors that influence it. Some managers are able to anticipate change and adapt accordingly. For others, it’s an ongoing struggle.
Global Integration vs. Local Responsiveness * Firms face two conflicting pressures: * Pressures for global integration * the process of combining differentiated parts into a standardized whole * maximize efficiency * Pressures for local responsiveness * the process of disaggregating a standardized whole into differentiated parts * optimize effectiveness
When firms develop their strategies they face two conflicting pressures. On one hand they have pressure to standardize and concentrate configuration. On the other hand, they face pressure to disperse configuration and adapt coordination.
Pressures for Global Integration * Drivers of global integration * The globalization of markets * Technology helps standardize consumer preferences * Global products have become popular * allows for standardization of product design * The efficiency gains of standardization * Location, scale, and learning effects * WTO supports global standards
When there are strong pressures for global integration, firms will need to concentrate configuration and standardize coordination. The globalization of markets along with the efficiency gains that come with standardization are two main drivers of global integration. Standardization is attractive because of the cost savings it creates for both the firm and the consumer. * Pressure for local responsiveness is driven by * Consumer divergence * cultural predisposition * historical legacy * Nationalism * Host government policies * fiscal, monetary, and business regulations
Despite the benefits of global integration, firms may find that there is considerable pressure to be locally responsive. A major reason to be locally responsive is the need to respond to consumer preferences. Consumers may be willing to pay a premium to get what they really want. In some case, local government policies dictate certain strategies.
Types of Strategy
The international strategy leverages a company’s core competencies in foreign markets. It allows limited local customization.
Benefits of Int’l Strategy:
An international strategy works well when a firm has a core competence that foreign rivals lack and industry conditions do not demand high degrees of global integration or local responsiveness.
Limitations of Int’l Strategy:
Unless aware, the company implementing the international strategy can be blindsided by an unexpectedly innovative rival. Google, for example, faces increasingly adept local rivals in South Korea, specifically Naver, and China, specifically Baidu, whose native sensitivities to local search tendencies pose threats.
The multidomestic strategy adjusts products, services, and business practices to meet the needs of local markets.
Firms applying a multidomestic strategy hold that value-chain design is the prerogative of the local subsidiary, not the unilateral declaration by the home office. Management that chooses the multidomestic strategy believes in customizing value activities to the unique conditions that prevail in different markets.
Benefits (Multidomestic):
A multidomestic strategy makes sense when the company faces a high need for local responsiveness and low need to reduce costs via global integration (the lower right-hand space of the IR grid). It has other benefits as well, such as minimizing political risk given the local standing of the company, lower exchange-rate risk given reduced need to repatriate funds to the home office, greater prestige given its national prominence, higher potential for innovative products from local R&D, and higher growth potential due to entrepreneurial zeal.
Limitations (Multidomestic):
The multidomestic strategy leads to widespread replication of management, design, production, and marketing activities—the outcome of building “mini-me” units around the world. Customizing products and processes to local markets inevitably increases costs. Different product designs require different materials, production runs become shorter, marketing programs are adapted, distribution requires new channels, and different transactions require different coordination methods. Hence, the multidomestic strategy is impractical in cost-sensitive situations.
A global strategy champions worldwide consistency and standardization.
Firms that choose the global strategy face strong pressure for cost reductions but weak pressure for local responsiveness.
Benefits (Global):
Global strategy is suited to industries that emphasize efficient operations and where local responsiveness needs either are nonexistent or can be neutralized by offering a higher-quality product for a lower price than the local substitute.
Limitations (Global):
Countries whose markets demand local responsiveness reduce the attractiveness of the global strategy. More fundamentally, the strength of the global strategy, ironically, is its weakness. The cost sensitivity and standardization bias of a global strategy gives MNEs little latitude to adapt value activities to local conditions. Moreover, disruptive market changes or product breakthroughs can turn a fine-tuned value chain into a misfiring machine.
A transnational strategy simultaneously engages pressures for global integration and local responsiveness in ways that leverage insight to improve the firm’s core competency.
A transnational strategy makes the exchange of ideas across value activities a key element of competitive advantage. The company implementing a transnational strategy aims not to work harder or work smarter than competitors but rather work differently based on diffusing the lessons it has learned and the knowledge it has earned throughout its worldwide operations. Ideas are the primary source of competitiveness for companies implementing a transnational strategy.
Benefits(transnational):
The learning orientation of the transnational strategy drives many benefits—most visibly its fine-tuned balancing of global integration and local responsiveness. The vitality of learning in the transnational strategy pushes managers to respond to changing environments, configuring resources and coordinating processes without imposing more bureaucracy. Ultimately, these capabilities permit standardizing some links of the value chain to generate the efficiencies warranted by global integration pressures, while also adapting other links to meet pressures for local responsiveness—but without sacrificing the benefits of one for the other.
Limitation (transnational):
Transnational strategy, admittedly difficult to even specify in theory, is even more difficult to implement in practice. Limitations arise from complicated agendas, high costs, and cognitive limits.
International Strategy * International strategy * leverage a company’s core competencies into foreign markets * critical elements of the value chain are centralized at headquarters * The strategy works well when * the firm has core competencies that foreign rivals lack * there is low pressure for global integration * there is low pressure for local responsiveness
The international strategy works well when the multinational has a core competency that foreign rivals lack, and pressures for local responsiveness and for global integration are both low. However, because key aspects of the value chain are centralized at headquarters there is little input from foreign markets and opportunities may be missed.
Multidomestic Strategy * Multidomestic strategy * emphasizes responsiveness to the unique circumstances that prevail in a country’s market * value added activities are adapted to local markets * The strategy works well when * there is high pressure for local responsiveness * there is low pressure for global integration The multidomestic strategy makes sense when pressures for local responsiveness are high, and those for global integration are low. Because it involves adapting value added activities to local market conditions, it is a costly strategy to implement.
Global Strategy * Global strategy * make standardized products that are marketed with little adaptation to local conditions * exploit location economies and capture scale economies * The strategy works well when * the MNE is the cost leader * there is low pressure for local responsiveness * there is high pressure for global integration
The global strategy works well when worldwide standardization is possible. This is usually the case for commodities, for example. However, keep in mind that because it emphasizes cost reductions is does not allow for local responsiveness, a situation that can be problematic if market conditions change.
Transnational Strategy * Simultaneously leverages core competencies worldwide, reduces costs by exploiting location economics, and adapts to local conditions * Allows firms to get the best of both worlds, it’s complicated and difficult to implement. * The strategy works well when * global learning and knowledge flows are emphasized * there is high pressure for local responsiveness * there is high pressure for global integration
Companies following a transnational strategy balance the conflicting pressures for local responsiveness with those for global integration. They emphasize global learning and the diffusion of knowledge throughout the organization. Keep in mind that while this strategy seems to allow firms to get the best of both worlds, it’s complicated and difficult to implement.
Future: What’s New in the World of Strategy Types * Evolution of the Multinational Corporation * Visions of the Future * The “Metanational” Company * “Micro-Nationals” * The “Cybercorp” * MNEs go through three phases on the path to becoming a global powerhouse:
1. First there was the nineteenth-century “international model, whereby the company was headquartered both physically and mentally in its home country; it sold goods, when it was so inclined, through a scattering of overseas sales offices.”
2. Phase two of the evolution ushered in the classic, multinational firm of the late twentieth century. This model saw the parent company creating smaller versions of itself in foreign markets. These smaller satellite companies were run by home-nation executives sent from headquarters, who typically had great technical expertise but little cultural fluency and minimal foreign-language competency.
3. The third phase, the “globally integrated enterprise,” is one that builds a company-wide value chain that put people, jobs, and investments anywhere in the world “based on the right cost, the right skills and the right business environment . . . . now work flows to the places where it will be done best, that is, most efficiently and to the highest quality.”
Visions of the future: Others trumpet a world where a dynamic ecology of locations and firms pushes beyond the historic division of local firms versus global companies. This view provides for different types of companies following different types of strategies. In a sense, these companies create a natural ecology that reacts to, and interacts with, their different environments. The diversity of these strategies and companies in this global ecology creates a business world populated by a variety of local firms, regional firms, firms that operate in a few countries or many countries, centralized firms, and networks of firms.
The Metanational Company:
Others see the emergence of a new type of global corporation, the so-called metanational company, which thrives on seeking unique ideas, activities, and insights that complement its existing operations as well as creating leverage points. The metanational company “builds a new kind of competitive advantage by discovering, accessing, mobilizing, and leveraging knowledge from many locations around the world.”
Micro-Nationals:
Although the number of MNEs grows worldwide, their average size is falling—most of the 70,000 or so firms that operate internationally employ less than 250 people. This anomaly signals the era of so-called micro-multinationals: clever, small companies that are born global and operate worldwide from day one. Unlike their bigger counterparts that expanded internationally by gradually entering new markets, micro-multinationals go global immediately.
The Cybercorp:
To this type of MNE, national boundaries no longer organize consumers, locations, markets, or industries. Instead, the cyberspace created by evolving Internet technologies—not the physical geography of lines on a map—defines markets. The cybercorp develops competencies that let it react in real time to changes in its customers, competition, industry, and environment.