INTERNATIONAL BUSINESS STRATEGY AND THE MULTINATIONAL COMPANY

INTERNATIONAL BUSINESS STRATEGY AND THE MULTINATIONAL COMPANY JOHN B. CULLEN Professor in the Department of Management, Washington State University AND K. PRAVEEN PARBOTEEAH Associate Professor in the College of Business, University of Wisconsin, Whitewater

Detailed Contents Part One Introduction to International Business 1 COMPETING IN THE GLOBAL MARKETPLACE 4 The Nature of International Business 7 Globalization: A Dynamic Context for International Business 9 Types of Economies in the Global Marketplace: The Arrived, the Coming, and the Struggling 11 Globalization Drivers 13 Lowering the Barriers of National Borders: Making Trade and Cross-border Investment Easier 14 Locate and Sell Anywhere to Anybody: It's No Longer Only for Manufacturing but Services as Well 15 The Rise of Low-cost Countries: An Increasingly Important Driver of Globalization 19 Information Technology and the Internet: A Necessary Tool for Globally Dispersed Companies 23 Increasingly Global Products, Services, and Customers 24 Can I Buy it in Germany and Use it in Japan? The Need for Global Standards 25 Environmental Sustainability and Responsibility 26 Plan of the Book 27 International Business: A Strategic Approach 28 Chapter Review 29 Discussion Questions 29 Pros and Cons of Globalization 30 Chapter Internet Activity 30 Key Concepts 31 Case 1 McDonald's Sells Hamburgers in India 31 Case Discussion Points 33 2 STRATEGY AND THE MNC 34 Strategic Choices for MNCs 36 Competitive Advantage and the Value Chain 37 Global Integration: Where Can We Do Things Best or Cheapest? 40 The Transnational Strategy 40 International Strategy 42 The Local Responsiveness Strategy: How Far to Go? 44 Multidomestic and Regional Strategies 44 A Brief Summary and Caveat 46 Choosing a Multinational Strategy: How to Solve the Global Local Dilemma 47 Global Markets 48 Do your Customers from Different Countries have Similar Needs? 48 Are There Global Customers? 48 Can You Transfer Marketing Activities to Other Countries? 49 Globalization Cost Drivers 49 Are There Global Economies of Scale? 49 Are There Global Sources of Low-cost Raw Materials or Components? 50 Are There Cheaper Sources of Skilled Labor? 50 Are Product Development Costs High? 50 Governments 50 VIII

Do Many Countries have Favorable Trade Policies for the Industry? 50 Do Many Countries have Regulations that Restrict Operations in the Industry? 51 The Competition 51 What Strategies do your Competitors Use? 51 What is the Volume of Imports and Exports in the Industry? 51 A Caveat 51 How to Make the Transnational or International Choice 52 Company-Situation Analysis and the Multinational Strategy Choice 53 Chapter Review 55 Discussion Questions 56 Identifying the Value-chain and Multinational Strategies 56 Chapter Internet Activity 57 Key Concepts 57 Case 2 Walmart or Carrefour: Who will be Master of Planet Retail? 58 Case Discussion Points 59 Part Two The Global Context of Multinational Competitive Strategy Case 3 Sunshine Farms: Withering since NAFTA 90 Case Discussion Points 91 3 GLOBAL AND REGIONAL ECONOMIC INTEGRATION: AN EVOLVING COMPETITIVE LANDSCAPE 62 Dropping Barriers to World Trade: GATT and the WTO 64 Regional Trade Agreements (RTAs) 70 Are RTAs Friend or Foe to World Trade? 70 Types of Regional Trade Agreements 70 Motivations for Regional Trade Agreements 73 Are Regional Trade Agreements Good for Business? 74 Regional Trade Agreements: A Look Inside 74 European Union 78 History and Organization of the EU 79 North American Free Trade Agreement 83 Governance of NAFTA 83 Asia-Pacific Economic Cooperation 84 Chapter Review 87 Discussion Questions 88 Understanding the WTO Debate 88 Chapter Internet Activity 89 Key Concepts 89 GLOBAL TRADE AND FOREIGN DIRECT INVESTMENT 92 History of Trade Theory 94 Mercantilism: Early Thinking 94 Foundations of Modern Trade Theory 97 Absolute Advantage: The World According to Adam Smith 97 Comparative Advantage: The World According to David Ricardo 99 Comparative Advantage and Production Gains 100 Comparative Advantage and Consumption Gains 101 The Heckscher-Ohlin Theory and the Role of Factor Endowments 102 The Leontief Paradox 104 Updating the HO Theory 104 Other Views of Trade 106 The Product Life Cycle: A Technology Innovation View 106 New Trade Theory 109 Michael Porter and the Competitive Advantage of Nations 110 IX

Firm Strategy, Structure, and Rivalry 110 Related and Supporting Industries 111 Demand Conditions 112 Factor Endowments 112 Evaluating Trade Theories: What Do They Tell Us? 113 Arguments against Free Trade 115 Free Trade as a Threat to National Sovereignty 115 Protecting Infant Industries 115 Fair Trade 116 Protecting the Environment 116 Job Loss 116 Foreign Direct Investment 118 Chapter Review 121 Discussion Questions 123 A Simulation of International Trade 123 Chapter Internet Activity 124 Key Concepts 124 Case 4 Levi Strauss & Company: No Longer "Made in the USA" 125 Case Discussion Points 127 FOREIGN EXCHANGE MARKETS 128 What is the Foreign Exchange Market? 130 Types of Foreign Exchange Transactions 133 The History of Exchange-rate Systems 134 The Gold Standard 134 The Bretton Woods Agreement 135 Other Currency Exchange-rate Systems 136 What Determines Exchange Rates 138 Purchasing Power Parity 138 Market Factors 141 Effects of Other Factors on Exchange Rates 143 Inflation 143 Relative Interest Rates 143 Income Levels 144 Government Controls 144 Exchange-rate Risks and Hedging 145 Foreign Exchange Arbitrage 148 Chapter Review 149 Discussion Questions 150 Formulating a Hedging Strategy 150 Chapter Internet Activity 151 Key Concepts 151 Case 5 Trading Pesos for Greenbacks: The Dollarization of San Miguel 152 Case Discussion Points 153 GLOBAL CAPITAL MARKETS 154 What are Capital Markets? 156 The Bond Market 157 The Stock Market 158 Global Financial Markets 159 Global Banking 159 The International Bond Market 161 Global Stock (Equity) Market 163 An Alternative Way to List on a Foreign Exchange 164 A Changing Future for the World's Stock Markets 169 Chapter Review 171 Discussion Questions 172 Understanding how Stock Markets Work 172 Chapter Internet Activity 172 Key Concepts 173 Case 6 Wall Street or Great Wall? The Challenge to Maintain Dominance in the Global Financial Markets 173 Case Discussion Points 175 X

Part Three The Institutional and Cultural Context of Multinational Competitive Strategy 7 CULTURE AND INTERNATIONAL BUSINESS 178 National Culture 180 National Culture Components 180 National Culture: Hofstede and the Global Organizational Behavior and Leadership Studies 182 Hofstede's Model of National Culture 182 The Global Leadership and Organizational Behavior Studies Model of Culture 189 National Culture and Business Culture 196 National Culture: Some Cautions and Caveats 199 National Culture: Cross-cultural Training 201 Culture Training Methods 202 Culture Training: Best Practices 204 Chapter Review 205 Discussion Questions 205 Designing a Cross-cultural Training Program 206 Chapter Internet Activity 206 Key Concepts 206 Case 7 Trying to Do Business in Mexico, Gringo Style 207 Case Discussion Points 211 THE STRATEGIC IMPLICATIONS OF ECONOMIC, LEGAL, AND RELIGIOUS INSTITUTIONS FOR INTERNATIONAL BUSINESS 212 Social Institutions 214 Economic Systems 215 Types of Economic Systems 216 International Business Implications of Economic Systems 216 Legal Systems 220 Types of Legal Systems 221 Other Aspects of the Legal Environment: The "Doing Business" Project 222 Political Risk 226 Religion 229 Buddhism 229 Christianity 230 Hinduism 231 Islam 232 Judaism 234 Confucianism 234 Chapter Review 235 Discussion Questions 236 Where to Start a Business? 236 Chapter Internet Activity 237 Key Concepts 237 Case 8 Tonia Motorbikes: Chinese Piracy 238 Case Discussion Points 239 XI

Part Four Multinational Operational and Functional Strategies ENTRY STRATEGIES FOR MNCS 242 MNC Entry Strategies 244 Exporting 244 Active Export Strategies 245 Which Way to Go Passive or Direct? 248 Licensing and Franchising 249 International Franchising: A Special Licensing Agreement 249 When to Choose a Licensing Entry Strategy 251 The Product 251 Characteristics of the Target Country 252 The Nature of the Company 252 When to Choose Franchising 253 Some Disadvantages of Licensing and Franchising 253 International Strategic Alliances 254 When to Choose Strategic Alliances 256 The Local Partner's Knowledge of their Market 256 Local Government Regulations and Requirements 256 Sharing Risks among Partners 257 Sharing Technology 257 Economies of Scale 257 Foreign Direct Investment 257 FDI Advantages and Disadvantages 261 Selecting the Entry Strategy: Some General Strategic Considerations 263 Strategic Intent 263 Company Capabilities 263 Local Government Regulations 264 Target Market and Product Characteristics 264 Cultural and Geographic Distance 264 Political and Financial Risk of the Investment 265 Need for Control 265 Entry Strategies and Multinational Strategies 267 Chapter Review 269 Discussion Questions 270 Identifying the Value-chain Activities and Entry Strategies 270 Chapter Internet Activity 271 Key Concepts 271 Case 9 Moonbeam Electronics: Profiting from a Foreign Trade Zone 272 Case Discussion Points 273 10 INTERNATIONAL MARKETING AND SUPPLY-CHAIN MANAGEMENT FOR MNCS 274 Market Research The Knowledge Advantage 276 Understanding Global Demand Segmentation 279 Products and Brands Global or Local? 280 Global and Local Branding 281 Delivering Products across the Globe Distribution and Supply Chains 286 Retailing in Global Markets 286 Wholesaling in Global Markets 289 Global Supply-chain Management 289 Pricing Global or Local? 293 Talking to Customers across the Globe Marketing Communications 295 Chapter Review 301 Discussion Questions 302 Test Your Cross-cultural Advertisements 303 Chapter Internet Activity 303 Key Concepts 304 Case 10 Frito-Lay Adapts to the Chinese Market 305 Case Discussion Points 307 XII

D E T A I L E D C O N T E N T S.1 11 FINANCIAL MANAGEMENT FOR MNCS 308 The Cost of Capital and Project Valuation 312 MNC Capital Structure 315 Cost of Capital for the MNC 316 Access to International Capital Markets 316 International Diversification 318 Exchange-rate Risk Exposure 318 Country Risk 318 How MNCs Decide on the Mixture of Debt and Equity in their Capital Structure 319 Company Factors 319 Country Factors 320 Financing International Trade 322 Methods of Payments in International Trade 322 Cash-in-advance 322 Letters of Credit 322 Documentary Collections 325 Open Account 325 Export Financing 325 Working Capital Financing 325 Export Factoring 326 Forfaiting 327 Chapter Review 327 Discussion Questions 328 Making NPV Decisions 328 Chapter Internet Activity 328 Key Concepts 328 Case 11 Wilson International: International Capital Budgeting 330 Case Discussion Points 331 12 ACCOUNTING FOR MULTINATIONAL OPERATIONS 332 Why do Nations have Different Accounting Systems? 334 National Culture 334 Social Institutions 335 The Nature of Capital Markets 336 The Type of Tax Reporting 336 The Legal System and Levels of Enforcement of Regulations 336 The Types of Businesses 337 The Status of the Accounting Profession and Accounting Education 337 Economic and Political Ties with Other Nations 337 Types of National Accounting Systems 337 Harmonization 338 Setting International Accounting Standards 338 Why are the International Accounting and Financial Reporting Standards Important for International Business? 342 Accounting for Exchange Rates 343 Foreign Currency Transactions 343 Foreign Currency Translation 344 Foreign Currency Translation Rules for US Firms and for International Accounting Standards 345 Major International Managerial Accounting Issues: Transfer Pricing and International Taxation 347 Transfer Pricing 348 Why have Transfer Pricing? 348 Factors Affecting Transfer Pricing 348 International Taxation 349 Tax Planning Strategies for the MNC 350 Social Responsibility Reporting and Accounting 352 Chapter Review 354 Discussion Questions 355 Exploring Accounting Standards 356 Chapter Internet Activity 356 Key Concepts 357 Case 12 "Baa"st Transfer Price 357 Case Discussion Points 361 Appendix: A Primer on Accounting Statements 362 Balance Sheets 362 Income Statements 363 Earnings Per Share or EPS 364 Cash Flow Statements 364 XII

D E T A I L E D C O N T E N T S 13 ORGANIZATIONAL STRUCTURES FOR MNCS 366 Organizational Design: Challenges, Forms and Basic Designs 368 The Functions of Organizational Design 368 Organizational Designs for Multinationals 370 The Export Department 370 The International Division 372 Worldwide Geographic Structure 373 Worldwide Product Structure 374 The Matrix and the Transnational Network Structure 376 Choosing the Appropriate Structure: Strategy and Structure 379 Coordination Mechanisms 380 Coordination and Integration 381 Teams 383 Global Virtual Teams 384 Knowledge Management 385 Chapter Review 389 Discussion Questions 390 Building a Knowledge Management System 390 Chapter Internet Activity 391 Key Concepts 391 Case 13 Airbus: Trouble Getting the A380 Off the Ground 392 Case Discussion Points 393 14 INTERNATIONAL HUMAN RESOURCE MANAGEMENT 394 International Human Resource Management: The International Setting 396 Recruitment and Selection 396 Training and Development 401 Performance Appraisal 403 Compensation 404 Labor Relations 406 Expatriates 409 Cost of Expatriates 410 Expatriate Failure 411 Ensuring Expatriate Success 412 The Future: Women Expatriates? 415 Chapter Review 417 Discussion Questions 418 Choosing a Plant Location 418 Chapter Internet Activity 419 Key Concepts 419 Case 14 India: The Employment Black Hole? 420 Case Discussion Points 423 15 E-COMMERCE AND THE MNC 424 E-commerce: Definitions, Types, and Importance 426 Internet and E-commerce Structure 428 E-Commerce and Globalization 429 Global E-commerce Opportunities and Threats 432 Key Cross-cultural and Global E-commerce Issues 433 Cross-cultural E-commerce Adoption and Diffusion 433 Cross-cultural Consumer Trust in E- commerce 435 Cross-cultural Web Design 436 Building a Successful Global E-commerce Strategy 438 Important Aspects of a Successful E-commerce Strategy 438 Cyber and E-commerce Security 441 Chapter Review 444 Discussion Questions 445 Designing an International Website 445 Chapter Internet Activity 446 Key Concepts 446 Case 15 E-cash: Global Currency? 446 Case Discussion Points 447 XIV

Part Five Ethical Management in the International Context 16 MANAGING ETHICAL AND SOCIAL RESPONSIBILITY IN AN MNC 450 International Ethics and Social Responsibility 452 Key Global Ethics Issues 454 Labor Rights 454 Environmental Pollution 456 Corruption and Bribery 457 Dealing with Global Ethics 462 Multinational Approach to Global Ethics: Ethical Relativism vs Ethical Universalism 462 Pressures Supporting Ethical Universalism 463 Building the Socially Responsible Company 464 Stakeholder Analysis 464 Code of Conduct 466 Successful Implementation of Codes of Conduct 468 Ethics Monitoring and Enforcement 469 Other Key Elements of the Successful Socially Responsible Multinational 470 Chapter Review 472 Discussion Questions 472 Determining Key Areas of Corporate Social Responsibility 473 Chapter Internet Activity 473 Key Concepts 473 Case 16 Mighty-Mart's Contract Manufacturing Issues 474 Case Discussion Points 476 XV