GLOBAL BUSINESS TODAY 12TH EDITION BY CHARLES W.L. HILL INSTRUCTORS SOLUTION MANUAL by QuentinAxel

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Instructor Manual For Global Business Today, 12th Edition Hill Chapter 1-17 Chapter 1: Globalization Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Detroit Bikes Introduction What Is Globalization? Did You Know Video Clip: Did You Know? Trade Tripled for the United States as a Percentage of GDP

The Emergence of Global Institutions Drivers of Globalization Role of Technological Change The Changing Demographics of the Global Economy The Globalization Debate Managing in the Global Marketplace End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: How the iPhone Is Made: Apple‘s Global Production System

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 1-1 Understand what is meant by the term globalization. 1-2 Recognize the main drivers of globalization. 1-3 Describe the changing nature of the global economy. 1-4 Explain the main arguments in the debate over the impact of globalization. 1-5 Understand how the process of globalization is creating opportunities and challenges for management practice.

Chapter Summary This opening chapter introduces the reader to the concepts of globalization and international trade and provides an introduction to the major issues that underlie these topics. The components of globalization are discussed, along with the drivers of globalization and the role of the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO) in lowering trade barriers. The influence of technological change in facilitating globalization is also discussed, along with the role of multinational firms in international business. The chapter also describes the changing demographics of the global economy, with a special emphasis on the increasingly important role of developing countries, especially China, in world trade. This discussion is complemented by a description of the changing world order, which was brought on by the collapse of communism in Eastern Europe and republics of the former Soviet Union. The chapter ends with a candid overview of the pros and cons of the trend towards globalization.

Chapter Opening Activity Conduct this activity during the first week of class, as an icebreaker. After students introduce themselves, ask them what their aspirant professional job will be after graduation. Organize the responses into groups on the whiteboard: accountants, supply chain managers, ERP managers, business owner or entrepreneur, marketing and sales reps, etc. Then, ask what additional skills they will need to do those jobs with international customers, suppliers, and co-workers. The idea is to help students understand they are unlikely to be successful unless they understand globalization and develop cultural competencies. Skills they might name include: comfortable with rapid change; can understand national cultural differences; can work in diverse cultures; can adapt to diverse management, leadership, and participation styles; can understand differences in intercultural communication; can build relationships, be a lifelong learner, and others.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Chapter Outline

Detroit Bikes opening case Summary The opening case explores the globalization of the bike industry. In the 1970s, the United States produced some 15 million bikes every year. Bike 2018 however, about 95 percent of the bikes sold in the United States were assembled in China. China also produced much of the industry‘s bike components, leaving U.S. bike companies to focus on design and marketing. In 2013, Detroit Bikes set out to change this trend and bring bike production back to the United States. This strategy has proved to be challenging, and even more difficult following Donald Trump‘s trade war with China which targeted bike parts among other products for hefty tariffs. Detroit Bikes remains optimistic that its dream of American-made bikes will succeed, but for now, is pursuing a patchwork of strategic initiatives including importing parts from Vietnam and Taiwan to Canada, where the bikes would be assembled prior to shipping them to the United States. Discussion Questions 1. Discuss globalization and how the bike industry epitomizes the phenomenon. How has globalization, and specifically the globalization of markets and production, changed the nature of the U.S. industry? Globalization refers to a world where cultural differences between countries are disappearing, barriers to cross-border trade and investment are decreasing, communication and technology are rapidly advancing, and national economies are becoming globally integrated systems. In short, globalization suggests a more integrated and interdependent world economy. For the U.S. bike industry, globalization means that much of the industry has moved to Asia, and especially to China. Nearly every aspect of bike production, from sourcing of parts like tires and seats, to final assembly, now takes part in China. Indeed, U.S. companies looking to produce their product in the United States will find it difficult to acquire locally made parts and also labor skilled in bike production. At the same time, because labor costs are so much lower in China, consumers benefit from lower prices on imported bike. Paradoxically, this also means that a U.S. company like Detroit Bikes, that manages to produce its product domestically, will likely be less competitive, at least on price. Some students might note that because much of the world‘s bike production takes place in Asia, disruptions to the global supply chain associated with the COVID-19 pandemic have been especially vexing for retailers, producers, and consumers. 2. How has U.S. trade policy impacted Detroit Bikes? What does it mean for consumers? What does it mean for the workforce at Detroit Bikes? A country‘s trade policy can often have unintended implications for companies. Bikes and bike parts were among the many products affected by Donald Trump‘s ongoing trade dispute with China. And, while the policy was almost certainly not intended to hurt the domestic industry, in

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

fact, the tariffs effectively raised prices for Detroit Bikes and also for consumers. To get around the tariffs, Detroit Bikes has considered moving its production to Canada. This strategy, of course, would have a direct impact on its U.S. workforce and could also have local spillover effects. Moving production and assembly to Canada could be beneficial for consumers though, who would likely enjoy lower prices as well as more choice. Teaching Tip: To extend the discussion, consider https://www.cnbc.com/2014/08/01/inwaterloo-wisconsin-a-passion-for-made-in-usa-bicycles.html.

CONNECT Case Analysis Detroit Bikes Summary This activity focuses on globalization as it relates to the bike industry. In 2013, Detroit Bikes set out to reclaim bike production as an American activity. The task has proved to be much more difficult than anticipated, and challenges like the 25 percent tariffs on imported bike parts, imposed as part of Trump‘s trade war with China, have forced the company to rethink its strategy. Activity Students are asked to read a short case exploring the challenges faced by Detroit Bikes in its quest to produce its product in the United States and then respond to a series of questions related to the case. Class Discussion Globalization has transformed some industries like bicycle production. Discuss why bike production moved to China, and why China has a competitive edge, not only in assembling bikes, but also in producing bike parts. Can Detroit Bikes produce a competitive product in the United States? How might the globalization of production and markets benefit Detroit Bikes in its endeavor? How might globalization be problematic?

Introduction A) Globalization refers to the trend towards a more integrated global economic system where barriers to cross-border trade and investment are declining, perceived distance is shrinking thanks to advances in transportation and telecommunications, and material cultures are more similar across borders. B) The effects of globalization can be seen everywhere, from the cars people drive and the food they eat to the jobs they have and the clothes they wear.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Lecture Note: To extend this discussion, consider http://review.chicagobooth.edu/economics/2018/article/globalization-close-its-holy-cow-moment and https://hbr.org/2017/07/globalization-in-the-age-of-trump. The first provides an alternative perspective of globalization and in particular, the role of services. The second explores globalization under the Trump Administration. Lecture Note: The U.S. Census Bureau offers an extensive website that maintains, among other things, monthly statistics on trade between the United States and its trading partners: https://www.census.gov/foreign-trade/index.html. Teaching Tip: Having a global mindset is becoming an important variable in the hiring selection process at some companies. Ask your students what it means to have a global mindset. Then, ask students to think about where they stand on the global mindset tips provided in https://trainingindustry.com/articles/strategy-alignment-and-planning/5-ways-to-develop-aglobal-mindset.

What Is Globalization? A) Globalization refers to the shift towards a more integrated and interdependent world economy. Video Note: To explore globalization from the perspective of Volvo‘s global strategy, consider Volvo Cars: CEO: It’s Important to Build Cars in the U.S. in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. THE GLOBALIZATION OF MARKETS B) The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace in which the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. The global acceptance of Coca-Cola, Citigroup credit cards, IKEA furniture, and McDonald's hamburgers are all examples. Firms, large and small, not only benefit from the globalization of markets, but they also, by offering the same basic products worldwide, facilitate the trend. C) Yet there are still significant differences between markets that frequently require that marketing strategies, product features, and operating practices be customized for a country. In fact, most global markets are for industrial goods and materials that serve a universal need around the world like microprocessors, rather than for consumer products. In many industries, there is no such thing as a ―German market‖ or an ―American market,‖ there is only a global market.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Video Note: To explore the role of globalization and global markets, consider Starbucks CEO Howard Schultz on First Roastery in Italy in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. THE GLOBALIZATION OF PRODUCTION D) The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as land, labor, capital, and energy), thereby allowing them to compete more effectively against their rivals. Video Note: To explore the role of globalization and the globalization of production, consider Was Your T-Shirt Made in North Korea? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Did You Know? Video Clip The video clip asks: Did you know that trade tripled for the United States as a percentage of GDP? Discussion Questions 1. What are the benefits of global production for Boeing? Do you see any risks with this strategy? The decision by Boeing to outsource some 65 percent of its 787 aircraft is a stark contrast to the strategy it used when building its 737 and 747 aircraft. Those planes were largely built in the United States. For the 787 however, Boeing kept key activities such as design and marketing in the United States, and then worked with 50 suppliers located around the world for much of the aircraft’s production. For Boeing the strategy meant lower costs and higher value, but it also meant greater risk as control over the operation was ceded to outside companies. 2. Roughly two-thirds of the value of Boeing‘s 787 aircraft is outsourced to companies around the world. Is Boeing still an American company? While Boeing outsources a significant percentage of the value of its 787 aircraft to companies in other countries, critical activities such as design, final assembly, an engineering remain in the United States. This would suggest that Boeing is indeed an American company. That being said, it 787 aircraft could be labeled an international product. 3. What role to companies, like Boeing, that outsource production play in the increase in trade as a percentage of GDP? What are the benefits to companies of outsourcing production? Much of the increase in global trade has been driven by companies that outsource production to places China and Mexico. Outsourcing allows companies to capitalize on lower cost labor,

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

thereby increasing profits, as well as increase efficiency. Because this type of strategy involves exporting and importing parts and finished products, trade between nations is increased.

management FOCUS: Boeing‘s Global Production System Summary The feature explores U.S. aircraft manufacturer Boeing‘s approach to the production of its Dreamliner 787 airplane. Boeing‘s strategy was unlike any of its previous strategies. Instead of producing much of the aircraft itself, Boeing, noting that 80 percent of its customers were foreign airlines, decided to outsource some 65 percent of the value of the Dreamliner to suppliers located around the world. This strategy introduced several challenges for Boeing, and production of the 787 was delayed by four years. Discussion Questions Please see Critical Thinking and Discussion Question #7 for discussion of this feature. Teaching Tip: To learn more about Boeing, go to http://www.boeing.com. Video Note: To extend the discussion on Boeing consider How the Boeing Max Became Boeing’s Fastest Selling Plane in the International Business Library at http://bit.ly/MHEIBVideo.

The Emergence of Global Institutions A) Over the last half-century, several global institutions have been created to help manage, regulate, and police the global marketplace, as well as to promote the establishment of multinational treaties to govern the global business system. The World Trade Organization (WTO), like its predecessor the General Agreement on Tariffs and Trade (GATT), is responsible for policing the world trading system and making sure that nations adhere to the rules established in WTO treaties. As of 2020, the 164 nations that account for about 98 percent of world trade were all members of the WTO. The International Monetary Fund (IMF) maintains order in the international monetary system while the World Bank promotes economic development. The United Nations (UN) maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems, promotes respect for human rights, and is a center for harmonizing the actions of nations. CONNECT Click and Drag Global Institutions

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Summary This activity focuses on the global institutions that shape the international business system. Countries have established these institutions to address the global issues that span their borders. The functions of these organizations have been established in international treaties. International businesses need to be aware of the functions of these organizations as they can have a profound impact on trade and commerce. Activity Students are asked to match various global institutions to the functions they perform. Class Discussion Global institutions are essential to international business and the movement of goods, services, and capital between nations. Discuss each institution and the role it plays in facilitating international business.

Drivers of Globalization A) Two macro factors seem to underlie the trend toward greater globalization. First, the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II; and second, technological change. Dramatic technological change in recent decades has brought about advances in communication, information processing, and transportation. DECLINING TRADE AND INVESTMENT BARRIERS B) International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, nations negotiated even further decreases in tariffs and made significant progress on several non-tariff issues (e.g. intellectual property, trade in services). With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws. Teaching Tip: A comprehensive overview of GATT is available at http://www.ciesin.org/TG/PI/TRADE/gatt.html. Teaching Tip: The World Trade Organization maintains an excellent website at http://www.wto.org. This site provides information about recent trade disputes, "hot" areas of international trade, and the status of current talks. Teaching Tip: To extend this discussion and to explore the impact of U.S. trade policy under Donald Trump, go to https://www.bloomberg.com/news/articles/2018-08-13/trump-s-tradetirade-can-t-slow-this-booming-canadian-port.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Video Note: To explore the idea of global trade without U.S. leadership, consider Global Trade Without U.S. Leadership Does Donald Trump Care? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. C) This removal of barriers to trade has taken place in conjunction with increased international trade, world output, and foreign direct investment. D) Between 1960 and 2019 the value of the world economy (adjusted for inflation) increased 9.4 times, while the value of international trade in merchandised goods increased 21.4 times. By 2019, the value of world trade in merchandised goods was 19.5 trillion, while the value of trade in services was $6 trillion. E) The success of the efforts by GATT and WTO to reduce barriers to trade has been supplemented by bilateral and regional trade agreements. The number of such agreements has increased from fewer than 50 in the early 1990s, to some 300 today. Similarly, the value of FDI has grown significantly over the last 30 years. In 1990, about $244 billion in foreign investment was made by enterprises. By 2019, that figure had increased to $1.5 trillion. F) The growing integration of the world economy into a single, huge marketplace is increasing the intensity of competition in a range of manufacturing and service industries, often prompting demands for protection from foreign competition. While it is unlikely that these calls will result in a return to the era of high barriers to trade and investment, the election of Donald Trump is representative of a move by some toward a more isolationist agenda. G) In 2020, global supply chains were hit hard by the COVID-19 global pandemic. Many firms are now rethinking their production strategies and whether moving them closer to home could help avoid future disruptions. Should this become the trend, globalization will slow. H) Predictions from the World Trade Organization are that cross border investment may fall by as much as 40 percent in the wake of the COVID-19 pandemic. ROLE OF TECHNOLOGICAL CHANGE I) While the lowering of trade barriers made globalization of markets and production a theoretical possibility, technological change made it a tangible reality. Communications J) Since the end of World War II, there have been major advances in communications and information processing. K) Moore’s Law predicts the power of microprocessor technology doubles and its cost of production falls in half every 18 months. As this happens, the cost of global communication plummets, lowering the cost of coordinating and controlling a global organization. The Internet L) The Internet, which has experienced explosive growth worldwide, promises to continue to develop as the information backbone of tomorrow's global economy. The Internet effectively

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

allows its 4.5 billion users in 2019 to find each other. For business, it can be a goldmine. In the United States, online retail sales were about $600 billion in 2019, while global e-commerce sales surpassed $3.5 trillion. Transportation Technology M) In addition to these developments, several major innovations in transportation technology have occurred since World War II. In economic terms, the most important are probably the development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies transshipment from one mode of transport to another. Implications for the Globalization of Production N) Due to technological innovations, the real costs of information processing and communication have fallen dramatically over the past two decades. These developments make it possible for a firm to create and then manage a globally dispersed production system, further facilitating the globalization of production. A worldwide communications network has become essential for many international businesses. Implications for the Globalization of Markets O) As a consequence of these trends, a manager in today's firm operates in an environment that offers more opportunities but is also more complex and competitive than that faced a generation ago. While there has been some convergence of consumer tastes and preferences between markets (a global culture), firms must still address differences between countries. CONNECT Click and Drag Drivers of Globalization Summary This activity focuses on the drivers of globalization. Two major factors are driving globalization: the decline in barriers to the free flow of goods, services, and capital; and technological change. Business has fueled these trends and has been the beneficiary of these trends. Activity Students are asked to match driving forces and their implications for business. Class Discussion It is essential that international businesses understand what‘s driving globalization and its implications for their organization. Ask students to discuss the drivers of globalization as they relate to various types of international businesses.

The Changing Demographics of the Global Economy A) As late as the 1960s, four facts described the demographics of the economy. The first was the U.S. dominance in the world economy and the world trade picture. The second was U.S. dominance in world foreign direct investment. The third fact was the dominance of large, multinational U.S. firms on the international business scene. The fourth was that roughly half of Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

the globe—the centrally planned economies of the Communist world—was off limits to Western international business. THE CHANGING WORLD OUTPUT AND THE CHANGING WORLD TRADE PICTURE B) In the early 1960s, the U.S. was still by far the world's dominant industrial power. In 1960, for example, the U.S. accounted for 38.3 percent of world manufacturing output. By 2018, the United States accounted for only 24 percent. This decline in the U.S. position was not an absolute decline, rather, it was a relative decline, reflecting the faster economic growth of several other economies, most notably those in Asia. China, now the world‘s largest economy, is responsible for 15.2 percent of world output. Video Note: To explore how a trade war between the United States and China could hurt emerging economies in Asia, consider Why a U.S. – China Trade War Could Hurt Asia in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes and discussion questions for this video. C) If we look into the future, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China, Russia, India, Indonesia, Thailand, Mexico, Brazil, and South Korea, and a commensurate decline in the share enjoyed by rich industrialized countries such as Great Britain, Germany, Japan, and the United States. For international companies, these trends suggest that future economic opportunities may be greater in developing nations, and that new competitors are likely to emerge from these countries. CONNECT Click and Drag Demographics of the Global Economy Summary This activity explores the demographics of the global economy. Four factors have played a central role in the changing demographics of the global economy since 1960. They are U.S. dominance in the world economy, U.S. dominance in world foreign direct investment, dominance of large multinational U.S. firms, and lack of trade with centrally planned economies. Activity Students are asked to match various issues with the descriptors of change. Class Discussion Changes in the demographics of the global economy have important implications for international companies. Discuss the changes, why they are happening, and what they mean for international organizations.

country FOCUS: India‘s Software Sector

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Summary This feature explores the growth of India‘s software industry. Starting from nothing just twentyfive years ago, Infosys Technologies now generates revenues of $10.2 billion and exports of more than $100 billion. India‘s growth in the software sector is based on its abundant supply of engineers, low labor costs, India‘s fluency in English, and time differences between India and the U.S. As Indian firms have done more business with large U.S. firms, U.S. firms have begun investing in their own Indian operations. Discussion Questions 1. What factors have contributed to the growth of India‘s software industry? In your opinion, is the growth of India‘s software sector a reflection of the growth of the overall economy or is the growth of the software sector prompting the growth of the entire economy? Four key factors have contributed to the growth of India‘s software industry. First is the huge number of engineers in India. Some 400,000 engineers graduate from Indian universities every year. A second factor is India‘s low wage structure. Indian engineers make about 12 percent of what an American colleague might make. Third, coordination between Western firms and Indian firms is facilitated by the large number of English-speaking Indians. Finally, because of the differences in time zones, Indian firms operate while American firms are closed. Many students will probably suggest that without these contributing factors, growth in the software sector would have almost certainly been more limited. 2. How has India‘s software industry changed in recent years? What are the implications of these changes for American companies like IBM and Microsoft? There has been a gradual shift in the Indian software industry in recent years. Initially, Indian firms focused on the low end of the industry to supply basic software development and testing services to Western firms. Today, however, many companies have moved into higher end services to compete for large software development projects, business outsourcing contracts, and information technology consulting services. This new competitive threat is forcing American firms like IBM and EDS to rethink their global strategies. Some Western companies are now investing in India with the goal of capturing some of the cost advantages Indian companies like Infosys Technologies enjoy. Lecture Note: India‘s smartphone industry is growing rapidly and Samsung is just one company that is looking to capitalize on this growth. To learn more, go to https://www.bloomberg.com/news/articles/2018-07-09/world-s-largest-mobile-phone-factoryset-to-open-in-india.

THE CHANGING FOREIGN DIRECT INVESTMENT PICTURE E) As shown in Figure 1.2 in the textbook, the share of total foreign direct investment stock for developed economies such as the United States and the United Kingdom has declined since 1995. Meanwhile, the same statistic indicates a considerable increase in developing economies. Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

F) As shown in Figure 1.3, this trend is mirrored in FDI flows. However, fluctuations appear in the total amount of foreign direct investment inflows due to economic factors. THE CHANGING NATURE OF THE MULTINATIONAL ENTERPRISE G) A multinational enterprise is any business that has productive activities in two or more countries. Non-U.S. Multinationals H) In the 1960s, large U.S. multinationals dominated the global business environment, accounting for about two-thirds of all foreign direct investment. The globalization of the world economy has resulted in a relative decline in the dominance of U.S. firms as well as firms from other developed countries. Today, just over a quarter of the top 2,000 global firms are U.S. multinationals, while at the same time, powerful global competitors have emerged from developing nations. Looking to the future, we can reasonably expect the growth of new multinational enterprises (any business that has productive activities in two or more countries) from the world's developing nations.

management FOCUS: The Dalian Wanda Group Summary This feature examines the expansion of the Dalian Wanda Group from its beginning in 1988. Originating in China, the company is well-known within the country as an important real estate developer. In 2012, Dalian Wanda expanded by purchasing the cinema chain AMC Entertainment Holdings in the United States. This expansion continued in 2015 with the acquisition of an Australian cinema operator, as well. With properties in Los Angeles, Chicago, Spain, and London, Dalian Wanda's goal is to have assets of $200 billion, revenues of $100 billion, and net profits of $10 billion by 2020. Discussion Questions 1. How has Dalian Wanda Group established itself in its home market of China? In other words, what is the company best known for? The company has had much success with five-star hotels as it is the largest owner of this hotel category. In addition, with activities in the film, sports, tourism, and children's entertainment industries, Dalian Wanda Group is well-positioned within China to expand internationally based on the experiences developed thus far. 2. Why has Dalian Wanda Group expanded internationally at such a fast rate? How do the acquisitions made fit into the company's strategy overall? Dalian Wanda Group has identified that it aims to have assets of $200 billion, revenues of $100 billion, and net profits of $10 billion by 2020. One approach to accomplish this is to expand internationally based on the skills the company has developed thus far. Since its core

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

competencies include real estate development focusing on the film industry, in particular, Dalian Wanda Group saw the opportunity to negotiate better distribution terms with movie studios after its purchase of cinemas in the United States and Australia. Because of these and other expansions, the actions discussed assist the company to reach its goals for assets, revenues, and net profits. Teaching Tip: To learn more about Wanda Group go to http://www.wanda-group.com. Lecture Note: Wanda Group‘s plans to continue to expand into the U.S. market may soon be going on hold. To learn more and extend the discussion of this feature, go to http://www.bloomberg.com/news/articles/2016-01-12/china-s-richest-man-to-buy-godzillaproducer-for-3-5-billion and https://www.reuters.com/article/us-dalian-wanda-results/chinasdalian-wanda-group-says-2017-revenue-down-10-8-percent-on-asset-sales-idUSKBN1F90G5.

The Rise of Mini-Multinationals I) Another trend in international business has been the growth of medium-sized and small multinationals. These businesses are referred to as mini-multinationals. THE CHANGING WORLD ORDER J) The collapse of communism in Eastern Europe presented a host of export and investment opportunities for Western businesses. However, because of growing unrest and totalitarian tendencies in many states, companies must be cautious. K) The economic development of China presents huge opportunities and risks, despite its continued Communist control. In addition, firms must be aware of the threat posed by China‘s emerging multinationals. L) For North American firms, the growth and market reforms in Mexico and Latin America also present tremendous new opportunities both as markets and sources of materials and production. However, given the history of economic mismanagement in Latin America, the favorable trends may not continue. THE GLOBAL ECONOMY OF THE TWENTY-FIRST CENTURY M) The path to full economic liberalization and open markets is not without obstruction. Economic crises in Latin America, South East Asia, and Russia all caused difficulties in 1997 and 1998. N) While firms must be prepared to take advantage of an ever more integrated global economy, they must also prepare for political and economic disruptions that may throw their plans into disarray. The 2008–2009 financial crisis that began in the United States, for example, quickly spread to much of the rest of the world. More recently, disruptions to global supply chains as a result of the COVID-19 pandemic have raised questions about relying on globally dispersed

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

production systems. Going forward, it is likely that hedging strategies will become more important to protect against risks like these and also against emerging nationalistic tendencies.

The Globalization Debate A) Is the shift toward a more integrated and interdependent global economy a good thing? While many economists, politicians and business leaders seem to think so, globalization is not without its critics. Globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global economy. Yet, there is a rising tide of opposition to globalization. ANTIGLOBALIZATION PROTESTS B) Since 1999, when protesters against globalization targeted the WTO meeting in Seattle, antiglobalization protesters have turned up at almost every major meeting of a global institution. Protesters fear that globalization is forever changing the world in a negative way. This fear was evident in the 2016 presidential election in the United States.

country FOCUS: Donald Trump‘s America First Policies Summary This feature explores Donald Trump‘s America First campaign and what it means for the United States and the rest of the world. As a candidate, Donald Trump frequently derided multilateral agreements including the Paris Accord on climate change, the Trans Pacific Partnership, and the North American Free Trade Agreement (NAFTA). Generally criticizing the agreements as being bad for America, Trump promised that as president, he would renegotiate the agreements so that they were more in America‘s favor, or pull out all together. As president, Trump made good on his promise, pulling out of the Paris Accord with the claim that climate change is a hoax, withdrawing from the Trans Pacific Partnership soon after taking office, and renegotiating NAFTA. In addition, Trump used the threat of tariffs in negotiations with other countries including China sparking trade disputes that made it difficult for many American companies to conduct their business. While Donald Trump‘s rejection of globalization and the role of the United States resonated with his followers, for his detractors, the policy was a loss for the United States. Discussion Questions 1. Reflect on the role of multilateral agreements like the Paris Accord on climate change in the context of the global economy. What purpose do agreements like these serve? Do you agree with Donald Trump‘s decision to withdraw from the agreement? Why or why not? This question will probably generate considerable discussion. Those who support Donald Trump will contend that the agreement did not serve the United States. Students sharing this view may question the existence of climate change as an existential threat to humanity and, like Donald Trump, view the agreement as unnecessary. Other students will argue that the decision by Donald Trump to withdraw from the agreement was misguided at best, and foolish on many

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

levels. Students taking this perspective will point out that climate change knows no boundaries and that the world must come together to solve the problem. While some may contend that the agreement did not go far enough, others will probably suggest that having a framework in place is an important starting point in working toward a solution. 2. What was the Trans Pacific Partnership and why did President Obama see it as an important agreement? Do you support the Donald Trump‘s decision to withdraw from the agreement? Explain. Responses to this question will likely be divided along political lines. Many students, despite supporting Donald Trump‘s decision to withdraw from the Trans Pacific Partnership, may not have any idea what the agreement was actually intended to do. Other students will probably point out that the agreement was designed to set the rules for trade in region, and that Donald Trump‘s decision to pull out created an opening for China to play a much bigger role in the region. Students sharing this perspective may note that by withdrawing, the United States is no longer able to put its interests on the table and lead the way on the rules for global trade and investment. Some students may also suggest that given the remaining countries went forward with their own agreement, the United States is now left in the cold. Teaching Tip: To learn more about the Trans Pacific Partnership, go to https://www.cfr.org/backgrounder/what-trans-pacific-partnership-tpp. Teaching Tip: To extend the discussion of Donald Trump‘s America First policy, consider https://www.brookings.edu/blog/order-from-chaos/2019/01/04/america-first-is-only-making-theworld-worse-heres-a-better-approach/. Video Note: Protesting globalization is not uncommon. Consider https://www.npr.org/sections/thetwo-way/2017/07/07/535959974/flames-subside-but-protestscontinue-as-g20-leaders-gather-for-hamburg-summit to explore some recent protests against globalization.

GLOBALIZATION, JOBS, AND INCOME C) In developed countries, labor leaders lament the loss of good-paying jobs to low-wage countries. However, supporters of globalization argue that free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently. Free trade advocates suggest that despite some job dislocation, the whole economy is better off with free trade. They make a similar argument to support the outsourcing of services like call centers to low-wage countries. However, given that the wage gap between developed and developing countries is closing, the migration of unskilled jobs to low-cost nations may only be a temporary phenomenon. Teaching Tip: For resources related to exporting, the export assistance center at http://www.export.gov can provide insight into this process.

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Video Note: Video clips related to importing and exporting are available at http://www.census.gov/foreign-trade/aes/exporttraining/videos/index.html. A variety of topics are available to consider. GLOBALIZATION, LABOR POLICIES, AND THE ENVIRONMENT D) A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous. Supporters of free trade and greater globalization express serious doubts about this scenario. They point out that tougher environmental regulation and stricter labor standards go hand in hand with economic progress. In general, as countries get richer, they enact tougher environmental and labor regulations. E) Lower labor costs are only one of the reasons why a firm may seek to expand in developing countries. These countries may also have lower standards on environmental controls and workplace safety. Nevertheless, since investment typically leads to higher living standards, there is often pressure to increase safety regulations to international levels. This is indicated in Figure 1.5, which indicates that pollution levels decrease after per capita income levels reach $8,000. No country wants to be known for its poor record on health and human safety. Thus, supporters of globalization argue that foreign investment often helps a country to raise its standards. GLOBALIZATION AND NATIONAL SOVEREIGNTY F) Another concern voiced by critics of globalization is that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization (WTO), the European Union (EU), and the United Nations. As perceived by critics, the problem is that unelected bureaucrats are now sometimes able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. G) With the development of the WTO and other multilateral organizations such as the EU and NAFTA, countries and localities necessarily cede some authority over their actions. Supporters of these organizations claim that if the organizations fail to serve the collective interests of member states, the states will withdraw their support and the organizations will collapse. GLOBALIZATION AND THE WORLD’S POOR H) Critics of globalization argue that over the last century, the gap between rich and poor has gotten wider, and the benefits of globalization have not been shared equally. However, supporters of free trade suggest that the actions of governments have limited economic improvement in many countries. In addition, debt may also be limiting growth in some countries. Today, there are various efforts underway to encourage debt relief programs. Video Note: South Africa‘s fishing industry, which has benefited from globalization, is now threatened by disruption in demand related to the novel coronavirus. To learn more, consider Coronavirus: South Africa’s Economic Victims in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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CONNECT Click and Drag The Globalization Debate Summary This activity focuses on the debate on globalization. While globalization has long been viewed as a beneficial trend, more recently, certain segments of the population have voiced their strong opposition to the trend. Anecdotes, evidence, and arguments can be collected to support each side of the debate. Activity Students are asked to match various issues in terms of whether they are arguments for or against globalization. Class Discussion The debate on globalization and its benefits and drawbacks has shaped elections and policies in several countries in recent years including the United States, Great Britain, and Sweden. Discuss this trend and why globalization has become such a driving and divisive issue for so many people.

Managing in the Global Marketplace A) An international business is any firm that engages in international trade or investment. B) As their organizations increasingly engage in cross-border trade and investment, managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. C) These differences require that business people vary their practices country by country, recognizing what changes are required to operate effectively. It is necessary to strike a balance between adaptation and maintaining global consistency, however. D) As a result of making local adaptations, the complexity of international business is clearly greater than that of a purely domestic firm. Firms need to decide which countries to enter, what mode of entry to use, and which countries to avoid. Rules and regulations also differ, as do currencies and languages. E) Managing an international business is different from managing a purely domestic business for at least four reasons: 1) countries differ, 2) the range of problems and manager faces is greater and more complex, 3) an international business must find ways to work within the limits imposed by governmental intervention and the global trading system, and 4) international transactions require converting funds and are susceptible to exchange rate changes.

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CONNECT Case Analysis How the iPhone is Made: Apple’s Global Production System Summary This activity focuses on Apple‘s production strategy for its iPhone. The company, which currently outsources much of its production to China, has come under fire both for shipping U.S. jobs abroad and for working with contractors that violate their employees‘ human rights. Activity Students are asked to read a case exploring Apple‘s global production strategy for its popular iPhone and then respond to a series of questions related to the case. Class Discussion Pursuing greater efficiency in production is generally seen as a positive strategy when it comes to profits. For Apple, that efficiency is achieved by outsourcing much of the production of its iPhone to China. However, there are serious concerns as to whether Apple, through its choice of subcontractors, is putting profit in front of human rights. Ask students to consider the issue from the perspective of various stakeholders including stockholders, domestic employees and managers, consumers, and employees at the subcontractor organizations. Is Apple making good decisions?

CONNECT Video Case Did You Know? Trade Tripled for the United States as a Percentage of GDP Summary This activity focuses on the growing interconnectedness of the global economy. Since 1960, trade as a percentage of GDP has tripled for the United States. Trade as a percentage of global GDP has grown from 24.1 percent in 1960 to more than 56 percent in 2016. Much of this growth can be attributed to individual enterprises unbundling their value creation activities and dispersing them to locations that are more efficient and effective. Activity Students are asked to watch a video on trade with a focus on Boeing, and then respond to a series of questions related to the video. Class Discussion It is essential that international managers understand the forces that shape the business world. After decades of general support for globalization, some are now challenging that perspective. The disruptions to global supply chains associated with the COVID-19 pandemic have highlighted the risks associated with global production. Ask students to discuss this trend and what it means for international companies like Boeing. Is it likely that Boeing will continue to

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disperse its value creation activities around the world, or will the company return to a more domestically oriented strategy?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Describe the shifts in the world economy over the last 30 years. What are the implications of these shifts for international businesses based in the United Kingdom? North America? Hong Kong? Answer: The world economy has shifted dramatically over the past 30 years. As late as the 1960s, four trends described the demographics of the global economy. The first was U.S. dominance in the world economy and world trade. The second was U.S. dominance in the world foreign direct investment picture. Related to this, the third fact was the dominance of large, multinational U.S. firms in the international business scene. The fourth was that roughly fifty percent of the world—the centrally planned economies of the Communist world—was off-limits to Western international businesses. All of these demographic facts have changed. Although the U.S. remains the world's dominant economic power, its share of world output and world exports have declined significantly since the 1960s. This trend does not reflect trouble in the U.S. economy, but rather reflects the growing industrialization of developing countries such as China, India, Indonesia, and South Korea. This trend is also reflected in the world foreign direct investment picture. The share of world output (or the stock of foreign direct investment) generated by developing countries has been on a steady increase since the 1960s, while the share of world output generated by rich industrial countries has been on a steady decline. Shifts in the world economy can also be seen through the shifting power of multinational enterprises. Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise. The first has been the rise of non-U.S. multinationals, particularly Japanese multinationals. The second has been the emergence of a growing number of small and mediumsized multinationals, called mini-multinationals. The fall of Communism in Eastern Europe and the republics of the former Soviet Union have brought about the final shift in the world economy. Many of the former Communist nations of Europe and Asia seem to share a commitment to democratic politics and free market economies. Similar developments are being observed in Latin America. If these trends continue, the opportunities for international business may be enormous. The implications of these shifts are similar for North America and Britain. The United States and Britain once had the luxury of being the dominant players in the world arena, with little substantive competition from the developing nations of the world. That has changed. Today, U.S. and British manufacturers must compete with competitors from across the world to win orders. Britain‘s departure from the European Union suggests a desire for greater sovereignty, yet also seemingly puts the country in the difficult position of needing its trading partners more than they need Britain. The changing demographics of the world economy favor a city like Hong Kong. Hong Kong is well located with easy access to markets in Japan, South Korea, Indonesia, and other Asian markets. Further, Hong Kong has a vibrant labor force that can compete on par with the industrialized nations of the world, yet the creeping influence of Beijing in 2019 and 2020 set of violent protests as citizens demanded to keep their democratic

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rights. The declining influence of the United States and Britain on the global economy suggests that companies will look elsewhere for growth opportunities. Britain is already experiencing an exodus of foreign investment as companies that once used the country as a jumping off point for the European Union, move their business elsewhere. Hong Kong is also likely to see companies leave as they seek more stable business environments for their Asian bases in locations like Singapore. Video Note: To extend this discussion, consider Why Brexit Uncertainty Means Companies Plan for the Worst in the International Business Library at http://bit.ly/MHEIBVideo. Video Note: To extend this discussion, consider From Tokyo to Sydney, Cities Vie To Replace Hong Kong as Asian Hub in the International Business Library at http://bit.ly/MHEIBVideo. 2. "The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in smaller firms." Evaluate this statement. Answer: People who believe in this view, and the firms that they work for, may find that they do not achieve their full potential (at best) and may ultimately fail because of their myopia. As barriers to trade decrease and state of the art technological developments take place throughout the world, new opportunities and threats exist on a worldwide basis. The rise of the minimultinationals suggests there are global opportunities even for small firms. But staying attuned to international markets is not only important from the perspective of seeking profitable opportunities for small firms; it can also be critical for long-term competitive survival. Firms from other countries may be developing products that, if sold internationally, could wipe out small domestic competitors. Scanning international markets for the best suppliers is also important for small firms, for if a domestic competitor is able to tap into a superior supplier from a foreign country, it may be able to seriously erode another firm's competitive position before the small firm understands the source of its competitor's competitive advantage and can take appropriate counteractions. 3. How have changes in technology contributed to the globalization of markets and production? Would the globalization of production and markets have been possible without these technological changes? Answer: Changes in technology have significantly contributed to the globalization of markets and of production. Improvements in transportation technology have paved the way for companies like Coca-Cola, Levi Strauss, Sony and McDonalds to make their products available worldwide. Similarly, improvements in communications technology have had a major impact. The ability to negotiate across continents has been facilitated by improved communications technology, and the rapidly decreasing cost of communications has lowered the expense of coordinating and controlling a global corporation. The power of advances in technology was on full display during the 2020 COVID-19 shutdowns, as companies around the world were transformed into web-based operations virtually overnight. Finally, the impact of information technology has been far reaching. Companies can now gain worldwide exposure simply by setting up a homepage on the Internet. This technology was not available just a few short years

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ago, yet online sales proved to be vital to the global economy during 2020 as traditional inperson shopping was replaced with shopping from home. The globalization of production and markets may have been possible without improvements in technology, but the pace of globalization would have been much slower. The falling cost of technology has made it affordable for many developing nations, which has been instrumental in helping these nations improve their share of world output and world exports. The inclusion of these nations, such as China, India, Thailand, and South Korea, has been instrumental in the globalization of markets and production. In addition, improvements in global transportation and communication have made it relatively easy for business executives from different countries to converse with one another. If these forms of technology, including air travel, fax capability, email, and overnight delivery of packages were not available, it would be much more difficult for businesses to conduct international trade. 4. "Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate course on international business." Evaluate this statement. Answer: This statement reflects a poor understanding of the unique challenges involved in international business. Managing an international business is different from managing a purely domestic business for at least four reasons. These are: (1) countries are different; (2) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business; (3) an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system; and (4) international transactions involve converting money into different currencies. Because of these differences, there are ample reasons for studying international business as a specific field of study or discipline. 5. How does the Internet affect international business activity and the globalization of the world economy? Answer: The Internet has changed the way companies do business. This technology makes it easier for individuals and companies in different countries to conduct business with one another and has lowered the cost of communications. These developments will undoubtedly hasten the already rapid pace of globalization and act as an equalizer between large (resource-rich) and small (resource-poor) firms. For instance, it does not cost any more for a small software firm to gain visibility via the Internet than it does for a large software company like Microsoft. As a result, the Internet helps small companies reach the size of audience that was previously only within the reach of large, resource-rich firms. Since COVID-19, the Internet has also changed the way meetings are held. Face-to-face meetings have been replaced with web-based meetings, allowing many businesses, including many services, to continue to operate even during a pandemic. The Internet has also transformed production and shipping as inventory levels and distribution can be tracked in real time allowing for leaner production and faster delivery times. 6. If current trends continue, China may be the world's largest economy by 2035. Discuss the possible implications of such a development for a. the world trading system

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b. the world monetary system c. the business strategy of today's European and U.S.-based global corporations d. global commodity prices Answer: The world trading system would clearly be affected by such a development. Currently, China enjoys a somewhat privileged status within the World Trade Organization as a ―developing‖ country. Such a rise to eminence, however, would clearly force it to become a full and equal member, with all the rights and responsibilities. China would also be able to actively influence the terms of trade between many countries. On the monetary front, one would expect that China would have to have fully convertible and trading currency, and that ultimately it could become one of the ―benchmark‖ currencies of the world. From the perspective of Western global firms, China would represent both a huge market, and potentially the home base of some very capable competitors. Students should recognize though, that the ongoing trade war between the United States and China during the Trump presidency has prompted some companies to move their operations to other locations in the region such as Vietnam. Finally, commodity prices would probably fall. Video Note: To extend this discussion, consider Tech Decoupling: China’s Race to End Its Reliance on the U.S. in the International Business Library at http://bit.ly/MHEIBVideo. 7. Reread the Management Focus ―Boeing‘s Global Production System‖ and answer the following questions: a. What are the benefits to Boeing of outsourcing manufacturing of components of the Boeing 787 to firms based in other countries? b. What are the potential costs and risks to Boeing outsourcing? c. In addition to foreign subcontractors and Boeing, who else benefits from Boeing's decision to outsource component part manufacturing assembly to other nations? Who are the potential losers? d. If Boeing's management decided to keep all production in America, what do you think the effect would be on the company, its employees, and the communities that depend on it? e. On balance, do you think that the kind of outsourcing undertaken by Boeing is a good thing or a bad thing for the American economy? Explain your reasoning. Answer: a. Boeing has traditionally outsourced some of the production of its aircraft, but it took outsourcing to a new level with the Dreamliner 787, outsourcing 65 percent of its value to suppliers located around the world. This strategy allowed each company including Boeing to focus on what it does best, allowing for greater efficiency and lower costs. Some students may also suggest that by using suppliers located in customer countries, Boeing could introduce a ―local‖ element to the Dreamliner and gain goodwill with its customers. b. With its new strategy, Boeing also encountered many problems, including challenges in coordinating its globally dispersed production chain. Production was frequently delayed, and the aircraft was ready for sale much later than Boeing had anticipated. Some students may note that while Boeing was able to benefit from the expertise of its suppliers, by outsourcing, the company also lost the ability to increase its own knowledge and skills.

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c. Workers in the countries to which the outsourcing takes place benefit. In specific, these workers may receive competitive wages for the skills they provide to the companies developing and manufacturing the products in-country. Knowledgeable workers within Boeing would not have the opportunity to use their skills and―in some cases―could lose their jobs as a result. d. Based on the design of the Boeing 787, there are some core competencies that Boeing must develop to manufacture the product. In the short term, it would be difficult for Boeing to experience that learning curve, but if the company is able to work through these problems, it may have more knowledge and capabilities to apply in different projects in the future. As a result, employee skills would be applied and potentially widened. By keeping these employees working, the communities that depend on the company and its employees would enjoy a certain level of success. However, for Boeing in particular, the financial investment to make for all production within the company could be a daunting proposition and may have an impact on profitability, as well. e. There will be some students who will state that this action is good for the American economy as it allows an American company to focus on its core strengths. In addition, this line of thought could be supported by the notion that, because of this focus on core strengths, the economy would become more competitive. However, other students will state that this approach is bad for the American economy due to the loss of jobs and commerce within the United States. Those holding this view will cite the danger of increased unemployment or the lack of jobs fitting the specific skills of the employees who may no longer be needed in the aerospace industry in the United States. Video Note: To extend this discussion, consider exploring the broader global airline industry through Will It Be A “Borderless World” For Emirates Under Trump? in the International Business Library at http://bit.ly/MHEIBVideo.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 As the drivers of globalization continue to pressure both the globalization of markets and the globalization of production, we continue to see the impact of greater globalization on worldwide trade patterns. HSBC, a large global bank, analyzes these pressures and trends to identify opportunities across markets and sectors through its trade forecasts. Visit the HSBC Global Connections site and use the trade forecast tool to identify which export routes are forecast to see the greatest growth over the next 15 to 20 years. What patterns do you see? What types of countries dominate these routes? Exercise 2 You are working for a company that is considering investing in a foreign country. Investing in countries with different traditions is an important element of your company’s long-term strategic goals. Management has requested a report regarding the attractiveness of alternative countries based on the potential return of FDI. Accordingly, the ranking of the top 25 countries in terms of FDI attractiveness is a crucial ingredient for your report. A colleague mentioned a potentially useful tool called the Foreign Direct Investment (FDI) Confidence Index. The FDI

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Confidence Index is a regular survey of global executives conducted by A.T. Kearney. Find this index and provide additional information regarding how the index is constructed.

How the iPhone Is Made: Apple‘s Global Production System closing case Summary This case explores Apple‘s strategy to produce its popular iPhone. While Apple initially depended largely on U.S. producers, since the early 2000s, Apple has increased its reliance on subcontractors and suppliers in China. The company claims that the ability of these suppliers and subcontractors to quickly respond to changing market conditions gives Apple an important competitive advantage in the highly competitive global mobile phone market. Apple has been criticized for its decision with some suggesting that the company is shipping American jobs abroad. Apple has also been negatively affected by the poor working conditions at some of its suppliers. While the company says it has tried to address these concerns, it admits that its efforts have not always generated the outcomes it would like. Case Discussion Questions 1. What are the benefits to Apple of outsourcing the assembly of the iPhone to foreign countries, and particularly China? What are the potential costs and risks to Apple? Apple, like other multinational companies, has capitalized on the opportunities associated with globalization. Lower barriers to trade and investment associated with globalization have allowed the company to optimize the production of its iconic iPhone. Rather than producing the iPhone in the United States, Apple outsources production to suppliers and subcontractors around the world. The company capitalizes on the efficiency of suppliers and subcontractors regardless of their location in the world. Today, Apple‘s product design team and marketing are based in the United States. While some parts such as the glass used for the screens are also produced domestically, much of the production takes place in China. In fact, Apple relies on foreign sources for some 90 percent of iPhone parts. Outsourcing means that Apple reduces its production costs and has the benefit of the flexibility of its suppliers to quickly ramp production up or down, however, it also means that the company is dependent on its supply chain working without interruption. Indeed, the company‘s global supply chain was disrupted during the COVID-19 pandemic as factories in China were forced to close to stop the spread of the virus. 2. In addition to Apple, who else benefits from Apple‘s decision to outsource assembly to China? Who are the potential losers here? China, along with other countries that produce parts used in the iPhone, are among the big winners from Apple‘s decision to outsource. The jobs created by Apple‘s strategy are a direct benefit, but it is important to keep in mind that these jobs will have spillover effects as workers spend their earnings in their local economies. In addition, the success of Apple‘s outsourcing strategy means that additional, higher skilled jobs are created in the United States. These jobs

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also have spillover effects. While some lower skilled jobs have moved to China, doing so allows Apple to keep its overall production costs lower, which then translates into higher profits for stockholders, and potentially lower prices for consumers. 3. What are the potential ethical problems associated with outsourcing assembly jobs to Foxconn in China? How might Apple deal with these? Apple has come under significant scrutiny after it was revealed that one of its primary subcontractors treated its employees very poorly. According to critics, workers at Foxconn, the company that produces about 50 percent of the iPhones sold across the world, requires long hours and mandatory overtime from its employees and has a poor safety record. While Apple defends its decision to work with Foxconn saying that it is trying to get improvements in Foxconn worker conditions, many say that Apple has not gone far enough. The negative press associated with these claims is of course, detrimental to Apple‘s reputation. Many students will probably suggest that Apple needs to be more vigilant when choosing its suppliers and conduct regular visits to supplier factories. 4. On balance, do you think that the kind of outsourcing undertaken by Apple is a good thing or a bad thing for the American economy? Explain your reasoning? Responses to this question will vary by student. Apple has been accused of shipping American jobs abroad to places like China. While Apple points out that it also employs large number of Americans and that its strategy of using Chinese suppliers and subcontractors allows it to price its product more competitively, many remain unconvinced. Students may focus on the loss of manufacturing jobs in the United States and what it means to working class Americans and contend that Apple is putting profits ahead of the American worker and that as an American company, Apple has a responsibility to support American workers. Other students however, will agree that the outsourcing undertaken by Apple is a good thing for the American economy because it helps to support some 450,000 U.S. jobs. In addition, students may point out that Apple has retained jobs requiring higher skills in the United States. These jobs of course, will be higher wage positions. Students sharing this perspective may argue that if Apple produced the entirety of its iPhone in the United States, it would likely be uncompetitive and quickly go out of business, eliminating the jobs it does create and the economic growth associated with those jobs. 5. How can a company like Apple, with a global supply chain, hedge against the risks of significant supply chain disruption due to the emergence of a new virus such as the SARS virus that appeared in 2003 and the COVID-19 virus that appeared in 2020? The speed with which the COVID-19 virus spread around the globe prompting the entire world to shut down in early 2020 caught most people by surprise. International cargo shipments ground to a halt and factories furloughed workers overnight. For companies like Apple that rely on highly efficient global supply chains, the disruption was a shock. Many companies are now rethinking their strategies. Some are moving key elements of their production closer to home, while others are reconsidering domestic production for at least part of their output. Still other companies are considering increasing inventory levels. Apple not only saw its supply chain dry up, it was also forced to close its retail store, in part because of supply issues. Students may

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suggest that developing a bigger online presence will be important for some companies as might rethinking the number and location of suppliers they rely on. Video Note: To extend the discussion for Question 5, consider Coronavirus Hits Companies in China, But They Still Have a Reason To Stay in the International Business Library at http://bit.ly/MHEIBVideo. Teaching Tip: Students can explore Apple‘s website at http://bit.ly/MHEIBVideo. Video Note: To extend this discussion, consider Apple’s China Problem Goes Deeper than the iPhone in the International Business Library at http://bit.ly/MHEIBVideo.

CONNECT Geography Mapping Activity Summary This activity is designed to test the student‘s knowledge of geography. Questions related to chapter material are asked, requiring students to understand the topics and the locations of the countries involved. Activity Students are asked to respond to a series of question related to the geographic location of several countries. Class Discussion Understanding the geographic location of countries is essential to the understanding of international business. Ask students to discuss the implications of the geographic locations of the countries in this exercise on the subject matter.

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Continuous Case Concept This feature allows you to integrate the material presented in each chapter of the text using a single industry, the auto industry. For each chapter, ideas will be presented on how to link the chapter contents to the current situation in the auto industry. This discussion can take place at the beginning of a new unit, at the end, or it could be threaded through the chapter material. In some cases, you may want to use the feature more than once. By using the continuous case concept, students will have the opportunity to understand how the elements presented throughout the text apply to an evolving, real situation. 

Sketch out a diagram of the auto industry showing the major players such as Ford, Chrysler, Toyota, Nissan, BMW, Mercedes, Tata, and Hyundai. Look at recent changes in corporate structure. For example, Italian automaker Fiat recently took control of Chrysler.

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Next, identify the location of each company‘s headquarters, where production takes place, which markets are important to each firm, which companies are key rivals, and so on. For example, China and the United States are both strong markets for most automakers right now, but sales in Latin America and Europe are slumping. One challenge for automakers today is meeting increasingly ambitious CO2 regulations. Nearly every carmaker is turning to electric vehicles as part of the solution to meeting these new standards, however, developing a range of electric cars that are profitable, yet affordable has proved to be challenging. Some automakers are teaming up with others in the effort. Ford and Volkswagen, are working together for example, as are BMW and Daimler, and Renault and Nissan. Students will probably be able to provide most of the information relatively easily. The goal here is to take a few minutes to establish the global nature of the industry.

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Finally, reflect on the factors that made the industry a global one, and consider what is likely to happen to the industry in the next three years, five years, and ten years. Students may note for example, that although the U.S. market is getting stronger, emerging markets have become more important. Similarly, students may predict that automakers will continue to look for ways to streamline production. Ford, for example, believes that auto buyers are becoming more similar in their buying habits and so implemented a strategy, One Ford, allowing it to sell just a few models in every market. The company hopes that by streamlining all phases of product development, production, and marketing it will be able to capture a larger share of the market and bigger profits.

Teaching Tip: To extend this discussion, consider https://www.bbc.com/news/business47376677. Video Note: To explore an article that relates to short- and long-term industry and consumer factors automotive companies must consider in this discussion, consider Volkswagen Comes Clean on Emissions Cheating in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes and

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discussion questions for this video.

Additional Readings and Sources of Information ‗America First‘ is only making the world worse. Here‘s a better approach. https://www.brookings.edu/blog/order-from-chaos/2019/01/04/america-first-is-only-making-theworld-worse-heres-a-better-approach/ Trade War Update: China May Have Shot Self in Foot https://www.forbes.com/sites/kenrapoza/2018/08/15/trade-war-update-china-soy-tariffs-braziltrump/#134149032bc7 iPhone, Laptop Makers Eye Moving Production in Trade War Prep: Video https://www.bloomberg.com/news/videos/2018-08-17/iphone-laptop-makers-eye-movingproduction-in-trade-war-prep-video In U.S. and UK, Globalization Leaves Some Feeling ‗Left Behind‘ or ‗Swept Up‘ https://www.pewresearch.org/2020/10/05/in-u-s-and-uk-globalization-leaves-some-feeling-leftbehind-or-swept-up/ The State of Globalization in 2019, and What It Means for Strategists https://hbr.org/2019/02/the-state-of-globalization-in-2019-and-what-it-means-for-strategists Boeing to cut 20% of workforce by end of 2021 https://www.bbc.com/news/business-54716296 Trump Pushes China for Better Deal With Trade Talks Set to Resume https://www.bloomberg.com/news/articles/2018-08-16/trump-pushes-china-for-better-deal-astrade-talks-set-to-resume BRICS Want World to Play by WTO Rules as Trump Seeks More Duties https://www.bloomberg.com/news/articles/2018-07-26/brics-nations-want-wto-multilateraltrade-system-strengthened Brexit Won't Stop Globalization http://www.bloomberg.com/news/articles/2016-07-14/brexit-won-t-stop-globalization Wanda Scraps $5.6 Billion Reorganization of Entertainment Assets http://www.bloomberg.com/news/articles/2016-08-01/wanda-scraps-5-6-billion-reorganizationof-entertainment-assets Why Anti-Globalization Drives Inflation: Video http://www.bloomberg.com/news/videos/2016-07-12/why-anti-globalization-drives-inflation Trump Targets Foreign Auto Companies for Not Building Enough in U.S.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

https://www.wsj.com/articles/auto-makers-meet-with-donald-trump-on-emissions-nafta1526063070

Chapter 2: National Differences in Political, Economic, and Legal Systems Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: China‘s Mixed Economy Introduction Political Systems Economic Systems Legal Systems Did You Know? Video Clip: Did You Know that Venezuela has dropped to one of the worst performing economies in the world? 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Kenya: An African Lion Continuous Case Concept Additional Readings and Sources of Information

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Learning Objectives 2-1 Understand how the political systems of countries differ. 2-2 Understand how the economic systems of countries differ. 2-3 Understand how the legal systems of countries differ. 2-4 Explain the implications for management practice of national difference in political economy.

Chapter Summary This chapter focuses on the different political, economic, and legal systems that are influential in the world. It is made clear to the reader that these differences are significant and must be clearly understood by the managers of international firms. The section focusing on legal systems includes a discussion of intellectual property including patents, copyrights, and trademarks. Protecting intellectual property is particularly challenging in international trade. Finally, the chapter ends with a discussion of the managerial implications of differing political, economic, and legal systems of a country.

Chapter Opening Activity In this activity, students will research and reflect on legal and political systems in several countries. Use globaledge.msu.edu to research the legal and representative political systems in the United States, Canada, Britain, and other advanced economies. The basic tenet of the U.S. system is preservation of individual rights, and this may be grounded in America‘s passion with individualism. Explain that the U.S. scores very high on Hofstede‘s individualism versus collectivism dimension of cultural differences (more on this in Chapter 4). Suggest that individualistic cultures value: • Individual responsibility for decisions •

Individual freedoms and achievement

•

Decisions can be rapid

•

Importance of nuclear family

•

Rewards given to those who venture into business alone—the entrepreneur

Cultures including Russian, Chinese, and Indian may be more collectivist and may employ more authoritarian political systems and planned economic systems. Suggest that collectivist cultures value: •

Group and shared responsibility for decisions

•

Decisions may be slow, consensual, and consultative

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

•

Group nurtures individual.

•

Importance of extended families and in-group priorities

•

Recognition of collective business ventures, with family and friends

As students work through this chapter, ask them to research the evolution of political and legal systems in a country they are familiar with (not the U.S.) by using globaledge.msu.edu. Some traditionally authoritarian countries are transitioning towards representative governments: suggest that this may be in response to changes driven by globalization and technology.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Chapter Outline

China‘s Mixed Economy opening case Summary The opening case explores the political economy of China. Over the past four decades, China has transformed from a one-party state where private enterprise was banned, and all economic activity was centrally planned to a thriving economy blending state-owned enterprises with privately held corporations. The transformation began when it became apparent that the Marxist model that had been in place was not working. Following a series of reforms, China embarked on its path as one of the world‘s fastest growing economies. Today, the country boasts the world‘s second largest economy as measured by nominal GDP, and the largest when measured by GDP on a purchasing power basis. Discussion Questions 1. How can China‘s political economy be characterized? How do its policies facilitate economic growth? What does the country‘s blend of state-owned and privately held companies mean for the current business environment and for the future business environment? As a one-party state ruled by the Communist Party, China clearly does not enjoy the freedoms of other large economies like the United States. Instead, China, with its mix of private sector companies and state-owned enterprises, operates as a mixed economy. Indeed, in China, the economy is described as a ―socialist market economy‖ dominated by large multinational tech companies such as Alibaba, Tencent, Baidu, and Huawei. Certain sectors of China‘s economy remain the domain of state-owned enterprises. In banking for example, nearly 90 percent of value added is attributed to state-owned corporations. However, regardless of ownership, the influence of the state is felt across all sectors of the economy and is central to economic growth in the country. For companies considering doing business in China, understanding this dynamic is essential. Huawei, for example, may have received as much as $75 billion in state-support, making the playing field for tech companies anything but level. 2. Discuss China‘s reliance on the state as a driver of economic growth. What does it mean for the efficiency and productivity of companies receiving assistance? What are the implications of a large state-owned sector for trade relations with other countries? The presence of the visible hand in driving economic growth in China is evident across numerous sectors, and especially in industries related to the development of infrastructure. While government assistance typically leads to greater inefficiency and productivity, for China, the biggest issue may be its impact on trade relations with other countries. The United States and other nations have made it clear that China‘s assistance to its companies gives them an unfair advantage in global trade. Donald Trump attempted to force China‘s hand on the issue when he levied hefty tariffs on steel imports from China. So far, however, China seems to be unwilling to back down. Going forward, it is expected that Joe Biden‘s administration could work together with European counterparts and present a united front to China on trade, something that could prompt China to reassess its policies. Teaching Tip: Students can explore China‘s political economy in greater detail at https://www.worldbank.org/en/country/china/overview.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Lecture Note: To extend this discussion, consider https://www.nytimes.com/2020/10/18/business/china-economy-covid.html and https://www.economist.com/finance-and-economics/2020/10/31/if-chinas-economy-is-so-strongwhy-isnt-its-currency-stronger. Video Note: To extend this discussion, consider Tech Decoupling: China’s Race to End Its Influence on the U.S. in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis China’s Mixed Economy Summary This activity focuses on differences in political and economic systems between countries, and specifically on China‘s mixed economy. Described by China as a ―socialist market economy‖, China blends a vibrant private sector with a significant state-owned sector. Activity Students are asked to read a short case exploring China‘s mixed economy and then respond to a series of questions related to the case. Class Discussion A country‘s political and economic systems can have important implications for international businesses and how they do business in that country. Discuss the situation in China. What does it mean for companies looking to do business in the country? How does China‘s blend of public and private enterprise create opportunities and challenges for foreign companies?

Introduction A) Different countries have different political, economic, and legal systems. Cultural practices can vary dramatically from country to country, as can the education and skill level of the population. All of these differences have major implications for the practice of international business. B) This chapter explores how the political, economic, and legal systems of countries differ. Together these systems are known as the political economy of a country.

Political Systems A) By political system, we mean the system of government in a nation. Political systems can be assessed according to two related dimensions. The first is the degree to which they emphasize

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

collectivism as opposed to individualism. The second dimension is the degree to which they are democratic or totalitarian. COLLECTIVISM AND INDIVIDUALISM B) Collectivism refers to a system that stresses the primacy of collective goals over individual goals. When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms. Advocacy of collectivism can be traced to Plato, in modern times the collectivist mantle has been picked up by socialists, and their champion, Karl Marx. Socialism C) Communists generally believed that this could only be achieved through violent revolution and totalitarian dictatorship, while social democrats worked to achieve the same goals by democratic means. D) While state-owned firms might have been intended to promote the public interest, experience suggests that this is not always the case. In many countries, the performance of state-owned companies has been poor. Consequently, a number of Western democracies voted social democratic parties out of office and moved toward free market economies by selling state-owned enterprises to private investors, a process known as privatization. Individualism E) Individualism refers to a political philosophy that an individual should have freedom over his or her economic and political pursuits. In contrast to collectivism, individualism stresses that the interests of the individual should take precedence over the interests of the state. F) While collectivism asserts the primacy of the collective over the individual, individualism asserts the opposite. This ideological difference shapes much of recent history and the Cold War. Individualism is usually associated with democratic political systems and free markets.

country FOCUS: Putin‘s Russia Summary This feature explores the state of the Russian economy since the collapse of the USSR, and in particular under the leadership of Vladimir Putin. While Russia‘s economy has grown rapidly in the so-called pseudo-democracy that now exists, the country is heavily dependent on oil and gas exports—both industries that are still largely state controlled. Indeed, the presence of the government remains an issue for the economy as a whole. Currently, roughly half of the total economy is still controlled by the state, a situation that could hamper future growth. Even private enterprises are dealing with considerable red tape and corrupt government officials. Freedom House ranks Russia low for civil and political liberties, a ranking that was confirmed by Putin‘s 2014 decision to annex the Crimea region of neighboring Ukraine. Discussion Questions

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

1. Discuss the implications of corruption on the development and growth of a country. How can Russia‘s current political system best be described? What conclusions can you draw regarding Russia‘s economic prospects? Since the collapse of the USSR, Russia has struggled to get its economy on track. Today, there is considerable concern that the government‘s involvement in the business sector combined with high level of corruption could hamper future economic growth. High levels of corruption and Putin‘s authoritarian approach to governing create an uncertain environment for foreign investors. In addition, the sanctions brought about by the annexing of the Crimea region of Ukraine have further disrupted economic growth 2. Discuss the pros and cons of investing in Russia. As a CEO of a company in the oil industry would you invest in Russia? How does a stable government affect a country‘s ability to attract investment? In general, companies exploring the opportunity to expand into foreign markets will be more attracted to countries where it is easy to conduct business as compared to locations where it is not. That being said, many students will probably suggest that the situation in Russia today is a tricky one. Corruption in the country is high, and many students will probably advise caution given that the oil industry is still largely under the control of the government. Some students may also wonder whether sanctions by the United States and/or the European Union could further complicate matters if Putin‘s aggressive stance towards Ukraine continues to persist. Students may also wonder how the relationship between Donald Trump and Vladimir Putin will evolve. Lecture Note: To extend the discussion of Russia‘s economy under Vladimir Putin, consider https://www.bloomberg.com/view/articles/2018-08-29/russia-s-economy-is-stuck-in-a-putintrap. Teaching Tip: Information on doing business in http://www.doingbusiness.org/data/exploreeconomies/russia.

Russia

available

Video Note: The relationship between the United States and Russia has been under significant scrutiny as a result of Russia‘s meddling in the 2016 Presidential election. To learn more, consider Tech Companies Set to Tell Congress About Russian Election Meddling in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues.

DEMOCRACY AND TOTALITARIANISM

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

G) Democracy and totalitarianism are at different ends of a political dimension. Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited. Democracy H) Democracy in its pure state, with each individual voting on every issue, has generally been replaced by representative democracy, where elected representatives vote on behalf of constituents. Totalitarianism I) Under totalitarianism, a single political party, individual, or group of individuals monopolize the political power and do not permit opposition. There are four major forms of totalitarianism: communist totalitarianism, (a form of totalitarianism that advocates achieving socialism through totalitarian dictatorship), theocratic totalitarianism, (a form of totalitarianism in which political power is monopolized by a party, group, or individual that governs according to religious principles), tribal totalitarianism (a form of totalitarianism found mainly in Africa in which a political party that represents the interests of a particular tribe monopolizes power), right-wing totalitarianism (a form of totalitarianism in which individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism). There has been a general trend away from communist and right-wing totalitarianism and towards democracy. Video Note: Hong Kong‘s two system, one country model is under threat as moves by Beijing effectively destroy the freedoms enjoyed by citizens of the city since its independence from Great Britain. To learn more, consider From Tokyo to Sydney, Cities Vie to Replace Hong Kong as Asia Hub in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Pseudo-Democracies J) The political system in many nations of the world can best be described as imperfect or pseudo-democracies—lying somewhere between a pure democracy and complete totalitarianism. CONNECT Click and Drag Differences in Political Systems Summary This activity focuses on differences in political systems. Political systems can be assessed according to two dimensions: the degree to which they emphasize collectivism as opposed to individualism and the degree to which they are democratic or totalitarian. International businesses need to be aware of the differences in political systems and appreciate the significance of these national differences.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Activity Students are asked to match various political systems to the country where they are in place. Class Discussion A country‘s political system shapes its economic and legal systems. Discuss the different types of political systems, how they are reflected in a country‘s economic and legal systems, and what they mean for companies doing business in those countries.

Economic Systems A) In countries where individual goals are given primacy over collective goals, a free market system is more likely to exist. In contrast, in countries where collective goals are dominant, enterprises may be state-owned, and markets may be restricted. Three broad types of economic systems can be identified—a market economy, a command economy, and a mixed economy. MARKET ECONOMY B) In a pure market economy, the goods and services that a country produces, and the quantity in which they are produced, is not planned by anyone. Rather price and quantity are determined by supply and demand. COMMAND ECONOMY C) In a pure command economy, the goods and services that a country produces, the quantity in which they are produced, and the price at which they are sold are all planned by the government. Resources are allocated "for the good of society." The government owns most, if not all, businesses. MIXED ECONOMY D) A mixed economy includes some elements of each.

Legal Systems A) The legal system of a country refers to the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained. Teaching Tip: To learn more about international law and the legal systems of the countries of the world, consider http://www.doingbusiness.org/law-library. DIFFERENT LEGAL SYSTEMS B) There are three main types of legal systems in use around the world: common law, civil law, and theocratic law. Common Law

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

C) The common law system (based on tradition, precedent, and custom) evolved in England over hundreds of years. It is now found in most of Great Britain‘s former colonies, including the United States. Civil Law D) A civil law system is based on a very detailed set of laws organized into codes. Over 80 countries, including Germany, France, Japan, and Russia, operate with a civil law system. Theocratic Law E) Islamic law is the most widely practiced theocratic law system (based on religious teachings) in the modern world. DIFFERENCES IN CONTRACT LAW F) Contract law is the body of law that governs contract enforcement. A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved. The United Nations Convention on Contracts for the International Sales of Goods (CIGS) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations. PROPERTY RIGHTS AND CORRUPTION G) Control over property rights (the bundle of legal rights over the use to which a resource is put and over the use made of any income that may be derived from that source) are very important for the functioning of business. Property rights can be violated by either private action (theft, piracy, blackmail, Russian Mafia) or public action (governmental bribery and corruption, nationalization). Private Action H) Private action refers to theft, piracy, blackmail, and the like by private individuals or groups. Public Action and Corruption I) Public action to violate property rights occurs when public officials extort income or resources from property holders using various legal mechanisms including excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners. CONNECT Click and Drag Property Rights and Corruption Summary This activity focuses on differences in legal systems. Firms need to understand the differences between private actions such as blackmail and public actions such as corruption. While both pose a threat to international businesses, how that threat is addressed depends on the action in question.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Activity Students are asked to match various scenarios to the type of legal action they represent. Class Discussion A country‘s legal system regulates the business environment, defines how business transactions take place, and details the rights and obligations of parties to a contract. Discuss the different types of legal systems and what they mean for companies doing business in those countries. Discuss how companies can protect themselves from risk associated with property rights violations and corruption.

country FOCUS: Corruption in Brazil Summary This country focus segment examines the extent of corruption in the country of Brazil. Even though the country is the seventh-largest economy in the world and considered to be a moderately free market economy, the corruption that exists in Brazil typically involves political connections. This is reflected in the relatively high perception of corruption in international surveys on the subject by Transparency International and the World Economic Forum. Known to exist for decades, the mensalao ("monthly payoff") and Petrobras scandals underscore the pervasiveness of the problem in Brazil. Discussion Questions 1. What is the nature of the mensalao scandal? How extensive was it? What was the reaction in Brazil to its occurrence? Even though a midlevel postal worker was caught taking a bribe for government contract favors, the awarding of such contracts and the backing of specific government programs in the Brazil‘s National Congress involved about 25 politicians and business executives. Bribery, money laundering, and corruption were the charges on which they were found guilty. Even though the mensalao case became known in 2005, the public outcry was significant through the time this case was resolved in the courts in 2012. 2. What was the extent of the Petrobras scandal? Who did it impact? What made this case such a problem for Brazil? Discuss why the scandal might help prevent further corrupt behavior by government officials. The Petrobras scandal became known in 2014, although it had been taking place since 1997. Construction firms would pay bribes to the state-owned company‘s executives who were typically politically appointed. A three percent fee was assessed to contracts and subsequently shared by Petrobras executives, construction industry executives, and politicians. As the Brazilian president, Dilma Rousseff was chair of Petrobras at the time, her presidency was suspended and, in 2016, Rousseff was impeached and removed from the presidency. Students

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should recognize that the highly public nature of the scandal as well as its resolution should act as a warning sign to others who may be flirting with corrupt behavior. Teaching Tip: Students can explore past and present information concerning Transparency International‘s Corruption Perceptions Index at http://www.transparency.org/research/cpi/overview. Lecture Note: To extend the discussion to include the economic impact of corruption in Brazil, consider https://www.reuters.com/article/us-brazil-politics-poll/bolsonaros-popularity-jumps-asbrazil-economy-improves-crime-drops-idUSKBN1ZL1ZQ.

Foreign Corrupt Practices Act J) The Foreign Corrupt Practices Act makes it a violation of the United States law to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority and requires all publicly traded countries to keep detailed records so that it is clear whether a violation of the act has occurred or not.

management FOCUS: Did Walmart Violate the Foreign Corrupt Practices Act? Summary This feature explores corruption at Walmart‘s Mexico division where managers allegedly bribed Mexican government officials to obtain permission to build the San Juan Teotihuacan store in the early 2000s. After leaders at Walmart‘s headquarters were alerted of the situation, Walmart launched an internal investigation. However, the investigation was turned over to Walmart Mexico to complete and only after a 2012 New York Times article again raised questions about the situation did Walmart reopen the investigation. Today, the company has spent more than $612 million on legal fees and paid a $283 million settlement to the U.S. Department of Justice. Discussion Questions Please see Critical Thinking Question #5 for discussion of this feature.

Did You Know? Video Clip The video clip asks: Did you know that Venezuela has dropped to one of the worst performing economies in the world?‖ Discussion Questions 1. How would you describe Venezuela‘s political system, and how has that system contributed to the country‘s economic distress?

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Venezuela’s economic distress can be directly attributed to the country’s non-democratic, authoritarian regime. Venezuela, once a prosperous nation, is now a country in which 90 percent of its citizens are in poverty, the inflation rate is at an astounding 1 million percent, and unemployment stands at a staggering 33 percent. Students should recognize that repressive policies focusing on short-term gains have destroyed the longer-term potential of Venezuela’s economy. 2. Discuss corruption as it relates to Venezuela. What does it mean for the business environment in the country? How might foreign companies view Venezuela as a location for investment? Most students will probably suggest that rampant corruption in Venezuela has put the country near the top of Transparency International’s ranking of corrupt nations, making it a highly unattractive destination for foreign investment. Many students will also point out that the economic situation in Venezuela is so poor, that most foreign companies would likely not entertain the thought of investing in the country and those that had previously made investments have probably already pulled out. 3. What can Venezuela do to turn its economy around? Responses to this question will vary by student. Most will agree that Venezuela’s best hope may be a new government, one that promotes democratic ideals and reduces the corruption that has plagued the country in recent years. Students will likely note however, that even in the unlikely event that a new government takes over, change will be slow, and the chance for social unrest could threaten any sort of economic turnaround. Indeed, following the most recent election, which existing president Nicolas Maduro claims to have won, opposition leader Juan Guaido, recognized by many countries including the United States, as the real winner, has been unable to assume governing power. Teaching Tip: Learn more about the battle over the presidency in Venezuela, consider https://www.bbc.com/news/world-latin-america-36319877. Video Note: To extend this discussion, consider Oil Rich Venezuela Suffers as Global Prices Plummet in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

THE PROTECTION OF INTELLECTUAL PROPERTY K) Intellectual property refers to property, such as computer software, a screenplay, or the chemical formula for a new drug that is the product of intellectual activity. Intellectual property rights include patents (documents giving the inventor of a new product or process exclusive rights to the manufacture, use, or sale of that invention); copyrights (exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit); and trademarks (designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products). Teaching Tip: For information on intellectual property rights and policies, go to the World Trade Organization at http://www.wto.org/english/tratop_e/trips_e/trips_e.htm and the United States Patent and Trade Office at http://www.uspto.gov/ip.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Lecture Note: The U.S. Department of Commerce has made intellectual property protection a priority. To learn more about what the Department is doing go to http://www.stopfakes.gov/about. Teaching Tip: For more information on U.S. https://cyber.harvard.edu/metaschool/fisher/domain/tm.htm.

Trademark

law

L) Over 185 nations are part of the World Intellectual Property Organization. These countries have all signed an international agreement to protect intellectual property rights known as the Paris Convention for the Protection of Industrial Property. In addition, an agreement known as the Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Teaching Tip: The World Intellectual Property Organization provides extensive information on various treaties and agreements between countries regarding the protection of intellectual property. Go to http://www.wipo.int/portal/index.html.en and click on About WIPO. PRODUCT SAFETY AND PRODUCT LIABILITY M) Different countries have different product safety laws (safety standards to which a product must adhere). In some cases, businesses must customize products to adhere to local standards if they are to do business in a country, whether these standards are higher or just different. Product liability involves holding a firm and its officers responsible when a product causes death, injury, or damage. Some executives believe that the high cost of liability insurance in U.S. hampers the competitiveness of the U.S. companies in the global marketplace. CONNECT Video Case Turmoil in Venezuela Summary This activity focuses on the political and legal situation in Venezuela where an unpopular president is failing to adequately address the needs of the country. Many foreign companies have left the troubled country as doing business there has become increasingly challenging. Activity Students are asked to watch a video on the political and legal situation in Venezuela and then respond to a series of questions related to the video. Class Discussion A country‘s political, legal, and economic systems have important implications for international businesses. Discuss the situation in Venezuela and how the policies being pursued by the current government have changed the business environment. How should companies respond? Can a company be successful in Venezuela today?

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

360° VIEW: MANAGERIAL IMPLICATIONS A) The material discussed in this chapter has two broad implications for international business. First, political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business. Second, the political, economic, and legal environments of a country clearly influence the attractiveness of that country as a market and/or investment site. B) The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. C) In general, a country with democratic political institutions, a market-based economic system, and strong legal system that protects property rights and limits corruption will be more attractive to companies than a country that lacks democratic institutions, where there is strong government regulation of economic activity, and where the level of corruption is high and the rule of law is not respected. CONNECT Case Analysis Kenya: An African Lion Summary This activity focuses on Kenya‘s economic, political, and legal systems. Kenya has made significant economic gains since its independence from Britain in 1963, however continued growth is being hampered by numerous challenges including corruption, barriers to entrepreneurship, and limited property rights. Activity Students are asked to read a case on Kenya describing changes in the country since 1963 and then respond to a series of questions related to the case. Class Discussion A country‘s economic, political, and legal systems can have important implications for international businesses and how they view the attractiveness of a country as a place in which to do business. Discuss how U.S. companies might view the benefits, costs, and risks of doing business in Kenya.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Video Case Did You Know? Venezuela Has Dropped to One of The Worst Performing Economies in The World Summary This activity focuses on Venezuela‘s remarkable shift from being an emerging economic powerhouse to its current economic chaos. The transformation, occurring over just a few short years, has left the majority of the population in poverty. Given the refusal of Nicolas Maduro to cede power to recently elected Juan Guaidó, the future of the country remains unclear. Activity Students are asked to watch a video on Venezuela‘s transformation and then respond to a series of questions related to the video. Class Discussion Venezuela‘s stunning transformation from being a prosperous country with a promising future to its current impoverished and corrupt state is remarkable by many measures. Ask students to discuss what prompted Venezuela‘s fall and what other countries can learn from Venezuela‘s experience. Then, ask students to reflect on the battle for power in the country and its implications for the future of democracy in Venezuela.

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Discuss. Answer: In a market economy, private individuals and corporations are allowed to own property and other assets. This right of ownership provides a powerful incentive for people to work hard, introduce new products, develop better advertising campaigns, invent new products, etc., all in the hopes of accumulating additional personal capital and wealth. In turn, the constant search on the part of individuals and corporations to accumulate wealth enriches the entire economy and creates economic growth. In contrast, in a command economy, private individuals and corporations are not allowed to own substantial quantities of property and other assets. The objective of a command economy is for everyone to work for ―the good of the society.‖ Although this sounds like a noble ideal, a system that asks individuals to work for the good of society rather than allowing individuals to build personal wealth does not provide a great incentive for people to invent new products, develop better advertising campaigns, find ways to be more efficient, etc. As a result, command economies typically generate less innovation and are less efficient than market economies. 2. A democratic political system is an essential condition for sustained economic progress. Discuss.

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Answer: This question has no clear-cut answer. In the West, we tend to argue that democracy is good for economic progress. This argument is largely predicated upon the idea that innovation is the engine of economic growth, and a democratic political system encourages rather than stifles innovation. However, there are examples of totalitarian regimes that have fostered a market economy and strong property rights protection and experienced rapid economic growth. The examples include four of the fastest growing economies of the past 35 years—South Korea, Taiwan, Singapore, and Hong Kong—all of which have grown faster than Western economies. However, while it is possible to argue that democracy is not a necessary precondition for the establishment of a free market economy, it seems evident that subsequent economic growth leads to the establishment of democratic regimes. Several of the fastest-growing Asian economies have recently adopted more democratic governments. 3. What is the relationship between corruption in a country (i.e., government officials taking bribes) and economic growth? Is corruption always bad? Answer: Economic evidence suggests that high levels of corruption significantly reduce the economic growth rate in a country. By siphoning off profits, corrupt politicians and bureaucrats reduce the returns to business investment, and hence, reduce the incentive that both domestic and foreign businesses have to invest in that country. The lower level of investment that results has a negative impact on economic growth. However, while most students will probably agree that corruption is bad, some may point out that the United States, despite its Foreign Corrupt Practices Act, does allow ―grease payments‖ to expedite or secure the performance of a routine governmental action. According to Congress, ―grease payments,‖ while technically bribes, are not being used to obtain or maintain business, but rather are simply made to facilitate performance of duties that the recipients are already obligated to perform. 4. You are the CEO of a company that has to choose between making a $100 million investment in either Russia or Poland. Both investments promise the same long-run return, so your choice of which investment to make is driven by risk considerations. Assess the various risks of doing business in each of these nations. Which investment would you favor and why? Answer: When assessing the risks of investment, one should consider the political, economic, and legal risks of doing business in either Russia or Poland. Today, the risk in Russia would probably be considered higher than the risk in Poland. Poland has recently been accepted as a member of the EU, and as such gains the benefits and stability offered by the EU. Russia, by contrast, is still many years away from even being in a position to be considered by the EU for membership, and the recent actions of President Vladimir Putin, particularly in Ukraine, have been alarming to many. 5. Reread the Management Focus "Did Walmart Violate the Foreign Corrupt Practices Act?" What is your opinion? If you think it did, what do you think the consequences will be for Walmart? Answer: The Foreign Corrupt Practices Act prohibits companies from bribing foreign government officials to obtain or maintain business over which that foreign official has authority. Most students will probably agree that Walmart clearly violated the Act when it bribed Mexican

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officials to redraw the zoning area so that Walmart‘s San Juan Teotihuacan store could be built outside the commercial-free zone rather than inside it.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 The definition of words and political ideas can have different meanings in different contexts worldwide. In fact, the Freedom in the World survey published by Freedom House evaluates the state of political rights and civil liberties around the world. Provide a description of this survey and a ranking (in terms of ―freedom‖) of the world‘s country leaders and laggards. What factors are taken into consideration in this survey? Exercise 2 As the chapter discusses, differences in political, economic, and legal systems have considerable impact on the benefits, costs, and risks of doing business in various countries. The World Bank‘s ―Doing Business Indicators‖ measure the extent of business regulations in countries around the world. Compare Brazil, Ghana, India, New Zealand, the United States, Sweden, and Turkey in terms of how easily contracts are enforced, how property can be registered, and how investors can be protected. Identify in which area you see the greatest variation from one country to the next.

Kenya: An African Lion closing case Summary This closing case explores the emergence of Kenya as a regional power in Africa. Kenya can be viewed as an economic and political success in sub-Saharan Africa. Acting as the economic, financial, and transportation hub in East Africa, Kenya boasts a range of industries including agriculture, mining, manufacturing, tourism, communications, and financial services. Kenya‘s assent to its position as a top economy in the region has been decades in the making. Following its independence from Great Britain in 1963, Kenya adopted African Socialism and a policy of large public investment in infrastructure by state-owned companies and the promotion of smallholder agricultural production. During this time Kenya also adopted an import substitution policy to promote domestic production. In 1993, faced with a stagnating economy, Kenya implemented a series of economic reforms eventually leading to today‘s market economy, strong private sector, and relatively low barriers to cross-border trade and investment. Kenya also implemented political reforms shifting from what was essentially a one-party state to a decentralized system where political power is held by 47 semiautonomous regions and a free and fair election process is emphasized. Today, while corruption remains a problem and ethnic conflict continues, Kenya‘s well-educated young population and growing urban middle class are contributing to the country‘s thriving economy and stable democracy. Case Discussion Questions

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1. What is ―African Socialism‖ and how might it differ from ―socialism‖ in general? Socialism involves public ownership of the means of production for the common good of society. Those who believe in socialism feel that the state, rather than the individual, is better suited to ensuring that workers are adequately compensated for their labor. Like socialism, African Socialism promotes social development encouraged through a large public sector. In addition, African socialism supports the notion of what it means to be African and the avoidance of social classes within society. 2. Why do you think that Kenya‘s post-independence policy of African Socialism failed to deliver consistent economic growth? Some students may suggest that while at the time of its independence in 1963, when ethnic divisions were creating conflict in Kenya, and one large group held a disproportionate share of power, African Socialism was likely appealing, yet as time went on, the policy fell out of favor. For Kenya, African Socialism involved a policy of import substitution, the promotion of smallholder agricultural production, and large public investment in infrastructure by state-owned companies. While the approach was positive in the short term, especially in agricultural gains, it soon became clear that Kenya‘s economy was not growing and that changes needed to be made. 3. Kenya was a creation of Britain, a colonial power that once occupied the area. What problems were created when colonial powers drew national borders? Have these problems hampered the country‘s economic development? How is Kenya dealing with these problems? Students will probably suggest that Kenya‘s problems derive from the challenges involved in fully recognizing and appreciating the deep differences among the various ethnic groups that claimed allegiance to the land. In 1993, Kenya implemented a series of economic and political reforms, working to remove price controls, lower barriers to trade and investment, and be more fiscally responsible. In addition, political power was decentralized to 47 semiautonomous regions and holding free and fair elections was made a key focus for the country. Today, the success of Kenya‘s political and economic reforms is evident. The country‘s market-based economy is growing at a steady clip and is spread across a range of industries including agriculture, mining, manufacturing, tourism, communications, and financial services. A new constitution was introduced in 2010 limiting the power of the central government and increasing the power of regional governments. In addition, the focus on ensuring free and fair elections has contributed to increased business confidence supported by a young well-educated population and a thriving middle class. 4. What significant economic problems does Kenya face today? How might it overcome these problems? What advantages does the country have? Despite the economic and political reforms that have helped Kenya become a strong player in sub-Saharan Africa, Kenya continues to face several challenges. One challenge is the country‘s complicated bureaucratic process that makes it difficult for companies to establish new businesses. This, combined with ongoing corruption, could slow future business development. Furthermore, property rights are weak making the situation even more precarious. Some students may note that foreign companies could see the situation in Kenya as too risky and complicated and take their investment dollars elsewhere. Students may also note that ethnic conflicts and terrorism are likely to impact business decisions especially for foreign investors. However, despite challenges like these, many students will be optimistic about the future of Kenya, noting that its growing middle class, well-educated young workforce, diversified industrial base, and position as regional leader will all be important to the future of Kenya.

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Teaching Tip: Information on Kenya is available at https://www.bbc.com/news/world-africa13681341. Video Note: To learn more about Kenya, consider Kenya Races Toward Goal of Electrifying Every Household in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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Continuous Case Concept The growing realization that aggressive changes will be needed to stop climate change has prompted many countries to develop stiff CO2 emissions requirements for automakers. Within the European Union (EU), ambitious goals have been established requiring automakers to significantly reduce average emissions in their fleets. For automakers, the new regulations represent a considerable challenge. Demand for relatively low CO2 emission diesel powered vehicles is down. Typically, automakers depend on these vehicles to offset higher emission vehicles like SUVs allowing the car makers to meet overall standards. Furthermore, despite considerable progress, most automakers still have only a few electric vehicles in their fleets, making it difficult to attract buyers. Indeed, in Europe, buyers are currently flocking to SUVs, some of the more profitable vehicles auto companies produce, but also among the vehicles that emit the highest levels of CO2. As a result, auto companies, in their effort to meet the EU standards, are left with the difficult task of trying to capitalize on demand for SUVs while convincing buyers of the merits of lower emission vehicles too. 

Ask students to consider the impact of the new regulations for the auto industry in Europe. How do the regulations change the cost of doing business in Europe?



Then, ask students to consider the strategic alternatives that are open to automakers. Should they abandon the market in Europe in favor of countries with less ambitious environmental goals?



Finally, ask students to consider how differing regulations between countries can impede or facilitate strategic decisions for multinational companies. Will the European Union regulations make it more, or less, difficult for automakers to compete in North America?

This exercise could be used at the beginning of the discussion of this chapter‘s material, and/or again at the end. To take the discussion into greater depth, ask students to read the pertinent selections in the Additional Readings section below. The exercise also works well at the beginning of the Managerial Implications section.

Additional Readings and Sources of Information Vladimir Putin: Russia‘s action man president http://www.bbc.com/news/world-europe-15047823 The End of One Country, Two Systems in Hong Kong https://www.ft.com/content/5d3d7d2e-bba8-11ea-a05d-efc604854c3f IMF Sees Surprise Upward Revision of Kenya‘s Economic Growth https://www.bloomberg.com/news/articles/2020-09-09/imf-sees-surprise-upward-revision-ofkenya-s-economic-growth

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The Worst May Be Over for the Saudi Economy https://www.bloomberg.com/news/articles/2018-07-02/worst-may-be-over-for-saudi-economyas-oil-brightens-outlook Bolsonaro Declares Brazil Corruption Free and Ends Carwash Probe https://www.bloomberg.com/news/articles/2020-10-07/bolsonaro-declares-brazil-corruptionfree-and-ends-carwash-probe 25l Corruption Scandals That Shook the World https://www.transparency.org/en/news/25-corruption-scandals# Walmart Inc. and Brazil-Based Subsidiary Agree to Pay $137 Million to Resolve Foreign Corrupt Practices Act Case https://www.justice.gov/opa/pr/walmart-inc-and-brazil-based-subsidiary-agree-pay-137-millionresolve-foreign-corrupt How Companies Can Take a Stand Against Bribery https://hbr.org/2018/09/how-companies-can-take-a-stand-against-bribery China‘s Economy Continues to Bounce Back from Virus Slump https://www.bbc.com/news/business-54594877 Communist China Turns 70. Who Shares It Economic Growth? https://www.npr.org/2019/10/01/765676993/communist-china-turns-70-who-shares-itseconomic-growth Putin‘s Biggest Fear is to Be Held Accountable for His Regime‘s Crimes https://www.washingtonpost.com/opinions/2020/11/13/putins-biggest-fear-is-be-heldaccountable-his-regimes-crimes/

Chapter 3: National Differences in Economic Development Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: What Ails Argentina?

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Introduction Differences in Economic Development Did You Know? Video Clip: Did you know that that by 2050 India may be the second largest economy in the world and Indonesia the fourth? Political Economy and Economic Progress States in Transition The Nature of Economic Transformation Implications of Changing Political Economy 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Poland: Eastern Europe‘s Economic Miracle Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 3-1 Explain what determines the level of economic development of a nation. 3-2 Identify the macropolitical and economic changes occurring worldwide. 3-3 Describe how transition economies are moving toward market-based systems. 3-4 Explain the implications for management practice of national difference in political economy.

Chapter Summary This chapter focuses on the determinants of economic development. A country‘s political, economic, and legal systems have a direct impact on its economic potential. The importance of innovation, along with the types of systems that facilitate innovation, is discussed. Next, the chapter examines the parts of the world that are in transition from one political-economic ideology to another. Finally, the chapter ends with a discussion of the managerial implications of differing political, economic, and legal systems of a country.

Chapter Opening Activity Ask students to define an ―emerging market‖ country. Have them research the answer. They may find several definitions. They‘ll learn that it‘s not the same as a ―developing country.‖ Investment banking professionals who needed a way to explain the risk/return profile to their clients coined the term. Emerging markets are nations that are investing in more productive capacity. They are moving away from their traditional economies that have relied on agriculture and the export of raw materials. It‘s assumed that their leaders want to create a better quality of life for their people. Therefore, they are rapidly industrializing and adopting a free market or mixed economy. They have immature securities markets without a long history of substantial foreign investment, high risk, and potentially high returns. See https://www.thebalance.com/what-are-emerging-markets-3305927. One list of emerging market countries is within the MSCI Emerging Market Index https://www.thebalance.com/msci-index-what-is-it-and-what-does-it-measure-3305948. It tracks the performance of stock markets in 24 developing countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. Other lists of emerging markets may include countries from Kenya, with a per capita income of $350, to Mexico, with per capita income just above $5,000. What is common across them? 

Good growth prospects appear desirable but may reflect wishful thinking since only a handful of developing countries have grown at consistently higher rates than advanced economies.

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

 

High rates of return may work, but the evidence is that rates of return on emerging market securities have, on average, been not much better than those obtained by investing in U.S. treasuries. High level of risk and their characterization as extremely volatile is important. Any group of developing countries faces higher volatility than advanced industrialized economies. Absence of a history of foreign investment and transition to market economies suggests the possibility that they may graduate from their current economic conditions to greater institutional and policy maturity as equal participants in the global market economy.

Chapter Outline

What Ails Argentina? opening case Summary The opening case explores the state of the Argentine economy. Once one of the richest countries in the world, Argentina now struggles with high levels of inflation and extensive government debt. Argentina‘s problems have been attributed to a series of populist leaders who moved to nationalize numerous industries and expand state benefits. However, rather than benefitting the Argentine population, the short-sighted populist agenda has resulted in a situation in which imports and exports are taxed making it difficult for Argentina to participate in the global economy, the local currency is worthless prompting potential investors to look for other places for their money, and state-run businesses are inefficient and unproductive. Discussion Questions 1. Reflect on the challenges facing Argentina. With its rich natural resources and productive agricultural sector, Argentina should be in a very different place today than it finds itself. Indeed, Argentina‘s demise over the past 70 years appears as a slow-motion train wreck, something that government leaders should have stopped, yet failed to do so. Despite the recent efforts of center-right leader Mauricio Macri to get the economy back on track, it seems that Argentina‘s citizens once again prefer the short-sighted policies of populist leaders. Newly elected Alberto Fernandez, while being seemingly more open to reforms, has promised a return to classic Peronist policies making it unlikely that at least turning his tenure, Argentina will see much of a turnaround. 2. Prior to the election of Juan Peron, Argentina had a strong economy and a promising future. Given this situation, what does the election of populist leader Juan Peron tell you? Given the current challenges facing Argentina, do you think it is likely that populist leaders will continue to be elected? Argentina‘s transformation from economic superstar to economic has-been has been a century in the making. Decades of overspending by the government has created a situation that seems to be difficult to get out of. Persuading the electorate to follow fiscally responsible policies when so

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many Argentinians rely on government programs is not easy. Many students will probably suggest that while Juan Peron‘s misguided policies set Argentina‘s demise in progress, his policies also struck a note with the country‘s citizens suggesting that despite its apparent prosperity 70 years ago, not everyone was enjoying the country‘s good fortune. Indeed, students will probably suggest that victory of populist Alberto Fernandez over center-right Mauricio Macri suggests that the majority of Argentinians are still willing to gamble long-term prosperity for short-term benefits. Teaching Tip: To extend the discussion of Brazil‘s economy and how to get it back on track, consider https://www.ft.com/content/f3d2cd90-1e46-11e8-aaca-4574d7dabfb6 and http://thebricspost.com/brazil-economic-activity-surges-but/#.W7JXyWhKg2w.

CONNECT Case Analysis What Ails Argentina? Summary This activity focuses on Argentina‘s economic woes. Over the past 70 years, Argentina has gone from being one of the one of the richest countries in the world to a country with high levels of poverty and government debt. Much of Argentina‘s problems can be attributed to policies implemented by a series of populist leaders. Activity Students are asked to read a short case on Argentina‘s challenges and then respond to a series of questions related to the case. Class Discussion Discuss why Argentina‘s populist policies have proved to be so disastrous for the once thriving country. How has Argentina approached the global economy under its populist leaders? What can other countries learn from Argentina‘s experiences?

Introduction A) Differences in political economy influence the level of economic development of a nation, and thus, how attractive it is as a place for doing business. B) The past three decades have seen a general move toward more democratic forms of government, market-based economic reforms, and adoption of legal systems that better enforce property rights. Taken together, these trends have helped foster greater economic development around the world creating a more favorable environment for international business.

Differences in Economic Development

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A) Different countries have dramatically different levels of economic development. One common measure of economic development is a country‘s gross national income (GNI) per head of population. To account for cost of living differences between countries, GNI can be adjusted by purchasing power. A purchasing power parity (PPP) adjustment allows for a more direct comparison of living standards in different countries. A drawback of both GNI and PPP data is that they provide only a static picture of development. Lecture Note: India posted strong economic growth in 2018, outpacing other emerging markets. To learn more, consider https://www.wsj.com/articles/indias-gdp-grew-8-2-in-the-last-quarter1535717818. Lecture Note: An interesting notion regarding economic development levels explores the cost of Big Macs around the world. To learn more, go to https://www.economist.com/news/2018/07/11/the-big-mac-index. Did You Know? Video Clip The video clip asks: ―Did you know that that by 2050 India may be the second largest economy in the world and Indonesia the fourth? Discussion Questions 1. Were you surprised to learn that India has been forecasted to be one of the world‘s biggest economies by 2050? Why? These are questions designed to get opinions. Students may be surprised to learn that India, a developing economy, will likely surpass the United States, a developed economy, within a few decades. Ask students to consider drivers of economic growth like human capital and discuss how those drivers differ between India and the United States. Students should recognize that gaps in areas such as education are quickly closing between the two countries, helping India emerge as a global economic force. 2. India, like many other nations, has been hard hit by COVID-19. Now the economic fallout related to lockdowns to limit the spread of the virus threaten the livelihood of thousands of small business owners. Can India regain its pre-COVID growth rates? What are the implications of COVID-19 for the future of the country? Responses will vary depending on student familiarity with India. Students should recognize though, that many of the thousands of small businesses that were vital to economic growth in India will be shuttered permanently in the wake of COVID-19 putting the livelihood of business owners and employees in jeopardy. Some people have already left city centers and returned to their villages, a trend that may continue at least for the short term. Whether the country can turn itself around and get back on its pre-COVID economic ascent is unknown. Video Note: Prior to the outbreak of COVID-19, India‘s economy was growing at a remarkable place. Now, growth has stalled, and experts are warning that it could be years before the country is back on track. To learn more, consider India’s Poor Find Themselves Even More Desperate

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Amid the Pandemic Economy in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Lecture Note: To extend the discussion of India‘s economic growth, consider https://www.nytimes.com/2020/08/31/world/asia/india-economy-gdp.html. BROADER CONCEPTIONS OF DEVELOPMENT: AMARTYA SEN B) Nobel Prize-winning economist Amartya Sen has argued that development should be assessed less by material output and more by the capabilities and opportunities that people enjoy. Sen‘s ideas have been picked up by the United Nations and are reflected in the Human Development Index (HDI), which is a United Nations developed index based on life expectancy, education attainment, and whether average incomes are sufficient to meet the basic needs of life in a country. The index was developed to gauge a country‘s economic development and likely future growth rate.

Political Economy and Economic Progress A) What is the relationship between political economy and economic progress? This question has been the subject of a vigorous debate among academics and policymakers for some time. INNOVATION AND ENTREPRENEURSHIP ARE THE ENGINES OF GROWTH B) Innovation is the process through which people create new products, new processes, new organizations, new management practices, and new strategies. Innovation is often seen as the product of entrepreneurial activity. C) Entrepreneurs first commercialize innovative new products and processes. There is broad agreement that innovation and entrepreneurship are the engines of long-run economic growth. INNOVATION AND ENTREPRENEURSHIP REQUIRE A MARKET ECONOMY D) It has also been argued that the economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or mixed economy. INNOVATION

AND

ENTREPRENEURSHIP

REQUIRE

STRONG

PROPERTY

RIGHTS E) Strong legal protection of property rights is another requirement for a business environment conducive to innovation, entrepreneurship, and economic growth.

country FOCUS: Property Rights in China Summary This feature explores the effect of a new property law in China. The law, which was passed in 2007, gives both rural and urban landholders more secure property rights. The new law was a much-needed response to the changes in China‘s economy over the last 30 years. Under the law,

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urban landholders are granted 40–70-year leases and rural landholders 30-year leases, and both groups have the right to automatically renew their leases. While the law has its limitations, it is a step toward strengthening property rights in China. The 2007 law was further strengthened in 2016 with new guidelines from the ruling Communist Party. Even so, there is still room for more improvement. Discussion Questions 1. What prompted the new property law in China? Why did it take so long to actually develop the law? China‘s economy has undergone significant changes over the last 30 years. The country has shifted from a centrally planned economy where state ownership ruled, to a dynamic marketbased system where some two-thirds of economic activity is now conducted by private companies. So, while the state technically still controls all land, the new law means that private enterprises have a greater opportunity to behave as true landowners. The new law took 14 years to create thanks to significant opposition from Communist Party activists who believe that it violates basic communist policies. 2. China‘s new law has implications for both urban landholders and rural landholders, but it is especially important for the latter group. Explain what China‘s new property law means for farmers. The new law is important for both farmers and other landholders because it grants landholders the right to a long lease and the opportunity to renew the lease. In the past, many farmers found themselves evicted from their farms without compensation when the state took the land for housing or factories. Under the new law, while the state technically still controls all land, and could therefore, appropriate it, farmers have a more stable, secure environment. If the state needs the land, the farmer must be compensated. Still, the law fails to give farmers ownership rights to their land, and effectively prevents them from either acquiring additional land and taking advantage of scale economies, or selling their land, and moving into a more productive situation. Lecture Note: China‘s new efforts to improve property rights are a move in the right direct, but much remains to be done. To extend this discussion, consider https://asiatimes.com/2020/05/chinapoised-for-major-property-rights-overhaul/,

https://www.forbes.com/sites/sarahsu/2016/11/30/china-improving-property-rightsprotections/#4b68755a6e5c, and https://www.export.gov/article?id=China-Protection-ofProperty-Rights. Video Note: For insight on the development of innovation in http://www.bloomberg.com/news/videos/2016-09-06/china-s-innovation-era.

China,

THE REQUIRED POLITICAL SYSTEM F) In the West, it is often argued that democracy is good for economic growth. However, there are examples of totalitarian regimes that have fostered a market economy and strong property Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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rights protection and experienced rapid economic growth. Given all the facts though, it seems likely that democratic regimes are far more conducive to long-term economic growth than a dictatorship, even those that are benevolent. ECONOMIC PROGRESS BEGETS DEMOCRACY G) While it is possible to argue that democracy is not a necessary precondition for the establishment of a free market economy in which property rights are protected, it seems evident that subsequent economic growth leads to the establishment of democratic regimes. GEOGRAPHY, EDUCATION, AND ECONOMIC DEVELOPMENT H) Geography can also affect economic development. A landlocked country with an inhospitable climate, poor soil, few natural resources, and terrible diseases is unlikely to develop economically as fast as a country with the opposite characteristics on each of these attributes. I) While it can be hard to do much about unfavorable geography, education is something that governments can change. Numerous studies suggest that countries that invest more in the education of their young people develop faster economically.

States in Transition A) Since the late 1980s, there have been three major changes in the political economy of many of the world‘s nations. First, a wave of democratic revolutions swept the world, and many of the previous totalitarian regimes collapsed. Second, there has been a move away from centrally planned and mixed economies toward free markets. Third, there are signs that some countries are retreating from the free market model, a shift toward greater authoritarianism. THE SPREAD OF DEMOCRACY B) One notable development of the past 30 years has been the spread of democracy (and by extension, the decline of totalitarianism). Three main reasons account for the spread of democracy. First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their population. Second, new information and communication technologies have broken down the ability of the state to control access to uncensored information. Third, in many countries the economic advances of the last quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms. THE NEW WORLD ORDER AND GLOBAL TERRORISM C) The end of the Cold War and the ―new world order‖ that followed the collapse of communism in Eastern Europe and the former Soviet Union, taken together with the collapse of many authoritarian regimes in Latin America, have given rise to intense speculation about the future shape of global geopolitics.

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Lecture Note: The election of Donald Trump has shaken up traditional political alliances in a manner unseen in recent history. To learn more, consider https://www.theatlantic.com/international/archive/2020/10/donald-trump-foreignpolicy/616773/, https://www.cnn.com/2018/06/11/politics/trump-world-order/index.html, and https://www.ft.com/content/a5762736-8c01-11e8-affd-da9960227309. Video Note: Donald Trump‘s insular focus is bringing into question the leadership role that the United States has traditionally held in world trade. To extend this discussion, consider Global Trade Without US Leadership, Does Donald Trump Care? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues.

THE SPREAD OF MARKET-BASED SYSTEMS D) Paralleling the spread of democracy since the late 1980s has been the transformation from centrally planned command economies to market-based economies. The rationale for transformation has been the same the world over. In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems. Teaching Tip: The CIA maintains a site with extensive information on every country in the world including a section on current issues. This can be an excellent ―first stop‖ when conducting research on the market potential of a particular country or area. The site is available at https://www.cia.gov/library/publications/the-world-factbook. Teaching Tip: The U.S. State Department produces a series of annual "Country Reports" to acquaint American businesses with other countries. Each report contains nine sections: (1) Key Economic Indicators; (2) General Policy Framework; (3) Exchange Rate Policies; (4) Structural Policies; (5) Debt Management Practices; (6) Significant Barriers to U.S. Exports and Investments; (7) Export Subsidies Policies; (8) Protection of U.S. Intellectual Property; and (9) Worker Rights. Information about obtaining these reports is available through the United States State Department. There is also a special section devoted to international business. Visit http://www.state.gov and then click on ―Countries & Regions‖ and then on ―A-Z List of Country and Other Area Pages.‖

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The Nature of Economic Transformation A) The shift toward a market-based economic system typically involves at least three distinct activities: deregulation, privatization, and legal enforcement of property rights. DEREGULATION B) Deregulation involves removing restrictions on the free operation of markets, the establishment of private enterprises, and the way private enterprises operate.

country FOCUS: India‘s Economic Transformation Summary This feature explores the economic transformation in India over the last two decades. After implementing a series of deregulation reforms, India‘s economy has been expanding rapidly and the country has been the recipient of significant investment by foreign companies, particularly in information technology and pharmaceuticals. These investments are helping India become a force in global markets. Still, the country has some way to go. Recent efforts to reduce tariffs have met with opposition and laws still limit the operation of private enterprises. Discussion Questions Please see Critical Discussion Question #3 for a detailed discussion of this feature. Video Note: To learn about one man‘s effort to improve the lives of women in India, consider This Innovator is Trying to Make Sanitary Pads Affordable for Women in India in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

PRIVATIZATION C) Privatization transfers the ownership of state property into the hands of private investors. To attract investment and protect the interests of the private enterprise encouraged by the first two activities, changes typically need to be made to legal systems to protect the property rights of investors and entrepreneurs. Video Note: To explore the demands placed on India‘s energy infrastructure, consider Demand for Power in India Outstrips Current Energy Infrastructure in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. LEGAL SYSTEMS D) Laws protecting private property rights and providing mechanisms for contract enforcement are required for a well-functioning market economy. Without a legal system that protects property rights, and without the machinery to enforce that system, the incentive to engage in

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

economic activity can be reduced substantially by private and public entities that expropriate the profits generated by the efforts of private sector entrepreneurs. Implications of Changing Political Economy A) The implications for business of the move toward free markets and democracy are enormous. Markets that were formerly off-limits to Western business are now open. However, just as the potential gains are large, so are the risks. CONNECT Click and Drag The Changing World Summary This activity focuses on how the modern business environment is shaped by political and economic forces. International managers need to understand world events and their implications for the countries in which they do business. As part of this, managers need to understand the difference between events and trends and how each changes the business environment. Activity Students are asked to identify whether various trends are political or economic in nature. Class Discussion The modern business environment is continually evolving, shaped by political and economic trends and events. Identify some of those trends and discuss why they are occurring and what they mean for international companies now and going forward.

CONNECT Click and Drag States in Transition Summary This activity focuses on understanding how political upheaval in a nation changes the attractiveness of a country as a destination for investment. International managers need to understand the nature of the transition, why it is occurring, and what it means for the business environment. Activity Students are asked to match various trends in terms of their political outcome. Class Discussion There has been a move away from centrally planned regimes toward more democratic, marketbased systems. These transitions are not always easy. Discuss the nature of these transitions along with the risks and opportunities they present to international businesses.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Benefits, Costs, and Risks of Doing Business Internationally A) The benefits, costs, and risks associated with doing business in a country are a function of that country‘s political, economic, and legal systems. The overall attractiveness of a country as a market and/or investment site depends on balancing the likely long-term benefits of doing business in that country against the likely costs and risks. Benefits B) By identifying and investing early in a potential future economic star, firms may be able to gain first-mover advantages (advantages that accrue to early entrants into a market) and establish loyalty and experience in a country. Companies that are late to enter a marker may suffer from late-mover disadvantages. Two factors that are reasonably good predictors of a country‘s future economic prospects are its economic system and property rights regime. Costs C) The costs of doing business in a country are determined by a number of political, economic, and legal factors. Political costs can involve the cost of paying bribes or lobbying for favorable or fair treatment. Economic costs relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses. Risks D) Political risk is the likelihood that political forces will cause drastic changes in a country‘s business environment that adversely affects the profit and other goals of a business enterprise. Economic risk is the likelihood that economic mismanagement will cause drastic changes in a country‘s business environment that adversely affects the profit and other goals of a business enterprise. Legal risk is the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. Video Note: The Brexit vote to leave the European Union has prompted many foreign companies to rethink their investments in Gibraltar. To learn more, consider In Gibraltar Many British Citizens Worry About the Effects of Brexit in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Video Note: Mercedes-Benz Questioned in China Pricing Probe explores how German automaker Mercedes is dealing with an adverse political situation in China. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Overall Attractiveness E) The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. Lecture Note: To extend this discussion, consider exploring some of the key risks for doing business in the global economy. See https://www.dnb.com/perspectives/finance-credit-risk/10key-risks-for-businesses-in-global-economy.html and

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

http://www.bloomberg.com/news/articles/2016-07-21/the-global-economy-is-slow-but-steadierthan-ever. Video Note: For information about future possible growth prospects in the global economy, consider http://www.worldbank.org/en/publication/global-economic-prospects. CONNECT Click and Drag Evaluating Country Attractiveness Summary This activity focuses on understanding the attractiveness of a country for doing business. Companies need to consider many factors when looking at investment opportunities in foreign countries. Countries with democratic regimes, strong property rights, and large and expanding markets are generally considered attractive options. Activity Students are asked to identify various factors in terms of whether they are a benefit, a cost, or a risk of doing business in a country. Class Discussion A country‘s attractiveness as a place of doing business is determined by numerous factors. Discuss how companies might identify which factors are most relevant to them. Then discuss how those factors can be measured to determine the overall attractiveness of a country.

CONNECT Video Case Globalization Has Worked Summary This activity focuses on how globalization, its benefits and costs, and how those patterns are driving current national policy. While globalization can generally be considered a success, some countries and groups have not benefitted from the trend. This is prompting a push for new policies—policies that emphasize a more inward focus rather than the more outward focus that is associated with globalization. Activity Students are asked to watch a video on globalization and then respond to a series of questions about that video. Class Discussion The election of Donald Trump in the United States and the vote in Great Britain to leave the European Union are just two examples of a burgeoning push to reexamine what globalization means and reflect on whether there should be greater focus on policies that promote single countries. Discuss this trend. What policy changes could it lead to and how will those shape the

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

economic development of nations? Try to focus the initial discussion on global powers including the United States, China, and Great Britain.

CONNECT Video Case Did You Know? By 2050 India May Be the Second Largest Economy in The World and Indonesia The Fourth Summary This activity focuses on economic transformation in India and Indonesia. Both countries have emerged as economic powerhouses in recent years, with India forecasted to become the second largest economy in the world. Activity Students are asked to watch a video on economic transformation in India and Indonesia and then respond to a series of questions related to the video. Class Discussion Understanding the implications of economic transformation is important for international managers. Ask students to consider what rapid economic growth in India and Indonesia means for companies expanding their markets. Then, ask students to discuss the implications of economic growth on the attractiveness of India and Indonesia as places for conducting business. Finally, ask students to reflect on how economic growth, especially in India, could change the power structure of the global economy. CONNECT Case Analysis Poland: Eastern Europe’s Economic Miracle Summary This activity explores the economic transformation in Poland since 1989. Following the election of a democratic government, Poland implemented reforms to promote entrepreneurship and reduce state ownership of companies. Today, Poland has one of the fastest growing economies in Europe. Activity Students are asked to read a short case on the economic transformation in Poland since 1989 and then respond to a series of questions related to the video. Class Discussion Discuss the implications of economic transformation and why it is important to international companies. How has economic transformation in Poland created new opportunities for international companies?

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. What is the relationship between property rights, corruption, and economic progress? How important are anticorruption efforts in the effort to improve a country‘s level of economic development? Answer: Innovation and entrepreneurship are widely recognized as important to long-run economic growth. Innovation and entrepreneurship flourish in environments that are free of corruption and where proprietary property is protected. Support for companies and individuals is important to this process. Individuals or companies that must pay bribes to obtain licenses or face other types of corrupt behavior are less likely to carry out the activities necessary for economic growth and progress. Similarly, companies and individuals are likely to shy away from environments where property rights are not well protected. 2. You are a senior manager at a U.S. automobile company considering investing in production facilities in China, Russia, or Germany. These facilities will serve local market demand. Evaluate the benefits, costs, and risks associated with doing business in each nation. Which country seems the most attractive target for foreign direct investment? Why? Answer: Responses to this question will vary by student. Many will probably suggest that China‘s low-cost labor and large potential domestic market make it an attractive destination for the investment. Other students, however, may raise questions about the legal environment in the country and whether proprietary property would be adequately protected. Similarly, many students might wonder whether despite Russia‘s privatization efforts and the high level of corruption in the country would offset any opportunities the market might offer. Some students might favor Germany with its stable government and strong history as a key player in the global auto industry, as well as its easy access to other European Union markets. 3. Reread the Country Focus ―India‘s Economic Transformation,‖ and answer the following questions. a. What kind of economic system did India operate during 1947–1990? What kind of system is it moving toward today? What are the impediments to completing this transformation? b. How might widespread public ownership of businesses and extensive government regulations have affected (i) the efficiency of state and private businesses and (ii) the rate of new business formation in India during the 1947–1990 time frame? How do you think these factors affected the rate of economic growth in India during this time frame? c. How would privatization, deregulation, and the removal of barriers to foreign direct investment affect the efficiency of business, new business formation, and the rate of economic growth in India during the post-1990 time period? d. India now has pockets of strengths in key high-technology industries such as software and pharmaceuticals. Why do you think India is developing strength in these areas? How might success in these industries help generate growth in other sectors of the Indian economy?

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

e. Given what is now occurring in the Indian economy, do you think the country represents an attractive target for inward investment by foreign multinationals selling consumer products? Why? Answer: a. From 1947 to 1990, India operated under a mixed economy that included several large state-owned enterprises, central planning, and subsidies. Today, the country is moving toward a market economy. Already a number of economic reforms have been implemented allowing for more privatization of key industries and attracting more foreign investment. However, tariffs are still high and efforts to lower them are meeting with opposition from companies that fear lower tariffs will bring in too much competition. Antiquated labor and manufacturing laws are also making it difficult for firms to operate competitively. b. Many students will probably agree that introducing privatization at a much earlier date could have led to greater corporate efficiency and generated more economic growth in India. Extensive government regulations also hampered the efforts of businesses to expand prior to 1990. In fact, it was India‘s lack of growth that forced the government to implement the reforms in 1990 that have been responsible for prompting the economic turnaround the country is currently experiencing. c. Since 1990, India has been much more open to foreign investment, and extensive privatization of numerous industries has introduced a new level of competition to the market—competition that forces firms to become more efficient. Foreign investment in the county is up from just $150 million in 1991 to $36.7 billion in 2007, and the overall economy has grown at a much quicker rate. Growth rates from 1994 to 2004 were about 6.3 per year, but about 9 percent per year from 2005 to 2008. d. India‘s information technology sector and pharmaceutical sector have been particularly successful in recent years. For example, in 2007, India‘s software development sector had sales of $50 billion as compared to just $150 million in 1990. Many students will probably attribute much of the country‘s success in these sectors to a combination of factors including a well-educated, low-cost workforce, and the country‘s growing middle class. Students will probably note that success in these industries should have a spillover effect for other sectors of the economy. e. Many students will probably suggest that despite the many recent changes in India, consumer products manufacturers could still face significant challenges in the country. India‘s laws make it difficult for private companies to operate efficiently; companies are limited in their ability to manufacture some products and may also find it hard to fire workers. Still, if the country can recapture its pre-COVID-19 prosperity, its large potential market could make it attractive to many companies. Lecture Note: To extend this discussion, consider exploring India‘s efforts to lure foreign companies to the country, https://www.bloomberg.com/news/articles/2018-01-10/modi-easesrules-to-lure-foreign-investors-as-india-growth-slows. Also learn more about China‘s burgeoning interest in investing in India, https://www.indiatvnews.com/business/news-nearly-600-foreigncompanies-most-of-them-chinese-plan-rs-5-5-lakh-crore-investments-in-india-406919. Finally, extend the discussion with an exploration of India‘s post-COVID economy, https://www.bloombergquint.com/economy-finance/india-needs-calibrated-economicreconstruction-post-covid-19-finance-ministry.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Teaching Tip: Information on doing business in India is available https://www.doingbusiness.org/content/dam/doingBusiness/country/i/india/IND.pdf.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 Increased instability in the global marketplace can introduce unanticipated risks in a company‘s daily transactions. Your company must evaluate these commercial transaction risks for its foreign operations in Argentina, China, Egypt, Poland, and South Africa. A risk analyst at your firm said you could evaluate both the political and commercial risk of these countries simultaneously. Provide a commercial transaction risk overview of all five countries for top management. In your evaluation, indicate possible corrective measures in the countries with considerably high political and/or commercial risk. Exercise 2 Managers at your firm are very concerned about the influence of terrorism on its long-term strategy. To counter this issue, the CEO has indicated you must identify the countries where terrorism threats and political risk are minimal. This will provide the basis for the development of future company facilities, which need to be built in all major continents in the world. Include recommendations on which countries in each continent would serve as a good candidate for your company to further analyze. Clicking on each country will provide a paragraph write-up justifying the reasons for the current rating.

Poland: Eastern Europe‘s Economic Miracle closing case Summary The closing case explores the economic transformation of Poland following its abandonment of four decades of Communist leadership in 1989. Under its newly elected democratic government, Poland quickly implemented a series of reforms designed to get the country on track economically. The country embraced market-based policies including opening its borders to trade and investment, privatizing many of its state-owned companies, and creating a climate of entrepreneurship. Fiscal responsibility has been an important element overriding the success of these reforms. Today, despite having some challenges related to an aging population and labor shortages as well as a number of state-owned business, Poland has one of the strongest economies in Europe. Case Discussion Questions 1. Why has Poland‘s economic growth been so strong in the country‘s post-Communist era? After rejecting four decades of Communism, in 1989, Poland elected its first democratic government. Unlike other Eastern European countries, Poland made the decision to quickly

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

implement market-based policies using a ―shock therapy‖ program. In addition to privatizing state-run businesses, Poland opened its doors to foreign trade and investment and created a climate supportive of entrepreneurs. Throughout the process, government leaders kept tight control on government spending, a strategy that paid off when the global recession hit in 20082009. Poland also moved to join the European Union in 2004 and adopted the euro as its currency. Today, Poland, with one of the strongest economies in Europe, continues to be fiscally conservative, keeping inflation and unemployment low. 2. What are the lessons learned from the Polish experience that could be applied to other states trying to achieve greater economic growth? As part of its transition to a market-based economy, Poland lowered barriers to foreign trade and investment. Today, exports account for more than half of the country‘s GDP and the country boasts the highest sustained growth in the region. As part of its effort to be part of the global economy, Poland joined the European Union in 2004 and adopted the euro further integrating its economy with much of Western Europe. Students should recognize that by engaging in the global economy rather than acting in isolation, Poland has been able to focus on those industries in which it is most competitive and trade for other products. Poland is also able to capitalize on the investments of foreign companies. 3. What economic headwinds might Poland face going forward? What additional policies should the government pursue to keep the economy on a stable footing and growing? Despite having one of the strongest economies in Europe, Poland still faces some challenges. One major challenge is its aging population and looming labor shortage. Poland is working to encourage immigration as a way to deal with this problem, but anti-immigration sentiment in the country is hampering progress. Another challenge for Poland is the potential for fiscal problems down the road. After following a very tightly controlled fiscal policy for more than twenty years, Poland recently loosened the purse strings to raise social security payments and the number of people qualifying for those payments. A third concern for the country relates to the number of state-owned businesses in key sectors that still exist. Given that state run enterprises are often inefficient, further privatization may be in order. Teaching Tip: To extend this discussion and further explore Poland‘s economic growth, consider https://www.euronews.com/2019/06/25/how-poland-s-golden-age-of-economic-growthis-going-unreported-view and https://www.mckinsey.com/~/media/mckinsey/business%20functions/economic%20studies%20t emp/our%20insights/how%20poland%20can%20become%20a%20european%20growth%20engi ne/poland%202025_full_report.ashx.

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Activity Students are asked to respond to a series of question related to the geographic location of several countries. Class Discussion Understanding the geographic location of countries is essential to the understanding of international business. Ask students to discuss the implications of the geographic locations of the countries in this exercise on the subject matter.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Continuous Case Concept Will Morocco become the next Detroit? Auto exports now account for about a quarter of all exports, and the country has been working hard over the last few years to further build up its auto industry by offering various incentives to foreign companies as an enticement for investment. Already, France‘s Renault has a plant in Casablanca and recently shifted production from its Dacia plant in Romania to Morocco. Prior to its recent move, the Romanian plant had been running at near capacity. 

Ask students to consider how Morocco‘s new policies could impact economic development in the country. How might investment in the auto industry benefit the country? Are there any drawbacks?

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Next, ask students to reflect on the role of government in economic development. How important are Morocco‘s new incentive policies to the country? Should other governments, like Romania follow Morocco‘s lead?

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Finally, ask students to think about Morocco as an investment destination. What challenges might a company investing in the country face? Ask students to identify the risks involved and how each risk level might change depending on whether a firm is a first mover as compared to a late mover.

Additional Readings and Sources of Information US Risks China‘s Ire by Raising Prospect of Taiwan Trade Deal http://www.bloomberg.com/news/articles/2016-07-21/the-global-economy-is-slow-but-steadierthan-ever Could Poland Catch Up with Germany‘s Economy? https://www.dw.com/en/could-poland-catch-up-with-germanys-economy/a-52425523 Wheels of fortune: how Morocco plans to overtake SA motor industry https://www.businesslive.co.za/bd/opinion/2018-05-28-wheels-of-fortune-how-morocco-plansto-overtake-sa-motor-industry Morocco‘s Automotive Sector to Compete with China, India https://www.moroccoworldnews.com/2020/01/291751/morocco-automotive-china-india/ Venezuela‘s Crash Is Worst Outside War in Decades Economists Say https://www.nytimes.com/2019/05/17/world/americas/venezuela-economy.html

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Serious Economic Reform Is Key to Unlocking India‘s Potential https://www.ft.com/content/5da809a6-b029-11e7-8076-0a4bdda92ca2 India‘s economy to overtake UK, Germany, France, and Japan in the next decade, predicts HSBC https://www.telegraph.co.uk/business/2018/09/30/indias-economy-overtake-uk-germany-francejapan-next-decade McDonald‘s and Starbucks hit by plastics ban in India https://money.cnn.com/2018/06/25/news/companies/india-plastic-ban-mcdonalds-starbucksmaharashtra/index.html Trump and the crumbling of the US-led world order https://www.brookings.edu/podcast-episode/trump-and-the-crumbling-of-the-us-led-world-order

Chapter 4: Differences in Culture Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Russian Culture Introduction Did You Know? Video Clip: Did You Know That Russians Typically Don‘t Smile as Much as Americans? What Is Culture? Social Structure Religious and Ethical Systems Language Education Culture and Business Cultural Change 360° View: Managerial Implications End-of-Chapter Resources

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Culture and Business in Saudi Arabia APPLICATION-BASED ACTIVITY: DIFFERENCES KNOWLEDGE

CULTURE: EXPANDING CULTURAL

Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 4-1 Explain what is meant by the culture of a society. 4-2 Identify the forces that lead to differences in social culture. 4-3 Identify the business and economic implications of differences in culture. 4-4 Recognize how differences in social culture influence values in business. 4-5 Demonstrate an appreciation for the economic and business implications of cultural change.

Chapter Summary This chapter begins by introducing the concept of culture. The determinants of culture are identified, which include religion, political philosophy, economic philosophy, education, language, and social structure. The first half of the chapter focuses on the influence of social structure, religion, language, and education on culture. The section on religion explains the economic implications of Christianity, Islam, Hinduism, Buddhism, and Confucianism. In addition, Geert Hofstede‘s model of how a society‘s culture impacts the values found in the workplace is presented. According to Hofstede, cultures vary along the lines of power distance, individualism versus collectivism, uncertainty avoidance, and masculinity versus femininity. The concept of ethnocentric behavior is introduced. Finally, the author reiterates the point that the value systems and norms of a country influence the costs of doing business in that country.

Chapter Opening Activity Ask students to find out what percentage of the world population is comprised of people in the U.S. and other countries. Students can search the World Bank, the CIA Factbook, some of the databases on globalEDGE, or even Wikipedia. As of 2018:     

U.S. is 4.3% of the world‘s population British are 1% Brazil is 2.7% Mexico is 1.6% 18.2% from China

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

   

17% from India 0.74% from South Africa 17.5% from India Russians are 1.9%

Ask students what conclusions they draw from this data. For example, international business is conducted outside of the home country. Nations have cultural diversity and different values, metaphors, stereotypes, idioms, and languages. How will students learn to work with people from different countries and cultures? How will they function effectively when visiting countries with distinctive cultures, such as Mexico, China, Russia, Japan, or Switzerland? Introduce them to Hofstede‘s dimensions of national culture on his own website: https://geerthofstede.com/landing-page.

Chapter Outline

Russian Culture opening case Summary The opening case explores the complexity of Russia‘s culture and the challenges it presents to Western businesspeople. As compared to individuals in Anglo Saxon nations like the United States and Great Britain, Russians typically are more accepting of hierarchy and power differences as they relate to social status, prefer to avoid uncertainty in business and social situations, and are less individualistic. Failing to appreciate these culture differences can lead to misunderstandings between Russian business people and their counterparts from Anglo Saxon countries. Discussion Questions 1. In general, as compared to Americans, Russians tend to less individualistic. Discuss how this difference might influence the business environment in Russia. How does the focus on the individual influence American business? For Americans, where individualism is prized, countries that focus less on individualism can be an enigma. Many students will conclude that because Russians do not embrace individualism in the same way that Americans do, individualism in business is less likely to be encouraged or supported in Russia as compared to the United States where entrepreneurism is actively encouraged. Students may note for example, that in the United States, support structures like the Small Business Administration exist to help entrepreneurs. Students may also point out that from a very young age, Americans are taught to focus on individual achievements. This then carries over to business and the preference by many to put the individual ahead of the group. Some students may suggest that the focus on the individual in the United States fosters a sense of optimism and invincibility, and the notion that anything can be achieved through hard work.

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

2. How might the preference by Russians to avoid uncertainty in business situations create an advantage for British and American companies doing business in Russia? Responses to this question will differ by students. Many will focus on long term planning and the differences between a Russian manager, who is likely to be more risk adverse and choose a strategy that has a greater certainty of success even if it has lower profit potential, as compared to the British or American manager who is more open to uncertainty and so may be more willing to accept higher levels of risk in exchange for higher profit potential. Other students might explore how a Russian might negotiate an agreement. Students taking this approach might suggest that the Russian would be more willing to accept a quick, guaranteed sale, even at a lower price, rather than hold out for a better price, when doing so might mean losing the sale. In contrast, the British or American manager, with a higher tolerance for uncertainty, may be willing to let negotiations play out even if there is a risk that a deal might fall apart. Regardless of the particular scenario, students should grasp that because of cultural differences, a Russian manager is likely to take a different tack as compared to a British or an American manager. Understanding why that is the case, may provide an advantage to the Western manager. 3. Suppose you have been assigned to work with your Russian colleague to develop five- and ten-year plans for your company‘s operations in Russia. How might cultural differences impact your discussions? As an American, what steps can you take to improve the success of your meetings? Many students will probably suggest that one of the most important things they can do to prepare for the meeting is to learn about the Russian culture and how that might influence business decisions. Students may conclude that the preference by Russians to avoid uncertainty could create challenges when making long-terms plans. Other students may point out that differences in how Americans and Russians view power could be an issue. If the American manager outranks the Russian manager, the Russian manager may simply accept the American‘s strategy suggestions without challenging them. Still other students may wonder whether Russia‘s focus on the group as compared to the individual could factor into long-term planning. Students are likely to conclude that it is imperative that the American manager understand how Russian culture might influence decision making and the implications of that influence in developing long term plans. 4. After months of communicating via email, you are excited to meet Petra, your Russian counterpart in person. You make plans to meet at the office in Moscow, but when you arrive your Russian colleague is stony-faced and seems grim. Furthermore, Petra seems confused by your effusive greeting. What should you make of the situation? Students should recognize that unlike Americans, Russians tend to smile much less frequently. While it is typical in the United States to greet a colleague with a handshake and a smile, in Russia, smiling is typically reserved for situations that are considered humorous. Students should recognize that the American businessperson has likely misunderstood Petra‘s lack of a smile to be grimness rather than simply a cultural difference. In addition, Petra‘s confusion about her American counterpart‘s greeting is probably also related to a lack of cultural understanding.

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Students should conclude that developing an awareness of cultural differences prior to meeting colleagues from a foreign culture can minimize challenges like the one faced by Petra and her American counterpart. Teaching Note: To extend the discussion of Russian culture within a business context, go to https://hbr.org/2017/05/navigating-the-complexities-of-doing-business-in-russia. Video Note: To learn more about one company, Mercedes Benz, that has established operations in Moscow, consider the video from Daimler at https://www.daimler.com/magazine/worklife/mercedes-benz-russia-moscow.html.

CONNECT Case Analysis Russian Culture Summary This activity focuses on the complexities of Russia‘s culture and how the country‘s long and unique history is reflected in modern day Russia. From a business standpoint, Russians tend to be less individualistic as compared to American managers and prefer to avoid uncertainty. These two differences, among others, can have a real impact on how foreign companies do business in Russia. Activity Students are asked to read a short case exploring the culture in Russia and in particular, unspoken language, and then respond to a series of questions related to the case. Class Discussion Understanding cultural differences and how they might influence business decisions is imperative for international companies. In Russia, there is a tendency to avoid uncertainty and as compared to the United States, focus less on the individual. Understanding these differences and others is important to the success of companies doing business in Russia. Companies also need to be aware of other aspects of culture such as Russia‘s preference to smile only when something is genuinely funny.

Introduction A) The focus of this chapter is culture, and how the underlying characteristics of a country help define the values and norms of a society. B) Two themes run through this chapter. The first theme is that operating a successful international business requires cross-cultural literacy. By cross-cultural literacy, we mean an

Hill, Global Business Today, 12e Chapter 1 Instructor‘s Manual

understanding of how cultural differences across and within nations can affect the way in which business is practiced. The second theme is that a relationship may exist between culture and the costs of doing business in a country or region.

Did You Know? Video Clip The video clip asks: ―Did you know that Russians typically don‘t smile as much as Americans?‖ Discussion Questions 1. As an American, should you be concerned if your Russian host does not greet you with a smile? Most students will probably suggest that because Russians tend to be more stoic and smile less frequently than Americans, you should not be worried if your Russian host fails to greet you with a smile. Some students, however, may suggest that if the Russian host prepares for the meeting, he may realize that smiling is important to Americans and greet you with a smile. Students may agree that this action could be viewed as an attempt by the Russian manager to get the meeting off to a good start. 2. As an American, should you smile as you greet your host in Russia, even if she does not greet you with a smile? Students may be divided on this question. Some students will suggest that the American should follow his culture and smile at his Russian counterpart. Other students, though, may contend that because the Russian host may interpret the smile as being mocking, the American should not smile when greeting his host in Russia. Students sharing this perspective may say that it is incumbent upon the American to follow Russian traditions when doing business in Russia. 3. Does your response to Question 2 change if the meeting is being held in the United States? Those students who suggested that the American not smile when greeting his Russian host in Russia, will probably agree that when the meeting takes place in the United States, American traditions should be followed, and smiling is appropriate. Those students who suggested that the American follow his culture, will probably suggest that the Russian has no need to smile in the United States, and instead should be true to her culture and not smile. Students may point out though, that if both managers take the time to learn about the other culture, smiles, or lack thereof, will be interpreted correctly. Teaching Tip: Start by doing research on social and business etiquette in that country, by visiting http://globaledge.msu.edu/global-insights/by/country and reading the U.S. Country Commercial Guide‘s chapter on Business Customs for that country. Speak with people from the country and ask about general attitudes and behaviors regarding time, space, dress, etiquette, gifts, conversation topics to avoid and those to encourage.

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Lecture Note: To extend this discussion, consider exploring appropriate way to greet people in other countries. Go to https://www.youtube.com/watch?v=nANhSfCGAs4.

What Is Culture? A) Culture is a system of values and norms that are shared among a group of people and that when taken together constitute a design for living. The fundamental building blocks of culture are values (abstract ideas about what a group believes to be good, right, and desirable) and norms (the social rules and guidelines that prescribe appropriate behavior in particular situations). The term society refers to a group of people who share a common set of values and norms. VALUES AND NORMS B) Values provide the context within which a society‘s norms are established and justified and form the bedrock of a culture. Norms are the social rules that govern the actions of people toward one another. Norms can be further subdivided into folkways (the routine conventions of everyday life) and mores (norms that are seen as central to the functioning of a society and to its social life). CULTURE, SOCIETY, AND THE NATION-STATE C) A society can be defined as a group of people that share a common set of values and norms; that is, a group bound together by a common culture. But there is not a strict one-to-one correspondence between a society and a nation-state. Nation-states are political creations. They may contain a single culture or several distinct cultures. DETERMINANTS OF CULTURE D) The values and norms of a culture do not emerge fully formed. They are the evolutionary product of factors including prevailing political and economic philosophies, the social structure of a society, and the dominant religion, language, and education. CONNECT Click and Drag The Determinants of Culture Summary This activity focuses on the determinants of culture. A nation‘s culture reflects a nation‘s political and economic philosophies, its social structure, dominant religions, language, and education. As such, a nation‘s culture is not static but instead evolves over time. Activity Students are asked to match various elements of culture with the examples of culture.

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Class Discussion Understanding cultural differences requires an understanding of the determinants of culture. Discuss the evolution of culture. Is culture evolving faster in a time of instant communication and social media?

Social Structure A) A society's social structure refers to its basic social organization. Two dimensions stand out when explaining the differences between cultures. The first is the degree to which the basic unit of social organization is the individual, as opposed to the group. The second dimension is the degree to which a society is stratified into classes or castes. INDIVIDUALS AND GROUPS The Individual B) A focus on the individual and individual achievement is common in many Western societies. The Group C) In sharp contrast to the Western emphasis on the individual, in many Asian societies the group (an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other‘s behavior) is the primary unit of social organization. SOCIAL STRATIFICATION D) All societies are stratified on a hierarchical basis into social categories, or social strata. There are four basic principles of social stratification: 1) it is a trait of society, not a reflection of individual differences; 2) it carries over to the next generation; 3) it is generally universal, but variable; 4) it involves not just inequality but also beliefs. Social Mobility E) Social mobility refers to the extent to which individuals can move out of the strata into which they are born. A caste system is a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual's lifetime. A class system is an open system of social stratification in which the position a person has by birth can be changed through his or her achievement or luck.

country FOCUS: Determining Your Social Class by Birth Summary This feature explores India‘s caste system and the implications of the system. While many urban middle-class citizens are not affected in a significant way by the caste system, for India‘s rural population, the influence of the system is readily apparent. The government is strongly encouraging private companies to hire more individuals from lower level castes.

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Discussion Questions 1. India‘s castes system has been around for many years. Explain why its influence has diminished among educated urban middle-class Indians. The caste system in India was officially abolished in 1949. However, it seems that urban citizens have benefited the most from its abolishment. For many rural Indians, the system is still very much in effect. Educated, urban middle class Indians make up the majority of employees in India‘s high tech economy. They may work for large multinationals like Infosys and Wipro. Many students will probably attribute the relative freedom of these individuals to the presence of these large companies, and their need to hire the best people regardless of caste. In rural areas though, the caste system still has significant influence in daily life. One female engineer working for Infosys notes, for example, that as a member of a lower caste, she was not able to enter the homes of higher caste individuals. Yet the same engineer, a beneficiary of Infosys training programs, now works for Infosys in a ―higher caste‖ position. 2. Why are many private companies in India resisting the hiring quotas suggested by the government? Why might it be necessary to hire lower caste individuals? The Indian government has suggested that private companies make an effort to employ lower caste individuals. However, many companies are resisting the request using the argument that they want to hire qualified people who want to work hard, and not people who are available simply because of a quota system. Some companies, however, recognize that there may be a place for lower caste individuals, especially as business grows. Infosys for example, offers special training to low caste members. Lecture Note: To extend this discussion, consider exploring the history behind the development of the caste system, https://www.bbc.com/news/world-asia-india-35650616. Video Note: To explore this discussion from a different perspective, consider how the caste system in India affects Indian women. To learn more, go to https://www.pbs.org/video/independent-lens-impact-indias-caste-system-women.

Significance F) A country‘s social strata can have important implications for the management and organization of businesses. In cultures where there is a great deal of consciousness over the class of others, the way individuals from different classes work together (i.e. management and labor) may be very prescribed and strained in some cultures (i.e. Britain), or have almost no significance in others (i.e. Japan). Class consciousness refers to a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with others.

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A) Religion can be defined as a system of shared beliefs and rituals that are concerned with the realm of the sacred. Ethical systems refer to a set of moral principles, or values, that are used to guide and shape behavior. The ethical practices of individuals within a culture are often closely intertwined with their religion. While there are literally thousands of religions worldwide, four that have the largest following are Christianity, Islam, Hinduism, and Buddhism. Confucianism, while not a religion, influences behavior and shapes culture in many parts of Asia. CHRISTIANITY B) Christianity is the most practiced religion in the world and is common throughout Europe, the Americas, and other countries settled by Europeans. Christianity is also rapidly growing in Africa. Within Christianity there are three major branches: Protestant, Roman Catholic, and Eastern Orthodox. Economic Implications of Christianity C) At the turn of the century, Weber suggested that the "Protestant work ethic" was the driving force of capitalism. This focus on hard work, wealth creation, and frugality encouraged capitalism while the Catholic promise of salvation in the next world did not foster the same kind of work ethic. The Protestant emphasis on individual religious freedom, in contrast to the hierarchical Catholic Church, was also consistent with the individualist economic and political philosophy discussed in Chapter 2. ISLAM D) Islam has the same underlying roots of Christianity (Christ is viewed as a prophet), and suggests many of the same underlying societal mores. Islam, however, extends this to more of an all-embracing way of life that governs one's being. It also prescribes many more "laws" on how people should act and live that are entirely counter the U.S. "separation of church and state." Islamic Fundamentalism E) The past three decades have witnessed the growth of a social movement often referred to as ―Islamic fundamentalism.‖ In the West, Islamic fundamentalism is associated in the media with militants, terrorists, and violent upheavals. However, this characterization may be misleading as the vast majority of Muslims point out that Islam teaches peace, justice, and tolerance. Fundamentalists demand a rigid commitment to traditional religious beliefs and rituals. Fundamentalists have gained political power in many Muslim countries, and have tried to make Islamic law the law of the land. Economic Implications of Islam F) In Islam, people do not own property, but only act as stewards for God and thus must take care of that with which they have been entrusted. They must use property in a righteous, socially beneficial, and prudent manner; not exploit others for their own benefit; and they have obligations to help the disadvantaged. Thus, Islam is supportive of international business as long as it is carried out in a way that reflects basic Islamic values.

country FOCUS: Turkey, Its Religion, and Politics

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Summary This feature examines the debate surrounding Turkey‘s membership in the European Union. Turkey has indicated that it would like to be a part of the regional bloc, but many are concerned that because the country‘s dominant religion is Islam, it would not be a good fit. Others, however, argue that these fears are unfounded. Supporters of Turkey‘s membership in the European Union note that the country‘s central region is home to many thriving entrepreneurial ventures. Discussion Questions 1. Are the concerns of those opposing Turkey‘s admittance to the European Union well-founded? Can Islam, capitalism, and globalization co-exist? Many students will probably suggest that if the country‘s religious preferences are the only issue preventing Turkey‘s membership in the European Union, then indeed these fears are unfounded. Students taking this perspective are likely to point out that Central Turkey, a region where Islamic values are particularly strong, is also referred to as the Anatolian Tiger because it is home to so many thriving Muslim companies, many of which are large exporters. Other students, however, may note that traditionally Islam is critical of those who earn a profit through the exploitation of others. Depending on just how this view is defined could influence how Turkey views the economic activities of other European Union countries. 2. Explain the concept of Islamic Calvinism. How has Islamic Calvinism helped the Kayseri region of Turkey? Islamic Calvinism is a fusion of traditional Islamic values and the Protestant work ethic. In the Kayseri region of Turkey, Islamic Calvinism is evident. The region is home to many thriving businesses in a wide variety of industries that have successfully meshed traditional Islamic values with the entrepreneurial values associated with the Protestant work ethic. Many companies set aside time for daily prayers and trips to Mecca, most restaurants in the region do not serve alcohol and require women to cover their heads. At the same time, businesses in the region have made it a priority to make money. Video Note: To extend this discussion, consider exploring recent issues related to human rights in Turkey at https://www.reuters.com/article/us-eu-turkey/turkey-taking-huge-strides-awayfrom-european-union-top-eu-official-idUSKBN1HO22G. Lecture Note: The COVID-19 pandemic has put significant stress on Turkey‘s economy. To learn more, consider https://www.nytimes.com/2020/08/27/business/turkey-currency-crisis.html. Lecture Note: To get an update http://www.mfa.gov.tr/default.en.mfa.

Turkey‘s

current

situation,

HINDUISM

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G) Hinduism, practiced primarily on the Indian sub-continent, focuses on the importance of achieving spiritual growth and development, which may require material and physical selfdenial. Economic Implications of Hinduism H) Since Hindus are valued by their spiritual rather than material achievements, there is not the same work ethic or focus on entrepreneurship found in some other religions. Likewise, promotion and adding new responsibilities may not be the goal of an employee or may be infeasible due to the employee's caste. Even so, India today is a dynamic entrepreneurial society. BUDDHISM I) Buddhists also stress spiritual growth and the afterlife, rather than achievement while in this world. Buddhism, practiced mainly in South East Asia, does not support the caste system; however, individuals do have some mobility not found in Hinduism and can work with individuals from different classes. Economic Implications of Buddhism J) Because Buddhists do not support the caste system and do not practice the extreme ascetic behavior of Hinduism, entrepreneurial activity is possible. Buddhism‘s Zen orientation has become a popular trend in the Western business world. CONFUCIANISM K) Confucianism, practiced mainly in China, teaches the importance of attaining personal salvation through right action. Unlike religions, Confucianism is not concerned with the supernatural and has little to say about the concept of a supreme being or an afterlife. The need for high moral and ethical conduct and loyalty to others is central in Confucianism. Economic Implications of Confucianism L) Three key teachings of Confucianism―loyalty, reciprocal obligations, and honesty―may all lead to a lowering of the cost of doing business in Confucian societies. The close ties between Japanese auto companies and their suppliers, which has been an important ingredient in the Japanese success in the auto industry, are facilitated by loyalty, reciprocal obligations, and honesty. In countries where these relationships are more adversarial and not bound by these same values, the costs of doing business are probably higher. CONNECT Click and Drag Economic Implications of Major Religions Summary This activity focuses on the role of religion in business, its effect on entrepreneurship, and religious ethics. Understanding religion and how it influences the way of doing business in a nation is important in understanding how to do business in that country. Activity

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Students are asked to match various economic implications of religion to the correct religion. Class Discussion Understanding the role of religion in determining the ―rules‖ of business is important in any culture and especially in cultures where a dominant religion exists. Discuss religion and culture. Identify countries where a dominant religion has a profound impact on the way that business is conducted. Consider how that influence would impact international companies doing business in that country.

management FOCUS: China and Its Guanxi Summary This feature explores guanxi, or the relationships and connections that are so important in the Chinese business world. The notion of guanxi comes from the Confucian philosophy of valuing social hierarchy and reciprocal obligations. Dan Mintz, founder of DMG, one of China‘s fastestgrowing advertising agencies, credits guanxi for his success. Mintz established connections with two Chinese individuals with access to high ranking government officials. Through these guanxiwang, or relationship networks, Mintz has been able to get permission to shoot advertisements in locations that are usually closed to foreigners. Discussion Questions 1. Explain the concept of guanxi. How did Mintz‘s guanxiwang help his company become so successful? Guanxi literally means relationships, although in business settings it can better be understood as ―connections.‖ The concept of guanxi is deeply rooted in Chinese culture and Confucianism. The Chinese will often cultivate a guanxiwang, or ―relationship network,‖ for help. In China, there is a tacit acknowledgment that if you have the right guanxi, legal rules can be broken or bent. Mintz made connections with two Chinese men who had access to high ranking government officials. Through these men, Mintz was able to secure permission to film commercials in locations that are normally closed to outsiders. 2. Compare the difference between doing business in the West and doing business in China. A basic difference between doing business in the West and doing business in China involves how legal agreements are handled. In the advanced economies of the West, business transactions are conducted and regulated by the centuries-old framework of contract law, which specifies the rights and obligations of parties to a business contract and provides mechanisms for seeking to redress grievances should one party in the exchange fail to live up to the legal agreement. China does not have the same infrastructure. Personal power and relationships or connections (guanxi), rather than the rule of law, have always been the key to getting things done in China. Lecture Note: To extend the conversation of the value of guanxi in China, see https://www.forbes.com/sites/michaelcwenderoth/2018/05/16/how-a-better-understanding-of-

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guanxi-can-improve-your-business-in-china/#c9d47955d85b and https://www.europeanceo.com/business-and-management/the-chinese-concept-of-guanxi-canhelp-european-companies-crack-asia/. Video Note: To expand the discussion, consider how top CEOs view guanxi in business, see https://www.bbc.com/news/business-29524701 and https://www.asiamediacentre.org.nz/features/chinese-business-values-guanxi-mianzi-renqing/.

Language A) One obvious way in which countries differ is language. By language, we mean both the spoken and the unspoken means of communication. Language is one of the defining characteristics of culture. Teaching Tip: For individuals with a particular interest in language, iLoveLanguages (http://www.ilovelanguages.com/index.php) is a comprehensive catalog of language-related Internet resources. There are more than 2,400 links available at this site include links to other Internet sites that focus on online language lessons, translating dictionaries, native literature, translation services, software, and language schools. SPOKEN LANGUAGE B) While English is clearly the language of international business, knowing at least some of the local language can greatly help when working in another country. Lecture Note: Consider expanding the discussion of language to include the use of social media in different countries. See http://www.pewresearch.org/fact-tank/2017/04/20/not-everyone-inadvanced-economies-is-using-social-media. UNSPOKEN LANGUAGE C) Unspoken language can be just as important for communication. CONNECT Video Case Be Aware of Cultural Nuances Summary This activity explores differences in culture and the importance of understanding and appreciating those differences when doing business. Activity Students are asked to watch a video on culture in business and then respond to questions about the video.

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Class Discussion Cultural blunders in business can result in miscommunication and even a loss of business. Discuss culture in business. How can international manager better understand and appreciate those differences?

Education A) Formal education plays a key role in a society. Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society.

Culture and Business A) For an international business with operations in different countries, an important question is how a society's culture impacts values found in the workplace. B) The most famous study of how culture relates to values in the workplace was undertaken by Geert Hofstede who isolated five dimensions that he claimed summarized different cultures. These are power distance, individualism versus collectivism, uncertainty avoidance, masculinity versus femininity, and long-term vs. short-term orientation.     

Power Distance is focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities. Individualism Versus Collectivism is focused on the relationship between the individual and his or her fellows. Uncertainty Avoidance measures the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity. Masculinity Versus Femininity looks at the relationship between gender and work roles. Long-term versus short-term orientation refers to the level of delayed material, social, and emotion needs gratification. In addition, it measures cultural attitudes toward concepts such as time, persistence, status order, ―face‖ protection, respect for tradition, and gift or favor reciprocation.

C) Currently, there is interest in adding a sixth dimension to Hofstede‘s model called indulgence versus restraint. This dimension reflects recent research where indulgence refers to a society that allows relatively free gratification of basic and natural human drives related to having fun, and restraint refers to a society that suppresses gratification of needs and regulates it by means of strict social norms. D) Hofstede's results are interesting for what they tell us in a general way about differences between cultures. However, because of methodological issues, one should be careful about reading too much into Hofstede's research. Still, it is a good starting point for understanding how cultures differ and what those differences might mean for management practice.

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Lecture Note: For more discussion of Hofstede and his research go to https://geerthofstede.com/landing-page. CONNECT Click and Drag Geert Hofstede’s Big Idea Summary This activity focuses on Geert Hofstede‘s study of culture. Hofstede‘s identified several dimensions of culture that he claimed summarized the differences between culture. Hofstede‘s study helped managers better understand the effects of cultural differences in the workplace. Activity Students are asked to match various cultural differences to the correct dimension of culture as identified by Geert Hofstede. Class Discussion Understanding cultural differences in the workplace is essential to success as an international business. Discuss the dimensions identified by Geert Hofstede. Are they still relevant today? Should other dimensions be added to his model to better understand cultural differences in today‘s global economy?

Cultural Change A) Culture evolves over time, although changes in value systems can be slow and painful for a society. Social turmoil is an inevitable outcome of culture change. B) As countries become economically stronger and increase in the globalization of products bought and sold, cultural change is particularly common.

360° VIEW: MANAGERIAL IMPLICATIONS Cultural Literacy and Competitive Advantage A) The material discussed in this chapter has three important implications for international business. First, there is a need to develop cross-cultural literacy. Second, there is a connection between culture and national competitive advantage. Third, there is a connection between culture and ethics in decision making. Cross-Cultural Literacy B) Individuals and firms must develop cross-cultural literacy. International businesses that are ill-informed about the practices of another culture are unlikely to succeed in that culture. One way to develop cross-cultural literacy is to regularly rotate and transfer people internationally.

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Video Note: German automaker, Audi, made cross-cultural training a priority for its German managers working in Mexico. To learn more, see Audi Trains Mexican Auto Workers in Germany in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. C) One must also beware of ethnocentrism, or a belief in the superiority of one's own culture. Individuals who are ethnocentric frequently demonstrate disregard for other cultures. Lecture Note: It can often be difficult to recognize cultural behaviors in one‘s own culture. To get an inside look at the American culture go to https://www.livescience.com/28945-americanculture.html. Culture and Competitive Advantage D) For international business, the connection between culture and competitive advantage is important for two reasons. First, the connection suggests which countries are likely to produce the most viable competitors. Second, the connection between culture and competitive advantage has important implications for the choice of countries in which to locate production facilities and do business. Teaching Tip: For guidelines on doing business in different countries, consider https://www.entrepreneur.com/article/226286 and https://news.abscbn.com/business/06/30/17/business-mentor-how-cultural-differences-affect-doing-business. CONNECT Video Case Did You Know? Russians Typically Don’t Smile as Much as Americans Summary This activity explores differences in culture, and in particular, unspoken language, and the importance of understanding and appreciating those differences when doing business. Activity Students are asked to watch a video about then tendency for Russians to smile less frequently than Americans and then respond to questions about the video. Class Discussion Recognizing how different aspects of culture like unspoken language are seen in different countries can allow international managers to appreciate how colleagues act in meetings and other situations. Discuss the concept of unspoken language in different countries. Why is it important to understand and recognize language differences, even when they are unspoken? How can gestures and other unspoken cues like smiles provide insight as to what someone from another culture is feeling? How can understanding unspoken language minimize the potential for cultural misunderstandings?

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CONNECT Case Analysis Culture and Business in Saudi Arabia Summary This activity focuses on the roots of Saudi Arabia‘s culture and the influence of its culture on business. Saudi culture, with its emphasis on Islam and Bedouin traditions, influences all aspects of business and especially the value of trust and loyalty in business dealings. Activity Students are asked to read a short case on Saudi Arabia‘s culture and then respond to a series of questions related to the case. Class Discussion Understanding and recognizing cultural differences and their influence on business is important for international managers. Explain the uniqueness of Saudi Arabia‘s culture and what it means for business. Discuss the potential for misunderstandings to occur between Saudi business people and business people from other countries.

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Discuss why the culture of a country might influence the costs of doing business in that country. Illustrate your answer with country and company examples. Answer: Since in a sense the entire chapter is about this question, there can be numerous reasons and examples of how culture influences the costs of doing business. Several are highlighted in this paragraph, but there could be numerous others. When there are simply different norms between how individuals from different countries interact, the costs of doing business rise as people grapple with unfamiliar ways of doing business. For example, while in the U.S. we may get down to business first, and then get to know each other socially later, in many South American countries it is important to develop a good social relationship before trying to discuss business issues. Different class structures and social mobility also raise the costs of doing business. If there are inhibitions against working with people from different classes, then the efficiency with which information can flow may be limited and the cost of running a business increased. A country's religion can also affect the costs of business, as religious values can affect attitudes towards work, entrepreneurship, honesty, fairness, and social responsibility. In Hindu societies where the pursuit of material well-being can be viewed as making spiritual well-being less likely, worker productivity may be lower than in nations with other religious beliefs. Finally, a country's education system can have important implications for the costs of business. In countries where workers receive excellent training and are highly literate, the need for specific worker training programs are decreased and the hiring of additional employees is facilitated.

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2. Do you think business practices in an Islamic country are likely to differ from business practices in a Christian country? If so, how? Answer: There are various cultural differences between an Islamic country and a Christian country like the United States that could impact business practices. The role of women, for example, or appropriate etiquette (including simple things like not passing papers with the left hand), holidays, and wining and dining can all differ. But beyond these types of example is the fact that the underlying philosophy and role of business can be very different. Since Muslims are stewards of property for God, rather than owners, they are more likely to use their resources carefully and may be less likely to give up or sell something to a person who may not practice the same stewardship. The importance of fairness to all parties in relations means that overaggressiveness in self-interest may not be well received, and breaking an agreement, even if technically/legally permissible may be viewed as very inappropriate. Finally, the prohibitions on interest payments in some Islamic countries means that the wording of the terms of an agreement must be done carefully so that "fair profits" are not construed as being "interest payments." 3. Choose two countries that appear to be culturally diverse (e.g. Sweden and Columbia). Compare the culture of those countries, and then indicate how cultural differences influence (a) the costs of doing business in each country, (b) the likely future economic development of that country, and (c) business practices. Answer: Responses to this question will obviously vary based on the countries chosen by the students and their knowledge of the countries. Hopefully students can present some information on the dimensions of culture including values, norms, social structure, religion, language, and education of the countries and also describe the key differences and similarities of the countries along these dimensions. Relating the differences between the countries along these dimensions to differences in the costs of doing business, the potential for economic development, and business practices would fully answer the question. While it may be more difficult for students to come up with really good examples relative to business practices, the costs and prospects for economic development should be quite feasible. 4. Reread the Country Focus ―Turkey, Its Religion, and Politics.‖ Then answer the following questions. a. Can you see anything in the values and norms of Islam that is hostile to business? b. What does the experience of the region around Kayseri teach about the relationship between Islam and business? c. What are the implications of Islamic values toward business for the participation of a country such as Turkey in the global economy or becoming a member of the European Union? Answer: When responding to this question, many students will probably focus on three key areas. First, they may note that Islam is firmly against making a profit by exploiting others. Depending on just how one defines exploitation, this could be a problem. For example, do commercials for sugary cereal that are traditionally shown during children‘s television programs count as exploitation? A second area that students may explore is the role of women in business. In Islamic countries, women make up only a very small part of the workforce. This traditional Islamic value could also present a problem. Third, students may note that the Koran condemns

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interest as exploitative and unjust. This could present a problem for the financial industry, and also for companies needing loans. Despite these concerns, however, many students will probably suggest that Turkey‘s central region clearly demonstrates that the country can indeed function successfully in the global economy. Teaching Tip: To extend the discussion of this feature, consider exploring how to do business in Turkey. See https://www.veem.com/turkey/how-to-do-business-in-turkey. 5. Reread the Management Focus ―China and Its Guanxi‖ and answer the following questions: a. Why do you think it is so important to cultivate guanxi and guanxiwang in China? b. What does the experience of DMG tell us about the way things work in China? What would likely happen to a business that obeyed all of the rules and regulations, rather than trying to find a way around them like Dan Mintz? c. What ethical issues might arise when drawing upon guanxiwang to get things done in China? What does this suggest about the limits of using guanxiwang for a Western business committed to high ethical standards? Answer: Guanxi and guanxiwang are essential to business in China. Guanxi refers to the business connections that are so important to companies doing business in China. Guanxiwang refers to the relationship network that companies cultivate. Both of these are important to the Confucian ethics―loyalty, reciprocal obligations, and honesty in dealing with others―that drives business in China. Dan Mintz believes that guanxi and guanxiwang are important because they help companies get around restrictions that limit the ability of companies to function. Many students will probably agree with Mintz that these relationships and connection are essential to success. Students taking this perspective are likely to argue that guanxi is part of the Chinese culture, and Western companies simply need to adapt. Companies that fail to adapt will probably find it more difficult to be successful, and companies that do follow all of the rules are likely to be at a competitive disadvantage. At the same time, students will probably note the need to carefully consider the ethical implications of certain relationships. Some students may suggest that managers use their gut instinct―if something seems like it could be unethical, it probably is. globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 You are preparing for a business trip to Brazil, where you will need to interact extensively with local professionals. As a result, you want to collect information about the local culture and business practices prior to your departure. A colleague from Latin America recommends that you visit the Brazil page on globalEDGE and read through the country insights and data available. Prepare a short description of the most striking cultural characteristics that may affect business interactions in this country. Exercise 2 Typically, cultural factors drive the differences in business etiquette encountered during international business travel. In fact, Middle Eastern cultures exhibit significant differences in business etiquette when compared to Western cultures. Prior to leaving for your first business

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trip to the region, a colleague informed you that globalEDGE can help you (as can a globalEDGE-promoted guide titled Business Etiquette around the World). Identify five tips regarding business etiquette in the Middle Eastern country of your choice (e.g., Turkey).

Culture and Business in Saudi Arabia closing case Summary The closing case explores the roots of Saudi Arabia‘s culture and the influence of its culture on the business environment. Saudi Arabia‘s culture is directly influenced by Islamic scholar, Ibn Abd-al-Wahhab, and his commitment to a strict adherence to the principles of Islam, together with ancient Bedouin beliefs. While current Crown Prince Mohammed bin Salman, has relaxed some Saudi traditions, especially as they relate to women, the country continues to be dominated by its culture. For companies operating in Saudi Arabia, the Saudi culture means that it is important to take a relaxed attitude toward time, recognize the importance of building trust and meeting face-to-face, and understand the role of loyalty in business decisions. Discussion of the case can revolve around the following questions. Case Discussion Questions 1. What forces shaped modern Saudi culture? How similar or different are these forces from those that shaped the culture of Western nations? Modern Saudi culture traces its roots to a combination of Islam and Bedouin traditions. The influence of Islamic scholar, Ibn Abd-al-Wahhab, and his focus on strict adherence to the original principles of Islam as expressed in the Koran is evident in modern day Saudi Arabia as is the influence of Bedouin values such as loyalty and interpersonal relationships. Indeed, the notion of trust is a precursor to all business. Students may suggest that Saudi Arabia seems to be rooted in its past, while Western nations, despite also being influenced by religion and other traditions, are more open to modernization and change. Indeed, Westerners doing business in Saudi Arabia may find the cultural differences to be challenging. The Saudi tradition of taking advice from family members and trusted colleagues rather than experts is in direct contrast to Western ideals. Similarly, the relaxed Saudi concept of time can be vexing to Westerners who are accustomed to keeping tight schedules. In addition, women are likely to find doing business in Saudi Arabia to be a real challenge. 2. What kinds of misunderstanding are likely to arise between an American company and a Saudi enterprise, neither of which has experience dealing with the other? Responses to this question will vary by student. Many will focus on Saudi Arabia‘s concept of time and the idea that business meetings are typically held face-to-face with interruptions being the norm. Students may suggest that a Westerner who is unfamiliar with these Saudi traditions may feel offended if meetings do not start on time or if they are interrupted. At the same time, because Saudis value status, they may feel slighted if a junior level executive is sent to meet with

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them rather than a senior level executive. Some students will also likely point out that Westerners may be offended if a family member‘s perspective carries more decision-making weight than that of an expert. Other students may note that because women are only just beginning to gain freedoms that are taken for granted in the West, a Saudi businessman may be unwilling to meet with a woman. 3. If you were in a position to advise a Western company that was considering doing business in Saudi Arabia for the first time, what would your advice be? Students will respond to this question in different ways. Most students will suggest that gaining an understanding of Saudi culture, and how it impacts business is essential for a company considering doing business in the country. Students will probably suggest that any company considering doing business in Saudi Arabia do so with an open mind toward schedules and timing, and recognize that if the company is doing any sort of business that involves low skilled labor, it should be prepared to face a tight labor market. Other students will likely stress the importance of traditions like daily prayer rituals and the need for Western companies to respect those traditions. 4. Since 2017, Crown Prince Mohammed bin Salman, the effective ruler of the country, has introduced a series of changes aiming at modernizing the country. These include relaxing many of the traditional norms based on conservative Islam. Why do you think he is doing this? What are the risks here for his government? Are there risks for Western businesses operating in the country? Responses to this question will vary by student. Many will suggest that the modernization efforts of Crown Prince Mohammed bin Salman are tacit recognition that if the country wants to play a role in the global economy, it needs to adapt to the changing times. Students may note that Saudi women, even with the recent changes, still have much less freedom than Western women, something that could cause problems for Saudi companies wanting to do business in the West, or for Western companies considering doing business in the kingdom. Some students may wonder whether, by making the changes, the Crown Prince is risking a confrontation with more traditional members of his government, however students may conclude that change is needed, and without it, civil unrest could become a problem. Some students may also note that Western companies could face a difficult situation if they attempt to follow their Western values of nondiscrimination while operating in Saudi Arabia. At the same time, discriminating against women will be deemed unacceptable in Western societies. Teaching Tip: Students can learn more about doing business in Saudi Arabia at https://2016.export.gov/saudiarabia/doingbusinessinsaudiarabia/index.asp. Video Note: Consider exploring Australia‘s Ambassador to Saudi Arabia experiences working in the Saudi Kingdom. Go to the Department of Foreign Affairs and Trade clip at https://www.youtube.com/watch?v=yhaY9Orjuss.

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Continuous Case Concept How does culture affect companies? When German automakers began their expansion into the U.S. market, cup holders were not a feature of their products. In contrast, because many Americans spent significant time in their cars, ate in their cars, and so on, advertisements for American cars often boasted of the number of cup holders that were part of their design. The German companies had to shift their thinking from strictly performance-based cars, to ones that better fit the needs of Americans. Today, many automakers have shifted their focus to the emerging markets, and how they can best serve the customers in those markets. 

Ask students to consider how different cultural dimensions might be reflected in the design of automobiles. Students might observe that in emerging markets, ―stripped down‘ models could make cars more affordable for many, or that in Japan, smaller cars might be more appropriate.



Then, consider how marketing might differ across markets. In China, for example, some automakers including Tesla are selling their cars via Alibaba. According to the company, this distribution method will be considerably cheaper than establishing a sales network in the country.

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Next, ask students to consider how culture might affect the manufacturing side of the business. How does culture affect relationships with suppliers? With employees? Some companies like Daimler AG have been introducing individual performance assessments in markets that have traditionally been assessed on a group basis.

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This exercise works at the beginning of the discussion on culture but can be even more valuable after the presentation of the chapter material. The exercise is also useful as a linking mechanism between the various chapter topics if it is used at the start and then referenced throughout the chapter. So, for example, you could talk about how religious practices might affect how a factory can be operated in certain countries, and then later, discuss how factory management could inadvertently miscommunicate with employees or how the color of the paint on a car could send the wrong message.

APPLICATION-BASED ACTIVITY

DIFFERENCES IN CULTURE: EXPANDING CULTURAL KNOWLEDGE I. Introduction Vivia Health & Beauty is an industry leader in the premium health & beauty industry. You have been selected to go to an international trade show in Paris, France. At the conference, you will have the opportunity to meet a few of your colleagues from around the world and to meet with a customer from the Netherlands. II. Learning Objectives 1. Explain what is meant by culture. 2. Analyze the forces that lead to differences in culture. 3. Identify the business and economic implications of culture. 4. Recognize how differences in social culture influence business. III. Scoring Dimensions The following theoretical concepts from the chapter are covered and scored in the simulation: Theoretical Concepts Percentage of Simulation Define Culture

25%

Cultural Forces

25%

Business and Economic Implications of Culture

25%

Differences in Social Culture and Business

25%

IV. Follow-up Activity

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Two students can be assigned to take on the roles of Vivia Health and Beauty managers, Shoma Tomaka and Maria Gonzalez. Other students can be assigned to act as customers from other countries such as India and Spain. Using their assigned identities, students can continue the role play as Shoma and Maria continue to experience different cultures as they meet with other prospective customers at the trade show. Students taking on the role of prospective cultures should review information on the culture of their assigned countries prior to the role play. Students can use a variety of sources to learn about their assigned cultures. One option is https://businessculture.org/business-culture/. Following the role play, students should identify similarities and differences between the various cultures involved and how the differences could lead to misunderstandings. Students should recognize why knowledge of other cultures is important in international business.

Additional Readings and Sources of Information Is Cultural Knowledge More Important Than Language Skills? https://www.bbc.com/worklife/article/20180518-is-cultural-knowledge-more-important-than-languageskills

How Amazon plans to battle Walmart in India https://money.cnn.com/2018/09/20/technology/more-supermarket-amazon-india/index.html 8 Cultural Differences Between America And Other Countries https://www.huffpost.com/entry/weird-cultural-differences_n_3875360 Uncovering the Value of Effective Cross-Cultural Communication for Tech Businesses https://emerging-europe.com/voices/uncovering-the-value-of-effective-cross-culturalcommunication-for-tech-businesses/ Cultural Differences? Or, are we really that different? http://www.cnr.berkeley.edu/ucce50/ag-labor/7article/article01.htm Managing Cross Cultural Diversity in Finance https://www.fm-magazine.com/issues/2020/aug/managing-cross-cultural-diversity-infinance.html The Challenges Facing Amazon in India: Video http://www.bloomberg.com/news/videos/2016-08-08/the-challenges-facing-amazon-in-india The Caste Formerly Known as ―Untouchables‖ Demands A New Role In India http://one.npr.org/?sharedMediaId=489883492:489883493 Skills Acquired During Study Abroad Linked to US Leadership Positions https://thepienews.com/news/study-abroad-skills-sought-for-us-leadership-positions-surveydetails/ Etched in Stone: Russian Strategic Culture and the Future of Transatlantic Security https://carnegieendowment.org/2020/09/08/etched-in-stone-russian-strategic-culture-and-futureof-transatlantic-security-pub-82657 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Saudi Arabia Failed to Win a Seat on the UN Human Rights Council, While China and Russia Were Voted In https://www.businessinsider.com/un-human-rights-council-saudi-arabia-failed-china-russiaelected-2020-10 Microsoft Looks to China for an Xbox One Rescue http://www.bloomberg.com/news/articles/2014-10-02/microsoft-looks-to-china-for-an-xbox-onerescue Gate B22 in the Frankfurt Airport Offers a Lesson in Cultural Differences http://www.bloomberg.com/news/articles/2014-03-19/gate-b22-in-the-frankfurt-airport-offers-alesson-in-cultural-differences Want a Creative Spark? Get to Know Someone From Another Culture https://www.npr.org/2018/07/10/627588115/want-a-creative-spark-get-to-know-someone-fromanother-culture How Can Cultural Differences Affect Business Communication https://smallbusiness.chron.com/can-cultural-differences-affect-business-communication5093.html

Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Who Stitched Your Designer Jeans? Introduction Ethics and International Business Ethical Dilemmas Roots of Unethical Behavior Philosophical Approaches to Ethics Did You Know? Video Clip: Did you know that international business can help topple governments that violate human rights? 360° View: Managerial Implications

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End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Microsoft Goes Carbon Neutral Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 5-1 Understand the ethical, corporate social responsibility, and sustainability issues faced by international businesses. 5-2 Recognize an ethical, corporate social responsibility, and/or sustainability dilemma. 5-3 Identify the causes of unethical behavior by managers as they relate to business, corporate social responsibility, or sustainability. 5-4 Describe the different philosophical approaches to business ethics that apply globally. 5-5 Explain how managers can incorporate ethical considerations into their decision-making in general and for corporate social responsibility and sustainability initiatives.

Chapter Summary This chapter focuses on how ethical issues can and should be incorporated into decision-making in an international business. The chapter starts by looking at the source and nature of ethical issues and dilemmas in an international business. Then, the reasons for poor ethical decisionmaking in international business are reviewed. Next, there is a discussion of different philosophical approaches to business ethics. Finally, the chapter concludes with a review of the different processes that managers can adopt to make sure that ethical considerations are incorporated into decision-making in an international business firm.

Chapter Opening Activity In small groups, ask students to select an African country and a non-African country. Next, they should research how corrupt each country is, using databases. Use globaledge.msu.edu and search the World Bank, Euromonitor Passport, and others. After about 10 minutes, students should share their findings, and discuss two points:  

Source credibility. This is a chance to discuss the superior credibility of more scholarly sources found on globalEdge, such as Transparency International, the World Bank, and the CIA World Factbook, compared to Google and Wikipedia searches. The common variables found in the corruption indices are used to measure corruption. Which ones are most important to business people? How does this impact international business and economic development?

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Chapter Outline

Who Stitched Your Designer Jeans? opening case Summary The opening case explores the thriving export sector that is driving an economic success story for one of the world‘s poorest countries. Bangladesh is experiencing a huge economic turnaround and is now second only to China in readymade garment exports. The country‘s low wage rates have been an important element in the success of the industry, however, there are concerns that a lack of labor regulations may be making it easy for factory owners to exploit their workers. Discussion Questions 1. How can companies like Zara and H&M that buy readymade garments from Bangladesh ensure that their suppliers are not violating human rights? How does the fast fashion business model of retailers like these contribute to unethical situations in the factories that supply their clothes? Retailers like Zara and H&M base their strategy on a ready supply of inexpensive garments that reflect quickly changing fashion preferences. This so-called fast fashion model generally involves a rapidly changing selection of relatively low-cost products. Many students will agree that because cost is often a major factor for those purchasing fast fashion and because demand can surge when a product suddenly catches on, the stage is set for possible human rights violations like mandatory overtime for factory workers and unreasonably low wages. Students may suggest that while companies like Zara and H&M should demand that suppliers follow ethical practices in their factories, the reality is that there is often little enforcement behind the sentiment, especially in countries where there are few worker protection regulations. 2. Child labor is not uncommon in Bangladesh, nor is it illegal. Discuss the ethics of hiring child labor. Does your response change if the child in question is the sole earner for a family? Most students will claim that hiring children to work in a factory is morally wrong. Some students, however, may argue that in countries where education is limited, it may be the norm to begin to work at an earlier age than in other countries where education is mandatory until age 18. Many students will find the issue of a child being the sole earner for a family to be complex. Some will likely suggest that in those situations, an exception should be made. Other students however will find it difficult to make that accommodation and argue that hiring children is still ethically wrong. 3. Would you boycott a retailer if it sold products made in sweatshop conditions? Do you see any drawbacks to boycotting? Discuss. Responses to this question will depend on student opinion. Many will quickly agree that a boycott would be in order as a means of making their voices heard. Others, however, may Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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suggest that unless the boycott was widespread, the retailer might not experience a significant drop in sales. Some students may argue that boycotting the retailer could ultimately harm the very workers the boycott is intended to protect, and that a better strategy to force change should be found. Teaching Tip: To learn more about the garment industry in Bangladesh, go to https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+ events/news/insights/bangladesh-garment-industry and https://www.cnbc.com/2020/10/19/coronavirus-worsened-the-reality-for-bangladesh-garmentworkers.html.

CONNECT Case Analysis Who Stitched Your Designer Jeans? Summary This activity focuses on ethics in the workplace. Personal ethics influence business ethics and the decisions managers make. Activity Students are asked to read a short case on ethics in the garment industry in Bangladesh and then respond to a series of question about the case. Class Discussion Understanding how ethical norms in other countries differ can help managers make better decisions. Discuss what a manager should do when the norms in a host country differ from those in the home country. Should the manager adopt local ethical standards even if it means violating home country ethics?

Introduction A) This chapter begins with a look at how three companies, Natura, and its subsidiaries Natura Cosmetics, the Bodyshop, and Aesop are meeting demands for ethical behavior, corporate social responsibility, and sustainability within their global strategies. Natura believes that sustainability is not a one-off issue, but rather something that should be incorporated into everything it does. B) The term ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of business people, and an ethical strategy is a strategy, or course of action, that does not violate these accepted principles. Teaching Tip: The Carnegie Council on Ethics and International Affairs‘ publications (see http://www.cceia.org) reflect on many ethical issues in international business. Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Ethics and International Business A) In the international business setting, the most common ethical issues involve employment practices, human rights, environmental regulations, corruption, and the moral obligation of multinational companies. EMPLOYMENT PRACTICES B) A critical ethical issue facing companies doing business in a foreign country involves employment practices. When work conditions in a host nation are clearly inferior to those in a multinational‘s home nation, what standards should be applied, those of the home nation, those of the host nation, or something in between?

management FOCUS: ―Emissiongate‖ at Volkswagen Summary This feature follows the scandal at Volkswagen when it was discovered that the German automaker had been deliberately tampering with the emissions on its cars sold in the United States in order to meet U.S. Environmental Protection Agency (EPA) regulations. Interestingly, the investigation into the situation revealed that upper-level managers were unaware of the tampering, and that knowledge of it was limited to a few managers close to the problem. The scandal cost Volkswagen large sums in fines, and also the trust and loyalty of many of its customers. Discussion Questions 1. Upper-level managers at Volkswagen were apparently unaware of the tampering that was going on to ensure that Volkswagen vehicles sold in the United States met EPA regulations. What does this situation tell you about the corporate culture at Volkswagen? Many students will probably suggest that the fact that upper-level managers at Volkswagen were unaware of what their subordinates were doing indicates a clear lack of communication between management levels, a lack of oversight by upper-level management, and a dysfunctional culture that prevented lower level managers from confiding in upper management that the company would not be able to meet EPA regulations without changes. Some students will wonder whether expectations of lower level managers are unreasonable, encouraging them to cheat the system. 2. Reflect on the ethics of the managers who tampered with the emissions systems of the cars sold in the United States. Why do you think they made the choices they did? Did Volkswagen do the right thing when it disciplined the managers? This question will probably generate some debate among students. Most students will probably agree that the pressure the managers obviously felt to ensure that the cars met the emissions requirements was very high. The tampering involved was not a quick and easy feat, but rather a well-thought out plan that took some effort. This would indicate that the managers knew the

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issue existed for some time and that they were afraid to let anyone know about it. Some students will argue that it is unfair to hold these few individuals accountable for a problem that should have had a company focus, and that disciplining them was wrong. Students taking this perspective might suggest that it is the upper-level managers who were unaware of the challenges their subordinates were facing that should be disciplined. Other students though, will probably contend that the managers had to be disciplined to indicate that unethical behavior is unacceptable at Volkswagen and to demonstrate to the public that it had taken appropriate action. Teaching Tip: To learn more about the emission scandal at Volkswagen, consider https://www.bbc.com/news/business-34324772 and http://fortune.com/2018/02/06/volkswagenvw-emissions-scandal-penalties. Teaching Tip: To learn more about Volkswagen, go to http://www.vw.com/.html. Lecture Note: To extend the discussion of Volkswagen to include sustainability, consider exploring Volkswagen‘s recent announcement of its plans to introduce a full line of electric cars by 2030 at https://www.bbc.com/news/business-41231766. Video Note: Carlos Ghosn, once one of the most powerful CEOs in the auto industries, has been under investigation for unethical behavior. To learn more, consider Renault, Nissan, and Mitsubishi: Was Carlos Ghosn Too Powerful? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

HUMAN RIGHTS C) There are still many nations in the world where basic human rights are not respected. Rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and so on, are by no means universally accepted. Video Note: The COVID-19 pandemic has created unprecedented demand for PPE prompting some factories to run 24/7, and in doing so, exploit their workers. To learn more, consider Shocking Conditions in PPE Factories Supplying UK in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

ENVIRONMENTAL POLLUTION D) Ethical issues arise when environmental regulations in host nations are inferior to those in the home nation. The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals resulting in its degradation. Corporations can contribute to the global tragedy of the commons by moving production to locations where they are free to pump pollutants into the environment, thereby harming these valuable global commons. The question here is whether the decision to do so, while perhaps legal, is ethical.

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Video Note: To explore Austria‘s response to environmental concerns, consider Vienna’s Carbon Neutral Neighborhood in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Video Note: To explore what happens to our recyclables, consider Why Your Recyclables Might Have No Place to Go in the International Business Library at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. Teaching Tip: Consumers International http://www.consumersinternational.org is dedicated to protecting the rights of consumers worldwide and promoting ethical behavior on the part of companies. CORRUPTION E) In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business (see Chapter 2). The Organization for Economic Cooperation and Development (OECD) adopted a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1999. The convention obliges member states to make the bribery of foreign public officials a criminal offense. Lecture Note: To extend this discussion, consider exploring the Foreign Corrupt Practices Act in more depth at https://www.business-anti-corruption.com/anti-corruption-legislation/fcpaforeign-corrupt-practices-act, and to further explore bribery in the business environment, consider https://www.oecd.org/about/impact/taking-bribery-out-of-business.htm, https://www.forbes.com/sites/alexandrawrage/2017/01/25/bribery-is-bad-forbusiness/#78ae051c4a42 and https://mexiconewsdaily.com/news/bribery-necessary-for-businesssuccess.

Ethical Dilemmas A) From an international business perspective, some argue that what is ethical depends upon one‘s cultural perspective. Ethical dilemmas are situations in which none of the available alternatives seems ethically acceptable. Video Note: The companies doing business in countries where Ebola is a threat are facing an ethical dilemma: close factories to keep workers safe, or put workers on leave or keep factories open, and put employees at risk. To learn more, consider Ebola in Ghana Would Have “Major Impact”: Nestle in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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Roots of Unethical Behavior A) The determinants of ethical behavior include personal ethics, decision-making processes, leadership, unrealistic performance expectations, and organizational culture. PERSONAL ETHICS B) Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals). The personal ethical code that guides our behavior comes from a number of sources, including our parents, our schools, our religion, and the media. DECISION-MAKING PROCESSES C) Many studies of unethical behavior in a business setting have come to the conclusion that business people sometimes do not realize that they are behaving unethically simply because they fail to ask the relevant question—is this decision or action ethical? ORGANIZATIONAL CULTURE D) The third cause of unethical behavior in business is an organizational culture that deemphasizes business ethics, reducing all decisions to the purely economic. The term organizational culture refers to the values and norms that are shared among employees of an organization (see the discussion of culture in Chapter 4). UNREALISTIC PERFORMANCE GOALS E) The fourth cause of unethical behavior is pressure from the parent company to meet performance goals that are unrealistic and can only be attained by cutting corners or acting in an unethical manner. LEADERSHIP F) The fifth root cause of unethical behavior is leadership. Leaders are vital in helping a firm establish its organizational culture and setting examples. If leaders are not acting ethically, other employees may not act ethically. SOCIETAL CULTURE G) Companies headquartered in countries where individualism and uncertainty avoidance are dominant (see the discussion of Hofstede‘s cultural dimensions in Chapter 4) are more likely to emphasize ethical behavior than companies that are located in countries where masculinity and power distance are important. CONNECT Click and Drag Ethics in the Workplace Summary

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This activity focuses on ethics in the workplace. Personal ethics influence business ethics and the decisions managers make. Activity Students are asked to match various ethical situations with determinants of ethical behavior. Class Discussion Understanding how ethical norms in other countries differ can help managers make better decisions. Discuss what a manager should do when the norms in a host country differ from those in the home country. Should the manager adopt local ethical standards even if it means violating home country ethics?

Philosophical Approaches to Ethics A) There are several different philosophical approaches to ethics. STRAW MEN B) Straw men approaches to business ethics are approaches that are raised by business ethics scholars primarily for the purpose of demonstrating that they offer inappropriate guidelines for ethical decision-making in a multinational enterprise. Four such approaches are the Friedman doctrine, cultural relativism, the righteous moralist, and the naïve immoralist. The Friedman Doctrine C) Nobel Prize-winning economist‘s Milton Friedman‘s classic position on business ethics is that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law. He rejects the idea that businesses should undertake social expenditures beyond those mandated by the law and required for the efficient running of a business. Friedman argues that it is acceptable for shareholders to choose to use firm profits to make social investments, but that managers should not make that decision for them. Cultural Relativism D) Cultural relativism is the belief that ethics are culturally determined and that firms should adopt the ethics of the cultures in which they operate, or in other words, ―when in Rome, do as the Romans do.‖ The Righteous Moralist E) The righteous moralist approach to business ethics claims that a multinational‘s home country standards of ethics are the appropriate ones for companies to follow in foreign countries. The main criticism of the righteous moralist approach is that its proponents go too far, and that in some cases, adopting home country standards may not be appropriate. The Naive Immoralist F) The naive immoralist asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either.

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UTILITARIAN AND KANTIAN ETHICS G) The utilitarian approach to business ethics dates back to philosophers such as David Hume, Jeremy Bentham, and John Stuart Mill. Utilitarian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences. An action is judged to be desirable if it leads to the best possible balance of good consequences over bad consequences. H) One problem with the utilitarian approach is measuring the benefits, costs, and risks of a course of action. A second problem is that the philosophy fails to consider justice. I) Kantian ethics are based on the philosophy of Immanuel Kant who argued that people should be treated as ends and never purely as means to the ends of others. RIGHTS THEORIES J) Rights theories recognize that human beings have fundamental rights and privileges that transcend national boundaries and culture. Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions that have an ethical component. K) The notion that there are fundamental rights that transcend national borders and cultures was the underlying motivation for the United Nations‘ Universal Declaration of Human Rights, which specifies the basic principles that should always be adhered to irrespective of the culture in which one is doing business. JUSTICE THEORIES L) Justice theories focus on the attainment of a just distribution of economic goods and services. A just distribution is one that is considered fair and equitable. There is no one theory of justice, and several theories of justice conflict with each other in important ways. One important and influential theory of justice was set forth by John Rawls, who argued that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone‘s advantage. M) Impartiality under Rawls‘ theory is guaranteed by the veil of ignorance (everyone is imagined to be ignorant of all his or her particular characteristics). Rawls suggests that under these conditions, people would unanimously agree on two fundamental principles of justice. First, that each person is permitted the maximum amount of basic liberty compatible with a similar liberty for others, and second, that once equal basic liberty is assured, inequality in basic social goods is to be allowed only if it benefits everyone. N) Rawls formulates what he calls the difference principle, which is that inequalities are justified if they benefit the position of the least advantaged person. The text provides examples of how Rawls‘ theory can be used as the moral compass that managers can use to help them navigate through difficult ethical dilemmas.

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360° MANAGERIAL IMPLICATIONS Making Ethical Decisions Internationally A) Five things an international business can do to make sure that ethical issues are considered in a business decision are (1) favor hiring and promoting people with a well-grounded sense of personal ethics; (2) build an organizational culture that places a high value on ethical behavior; (3) put decision-making processes in place that require people to consider the ethical dimension of business decisions; (4) institute ethical officers in the organization; (5) develop moral courage; (6) make corporate social responsibility a cornerstone of the enterprise policy; (7) pursue strategies that are sustainable. Hiring and Promotion B) Not only should businesses strive to identify and hire people with a strong sense of personal ethics, but it is also in the interests of prospective employees to find out as much as they can about the ethical climate in an organization. Organizational Culture and Leadership C) To foster ethical behavior, businesses need to build an organizational culture that places a high value on ethical behavior. Three things are particularly important. First, the business must explicitly articulate values that place a strong emphasis on ethical behavior, perhaps using a code of ethics (a formal statement of the ethical priorities a business adheres to). Second, leaders in the business should give life and meaning to the code of ethics by repeatedly emphasizing its importance, and then acting on it. Third, the business should put in place a system of incentives and rewards that recognize people who engage in ethical behavior and sanction those who do not. Decision-Making Processes D) Business people need a moral compass to help determine whether a decision is ethical. According to experts, if a business person can answer ―yes‖ to the following questions, the decision is ethically acceptable. First, does my decision fall within the accepted values of standards that typically apply in the organizational environment? Second, am I willing to see the decision communicated to all stakeholders affected by it? Third, would the people with whom I have significant personal relationships approve of the decision? Video Note: Walmart has been involved in cases of bribery in the past. As a result, this has created legal difficulties for the company. To learn more, consider Wal-Mart Bribery Allegations: What Legal Problems, Penalties Could It Face? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. E) Others have recommended a five-step process to think through ethical problems. In Step 1, business people should identify which stakeholders (the individuals or groups who have an interest, stake, or claim in the actions and overall performance of a company) a decision would affect and in what ways. Internal stakeholders include those who work for or who own the business such as employees, the board of directors, and stockholders. External stakeholders are

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the individuals or groups who have some claim on a firm such as customers, suppliers, and unions. F) Step 2 involves judging the ethics of the proposed strategic decision given the information gained in Step 1. Managers need to determine whether a proposed decision would violate the fundamental rights of any stakeholders. G) Step 3 requires managers to establish moral intent (the business must resolve to place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated). H) Step 4 requires the company to engage in ethical behavior. Step 5 requires the business to audit its decisions, reviewing them to make sure that they are consistent with ethical principles. Ethics Officers I) To encourage ethical behavior in a business, a number of firms now have ethics officers who are responsible for making sure all employees are trained to be ethically aware, that ethical considerations enter the business decision-making process, and that the company‘s code of ethics is followed. Moral Courage J) It is important to recognize that employees in an international business may need significant moral courage. Video Note: To explore this issue in more depth, consider The Moral Dilemma of Doing Business in China Explained in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Corporate Social Responsibility K) The concept of social responsibility refers to the idea that business people should take the social consequences of economic actions into account when making business decisions, and that there should be a bias in favor of decisions that have both good economic and good social consequences.

L) In its purest form, social responsibility can be supported for its own sake simply because it is the right way for a business to behave. Advocates of this approach argue that businesses need to recognize their noblesse oblige (honorable and benevolent behavior that is the responsibility of successful companies) and give something back to the societies that have made their success possible. CONNECT Video Case VW Says It’s Going Full Steam on Electric Vehicles Summary

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This activity explores corporate social responsibility and sustainable strategies. Managers need to ensure that the strategies they adopt make good economic sense as well as good sense for the environment. Activity Students are asked to watch a video on VW‘s sustainable strategy and then respond to questions about the video. Class Discussion Discuss how companies can be good corporate citizens, pursue sustainable strategies, and be profitable. Identify examples of companies that have achieved these goals and discuss why these companies have been successful.

Did You Know? Video Clip The video clip asks: ―Did you know that international business can help topple governments that violate human rights?‖ Discussion Questions 1. What role did international companies play in supporting apartheid in South Africa? Why do you think international managers ignored the human rights violations occurring in the country? By continuing to operate in country in which government mandates violated human rights, international companies provided tacit support for apartheid. Many students will probably suggest that the decision to remain in South Africa was probably profit driven and legitimized by the fact that their actions were not illegal. 2. What role did international companies play in bringing an end to apartheid in South Africa? What does this tell you about the power of international business? Apartheid in South Africa came to end when numerous international companies pulled out, creating an economic crisis in the country. Students will probably note that while the economic challenges created by the departure of international companies was difficult for South Africa, it ultimately was a change for the better. Students may suggest that international companies, especially those that are high-profile, have an obligation to highlight situations like the one in South Africa and take steps to correct them. 3. Reflect on the situation in South Africa. The actions of international companies doing business in the country that observed the apartheid mandate were unethical, but not illegal. Should the companies have behaved differently? Why? Most students will probably agree that the human rights violations that occurred daily in South Africa during apartheid are unacceptable and unethical even if they were legal. Students will likely suggest that in this situation, managers should have used their moral compasses to clearly

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express their disagreement with the mandate. Students will probably note however, that it took an unacceptably long time for them to do so.

management FOCUS: Corporate Social Responsibility at Stora Enso Summary This feature explores Stora Enso‘s sustainability strategy. Stora Enso, a Finnish pulp and paper manufacturer, has made sustainability a central focus for the organization. The company clearly outlines on its website and company reports its commitment to ensuring that it acts in a socially responsible, environmentally friendly way. All decisions at Stora Enso are guided by this commitment. Discussion Questions 1. Why is a sustainable strategy so important to Stora Enso? What message does its publicly stated commitment to sustainability send? Consider your response from the perspective of various stakeholders including investors and local communities. Stora Enso has clearly and publicly stated its policy toward sustainability and reinforces this commitment by defining how it measures success in achieving a sustainable strategy. Most students will probably suggest that by being so open about how decisions are made at the company, Stora Enso is not only demonstrating its true dedication to sustainability, it is also letting shareholders and communities know what to expect. Students may note for example, that investors should recognize that Stora Enso may not always choose the lowest cost approach to doing business because doing so could compromise its commitment to preserving the environment. Similarly, communities may be more welcoming to the company because its policies on how it will operate are clearly stated, and emphasize good corporate citizenship. 2. As an employee of Stora Enso, what does its commitment to a sustainable strategy mean to you? How does Stora Enso‘s strategy affect its position in the global marketplace? Many students will probably agree that Stora Enso‘s commitment to a sustainable strategy indicates that the company will not knowingly pursue strategies that could negatively impact its employees. As such, it is likely to attract well-qualified employees and create a loyal workforce. Students will probably recognize that a strong workforce will be beneficial in the global marketplace, as will Stora Enso‘s environmentally friendly approach to doing business. Some students may also point out that as more local governments signal their commitment to protecting the environment through policy decisions, companies like Stora Enso stand to benefit. Lecture Note: To extend this discussion, https://ec.europa.eu/growth/industry/sustainability/corporate-social-responsibility_en.

consider

Teaching Tip: To learn more about Stora Enso, go to http://www.storaenso.com.

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Sustainability N) Sustainable strategies are strategies that not only help the multinational firm make good profits, but that do so without harming the environment while simultaneously ensuring that the corporation acts in a socially responsible manner with regard to the stakeholders. O) The basic idea of sustainability is that the organization does not exert a negative impact upon the ability of future generations to meet its own economic needs and that its actions impart longrun economic and social benefits to stakeholders. Lecture Note: To extend this discussion on sustainability in business, consider https://www.forbes.com/sites/josephholt/2020/01/28/sustainability-in-business-is-more-anopportunity-than-a-threat/?sh=2f5666a71b76.

CONNECT Click and Drag Thinking Through Ethical Problems Summary This activity focuses on thinking through ethical problems and the responsibility of the multinational firm to its stakeholders. In many situations, there are no conclusive right or wrong answers and so managers must rely on basic ethical principles to guide their thinking. Activity Students are asked to match various company actions to the correct step in the decision-making process. Class Discussion Recognizing that a clear right or wrong answer may not exist is part of ethical decision-making. Discuss how using a decision-making process can lead to a more ethical decision.

CONNECT Case Analysis Microsoft Goes Carbon Neutral Summary This activity focuses on understanding the ethical and social responsibility of companies like Microsoft with regard to global warming. Carbon neutral since 2012, Microsoft has set its sights on being carbon negative by 2030. Yet, despite its efforts to make a difference for the

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environment, the company continues to work with companies in the oil and gas industries, a seeming conflict of purpose. Activity Students are asked to read a short case on Microsoft‘s strategy to reduce and reverse its carbon footprint and then respond to a series of questions about the case. Class Discussion Using the various theories presented in the chapter, discuss Microsoft‘s current strategy and future ambitions toward reducing its carbon footprint. Are Microsoft‘s actions ethical? What are the implications of its strategies for its stakeholders? CONNECT Video Case Did You Know? International Business Can Help Topple Governments that Violate Human Rights Summary This activity focuses on the role of international companies in helping to end the apartheid system in South Africa. Under the apartheid government, segregation was mandated between whites and non-whites and black people were not permitted to take positions in which they would supervise whites. Despite the situation, many international companies continued to operate in South Africa until the mid-1980s. The apartheid system finally ended when many companies made the decision to pull out creating an economic crisis in the country. Activity Students are asked to watch a video on the end of apartheid in South Africa and then respond to a series of questions related to the video. Class Discussion It is essential that international managers incorporate ethics into their decision making and further that they recognize that while something may be legal, it may not be ethical. Ask students to reflect on why so many international companies gave tacit support to South Africa‘s apartheid government. What drove the decision to pull out? Are there situations today where international companies could effect change? Video Note: South Africa‘s fishing industry, which has benefited from globalization, is now being threatened by disruption in demand related to the novel coronavirus. To learn more, consider Coronavirus: South Africa’s Economic Victims in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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End-of-Chapter Resources Critical Thinking and Discussion Questions 1. A visiting American executive finds that a foreign subsidiary in a less developed country has hired a 12-year old girl to work on a factory floor, in violation of the company‘s prohibition on child labor. He tells the local manager to replace the child and tell her to go back to school. The local manager tells the American executive that the child is an orphan with no other means of support, and she will probably become a street child if she is denied work. What should the American executive do? Answer: This question, illustrating a potentially very real ethical dilemma facing managers working in subsidiaries located in developing countries, is designed to stimulate class discussion. Students should recognize that neither alternative—violating the company‘s position on child labor, nor putting the child out on the streets—seems acceptable. In the end, many students may agree that allowing the child to continue to work in the factory is the lesser of the two evils. 2. Drawing upon John Rawls‘ concept of the veil of ignorance, develop an ethical code that will (a) guide the decisions of a large oil multinational toward environmental protection and (b) influence the policies of a clothing company in its potential decision to outsource its manufacturing operations. Answer: According to John Rawls, a decision is just and ethical if people would allow for it when designing a social system under a veil of ignorance. Rawls‘ veil of ignorance is a conceptual tool that can contribute towards the moral compass that managers can use to help them navigate through difficult ethical dilemmas. This question can produce some interesting responses, particularly in a class with a diverse group of nationalities. Lecture Note: In an effort to conserve water, Nestle has discovered a way to produce powdered milk using a water-free process. The company currently has a plant open in Mexico and plans to export the process to other countries. To learn more, go to http://www.bloomberg.com/news/articles/2014-10-24/nestle-plant-extracts-15-of-water-inmexico-from-milk. 3. Under what conditions is it ethically defensible to outsource production to the developing world where labor costs are lower when such actions also involve laying off long-term employees in the firm‘s home country? Answer: This question is likely to stimulate some lively discussion, particularly if students have personally felt the impact of this practice. Many American companies are outsourcing not only blue-collar work, but also white-collar positions to the developing world. Students are facing a tenuous job market where positions that they may have sought when they began their college degrees are being ―shipped abroad.‖ Some students will argue that companies have to do what is best for all stakeholders, and if that means taking advantage of cheaper labor costs elsewhere, then that is the appropriate strategy. Others, however, will probably argue that companies owe a social debt to their home countries, and that loyalty from long-term employees should be rewarded.

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4. Do you think facilitating payments (speed payments) should be ethical? Does it matter in which country, or part of the world, such payments are made? Answer: Students will probably be divided on this question, and a lively debate should ensue. Certainly, the notion of when in Rome, do as the Romans do could be argued. However, those taking this perspective should recognize that it may be difficult to draw the line on exactly what is acceptable under this guise, and when bribery goes too far. 5. A manager from a developing country is overseeing a multinational‘s operations in a country where drug trafficking and lawlessness are rife. One day, a representative of a local ―big man‖ approaches the manager and asks for a ―donation‖ to help the big man provide housing for the poor. The representative tells the manager that in return for the donation, the big man will make sure that the manager has a productive stay in his country. No threats are made, but the manager is well aware that the big man heads a criminal organization that is engaged in drug trafficking. He also knows that the big man does indeed help the poor in the rundown neighborhood of the city where he was born. What should the manager do? Answer: Many students will probably suggest that the manager should not accept the assistance of the ―big man,‖ nor make the recommended ―donation.‖ Students taking this perspective are likely to suggest that doing so would be unethical, and that if the manager really wants to help poor people it can give a more legitimate donation. Other students, however may point out that the ―big man‖ could make life very difficult for the manager, or he could really help the manager. Some students may argue that, in order to satisfy stakeholders, the managers should meet the demands of the ―big man.‖ Still other students will probably point out that if conditions in the country are so poor, the company should simply take its investments elsewhere. Lecture Note: Mexico‘s drug trafficking problem is currently prompting some foreign companies to rethink their investments in the country, see https://www.ft.com/content/91d611c27907-11e7-90c0-90a9d1bc9691. To learn about drug trafficking in the gas industry, go to https://www.rollingstone.com/culture/culture-features/drug-war-mexico-gas-oil-cartel-717563. 6. Milton Friedman stated in his famous article in The New York Times in 1970 that ―the social responsibility of business is to increase profits.‖ Do you agree? If not, do you prefer that multinational corporations adopt a focus on corporate social responsibility or sustainability practices? Answer: This question is sure to generate considerable debate among students. Some students will probably side with Milton Friedman and argue that it is the responsibility of a company to generate profits for its shareholders and that the decision to invest in sustainability efforts should be left to stakeholders. Other students, however, may argue that sustainability and social responsibility should be an integral part of all company strategies. Students taking this perspective are likely to suggest that managers have an ethical responsibility to ensure that they are not knowingly engaging in practices that could harm the environment, employers, customers, and so on.

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7. Can a company be good at corporate social responsibility but not be sustainability-oriented? Is it possible to focus on sustainability but not corporate social responsibility? Based on reading the Focus on Managerial Implications section, discuss how much CSR and sustainability are related and how much the concepts differ from each other. Answer: This question will likely result in a number of responses depending on how students define corporate social responsibility. Those who define the concept as being a good corporate citizen in general will probably suggest that indeed, a firm could be good at corporate social responsibility, perhaps by supporting a local women‘s shelter or helping disadvantaged children for example, even if they don‘t focus on the environment. Other students, however, will suggest that corporate social responsibility mandates sustainability, and that it doesn‘t matter how many disadvantaged children a company helps, if the company is at the same time, polluting local rivers, the company is not being good at corporate social responsibility. Other students will probably suggest that a company that chooses to invest in expensive equipment to prevent polluting local rivers, even when pollution levels are within legal limits, may be sustainabilityoriented, but not good at corporate social responsibility because some stakeholders, namely shareholders, may not benefit from the expensive investment in equipment.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 Promoting respect for universal human rights is a central dimension of many countries‘ foreign policy. As history has shown, human rights abuses are an important concern worldwide. Some countries are more ready to work with other governments and civil society organizations to prevent abuses of power. The annual Country Reports on Human Rights Practices are designed to assess the state of democracy and human rights around the world, call attention to violations, and—where needed—prompt needed changes in U.S. policies toward particular countries. Find the latest annual Country Reports on Human Right Practices for the BRIC countries (Brazil, Russia, India, and China), and create a table to compare the findings under the ―Worker Rights‖ sections. What commonalities do you see? What differences are there? Exercise 2 The use of bribery in the business setting is an important ethical dilemma many companies face both domestically and abroad. The Bribe Payers Index is a study published every three years to assess the likelihood of firms from leading economies to win business overseas by offering bribes. It also ranks industry sectors based on the prevalence of bribery. Compare the five industries thought to have the largest problems with bribery with those five that have the least problems. What patterns do you see? What factors make some industries more conducive to bribery than others?

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Microsoft Goes Carbon Neutral closing case Summary The closing case details Microsoft‘s pledge to go carbon negative by 2030 and to remove all CO2 it has emitted since it was founded by 2050. The company, which has been carbon neutral since 2012, plans to use only renewable energy to run its facilities by 2025 and to fully convert to an electric vehicle fleet for its campus by 2030. Microsoft is also making significant investments in new technologies for carbon reduction. Yet, despite these ambitious plans, critics say the company is not going far enough, pointing out that as long as it does business with companies in the oil and gas industry, it cannot claim to have fully committed to sustainability. Case Discussion Questions 1. Is Microsoft‘s decision to go carbon negative by 2030 in the best interests of Microsoft‘s stockholders? What about other stakeholders such as the company‘s customers, employees, suppliers, and the communities in which it does business? Many students will probably agree that Microsoft‘s decision to go carbon negative by 2030 may have been, in part, stockholder driven. Students sharing this perspective may suggest that as awareness of the coming environmental crisis grows, people, including Microsoft‘s stockholders, are looking for those with a big voice to become more actively involved in finding solutions to the crisis. Students may conclude that while Microsoft‘s strategy may mean lower profits in the short run, those lower profits could be offset in the longer term if the company gains more customer loyalty for its good corporate citizenship. 2. What would the Friedman doctrine suggest about Microsoft‘s decision to go carbon negative by 2030? The Friedman doctrine argues that a company‘s social responsibility is to maximize profits within the limits of the law. Students may conclude that in the short term, Microsoft‘s strategy, with its large investments in new carbon reduction technologies and other efforts to reduce its carbon footprint, may violate this principle. However, students may also note that in a world that is literally heating up every day, finding a way to reduce CO2 emissions is vital to the very future of the planet. Students may therefore conclude that in the longer term, Microsoft‘s strategy may prove to be the most profitable approach if its efforts serve to attract more business as customers seek out companies that are socially responsible. 3. Viewed through the lens of ―rights theories,‖ is Microsoft‘s decision to go carbon negative by 2030 ethical? According to rights theories, people have fundamental rights and privileges that transcend national boundaries and cultures. Students may argue, that view through this lens, Microsoft‘s commitments to being carbon negative could be considered unethical in that the company is making decisions that will have implications for its employees, its communities, and its Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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customers. While many students will claim that Microsoft‘s actions are intended to improve the situation for these stakeholders, others may point out that the support the company is likely to receive from other stakeholders would probably offset the concerns of its critics. 4. Apply John Rawls‘ concept of the veil of ignorance to Microsoft‘s decision. What conclusion do you reach about Microsoft‘s decision? Most students will probably conclude that Microsoft‘s decision to go carbon negative and to invest in developing new technologies to reduce carbon emissions are indeed just and ethical. What students may have a problem with however, is Microsoft‘s continued interaction with companies like ExxonMobil. Indeed, students may conclude that until Microsoft either uses its power to get customers like ExxonMobil to make similar CO2 reduction commitments or refuses to do business with them, Microsoft is talking the talk, not walking the walk. 5. Do you think that Microsoft should decline to do business with the likes of ExxonMobil unless they also adopt ambitious sustainability targets, as some critics have suggested? Responses to this question will depend on student opinion. Many, however, will probably agree with Microsoft‘s critics and argue that the company cannot claim that it is fully committed to reducing its carbon footprint if it continues to do business with companies like ExxonMobil. Teaching Tip: To learn more about Microsoft, go to https://www.microsoft.com/en-us/about. To learn about the company‘s efforts to reduce and reverse its carbon footprint, consider https://www.bbc.com/news/technology-51133811. Video Note: Other large companies are recognizing that investing in sustainability may be good business. To learn more, consider Large Companies See Payoff in Sustainability in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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Class Discussion Understanding the geographic location of countries is essential to the understanding of international business. Ask students to discuss the implications of the geographic locations of the countries in this exercise on the subject matter.

Continuous Case Concept The auto industry, as Continuous Case Concept in Chapter 1 demonstrated, is a global one. Manufacturing takes place across the globe, and auto companies rely on suppliers around the world to produce quality parts at a reasonable cost. 

Ask students whether the auto companies should run their foreign operations according to the ethical standards in the host country or according to home country standards. The recall of Japanese-made Takata airbags affected many key players in the global auto industry including Honda, Toyota, and General Motors. Discuss the responsibility of those automakers to their consumers.

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The recall of Takata airbags involved some 12 million vehicles globally, but it is just one of many recalls that seem to have become common-place in the industry. Audi, for example, announced a recall of airbags made by a different company. Ask students how companies like Audi and General Motors can reconcile how their suppliers run their operations with their own ethics policies. Do these companies have any responsibility to ensure that suppliers make ethical decisions?

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Finally, reflect on the move by both Honda and Nissan to create new positions to oversee safety. At Honda, executives are taking pay cuts as a signal of their responsibility and concern over performance and quality lapses. What do these actions communicate to employees and other stakeholders?

This exercise is useful for expanding the discussion of Ethical Dilemmas, Philosophical Approaches to Ethics, and Organizational Culture and Leadership. The exercise also works well with the discussion of the role of leaders in ethical decision-making, and with the material on ethics officers.

Additional Readings and Sources of Information How Managers Should Respond When Bribes Are Business as Usual https://hbr.org/2018/11/how-managers-should-respond-when-bribes-are-business-as-usual European firms are increasingly tackling the scourge of bribery https://www.economist.com/business/2018/05/26/european-firms-are-increasingly-tackling-thescourge-of-bribery

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Microsoft Pledges to Be Carbon Negative by 2030 https://www.theguardian.com/technology/2020/jan/16/microsoft-carbon-emissions-negative2030 Microsoft is Going Carbon Negative. What Does That Mean? https://www.forbes.com/sites/davidrvetter/2020/01/20/microsoft-is-going-carbon-negative-whatdoes-that-mean/?sh=15f541cfb130 The 2020 World‘s Most Ethical Companies® Honorees https://www.worldsmostethicalcompanies.com/honorees/ Starbucks named one of the World‘s Most Ethical Companies https://news.starbucks.com/news/starbucks-worlds-most-ethical-companies-2018 Volkswagen Europe Market Share Continues Drop Amid Recalls http://www.bloomberg.com/news/articles/2016-03-16/volkswagen-europe-market-sharecontinues-slide-as-recalls-start Organizational Culture Drives Ethical Behavior https://www.oecd.org/corruption/integrity-forum/academic-papers/Filabi.pdf Goodbye Boozy Dinners: Korean Business Braces for Corruption Crackdown http://www.bloomberg.com/news/articles/2016-08-29/korean-business-culture-set-for-shake-upas-anti-graft-law-looms Airlines‘ Biofuel-Powered Flights Might Soon Take Off https://www.bloomberg.com/news/articles/2018-09-13/airlines-biofuel-powered-flights-mightsoon-take-off At Detroit's auto show, the issue is trust, not just new cars https://www.usatoday.com/story/money/cars/2016/01/10/auto-industry-scandals-general-motorsgm-volkswagen-takata/78406022

Chapter 6: International Trade Theory Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline

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Opening Case: Trade in Services Introduction An Overview of Trade Theory Did You Know? Video Clip: The Last Time The United States Imposed Tariffs On Imports Of Steel It Led To Job Losses Mercantilism Absolute Advantage Comparative Advantage Heckscher–Ohlin Theory The Product Life-Cycle Theory New Trade Theory National Competitive Advantage: Porter‘s Diamond 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: A Tale of Two Nations: Ghana and South Korea APPLICATION-BASED ACTIVITY: UNDERSTANDING TRADE THEORY AND GOVERNMENT POLICY: TRADE THEORY IS US!

Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 6-1 Understand why nations trade with each other. 6.2 Summarize the different theories explaining trade flows between nations. 6-3 Recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system. 6-4 Explain the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries. 6-5 Understand the important implications that international trade theory holds for management practice.

Chapter Summary

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This chapter focuses on the benefits of international trade and introduces several theories that help explain the patterns of international trade that are observed in practice. The discussion begins with an explanation of the theory of mercantilism, and then proceeds to discuss the theories of absolute advantage and comparative advantage. Four additional theories are discussed, including the Heckscher-Ohlin theory, the product life cycle theory, the new trade theory, and the theory of national competitive advantage. Each of these theories helps explain why certain goods are (or should be) made in certain countries. The chapter ends by discussing the link between the theories of international trade and (1) a firm‘s decision about where (in the world) to locate its various productive activities, (2) the importance of establishing first-mover advantages, and (3) government trade policies.

Chapter Opening Activity In groups of four or five, give each group ten minutes to share their ideas about one of the several theories discussed in this chapter (e.g., mercantilism, absolute advantage, comparative advantage, Heckscher-Ohlin, product life cycle, new trade, and Porter‘s diamond). Then, ask a student representative from each group to explain their theory using a few main points. Suggest the group create one or two PowerPoint slides to illustrate or draw a graphic illustration on the board. This is a way to create some enthusiasm about theories by tackling them interactively, instead of putting them to sleep with a lecture on trade theories.

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Chapter Outline

Trade in Services opening case Summary The opening case explores growing global trade in services. Today, the share of services in world trade is about 20 percent, and it is expected that by 2040, trade in services will account for about one-third of all trade. The growth in global trade in services is not unexpected given that services represent the bulk of economic activity in many nations. In the United States for example, services make up about 80 precent of all economic activity. However, while numerous agreements exist on cross-border trade in products, the same does not exist for global trade in services. Going forward, it is anticipated that this will need to be addressed if countries are to capitalize on the potential for greater trade in services. Discussion Questions 1. Discuss the notion of global trade in services. How do you feel about having your X-ray read in India or your taxes completed in the Philippines? Nearly every student will have encountered cross-border trade in services in some capacity, as a tourist perhaps, or when dealing with a customer service agent located in a foreign country. While most students will have likely given these experiences little thought, the idea that their Xrays are being read not at the local hospital but in a country half a world away may be a surprise. Many will recognize the value in this strategy, but some will wonder whether common standards need to be in place when it comes to services like healthcare. 2. Why has it been so difficult to negotiate agreements covering cross-border trade in services when agreements exist to cover cross-border trade in products? Many students will probably conclude that the challenges hampering efforts to negotiate agreements on cross-border trade in services as compared to trade in products comes down to the fact that services are subject to more national regulations, rules, and standards than products. Students may note for example, that the United States has regulations limiting the sharing of patient healthcare records. Similarly differences in professional standards in areas like accounting and law are also common. The challenge for trade negotiators is deciding on a common set of standards and regulations that can then be applied across numerous countries. Some students may also point out that a service comprise an ever larger share of all economic activity, nations will see opportunities to increases revenues through taxes or leverage domestic companies through subsidies or other assistance, making it even more difficult to come to agreement. Teaching Tip: To further explore the growth of cross-border trade in services, go to https://www.oecd.org/sdd/its/international-trade-in-services-statistics.htm and https://www.wto.org/english/res_e/booksp_e/03_wtr19_2_e.pdf. Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Teaching Tip: To further explore India‘s role in reading U.S. X-rays, go to https://www.nytimes.com/2003/11/16/business/who-s-reading-your-x-ray.html.

CONNECT Case Analysis Trade in Services Summary This activity explores global trade in services. Currently, cross-border trade in services accounts for about 20 percent of all trade. That number is expected to grow to about one-third of all trade by 2040 making it even more urgent for nations to come to terms on agreements to facilitate its flow. Activity Students are asked to read a short case on global trade in services and then respond to questions about the case. Class Discussion What is driving the growth in global trade in services. Why has it been so difficult for countries to negotiate agreements to facilitate the free flow of cross-border trade in services?

Introduction A) The long-held belief espoused by the United States and other nations that free trade is a positive-sum game under which all nations win is under threat from Donald Trump. Trump is rapidly working to dismantle 70 years of American-led policy to lower trade barriers, believing that trade is a zero-sum game, where some countries win at the expense of others. Lecture Note: It is often worth asking students before discussing the theories why countries trade the products they do. They will frequently, with a little prompting, hit upon many of the ideas presented in this chapter and consequently relate better to the various theories that are discussed.

An Overview of Trade Theory A) Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. THE BENEFITS OF TRADE

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B) The great strength of the theories of Smith, Ricardo, and Hecksher–Ohlin is that they identify with precision the specific benefits of trade. Common sense suggests that some trade is beneficial. The theories of Smith, Ricardo, and Hecksher–Ohlin go beyond common sense to show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself. The gains arise because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries. CONNECT Video Case EU to Remain Open For International Trade Summary This activity explores why nations trade with each other and in particular looks at the European Union‘s trade policy and its efforts to form a free trade agreement with Japan. Activity Students are asked to watch a video on the European Union‘s trade policy and then respond to questions about the video. Class Discussion Discuss the philosophy of the European Union on trade. Why is the European Union interested in forming a free trade agreement with Japan?

Did You Know? Video Clip The video clip asks: ―Did you know that the last time the United States imposed tariffs on imports of steel it led to job losses?‖ Discussion Questions 1. Explain the rationale for tariffs on imported steel. What was Donald Trump trying to achieve with the policy? While some students are likely to suggest that Donald Trump‘s policy was largely politically motivated, other will contend that the policy was designed to protect U.S. steel workers from lower cost steel imported from China. By effectively increasing the price of imported steel by 25 percent, U.S. steel makers gain a price advantage, making it more likely that they will remain in business and keep steel workers employed. 2. Discuss the impact of Trump‘s tariffs for steel companies and their employees. Who is likely to benefit from the tariffs? How might the policy impact workers in other industries? This is an extension of the previous question. History suggests that while the tariffs will protect some steel workers, steel companies are the bigger beneficiary from the tariffs. Furthermore, because the tariffs increase the price of steel in the United States, companies in industries that

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consume steel will have higher raw materials costs, putting jobs in those industries in jeopardy. Indeeed, the tariffs imposed in 2002 during the Bush administration resulted in significant overall job losses. 3. Are Trump‘s tariffs fair to U.S. consumers buying appliances or autombiles? For consumers, the tariffs imposed on imported steel mean higher prices on steel-intensive products like appliances and autombiles. While the companies producing these products may absorb some of the cost of the higher priced steel, much of it will be passed on to conumers. Lecture Note: To extend this discussion, consider the the situation in Michigan: https://www.nbcnews.com/business/economy/trump-steel-tariffs-raised-prices-shriveleddemand-led-job-losses-n1242695.

THE PATTERN OF INTERNATIONAL TRADE C) Some patterns of trade are easy to explain. It is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffee. Yet others are not so obvious or easily explained. D) New trade theory stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. So a country‘s pattern of trade may be a reflection of the ability of firms in that nation to capture firstmover advantages. E) Michael Porter suggested that a country‘s factor endowments, as well as domestic demand and domestic rivalry are important in explaining a nation‘s dominance in the production and export of particular products. TRADE THEORY AND GOVERNMENT POLICY F) While all the trade theories discussed in the text agree that international trade is beneficial to a country, they lack agreement in their recommendations for government policy. Mercantilism makes a crude case for government involvement in promoting exports and limiting imports. Smith, Ricardo, and Heckscher-Ohlin all promote the notion of unrestricted free trade. The argument for unrestricted free trade is that both import controls and export incentives (such as subsidies) are self-defeating and result in wasted resources. Yet both the new trade theory and Porter‘s theory of national competitive advantage can be interpreted as justifying some limited and selective government intervention to support the development of certain export-oriented industries.

Mercantilism A) The first theory of international trade emerged in England in the mid-16th century. Referred to as mercantilism, its principle assertion was that it is in a country‘s best interest to maintain a trade surplus, to export more than it imports. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Teaching Note: To extend the discussion on mercantilism, https://www.economist.com/free-exchange/2013/08/23/what-was-mercantilism.

visit

B) The flaw of mercantilism was that it viewed trade as a zero-sum game, one in which a gain by one country results in a loss by another. It was left to Adam Smith and David Ricardo to show the shortsightedness of this approach and to demonstrate that trade is a positive-sum game. Video Note: Donald Trump defined his presidency in part by his policies designed to take the United States on a more isolationist path. To extend this discussion, consider Global Trade Without U.S. Leadership. Does Donald Trump Care? Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

country FOCUS: Is China Manipulating Its Currency in Pursuit of a Neo-Mercantilist Policy? Summary This feature analyzes claims that China is a neo-mercantilist nation. Exports are largely responsible for China‘s recent rapid economic growth and for decades, the country‘s exports have grown faster than its imports. In 2017, the trade deficit between the United States and China reached a record $375 billion, prompting renewed criticism that China has been artificially keeping the value of its currency low, making its exports cheaper. However, this claim is not supported by the evidence, which shows instead that China‘s currency has strengthened relative to the dollar and that China has actually taken actions to allow the value of its currency to appreciate. Discussion Questions 1. Are the claims that China is manipulating its currency and following a neo-mercantilist policy valid? Why or why not? Evidence shows that despite the claims that China has been increasing its exports via an artificially low yuan, the opposite is actually true. The value of the yuan relative to the dollar began rising in 2005 and has continued to rise, albeit slowly, ever since. Indeed, the U.S. Treasury Department moderated its criticism of China‘s foreign exchange policies in 2017, declining to call the country a currency manipulator. 2. What incentive does China have to open its markets to foreign products? Why might China resist such a move? China is under significant pressure from many countries including the United States to open its markets to foreign goods. Students will probably recognize that if the country does open its markets, the impressive economic growth the country has been experiencing would probably be affected. However, students may also note that the country may have to make some changes to

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its policies if only to appease other nations and prevent retaliatory trade measures. Already the country, in response to pressure from the United States, has allowed its currency to appreciate relative to the dollar. 3. Why does China‘s trade surplus with the United States persist despite the country‘s efforts to keep the value of its currency from declining? Students should recognize that the United States‘ trade deficit with China suggests that Americans consume far more products made in China relative to China‘s consumption of American-made goods. Some students might point out though, that in addition to finished goods, China also exports unfinished goods, products that are generally produced more cheaply and efficiently in China than elsewhere. These unfinished goods also contribute to the trade imbalance between the two countries. Lecture Note: For more information on China‘s currency policy and its interrelationship with the U.S. economy, go to https://home.treasury.gov/news/press-releases/sm751 And http://www.bloomberg.com/news/articles/2016-01-14/the-market-thinks-china-s-currencypolicy-drives-u-s-monetary-policy.

Absolute Advantage A) In 1776, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game, arguing that countries differ in their ability to produce goods efficiently, and that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries.

Comparative Advantage A) In 1817, David Ricardo took Adam Smith‘s theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods. Smith‘s theory of absolute advantage suggests that such a country might derive no benefits from international trade. Ricardo showed that this was not the case. According to Ricardo‘s theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. Teaching Tip: For more on the ideas and philosophies of David Ricardo, go to http://www.econlib.org/library/Enc/bios/Ricardo.html. THE GAINS FROM TRADE

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B) The theory of comparative advantage argues that trade is a positive-sum gain in which all benefit. It provides a strong rationale for encouraging free trade. QUALIFICATIONS AND ASSUMPTIONS C) The simple example of comparative advantage presented in the text makes a number of assumptions: only two countries and two goods; zero transportation costs; similar prices and values; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources; and no effects on income distribution within countries. While these are all unrealistic, the general proposition that countries will produce and export those goods in which they are most efficient has been shown to be quite valid. EXTENSIONS OF THE RICARDIAN MODEL D) The text explores the effects of relaxing the assumptions that resources are mobile between goods within a country, and that trade does not change a country‘s stock of resources or the efficiency with which those resources are utilized. Immobile Resources E) As illustrated by the example in the text, resources do not always move freely from one economic activity to another. Diminishing Returns F) The model of comparative advantage assumes constant returns to specialization (the units of resources required to produce a good are assumed to remain constant no matter where one is on a country‘s production possibility frontier). However, it is more realistic to assume diminishing returns to specialization (more units of resources are required to produce each additional unit). G) Diminishing returns are more realistic because not all resources are of the same quality, and because different goods use resources in different proportions. Diminishing returns to specialization suggest that the gains from specialization will probably be exhausted before specialization is complete. Still, unrestricted free trade makes sense even if the gains are not as great as suggested by the constant returns case. Dynamic Effects and Economic Growth H) Opening an economy to trade is likely to generate dynamic gains of two types. First, trade might increase a country's stock of resources as increased supplies become available from abroad. Second, free trade might increase the efficiency of resource utilization, and free up resources for other uses. Trade, Jobs and Wages: The Samuelson Critique I) Samuelson argues that in some cases, the dynamic gains from trade may not be so beneficial. He argues that the ability to off-shore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the United States, where wages fall, effectively negating the gains of international trade.

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country FOCUS: ―Trade Wars Are Good and Easy to Win‖ Summary This feature explores Donald Trump‘s perspective on trade and the actions he has taken on trade while President of the United States. Trump‘s isolationist views are in stark contrast to U.S. trade policy of the past 70 years. Trump appears to be under the impression that trade agreements are zero-sum games and further that other countries can be bullied into making concessions to the United States. Trump has boasted that ―trade wars are good and easy to win‖ indicating that he intends to impose widespread tariffs as part of his effort to make America great again. Discussion Questions 1. Do you agree with Donald Trump‘s assessment that trade wars are good and easy to win? Do you agree with his approach to trade? Since winning the election, Donald Trump has moved swiftly to change what he feels are terrible deals for the United States. He withdrew from the TPP within days of taking office, started the process of renegotiating NAFTA, and implemented wide-ranging tariffs on steel and aluminum with promises of more to come if countries fail to respond to his demands. Many students will be perplexed by Trump‘s actions pointing to the wide-ranging evidence that free trade is beneficial and that trade agreements are a positive-sum game. Other students will support Trump‘s tactics echoing his statements that China and Mexico are taking advantage of the United States. Some students will have direct experience with job losses related to shifts in manufacturing locations or cheap imports. These students may support the notion that protectionist moves are important to protect U.S. jobs. Other students, however, will probably counter their arguments with a discussion of how trade is important for global economic growth and the need to look at the overall picture rather than a slice of it. 2. For the last 70 years, the United States has been the leader in promoting a free trade environment. What role will the United States play under Donald Trump and what does that mean for the United States going forward? Since the end of World War II, the United States has been a strong force in pushing the world to adopt free trade measures. Indeed, until the election of Donald Trump, there was little dispute as to leadership role of the United States in the global economy. Now, however, there are concerns that that leadership role could be rapidly deteriorating. Already for example, the remaining 11 countries that were part of the TPP have agreed to a new version of their deal, a version that does not include the United States. That effort was led by Japan, a country that is now being seen as a stronger force in the Asia-Pacific region. Many students will probably suggest that the United States is now at a disadvantage when it comes to writing the rules for important areas in the future—ecommerce, intellectual property, and so on. Students may also point out that regaining its role as a leader in free trade will not be easy, and the United States could be putting its companies at a long-term competitive disadvantage. Teaching Tip: To further explore Donald Trump‘s views on trade, go to https://apnews.com/article/donald-trump-virus-outbreak-global-trade-trade-policy-mexico-

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39aadae9a6d18de2b91889f1e552b605, https://www.newyorker.com/news/our-columnists/what-is-donald-trumps-trade-policy-nobodyknows, and https://www.usatoday.com/story/tech/2018/02/13/bill-gates-warns-china-otherpowers-fill-void-if-u-s-foreign-aid-cuts-could-cede-leadership-china-ot/322177002.

Evidence for the Link between Trade and Growth J) Studies exploring the relationship between trade and economic growth suggest that countries that adopt a more open stance toward international trade enjoy higher growth rates than those that close their economies to trade.

Heckscher–Ohlin Theory A) Heckscher and Ohlin argued that comparative advantage arises from differences in national factor endowments (land, labor, and capital). As a result, the Heckscher–Ohlin theory predicts that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Teaching Tip: To learn more about http://www.econlib.org/library/Enc/bios/Ohlin.html.

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THE LEONTIEF PARADOX B) Using the Heckscher–Ohlin theory, Leontief, in 1953, postulated that since the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods. To his surprise, however, he found that U.S. exports were less capital-intensive than U.S. imports. Since this result was at variance with the predictions of the theory, it has become known as the Leontief Paradox. Teaching Tip: A more extensive discussion of Wassily Leontief is available at http://www.econlib.org/library/Enc/bios/Leontief.html. C) Recent research suggests that the Heckscher–Ohlin theory gains predictive power if the impact of differences in technology on productivity is controlled for.

The Product Life-Cycle Theory A) Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s. According to the theory, as products mature, both the location of sales and the optimal production location will change affecting the flow and direction of trade. B) According to Vernon, early in the life cycle of a typical new product, while demand is starting to grow in the United States, demand in other advanced countries is limited to high-income groups. The limited initial demand in other advanced countries does not make it worthwhile for

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firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries. Over time, however, demand for the new product starts to grow in other advanced countries. As it does, it becomes beneficial for foreign producers to begin producing for their home markets. In addition, U.S. firms might set up production facilities in those advanced countries where demand is growing. Consequently, production within other advanced countries begins to limit the potential for exports from the United States. C) As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. One result is that producers based in advanced countries where labor costs are lower than the United States might now be able to export to the United States. D) If cost pressures become intense, the process might not stop there. The cycle by which the United States lost its advantage to other advanced countries might be repeated once more as developing countries begin to acquire a production advantage over advanced countries. E) The consequence of these trends for the pattern of world trade is that the United States (and other advanced countries) switches from being an exporter of the product to an importer of the product as production becomes more concentrated in lower-cost foreign locations. PRODUCT LIFE-CYCLE THEORY IN THE TWENTY-FIRST CENTURY F) While the product life cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the United States in the 1960s and 1970s, the increasing globalization and integration of the world economy has made this theory less valid in today's world. In fact, the product life-cycle as introduced by Vernon could be considered ethnocentric, as well. As such, this approach may be best suited to explain the pattern of international trade during the period of American global dominance.

New Trade Theory A) New trade theory suggests that the ability of firms to realize economies of scale (unit cost reductions associated with a large scale of output) may help explain international trade patterns. B) New trade theory makes two important points. First, trade can increase the variety of goods available to consumers and decrease the average cost of those goods. Second, in industries where the output necessary to attain economies of scale is significant relative to total world demand, only a few companies may be able to survive. Being a first-mover in these industries is important. INCREASING PRODUCT VARIETY AND REDUCING COSTS C) According to new trade theory, with trade a nation may be able to specialize in producing a narrower range of products than it would in the absence of trade. By buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods.

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ECONOMIES OF SCALE, FIRST-MOVER ADVANTAGES, AND THE PATTERN OF TRADE D) A second theme in new trade theory is that the pattern of trade we observe in the world economy may be the result of first-mover advantages (economic and strategic advantages that accrue to early entrants into an industry) and economies of scale. IMPLICATIONS OF NEW TRADE THEORY E) New trade theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology. The theory also suggests that a country may predominate in the export of a good simply because it was lucky enough to have first-mover firms. F) New trade theory is at variance with the Heckscher-Ohlin theory, which suggests that a country will predominate in the export of a product when it is particularly well endowed with those factors used intensively in its manufacture. New trade theory does not contradict the theory of comparative advantage, but instead identifies a source of comparative advantage. G) An obvious and controversial extension of new trade theory is the implication that governments should consider strategic trade policies. Strategic trade policies would suggest that governments should nurture and protect firms and industries where first-mover advantages and economies of scale are likely to be important, as doing so can increase the chance that a firm will build economies of scale and eventually end up a winner in the global competitive race. CONNECT Case Analysis New Trade Theory and Aircraft Production Summary This activity explores new trade theory and how it can explain the success of Boeing and Airbus in the global aircraft industry. Both companies have benefitted from favorable government actions. Activity Students are asked to read a case on the aircraft industry and then respond to questions about the case. Class Discussion Discuss new trade theory and the role of government in helping an industry, like the aircraft industry, be successful. How has government policy shaped other industries?

National Competitive Advantage: Porter’s Diamond A) Porter‘s 1990 study tried to explain why a nation achieves international success in a particular industry. This study found four broad attributes―factor endowments, demand conditions, relating and supporting industries, and firm strategy, structure, and rivalry―that promote or

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impede the creation of competitive advantage. These are shown as a diamond in Figure 6.5. Porter argues that firms are most likely to succeed in industries where the diamond is favorable. FACTOR ENDOWMENTS B) A nation's position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry can be critical. These factors can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how). While either can be important, advanced factors are more likely to lead to competitive advantage. DEMAND CONDITIONS C) The nature of home demand for the industry‘s product or service influences the development of capabilities. Sophisticated and demanding customers pressure firms to be competitive. RELATED AND SUPPORTING INDUSTRIES D) The presence of supplier and related industries that are internationally competitive in a nation can spill over and contribute to other industries. Successful industries tend to be grouped in clusters in countries. FIRM STRATEGY, STRUCTURE, AND RIVALRY E) The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry impact firms‘ competitiveness. Firms that face strong domestic competition will be better able to face competitors from other firms. EVALUATING PORTER’S THEORY F) In addition to these four main attributes, government policies and chance can impact any of the four. Government policy can affect demand through product standards, influence rivalry through regulation and antitrust laws, and impact the availability of highly educated workers and advanced transportation infrastructure. G) The four attributes of the diamond work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage. To date, Porter‘s theory has not been subjected to detailed empirical testing. CONNECT Click and Drag Applying Porter’s Model Summary This activity focuses on Michael Porter‘s Diamond of Competitive Advantage. Using his Diamond, Porter tries to explain why some countries succeed in trade and others do not. Activity Students are asked to match various descriptions with the correct component of Porter‘s model.

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Class Discussion Understanding Porter‘s model can provide insight into why countries succeed in trade and can influence trade policy decisions. Discuss the different parts of the model and what they mean. Then using the model, identify industries that have been successful and why. How could this shape future trade policy?

CONNECT Click and Drag Trade Theories: A Historical Approach Summary This activity focuses on the evolution of trade theory beginning with the early mercantilist approach to modern day new trade theory and Porter‘s Diamond of Competitive Advantage. Activity Students are asked to match the various trade theories to a timeline. Class Discussion Understanding how philosophy on trade has evolved over time allows for a greater understanding of the current trading environment and countries‘ trade policies. Discuss how the different theories have built on previous works and how the theories have changed as the trading environment has changed.

360° VIEW: MANAGERIAL IMPLICATIONS Location, First-Mover Advantages, and Government Policy A) There are at least three main implications of the material discussed in this chapter for international businesses: location implications, first-mover implications, and policy implications. Location B) Underlying most of the theories is the notion that different countries have particular advantages in different productive activities. Thus, from a profit perspective, it makes sense for a firm to disperse its various productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. Video Note: To extend this discussion, consider the decision by Volvo to produce in the United States. Go to Volvo Cars: CEO: It’s Important to Build in the U.S. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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First-Mover Advantages C) Being a first-mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors. Firms need to be prepared to undertake huge investments and suffer losses for several years in order to reap the eventual rewards. Government Policy D) Because of their pivotal role in international trade, business firms can and do exert a strong influence on government trade policy. Government policies with respect to free trade or protecting domestic industries can significantly impact global competitiveness. E) One of the most important implications for businesses is that they should work to encourage governmental policies that support free trade. If a business is able to get its goods from the best sources worldwide and compete in the sale of products into the most competitive markets, it has a good chance of surviving and prospering. If such openness is restricted, a business‘s long-term survival will be in greater question. Video Note: To extend this discussion, consider the plight of Maine‘s lobstermen who are caught up in a trade war between the United States and China. Go to How U.S.-China Trade War Is Pinching Maine’s Lobster Industry. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Teaching Tip: For information about foreign governments and their approaches to international trade, visit the Electronic Embassy at http://www.embassy.org. This site provides links to all of the foreign embassies located in Washington D.C. CONNECT Click and Drag The Balance-of Payments Explained Summary This activity focuses on the balance of payments. Understanding the balance of payments is important to international managers as it provides insight to a nation‘s trade policy. Activity Students are asked to match various transactions to the correct account in the balance of payments. Class Discussion Ask students what it means for a country to have a balance of payments surplus or a balance of payments deficit. What are the implications of balances in each account for a nation‘s trade policy?

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CONNECT Case Analysis A Tale of Two Nations: Ghana and South Korea Summary This activity explores economic development in two countries, Ghana and South Korea. Once at similar places economically, South Korea with its policy of low trade barriers and strong engagement in international trade has surged past Ghana, a nation that followed a policy of selfsufficiency and state involvement, over engaging in global trade. Activity Students are asked to read a short case on economic development in Ghana and South Korea and then respond to questions about the case. Class Discussion Discuss why the choices made by Ghana and South Korea had significant implications for each country. Ask students to reflect on the experience of each country and what Ghana can learn about international trade and economic development from South Korea.

CONNECT Video Case Did You Know? The Last Time the United States Imposed Tariffs on Imports of Steel It Led to Job Losses Summary This activity focuses on the tariffs imposed by Donald Trump on imported steel. The tariffs, imposed as part of the ongoing trade dispute between China and the United States, effectively raised the price of steel by 25 percent for U.S. companies producing steel-intensive products. So, while potentially protecting some jobs in the steel industry, the policy threatened other jobs in other industries. Activity Students are asked to watch a video on the tariffs imposed by Donald Trump and then respond to a series of questions related to the video. Class Discussion What was the rationale behind the tariffs imposed by Donald Trump? What can history tell us about the potential beneficiaries of Trump‘s tariffs? Consider the tariffs from the perspective of steel companies, their employees, consumers, and employees in industries like appliances and automobiles. Who stands to benefit from the tariffs and who stands to lose?

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End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Mercantilism is a bankrupt theory that has no place in the modern world. Discuss. Answer: Mercantilism, in its purest sense, is a bankrupt theory that has no place in the modern world. The principle tenant of mercantilism is that a country should maintain a trade surplus, even if it means that imports are limited by government intervention. This policy is bankrupt for at least two reasons. First, it is inconsistent with the general notion of globalization, which is becoming more and more prevalent in the world. A policy of mercantilism will anger potential trade partners because it will exclude their goods from free access to the mercantilist country‘s markets. Eventually, a country will find it difficult to export if it imposes oppressive quotas and tariffs on its trading partners. Second, mercantilism is bankrupt because it hurts the consumers in the mercantilist country. By denying its consumers access to either ―cheaper‖ goods from other countries or more ―sophisticated‖ goods from other countries, the mercantilist country‘s ordinary consumers suffer. Even so, the election of Donald Trump as U.S. President has brought the mercantilist philosophy to table as a viable perspective on trade, at least for his supporters. 2. Is free trade fair? Discuss. Answer: This question is designed to stimulate class discussion. Trade theory suggests that specialization and free trade benefits all countries. However, a case can be made in some situations for imposing trade barriers. For example, if a developing country is trying to establish a new industry, trade barriers may be needed in the short term until the industry can become competitive. While it could be argued that another country could make the product more efficiently already, is it fair to limit a country‘s ability to develop its industrial base? 3. Unions in developed nations often oppose imports from low-wage countries and advocate trade barriers to protect jobs from what they often characterize as ―unfair‖ import competition. Is such competition ―unfair?‖ Do you think that this argument is in the best interests of (a) the unions, (b) the people they represent, and/or (c) the country as a whole? Answer: The theory of comparative advantage suggests that a country should specialize in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries. Furthermore, the theory suggests that opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. Therefore, it would follow that if low-wage countries can make certain products more efficiently than high wage countries, the low wage countries should produce and export those products. While trade barriers may protect workers and companies, they are a short-term fix at best. Moreover, by protecting industries, the government is not encouraging companies to become more efficient. Instead, they are promoting inefficiency. Consumers lose out because they have higher prices and less choice.

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4. What are the potential costs of adopting a free trade regime? Do you think governments should do anything to reduce these costs? What? Answer: Students will probably be divided on this question, and a lively debate should ensue. For example, students will probably recognize that by adopting a free trade regime, jobs will be lost in some industries, however, they may not agree on exactly what should be done about the jobs losses. Some students might suggest that the government provide retraining programs while others may argue that people lose their jobs every day and do not get government assistance to find new ones. 5. Reread the Country Focus ―Is China Manipulating Its Currency in Pursuit of a NeoMercantilist Policy?‖ a. Do you think China is pursuing an economic policy that can be characterized as neomercantilist? b. What should the United States, and other countries, do about this? Answer: Many students will probably suggest that on the surface, China does appear to be following a neo-mercantilist philosophy. China has run a trade surplus for years, prompting critics to suggest that an artificially low currency is making its exports cheaper in foreign markets, leading to trade imbalances. Evidence points to the contrary, however. That being said, students may suggest that China does not maintain open markets and, as a result, effectively limits imports while encouraging exports—the basic notion of mercantilism. Some students will support the actions taken by Donald Trump to force China to make trade concessions. Other students may argue that the tit-for-tat negotiating approach is threatening growth in the global economy and a better alternative might be to take a bigger role in trade agreements in the region, like the Trans Pacific Partnership Agreement. Students taking this perspective might argue that had Donald Trump not withdrawn from the agreement, the United States would have been poised to take a significant role in dictating the rules of trade in the region and, in the process, encouraged China to be more open to trade. 6. Is there a difference between the transference of high paying white-collar jobs such as computer programming and accounting, to developing nations, and low paying blue collar jobs? If so, what is the difference, and should government do anything to stop the flow of white-collar jobs out of the country to countries like India? Answer: This question is likely to generate a lively debate. Many students will suggest that the outward flow of white-collar jobs is indeed a serious issue, one that should be the focus of government attention. Students taking this perspective are likely to suggest that white-collar jobs are more important to the nation‘s future, and therefore they should remain at home. Other students, however, may argue that some companies cannot afford to pay the higher wages commanded by white-collar jobs and still remain profitable. Therefore, the argument might be that by taking these jobs outside the country, the company is able to remain viable, and keep other people employed. 7. Drawing upon the new trade theory and Porter‘s theory of national competitive advantage, outline the case for government policies that would build national competitive advantage in

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biotechnology. What kind of policies would you recommend that the government adopt? Are these policies at variance with the basic free trade philosophy? Answer: Porter‘s theory of national competitive advantage argues that four broad attributes of a nation shape the environment in which local firms compete, and that these attributes promote or impede the creation of competitive advantage. These attributes are: factor endowments, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. Porter goes on to argue that firms are most likely to succeed in industries in which the diamond (which are the four attributes collectively) is favorable. Porter later added two factors to the list of attributes described above: chance and government policy. The New Trade theory addresses a separate issue. This theory argues that due to the presence of substantial scale economies, world demand will support only a few firms in many industries. Underpinning this argument is the notion of first-mover advantages, which are the economic and strategic advantages that accrue to early entrants into an industry. One could argue that when the attributes of a nation are conducive to the production of a product, and when the manufacturers of that product have experienced some ―chance‖ events that have provided them first-mover advantages, the governmental policies of that nation should promote the building of national competitive advantage in that particular area. This could be accomplished through government R&D grants, policies that favor the industry in capital markets, policies towards education, the creation of a favorable regulatory atmosphere, tax abatements, and the like. Ask students whether they think this policy is at variance with the basic free trade philosophy. One could argue that it is, because the government intervention is creating the basis for comparative advantage. Conversely, one could argue that if a country establishes a comparative advantage in a particular area that is based on a unique set of attributes (such as Swiss production of watches), world output will be favorably impacted by letting that country pursue its area of comparative advantage. 8. The world‘s poorest countries are at a competitive disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade cannot possibly be in the interests of such nations. Discuss. Answer: This is a difficult question. Certainly, most students will recognize that these countries are in dire straits and need assistance from richer countries. Most students will probably be sympathetic to their cause and suggest various aid programs including education and monetary support to help the countries develop. However, others may be more cautious and promote the notion that assistance would have to come in an organized form with multiple nations working together. The question is an interesting one that should provide students with an eye-opening discussion.

globalEDGE™ Research Task Use the globalEDGE™ site (globalEDGE.msu.edu) to complete the exercises in the text. Exercise 1 The World Trade Organization International Trade Statistics is an annual report that provides comprehensive, comparable, and updated statistics on trade in merchandise and commercial services. The report is an assessment of world trade flows by country, region, and main product

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or service categories. Using the most recent statistics available, identify the top 10 countries that lead in the export and import of merchandise trade, respectively. Which countries appear in the top 10 in both exports and imports? Can you explain why these countries appear at the top of both lists? Exercise 2 Food is an integral part of understanding different countries, cultures, and lifestyles. You run a chain of high-end premium restaurants in the United States, and you are looking for unique Australian wines you can import. However, you must first identify which Australian suppliers can provide you with premium wines. After searching through the Australian supplier directory, identify three to four companies that can be potential suppliers. Then, develop a list of criteria you would need to ask these companies about to select which one to work with.

A Tale of Two Nations: Ghana and South Korea closing case Summary The closing case explores explores the contrast between South Korea and Ghana, two nations that in 1970 were at similar levels of economic development. The countries pursued different policies towards international trade and experienced very different outcomes as a result of those policies. South Korea, which embraced international trade and established policies to promote it, now has the world‘s 11th largest economy with a per capita income of $32,000. In contrast, Ghana, which initially pursued a policy that was much more isolationist, is significantly poorer with a per capita income of just $1,786. Case Discussion Questions 1. What was Ghana trying to achieve with its post-independence policies toward international trade? Why did these policies not have the intended effect? Following its independence from Great Britain in 1957, Ghana pursued an inward focusing policy that discouraged both imports and exports and instead promoted self-sufficiency. Ghana‘s President, Kwame Nkrumah, imposed high tariffs on imports and adopted policies to discourage exports. Most students will agree that these inward focusing policies proved to be disastrous for the country, causing living standards to drop some 35 percent from 1970 to 1983. While the country eventually changed course and opened its market to international trade, the legacy of the failed policies is reflected in Ghana‘s GDP per capita which stands below $2,000. 2. What was South Korea trying to achieve with the trade policies that it implemented from the late 1950s onward? Did these policies work? Why? In 1970, South Korea had a GDP per capita of just $260. Today, that figure has soared to $32,000 suggesting that the policies pursued by the country over the past 50 years have been

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beneficial. Rather than focusing inward as Ghana did, South Korea chose to embrace globalization, and opened its market to international trade and investment. The country adopted policies to reduce barriers to entry, created an environment conducive to investment in exportoriented industries, and encouraged producers to capitalize on the country‘s resources especially its low- cost, well-educated labor. Today, the country has moved away from less efficient agriculture and toward manufacturing capital-intensive goods 3. What does the relative experience of Ghana and South Korea teach you about the importance of international trade policies? In 1970, Ghana and South Korea were in similar places economically. Ghana‘s GDP per capita was $250, while GDP per capita in South Korea was about $260. Today though, those numbers are sharply different. In South Korea, GDP per capita has soared to $32,000, while in Ghana, GDP per capita is just $1,786. The World Bank attributes the situation at least in part, to the very different paths the two countries took on foreign trade. One country, South Korea, embraced international trade, while the other, Ghana, did not. 4. Drawing on the case history of Ghana and South Korea, what advice on trade policy would you give a developing nation? What resistance to your recommendations would you expect? Most students will probably suggest that based on the experiences of Ghana and South Korea, developing nations should recognize the value of lowering trade barriers and engaging in international trade. Students should point out that while self-sufficency may seem to have its benefits, it is a short sighted policy at best. Students may also note that nationalization of key industries typically leads to inefficiency as Ghana found out when the state tried to control the prices farmers received for their cocoa crops. Prior to state involvement, Ghana was a leading producer and exporter of cocoa, however, many farmers moved to other crops once Ghana‘s government became involved. Teaching Tip: For more information on the economies of Ghana and South Korea, go to https://www.worldbank.org/en/country/ghana/overview and https://www.worldbank.org/en/country/korea/overview. Teaching Tip: To extend this discussion, consider https://www.bbc.com/news/av/business39667527 and https://www.wsj.com/articles/south-korean-economy-returns-to-growth11603800971.

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Continuous Case Concept In the last few decades, the auto industry has shifted from one in which a few, large companies primarily manufactured in their domestic markets and sold in their domestic markets, to one in which a few large companies serve the world market, manufacturing around the globe to capture competitive advantages wherever they can. 

Ask students to reflect on the changes in the industry. Why do companies like Toyota and Nissan have large operations in the U.S. market? Why don‘t American companies have a large presence in Japan?



Next, consider why BMW and Mercedes have established manufacturing operations in the U.S. market, while American companies are shifting their production to places like Mexico. Similarly, reflect on the new agreement between Toyota and Mazda whereby Mazda will produce cars at its plant in Mexico for Toyota to sell in the United States.



Finally, ask students to use the theories presented in the chapter to explain the changes in the industry, and to predict what may occur in the next decade. How will the Chennai region of India, referred to as the Detroit of India because so many automakers and suppliers have established operations there, change the industry? What are the implications of Morocco‘s burgeoning auto industry? What will be the impact of the new trade agreement between Mexico, Canada, and the United States have on production? What are the implications of the move toward more electric vehicles by companies like Volkswagen?

The first two parts of this exercise can be used either at the beginning of a discussion of trade theory or threaded through the discussion of the material. The last question works well as a way

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of applying the theories to a real-world situation and makes a nice conclusion to the discussion of the theories. Teaching Tip: Donald Trump‘s trade policy is creating a number of challenges for the auto industry. To learn more, consider https://www.cnbc.com/2018/08/12/auto-industry-caught-inthe-trade-war-crosshairs.html and https://www.npr.org/2018/08/28/642696473/how-the-autoindustry-is-reacting-to-the-tentative-u-s-mexico-trade-deal.

APPLICATION-BASED ACTIVITY

UNDERSTANDING TRADE THEORY AND GOVERNMENT POLICY: TRADE POLICY IS US! I. Introduction In this activity, you'll be participating in a meeting of Trade Policy Is Us!, a consulting firm that specializes in global trade. The company has been hired by a candidate running for office to develop recommendations for the foreign policy component of the campaign. The focus of the recommendations should be to help the candidate better understand the complexities of international trade and make recommendations for U.S. foreign trade policy. The candidate will be using the information in campaign speeches and debates. If the campaign is successful, the recommendations will form the basis for U.S. foreign policy decisions in the new administration. A team of consultants and interns are meeting to develop a set of recommendations. At the meeting are Kate, Team Leader and International Trade Specialist for Trade Is Us!; Max, another International Trade Specialist at Trade Is Us!; and two summer interns, Ashley and Will. Ashley and Will are both rising stars at their universities majoring in International Business and minoring in Public Policy. II. Learning Objectives 1. Explain theories of international trade. 2. Discuss why governments intervene in trade and describe the policy instruments they use. 3. Understand the benefits of trade and the advantages of eliminating barriers to free trade. 4. Evaluate data related to international trade.

III. Scoring Dimensions The following theoretical concepts from the chapter are covered and scored in the simulation: Theoretical Concepts Percentage of Simulation Theories of Trade

25%

Rationale for Government Intervention and Policy Instruments

25%

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Benefits of Free Trade

25%

Understanding Balance of Payments Data

25%

IV. Follow-up Activity Four students can be assigned to take on the roles of Kate, Max, Ashley, and Will. Other students can be assigned to act as staff members of the campaign that hired Trade Policy Is Us!. Using their assigned identities, students can continue the role play as the Trade Policy Is Us! presents their recommendations to the campaign. Students taking on the role of campaign staff should review current policy issues prior to the role play and be prepared to ask questions. Students can use a variety of sources to learn about current and planned policies. One option is https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf. Following the role play, students should discuss the connection between trade theory and government policy. Students should recognize why understanding trade theory and its implications is important in international business.

Additional Readings and Sources of Information Did Trump‘s Tariffs Benefit American Workers and National Security? https://www.brookings.edu/policy2020/votervital/did-trumps-tariffs-benefit-american-workersand-national-security/ Trump Trade Policy Gets Failing Grades https://www.forbes.com/sites/stuartanderson/2020/10/29/trump-trade-policy-gets-failinggrades/?sh=75bf5aa85513 How A Trans-Pacific Trade Deal Got Made Without Trump https://www.forbes.com/sites/stratfor/2018/03/08/how-a-trans-pacific-trade-deal-got-madewithout-trump/#1d84f01a75d7 TPP: What Is It and Why Does It Matter? https://www.bbc.com/news/business-32498715 Why Economists Are Worried About International Trade https://www.nytimes.com/2018/02/16/business/trump-economists-trade-tariffs.html How Is COVID-19 Affecting US Trade? https://www.brookings.edu/podcast-episode/how-is-covid-19-affecting-us-trade/ Trade Wars, Trump Tariffs and Protectionism Explained https://www.bbc.com/news/world-43512098 What Game Theory Says About Trump‘s Trade Strategy https://www.bloomberg.com/view/articles/2018-07-16/what-game-theory-says-about-trump-strade-strategy

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The Last American ―Trade War‖ Didn‘t Work Out So Great https://www.cnn.com/2018/03/02/politics/donald-trump-steel-tariffs-q-and-a/index.html Is Free Trade Always the Answer? https://www.theguardian.com/business/2018/aug/13/is-free-trade-always-the-answer "Trade Is Key to Africa‘s Economic Growth" https://ustr.gov/about-us/policy-offices/press-office/blog/trade-key-africa%E2%80%99seconomic-growth China-US Trade War: Beijing Escalates Tit-For-Tat With Washington https://www.bbc.com/news/business-55132425 China Dominates World Export Markets Despite US Trade War https://asia.nikkei.com/Spotlight/Datawatch/China-dominates-world-export-markets-despite-UStrade-war

Chapter 7: Government Policy and International Trade Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: America and Kenya Negotiate a Trade Deal Introduction Instruments of Trade Policy Did You Know? Video Clip: One of The First Arguments for Protectionist Trade Policies Was Proposed by Alexander Hamilton In 1792 The Case for Government Intervention The Revised Case for Free Trade Development of the World Trading System 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions

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globalEDGE™ Research Task Closing Case: American Steel Tariffs APPLICATION-BASED ACTIVITY: UNDERSTANDING TRADE THEORY AND GOVERNMENT POLICY: TRADE THEORY IS US!

Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 7-1 Identify the policy instruments used by governments to influence international trade flows. 7-2 Understand why governments sometimes intervene in international trade. 7-3 Summarize and explain the arguments against strategic trade policy. 7-4 Describe the development of the world trading system and the current trade issue. 7-5 Explain the implications for managers of developments in the world trading system.

Chapter Summary This chapter begins with a discussion of the main instruments of trade policy, including tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, antidumping duties, and administrative policies. This section is followed by a discussion of the merits of government intervention into international trade. The author provides a balanced view of this difficult issue. The second half of the chapter focuses on the development of the global trading system. A historical context is provided, along with a view of the global trading system as it exists today. The author acquaints the reader with the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization.

Chapter Opening Activity Ask students to do some research on the World Trade Organization website. Students often suggest that a global governance body is needed to solve the problems of world trade: enter the World Trade Organization. Ask them to research the organization by first visiting https://www.wto.org. From the main page, go to Dispute Settlement; then to Individual Dispute Cases: then Disputes; then to Map of Disputes between WTO Members. Put in United States as complainant and show map. Then put in U.S. as respondent and show map. Click on a few cases in each category, as complainant and respondent, and ask students to try to understand the cases countries bring against one another. Students might begin to understand how difficult it is for the WTO to enforce free trade among members, despite their valiant efforts.

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Chapter Outline

America and Kenya Negotiate a Trade Deal opening case Summary The opening case explores a proposed trade agreement between the United States and Kenya. While at first glance working toward a trade deal with Kenya, a country with an economy some 200 times smaller than that of the United States, seems an unlikely prospect, when taken in consideration with China‘s power moves in the region, a trade deal becomes infinitely more attractive. China has invested vast sums of money in the region via its Belt and Road initiative hoping that it will be able to influence the region‘s future direction. However, many Africans have expressed resentment with China, and what they feel are neocolonial policies. For Kenya, a deal with the United States, its third largest trading partner, is a welcome prospect that could secure access to the U.S. market going forward. Discussion Questions 1. Discuss the proposed trade deal between the United States and Kanya. Why does the United States want to enter into a trade agreement with a country a fraction of its size? How does China play into the United States‘ policy decision? The United States has long followed a policy of working toward lowering trade barriers and negotiating bilateral and multi-lateral trade agreements, however, its decision to seek a trade agreement with Kenya could be seen as a bit of an aberration. Kenya‘s economy is some 200 times smaller than that of the United States and any agreement that the United States might sign with the African nation would have very little impact on the U.S. economy. However, viewed from the larger lens of geopolitics, the agreement is much more attractive and important. China has been flexing its muscle in Africa, working through its Belt and Road initiative to create ties within the region that it hopes will allow it to influence the future direction of Africa as a whole. China sees Africa, which is on the cusp of being the world‘s population center, as an important cog in the balance of global power. The United States, also recognizing this situation, sees the proposed trade agreement with Kenya as an opportunity to thwart the effort by China, and gain its own power in Africa. 2. What does the proposed free trade agreement with the United States mean for Kenya? Does the United States have the best interests of Kenya in mind as it negotiates the agreement? Kenya has emerged as a bright spot in Africa. Its strong economic growth over the past few years is expected to continue, it has a relatively well-educated workforce and a sprit of entrepreneurship, and it is the financial and transportation hub for East Africa. While the proposed free trade agreement with the United States will likely barely register in America, in Kenya it will provide continued access to an important trading partner. Some students may also suggest that the agreement would provide Kenya with legitimacy as a leader in the region, and a clear ally against any encroachment from Beijing. Students may argue that given the United Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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States has largely geopolitical goals for the agreement, rather than trade ambitions, it is likely that the agreement will be favorable to Kenya. Lecture Note: To expand this discussion, consider https://www.brookings.edu/blog/africa-infocus/2020/07/29/the-us-and-kenya-launch-negotiations-on-a-free-trade-agreement-will-theysucceed/ and https://www.cfr.org/in-brief/what-would-us-kenya-trade-deal-mean. Video Note: To learn about exporting to Kenya, go to https://www.trade.gov/knowledgeproduct/kenya-market-overview.

CONNECT Case Analysis America and Kenya Negotiate a Trade Deal Summary This activity focuses on the proposed free trade agreement between the United States and Kenya. For Kenya, the agreement is an opportunity to maintain access to one of its most important trading partners. For the United States, the agreement is an opportunity to maintain the geopolitical balance of power in the region. Activity Students are asked to read a short case on trade relations between America and Kenya and then respond to a series of questions related to the case. Class Discussion Discuss the rationale for the proposed free trade area between Kenya and the United States. What does it mean for the United States? Why is it important for Kenya? What does it mean from a geopolitical balance of power perspective?

Introduction A) This chapter explores the political reality of international trade. Free trade refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country. While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups.

Instruments of Trade Policy A) In this section, the text reviews seven main instruments of trade policy. These are: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, antidumping policies, and administrative policies.

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TARIFFS B) A tariff is a tax levied on imports (or exports) that effectively raises the cost of imported (or exported) products relative to domestic products. Specific tariffs are levied as a fixed charge for each unit of a good imported, while ad valorem tariffs are levied as a proportion of the value of the imported good. The important thing to understand about a tariff is who suffers and who gains. The government gains, because the tariff increases government revenues. Domestic producers gain because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. Consumers lose since they must pay more for certain imports. C) Thus, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy. Lecture Note: To extend this discussion to explore the impact of tariffs on jobs, consider https://www.forbes.com/sites/stuartanderson/2018/09/24/tariffs-are-costing-jobs-a-look-at-howmany/#39a324a07b26.

Did You Know? Video Clip The video clip asks: ―Did you know that that one of the first arguments for protectionist trade policies was proposed by Alexander Hamilton in 1792?‖ Discussion Questions 1. What is a tariff and how is it used to protect an industry? Tariffs are taxes imposed by a government on the import (or export) of goods. Tariffs can be levied on a per unit basis or on a value basis, or some combination thereof. Tariffs serve to protect an industry by making cheaper imports more expensive, thereby giving an advantage to the domestic producer. 2. Who benefits from tariffs and who loses? Who ultimately pays for tariffs? In general, the domestic producer and employee benefit, while the foreign producer and consumers do not. While the foreign producer may absorb some of the cost of the tariff, very often tariffs are passed on to consumers in the form of higher prices on the products they buy. 3. Why are tariffs imposed to protect infant industries ineffective? Are these tariffs ill-advised from a policy perspective? Tariffs imposed to protect infant industries generally promote inefficiency as the producers being protected have little incentive to achieve a level of competitiveness that would allow them to compete without the tariffs. While many students may therefore conclude that this type of policy is ill-advised, others may point out that so long as the tariff policy remains in place, the industry will function providing some benefit. In Brazil for example, thanks to protectionist tariffs, a thriving auto industry provides jobs and other economic benefits to the country.

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Teaching Tip: To extend this discussion, consider https://www.bls.gov/opub/btn/volume-9/theeffects-of-tarifff-rates-on-the-u-s-economy-what-the-producer-price-index-tells-us.htm and https://www.wsj.com/articles/brazil-opens-up-an-economy-long-shielded-from-competition11569244957.

SUBSIDIES D) A subsidy is a government payment to a domestic producer. By lowering costs, subsidies help domestic producers compete against low-cost foreign imports and gain export markets. However, many subsidies are not that successful at increasing the international competitiveness of domestic producers. Moreover, consumers typically absorb the costs of subsidies.

country FOCUS: Are the Chinese Illegally Subsidizing Auto Exports? Summary This feature explores the subsidies paid by China‘s government to Chinese producers of autos and auto parts. U.S. lawmakers have raised concerns that the subsidies are unfair and have filed a complaint with the World Trade Organization (WTO) arguing that the subsidies have effectively hurt U.S. auto and auto parts producers. While some in the U.S. auto industry support the complaint, others are concerned that it could jeopardize their investments in the Chinese market. Discussion of the feature can begin with the following questions: Discussion Questions 1. In your opinion, could U.S. complaints about China‘s policies toward its auto exports actually harm U.S. producers more than they help? Should the U.S. dismiss its complaint with the WTO? The vast market potential in China is attractive to most companies including U.S. auto producers. Consequently, when the United States registered its complaint with the WTO against the subsidies paid by China to its automakers, U.S. manufacturers responded cautiously. Most are concerned that the move could jeopardize their opportunity to capitalize on the Chinese market if China responds to the complaint with retaliatory measures. Moreover, some U.S. companies actually benefit from the lower cost parts that China is exporting and so support the subsidies. 2. As a U.S. consumer, do you support China‘s subsidies on autos and auto parts? Does your response change if you work for a U.S. automaker? Why or why not? U.S. consumers are probably generally supportive of the subsidies paid by China to its auto producers because cheaper exports from China help drive down prices in the United States by

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introducing additional competition in the market. The response by workers may be more mixed. The additional competition in the industry that is created as a result of the subsidies could threaten jobs, but at the same time, the cheaper parts that are available could help create jobs. Lecture Note: To extend this discussion, consider learning about China‘s subsidies on electric vehicles at https://www.forbes.com/sites/jackperkowski/2018/07/13/china-shifts-subsidies-forelectric-vehicles/#5b6ae1485703.

IMPORT QUOTAS AND VOLUNTARY EXPORT RESTRAINTS E) An import quota is a direct restriction on the quantity of some good that may be imported into a country. A tariff rate quota is a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota. A voluntary export restraint is a quota on trade imposed by the exporting country, typically at the request of the importing country‘s government. F) While import quotas and voluntary export restraints benefit domestic producers by limiting import competition, they raise the prices of imported goods. The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent. EXPORT TARIFFS AND BANS G) An export tariff is a tax placed on the export of a good. The goal is to discriminate against exporting to ensure a sufficient supply of a good is available within a country. An export ban is a policy that partially or entirely restricts the export of a good. LOCAL CONTENT REQUIREMENTS H) A local content requirement (LCR) demands that some specific fraction of a good be produced domestically. As with import quotas, local content requirements benefit domestic producers, but consumers face higher prices. ADMINISTRATIVE POLICIES I) Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. The effect of these policies is to hurt consumers by denying access to possibly superior foreign products. ANTIDUMPING POLICIES J) Dumping is variously defined as selling goods in a foreign market below their costs of production, or as selling goods in a foreign market at below their ―fair‖ market value. Dumping is viewed as a method by which firms unload excess production in foreign markets. Alternatively, some dumping may be the result of predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market. Once this has been achieved the predatory firm can raise prices and earn substantial profits.

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J) Antidumping policies (also known as countervailing duties) are policies designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from ―unfair‖ foreign competition. CONNECT Click and Drag The Arsenal of Trade Weaponry Summary This activity focuses on the various instruments of trade policy used by governments to intervene in the free flow of goods and services across borders. Activity Students are asked to match examples of the use of trade instruments with the correct trade weapon. Class Discussion Understanding the various instruments of trade policy is important to managers of international businesses. Discuss how recently implemented trade barriers are affecting various stakeholders.

management FOCUS: Protecting U.S. Magnesium Summary This feature explores the dumping charges levied by U.S. Magnesium against Chinese and Russian producers. According to U.S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium significantly below market value in an effort to drive U.S. Magnesium out of business. The company filed a complaint with the International Trade Commission (ITC), which ultimately ruled in favor of U.S. Magnesium. Discussion Questions 1. What is dumping? Were Chinese and Russian producers guilty of dumping? How did U.S. Magnesium justify its claims against Russian and Chinese producers? Dumping is defined as selling goods in a foreign market below the cost of production, or below fair market value. In 2004, U.S. Magnesium claimed that China and Russia had been dumping magnesium in the United States. The company noted that in 2002 and 2003, magnesium imports rose, and prices fell. While the ITC ruled in favor of the American company, some students might question whether the fact that the Chinese could sell their product at low prices might simply reflect the country‘s significantly lower wage rates. 2. What does the ITC‘s ruling mean for American consumers of magnesium? In your opinion,

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was the ruling fair? The ITC ruled in favor of U.S. Magnesium finding that indeed China and Russia had been dumping their product in the United States. Fines ranging from 50 to 140 percent on imports were imposed against China and 19 to 22 percent on Russian companies. Most students will note that while the ITC‘s decision is a good one for U.S. Magnesium and its employees, for consumers, the ruling means magnesium prices that are significantly higher in the United States than those in world markets. Students will probably argue that this result is unfair and should be revisited. Lecture Note: Complaints about alleged dumping have hit a number of industries recently. To extend this discussion, consider exploring some of the other cases. Go to https://www.commerce.gov/news/press-releases/2018/09/us-department-commerce-findsdumping-polytetrafluoroethylene-resin-china, https://www.wsj.com/articles/how-china-skirtsamericas-antidumping-tariffs-on-steel-1528124339, and https://www.reuters.com/article/usemirates-usa-steel-tariffs/uae-will-defend-industries-after-u-s-dumping-accusationsidUSKCN1BV10J. Teaching Tip: U.S. Magnesium‘s website is available at http://usmagnesium.com.

The Case for Government Intervention A) In general, there are two types of arguments for government intervention: political and economic. Political arguments for intervention are concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers). Economic arguments for intervention are typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers). Video Note: To expand this discussion, consider the video, Here’s Who Pays Price for Brewing United States-China Trade War in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes for this video. POLITICAL ARGUMENTS FOR INTERVENTION B) Political arguments for government intervention cover a range of issues including protecting jobs, protecting industries deemed important for national security, retaliating against unfair foreign competition, protecting consumers from ―dangerous‖ products, furthering the goals of foreign policy, and protecting the human rights of individuals in exporting countries. Video Note: To explore who wins and who loses from tariffs imposed by Donald Trump, consider https://www.washingtonpost.com/news/wonk/wp/2018/03/06/winners-and-losers-fromtrumps-tariffs/?utm_term=.4cf8991b6b0a. Protecting Jobs and Industries C) The most common political reason for trade restrictions is "protecting jobs and industries." Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Usually, this is a result of political pressures by unions or industries that are threatened by more efficient foreign producers and that have more political clout than the consumers who will eventually pay the costs. Protecting National Security D) Protecting industries because they are important for national security is another argument for trade restrictions. Lecture Note: Donald Trump justified imposing tariffs as necessary to protect national security. Many disagree with this argument. To learn more, consider https://www.nytimes.com/2018/08/12/us/politics/trumps-tariffs-foster-crisis-at-the-wto.html and https://www.forbes.com/sites/johnbrinkley/2018/03/12/trumps-national-security-tariffshave-nothing-to-do-with-national-security/#224819b9706c. Retaliating E) Government intervention in trade can be used as part of a "get tough" policy to open foreign markets. By taking, or threatening to take, specific actions, other countries may remove trade barriers. But when threatened governments do not back down, tensions can escalate and new trade barriers may be enacted. Lecture Note: Many critics have accused Donald Trump of trying to start a trade war. To learn more about Trump‘s tactics, go to https://www.cnbc.com/2018/07/18/trump-trade-anticssabotaging-economy-and-markets-stephen-roach-warns.html, https://wwwm.cnn.com/2018/10/01/politics/donald-trump-trade-naftausmca/index.html?r=https%3A%2F%2Fwww.google.com%2F, and https://www.bnnbloomberg.ca/economics/video/explaining-trump-s-strategy-in-the-u-s-chinatrade-war~1420223. Protecting Consumers F) Consumer protection can also be an argument for restricting imports. The following Country Focus suggests that the European Union‘s concern over beef was, in part, due to an interest in protecting consumers. Since different countries do have different health and safety standards, what may be acceptable in one country may be unacceptable in others. Furthering Foreign Policy Objectives G) On occasion, governments will use trade policy to support their foreign policy objectives. One aspect of this is to grant preferential trade terms to countries that a government wants to build strong relations with. Trade policy has also been used several times as an instrument for pressuring or punishing ―rogue states‖ that do not abide by international laws or norms. In recent years, the United States has imposed trade restrictions against Libya, Iran, Iraq, Cuba, and other countries where governments were pursuing policies that were not viewed favorably by the U.S. government. A serious problem with using trade as an instrument of foreign policy is that other countries can undermine any unilateral trade sanctions. Protecting Human Rights H) Concern over human rights in other countries plays an important role in foreign policy.

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Governments sometimes use trade policy to improve the human rights policies of trading partners. Governments also use trade policies to put pressure on governments to make other changes. The United States, for example, has long had trade sanctions in place against Myanmar to pressure the country to improve its human rights practices, and only recently eased them in response to the democratic reforms taking place in the country. ECONOMIC ARGUMENTS FOR INTERVENTION Video Note: To expand this discussion, consider the video, How a Tariff on Canadian Lumber Could Backfire in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes for this video. I) Economic arguments for intervention include the infant industry argument and strategic trade policy. The Infant Industry Argument J) The infant industry argument suggests that an industry should be protected until it can develop and be viable and competitive internationally. Unless an industry is allowed to develop and achieve minimal economies of scale, foreign competitors may undercut prices and prevent a domestic industry from developing. The infant industry argument has been accepted as a justification for temporary trade restrictions under GATT. K) A problem with the infant industry argument is determining when an industry "grows up." Some industries that are just plain inefficient and noncompetitive and are still infants after 50 years. The other problem is that given the existence of global capital markets, if the country has the potential to develop a viable competitive position its firms should be capable of raising the necessary funds without additional support from the government. Strategic Trade Policy L) Strategic trade policy suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages. Strategic trade policy also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage.

The Revised Case for Free Trade A) While strategic trade policy identifies conditions where restrictions on trade may provide economic benefits, there are two problems that may make restrictions inappropriate: retaliation and politics. RETALIATION AND TRADE WAR B) Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation.

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DOMESTIC POLITICS C) Governments do not always act in the national interest when they intervene in the economy. Instead, special interest groups may influence governments. Thus, a further reason for not embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to be captured by special interest groups within an economy, who will distort it to their own ends. CONNECT Video Case C&M Sees Tough Trade Issues Between China and the U.S. Summary This activity focuses on government intervention in trade, specifically on trade issues between the United States and China. Because these two countries are such dominate players in the global economy, tensions between the two can have significant spillover effects to the rest of the world. Activity Students are asked to watch a video on trade issues between China and the United States and then respond to a series of questions related to the video. Class Discussion It is essential that international managers understand trade policy, the instruments of trade policy, and the rationale behind government intervention in trade. For decades, there has been a general trend toward open markets and free trade. More recently, there has been a shift to a more inward, isolationist approach. Discuss the current China–U.S. trade situation, why it is important, and how it affects decision making in companies.

CONNECT Click and Drag Why Governments Intervene Summary This activity focuses on the rationale for government intervention in trade. Governments intervene in trade for both political and economic reasons and support the intervention using various rationale, including the protection of national security, infant industries, consumers, the environment, jobs, and the wealth of the nation. Activity Students are asked to identify arguments for government intervention in trade as being economic or political in nature.

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Class Discussion Managers of international business need to understand the reasons why governments intervene in trade, what the implications of that intervention is for their company or industry, and how they can take an active role in encouraging governments to act in a favorable way for their organization.

Development of the World Trading System A) Many governments recognize the value of unrestricted free trade, but are hesitant to unilaterally lower their trade barriers in case other countries do not follow suit. Since World War II, an international trading framework has evolved that enables governments to negotiate a set of rules to govern cross-border trade and lower trade barriers. For the first 50 years, the framework was known as the General Agreement on Tariffs and Trade (GATT). Since 1995, it has been known as the World Trade Organization (WTO). FROM SMITH TO THE GREAT DEPRESSION B) Up until the Great Depression of the 1930s, most countries had some degree of protectionism. Great Britain, as a major trading nation, was one of the strongest supporters of free trade. C) Although the world was already in a depression, in 1930 the United States enacted the Smoot-Hawley Act, which created significant import tariffs on foreign goods. As other nations took similar steps and the depression deepened, world trade fell further. 1947–1979: GATT, TRADE LIBERALIZATION, AND ECONOMIC GROWTH D) After WWII, the United States and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). E) The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade. Over 100 countries became members of GATT and worked together to further liberalize trade. 1980–1993: PROTECTIONIST TRENDS F) During the 1980s and early 1990s, the world trading system as ―managed‖ by GATT came under strain. First, Japan‘s economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan‘s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries. Second, persistent trade deficits by the United States, the world‘s largest economy, caused significant economic problems for some industries and political problems for the government. Third, many countries found that although limited by GATT from utilizing tariffs, there were many other subtler forms of intervention that had the same effects and did not technically violate GATT (e.g. VERs). THE URUGUAY ROUND AND THE WORLD TRADE ORGANIZATION

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G) Against the background of rising protectionist pressures, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs (called the Uruguay Round). This was the most ambitious round to date. The World Trade Organization H) When the WTO was established in 1995, its creators hoped the WTO‘s enforcement mechanisms would make it a more effective policeman of the global trade rules than the GATT had been. The WTO encompassed GATT along with two sister organizations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Lecture Note: To see current issues at the WTO, go to https://www.wto.org. WTO: EXPERIENCE TO DATE I) At the time of its establishment, the great hope was that the WTO might emerge as an effective advocate and facilitator of future trade deals, particularly in such areas as services. In general, the experience so far has been mixed, and with the Brexit vote and election of Donald Trump, there is a trend toward greater protectionism. WTO as Global Police J) So far, the WTO‘s policing and enforcement mechanisms are having a positive effect. In general, countries have adopted WTO recommendations for trade disputes. Expanded Trade Agreements K) In 1997, 68 countries that account for more than 90 percent of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications. Similarly, 102 countries pledged to open to varying degrees their banking, securities, and insurance sectors to foreign competition. Like the telecommunications deal, the agreement covers not just cross-border trade, but also foreign direct investment. THE FUTURE OF THE WTO: UNRESOLVED ISSUES AND THE DOHA ROUND L) Substantial work still remains to be done on the international trade front. Four issues on the current agenda of the WTO are the rise of antidumping policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual property rights in many nations, and continued high tariffs on nonagricultural goods and services in many nations. Antidumping Actions O) There has been a proliferation of antidumping actions in recent years, perhaps because of the rather vague definition of what constitutes dumping. The WTO is encouraging members to strengthen the regulations governing the imposition of antidumping duties. Protectionism in Agriculture P) The WTO is concerned with the high level of tariffs and subsidies in the agricultural sector of many economies. However, the advanced countries of the world defend the current system

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because they want to protect their producers from lower-cost producers from developing nations. Protection of Intellectual Property Q) The agreement to protect intellectual property (TRIPS) obliges WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. The basis for this agreement was a strong belief among signatory nations that the protection of intellectual property rights is an essential element of the international trading system. Market Access for Nonagricultural Goods and Services R) The WTO would like to bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates. The hope is that at some point, rates would move to zero.

country FOCUS: Estimating the Gains from Trade for America Summary This feature explores the results of a study by the Institute for International Economics. The study, which estimated the gains to the U.S. economy from free trade, found that the United States‘ GDP in 2003 was more than 7 percent higher as a result of reductions in trade barriers than it would have been if the barriers remained. The study also estimated that if tariffs were reduced to zero, significant gains would still result. Discussion Questions 1. What does the Institute for International Economics suggest about the benefits of free trade? The Institute for International Economics found that thanks to reductions in trade restrictions, the United States‘ GDP was up. The Institute also estimated that even greater gains in the country‘s GDP would occur if protectionism was eliminated altogether. Students should recognize that these findings follow the principles of Adam Smith and David Ricardo and suggest that free trade is beneficial. 2. According to the Institute for International Economics study, a move toward free trade would cause disruption in employment. Is it still worth pursuing free trade if it means that some people lose their jobs? This question should prompt a strong debate among students. Some students will probably suggest that the costs in terms of lost wages and benefits associated with free trade outweigh the benefits that would be gained. Other students, however, will probably argue that since protectionism typically benefits only a few at the expense of others, while free trade generates greater economic growth and higher wages, a free trade policy should be followed. Teaching Tip: The website for Petersen Institute for International Economics is available at https://piie.com.

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A New Round of Talks: Doha R) In late 2001, the WTO launched a new round of talks at Doha, Qatar. The agenda includes cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of antidumping laws. As of 2018, the talks were stalled. CONNECT Click and Drag Milestones in Trade Summary This activity focuses on the development of the international trading framework. Following World War II, a small number of countries committed to an agreement supporting free trade. Today, some 150 countries follow the basic rules outlined in the initial agreement. Activity Students are asked to put various trade milestones into chronological order showing the development of the world trading system. Class Discussion The framework for free trade that began with the General Agreement on Tariffs and Trade (GATT) and continues today under the umbrella of the World Trade Organization (WTO), which sets the rules of trade along with enforcing mechanisms. Discuss the role of GATT and the WTO in facilitating international business. MULTILATERAL AND BILATERAL AGREEMENTS S) While the Doha negotiations have seemingly stalled, countries are still working to achieve its objectives forming multilateral or bilateral trade agreements. These reciprocal trade agreements are designed to capture gains from trade beyond what is currently attainable under WTO treaties. One effort is the formation of the Trans-Pacific Partnership (TPP). Following the decision by Donald Trump to withdraw the United States from the agreement, the remaining 11 countries involved went forward with a revised agreement. In all, some 470 regional or bilateral trade agreements were in effect as of 2019. Video Note: To expand this discussion, consider the video, How Many Manufacturing Jobs Can U.S. Realistically Maintain? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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360° VIEW: MANAGERIAL IMPLICATIONS Trade Barriers, Firm Strategy, and Policy Implications A) What does all of this mean for business? Managers need to consider how trade barriers impact firm strategy, and what role they can play in promoting free trade or trade barriers. Trade Barriers and Firm Strategy B) Trade barriers are a constraint upon a firm‘s ability to disperse its productive activities. First, trade barriers raise the cost of exporting products to a country. Second, voluntary export restraints (VERs) may limit a firm‘s ability to serve a country from locations outside that country. Third, to conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise. Finally, a firm‘s ability to use aggressive pricing to gain market share in a country is limited by the threat of antidumping action. All of the above effects are likely to raise the firm‘s costs above the level that could be achieved in a world without trade barriers. In addition, the threat of antidumping action could limit the ability of a firm to use aggressive pricing as a way to gain market share. Lecture Note: To extend this discussion, consider that the tariffs imposed by Donald Trump on steel are already contributing to blue collar jobs losses in the auto industry. To learn more, go to http://fortune.com/2018/10/31/gm-offers-buyouts-after-trump-tariffs. Video Note: To expand this discussion, consider the video, How Trump’s Tariffs Changed the Fate of These Two Factories in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes for this video. Policy Implications C) In general, international firms have an incentive to lobby for free trade and keep protectionist pressures from causing them to have to change strategies. While there may be short-term benefits to having governmental protection in some situations, in the long run these can backfire and other governments can retaliate.

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Video Note: To expand this discussion, consider the video, Trump Plan for Tariffs Draws Backlash at Home and Abroad in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes for this video. CONNECT Video Case American Steel Tariffs Summary This activity focuses on the tariffs imposed by the United States on imported steel. Claiming a need to protect national security, Donald Trump levied the tariffs on steel imported from China amidst strong criticism from a range of stakeholders including companies using steel as a raw material, consumers, and companies in other industries that were targeted in retaliatory moves by China. Activity Students are asked to read a short case on Trump‘s steel tariffs and then respond to a series of questions related to the case. Class Discussion Governments intervene in trade for a variety of reasons. International managers need to be aware of the rationale for intervention and what it could mean for their company. Discuss the steel tariffs and their implications for various stakeholders including steel companies, consumers of products containing steel, industries that were target in retaliatory moves, and companies using steel in their products.

CONNECT Video Case Did You Know? One of the First Arguments for Protectionist Trade Policies Was Proposed by Alexander Hamilton In 1792 Summary This activity focuses Alexander Hamilton‘s argument that tariffs are an effective means of protecting infant industries until they are better able to compete. Activity Students are asked to watch a video on free trade and the instruments of trade policy and then respond to a series of questions related to the video.

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Class Discussion What was the basis for Alexander‘s Hamilton‘s argument on government intervention in trade? Why is it important for international managers to understand trade policy, the instruments of trade policy, and the rationale behind government intervention in trade?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Do you think governments should consider human rights when granting preferential trading rights to countries? What are the arguments for and against taking such a position? Answer: China is frequently cited as a violator of human rights and can form the basis for a discussion of this question. While the answer to the first question clearly is a matter of personal opinion, in stating their opinions, students should consider the following points. Trade with the United States is very important to China, as China views the United States as an important market. The U.S. is also an important source of certain products. Thus, the U.S. has some leverage with trade when trying to influence China‘s human rights policies. For this policy to have much effect, however, other nations important to China must adopt similar policies. Otherwise, China will simply choose to work with other countries, and U.S. consumers and producers may be more negatively impacted than the Chinese. Another concern with tying MFN status to human rights is that denying MFN may make the human rights situation worse rather than better. By engaging in trade, the income levels in China will increase, and with greater wealth the people will be able to demand and receive better treatment. 2. Whose interests should be the paramount concern of government trade policy: the interests of producers (businesses and their employees) or those of consumers? Answer: The long run interests of consumers should be the primary concern of governments. Unfortunately, consumers, each of whom may be negatively impacted by only a few dollars, are less motivated and effective lobbyists than a few producers that have a great deal at stake. While in some instances it could be argued that domestic consumers will be better off if world-class domestic producers are nurtured and allowed to gain first mover advantages in international markets, it is doubtful that the government will be better than international capital markets at picking winners and will more likely pick the firms with the greatest political clout. While employees may well lose jobs if there are more efficient foreign competitors, some would argue that this is just the nature of competition, and that the role of government should be to help these employees get jobs where they can be efficiently employed rather than to protect them from reality in inefficient firms. 3. Given the arguments relating to the new trade theory and strategic trade policy, what kind of trade policy should business be pressuring government to adopt? Answer: According to the textbook, businesses should urge governments to target technologies

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that may be important in the future and use subsidies to support development work aimed at commercializing those technologies. Government should provide export subsidies until the domestic firms have established first mover advantages in the world market. Government support may also be justified if it can help domestic firms overcome the first-mover advantages enjoyed by foreign competitors and emerge as viable competitors in the world market. In this case, a combination of home market protection and export-promoting subsidies may be called for. 4. You are an employee of a U.S. firm that produces personal computers in Thailand and then exports them to the United States and other countries for sale. The personal computers were originally produced in Thailand to take advantage of relatively low labor costs and a skilled workforce. Other possible locations considered at that time were Malaysia and Hong Kong. The U.S. government decides to impose punitive 100 percent ad valorem tariffs on imports of computers from Thailand to punish the country for administrative trade barriers that restrict U.S. exports to Thailand. How should your firm respond? What does this tell you about the use of targeted trade barriers? Answer: As long as the manufacturing requirements have not changed significantly, looking at Malaysia or Hong Kong again for production would appear obvious. By the U.S. government introducing a specific ad valorem tariff on Thai computer imports, it would be easy to get around these by looking at other locations. Hence such targeted trade barriers can often be easily circumvented without having to locate production facilities in an expensive country like the United States. 5. Reread the Management Focus ―Protecting U.S. Magnesium.‖ Who gains most from the antidumping duties levied by the United States on imports of magnesium from China and Russia? Who are the losers? Are these duties in the best national interests of the United States? Answer: Most students will probably recognize that U.S. producers and their employees are the primary beneficiaries of the antidumping duties levied by the United States on Chinese and Russian magnesium imports. As a result of the duties, consumers in the U.S. will pay higher prices for magnesium-based products. Some students may suggest that by imposing the duties, the U.S. runs the risk of retaliatory measures from both China and Russia.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 You work for a pharmaceutical company that hopes to provide products and services in New Zealand. Yet management‘s current knowledge of this country‘s trade policies and barriers is limited. After searching a resource that summarizes the import and export regulations, outline the most important foreign trade barriers your firm‘s managers must keep in mind while developing a strategy for entry into New Zealand‘s pharmaceutical market. Exercise 2

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The number of member nations of the World Trade Organization has increased considerably in recent years. In addition, some nonmember countries have observer status in the WTO. Such status requires accession negotiations to begin within five years of attaining this preliminary position. Visit the WTO‘s website to identify a list of current members and observers. Identify the last five countries that joined the WTO as members. Also, examine the list of current observer countries. Do you notice anything in particular about the countries that have recently joined or have observer status?

American Steel Tariffs closing case Summary The closing case explores the tariffs on American steel imports imposed by Donald Trump in 2018 with claims that protecting the U.S. steel industry was important to U.S. national security. Critics complained that these tariffs would result in higher prices for consumers and higher prices and job losses for companies using steel in their products. Steel producers celebrated their new-found profits earned as a result of the tariffs by expanding capacity. Discussion Questions 1. The steel industry has a long history of asking for, and getting, tariff protection from foreign competitors. Why do you think this is the case? Donald Trump‘s hefty tariffs on imported steel have generated significant controversy. Critics claim that the tariffs are politically motivated while the Trump Administration argues that the tariffs are necessary to the country‘s national security. Many students will contend that it is hard to ignore the fact that the steel industry is primarily located in traditional battleground states like Pennsylvania and Ohio, where gaining votes may be the difference between winning and losing a presidential election. While some students may agree that protecting national security is important, they may have a difficult time linking these tariffs to national security protection especially when Donald Trump highlighted the fact that the tariffs would protect steel jobs. 2. Who pays the tariffs on imports on foreign steel into the United States? How does the payee deal with the additional costs that the tariffs represent? The pushback against Donald Trump‘s tariffs on imported steel have come from all sides. One of the biggest critics has been General Motors which has complained that the tariffs are costing it more than $1 billion a year. Students should recognize that these higher costs will undoubtedly lead to layoffs and possibly plant closures. Harley Davidson has also criticized the policy and the negative impact the tariffs have had on its profits. Students should recognize that while these companies are large enough to have their voices heard, many smaller companies and their employees are hurting as well. Students should also recognize that while steel producers are reaping the benefits of the tariffs, many consumers are paying higher prices for products that use imported steel as an input. 3. What was the motivation of the Trump administration in placing tariffs on imports of foreign steel in 2017? Who benefits from these tariffs? Who loses? In your estimations, are the tariffs and net positive or negative for the American economy?

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Students may be divided on this question, but they should understand the basis of the argument that protecting national security could be a reason to use certain instruments of trade policy. Companies that rely on imported steel have seen their cost of inputs rise 25 percent virtually overnight. For these companies, the tariffs have been devastating. Students should recognize that some of these companies will eventually go out of business taking their jobs with them. Other companies may look for alternative strategies such as moving production to another country, again, having a negative effect on jobs in this country. Some companies may try to wait the situation out, possibly laying off some employees. These outcomes could be magnified based on the behavior of consumers facing higher prices for cars, motorcycles, and other products using steel. Many students may wonder whether in the long run, the economic fallout of these tariffs in terms of lost jobs and higher prices, is worth the cost. While U.S. steel production has risen, only about 140,000 people are employed in the industry. Lecture Note: For additional information on U.S. tariffs on imported steel, consider: https://www.ft.com/content/71cc85d4-4d2c-11e7-919a-1e14ce4af89b and https://fortune.com/2019/11/04/trump-steel-tariffs-2020-political-plus-or-millstone/. Video Note: To expand this discussion, consider the video, Trump’s Plan for Tariffs Draws Backlash at Home and Abroad in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title and access to teaching notes for this video.

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As automakers establish production operations in multiple countries around the world, and rely on suppliers from numerous countries, the question of tariffs and quotas becomes more important. In this chapter‘s Continuous Case Concept, explore what happens if a country places a tariff or other trade barrier on imported cars. 

Ask students to consider, for example, how consumers would react if the U.S. charged a tariff on every car that is imported from Japan. What would be the likely reaction of Japanese automakers? What would American producers do?



Next, ask students to consider whether such as tariff is ―fair.‖ Who really pays the tariff? Who benefits from the tariff? Who would benefit from free trade in automobiles and car parts?



Finally, explore the decision by the state of Tennessee to offer German automaker VW incentives totaling over $165 billion to open a new factory. As part of the deal, Tennessee provided a grant of $12 million to train workers for the new VW facility. Is this fair to U.S. automakers? How does it affect the competitiveness of U.S. companies? Should Tennessee offer similar incentive packages to U.S. companies to encourage them to locate production in the state? Why or why not?

This exercise works well after the notion of trade barriers has been introduced. It can also be used to extend the discussion of The Case for Government Intervention and the section on Policy Implications.

APPLICATION-BASED ACTIVITY

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1. Explain theories of international trade. 2. Discuss why governments intervene in trade and describe the policy instruments they use. 3. Understand the benefits of trade and the advantages of eliminating barriers to free trade. 4. Evaluate data related to international trade.

III. Scoring Dimensions The following theoretical concepts from the chapter are covered and scored in the simulation: Theoretical Concepts Percentage of Simulation Theories of Trade

25%

Rationale for Government Intervention and Policy Instruments Benefits of Free Trade

25%

Understanding Balance of Payments Data

25%

Additional Readings and Sources of Information EU to Impose Tariffs on up to $4 billion of U.S. Products https://www.cnbc.com/2020/11/09/eu-to-impose-tariffs-on-4-billion-of-us-products.html WTO rejects vast majority of US claims in Airbus dispute http://trade.ec.europa.eu/doclib/press/index.cfm?id=1841 U.S., Kenya Formally Launch Trade Deal Talks https://www.reuters.com/article/us-kenya-usa-trade/u-s-kenya-formally-launch-trade-deal-talksidUSKBN2492BE

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Brazil Should Increase Value Instead of Tariffs https://www.automotiveworld.com/articles/truck-bus-articles/92956-brazil-should-increasevalue-instead-of-tariffs/ The turbulent feud between Airbus and Boeing https://www.telegraph.co.uk/business/2017/09/17/turbulent-feud-airbus-boeing China Paid Record $22 bn in Corporate Subsidies in 2018 https://www.ft.com/content/e2916586-8048-11e9-b592-5fe435b57a3b Subsidies and the China Price https://hbr.org/2008/06/subsidies-and-the-china-price Should We Subsidize Manufacturing? https://www.newyorker.com/news/news-desk/should-we-subsidize-manufacturing Trump is showing he ―actually wants‖ a trade deal with China, Stanford expert says https://www.cnbc.com/2018/11/02/us-china-trade-war-trump-wants-a-trade-deal-with-chinasays-expert.html Asian Countries Seen Benefiting Most from Trump Trade War https://www.forbes.com/sites/kenrapoza/2018/11/02/asian-countries-seen-benefiting-most-fromtrump-trade-war/#6c14246fcf36 The Total Cost of Trump‘s Tariffs https://www.americanactionforum.org/research/the-total-cost-of-trumps-new-tariffs/ A Bitter Battle Over Sugar Subsidies Heats Up https://www.cbsnews.com/news/bitter-battle-over-sugar-subsidies-heats-up

Chapter 8: Foreign Direct Investment Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: JCB in India Introduction Foreign Direct Investment in the World Economy

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Did You Know? Video Clip: The Value of Foreign Direct Investment Has Been Growing Faster Than World Trade and World Output Theories of Foreign Direct Investment Political Ideology and Foreign Direct Investment Benefits and Costs of FDI Government Policy Instruments and FDI Focus on Managerial Implications: FDI and Government Policy End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Starbucks Foreign Direct Investment Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 8-1 Recognize current trends regarding foreign direct investment (FDI) in the world economy. 8-2 Explain the different theories of FDI. 8-3 Understand how political ideology shapes a government‘s attitudes toward FDI. 8-4 Describe the benefits and costs of FDI to home and host countries. 8-5 Explain the range of policy instruments that governments use to influence FDI. 8-6 Identify the implications for managers of the theory and government policies associated with FDI.

Chapter Summary This chapter focuses on the topic of foreign direct investment (FDI). FDI occurs when a firm invests directly in new facilities to produce and/or market a product in a foreign country. At the outset, the chapter discusses the growth in FDI, particularly by medium-sized and small firms. The theoretical underpinnings of FDI are discussed, which describe under what circumstances it is advantageous for a firm to invest in production facilities in a foreign country. The chapter also addresses the different policies that governments have toward foreign direct investment. Some governments are opposed to FDI and some governments encourage it. Three specific ideologies of FDI are discussed, including the radical view, the free market view, and pragmatic nationalism. The chapter also provides a discussion of the costs and benefits of FDI from the perspective of both the home country and the host country involved. The chapter concludes with a review of the policy instruments that governments use to regulate FDI activity by international firms.

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Chapter Opening Activity Discuss examples of foreign direct investment by foreign firms in the U.S., or by U.S. firms in other countries. The textbook provides many examples, but ask students to consult recent articles in Fortune, the Financial Times, or Bloomberg’s Businessweek to learn about the latest foreign equity investments by firms worldwide. Choose one industry, for example, retail general merchandise or retail supermarkets. Ask students to research, using Mergent Online http://www.mergentonline.com or other databases, to find out which companies compete globally in this industry. U.S. firms include Walmart and Target, U.K. firms include Tesco, French firms include Carrefour, Swedish firms include IKEA and H&M, and German firms include Aldi and Lidl. Ask students to research these companies to find out how they have tried to expand internationally.

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Chapter Outline

JCB in India opening case Summary The opening case explores the rationale behind the joint venture between Britain‘s JCB, a manufacturer of construction equipment, and Indian engineering conglomerate, Escorts. The two companies linked up to make backhoe loaders for the Indian market. The joint venture was a first for JCB and proved to be hugely successful. However, JCB felt the arrangement limited its expansion opportunities and eventually bought out its partner. Today, thanks to significant infrastructure investment in the country, JCB is a major player in both India and China. The company has continued to expand its presence in India, and now relies on its factories in India to export to some 93 countries. Discussion Questions 1. What did JCB learn from its experiences in India? Why did JCB, a company that had traditionally favored wholly owned operations, form a joint venture with Escorts? How did JCB‘s experience in India help it in its overall strategy? JCB entered the Indian market in 1979 via a joint venture with Escorts. The decision to enter via a joint venture arrangement was prompted by high tariff barriers that made JCB‘s traditional strategy of exporting its product to foreign locations difficult. Given that JCB was primarily an exporter and had little experience operating in foreign locations, the joint venture arrangement offered the company a means of getting around local regulations and serving the Indian market without incurring all the risk involved in setting up a wholly owned operation. Until its joint venture with Escorts, JCB had been exporting its equipment from Great Britain to a number of foreign locations. JCB‘s experience in India gave it the means to not only establish wholly owned operations there, but also to expand into China via a wholly owned subsidiary. JCB was able to match its global rivals and become one of the major players in the global construction equipment industry. 2. What prompted JCB to buy out its partner? Do you feel JCB‘s concerns were valid? Why or why not? While the joint venture between JCB and Escorts was successful, JCB chose to buy out its partner. The company took a majority share in the venture in 1999, and then purchased the remaining equity in 2002. JCB was concerned that the joint venture limited its ability to expand. The company did not want to share its proprietary technologies that were at the core of its competitive advantage with Escorts, and feared that without complete control over the venture, it could not properly serve the rapidly growing Indian market. JCB took advantage of new government regulations to initially buy a majority position in the venture, and later buy it outright.

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Lecture Note: To learn more about JCB, go to https://www.jcb.com/en-us/construction and https://www.manufacturingtodayindia.com/products-suppliers/6775-jcb-rolls-out-750000thbackhoe-loader. Video Note: To extend the discussion on doing business in India, consider Amazon India Launches Hindi App, Website to Address 100 million Customers. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis JCB in India Summary This activity focuses on construction equipment maker JCB‘s investment in India. The company which initially entered India via a joint venture, now has a significant share of the market and exports products produced in its Indian factories to 93 countries. Activity Students are asked to read a short case on JCB‘s investment in India and then respond to a series of questions related to the case. Class Discussion Discuss the rationale behind JCB‘s investment in India. Why did the company initially choose a joint venture? What prompted the company to buy out its partner? What can other companies learn from JCB‘s experience?

Introduction A) This chapter is concerned with the phenomenon of foreign direct investment (FDI). Foreign direct investment occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise. Teaching Tip: Fortune magazine publishes a list of the 500 largest global corporations in the world. For more information, go to http://fortune.com/rankings. The article also breaks down the list by country and is an excellent resource for discussing the role of large multinationals in the world economy.

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B) FDI takes on two main forms: the first is a greenfield investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.

Foreign Direct Investment in the World Economy A) The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Outflows of FDI, meaning the flow of FDI out of a country, and inflows of FDI, meaning the flow of FDI into a country are also discussed. TRENDS IN FDI B) Over the past 30 years, there has been a marked increase in both the flow and stock of FDI in the world economy. C) FDI has grown more rapidly than world trade and world output for three reasons. First, firms still fear the threat of protectionism. Second, the general shift toward democratic political institutions and free market economies has encouraged FDI. Third, the globalization of the world economy is having a positive impact on the volume of FDI as firms undertake FDI to ensure they have a significant presence in many regions of the world. Did You Know? Video Clip The video clip asks: ―Did you know that the value of Foreign Direct Investment has been growing faster than world trade and world output?‖ Discussion Questions 1. Discuss the rapid increase in the flow of FDI. Why is it growing more quickly than world trade? The growth in FDI as compared to the growth in global trade reflects the efforts by companies to hedge against import barriers and capitalize on decreasing barriers to foreign investment. Many companies now also view the world as a potential market, including the countries that are, in a post-Cold War era, possible growth markets. 2. Explain how companies see FDI as a hedge against potential protectionist policies? Why for example, has Toyota established production in the United States? Students should recognize that FDI allows companies to circumvent potential protectionist policies like tariffs and other import barriers. By producing in the United States, Toyota avoids tariffs that could be assessed by the United States and is closer to one of its biggest markets. 3. What makes a country an attractive destination for FDI? What do companies like Toyota look for when they invest in the U.S.?

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Economic and political stability together with strong, open markets make a country an attractive destination for foreign investment. Many companies for example, are now investing in emerging markets in Eastern Europe, markets that had previously been off limits when they were part of the former USSR. Teaching Tip: To learn more about FDI inflows and outflows, consider http://www.oecd.org/daf/inv/mne/statistics.htm and https://unctad.org. THE DIRECTION OF FDI D) Historically, most FDI has been directed at the developed nations of the world, with the United States being a favorite target. FDI inflows have remained high during the 2000s for the United States, with $255 billion in 2019. FDI inflows are also high to the developed nations in Europe. Inward investment into these countries was $274 billion in 2019. E) South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows. China attracted $140 billion in FDI in 2019. Latin America is also emerging as an important region for FDI. Inward investment to the region was about $170 billion in 2019. F) Because of the region‘s political unrest, conflict, and changing economic policy, Africa is the recipient of the smallest amount of inward investment with just $49 billion in 2019. Teaching Tip: The United Nations Conference on Trade and Development (UNCTAD) provides extensive statistics on the flows of foreign direct investment and the operations of transnational companies. For more information, go to https://unctad.org. THE SOURCE OF FDI G) Not only has the flow of FDI been accelerating, but its composition has also been changing. For most of the period after World War II, the United States was by far the largest source country for FDI. Other important source countries include the United Kingdom, the Netherlands, France, Germany, and Japan. Together, these countries accounted for 60 percent of all FDI outflows from 1998 to 2019. Chinese firms have also emerged as major foreign investors accounting for $117 billion in 2019.

country FOCUS: Foreign Direct Investment in China Summary This feature explores investment opportunities in China. In the late 1970s, China opened its doors to foreign investors. By 2019, China attracted a $140 billion of FDI, and now claims the position of being second only to the United States in terms of attracting FDI. China‘s large population is a magnet for many companies and because high tariffs make it difficult to export to the Chinese market, firms frequently turn to foreign direct investment. However, many companies have found it difficult to conduct business in China, and in recent years investment rates have slowed. In response, the Chinese government, hoping to continue to attract foreign

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companies has established a number of incentives for would-be investors. The following questions can be used in a discussion. Discussion Questions 1. Consider the challenges involved with investing in China. How does China‘s political position and economic situation affect its ability to attract foreign direct investment? Students will probably recognize that while on the surface, China has tremendous market potential it is still a poor country. Anticipated demand does not always translate into actual demand. In addition, opportunistic and inexperienced local joint venture partners can make it challenging for companies to successfully establish their presence in China. Furthermore, the country‘s highly regulated environment and lack of protection for proprietary assets can make it difficult for companies to conduct business. 2. Discuss China‘s efforts to encourage investment in its underdeveloped areas. What effect will investment have on these areas? How can firms prepare for the unique challenges of operating in these areas? China is making a concerted effort to continue to attract investment, especially in the country‘s less developed areas. Recognizing the problems associated with its infrastructure, the country has committed $800 billion to improvements over the next decade. In addition, China is offering preferential tax breaks to countries that invest in more remote areas. Lecture Note: The COVID-19 pandemic caused many companies to scuttle planned foreign investments. China, however, perhaps because of its central role in global supply chains, continued to attract investment. For more information, go to https://www.wsj.com/articles/foreign-investment-plummets-during-pandemic-except-in-china11603785873. Lecture Note: While China remains a popular location for foreign investment, questions about the country‘s infrastructure and political goals continue. For more details, go to https://www.cnbc.com/2020/06/22/investing-in-china-foreign-firms-buy-more-china-despitetensions-with-us.html, http://time.com/4992103/china-silk-road-belt-xi-jinping-khorgoskazakhstan-infrastructure, and https://www.theatlantic.com/international/archive/2017/10/chinabelt-and-road/542667.

THE FORM OF FDI: ACQUISITIONS VERSUS GREENFIELD INVESTMENTS H) The majority of cross-border investment is in the form of mergers and acquisitions rather than greenfield investments. Firms prefer to acquire existing assets rather than undertake greenfield investments because (1) mergers and acquisitions are quicker to execute than greenfield investments; (2) it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up; and (3) firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills.

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Theories of Foreign Direct Investment A) In this section of the text, several theories of foreign direct investments are discussed. These theories attempt to explain the observed pattern of foreign direct investment flows. WHY FOREIGN DIRECT INVESTMENT? B) Why do so many firms apparently prefer FDI to either exporting (producing goods at home and then shipping them to the receiving country for sale) or licensing (granting a foreign entity the right to produce and sell the firm‘s product in return for a royalty fee on every unit that the foreign entity sells)? The answer lies in the limitations of these methods for exploiting foreign market opportunities. Limitations of Exporting C) The viability of an exporting strategy is often constrained by transportation costs and trade barriers. Much foreign direct investment is undertaken as a response to actual or threatened trade barriers such as import tariffs or quotas.

management FOCUS: Burberry Shifts Its Entry Strategy in Japan Summary This feature examines Burberry‘s strategy in Japan in the past and for the future. For years, Burberry relied on a licensing agreement with Sanyo Shokai to sell its products in the country. However, these Burberry-licensed stores in Japan sold the company‘s branded products at prices significantly below the high-priced, luxury items sold in the United Kingdom. Even though Burberry received 10 percent in annual royalty payments from Sanyo Shokai, the company decided to terminate many of its licensing arrangements. In Japan, this meant that the Burberrylicensed stores operated by Sanyo Shokai were closed. As a result, plans have been laid for opening a limited number of wholly owned stores and selling at a price similar to in Britain at premium locations in Japan. Discussion Questions 1. Discuss the problems associated with Burberry‘s licensing arrangement in Japan. What were the benefits of establishing a relationship with Sanyo Shokai in the country? The main issue in the licensing arrangement with Sanyo Shokai is that Burberry had little control over the pricing strategy its partner used in its Japanese stores. Even though Burberry‘s products were sold in over 400 stores throughout the country, the exclusivity of the company‘s brand was not communicated in the Japanese market. In fact, prices were considerably lower than they would be in the United Kingdom. As a result, this arrangement—along with 22 others worldwide —damaged the company‘s luxury image. A benefit to having a relationship with Sanyo Shokai is that sales in Japan contributed $80 million in royalty payments for Burberry every year.

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2. Reflect on the new strategy that Burberry is undertaking in Japan. Given that this is a shift away from Sanyo Shokai‘s past strategy, what can you expect in the near future concerning performance in the country? What is Burberry‘s goal in the long term? The new strategy that Burberry is enacting is to encourage an aura of exclusivity with the company‘s brand. Rather than selling everything from golf bags to miniskirts and Barbie dolls, the goal is to use the brand on a select number of items. In addition, to contrast with the 400 stores that Sanyo Shokai operated under the Burberry brand, the company is planning to have about 35 to 50 stores in very exclusive locations in Japan. In terms of performance, the immediate expectation is that sales will suffer. This will be due to the Burberry image that Japanese consumers are accustomed to. However, over time, the goal is that the company will be able to rebuild its brand in Japan such that exclusive locations and luxury items will prove a successful strategy. Lecture Note: To extend this discussion, consider further exploring Burberry‘s efforts to regain its image as a luxury brand at https://www.wsj.com/articles/burberry-revamps-its-image-injapan-1439547804.

Limitations of Licensing D) There is a branch of economic theory known as internalization theory (also known as the market imperfections approach) that seeks to explain why firms often prefer foreign direct investment to licensing as a strategy for entering foreign markets. According to internationalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities. (1) Licensing may result in a firm‘s giving away valuable technological know-how to a potential foreign competitor. (2) Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. (3) A problem arises with licensing when the firm‘s competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those products. Such capabilities are often not amenable to licensing. E) When one or more of the following conditions holds, markets fail as a mechanism for selling know-how and FDI is more profitable than licensing. (1) when the firm has valuable know-how that cannot be adequately protected by a licensing contract, (2) when the firm needs tight control over a foreign entity to maximize its market share and earnings in that country, and (3) when a firm‘s skills and know-how are not amenable to licensing. Advantages of Foreign Direct Investment F) It follows from the above discussion that a firm will favor FDI over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favor FDI over licensing when it wishes to maintain control over its technological

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know-how, or over its operations and business strategy, or when the firm‘s capabilities are simply not amenable to licensing. THE PATTERN OF FOREIGN DIRECT INVESTMENT G) Observation suggests that firms in the same industry often undertake foreign direct investment around the same time and tend to direct their investment activities towards certain locations. Strategic Behavior H) One theory used to explain foreign direct investment patterns is based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. Knickerbocker looked at the relationship between FDI and rivalry in oligopolistic industries (industries composed of a limited number of large firms). A critical competitive feature of such industries is the interdependence of the major players: what one firm does can have an immediate impact on the major competitors forcing a response in kind. I) Knickerbocker‘s theory can be extended to embrace the concept of multipoint competition (when two or more enterprises encounter each other in different regional markets, national markets, or industries.) THE ECLECTIC PARADIGM J) The eclectic paradigm has been championed by the British economist John Dunning. Dunning argues that in addition to the various factors discussed above, location-specific advantages (that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets) and externalities (knowledge spillovers that occur when companies in the same industry locate in the same area) are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

CONNECT Case Analysis Exporting, Licensing, or FDI Summary This activity explores the strategic decisions firms must make between licensing and foreign direct investment when they enter foreign markets. Activity Students are asked to read a short case on market entry decisions and then respond to questions about the case. Class Discussion Understanding the choice between exporting, licensing, and foreign direct investment is essential for managers making decisions about expanding into foreign markets. Choose a few companies

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that have recently expanded into foreign markets and ask students to explain the strategic choices for each firm.

Political Ideology and Foreign Direct Investment A) Historically, ideology toward FDI has ranged from a radical stance that is hostile to all FDI to the non-interventionist principle of free market economies. Between these two extremes is an approach that might be called pragmatic nationalism. THE RADICAL VIEW B) The radical view traces its roots to Marxist political and economic theory. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. They see MNEs as a tool for exploiting host countries to the exclusive benefit of their capitalistimperialist home countries. By the early 1990s, however, the radical position was in retreat almost everywhere because of 1) the collapse of communism in Eastern Europe; 2) the generally abysmal economic performance of those countries that embraced the radical position, and a growing belief by many of these countries that, contrary to the radical position, FDI can be an important source of technology and jobs and can stimulate economic growth; and 3) the strong economic performance of developing countries that embraced capitalism rather than ideology. THE FREE MARKET VIEW C) The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. The free market view has been embraced by a number of advanced and developing nations, including the United States and Britain. PRAGMATIC NATIONALISM D) The pragmatic nationalist view is that FDI has both benefits, such as inflows of capital, technology, skills and jobs, and costs, such as repatriation of profits to the home country and a negative balance of payments effect. E) Recognizing this, countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. According to this view, FDI should be allowed only if the benefits outweigh the costs. SHIFTING IDEOLOGY F) In recent years the center of gravity on the ideological spectrum has shifted strongly toward the free market stance, creating a surge in FDI. However, some countries such as Venezuela and Bolivia have become increasingly hostile to FDI. CONNECT Click and Drag Political Ideology and FDI

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Summary This activity explores political ideology toward FDI. Political ideology can range from radical to free market to pragmatic nationalism. At one end of the spectrum is hostility toward inward FDI while at the other end is the principle of free market economics. Activity Students are asked to match various items to the appropriate view of FDI. Class Discussion Understanding the different perspectives on FDI can help an international business manager understand what an investment can mean for a host country and for the home country.

Benefits and Costs Of FDI A) Most governments take a pragmatic nationalist approach to FDI, and weigh its costs and benefits when making policy decisions. The costs and benefits of FDI differ according to whether it is considered from a host country perspective or from a home country perspective. HOST-COUNTRY BENEFITS B) The main benefits of inward FDI for a host country are: the resource transfer effect, the employment effect, the balance of payments effect, and effects on competition and economic growth. Resource-Transfer Effects C) FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available. Employment Effects D) The beneficial employment effect claimed for FDI is that FDI brings jobs to a host country that would otherwise not be created there. Balance-of-Payments Effects E) The effect of FDI on a country‘s balance-of-payments accounts is an important policy issue for most host governments. A country‘s balance-of-payments account is a record of a country‘s payments to and receipts from other countries. The current account is a record of a country‘s export and import of goods and services. F) Governments typically prefer to see a current account surplus than a deficit. There are two ways in which FDI can help a country to achieve this goal. First, if the FDI is a substitute for imports of goods and services, the effect can be to improve the current account of the host country‘s balance of payments. A second potential benefit arises when the MNE uses a foreign subsidiary to export goods and services to other countries. Effect on Competition and Economic Growth

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G) When FDI takes the form of greenfield investment, the number of players in a market increases giving consumers more choice. This can increase the level of competition in a market, driving down prices and improving the welfare of consumers. In the long term, increased competition can lead to increased productivity growth, product and process innovation, and greater economic growth. Video Note: Mercedes-Benz Questioned in China Pricing Probe explores how German automaker Mercedes is dealing with an adverse political situation in China. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues.

CONNECT Video Case BMW's Robertson Sees EV Demand Accelerating Summary This activity focuses on foreign investment, what it means to home and host countries, and the role of government policy on a firm‘s investment decisions. Activity Students are asked to watch a video on foreign investment and then respond to a series of questions related to the video. Class Discussion International managers need to be aware of the implications of their investment decisions for both the home country and for the host country. International managers also need to be aware of how government policy decisions can impact strategic choices for firms.

CONNECT Click and Drag The Costs and Benefits of FDI Summary This activity explores the costs and benefits of FDI. FDI can be beneficial to a host country bring in capital, technology, and jobs. Yet, FDI also has its drawbacks. Governments can use various policies to either encourage or discourage FDI.

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Activity Students are asked to match various costs and benefits of FDI to the correct home country or host country. Class Discussion Managers need to understand the costs and benefits of FDI for both the home country and for the host country. Consider foreign investment near you and what benefits that investment has brought to the local community. Are there any drawbacks to the investment? HOST-COUNTRY COSTS H) Three main costs of inward FDI concern host countries: the possible adverse effects of FDI on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy. Adverse Effects on Competition I) Host governments sometimes worry that the subsidiaries of foreign MNEs operating in their country may have greater economic power than indigenous competitors because they may be part of a larger international organization. Adverse Effects on the Balance of Payments J) The possible adverse effects of FDI on a host country‘s balance-of-payments position are twofold. First, set against the initial capital inflows that come with FDI must be the subsequent outflow of capital as the foreign subsidiary repatriates' earnings to its parent country. A second concern arises when a foreign subsidiary imports a substantial number of its inputs from abroad, which results in a debit on the current account of the host country‘s balance of payments. Possible Effects on National Sovereignty and Autonomy K) Many host governments worry that FDI is accompanied by some loss of economic independence. The concern is that key decisions that can affect the host country‘s economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country‘s government has no real control. HOME-COUNTRY BENEFITS L) The benefits of FDI to the home country arise from three sources. First, the capital account of the home country‘s balance of payments benefits from the inward flow of foreign earnings. Second, benefits to the home country from outward FDI arise from employment effects. Third, benefits arise when the home country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country. HOME-COUNTRY COSTS M) The most important concerns center around the balance-of-payments and employment effects of outward FDI. With regard to employment effects, the most serious concerns arise when FDI is seen as a substitute for domestic production.

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INTERNATIONAL TRADE THEORY AND FDI N) When assessing the costs and benefits of FDI to the home country, keep in mind the lessons of international trade theory (chapter 5). International trade theory tells us that home-country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may be misplaced. CONNECT Click and Drag Why FDI Summary This activity explores the choice of FDI as compared to exporting and licensing. Each entry method means different things to the home and host country. Activity Students are asked to match various costs and benefits to the correct entry mode. Class Discussion Managers need to understand the costs and benefits of exporting, licensing, and foreign direct investment. Develop a few decision scenarios that an organization may face regarding foreign expansion and ask students to determine which entry mode makes sense and why. Then ask what the choice means for the host country and for the home country.

Government Policy Instruments and FDI A) The costs and benefits of the FDI from the perspective of both home country and host country have been reviewed. Next, the policy instruments that home countries and host countries use to regulate FDI are addressed. HOME-COUNTRY POLICIES B) With their choice of policies, home countries can both encourage and restrict FDI by local firms. Encouraging Outward FDI C) Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. Restricting Outward FDI D) Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time. HOST-COUNTRY POLICIES E) Host countries adopt policies designed both to restrict and to encourage inward FDI.

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Encouraging Inward FDI F) It is increasingly common for governments to offer incentives to foreign firms to invest in their countries. G) Incentives are motivated by a desire to gain from the resource-transfer and employment effects of FDI. They are also motivated by a desire to capture FDI away from other potential host countries. Restricting Inward FDI H) Host governments use a wide range of controls to restrict FDI. The two most common, however, are ownership restraints and performance requirements. I) The rationale underlying ownership restraints seems to be twofold. First, foreign firms are often excluded from certain sectors on the grounds of national security or competition. Second, ownership restraints seem to be based on a belief that local owners can help to maximize the resource transfer and employment benefits of FDI for the host country. INTERNATIONAL INSTITUTIONS AND THE LIBERALIZATION OF FDI J) Until recently there has been no consistent involvement by multinational institutions in the governing of FDI. With the formation of the World Trade Organization in 1995, this changed. The WTO is more involved in regulations governing FDI.

360° VIEW: MANAGERIAL IMPLICATIONS FDI and Government Policy A) There are several implications for managers. The text explores the implications of theory, and then the implications of government policy. The Theory of FDI B) The implications of the theories of FDI for business practice are straightforward. First, the location-specific advantages argument associated with John Dunning helps explain the direction of FDI. However, the location-specific advantages argument does not explain why firms prefer FDI to licensing or to exporting. In this regard, from both an explanatory and a business perspective, perhaps the most useful theories are those that focus on the limitations of exporting and licensing. Video Note: To extend this discussion, consider Volvo CEO: Why It’s Important to Build in the U.S. and Why Tesla is Betting Big in China with a Shanghai Giga Factory. Find them in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Government Policy

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C) A host government‘s attitude toward FDI should be an important variable in decisions about where to locate foreign production facilities and where to make a foreign direct investment. Teaching Tip: The World Bank is an excellent resource for exploring the potential of a country for investment. Students can also access additional information on countries by click on in ―Doing Business‖ on the home page. The site is available at https://www.worldbank.org.

CONNECT Case Analysis Starbucks’ Foreign Direct Investment Summary This activity focuses on foreign investment by Starbucks. When the coffee icon originally began its foreign expansion, it chose a joint venture strategy before later moving to a wholly owned subsidiary strategy. Activity Students are asked to read a short case exploring Starbucks‘ foreign investment strategy and then respond to a series of questions related to the case. Class Discussion Expanding into foreign markets requires careful analysis of the benefits, costs, and risks of doing business in the foreign country. Discuss Starbucks‘ initial foreign expansion. Why did the company choose a joint venture as opposed to a wholly owned subsidiary? What can other companies learn from Starbucks‘ experiences?

CONNECT Video Case Did You Know That the Value of Foreign Direct Investment Has Been Growing Faster than World Trade and World Output? Summary This activity focuses on foreign investment, why companies choose it, what it means to home and host countries, and the role of government policy on a firm‘s investment decisions. Activity Students are asked to watch a video on foreign investment and then respond to a series of questions related to the video.

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Class Discussion International managers need to be aware of the implications of their investment decisions for both the home country and for the host country. International managers also need to be aware of how government policy decisions can impact strategic choices for firms.

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. In 2018, inward FDI accounted for some 63.7 percent of gross fixed capital formation in Ireland, but only 4.1 percent in Japan (gross fixed capital formation refers to investments in fixed assets such as factories, warehouses, and retail stores). What do you think explains this difference in FDI inflows into the two countries? Answer: Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and so on. When capital investment is high, a country has more favorable growth prospects. The difference between the rates of gross capital formation in Ireland and Japan would indicate that FDI is an important source of investment capital and economic growth in Ireland, but not in Japan. There can be several reasons for this. Companies may perceive that Ireland is more attractive as a destination for their investments, or that it is easier to establish operations in Ireland than in Japan. Investors may be cautious about Japan because of its reputation for burdensome regulations. 2. Compare and contrast these explanations of FDI: internalization theory and Knickerbocker‘s theory of FDI. Which theory do you think offers the best explanation of the historical pattern of FDI? Why? Answer: Internalization theory seeks to explain why firms often prefer foreign direct investment to licensing as a strategy for entering foreign markets. According to internationalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities: licensing may result in a firm giving away proprietary technology, licensing does not permit a firm to maintain tight control over its activities, and licensing is not appropriate when a firm‘s competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those products. Knickerbocker‘s theory of FDI suggests that firms follow their domestic competitors overseas. This theory had been developed with regard to oligopolistic industries. Imitative behavior can take many forms in an oligopoly, including FDI. The second part of this question is designed to stimulate classroom discussion and/or force students to think through these theories and select the one that they feel provides the best explanation for the historic pattern of FDI. 3. What are the strengths of the eclectic theory of FDI? Can you see any shortcomings? How does the eclectic theory influence management practice? Answer: Internalization theory explains why a firm would choose investment over exports or licensing. The eclectic theory of FDI expands upon this by explaining how location factors affect

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the direction of FDI. According to Dunning, location-specific advantages, or those benefits that come from being in a particular location, help explain why the firm would choose to invest in a particular country. The theory is helpful to understand why, for example, it might be important for a company in the computer industry to locate in Silicon Valley. 4. Reread the Management Focus ―Burberry Shifts Its Entry Strategy in Japan‖ and then answer the following questions: a. Why did Burberry initially choose a licensing strategy to expand its presence in Japan? b. What limitations of licensing became apparent over time? Should Burberry have expected these drawbacks to arise? c. Was terminating the Japanese licensing agreement and opening wholly owned stores the correct strategy for Burberry? What are the risks here? Answer: a. For nearly half a century, Burberry‘s licensing arrangement with Sanyo Shokai generated revenues of about $800 million per year for the British apparel maker. For Burberry, the arrangement was a good one because it allowed Burberry to avoid the costs and risks of developing the iconic brand in Japan. b. As part of its licensing arrangement with Burberry, Sanyo Shokai had discretion over how it used the brand. For Burberry, this proved to be problematic as its Japanese licensee priced its products significantly lower than the prices Burberry charged in the United Kingdom, threatening the company‘s reputation as a high-end luxury brand. Most students will probably suggest that Burberry should have maintained greater control over this aspect of its business in particular. c. Most students will probably agree that Burberry had little choice but to end its licensing arrangement with Sanyo Shokai. By opening its own stores in Japan, Burberry will have complete control over its store format, pricing, and branding—all of which are critical for the retailer if it wants to maintain the integrity of reputation as being a maker of high-end luxury apparel. That being said, Burberry will now incur all of the costs and risks of operating in Japan. While the brand is clearly accepted in the country, customers may resist the higher prices Burberry is likely to charge. 5. You are the international manager of a U.S. business that has just developed a revolutionary new personal computer that can perform the same functions as PCs but costs only half as much to manufacture. Several patents protect the unique design of this computer. Your CEO has asked you to formulate a recommendation for how to expand into western Europe. Your options are (a) to export from the United States, (b) to license a European firm to manufacture and market the computer in Europe, or (c) to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative and suggest a course of action to your CEO. Answer: In considering expansion into the European Union, three options will be considered: FDI, licensing, and export. With export, assuming there are no trade barriers, the key considerations would likely be transport costs and localization. While transport costs may be quite low for a relatively light and high-value product like a computer, localization can present some difficulties. Power requirements, keyboards, and preferences in model all vary from country to country. It may be difficult to fully address these localization issues from the United

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States, but not entirely infeasible. Since there are many computer manufacturers and distributors in Europe, there are likely to be a number of potential licensees. But by signing up licensees, valuable technological information may have to be disclosed, and the competitive advantage lost if the licensees use or disseminate this information. FDI (setting up a wholly owned subsidiary) is clearly the most costly and time-consuming approach, but the one that best guarantees that critical knowledge will not be disseminated and that localization can be done effectively. Given the fast pace of change in the personal computer industry, it is difficult to say how long this revolutionary new computer will retain its competitive advantage. If the firm can protect its advantage for a period of time, FDI may pay off and help assure that no technological know-how is lost. If, however, other firms can copy or develop superior products relatively easily, then licensing, while speeding up knowledge dissemination, may also allow the firm to get the quickest large-scale entry into Europe and make as much as it can before the advantage is lost.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 The World Investment Report published annually by UNCTAD provides a summary of recent trends in FDI, as well as quick access to comprehensive investment statistics. Identify the table of largest transnational corporations from developing and transition countries. The ranking is based on the foreign assets each corporation owns. Based only on the top 20 companies, provide a summary of the countries and industries represented. Do you notice any common traits from your analysis? Did any industries or countries in the top 20 surprise you? Why? Exercise 2 An integral part of successful foreign direct investment is to understand the target market opportunities and the nature of the risk inherent in possible investment projects, particularly in developing countries. You work for a company that builds wastewater and sanitation infrastructure in such countries. The Multilateral Investment Guarantee Agency (MIGA) provides insurance for risky projects in these markets. Identify the sector brief for the water and wastewater sector, and prepare a report to identify the major risks that projects in this sector tend to face and how MIGA can assist in such projects.

Starbucks‘ Foreign Investment closing case Summary The closing case explores the foreign investment strategy of Starbucks, the iconic coffee chain that grew from a single store in Seattle to a global chain of some 28,000 stores located across 76 countries. The growth of Starbucks is remarkable both for its speed, just 40 years, and for its approach, mainly wholly owned stores with some joint ventures. Starbucks is also credited for changing the global culture of coffee from what had been a largely ordinary relatively

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standardized product to a highly tailored experience to be shared with friends, enjoyed alone, or taken as part of business meeting, and more. Discussion Questions 1. Where did the original idea for the Starbucks‘ format come from? What lessons for international business can be learnt from this?

The initial concept for Starbucks came when the future CEO, Howard Schultz, took a trip to Italy. While in Italy, Schultz became enamored with the Italian coffee shop experience and upon his return, lobbied Starbucks management to move to a similar third place experience model. Students will probably suggest that international companies can use the Starbucks experience as an example of an opportunity to translate something that is integral to one culture to a global phenomenon. Students may point out that a big part of Starbucks‘ success is its consistency from store to store, regardless of where in the world that store may be located. Other students may focus on the social aspect of Starbucks and the original coffee shops that inspired it and note that human nature prompts social interactions. Companies can capitalize on this aspect of the Starbucks‘ story as they look for ways to take their product or service to other countries. 2. What drove Starbucks to start expanding internationally? Is this strategy in the best interests of its company‘s shareholders? At the time of its expansion into Japan, Starbucks had opened some 700 stores across the United States, each a duplicate of the other. Many students will probably suggest that taking its proven concept international was the next logical step. Expanding into foreign markets gave Starbucks the opportunity to capitalize on a bigger market, and it enabled the company to diversify its earnings. Students may also note that in many cases, Starbucks was also able benefit from first mover advantages. 3. Why do you think Starbucks decided to enter the Japanese market via a joint venture with a Japanese company? What lessons can be drawn from this? After successfully establishing itself in the United States, Starbucks began exploring opportunities to expand into foreign markets. In 1995, Starbucks entered into a 50/50 joint venture with Japan‘s Sazaby. Students should recognize that with no experience in foreign markets, the joint venture format offered Starbucks an opportunity to share the cost and risk of its initial foreign expansion. By partnering with a local company, Starbucks was also able to capitalize on the local knowledge of Sazaby. Students should note though, that the joint venture format meant that Starbucks shared control and profits with its partner, and further that as part of the agreement, Starbucks shared its proprietary design and operations. 4. What drove Starbucks to shift from a joint venture strategy in China to run the operation through a wholly owned subsidiary? What are the benefits here? What are the potential risks and costs? Do you think this was the correct decision? When Starbucks initially chose Japan as the target for its first foray into foreign markets, the company took steps to ensure that the experiences of its customers in Japan duplicated those of

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its customers in the United States. To create the ―Starbucks experience‖ in Japan, Starbucks transferred U.S. employees to Japan to share their knowledge with local employees, required local employees to attend training classes similar to those provided to U.S. employees, and required that all stores follow strict design specifications. Starbucks encouraged loyalty among its Japanese employees by offering a stock option plan similar to the one offered to U.S. employees. Most students will probably agree that while a joint venture made sense for Starbucks when it was just beginning to expand into foreign markets, today, with 28,000 stores located across 76 markets, the company has moved down the learning curve making wholly owned properties more attractive even in markets that are very different from the United States. Students will probably further point out that by buying out its joint venture partners in Japan and China, Starbucks not how complete control over its operations in those markets and retains 100 percent of the profits. Video Note: To extend this discussion, consider Starbucks CEO Howard Schultz on First Coffee Roastery in Italy. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

Continuous Case Concept In 2012, Nissan announced plans to increase its investment in Thailand. The company, which spent about $358 million to open a new plant in the country, hoped the additional capacity the new plant provided would allow it to increase its market share in the country. Nissan was not the only foreign automaker expanding into the country—GM, Ford, BMW, and Mercedes also made investments in Thailand, prompting the claim that Thailand is now the Detroit of the East. Thailand‘s auto production exploded, growing 383 percent between 2000 and 2017. Yet, despite

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these gains, the 2020 COVID-19 pandemic threatens to reshape Thailand‘s automotive sector completely as automakers use the moment to accelerate their shift to electric vehicles. Because electric vehicles use just 10-20 percent of the parts required in traditional internal combustion vehicles, many of the parts makers that shut down during the pandemic will not be reopening, potentially putting thousands of workers out of their jobs. 

Ask students to predict what changes in the global auto industry might occur in the next decade as a result of Thailand‘s position as a regional auto hub. How might the patterns of FDI shift? What impact will the move to electric vehicles have on the industry?

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Then, ask students to consider which theory best explains why companies like Nissan are attracted to Thailand.

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Finally, ask students to identify the benefits for Thailand of inward FDI in the auto industry. How do investments like Nissan‘s impact the country? Do you see any drawbacks to Thailand from Nissan‘s investment?

The first and third parts of this exercise can be used as an introduction to the chapter material, or together with the second question as a conclusion to the chapter. The second question can also be used by itself during the discussion of how trade theories help us understand trade patterns.

Additional Readings and Sources of Information Does China Dominate Global Investment https://chinapower.csis.org/china-foreign-direct-investment/ COVID-19, Electric Vehicles to Reshape Thailand‘s Automotive Industry https://www.reuters.com/article/us-thailand-autos/covid-19-electric-vehicles-to-reshapethailands-auto-industry-idUSKCN24I009 How Thailand became the 'Detroit of the Asia' https://money.cnn.com/2018/07/10/news/world/thailand-auto-industry/index.html Auto Industry Outlook Hinges on China Sales Holding Up Under Tariff Pressure https://www.cnbc.com/2018/09/18/global-auto-outlook-stable-so-far-but-tariffs-and-trade-couldbe-threats-next-year.html Don‘t Underestimate Chinese Automakers https://www.forbes.com/sites/willyshih/2018/07/25/dont-underestimate-chinese-automakers/#6fedeeb9ec96 How Starbucks Went from a Single Coffee Bean Store to an $80 Billion Business https://www.cnbc.com/2019/01/07/starbucks-cafes-coffee-business.html India‘s Biggest Competitors to Walmart and Amazon? Mom and Pop

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https://www.wsj.com/articles/indias-biggest-competitors-to-walmart-and-amazon-mom-and-pop1527512400 How China‘s $60 Billion For Africa Will Drive Global Prosperity https://www.forbes.com/sites/amyjadesimi/2017/03/14/how-chinas-60-billion-for-africa-willdrive-global-prosperity/#7fce6d0738a3 Foreign investment in U.S. dropping dramatically under Trump https://www.cbsnews.com/news/foreign-investment-in-u-s-dropping-dramatically-under-trump Brexit could cause 'serious damage' for foreign investment into the UK, new study says https://www.cnbc.com/2018/11/01/brexit-could-cause-serious-damage-for-foreign-investmentinto-the-uk-new-study-says.html Where Is All the FDI Into India Really Coming From And Going To? https://www.bloombergquint.com/opinion/where-is-all-the-fdi-into-india-really-coming-fromand-going-to#gs.6jIOV5M India‘s Amazon Slap Bodes Ill for Investors https://www.bloomberg.com/opinion/articles/2020-01-22/india-s-amazon-slap-bodes-ill-forforeign-investors

Regional Economic Integration Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline

Opening Case: The World‘s Largest Trade Deal Introduction Levels of Economic Integration Did You Know? Video Clip: NAFTA Is In the Process of Being Replaced by the USMCA The Case for Regional Integration The Case against Regional Integration

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Regional Economic Integration in Europe Regional Economic Integration in the Americas Regional Economic Integration Elsewhere 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: The Cost of Brexit Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 9-1 Describe the different levels of regional economic integration. 9-2 Understand the economic and political arguments for regional economic integration. 9-3 Understand the economic and political arguments against regional economic integration. 9-4 Explain the history, current scope, and future prospects of the world's most important regional economic agreements. 9-5 Understand the implications for management practice that are inherent in regional economic integration agreements.

Chapter Summary In this chapter, we explore regional economic integration. The levels of regional economic integration (from least to most integrated) include: a free trade area, a customs union, a common market, an economic union, and a full political union. Arguments for and against regional economic integration are provided. Many students will remember some of these arguments from the debate on the ratification of the North American Free Trade Agreement (NAFTA). We also discuss major trade blocks of the world, including the European Union, NAFTA/USMCA, the Andean Group, MERCOSUR, and several other Latin American and Asian trade alliances. Implications for business of these trade agreements and others are fully discussed.

Chapter Opening Activity In small groups, ask students to briefly research some well-known examples of regional economic integration, e.g., USMCA, the European Union, the TPP, APEC, Mercosur, ASEAN. Some are trade agreements, others are economic cooperation agreements, and students should realize the differences. For each example, have students find out the goals of the agreement, the date established, the countries participating, and summarize principal points of the agreement regarding tariffs, intellectual property, foreign direct investment, and rules regulating environmental, health and safety, minimum wages, and child labor. Report back to the class. Suggest they begin their research at https://globaledge.msu.edu/global-insights and then search ―Insights by Trade Bloc.‖

Chapter Outline

The World‘s Largest Trade Deal opening case Summary The opening case explores the Regional Comprehensive Economic Partnership (RCEP) between the Association for South East Asian Nations (ASEAN) and Australia, New Zealand, China, Japan, and South Korea, which if ratified, will include about one-third of the global population and GDP. The agreement will reduce tariffs on goods between member states and allow companies to sell the same product across the trading bloc without having to meet individual nation requirements. While negotiations for the trading bloc started a number of years ago, efforts to come to an agreement took on a new urgency

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when Donald Trump pulled the United States out of the Trans Pacific Partnership (TPP) and fear grew that protectionism was on the rise. Some have suggested that the RCEP is a China led agreement, however the ASEAN nations argue that while China is a large voice in the agreement, it is not the leader of the agreement. Discussion Questions 1. Discuss the proposed Regional Comprehensive Economic Partnership (RCEP) and what it means to companies inside the proposed bloc and for companies that export to potential member countries. How might companies benefit from the agreement? Under the Regional Comprehensive Economic Partnership (RCEP), tariffs and other barriers to the free flow of goods, will be reduced allowing goods to move more freely and cheaply among member countries. For companies, especially those with multi-country supply chains, the agreement is important because rather than having to complete paperwork and meet other nation-specific requirements in the region, companies will now be able to sell the same product across markets, eliminating the need for costly customization. Students should recognize however, that the agreement does not extend to all goods, and is especially weak for agricultural products, nor does it cover all services. In addition, because the agreement does not include a harmonized tariff policy, tariffs will be agreed to between member countries. 2. Will the Regional Comprehensive Economic Partnership (RCEP) change the balance of power in global trade? Is the agreement a ―win‖ for China or is China just another member nation? As the world‘s largest free trade area, covering one-third of the world‘s population and one-third of global trade, the Regional Comprehensive Economic Partnership (RCEP) will certainly have an impact on the power base in global trade. Two key takeaways are the fact that the United States is not part of the agreement while competing global economic superpower, China, is, and while the ASEAN countries claim that the agreement is not a China-led initiative, it is impossible to ignore the fact that China‘s voice will be a loud one. Some students are likely to suggest that given that movement toward negotiating the agreement came after Donald Trump indicated his preference for a more isolationist United States, the agreement is indeed a win for China. Other students, however, may point out that the European Union is also on the outside of the agreement, and will certainly act as a counterbalance to the RCEP. 3. The Regional Comprehensive Economic Partnership (RCEP) has been criticized for not including agreements on the environment, labor regulations, and provisions on state-owned enterprises. Should RCEP members have made a bigger effort to negotiate these areas? Is their omission a sign of failure? This question is likely to generate some discussion among students. Some students will argue that the fact that countries were able to quickly come to agreement following Donald Trump‘s decision to pull the United States out of the Trans Pacific Partnership indicates a commitment to reducing trade barriers and working toward a less protectionist trading environment. Other students may contend that the RCEP as it stands is an important first step in what could become a more comprehensive agreement. Students sharing this view may point out that the agreement was stalled for years. Trying to extend it to include these more complex issues could have meant that no agreement would be reached. However, other students will probably claim that by moving forward quickly, the RCEP nations missed an opportunity to make a meaningful difference in areas like the environment, areas that are very much in need of multilateral coordination. Lecture Note: The Regional Comprehensive Economic Partnership (RCEP) was signed in November 2020 making it the largest free trade agreement in history. While it still needs to be ratified, it is now

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likely to move forward. To learn more, consider https://www.brookings.edu/blog/order-fromchaos/2020/11/16/rcep-a-new-trade-agreement-that-will-shape-global-economics-and-politics/ and https://www.economist.com/finance-and-economics/2020/11/21/who-gains-from-rcep-asias-new-tradepact. Video Note: To extend the discussion of the Regional Comprehensive Economic Partnership (RCEP), consider We’re Excluded, It’s Not A Good Thing: Fisher’s On U.S.’s Exclusion From Asia-Pacific Trade Agreement. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title

CONNECT Video Case The World’s Largest Trade Deal Summary This activity explores the recently signed Regional Comprehensive Economic Partnership (RCEP). The agreement, which is still to be ratified, creates the largest free trade area in the world covering about one-third of the world population and one-third of global trade. Activity Students are asked to read a short case on the Regional Comprehensive Economic Partnership (RCEP) and then respond to a series of questions related to the case. Class Discussion As the world‘s largest free trade area, the recently signed Regional Comprehensive Economic Partnership (RCEP) could have a significant impact on global trade. Discuss the new agreement and what it means for companies and for the global balance of trade.

Introduction A) One notable trend in the global economy in recent years has been the accelerated movement toward regional economic integration. Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

Levels of Economic Integration A) Several levels of economic integration are possible in theory (see Figure 9.1 in the textbook). From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and, finally, a full political union. B) In a free trade area, all barriers to the trade of goods and services among member countries are removed. In a theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between member nations. Each

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country, however, is allowed to determine its own trade policies with regard to nonmembers. C) The most enduring free trade area in the world is the European Free Trade Association (EFTA). EFTA currently joins four countries-Norway, Iceland, Liechtenstein, and Switzerland. Other free trade areas include the United States-Canada-Mexico Agreement (USMCA) . Teaching Tip: To find out more about EFTA, and its current issues, go to http://www.efta.int. D) The customs union is one step further along the road to full economic and political integration. A customs union eliminates trade barriers between member countries and adopts a common external trade policy. E) Customs unions around the world include the current version of the Andean Community (between Bolivia, Columbia, Ecuador, and Peru). F) Like a customs union, the common market has no barriers to trade between member countries and a common external trade policy. Unlike a customs union, in a common market, factors of production are allowed to move freely between members. Thus, labor and capital are free to move, as there are no restrictions on immigration, emigration, or cross-border flows of capital between markets. G) Currently, Mercosur, the South America grouping that includes Brazil, Argentina, Paraguay, and Uruguay, is aiming to eventually establish itself as a common market. Venezuela has been accepted as a member of Mercosur, but as early 2016, was still waiting for Paraguay to ratify its membership. H) An economic union entails even closer economic integration and cooperation than a common market. Like the common market, an economic union involves the free flow of products and factors of production between members and the adoption of a common external trade policy. Unlike a common market, a full economic union also requires a common currency, harmonization of the member countries‘ tax rates, and a common monetary and fiscal policy. I) The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, the currency of the EU, and differences in tax rates across countries still remain. J) In a political union, independent states are combined into a single union. The EU is on the road to at least partial political union. The United States provides an example of an even closer political union.

The Case for Regional Integration A) The case for regional integration is both economic and political. THE ECONOMIC CASE FOR INTEGRATION B) Regional economic integration can be seen as an attempt to achieve additional gains from the

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free flow of trade and investment between countries beyond those attainable under international agreements such as the World Trade Organization. THE POLITICAL CASE FOR INTEGRATION C) The political case for integration has two main points: 1) by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease, and 2) by linking countries together, they have greater clout and are politically much stronger in dealing with other nations. IMPEDIMENTS TO INTEGRATION D) There are two main impediments to integration. First, although economic integration benefits the majority, it has costs. Although a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. A second impediment to integration arises from concerns over national sovereignty.

The Case against Regional Integration A) Although the tide has been running in favor of regional free trade agreements in recent years, some economists have expressed concern that the benefits of regional integration have been oversold, while the costs have often been ignored. B) Whether regional integration is in the economic interests of the participants depends upon the extent of trade creation as opposed to trade diversion. Trade creation occurs when low-cost producers within the free trade area replace high-cost domestic producers. Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers. A regional free trade agreement will only make the world better off if the amount of trade it creates exceeds the amount it diverts. CONNECT Click and Drag Regional Integration Summary This activity explores regional economic integration as it relates to trade creation and trade diversion. Regional economic integration is beneficial when it creates more trade than it diverts. Activity Students are asked to match various hints to indicate whether they are examples of trade creation or trade diversion. Class Discussion International managers need to understand the benefits and drawbacks of regional economic integration and how it might affect their company‘s ability to operate in a market. Discuss current examples of trade creation and trade diversion.

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Regional Economic Integration in Europe A) There are two trade blocks in Europe: the European Union (EU) and the European Free Trade Association. Of the two, the EU is by far the more significant, not just in terms of membership, but also in terms of economic and political influence in the world economy. EVOLUTION OF THE EUROPEAN UNION B) The European Union (EU) is the product of two political factors: first, the devastation of two World Wars on Western Europe and the desire for a lasting peace, and second, the European nations‘ desire to hold their own on the world‘s political and economic stage. Teaching Tip: The EU maintains an excellent website at http://europa.eu/europeanunion/index_en. Students can click on a number of subjects to see the EU‘s position and role in the area. The site also contains a broad array of information about the historical role and current activities of the EU in the global economy. C) The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951. The European Community was formed in 1957 at the Treaty of Rome. While the original goal was for a common market, progress was generally very slow. Over the years the EU expanded in spurts, as well as moved towards ever-greater integration. Today, following the departure of Britain in 2020, the EU has 27 members. Map 9.1 in the text shows the current membership of the EU. POLITICAL STRUCTURE OF THE EUROPEAN UNION D) The four main institutions of the EU are the European Commission (responsible for proposing EU legislation, implementing it, and monitoring member states to ensure they are complying with EU laws), the European Council (the ultimate controlling authority within the EU), the European Parliament (debates legislation proposed by the commission and forwarded to it by the Council), and the Court of Justice (the supreme appeals court for EU law). E) The Treaty of Lisbon gives more power to the European Parliament, which is effectively the co-equal legislator for almost all European laws. Lecture Note: To learn more about the Lisbon Agreement and its implications for the European Union countries, consider http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=OJ:C:2007:306:TOC.

management FOCUS: The European Commission and Google Summary This feature explores the European Commission‘s case against tech giant, Google. According to the European Commission, which fined the company €4.3 billion, Google engaged in anticompetitive behavior related to its Android operating system. Discussion of the feature can begin

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with the following questions. Discussion Questions 1. Is the European Commission justified in its case against Google? Why or why not? The European Commission‘s fine on Google is part of a bigger effort to crack down on what the European Commission believes are unfair practices by big tech firms. Students are likely to agree with the European Commission that Google, with its bundling requirements, is indeed engaging in anti-competitive behavior, however some students may also wonder about the viability of competing firms. Students taking this point of view may argue that the speed at which smart phone technology has emerged, technology that arguably benefits consumers, is due in part, to the efforts of companies like Google to develop seamless technologies. Coupling together rival systems could result in a lesser experience for Android users. 2. Why are the actions of institutions like the European Commission important to the function of markets? How does the European Commission protect consumers? The European Commission is playing an increasingly bigger role in ensuring that markets in Europe are competitive, and that no single player is permitted to dominate the market. Most students will recognize the importance of this type of institution and the protection it offers consumers. In the Google case, for example, Google gave smart phone makers and telecom operators little choice but to use the Android system in a way that benefited Google. In a more competitive market, consumers would have enjoyed more choice. Students should also recognize that Google‘s dominance of the market harmed producers of rival operating programs. Teaching Tip: To learn more about the European Commission‘s case against Google, go to https://www.washingtonpost.com/technology/2020/11/10/eu-antitrust-probe-google/ and https://www.reuters.com/article/us-eu-alphabet-antitrust/google-protests-eye-catching-2-6billion-eu-fine-judge-disagrees-idUSKBN2081JB. Video Note: Amazon has also been targeted by the European Commission in its crackdown on big tech firms. To learn about Amazon‘s case, consider Amazon is Facing New Scrutiny by the European Union. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

THE SINGLE EUROPEAN ACT F) The Single European Act, adopted by the EU member nations in 1987, committed the EC countries to work toward the establishment of a single market by December 31, 1992. G) The Single European Act was born out of frustration among EC members that the community was not living up to its promise. In the early 1980s, many of the EC‘s prominent business people mounted an energetic campaign to end the EC‘s economic divisions. The result was the Single European Act, which was independently ratified by the parliaments of each member country and

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became EC law in 1987. The Objectives of the Act H) The purpose of the Single European Act was to have a single market in place by December 31, 1992. The changes the act proposed included the following:      

The removal of all frontier controls between EC countries Mutual recognition of standards to apply the principle of ―mutual recognition,‖ which is that a standard developed in one EC country should be accepted in another, provided it meets basic requirements in such matters as health and safety Open public procurement to non-national suppliers Financial services to lift barriers to competition in the retail banking and insurance businesses The removal of all restrictions on foreign exchange transactions between members by the end of 1992 The abolishment of all restrictions on cabotage (the right of foreign truckers to pick up and deliver goods within another member‘s borders), by the end of 1992

Impact I) The Single European Act has had a significant impact on the EU economy. The act provided the impetus for the restructuring of substantial sections of European industry allowing for faster economic growth than would otherwise have been the case. THE ESTABLISHMENT OF THE EURO J) The Maastricht Treaty, signed in 1992, committed the EU to adopt a single currency, the euro, by January 1, 1999. The euro is now used by 19 of the 28 member states. By adopting the euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar. For now, three EU countries, Great Britain, Denmark, and Sweden, are opting out of the euro zone. Teaching Tip: The European Central Bank maintains a website with current information on the euro. The site is available at http://www.ecb.europa.eu/ecb/html/index.en.html. K) Euro notes and coins were not actually issued until January 1st, 2002. In the interim, national currencies circulated in member countries. However, in each participating state the national currency stood for a defined quantity of euros. Benefits of the Euro L) There are a number of reasons why the Europeans decided to establish a single currency in the EU. First, they believe that business and individuals will realize significant savings from having to handle one currency, rather than many. Second, and perhaps most importantly, the adoption of a common currency makes it easier to compare prices across Europe. Third, faced with lower prices European producers must look for ways to reduce their production costs to maintain their profit margins. Fourth, the introduction of a common currency should give a strong boost to the development of a highly liquid pan-European capital market. Finally, the development of a panEuropean euro-denominated capital market will increase the range of investment options open

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both to individuals and institutions. Costs of the Euro M) The drawback of a single currency is that national authorities lose control over monetary policy. Thus, it is crucial to ensure that the EU‘s monetary policy is well managed. The Maastricht treaty called for the establishment of an independent European Central Bank (ECB), similar in some respects to the U.S. Federal Reserve, with a clear mandate to manage monetary policy to ensure price stability. The ECB is based in Frankfurt. Like the U.S. Federal Reserve, the ECB is meant to be independent from political pressure, although critics question this. Among other things, the ECB sets interest rates and determines monetary policy across the eurozone. The implied loss of national sovereignty to the ECB underlies the decision by Britain, Denmark and Sweden to stay out of the euro-zone for the time being. O) Another drawback of the euro is that the EU is not what the economists would call an optimal currency area. An optimal currency area is an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy. Many of the European economies in the euro zone, however, are very dissimilar. The Euro Experience P) Since its establishment on January 1, 1999, the euro has had a volatile trading history with the U.S. dollar. Initially, the currency fell in value relative to the dollar, but strengthened to an alltime high of €1=$1.54 in March 2008. By the end of 2019, the euro accounted for about a fifth of global foreign exchange reserves.

country FOCUS: The Greek Sovereign Debt Crisis Summary This feature explores the causes of the 2010 financial crisis in Greece and its implications for other countries in the Euro Zone. Years of overspending by the Greek government led to huge deficits that the country could not manage. While the country‘s problems had been hidden throughout much of the decade, a new government that took power in 2009 revealed that Greece‘s problems were actually worse than had been suspected. Investors lost faith in Greece and its ability to not only refinance its debt but also to implement policies to reduce its debt load. This combined with concerns that other countries in the euro zone could have problems sent the euro to its lowest level in years. Discussion of this feature can begin with the following questions. Discussion Questions 1. Discuss the implications of the financial crisis in Greece on other countries in the euro zone.

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What does the loss of confidence in Greece and in Spain, Portugal, and Italy as well mean for the bloc? The financial crisis in Greece highlighted the difficulties associated with having multiple countries sharing a single currency. Greece‘s problems contributed to a drop in the value of the euro and concern that it could spill over into the other weaker countries in the European Union including Spain, Portugal, and Italy. Greece was forced to seek aid from other euro zone countries and the IMF, aid that was granted with strict debt restructuring requirements. As of 2014, there was reason to believe that the reforms were working. Yields on 10-year bonds had fallen and the government‘s budget was improving. But things again took a turn for the worse, and in 2015, a third bailout occurred. 2. What does a falling euro mean for U.S. companies exporting to the European Union and for U.S. companies with operations in the bloc? For U.S. firms that export to the European Union, the falling euro is a problem because it will make their products seem more expensive in Europe. For U.S. firms operating within the European Union, the falling euro could reduce earnings as euro profits are converted back into U.S. dollars. For both types of firms, the loss of confidence in the euro could contribute to a slower economy and slower demand. Lecture Note: To extend this discussion on Greece‘s efforts to overcome its crisis, consider https://www.bbc.com/news/world-europe-45245969 and https://www.forbes.com/sites/francescoppola/2018/08/20/lessons-for-the-eurozone-from-thegreek-debt-crisis/#6fb2a0b055dd.

ENLARGEMENT OF THE EUROPEAN UNION Q) A number of countries, particularly from Eastern Europe, have applied for membership in the EU. In December of 2002, the EU formally agreed to accept the applications of 10 countries that joined on May 1, 2004. Their inclusion expanded the EU to 25 states, creating an EU population of 450 million people, and a single continental economy with a GDP of €11 trillion. In 2007, the EU welcomed Bulgaria and Romania. Croatia joined in 2013 bringing the total number of member countries to 28. CONNECT Click and Drag EU Expansion Summary This activity explores regional economic integration and specifically, the evolution of the European Union (EU) from its early formation to its most recent incarnation. The EU is the

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world‘s most advanced example of the benefits and challenges associated with regional economic integration. Activity Students are asked to match descriptions of the evolution of the EU with various milestones. Class Discussion Understanding regional economic integration, its benefits, and its challenges, is important for managers as they seek to consider the implications of the external environment on the ability of the firm to reach its full potential. Discuss what regional economic integration means for firms both inside and outside a trade bloc. BRITISH EXIT FROM THE EUROPEAN UNION (BREXIT) R) On June 23, 2016, British voters decided by referendum to leave the EU. Even though the British enjoyed many of the benefits of being a part of the EU, one of the critical issues leading to the referendum‘s outcome was immigration. As many immigrants came from eastern Europe and took lower-skilled jobs, the campaign against EU membership aimed to ―take back control‖ of immigration. The British economy is the second largest in the EU and fears are that this country‘s exit could encourage other EU members to exit, as well. In the referendum, London, Scotland, and Northern Ireland voted to stay in the EU while most of the rest of the country voted to exit. S) In 2017, Britain formally notified the EU of its intention to leave the bloc. Under the terms of the Treaty of Lisbon, Britain must conclude its exit negotiations within two years. While the country was scheduled to officially leave the bloc on March 29, 2019, it was granted an extension until January 31, 2020 by the EU in the hopes that the additional time would allow for the negotiation of a clear exit deal. Britain officially left the bloc on January 31, 2020 and entered an 11 month transition period during which a new trade deal with the EU was negotiated. With the clock running out, the EU and Britain announced a new deal in December 2020 agreeing to the continued free flow of goods across borders, although companies will now be required to complete extensive paperwork for customs officials. In addition, under the new deal, Britain will regain some control over fishing rights. Financial services firms will lose their passporting rights and those British companies relying on low cost labor from Eastern Europe will lose out as the new deal restricts the free flow of people across borders. Video Note: To explore the new deal between the European Union and the United Kingdom, consider How the EU & Britain Struck a Brexit Trade Deal and What It Means. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Video Note: To extend this discussion, consider Talks Over Post Brexit EU Trade Deal Continue and Why Brexit May Be the Best Thing for Britain. Find them in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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CONNECT Case Analysis Regional Economic Integration and Brexit Summary This activity focuses on regional economic integration and specifically on the implications of Britain‘s withdrawal from the EU following a vote to leave or remain. Activity Students are asked to read a short case on Britain‘s withdrawal from the EU and then respond to a series of questions related to the video. Class Discussion It is essential that international managers understand what Britain‘s pending withdrawal from the EU means to the trade bloc and to Britain itself. Discuss these issues and how companies should respond to the changing situation.

Regional Economic Integration in the Americas A) Regional economic integration is on the rise in the Americas. The North American Free Trade Agreement (NAFTA) is the most significant attempt. This agreement was superseded by the United States-Canada-Mexico Agreement in 2020. Other efforts include the Andean group and Mercosur. In addition, there are plans to establish a hemisphere-wide Free Trade Area of the Americas (FTAA.) THE NORTH AMERICAN FREE TRADE AGREEMENT B) The United States, Canada, and Mexico established the North American Free Trade Agreement (NAFTA) in 1994. NAFTA’s Contents C) The free trade agreement between the United States, Canada, and Mexico contains the following actions:      

Abolishes by 2004, tariffs on 99 percent of the goods traded between Mexico, Canada, and the United States Removes most barriers on the cross-border flow of services Protects intellectual property rights Removes most restrictions on FDI between the three member countries Allows each country to apply its own environmental standards, provided such standards have a scientific base Establishes two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored

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The Case for NAFTA D) Proponents of NAFTA argued that it would provide economic gains to all countries. Mexico would benefit from increased jobs as low-cost production moved south and would attain more rapid economic growth as a result. The United States and Canada would benefit from the access to a large and increasingly prosperous market and from the lower prices for consumers who buy goods produced in Mexico. In addition, U.S. and Canadian firms with production sites in Mexico would be more competitive on world markets The Case against NAFTA E) Opponents of NAFTA argued that jobs would be lost and wage levels would decline in the United States and Canada, Mexican workers would emigrate north, pollution would increase due to Mexico's more lax standards, and Mexico would lose its sovereignty. NAFTA: The Results F) Studies of NAFTA‘s impact to date suggest that its initial effects were at best muted, and both advocates and detractors may have been guilty of exaggeration. The most significant impact of NAFTA may not have been economic, but rather political. The agreement helped to create the background for increased political stability in Mexico. The United States-Canada-Mexico Agreement (USMCA) G) Following the election of Donald Trump as U.S. president, NAFTA was renegotiated. He signed a new deal called the United States-Mexico-Canada Agreement, or USMCA for short. While the new deal is essentially an updated version of the original agreement, the new deal requires automakers to produce 75 percent of a vehicle's content in North American in order to qualify for zero tariffs. In addition, it requires that 40 percent of parts for any tariff-free vehicle must come from a so-called ―high wage‖ factory. While this may increase the production of automobiles and their parts in the United States, it could lead to much higher costs for automakers and consumers. Lecture Note: To extend the discussion of NAFTA and the USMCA, consider https://www.cfr.org/backgrounder/naftas-economic-impact. Did You Know? Video Clip The video clip asks: ―Did you know that NAFTA is in the process of being replaced by the USMCA?‖

Discussion Questions 1. What prompted the renegotiation of NAFTA? Do you agree with Donald Trump that the agreement was unfair to the United States? During his bid for the presidency, Donald Trump made it clear that he felt that NAFTA was a poor agreement and that it did not benefit the United States. Following his win, Donald Trump moved quickly to renegotiate the agreement. Students will probably be divided along political lines as to whether they support Donald Trump‘s opinion of the agreement. Some students may point out that Donald Trump‘s view of the agreement as potentially benefitting Mexico more than the United States may have been an accurate assessment, however, it did not then follow that the agreement was not beneficial to the United States as well.

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2. The USMCA has been referred to as NAFTA 2.0. Why? What does this name tell you about the original agreement? The term NAFTA 2.0 has often been used to describe the USMCA, which despite Donald Trump‘s announcement that it was a much better agreement, appeared to be remarkably similar to the original agreement between Canada, Mexico, and the United States. While some areas have been renegotiated, especially in the areas of agriculture and auto manufacturing, much of the original NAFTA remains. Students will likely conclude then, that the original agreement was a good one, and one that benefitted all member countries albeit perhaps not equally.

Teaching Tip: Learn more about the USMCA at https://ustr.gov/search?q=usmca. Video Note: To learn more about the differences between NAFTA and the USMCA and what they mean for companies, consider Key Differences Between the New USMCA Trade Deal and NAFTA. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Video Case Toyota’s van Zyl on USMCA Deal, Brexit, Electric Vehicles Summary This activity explores regional economic integration and specifically revisions to NAFTA and Brexit and the implications of those evolving situations for Toyota. Activity Students are asked to watch a video on regional economic integration and then respond to a series of questions related to the video. Class Discussion Changes are currently underway to both NAFTA and the EU. For companies, these changes could be major disruptors. Discuss what the proposed changes to NAFTA mean for companies and how Brexit will change the way companies do business with Britain. THE ANDEAN COMMUNITY H) The Andean Pact, originally formed in 1969, was based on the EU model, but was far less successful in achieving its stated goals. By the mid-1980s, the Andean Pact had more or less failed. However, in the late 1980s, Latin American governments began to adopt free-market economic policies, and in 1990, the Andean Pact was relaunched. The renamed Andean Community now operates as a customs union, and in 2005, it signed an agreement with Mercosur to restart negotiations towards the creation of a free trade area between the two trading blocs.

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MERCOSUR I) Mercosur originated in 1988 as a free trade pact between Brazil and Argentina. In 1990, it was expanded to include Paraguay and Uruguay. In 2006, Venezuela joined the bloc, although it was suspended in 2016 for violating the pact‘s principles and engaging in human rights violations. Mercosur made some progress on reducing trade barriers between member states; however, given some fairly high tariffs for goods from other countries, it would appear that in some industries Mercosur is trade diverting rather than trade creating, and local firms are investing in industries that are not competitive on a worldwide basis. Since 2010, questions have been raised as to whether the bloc will ever become a fully functioning customs union. Teaching Tip: For more information on Mercosur go to https://www.mercosur.int/en. CENTRAL AMERICAN COMMON MARKET, CAFTA, AND CARICOM J) There are two other trade pacts in the Americas: the Central American Common Market (between Costa Rica, El Salvador, Guatemala, Honduras, the Dominican Republic, and Nicaragua) and CARICOM (includes the English-speaking countries of the Caribbean), although neither has made much progress as yet. K) In 2004, an agreement was reached between the United States and the members of the Central American Common Market. The agreement, known as the Central American Free Trade Agreement (CAFTA), is designed to lower trade barriers between the United States and the six countries on most goods and services. L) In 2006, six members of CARICOM established the Caribbean Single Market and Economy (CSME) with the goal of lowering trade barriers and harmonizing macroeconomic and monetary policy between member states. CONNECT Click and Drag Economic Integration and Member Countries Summary This activity explores regional economic integration across the globe. Groups of countries have worked to integrate their economies in order to benefit from free trade and other advantages associated with economic integration. Activity Students are asked to match various examples of regional economic integration with the correct description. Class Discussion Managers need to understand the impact of regional economic integration on business. Discuss what the various trade agreements mean to companies operating in and out of the agreements in this application.

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CONNECT Click and Drag REI in the Americas Summary This activity explores regional economic integration and specifically regional economic integration in the Americas. While none of the agreements has had an impact as large as the EU, regional economic integration in the Americas is significant. Activity Students are asked to match various descriptors with the correct trade pact. Class Discussion International managers of companies doing business in the Americas need to be aware of the impact of trade agreements on their companies. Discuss the impact of the recent changes to NAFTA for firms doing business within the bloc.

Regional Economic Integration Elsewhere A) There have been numerous attempts at regional economic integration throughout Asia and Africa. Few efforts, however, have made much progress. ASSOCIATION OF SOUTHEAST ASIAN NATIONS B) Formed in 1967, the Association of Southeast Asian Nations (ASEAN) currently includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam (see Map 9.3 in the text). The basic objectives of ASEAN are to foster freer trade between member countries and to achieve some cooperation in their industrial policies. C) In 2003, an ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect. Vietnam, Laos, Myanmar, and Cambodia joined later. The goal of AFTA is to reduce import tariffs among the six original members by 2010 and for the newer members by 2015. In 2010, ASEAN signed a new free trade agreement with China to remove tariffs on 90 percent of traded goods. REGIONAL TRADE BLOCS IN AFRICA E) There are nineteen trade blocs on the African continent; however, progress toward the establishment of meaningful trade blocs has been slow. Teaching Tip: For information on the East African Community, go to https://www.eac.int. OTHER TRADE AGREEMENTS F) As the WTO‘s Doha Round of talks failed, the United States and other countries have emphasized the importance of bilateral and multilateral trade agreements. However, under

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President Trump, the U.S pulled out of the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) were put on hold. G) Since the withdrawal of the United States from the TPP, the remaining 11 members moved forward with a new deal called the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Under the deal, which cover 500 million people, tariffs and other trade barriers between member nations will be significantly reduced. Several leaders of member countries have indicated that the door is open for the United States to join in the future. H) Another deal currently under negotiation is the Comprehensive Economic Partnership (RCEP). Comprised of the members of ASEAN together with Australia, China, New Zealand, and South Korea, this agreement is likely to favor China, and is expected to be ratified in 2020. Video Note: To extend the discussion on regional economic integration, consider https://www.bbc.com/news/av/business-37276293.

360° VIEW: MANAGERIAL IMPLICATIONS Regional Economic Integration Threats A) The most significant developments in regional economic integration are occurring in the EU and NAFTA. These developments have the most profound and immediate implications for business practice. Opportunities B) Creation of a single market offers significant opportunities because markets that were formerly protected from foreign competition are opened. C) The greatest implication for MNEs is that the free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes, makes it possible for them to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal. Through specialization and the shipping of goods between locations, a much more efficient web of operations can be created. D) On the other hand, even after the removal of barriers to trade and investment, enduring differences between nations in culture and competitive practices often limit the ability of companies to realize cost economies by centralizing production in key locations and producing a standardized product for a single multi-country market. Threats F) Just as the emergence of single markets in the EU and North America creates opportunities for business, it also presents a number of threats. For one thing, the business environment within both groups will become more competitive. A further threat to non-EU and/or non-North American firms arises from the likely long-term improvements in the competitive position of many European and North American companies.

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G) Another threat to firms outside of trading blocs is the threat of being shut out of the single market by the creation of a ―trade fortress.‖ Furthermore, firms may be limited in their ability to pursue the strategy of their choice in the EU as the EU increases its willingness and ability to intervene and impose conditions on companies proposing mergers and acquisitions. H) Finally, growing opposition to free trade areas is a threat to business. The recent contentious renegotiation of NAFTA/USMCA and Britain‘s departure from the EU together with Donald Trump‘s decision to pull out of the TPP indicate the fragility of these agreements and the potential that the benefits they bring business could disappear. CONNECT Case Analysis The Cost of Brexit Summary This activity explores the decision by the United Kingdom to leave the European Union. The decision, known as Brexit, was the result of a sharply divided Briton over the costs of remaining in the bloc versus the benefits that doing so would bring. Activity Students are asked to read a short case on the decision by the United Kingdom to leave the European Union and then respond to questions about the case. Class Discussion Discuss the benefits and costs of regional economic integration. What initially made participation in the European Union important for the United Kingdom? Why did it no longer make sense to many British citizens to continue to be part of the bloc? CONNECT Video Case Did You Know? NAFTA Is in the Process of Being Replaced by the USMCA Summary This activity explores regional economic integration and specifically NAFTA and its replacement agreement, USMCA. Renegotiating NAFTA has been at the top of President Trump‘s agenda since he took office. Activity Students are asked to watch a video on NAFTA and USMCA and then respond to a series of questions related to the video. Class Discussion

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Discuss the differences between the new USMCA and the original NAFTA agreement. What are the implications of the changes for companies doing business in Mexico, Canada, and the United States?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. NAFTA produced significant net benefits for the Canadian, Mexican, and U.S. economies. Discuss. Answer: Proponents of NAFTA argue that the agreement should be viewed as an opportunity to create an enlarged and a more productive base for the United States, Canada, and Mexico. As low-income jobs move from Canada and the United States to Mexico, the Mexican economy should be strengthened giving Mexican consumers the ability to purchase higher-cost American products. The net effect of the lower income jobs moving to Mexico and Mexico increasing its imports of higher quality American goods should be positive for the American economy. In addition, the international competitiveness of U.S. and Canadian firms that move production to Mexico to take advantage of lower labor costs will be enhanced, enabling them to better compete with Asian and European rivals. 2. What are the economic and political arguments for regional economic integration? Given these arguments, why don‘t we see more substantial examples of integration in the world economy? Answer: The economic case for regional integration is straightforward. As noted in Chapter 5, unrestricted free trade allows countries to specialize in the production of goods and services that they can produce most efficiently. If this happens as the result of economic integration within a geographic region, the net effect is greater prosperity for the nations of the region. From a more philosophical perspective, regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the World Trade Organization. The political case for integration is also compelling. Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between neighboring states. The potential for violent conflict between the states is also reduced. In addition, by grouping their economies together, the countries can enhance their political weight in the world. Despite the strong economic and political arguments for integration, it has never been easy to achieve on a meaningful level. There are two main reasons for this. First, although economic integration benefits the majority, it has its costs. While a set of nations as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. The second impediment to integration arises from concerns over national sovereignty. 3. What in general was the effect of the creation of a single market and a single currency within the EU on competition within the EU? Why? Answer: If the EU is successful in establishing a single market and currency, member countries

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can expect significant gains from the free flow of trade and investment. This will result from the ability of the countries within the EU to specialize in the production of the product that they manufacture the most efficiently, and the freedom to trade those products with other EU countries without being encumbered by tariffs and other trade barriers. The competition between European firms will increase. Some of the most inefficient firms may go out of business because they will no longer be protected from other European companies by high tariffs, quotas, or administrative trade barriers. Companies from those countries that have not adopted the euro may find that their costs are higher as they deal with currency exchanges; however, companies can also avoid exchange rate risk by dealing in a single currency. 4. Do you think it is correct for the European Commission to restrict mergers between American companies that do business in Europe? (For example, the European Commission vetoed the proposed merger between WorldCom and Sprint, both U.S. companies, and it carefully reviewed the merger between AOL and Time Warner, again both U.S. companies.) Answer: This question deals with the delicate issue of just how far a country can extend the reach of its law, and should set the stage for a good debate. While some students will argue that the European Commission is overstepping its boundaries by restricting mergers between American companies doing business in Europe, other students will recognize that the United States might act in a similar fashion if American firms were being threatened by foreign companies seeking to merge and operate in the U.S. market. 5. What were the causes of the 2010–2012 sovereign debt crisis in the EU? What does this crisis tell us about the weaknesses of the euro? Do you think the euro will survive the sovereign debt crisis? Answer: Several factors contributed to the financial crisis in Europe, including concern about slow economic growth and the large budget deficits in many European Union countries, and the ability of some countries to service their debt. Of particular concern were Greece, Portugal, Ireland, Italy, and Spain where debt had reached record levels. As investors sold government bonds issued by these troubled nations, the cost of servicing the debt increased even more, putting additional pressures on the countries and on the euro. The International Monetary Fund together with the European Union intervened to help Greece, Portugal, and Ireland. Even so, the euro continued to decline, and questions began to emerge regarding the survival of the currency as it became increasingly apparent that the monetary union did not allow more stable countries to control the fiscal policies of other, less responsible countries. Most students will probably agree that it is still too early to tell what will ultimately happen to the euro and whether it can survive the situation. 6. How should a U.S. firm that currently only exports to ASEAN countries respond to the creation of a single market in this regional grouping? Answer: A U.S. firm that is currently only exporting to ASEAN markets should seriously consider opening a facility somewhere within the region, as the economics of a common market suggest that outsiders can be at a disadvantage relative to insiders. The opening of borders within a common market has the potential to increase the size of the market for the firm. Of course, it is

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possible, after careful consideration, that exporting may still be the most appropriate means of serving the market in some situations. 7. How should a firm with self-sufficient production facilities in several ASEAN countries respond to the creation of a single market? What are the constraints on its ability to respond in a manner that minimizes production costs? Answer: The creation of a single market means that it may no longer be efficient to operate separate production facilities in each country. Instead, the facilities should either be linked so that each specializes in the production of only certain items, or several sites should be closed down and production consolidated into the most efficient locations. Existing differences between countries as well as the need to be located near important customers may limit a firm‘s ability to fully consolidate or relocate production facilities for production cost reasons. Minimizing production costs are only one of many objectives of firms, as location of production near R&D facilities can be critical for new product development and future economic success. Thus, what is most important in location decisions is long-run economic success, not just cost minimization. 8. After a promising start, Mercosur, the major Latin American trade agreement, has faltered and made little progress since 2000. What problems are hurting Mercosur? What can be done to solve these problems? Answer: Mercosur originated in 1988 as a free trade pact between Brazil and Argentina. The pact was expanded in 1990 to include Paraguay and Uruguay with the goal of becoming a full free trade area by 1994, and a common market sometime later. While initially considered a success, critics began to question whether the trade diversion effects of Mercosur outweighed it trade creation effects. Then, in 1998, member states slipped into a recession and in 1999, Brazil‘s financial crisis led to a significant devaluation of its currency creating further turmoil. Finally, in 2001, Argentina, beset by economic stresses, asked that the customs union be temporarily suspended, effectively ending Mercosur‘s quest to become a fully functioning customs union. In 2003, Brazil‘s new president announced his support for a revitalized and expanded Mercosur that would be modeled after the EU, but little has been accomplished. Teaching Tip: Students can check the current status of the agreement online at https://www.mercosur.int/en.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 The World Trade Organization maintains a database of regional trade agreements. You can search this database to identify all agreements that a specific country participates in. Search the database to identify the trade agreements that Japan currently participates in. What patterns do you see? Which region (or regions) of the world does Japan seem to be focusing on in its trade endeavors?

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Exercise 2

Your company has assigned you the task of investigating the various trade blocs in Africa to see if your company can benefit from these trade agreements while expanding into African markets. The first trade bloc you come across is COMESA. Prepare a short executive summary for your company, explaining the level of integration the bloc has currently achieved, the level it aspires to accomplish, and the relationships it has with other African trade blocs.

The Cost of Brexit closing case Summary The closing case explores the implications of the decision by the United Kingdom to leave the

European Union. A member of the European Union since 1973, the United Kingdom voted to leave in 2016 as concern grew among some citizens that remaining in the bloc was compromising the country‘s national sovereignty, making the country vulnerable to an unwanted increase in immigration, and limiting the country‘s ability to make its own trade deals. The vote to leave was a close one, making the negotiations of what the break will look like especially challenging. Discussion Questions 1. What have been the benefits of the EU to the British economy? What do you think have been the costs? When the United Kingdom joined the European Economic Community, now the European Union, expectations were high that membership would bring better trading relationships with other member countries and economic growth a result. At the time, though, there were concerns that the country was compromising its national sovereignty, a concern that ultimately factored into the 2016 vote to leave. By 2016, there were also concerns about high rates of immigration from other member countries, the level of bureaucracy in Brussels, and the inability of the United Kingdom to make its own trade deals with nonmember countries, all of which led to the question of whether continued membership in the European Union made sense for the United Kingdom. Students should recognize that despite these concerns, membership in the European Union offered the United Kingdom and its citizens many benefits including easing of movement, a greater voice in international affairs, and for companies, easy access to a huge market. In addition, since the decision to leave, economic growth in the United Kingdom has been lower than it would have been had the country remained. 2. Why did a majority of people in Britain apparently feel that it was in the best interest of the nation to exit the EU?

The decision by the United Kingdom to leave the European Union, a bloc that it had been part of since 1973, was a divisive one with nearly half of the votes going for remain, and just over half for leave, suggesting that almost half the population believed that membership in the European Union was in fact meeting expectations, or at least was better than leaving. Just over half voted to leave however, indicating that a slightly larger share of the population felt the agreement was not beneficial. Like the population of the United Kingdom, students will probably be split as to whether the decision to leave was a good one or not. Despite the continued debate on the 2016

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vote, the United Kingdom left the European Union in 2020. As the first country to ever leave the bloc, there is no precedent as to just what will follow, a situation that is complicated by the fact that the nearly half the UK population was not in favor of leaving anyway. Negotiations therefore have been slow and difficult both with the European Union and especially within the United Kingdom. Coming to agreement on what the country‘s future relationship with the European Union will be has proved to be an arduous task, and many companies operating in the United Kingdom, faced with difficulty in strategic planning because of the uncertainty, have now opted to pull some or all of their investments out of the United Kingdom. 3. There is evidence that the uncertainty surrounding the precise nature of the post-Brexit trade deal between Britain and the EU has lowered economic growth rates in Britain. Why do you think uncertainty over trade has this effect on growth? Students should recognize that for companies, the uncertainty surrounding first, the vote by the United Kingdom to leave the European Union, and second, what the country‘s future relationship with the trading bloc will be, has been challenging. For many companies, the United Kingdom has long been an attractive location for investment and gaining access to the European Union market. The decision to leave the bloc has thrown a spanner in the works for many companies operating in the United Kingdom and since the vote to leave, many companies have also made the decision to leave, dampening economic growth. Students should note that until it is clear exactly what the United Kingdom‘s relationship with the European Union will be going forward, it is likely that many companies will hold off on future investments in the country. Some students may suggest that having the ability to negotiate its own trade deals will ultimately make the United Kingdom a more attractive option for investment, while other students will suggest that being on the outside of the European Union will make the country a less enticing option. 4. For Brexit to be a net positive for the British economy in the long run, what has to happen? This question will likely generate considerable discussion among students. Most will agree that much of the answer will pivot on the outcome of the negotiations between the European Union and the United Kingdom on their post-Brexit relationship. Students may note that this agreement will set the stage for the country‘s trade deals with other important partners like the United States, and of course, the general attractiveness of the country as an investment destination. Other students may note that defining ―net positive‖ is important. Some students may point out for example, that the United Kingdom was never quite as committed to the European Union as other member states like Germany, preferring for example to keep its own currency. This preference for independence and sovereignty has already been achieved, time will tell whether it was the right decision economically. Lecture Note: To extend the discussion, consider https://www.bbc.com/news/uk-politics-32810887 and https://www.government.nl/topics/brexit/brexit-where-do-we-stand. Video Note: To extend this discussion, consider UK: Anxious Times for Pre-Brexit Economy, Why Brexit May be the Best Thing for Britain, Why Brexit Uncertainty Means Companies Plan for the Worst, and UK & EU Announce Post Brexit Trade Deal Smoothing December 31 Departure in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT

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Geography Mapping Activity Summary This activity is designed to test the student‘s knowledge of geography. Questions related to chapter material are asked, requiring students to understand the topics and the locations of the countries involved. Activity Students are asked to respond to a series of question related to the geographic location of several countries. Class Discussion Understanding the geographic location of countries is essential to the understanding of international business. Ask students to discuss the implications of the geographic locations of the countries in this exercise on the subject matter.

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Continuous Case Concept A major point of contention in the KOREU Free Trade agreement that went into effect in 2011 between South Korea and the European Union was its impact on the auto industry, and especially on South Korean automakers. Hyundai Motor India for example, was worried that competition from its parent company could threaten sales in Europe. Europe is one of India‘s largest export markets for cars, and Hyundai Motor India relies on the market for over half of its sales. 

Ask students to consider the implications of trade agreements like the one between South Korea and the European Union. How can companies avoid being shut out of large markets like the European Union? Hyundai Motor India claimed that it would be virtually impossible for it to compete in Europe if the free trade agreement were implemented.

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Next, consider the benefits for companies like Hyundai of operating in the European Union or NAFTA/USMCA countries instead of individual markets. How does a single market environment affect issues such as product pricing, or the location of manufacturing? Should Hyundai Motor India consider shifting production to Europe?

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Finally, while most of the world‘s major players in the auto industry already have a presence in both North America and the European Union, consider what a common set of external trade policies means to companies like Hyundai Motor India that want to enter these markets. How does it affect the cost and choice of entry mode? What does it mean in terms of risk?

This Continuous Case Concept works well after students have been introduced to the notion of economic integration and understand the advantages and disadvantages of membership in a trade bloc.

Additional Readings and Sources of Information Africa‘s big new free trade agreement, explained https://www.washingtonpost.com/news/monkey-cage/wp/2018/03/29/the-countdown-to-the-africancontinental-free-trade-area-starts-now/?utm_term=.49412caab3c3 How Africa Is Building a $3 Trillion Free-Trade Future https://www.bloomberg.com/news/articles/2018-05-14/how-africa-is-moving-ahead-on-a-free-tradefuture-quicktake Brexit: All you need to know about the UK leaving the EU https://www.bbc.com/news/uk-politics-32810887 Brexit: Will the Borders Be Ready? https://www.bbc.com/news/55134903 UK Says Brexit Talks with EU Are In Their ―Last Week‖ https://apnews.com/article/business-brexit-global-trade-europe-a523fc2d76e731b8f5f21c10196b798c Free Trade Agreements/United States Trade Representative

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https://ustr.gov/trade-agreements/free-trade-agreements ―World Upside Down‖: As Trump Pushes Tariffs, Latin America Links Up https://www.nytimes.com/2018/03/18/world/americas/trump-trade-latin-america.html Latin America Looks Past the U.S. on Trade https://www.bloomberg.com/opinion/articles/2018-07-23/latin-america-looks-past-u-s-on-trade

Trump Just Signed the USMCA. Here‘s Whats in the New NAFTA https://www.nytimes.com/2020/01/29/business/economy/usmca-deal.html Summary of the Regional Comprehensive Economic Partnership Agreement

https://asean.org/summary-regional-comprehensive-economic-partnership-agreement/ Who Gains From RCEP, Asia‘s New Trade Pact?

https://www.economist.com/finance-and-economics/2020/11/21/who-gains-from-rcep-asiasnew-trade-pact 'Let's rebuild a strong EU-USA alliance', EU Chiefs Tell Joe Biden https://www.euronews.com/2020/11/24/let-s-rebuild-a-strong-eu-usa-alliance-eu-chiefs-tell-joebiden What Is TPP? Behind the Trade Deal That Died https://www.nytimes.com/interactive/2016/business/tpp-explained-what-is-trans-pacific-partnership.html

The Foreign Exchange Market Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Exchange Rates and the Profitability of Korean Airlines Introduction The Functions of the Foreign Exchange Market The Nature of the Foreign Exchange Market Economic Theories of Exchange Rate Determination Exchange Rate Forecasting Did you Know Video Clip: The Value Of The U.S. Dollar Fluctuates Significantly Against

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The Value Of The Euro Currency Convertibility 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Managing Foreign Currency Exposure at 3M APPLICATION-BASED ACTIVITY: UNDERSTANDING THE IMPACT OF CHANGING EXCHANGE RATES

Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 10.1 Describe the functions of the foreign exchange market. 10.2 Understand what is meant by spot exchange rates. 10.3 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. 10.4 Understand the different theories explaining how currency exchange rates are determined and their relative merits. 10.5 Identify the merits of different approaches toward exchange rate forecasting. 10.6 Compare and contrast the differences among translation, transaction, and economic exposure, and explain the implications for management practice.

Chapter Summary This chapter focuses on the foreign exchange market. At the outset, the chapter explains how the foreign exchange market works. Included in this discussion is an explanation of the difference between spot exchange rates and forward exchange rates. The nature of the foreign exchange market is discussed, including an examination of the forces that determine exchange rates. In addition, the author provides a discussion of the degree to which it is possible to predict exchange rate movements. Other topics discussed in the chapter include exchange rate forecasting, currency convertibility, and the implications of exchange rate movements on business. For instance, it is absolutely critical that international businesses understand the influence of exchange rates on the profitability of trade and investment deals. Adverse changes in exchange rates can make apparently profitable deals unprofitable.

Chapter Opening Activity Ask students to think about how far their money went the last time they traveled internationally. For example, for students in the United States who visited Canada or Mexico in the past two years, the U.S. dollar was quite strong. That is, their dollars purchased relatively more Canadian dollars (at a price of about 77¢ each) and Mexican pesos (at a price of about 5¢ each), which means that the U.S. dollar—and U.S. goods—are more expensive for Canadians and Mexicans. If students visited France, Germany, Spain, or any other country that is a member of the European Union a few years ago, the situation was different. In 2002, at the time the euro was adopted, each U.S. dollar purchased about €1.20. In December 2010, the dollar had fallen in value compared to the euro, and US$1 only bought €0.75. But in late 2018, U.S. $1 bought €0.89, and just £0.77 (British pound). That means U.S. visitors to Italy, France, Spain, or the UK may be encouraged to shop there, especially at the newest, most fashion-forward clothing companies such as Zara, because of the lower price of the Euro and the pound. Since the UK left the European Union in 2020, the British pound has dropped in value relative to the dollar and it now takes just $1.30 to buy one pound as compared to $1.50 in 2015. Ask students to visit one of several currency conversion websites http://www.xe.com/ucc

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and calculate how much a room at a Marriott International Hotel https://www.marriott.com/marriott/aboutmarriott.mi would cost today in U.S. dollars in the following cities:         

New York City, USA Glasgow, Scotland Frankfurt, Germany Mexico City, Mexico Tokyo, Japan Shanghai, China Bangkok, Thailand Buenos Aires, Argentina Dubai, United Arab Emirates

Chapter Outline

Exchange Rates and the Profitability of Korean Airlines opening case Summary The opening case discusses the impact of fluctuating exchange rates on two major South Korean airlines. Both Korean Airlines and Asiana Airlines have been hard hit by the drop in value of the Korean won relative to the U.S. dollar over the past two years. In 2018, the won-dollar exchange rate was $1.00 = won1,065. By 2020, the exchange rate was $1.00 = won1,200, a drop of about 12.5 percent. Because jet fuel is sold in U.S. dollars, costs for the two airlines have risen significantly. In addition, both airlines have dollar-denominated debt, which is attractive from an interest rate standpoint, but risky when the value of the won declines. The slowdown in travel related to the COVID-19 pandemic has put further stress on the two companies, and to make matters worse, it is expected that the won will continue to depreciate relative to the dollar. Discussion Questions 1. Discuss the impact of currency fluctuations on the price of jet fuel. Why is the price of jet fuel riskier for foreign airlines as compared to U.S. airlines? How can foreign airlines protect themselves from price fluctuations related to changing exchange rates? One of the biggest operating costs for an airline is jet fuel. Jet fuel is always sold in U.S. dollar terms making it a risky transaction for foreign airlines. Indeed, both Korean Airlines and Asiana Airlines have seen their jet fuel costs rise over the past two years as the value of the Korean won has fallen. While airlines typically try to lock in fuel prices in advance, foreign airlines must also contend with the possibility that their currencies will change in value when the contracts are due. Both Korean Airlines and Asiana Airlines have experienced this situation over the past two years. Students should recognize though, that had the won appreciated relative to the dollar, their

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jet fuel costs would have dropped. Both companies can try to limit their exposure to changes in exchange rates by using mechanisms such as forward contracts. 2. The COVID-19 pandemic dealt a further blow to South Korea‘s airlines as international travel ground to a virtual standstill and disruptions to global supply chains put a damper on economic growth. What are the implications of a continued depreciation in the value of the won for Korean Airlines and Asiana Airlines? Can the market continue to support both airlines? The COVID-19 pandemic has caused challenges for companies around the world. For the Korean airlines, the drop in passenger travel will certainly cause significant hardship as will rising jet fuel costs should the won continue to depreciate. The two airlines will also see higher costs on their dollar-denominated debt repayments. Because passenger revenue is so low and unlikely to recover any time soon, the companies will have little opportunity to increase revenues to offset their rising costs. Some students may wonder whether the two airlines should merge rather than continue to compete with each other. Students sharing this view might point out that merging would eliminate price competition and potentially allow for greater passenger revenue. In addition, combining fleets could allow for greater efficiency and allow the combined company to eliminate costly excess capacity. Lecture Note: To extend this case, consider http://www.businesskorea.co.kr/news/articleView.html?idxno=31885 and https://asia.nikkei.com/Business/Transportation/Asiana-bailout-Price-war-weak-economy-blightSouth-Korea-airlines.

CONNECT Case Analysis Exchange Rates and the Profitability of Korean Airlines Summary This activity focuses on understanding the implications of exchange rate movements for South Korea‘s two airlines. Both companies have suffered losses over the past two years as the Korean won has depreciated in value relative to the dollar. Activity Students are asked to read a short case on the challenges facing Korean Airlines and Asiana Airlines and then respond to a series of questions about the case. Class Discussion Understanding the implications of exchange rate fluctuations is important for managers. Discuss why the depreciating won is hurting profits for South Korea‘s airlines. How can the companies hedge against foreign exchange rate exposure?

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Introduction A) This chapter has three main objectives. The first objective is to explain how the foreign exchange market works. The second objective is to examine the forces that determine exchange rates and to discuss the degree to which it is possible to predict exchange rate movements. The third objective is to map the implications for international business of exchange rate movements and the foreign exchange market. B) The foreign exchange market is a market for converting the currency of one country into that of another country. C) The exchange rate is the rate at which one currency is converted into another.

The Functions of the Foreign Exchange Market A) The foreign exchange market serves two main functions. The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk (the adverse consequences of unpredictable changes in exchange rates). CONNECT Click and Drag Foreign Exchange Market Summary This activity focuses on the foreign exchange market. The foreign exchange market serves two main functions: to convert currencies and to provide some insurance against exchange rate risk. Activity Students are asked to match various descriptions with the correct type of exchange rate. Class Discussion International managers need to understand the difference between a spot exchange rate and a forward exchange rate. Pick a few currencies and compare the spot quotes to the 90-day forward quotes. Then discuss what the difference between the two quotes is likely to mean.

CONNECT Click and Drag Functions of Foreign Exchange Summary This activity focuses on the functions of the foreign exchange market. The foreign exchange market facilitates trade between countries, allowing for the exchange of one currency for another. The market also facilitates foreign investments and currency speculations. Activity

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Students are asked to match items related to functions of foreign exchange with their correct descriptions. Class Discussion Understanding the functions of the foreign exchange market is important for managers doing international business.

CONNECT Video Case Trump Deal with Mexico Targets Exchange Rates Summary This activity focuses on exchange rates and specifically on how exchange rates can impact a company‘s ability to import or export goods. Activity Students are asked to watch a video on exchange rates and then respond to a series of questions related to the video. Class Discussion International managers need to understand the relationship between exchange rates and trade. Discuss why the United States is concerned with the dollar/peso exchange rate. CURRENCY CONVERSION B) International businesses have four main uses of foreign exchange markets. First, the payments a company receives for its exports, the income it receives from foreign investments, or the income it receives from licensing agreements with foreign firms may be in foreign currencies. Second, international businesses use foreign exchange markets when they must pay a foreign company for its products or services in its country‘s currency. Third, international businesses use foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets. Finally, currency speculation is another use of foreign exchange markets. Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. Carry trade involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high. Teaching Tip: XE.com http://www.xe.com provides a real-time currency cross-rate chart and an option to do currency conversions. Video Note: To explore the recent conversion of Lithuania‘s currency to Euros, consider EU Neighbors: Lithuania Changes From Litas to Euros in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. INSURING AGAINST FOREIGN EXCHANGE RISK C) A second function of the foreign exchange market is to provide insurance to protect against the possible adverse consequences of unpredictable changes in exchange rates, or foreign exchange risk. Spot Exchange Rates D) The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. Spot rates change continually and are determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. Forward Exchange Rates E) A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. F) Rates for currency exchange are typically quoted for 30, 90, or 180 days into the future. Currency Swaps G) A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange rate risk.

CONNECT Case Analysis The Coffee Buzz: The Impact of Exchange Rates on Coffee Summary This activity focuses on the impact of exchange rates on the global coffee market. Activity Students are asked to read a short case on the impact of exchange rates on the coffee market and then respond to a series of questions about the case. Class Discussion Fluctuating exchange rates can have a very real impact on the competitiveness and profitability of a firm. What other industries are deeply impacted by currency fluctuations?

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management FOCUS: Embraer and the Gyrations of the Brazilian Real Summary This case describes the efforts by Brazilian aircraft maker Embraer to limit the impact of changing exchange rates on its revenues. Embraer is exposed to exchange rate fluctuations because the company prices its aircraft in U.S. dollars and then translates its revenues back into Brazilian reals. The company was negatively impacted in the mid-2002s by the appreciation of the real versus the dollar and later when efforts to minimize its exposure were foiled by the 2008 global financial crisis. Discussion Questions 1. Brazilian aircraft maker Embraer has been negatively impacted not only by its exposure to changing exchange rates, but also by its attempts to limit its exposure through the use of forward contracts. What options other than forward contracts might Embraer have used to limit its foreign exchange rate exposure? After experiencing a decline in its revenues when the Brazilian real appreciated versus the U.S. dollar in the early 2000s, Brazilian aircraft maker Embraer decided to try to minimize future exposure to real/dollar fluctuations using forward contracts. Embraer is exposed to exchange rate fluctuations because it prices its aircraft in dollars and then converts its revenues into reals. Embraer‘s forward strategy failed when during the 2008 global financial crisis, the dollar rose relative to the real, leaving Embraer on the losing side of its contracts. Many students will probably suggest that while Embraer was using a viable strategy to limit exchange rate exposure, a better option might be to focus on using its dollar earning to pay U.S. suppliers and invest in its U.S.-based operations and converting remaining dollars into reals when exchange rates are more favorable. 2. What does Embraer‘s experience tell you about the forward market? Could the company‘s losses in 2008 have been prevented? Do you agree with Embraer‘s decisions to stop using forward contracts? Most students will probably suggest that Embraer‘s experiences clearly indicate that it is essential that managers understand foreign exchange markets and the potential impact that exchange rate fluctuations can have on their earnings. Many students will likely agree that Embraer had the right idea prior to the 2008 global financial crisis when it implemented strategies designed to limit its exchange exposure, the conditions just changed very rapidly. Some students may contend that the 2008 crisis was a one-off and therefore the company should continue to try to limit its foreign exchange rate exposure through the forward market. Other students, however, may point out that world economy is more volatile today and the need for flexibility is important. Teaching Tip: For more information about Embraer, go to https://embraer.com/global/en.

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The Nature of the Foreign Exchange Market A) The foreign exchange market is not located in any one place. Rather, it is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. The most important trading centers are London, New York, Zurich, Tokyo, and Singapore. Two significant features of the market are 1) it never sleeps, and 2) high-speed computer linkages between trading centers around the globe have effectively created a single market. B) The exchange rates quoted worldwide are basically the same. If different U.S. dollar/Japanese yen rates were being offered in New York and Tokyo, there would be an opportunity for arbitrage and the gap would close. An illustrative example can be done showing how someone could make money through arbitrage (buying a currency low and selling it high), and how this would affect the supply and demand for the currencies in both markets to close the gap. C) The U.S. dollar frequently serves as a vehicle currency to facilitate the exchange of two other currencies.

Economic Theories of Exchange Rate Determination A) At the most basic level, exchange rates are determined by the demand and supply for different currencies. Most economic theories of exchange rate movements seem to agree that three factors have an important impact on future exchange rate movements in a country‘s currency: the country‘s price inflation, the country‘s interest rate, and market psychology. PRICES AND EXCHANGE RATES B) To understand how prices are linked to exchange rates, it is important to understand the law of one price. The Law of One Price C) The law of one price states that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. Purchasing Power Parity D) If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices. A less extreme version of the PPP theory states that given relatively efficient markets—that is, markets in which few impediments to international trade and investment exist—the price of a ―basket of goods‖ should be roughly equivalent in each country. Lecture Note: The Economist informally tests this theory every year using its ―Big Mac Index.‖ To see a recent example, go to https://www.economist.com/news/2020/07/15/the-big-mac-index.

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Money Supply and Price Inflation E) There is a positive relationship between the inflation rate and the level of money supply. When the growth in a country‘s money supply is greater than the growth in its output, inflation will occur. A country with a high inflation rate will see its currency depreciate. F) Simply put, PPP suggests that changes in relative prices between countries will lead to exchange rate changes. The empirical tests suggest that this relationship does hold in the long run, but not in the short run. While PPP assumes no transportation costs or barriers to trade and investment, it also assumes that governments do not intervene to affect their exchange rates. Empirical Tests of PPP Theory G) Extensive empirical testing of the PPP theory has not shown it to be completely accurate in estimating exchange rate changes.

country FOCUS: Quantitative Easing, Inflation, and the Value of the U.S. Dollar Summary This feature describes the process of quantitative easing and its implications for the economy. The injection of money into the market by the Federal Reserve in the fall of 2010 was designed to help stimulate the struggling U.S. economy. The move was criticized by those who felt the move would actually generate inflation and a falling dollar. Time proved the critics wrong, as the value of the currency remained virtually unchanged for several months. After pursuing further rounds of quantitative easing in 2011 through 2013, in 2014, the Federal Reserve indicated it would end the policy. By 2016, there was still no sign of a surge in inflation in the U.S. economy. Discussion Questions 1. What does the 2010 purchase by the Federal Reserve of $600 billion in U.S. government bonds tell you about U.S. fiscal policy? What was the Federal Reserve trying to accomplish? The decision by the Federal Reserve to purchase $600 billion in U.S. government bonds suggests that the United States was trying to expand the money supply. A larger money supply implies lower interest rates. Lower interest rates decrease the cost of borrowing and should therefore increase investment in the economy. Most students will recognize that the goal of the Federal Reserve was to stimulate the U.S. economy 2. Why did the Federal Reserve receive so much criticism for its policy of quantitative easing? Do you agree with the critics? Was the policy simply mercantilism in disguise? Critics claim that the decision by the Federal Reserve to increase the money supply via quantitative easing was actually a form of protectionism, and in particular, simply a mercantilist policy. According to critics, the Federal Reserve‘s policy would prompt a decline in the value of the U.S. dollar, making it easier for U.S. companies to export and harder for foreign companies

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to export their products to the United States. Most students will probably agree that the fears of the critics proved to be unfounded as the value of the dollar against a basket of major currencies remained virtually unchanged. Students will probably also note that the Federal Reserve stated that it would continue with its policy at least through 2014, which would indicate that it was satisfied with the results.

INTEREST RATES AND EXCHANGE RATES H) Interest rates also affect exchange rates. The Fisher Effect says that a country‘s nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). i=r+I I) The International Fisher Effect states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries. Stated more formally: (S1 – S2) / S2 × 100 = i$ – i¥ where i$ and i¥ are the respective nominal interest rates in two countries (in this case the U.S. and Japan), S1 is the spot exchange rate at the beginning of the period and S2 is the spot exchange rate at the end of the period. J) While interest rate differentials suggest future exchange rates, this appears to hold in the long run but not necessarily in the short run. Video Note: Will Falling Euro End Up Boosting Europe's Economy? explores the relationship between inflation, interest rates, and the Euro, and fits in well with this discussion. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. INVESTOR PSYCHOLOGY AND BANDWAGON EFFECTS K) Investor psychology and bandwagon effects can also influence exchange rate movements. Expectations on the part of traders can turn into self-fulfilling prophecies, and traders can join the bandwagon and move exchange rates based on group expectations. This is known as the bandwagon effect. While such changes can be important in explaining some short-term exchange rate movements, they are very difficult to predict. At times governmental intervention can prevent the bandwagon from starting, but at other times it is ineffective and only encourages traders. L) Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates. Consequently, international businesses should pay attention to countries‘ differing monetary growth, inflation,

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and interest rates. SUMMARY OF EXCHANGE RATE THEORIES M) Long-term exchange rate movements influence the long-term profitability of investments, export opportunities, and the price competitiveness of foreign imports. International businesses therefore, should pay attention to monetary growth, inflation, and interest rates in other countries.

Exchange Rate Forecasting A) A company‘s need to predict future exchange rate variations raises the issue of whether it is worthwhile for the company to invest in exchange rate forecasting services to aid decisionmaking. Two schools of thought address this issue. One school, the efficient market school, argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money. The other school of thought, the inefficient market school, argues that companies can improve the foreign exchange market‘s estimate of future exchange rates (as contained in the forward rate) by investing in forecasting services. THE EFFICIENT MARKET SCHOOL B) Many economists believe the foreign exchange market is efficient at setting forward rates. An efficient market is one in which prices reflect all available information. There have been a large number of empirical tests of the efficient market hypothesis. Although most of the early work seems to confirm the hypothesis (suggesting that companies should not waste their money on forecasting services), some recent studies have challenged it. THE INEFFICIENT MARKET SCHOOL C) An inefficient market is one in which prices do not reflect all available information. In an inefficient market, forward exchange rates will not be the best possible predictors of future spot exchange rates. If this is true, it may be worthwhile for international businesses to invest in forecasting services. Did You Know? Video Clip The video clip asks: ―Did you know that the value of the U.S. dollar fluctuates significantly against the value of the euro?‖ Discussion Questions 1. What does it mean to say that a currency has strengthened or weakened relative to another currency? If the dollar has strengthened relative to the euro, does a euro cost more, or less, in dollars terms?

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When a currency strengthens relative to another, for example the U.S. dollar has strengthened relative to the euro, it means that the dollar is worth more, and so it takes fewer dollars to buy one euro. 2. Why should exporters be concerned about currency fluctuations? Exporters need to be aware of foreign exchange rates because they can have a direct impact on their sales. If, for example, the dollar is strong relative to the euro, a U.S. exporter might find that sales drop as they become more expensive to European buyers. In contrast, a European exporter might find exports sales increasing as U.S. buyers need fewer dollars to buy the same amount of European goods. 3. Suppose you are planning a trip to Europe next summer. Are you better off with a weak dollar or a strong dollar? Assuming all else is equal, an American tourist in Europe would be better off with a strong dollar. A strong dollar will buy more euros, making hotels stays, restaurant visits, museum entrance fees, and so on, less expensive in dollar terms. Teaching Tip: See another view on the strength of the U.S. dollar at https://www.forbes.com/sites/simonmoore/2018/08/13/three-ways-the-strong-dollar-isimpacting-your-investment-portfolio-in-2018/#6e09d9e31a89 APPROACHES TO FORECASTING D) Two approaches to forecasting exchange rates are fundamental analysis and technical analysis. Fundamental Analysis E) Forecasters that use fundamental analysis draw upon economic theories to predict future exchange rates, including factors like interest rates, monetary policy, inflation rates, or balance of payments information. Technical Analysis F) Forecasters that use technical analysis typically chart trends, and believe that past trends and waves are reasonable predictors of future trends and waves. CONNECT Click and Drag Predicting Exchange Rate Movements Summary This activity focuses on fluctuations in currency values and specifically on predicting exchange rate movements. Movements in exchange rates can affect the short- and long-term profitability of a firm, its opportunities to export, individual transactions, and the overall competitiveness of the firm.

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Activity Students are asked to match various descriptions with whether they are better short-range predictors or long-ranger predictors of exchange rates. Class Discussion International managers need to be aware of exchange rate movements, what causes them, and what their potential impact on the firm is. Discuss current factors that are driving exchange rates.

Currency Convertibility A) Many currencies are not freely convertible into other currencies. A currency is said to be freely convertible when a government of a country allows both residents and non-residents to purchase unlimited amounts of foreign currency with the domestic currency. B) A currency is said to be externally convertible when non-residents can convert their holdings of domestic currency into a foreign currency, but when the ability of residents to convert currency is limited in some way. A currency is nonconvertible when both residents and nonresidents are prohibited from converting their holdings of domestic currency into a foreign currency. C) Free convertibility is the norm in the world today, although many countries impose some restrictions on the amount of money that can be converted. The main reason to limit convertibility is to preserve foreign exchange reserves and prevent capital flight (when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency). D) Countertrade refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. It can be used in international trade when a country‘s currency is nonconvertible. Teaching Tip: The Global Offset and Countertrade Association maintains a website (http://www.globaloffset.org) with information for those interested in countertrade.

360° VIEW: MANAGERIAL IMPLICATIONS Foreign Exchange Rate Risk A) First, it is absolutely critical that international businesses understand the influence of exchange rates on the profitability of trade and investment deals. Foreign exchange risk can be divided into three main categories: transaction exposure, translation exposure, and economic exposure. Transaction Exposure B) Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Translation Exposure C) Translation exposure is the impact of currency exchange rate changes on the reported financial statements of a company. Translation exposure is basically concerned with the present measurement of past events. Economic Exposure D) Economic exposure is the extent to which a firm‘s future international earning power is affected by changes in exchange rates. Economic exposure is concerned with the long-term effect of changes in exchange rates on future prices, sales, and costs. Reducing Translation and Transaction Exposure E) In addition to buying forward and using swaps, firms can minimize their foreign exchange exposure through leading and lagging payables and receivables (paying suppliers and collecting payment from customers early or late depending on expected exchange rate movements). F) A lead strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate. A lag strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate. Lead and lag strategies can be difficult to implement. Reducing Economic Exposure G) The key to reducing economic exposure is to distribute the firm‘s productive assets to various locations so the firm‘s long-term financial well-being is not severely affected by changes in exchange rates. In general, reducing economic exposure necessitates that the firm ensures its assets are not too concentrated in countries where likely rises in currency values will lead to damaging increases in the foreign prices of the goods and services they produce. Other Steps for Managing Foreign Exchange Risk H) To manage foreign exchange risk: 1) central control of exposure is needed to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies; 2) firms should distinguish between transaction and translation exposure on the one hand, and economic exposure on the other hand; 3) the need to forecast future exchange rates cannot be overstated; 4) firms need to establish good reporting systems so the central finance function can regularly monitor the firm‘s exposure position; and 5) the firm should produce monthly foreign exchange exposure reports. CONNECT Click and Drag Managing Exchange Rate Risks Summary This activity focuses on exchange rates and specifically on how to manage exchange rate risk. International managers need to understand the different types of exchange rate exposure and how to manage each type.

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Activity Students are asked to match various descriptions with the type of exchange rate risk they represent and how to best mitigate that risk. Class Discussion Understanding the various tools that can help a firm manage its exposure to exchange rates is important for international managers. Ask students to pick a company and research the impact of exchange rates on that company and recommend how to best manage exchange rate exposure.

CONNECT Case Analysis Managing Foreign Currency Exposure at 3M Summary This activity focuses on understanding the implications of fluctuating exchange rates on company earnings. Industrial giant 3M saw its pre-tax profits drop by more than $40 million in 2108 because of adverse exchange rate movements. Activity Students are asked to read a short case on the impact of fluctuating exchange rates on 3M and then respond to a series of questions about the case. Class Discussion For companies like 3M that earn a significant share of their revenues in foreign countries, understanding exchange rate movements and the risk they create is essential. Discuss the types of exchange rate risk facing 3M and the strategies managers can use to hedge against adverse movements.

CONNECT Video Case Did You Know? The Value of the U.S. Dollar Fluctuates Significantly Against the Value of the Euro Summary This activity focuses on understanding the implications of exchange rate movements on company earnings. Fluctuating exchange rates can have profound implications for organizations.

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Activity Students are asked to watch a short video on the value of the dollar against the euro and then respond to a series of questions about the video. Class Discussion Understanding exchange rate movements and the risk they create is essential for managers conducting business across borders. Discuss the different types of exchange rate risk and the strategies international managers can employ to protect from exchange rate risk.

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government securities with one-year maturity is 7 percent and the expected rate of inflation is 5 percent. The current spot exchange rate for Korea won is $1 = W1,200. Forecast the spot exchange rate one year from today. Explain the logic of your answer. Answer: From the Fisher effect, we know that the real interest rate in both the U.S. and South Korea is 2 percent. The international Fisher effect suggests that the exchange rate will change in an equal amount but opposite direction to the difference in nominal interest rates. Hence since the nominal interest rate is 3 percent higher in the U.S. than in South Korea, the dollar should depreciate by 3 percent relative to the South Korean Won. Using the formula from the book, (S1 – S2)/S2 × 100 = i$ – iWon, and substituting 7 for i$, 4 for iWon, and 1,200 for S1, yields a value for S2 of $1 = W1,165. 2. Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the U.S. is $2.80 per pound, and in Britain it is £3.70 per pound. a. According to PPP theory, what should the $/£ spot exchange rate be? b. Suppose the price of beef is expected to rise to $3.10 in the United States, and to £4.65 in Britain. What should the one-year forward dollar/pound exchange rate be? c. Given your answers to parts a and b, and given that the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Britain? Answer: a. According to PPP, the $/£ rate should be 2.80/3.70, or 0.76$/£. b. According to PPP, the $/£ one year forward exchange rate should be 3.10/4.65, or 0.67$/£. c. Since the dollar is appreciating relative to the pound, and given the relationship of the international Fisher effect, the British must have higher interest rates than the U.S. Using the formula (S1 – S2)/S2 × 100 = i£ – i$ we can solve the equation for i£, with S = 0.76, S = 0.67, I$ = 10, yielding a value of 23.4 percent for the British interest rates. 1

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3. Reread the Management Focus ―Embraer and the Gyrations of the Brazilian Real,‖ and then answer the following questions: a. What does the recent economic history of Brazil tell you about the relationship between price inflation and exchange rates? What other factors might determine exchange rates for the Brazilian real? b. Is a decline in value of the real against the U.S. dollar good for Embraer, bad for Embraer, or a mixed bag? Explain your answer. c. What kind of foreign exchange risks is Embraer exposed to? Can Embraer reduce these risks? How? d. Do you think Embraer's decision to try and hedge against further appreciation of the real in the early 2000s was a good decision? What was the alternative? e. Since 2008, Embraer has significantly reduced its dollar hedging operations. Is this wise? f. Between mid-2014 and early 2015, the real depreciated significantly against the U.S. dollar. What do you think the impact was on Embraer? Answer: a. The recent economic history of Brazil indicates that the relationship between price inflation and exchange rates is volatile. Typically, as price inflation increases, the strength of the Brazilian real weakens versus the U.S. dollar. The economic policy of the Brazilian national banking system could also play a role based on decisions related to the money supply. b. Students will have opinions about each facet of this question. A good aspect for Embraer is that the stock price is likely to increase. A bad aspect is that components which are supplied by U.S. firms would become more expensive. One could consider this situation a mixed bag, as well, since Embraer's revenues as expressed in reals would increase considerably, but this is based on the industry standard of pricing on the U.S. dollar. c. One risk facing Embraer is forward exchange risk. Embraer can reduce this risk by purchasing currency swaps. d. Given what we know, it is logical to presume that the decision was sound. However, there may be a few students who think it was not a good move as the question could arise as to the long-term strength and sustainability of such a currency appreciation. The alternative, of course, was to not hedge. However, given the trend, many would think that hedging was a sound strategy. e. Students may think this is a good move since the Brazilian real has depreciated in value. However, one must also consider that international nature of Embraer's operations. In specific, purchasing components from U.S. suppliers (as well as global industry pricing in U.S. dollars) could lead some to reconsider this strategy. f. Embraer's stock price increased substantially due to the conversion of U.S. dollars to Brazilian reals. However, costs from U.S. suppliers likely increased. Still, Embraer's prices on the market could have been more competitive, as well. 4. You manufacture wine goblets. In mid-June, you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in mid-December. You expect the yen to rise from its present rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6 percent a year. What should you do? Answer: The simplest solution would be to just wait until December, take the ¥400,000 and convert it at the spot rate at that time, which you assume will be $1 = ¥100. In this case, you

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would have $4,000 in mid-December. If the current 180 day forward rate is lower than 100¥/$, then it would be preferable since it both locks in the rate at a better level and reduces risk. If the rate is above ¥100/$, then whether you choose to lock in the forward rate or wait and see what the spot does will depend upon your risk aversion. There is a third possibility also. You could borrow money from a bank that you will pay back with the ¥400,000 you will receive (400,000/1.03 = ¥388,350 borrowed), convert this today to U.S.$ (388,350/130 = $2,987), and then invest these dollars in a U.S. account. For this to be preferable to the simplest solution, you would have to be able to make a lot of interest (4,000 – 2,987 = $1,013), which would turn out to be an annual rate of 51 percent ((1,013/4000) * 2). If, however, you could lock in these interest rates, then this method would also reduce any exchange rate risk. What you should do depends upon the interest rates available, the forward rates available, how large a risk you are willing to take, and how certain you feel that the spot rate in December will be ¥100 = $1. 5. You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take? Answer: This question deals with the risk faced by businesses related to changes in exchange rates. If the peso depreciates as expected peso relative to the dollar, the dollar value of the company‘s Mexican subsidiary would decrease substantially. This would then reduce the total dollar value of the firm‘s equity reported in its consolidated balance sheet, raising the apparent leverage of the firm, which could increase the firm‘s cost of borrowing and limit its access to the capital market. Most students will suggest that the company explore the use of forward contracts and swaps to protect itself from the currency movement for individual transactions. In addition, the company may want to engage in a lead strategy and collect its foreign receivables early.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 One of your company’s essential suppliers is located in Japan. Your company needs to make a 1-million Japanese yen payment in six months. Considering that your company primarily operates in U.S. dollars, you are assigned the task of deciding on a strategy to minimize your transaction exposure. Identify the spot and forward exchange rates between the two currencies. What factors influence your decision to use each? Which one would you choose? How many dollars must you spend to acquire the amount of yen required? Exercise 2 Sometimes analysts use the price of specific products in different locations to compare currency valuation and purchasing power. For example, The Economist’s Big Mac Index compares the purchasing power parity of many countries based on the price of a Big Mac. Using Google, locate the latest edition of this index that is accessible. Identify the five countries (and

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their currencies) with the lowest purchasing power parity according to this classification. Which currencies, if any, are overvalued?

Managing Foreign Currency Exposure at 3M closing case Summary The closing case explores the implications of changing currency values at 3M. With about 60 percent of its annual revenues coming from outside the United States, 3M is especially vulnerable to fluctuations in exchange rates. Indeed, 3M believes that adverse currency movements cost the company some $42 million in pretax profits in 2018, and $11 million in 2017. 3M uses various strategies to reduce its exchange rate risk including forward contracts and foreign currency debt. Case Discussion Questions 1. If the dollar appreciates in value against most other countries over the next year, what will the impact of this be on 3M? With sales spread across some 200 countries and about 60 percent of annual revenues coming from outside the United States, 3M is truly an international company. Students should recognize that a strong dollar decreases the dollar value of earnings in foreign currencies, while a weak dollar will have just the opposite effect. 2. If the dollar depreciates in value against most other countries over the next year, what will the impact be on 3M? 3M relies on revenues earned outside the United States for nearly two thirds of its total earnings. While it is unknown exactly how those revenues are earned, whether from exports from the United States, production within a foreign country, or exports from a foreign plant, 3M does report its earnings in U.S. dollars. A drop in the value of the dollar would imply a stronger foreign currency. It would then follow that when foreign revenues are converted from a strong foreign currency to a weak dollar, revenue would increase. Students might point out that if the dollar is weak relative to other currencies, exports from the United States would be cheaper in those foreign countries. 3M could capitalize on this situation and increase its exports from the United States. 3. Should 3M hedge against adverse movements on foreign exchange rates? How should it do this? With so much of its business taking place outside the United States and in a range of foreign currencies, it is important that 3M take action to protect itself from adverse exchange rate movements. 3M can use a variety of tools to hedge its foreign currency transactions. In the short term, 3M can use forward contracts, currency swaps, and lead/lag strategies. In the longer term, 3M could eliminate some of its exchange rate exposure by increasing domestic sales or by

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waiting to repatriate foreign currency profits until currency values are more favorable. Some students may suggest that developing flexible production strategies could also enable the company to shift production based on long term expectations of currency values. 4. Should it hedge all of its foreign exchange transactions, or just a subset? In 2018, 3M saw its pretax profits drop $42 million as a result of adverse exchange rate movements, highlighting the need for strategies to limit its foreign exchange exposure. Students may point out however, that with 60 percent of its revenues coming from foreign sources, it may be impractical and costly for 3M to hedge all foreign exchange transactions. Students may suggest focusing on bigger transactions, using a lead/lag strategy, and encouraging payments in dollars as a means of reducing the number of transactions that require hedging strategies like forward contracts. Lecture Note: For more information on 3M, consider https://www.3m.com/ https://www.forbes.com/sites/greatspeculations/2018/10/25/foreign-currency-headwindsdampen-outlook-for-3m/#49f3cb5b391b.

and

Video Note: To extend this discussion by looking at how other companies deal with foreign currency exposure, consider The Challenges Facing Swiss Watchmakers in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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Continuous Case Concept As the world‘s automakers search around the globe for the best suppliers for their parts, and at the same time, focus on new markets such as China and India, controlling for changes in exchange rates becomes an important part of their financial strategies. 

Ask students to identify the types of exposure to foreign exchange rates automakers are likely to encounter.



Then, ask students to develop a plan for controlling for the exposure. Discuss why a company might choose one hedging strategy over another. For example, Subaru is expanding its presence in the United States to capitalize on greater access to the U.S. market and the potential of a weaker dollar in the future. The company has also benefited from its hedging strategy to control for exposure to currency movements. In the past, several automakers including Honda, Nissan, and Toyota have struggled with a strong yen which has limited their ability to expand globally.



Finally, ask students to consider what exchange rates mean to companies that draw a significant percentage of their revenues from foreign countries. How do the strategies of these companies differ from those of companies that can rely on their domestic market for the majority of their sales?

This feature could be expanded into a mini-case by asking students to identify companies that have reported losses or gains due to exchange rate movements, and then, exploring the strategic responses of the firms involved.

APPLICATION-BASED ACTIVITY

UNDERSTANDING THE IMPACT OF CHANGING EXCHANGE RATES I. Introduction In this activity, you'll be participating in a meeting with several top executives from RedBucz, a German company that produces high tech equipment. The meeting has been called to decide how to present the company's financial situation at the upcoming meeting with shareholders. Despite having achieved record export sales and beating chief rival Big Blue, RedBucz has seen its profit margins impacted by changing currency values. Executives know that they will need to explain the current state of affairs and the strategies they plan to implement. They know that they will be facing intense scrutiny at the shareholder meeting in nine months so they want to be sure they fully understand the international monetary system and how the firm should navigate the challenges it presents. II. Learning Objectives

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1. Understand the evolution of the modern global monetary system and describe the role of the World Bank and the IMF. 2. Describe the differences between fixed and floating exchange rate systems. 3. Discuss financial crises and debate regarding the IMF's management of those crises. 4. Recognize the implications of the global monetary system for management practice. III. Scoring Dimensions

The following theoretical concepts from the chapter are covered and scored in the simulation: Theoretical Concepts

Percentage of Simulation

Evolution of the Monetary System and Role of World Bank and IMF Difference Between Fixed and Floating Exchange Rate Systems Financial Crises and IMF Role in Resolution

25%

Understanding Foreign Exchange Data

25%

25% 25%

IV. Follow-up Activity Five students can be assigned to take on the roles of Felix, Peter, Charlie, Jill, and Karla. Other students can be assigned to act as members of the board. Using their assigned identities, students can continue the role play as the team presents its findings to shareholders. Students taking on the role of shareholders should review the situation prior to the role play and be prepared to ask questions. Students can use a variety of sources to learn about current expectations on the direction of exchange rates and factors that could influence them. One option is https://www.imf.org/external/np/fin/ert/GUI/Pages/CountryDataBase.aspx. Following the role play, students should discuss the implications of fluctuating exchange rates for international companies. Students should recognize why understanding exchange rates, their evolution, and the international monetary system and its players is important in international business.

Additional Readings and Sources of Information Trump Now Says Strong Dollar Is Good, Yet Markets Beg to Differ https://www.bloomberg.com/news/articles/2020-04-18/trump-now-says-strong-dollar-is-goodyet-markets-beg-to-differ The Dollar Is on A Tear. Here's Why That's Troubling https://www.cnn.com/2020/03/20/investing/strong-dollar-coronavirus/index.html China Gives Market More Say in Setting Yuan‘s Value Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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https://www.wsj.com/articles/china-gives-market-more-say-in-setting-yuans-value-11603874015 Signs point to the Japanese yen getting even stronger as the U.S. dollar weakens https://www.cnbc.com/2018/02/27/japanese-yen-may-strengthen-as-dollar-weakens-morganstanley-and-ing.html Japan Government Calls for Stable FX, Seeks to Jawbone Strong Yen https://money.usnews.com/investing/news/articles/2018-02-13/japan-government-calls-forstable-fx-seeks-to-jawbone-strong-yen Foreign Exchange Risk https://www.export.gov/article?id=Trade-Finance-Guide-Chapter-14-Foreign-Exchange-FXRisk-Management New iPhones: Why Is Apple pricing the same in pounds and dollars? https://www.theguardian.com/technology/2017/sep/13/apple-iphone-x-launch-uk-prices-dollarparity Why a stronger dollar hurts corporate earnings https://www.cbsnews.com/news/why-a-stronger-dollar-hurts-corporate-earnings Greenback Weights On Corporate Profits https://www.wsj.com/articles/surging-greenback-weighs-on-corporate-profits-1538236800 Small UK Businesses Feel the Squeeze From Falling Sterling https://www.ft.com/content/a721b2e2-ae12-11e9-8030-530adfa879c2 How the Devaluation Of The Pound Has Affected British Business – For Better And For Worse https://www.telegraph.co.uk/business/2019/09/08/devaluation-pound-has-affected-britishbusiness-better-worse/ Brexit Once Meant a Weaker British Pound, but Not Anymore https://www.nytimes.com/2019/12/12/business/economy/uk-election-pound-markets.html

The International Monetary System Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline

Opening Case: Did the IMF Help Egypt?

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Introduction The Gold Standard The Bretton Woods System The Collapse of the Fixed Exchange Rate System The Floating Exchange Rate Regime Did You Know? Video Clip: The Turkish Lira Lost 40% of Its Value Against the U.S. Dollar During the First Nine Months of 2018 Fixed versus Floating Exchange Rates Exchange Rate Regimes in Practice Crisis Management by the IMF 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Pakistan Takes Another IMF Loan APPLICATION-BASED ACTIVITY: UNDERSTANDING THE IMPACT OF CHANGING EXCHANGE RATES

Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 11.1 Describe the historical development of the modern global monetary system. 11.2 Explain the role played by the World Bank and the IMF in the international monetary system. 11.3 Compare and contrast the differences between a fixed and a floating exchange rate system. 11.4 Identify exchange rate regimes used in the world today and why countries adopt different exchange rate regimes. 11.5 Understand the debate surrounding the role of the IMF in the management of financial crises. 11.6 Explain the implications of the global monetary system for management practice.

Chapter Summary The objective of this chapter is to explain how the international monetary system works and its implications for international business. The chapter begins by reviewing the historical evolution of the monetary system, starting with the gold standard and the Bretton Woods System. The chapter explains the role of the International Monetary Fund (IMF) and the World Bank, both of which were initiated by the Bretton Woods Conference. The fixed exchange rate system that was

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initiated by the Bretton Woods Conference collapsed in 1973. The majority of the chapter explains the workings of the current international monetary system. The pluses and minuses of fixed exchange rates versus floating exchange rates are discussed. Scholars differ regarding which system is best. The current role of the IMF and the World Bank are discussed, including the way the IMF has helped nations restructure their debts.

Chapter Opening Activity Ask students to think about how challenging it is for an SME to suddenly conduct business in a new currency. Consider a local firm: select one, or invent one and give it a name, such as Gamma Co., that has always issued quotes and received payment in British pounds, and suddenly it must prepare quotes in Mexican pesos and German euros for potential foreign customers. How does the company do this? How can it prepare quotes that assure that when it is paid, it will receive the price charged? Further, if Gamma Co. has to increase capacity at its home-country plant to meet the new demand placed on it by exports, how will it finance the new materials, equipment, and labor it needs? Will the local bank finance this increased capacity for international sales? Assuming Gamma Co. is paid on time, how will the additional income be accounted for and taxed? Must Gamma Co. pay taxes on the income it earns from selling in Germany and Mexico? Students may research international banking products that help business customers manage currency risk and commercial risk, and protect receivables. One international bank offering global trade services is JPMorgan Chase https://www.jpmorgan.com/solutions/treasurypayments/global-trade. U.S. students should research the U.S. Export-Import Bank, http://www.exim.gov, which is not a bank at all but a program of the federal government that provides trade financing solutions, such as export credit insurance, working capital guarantees, and guarantees of commercial loans to foreign buyers to help exporters of U.S. goods and services be successful in foreign markets.

Chapter Outline

Did the IMF Help Egypt? opening case Summary The opening case describes the currency crisis in Egypt and the efforts by the International Monetary Fund (IMF) to get the country back on track. Following a military coup in 2013, Egypt‘s new president Abdel Fatah al-Sissi promised to take steps to deal with the country‘s problems, but by 2016, the situation had gotten worse, not better. Face with high unemployment and inflation, large trade and budget deficits, and huge public debt, Egypt turned to the IMF for help. The IMF agreed to lend Egypt up to $12 billion provided the country implemented various reforms designed to devalue the Egyptian pound, improve the country‘s trade deficit, end subsidies, and increase the efficiency of public enterprises. Discussion Questions 1. What caused the currency crisis in Egypt?

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Egypt‘s economic problems date back many years but have intensified more recently as the country‘s tourism sector all but collapsed following the downing of a Russian passenger jet. The incident was linked to the Islamic State. Tourism is an important source of foreign currency for Egypt, bringing in the funds used to pay for key commodities like sugar. Concerns about rising terrorist activities also prompted companies to reconsider plans for foreign direct investment in Egypt or pull existing investments out. Without a steady source of foreign currency, Egypt was unable to make payments on its significant debt. While the country had traditionally turned to its neighbors in the Persian Gulf for help, a collapse in oil prices had left those countries in a more precarious state, and unable to lend Egypt the money it needed. By mid-2016, Egypt was forced to go to the IMF for help. 2. What is the goal of the reforms demanded by the IMF in exchange for a loan of up to $12 billion? Can Egypt turn its economy around? When the IMF agreed to loan Egypt up to $12 billion, it demanded that in exchange, the country implement various reforms. In keeping with its general goal of linking loans to reforms designed to get a country‘s economy back on track, the IMF required, among other things, that Egypt allow its currency to float. The idea was that doing so would result in a rapid depreciation of the Egyptian dollar, which would then serve to make imports more expensive, exports less expensive, and in turn, generate an inflow of much needed foreign currency. Students may suggest that even if the reforms required by the IMF are effective, the country remains dependent on its tourism sector for economic growth and foreign currency. Continued terrorist activity will make it difficult for this sector to return, as will the COVID-19 pandemic. Students may conclude therefore, that at least in the short term, Egypt will remain in a fragile state, making foreign investment also a risky proposition. Lecture Note: To extend this case discussion, consider https://www.theguardian.com/world/2013/may/16/egypt-worst-economic-crisis-1930s and https://www.cia.gov/library/readingroom/docs/CIA-RDP88T00096R000100020003-7.pdf.

CONNECT Case Analysis Did the IMF Help Egypt? Summary This activity focuses on Egypt‘s currency crisis and the efforts by the International Monetary Fund (IMF) to help the country stabilize its economy. The IMF agreed to loan Egypt up to $12 billion provided that the country adopt numerous reforms. Activity Students are asked to read a short case on Egypt‘s currency crisis and then respond to a series of questions related to the case.

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Class Discussion Discuss Egypt‘s currency crisis and the IMF‘s efforts to help the country stabilize its economy. What led to the country‘s crisis? How will the reforms required by the IMF help? What are the implications of the reforms for companies considering an investment in Egypt?

Introduction A) The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates. When the foreign exchange market determines the relative value of a currency, that country is adhering to a floating exchange rate. The world‘s four major trading currencies—the U.S. dollar, the European Union‘s euro, the Japanese yen, and the British pound—are all floating currencies. B) A pegged exchange rate means that the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate. C) A managed-float system or dirty-float occurs when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency. D) Countries that adopt a fixed exchange rate system fix their currencies against each other. Prior to the introduction of the euro, some European Union countries operated with fixed exchange rates within the context of the European Monetary System (EMS). CONNECT Click and Drag The Evolution of the Global Monetary System Summary This activity focuses on the international monetary system. The global monetary system has evolved in response to the needs of governments, international companies, and currency traders. Activity Students are asked to match developments in the evolution of the global monetary system to the correct spot in the timeline. Class Discussion Understanding the evolution of the global monetary system can help international managers better understand the system and how it operates. Discuss the institutions that comprise the international monetary system and their role within it.

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CONNECT Click and Drag Understanding Exchange Rates Summary This activity focuses on exchange rates. Companies that have business in or with other countries are affected by changing exchange rates. Activity Students are asked to match arguments for and against various exchange rate systems. Class Discussion Understanding how exchange rates are determined is essential for international business managers. Changing exchange rates have a direct impact on the profitability of an international company. Discuss how current fluctuations in a country‘s currency occur, for example, the British pound following the Brexit vote, and what that means to companies doing business with that country.

The Gold Standard A) The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value—a practice that stretches back to ancient times. As the volume of international trade increased, governments agreed to convert paper currency into gold on demand at a fixed rate. Lecture Note: To extend this discussion, consider asking students to list to the NPR podcast on the demise of the Gold Standard. For the podcast link, go to https://www.npr.org/sections/money/2011/02/18/133874462/the-friday-podcast-gold-standard-ri-p. MECHANICS OF THE GOLD STANDARD B) The practice of pegging currencies to gold and guaranteeing convertibility is known as the gold standard. For example, under the gold standard one U.S. dollar was defined as equivalent to 23.22 grains of fine (pure) gold. C) The exchange rate between currencies was determined based on how much gold a unit of each currency would buy. The amount of a currency needed to purchase one ounce of gold was referred to as the gold par value. STRENGTH OF THE GOLD STANDARD D) The great strength claimed for the gold standard was that it contained a powerful mechanism for simultaneously achieving balance-of-trade equilibrium (when the income a country‘s residents earn from its exports is equal to the money its residents pay for imports) by all countries.

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THE PERIOD BETWEEN THE WARS: 1918–1939 E) The gold standard worked fairly well from the 1870s until the start of World War I. Trying to spur exports and domestic employment, a number of countries started regularly devaluing their currencies, with the end result that people lost confidence in the system and started to demand gold for their currency. This put pressure on countries' gold reserves and forced them to suspend gold convertibility. F) By the start of World War II, in 1939, the gold standard was dead.

The Bretton Woods System A) In 1944, at the height of World War II, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system. With the collapse of the gold standard and the Great Depression of the 1930s fresh in their minds, these statesmen were determined to build an enduring economic order that would facilitate postwar economic growth. The agreement reached at Bretton Woods established two multinational institutions—the International Monetary Fund (IMF) and the World Bank. The task of the IMF was to maintain order in the international monetary system and that of the World Bank would be to promote general economic development. B) The U.S. dollar was the only currency to be convertible to gold, and other currencies would set their exchange rates relative to the dollar. Devaluations were not to be used for competitive purposes, and a country could not devalue the currency by more than 10 percent without IMF approval. THE ROLE OF THE IMF C) The aim of the Bretton Woods agreement, of which the IMF was the main custodian, was to try to avoid a repetition of the chaos that occurred between the wars through a combination of discipline and flexibility. Teaching Tip: More information on the IMF is available at http://www.imf.org. Students can click on ―About the IMF‖ to get an overview of the IMF and its activities. Discipline D) A fixed exchange rate regime imposes discipline in two ways. First, the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment. Second, a fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation. Flexibility E) Although monetary discipline was a central objective of the Bretton Woods agreement, it was recognized that a rigid policy of fixed exchange rates would be too inflexible. The IMF stood ready to lend foreign currencies to members to tide them over during short periods of balance-ofpayments deficits, when a rapid tightening of monetary or fiscal policy would hurt domestic employment.

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CONNECT Video Case Talk of a Weak Dollar Has Divided Opinion at Davos Summary This activity focuses on the international monetary system and in particular its institutions. The International Monetary Fund (IMF) is responsible for maintaining order in the international monetary system. Activity Students are asked to watch a video on the international monetary system and then respond to a series of questions related to the video. Class Discussion International managers need to understand the role of the IMF in the international monetary system. Discuss recent efforts by the IMF and their implications for companies. THE ROLE OF THE WORLD BANK F) The official name of the World Bank is the International Bank for Reconstruction and Development (IBRD). The bank lends money under two schemes. Under the IBRD scheme, money is raised through bond sales in the international capital market. Borrowers pay what the bank calls a market rate of interest—the bank's cost of funds plus a margin for expenses. A second scheme is overseen by the International Development Agency (IDA), an arm of the bank created in 1960. IDA loans go only to the poorest countries. Teaching Tip: More information on the World Bank can be accessed at http://www.worldbank.org. Click on ―Data‖ or ―Research‖ to pull information on World Bank activities.

The Collapse of the Fixed Exchange Rate System A) The collapse of the exchange rate system established in Bretton Woods can be traced to U.S. macroeconomic policy decisions from 1965 to 1968. Under President Johnson, the U.S. financed huge increases in welfare programs and the Vietnam War by increasing its money supply, leading to significant inflation. B) Speculation that the dollar would have to be devalued relative to most other currencies, as well as underlying economics and some forceful threats by the U.S., forced other countries to increase the value of their currencies relative to the dollar C) The key problem with the Bretton Woods system was that, since the dollar was the base currency, the system relied on an economically well-managed United States. When the United States began to print money, run high trade deficits, and experience high inflation, the system was strained to the breaking point

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The Floating Exchange Rate Regime A) The floating exchange rate regime that followed the collapse of the fixed exchange rate system was formalized in January 1976 when IMF members met in Jamaica and agreed to the rules for the international monetary system that are in place today. THE JAMAICA AGREEMENT B) The purpose of the Jamaica meeting was to revise the IMF's Articles of Agreement to reflect the new reality of floating exchange rates. The three main elements of the Jamaican agreement include the following:   

Floating rates were declared acceptable. Gold was abandoned as a reserve asset. Total annual IMF quotas—the amount member countries contribute to the IMF—were increased to $41 billion. Since then, they have been increased to $311 billion and membership in the IMF has expanded to 184 countries.

EXCHANGE RATES SINCE 1973 C) Since March 1973, exchange rates have become much more volatile and far less predictable than they were between 1945 and 1973. The volatility has been partly due to a number of unexpected shocks to the world monetary system including:        

The oil crisis in 1971 The loss of confidence in the dollar that followed the rise of U.S. inflation in 1977–1978 The oil crisis of 1979 The unexpected rise in the dollar between 1980 and 1985 The rapid fall of the U.S. dollar against the Japanese yen and German deutsche mark between 1985 and 1987, and against the yen between 1993 and 1995 The partial collapse of the European Monetary System in 1992 The 1997 Asian currency crisis The global financial crisis of 2008–2010 and the sovereign debt crisis in the European Union during 2010–2011

Did You Know? Video Clip The video clip asks: ―Did you know that the Turkish lira lost 40% of its value against the U.S. dollar during the first nine months of 2018?‖

Discussion Questions 1. Why did Turkey‘s president, Racep Erdogan, pressure banks to keep interest rates in Turkey at artificially low levels? What were the implications of the policy? The pressure on banks by Turkey‘s president Recep Erdogan to keep interest rates at artificially low levels has been disastrous. The low rates initially seemed to be a good thing for the economy, as

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companies, lured by cheap credit, made huge investments. However, the low interest rates also resulted in high inflation and a huge budget deficit. Foreign investors, watching the situation in Turkey become more precarious, began pulling out their investments in early 2018. This resulted in a rapid depreciation of the Turkish lira and significant economic challenges as companies saddled with too much debt or dollardenominated debt filed for bankruptcy. 2. How can Turkey get its economy back on track? The low interest rate policy pursued by Turkish President Erdogan was initially popular as it resulted in significant economic growth. Now though, the country needs to allow interest rates to rise to stabilize the value of the lira and the economy as a whole. Pursuing a policy of higher interest rates is not popular however, and President Erdogan is resistant to implementing one. 3. Why were Turkish companies holding dollar denominated debt especially hard hit by the plunge in the lira? The value of the Turkish lira dropped by 40 percent in just the first nine months of 2018 as the Turkish economy unraveled. For Turkish companies holding dollar denominated debt, the drop in the value of the lira was especially painful as they now needed 40 percent more money to service their debts.

Lecture Note: To learn more about Turkey‘s lira crisis, consider https://www.bbc.com/news/topics/c6xkk152803t/turkish-lira-crisis and https://www.reuters.com/article/us-turkey-economy-lira-analysis/analysis-turkeys-neweconomic-chiefs-need-new-crisis-playbook-idUSKBN27P2OW. Video Note: To explore economic instability related to exchange rates in another country, Greece, consider Eyes on Greek Instability as Euro Plunges to Nine Year Low in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues.

Fixed versus Floating Exchange Rates A) The breakdown of the Bretton Woods system has not stopped the debate about the relative merits of fixed versus floating exchange rate regimes. THE CASE FOR FLOATING EXCHANGE RATES B) The case for floating exchange rates has two main elements: monetary policy autonomy and automatic trade balance adjustments. Monetary Policy Autonomy

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C) It is argued that a floating exchange rate regime gives countries monetary policy autonomy. Under a fixed system, a country's ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity. Advocates of a floating exchange rate regime argue that removal of the obligation to maintain exchange rate parity restores monetary control to a government. Trade Balance Adjustments D) Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, IMF approval was needed for a currency devaluation. Critics of this system argue that the adjustment mechanism works much more smoothly under a floating exchange rate regime.

Crisis Recovery E) Advocates of floating exchange rates argue that exchange rate adjustments can help a country deal with economic crises. The devaluation of a currency that typically follows a currency crisis promotes export-led economic growth. Critics point out, however, that the devalued currency also causes import prices to rise and consequently increases inflation. THE CASE FOR FIXED EXCHANGE RATES F) The case for fixed exchange rates rests on arguments about monetary discipline, uncertainty, and the lack of connection between the trade balance and exchange rates. Monetary Discipline G) The need to maintain a fixed exchange rate parity ensures that governments do not expand their money supplies at inflationary rates. Speculation H) Critics of a floating exchange rate regime also argue that speculation can cause fluctuations in exchange rates. A fixed exchange rate system limits the destabilizing effects of speculation. Uncertainty I) Speculation also adds to the uncertainty surrounding future currency movements that characterizes floating exchange rate regimes, and can negatively affect the growth of international trade and investment. Trade Balance Adjustments and Economic Recovery J) Those in favor of floating exchange rates argue that floating rates help adjust trade imbalances. WHO IS RIGHT? K) There is no real agreement as to which system is better. We do, however, know that a fixed exchange rate regime modeled along the lines of the Bretton Woods system will not work. It is telling that speculation ultimately broke the system, a phenomenon that advocates of fixed rate regimes claim is associated with floating exchange rates. Nevertheless, a different kind of fixed exchange rate system might be more enduring and might foster the kind of stability that would

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facilitate more rapid growth in international trade and investment. Lecture Note: In uncertain times, calls for a return to the gold standard are not uncommon. To extend this discussion, consider https://www.npr.org/2016/06/16/482279689/trump-favors-returning-to-the-goldstandard-few-economists-agree.

Exchange Rate Regimes in Practice A) A number of different exchange rate policies are pursued around the world. Twenty-one percent of IMF members follow a free float policy, 23 percent a managed-float system, and 5 percent have no legal tender of their own (excludes the European Union countries that have adopted the euro). The remaining countries use less flexible systems, such as pegged arrangements, or adjustable pegs.

country FOCUS: China‘s Exchange Rate Regime Summary This feature describes the development of China's monetary policy over time. The Chinese yuan was pegged to the U.S. dollar at a fixed exchange rate for most of its history. However, after opening to foreign trade and investment in the 1980s, the yuan was devalued so the country could be a more competitive exporter. By 2005, there was a general consensus that the Chinese currency was undervalued. As a result, the country introduced a managed floating exchange rate system. This allowed the yuan to appreciate against foreign currencies. After a general slowdown in the Chinese economy and a subsequent depreciation of the yuan in late 2015, the government's monetary policy led to the purchase of the country's currency with U.S. dollars to maintain the value of the yuan and prevent many Chinese companies for going bankrupt. These actions reduced China‘s foreign exchange reserves to $3.011 trillion by January 2017, the lowest level since 2012. As of March 2020, the dollar-yuan exchange rate was about 7 yuan to the dollar compared to 6.0875 yuan per dollar in 2015. Discussion Questions 1. Explain the managed floating exchange rate system that China introduced in July 2005. Why was it introduced? The managed floating exchange rate system introduced by China set the yuan to a set of foreign currencies that included the U.S. dollar, the euro, the Japanese yen, and the British pound. The daily exchange rate was permitted to float within 0.3 percent of the central parity. This rate was expanded to 0.5 percent in 2007, 1 percent in 2012, and 2 percent in 2014. This system was introduced because there was concern that China's currency, using a fixed exchange rate policy, was undervalued. 2. Have the Chinese artificially depressed the value of the yuan as some have claimed in the United States? Explain your position. The evidence indicates that since 2015, China has allowed the yuan to appreciate versus foreign

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currencies, spending more than $1 trillion in 2016, although by 2018, the yuan was dropping again versus the dollar. In general though, the managed-float system introduced has allowed the currency to appreciate considerably against other major world currencies. Lecture Note: To extend this case discussion, consider https://money.cnn.com/2018/06/28/investing/china-currency-yuan-trade-war/index.html.

PEGGED EXCHANGE RATES B) Under a pegged exchange rate regime a country will peg the value of its currency to that of another major currency. There is some evidence that adopting a pegged exchange rate regime does moderate inflationary pressures in a country. CURRENCY BOARDS C) A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.

Crisis Management by the IMF A) With the introduction of the floating rate system and the emergence of global capital markets, many of the original reasons for the IMF's existence have disappeared. Financial difficulties have not disappeared, however, and the IMF has found a way to grow and redefine its mission. Video Note: Greek Budget Crisis Could Stagnate U.S. Recovery fits in well with this discussion. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. FINANCIAL CRISES IN THE POST-BRETTON WOODS ERA B) A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend the prevailing exchange rate. C) A banking crisis refers to a situation in which a loss of confidence in the banking system leads to a run on the banks, as individuals and companies withdraw their deposits. D) A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt.

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country FOCUS: The IMF and Iceland's Economic Recovery Summary This feature describes the economic crisis in Iceland in 2008. In the years prior to the crisis, Iceland‘s banks grew through international expansion financed by debt. When, because of the global financial crisis in 2008, the banks were unable to refinance their debt, the banks went into bankruptcy sending the economy into a nosedive. To stem the fall, Iceland turned to the IMF for assistance. Thanks to the IMF and other foreign loans, Iceland has been able to begin to turn its economy around. The low value of the krona helped spark an export-led economic recovery. In 2013, Iceland‘s economy grew at 4 percent and its unemployment rate continued to fall. Discussion Questions 1. What type of exchange rate system does Iceland follow? Explain how this system helped the country to recover from the 2008–2009 global financial crisis. Iceland follows a floating exchange rate. This system actually helped the country recover from its financial crisis in 2008. As a result of the global financial crisis and the ensuing banking crisis in Iceland, the value of the Icelandic krona dropped significantly. While the lower krona made imports more expensive, it also allowed the country‘s exporters to be more competitive in global markets. Higher exports sparked the country‘s economic recovery. 2. How would you characterize the financial crisis in Iceland in 2008? Was it a currency crisis, a banking crisis, or a foreign debt crisis? Explain your response. Most students will recognize that Iceland experienced a banking crisis in 2008. A banking crisis refers to a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits. The banking crisis occurred after the heavily indebted Icelandic banks found that they could not refinance their debt during the 2008 global financial crisis and were therefore facing bankruptcy. Lecture Note: To extend this case discussion, consider https://www.ft.com/content/ea3dbe58-097e-11e797d1-5e720a26771b, https://www.bloomberg.com/opinion/articles/2018-09-25/iceland-found-anotherway-to-clean-up-a-financial-crisis, and https://www.brookings.edu/wpcontent/uploads/2018/02/benediktsdottirtextfa17bpea.pdf.

E) The causes of the financial crisis that erupted across Southeast Asia during the fall of 1997 were sown in the previous decade when these countries were experiencing unprecedented growth. F) Huge increases in exports, and hence the incoming funds, helped fuel a boom in commercial and residential property, industrial assets, and infrastructure. As the volume of investments

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ballooned during the 1990s, often at the bequest of national governments, the quality of many of these investments declined significantly. G) Investments made on the basis of unrealistic projections about future demand conditions created significant excess capacity. These investments were often supported by dollar-based debts. When inflation and increasing imports put pressure on the currencies, the resulting devaluations led to default on dollar-denominated debts. A final complicating factor was that by the mid-1990s although exports were still expanding across the region, so were imports. H) The Asian meltdown began in mid-1997 in Thailand when it became clear that several key Thai financial institutions were on the verge of default. Following the devaluation of the Thai Baht, wave after wave of speculation hit other Asian countries. These devaluations were largely driven by similar factors to those that underlay the earlier devaluation of the Thai Baht. A combination of excess investment, high borrowings, much of it in dollar-denominated debt, and a deteriorating balance of payments position. EVALUATING THE IMF’S POLICY PRESCRIPTIONS I) By 2016, the IMF had programs in more than 30 countries that were struggling with economic and currency crises. All IMF loan packages come with conditions attached, generally a combination of tight macroeconomic policy and tight monetary policy. Teaching Tip: To explore current issues at the International Monetary Fund in more depth, go to http://www.imf.org. Inappropriate Policies J) The IMF‘s policies have recently come under fire. One criticism is that the IMF‘s ―one-sizefits-all‖ approach to macroeconomic policy is inappropriate for many countries. Lecture Note: To extend this discussion, consider https://www.brookings.edu/blog/futuredevelopment/2020/04/14/the-world-economy-in-2020-the-imf-gets-it-mostly-right/. Moral Hazard K) A second criticism of the IMF is that its rescue efforts are exacerbating a problem known to economists as moral hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong. Lecture Note: To extend this discussion, consider https://www-cdn.oxfam.org/s3fspublic/file_attachments/bp-great-expectations-imf-inequality-101017-en.pdf and https://www.forbes.com/sites/francescoppola/2018/10/28/the-imf-has-learned-nothing-from-thegreek-crisis/#1f2f0f2e6f3c. Lack of Accountability L) The final criticism of the IMF is that it has become too powerful for an institution that lacks any real mechanism for accountability. Observations

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M) As with many debates about international economics, it is not clear which side has the winning hand about the appropriateness of IMF policies.

360° VIEW: MANAGERIAL IMPLICATIONS Currency Management, Business Strategy, and Government Relations A) The managerial implications of the material discussed in this chapter fall into three main areas: currency management, business strategy, and corporate-government relations. Currency Management B) An obvious implication with regard to currency management is that companies must recognize that the foreign exchange market does not work quite as depicted in Chapter 10. The current system is a managed-float system in which government intervention can help drive the foreign exchange market. Companies need to be aware of this and adjust their foreign exchange transactions accordingly. C) A second message contained in this chapter is that under the present system, speculative buying and selling of currencies can create volatile movements in exchange rates. Business Strategy D) The volatility of the present floating exchange rate regime presents a conundrum for international businesses. Exchange rate movements are difficult to predict, and their movement can have a major impact on the competitive position of businesses. One response to the uncertainty that arises from a floating exchange rate regime might be to build strategic flexibility to minimize the economic exposure of the firm.

management FOCUS: Airbus and the Euro Summary This feature describes how Airbus is protecting itself from exchange rate fluctuations. French aircraft maker Airbus prices its planes in dollars. However, because over half the company‘s costs are in euros, the company has the potential to see significant fluctuations in its earnings if it does not hedge its foreign exchange exposure. The following questions can help in the discussion of the feature. Discussion Questions 1. What type of foreign exchange exposure does Airbus face? How can Airbus protect itself from its exposure to changing exchange rates? How does the company‘s switch to more U.S. suppliers help the company? Students should easily recognize the transaction exposure facing Airbus. Some students will

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point out that economic exposure is also a problem for the company. Airbus can hedge its transaction exposure in the foreign exchange markets using forward contracts, however to manage its economic exposure, the company is trying to reduce its costs by shifting to American suppliers, and asking European suppliers to price in dollars. 2. Airbus has asked its European-based suppliers to start pricing in U.S. dollars. What does Airbus hope to gain by this request? What does it mean for suppliers? Airbus‘ decision to ask suppliers to price their components in dollars is an effort to control exchange rate risk. The company prices its planes in dollars, but was paying for components in a variety of currencies. By shifting to a strictly dollar run business, the company not only consolidates all of its transactions and so hedges its exposure more easily and cheaply, it also increases the proportion of its costs that are in dollars. For American suppliers, the shift to pricing in dollars is beneficial because it eliminates exchange rate risk. For other suppliers however, the shift may mean an introduction of exchange rate risk. Teaching Tip: Students can learn more about Airbus by going to the company‘s website at http://www.airbus.com/en. Lecture Note: To extend the discussion about Airbus, consider https://www.bbc.com/news/business-53242272 and https://www.bloomberg.com/news/articles/2020-10-06/airbus-unveils-new-business-jet-insearch-of-corporate-demand.

Corporate-Government Relations E) As major players in the international trade and investment environment, businesses can influence government policy towards the international monetary system. International businesses should use their influence to promote policy decisions that facilitate the growth of international trade and investment.

CONNECT Case Analysis A Business’s Strategic Choice Summary This activity focuses on the international monetary system and the choices that businesses make within that context. Firms should be aware of the risks involved with exchange rates as they make strategic choices. Activity Students are asked to read a short case on exchange rates and then respond to a series of questions related to the case.

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Class Discussion Understanding the impact of fluctuating exchange rates on a business is important for international managers. Companies must assess exchange rate risk as they make strategic decisions. Discuss how companies can assess their exposure to changing exchange rates.

CONNECT Case Analysis Pakistan Takes Another IMF Loan Summary This activity focuses on the IMF‘s role in the international monetary system and the impact of its efforts to help countries in crisis. Years of mismanagement by Pakistan‘s leaders forced the country to seek a loan from the IMF in 2019. As a condition of the loan, the IMF has demanded that Pakistan implement a number of reforms. Activity Students are asked to read a short case on Pakistan‘s crisis and IMF bailout and then respond to a series of questions related to the case. Class Discussion Discuss how countries like Pakistan fall into such economic distress that they are forced to request assistance from the IMF. How are the conditions attached to bailouts designed to help restore order to a country‘s economy?

CONNECT Video Case Did You Know? The Turkish Lira Lost 40% of Its Value Against the U.S. Dollar During the First Nine Months of 2018 Summary This activity focuses on the value of the Turkish lira relative to the U.S. dollar. Government pressure to keep the value of the lira at artificial levels have created significant problems for the Turkish economy and resulted in a dramatic fall in value for the lira. Activity Students are asked to watch a short video on the fluctuations of the lira and then respond to a series of questions about the video. Class Discussion Understanding exchange rate movements and their implications for business is important for

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international managers. Discuss the reasons for the drop in the Turkish lira and what it means for Turkey and for companies doing business there.

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Why did the gold standard collapse? Is there a case for returning to some type of gold standard? What is it? Answer: The gold standard worked reasonably well from the 1870s until the start of World War I in 1914, when it was abandoned. During the war, several governments financed their massive military expenditures by printing money. This resulted in inflation, and by the war's end in 1918, price levels were higher everywhere. Several countries returned to the gold standard after World War I. However, the period that ensued saw so many countries devalue their currencies that it became impossible to be certain how much gold a currency could buy. Instead of holding onto another country's currency, people often tried to exchange it into gold immediately, lest the country devalue its currency in the intervening period. This put pressure on the gold reserves of various countries, forcing them to suspend gold convertibility. As a result, by the start of World War II, the gold standard was dead. The great strength of the gold standard was that it contained a powerful mechanism for simultaneously achieving balance-of-trade equilibrium by all countries, as explained in the example provided in the textbook. This strength is the reason for reconsidering the gold standard as a basis for international monetary policy. 2. What opportunities might current IMF lending policies to developing nations create for international businesses? What threats might they create? Answer: Current IMF lending policies require recipient countries to implement government reforms to stabilize monetary policy and encourage economic growth. One of the principal ways for a developing nation to spur economic growth is to solicit foreign direct investment and to provide a hospitable environment for the foreign investors. These characteristics of IMF lending policies work to the advantage of international businesses that are looking for investment opportunities in developing countries. 3. Do you think the standard IMF policy prescriptions of tight monetary policy and reduced government spending are always appropriate for developing nations experiencing a currency crisis? How might the IMF change its approach? What would the implications be for international businesses? Answer: Critics argue that the tight macroeconomic policies imposed by the IMF in the recent Asian crisis were not well suited to countries that were not suffering from excessive government spending and inflation, but instead from a private-sector debt crisis with inflationary undertones. Anti-inflationary monetary policies and reductions in government spending usually result in a sharp contraction of demand, at least in the short run. In the longer term, the policies can promote economic growth and expansion of demand, which creates opportunities for international business.

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4. Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of an international business, what are the most important criteria in a choice between the systems? Which system is the more desirable for an international business? Answer: The case for fixed exchange rates rests on arguments about monetary discipline, speculation, uncertainty, and the lack of connection between the trade balance and exchange rates. In terms of monetary discipline, the need to maintain fixed exchange rate parity ensures that governments do not expand their money supplies at inflationary rates. In terms of speculation, a fixed exchange rate regime precludes the possibility of speculation. In terms of uncertainty, a fixed rate regime introduces a degree of certainty in the international monetary system by reducing volatility in exchange rates. Finally, in terms of trade balance adjustments, critics question the closeness of the link between the exchange rate and the trade balance. The case for floating exchange rates has two main elements: monetary policy autonomy and automatic trade balance adjustments. In terms of the former, it is argued that a floating exchange rate regime gives countries monetary policy autonomy. Under a fixed rate system, a country‘s ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity. In terms of the later, under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, the IMF would agree to a currency devaluation. Critics of this system argue that the adjustment mechanism works much more smoothly under a floating exchange rate regime. They argue that if a country is running a trade deficit, the imbalance between the supply and demand of that country‘s currency in the foreign exchange markets will lead to depreciation in its exchange rate. An exchange rate depreciation should correct the trade deficit by making the country‘s exports cheaper and its imports more expensive. It is a matter of personal opinion in regard to which system is better for an international business. We do know, however, that a fixed exchange rate regime modeled along the lines of the Bretton Woods system will not work. Nevertheless, a different kind of fixed exchange rate system might be more enduring and might foster the kind of stability that would facilitate more rapid growth in international trade and investment. 5. Imagine that Canada, the United States, and Mexico decide to adopt a fixed exchange rate system. What would be the likely consequences of such a system for (a) international businesses and (b) the flow of trade and investment among the three countries? Answer: In theory, a fixed exchange rate system similar to the ERM of the European Monetary System should impose monetary discipline, remove uncertainty, limit speculation, and promote trade and investment among member countries. Therefore, for international businesses, such a system should be positive, and the three countries should see increased trade and investment. However, it is important to consider the challenges of linking the economies of diverse nations. Some students may point out for example, that the full implications of Greece‘s 2010 financial crisis on the other countries in the euro zone are still unknown. 6. Reread the Country Focus ―The IMF and Iceland‘s Economic Recovery,‖ and then answer the following questions: a. What were the main causes of Iceland's economic troubles in 2008?

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b. Was Iceland facing a classic currency crisis, or was this a banking crisis? c. How did Iceland recover from its 2008–2009 crisis? What are the important lessons to draw from this case? d. Iceland did not implement the austerity policies that are so often associated with IMF loans, and yet the economy recovered. Does this suggest that austerity policies do not work? Answer: a. Iceland‘s economic troubles were rooted in its banking industry. The country‘s three biggest banks attempted to expand too rapidly and essentially got tripped up when the global financial crisis hit. Much of the over-expansion by the banks was short-term debt-based that required regular refinancing. However, when the financial markets froze in 2008, refinancing was no longer an option for the banks and they fell into bankruptcy. b. A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate. A banking crisis refers to a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits. The crisis in Iceland was a banking crisis. c. The IMF helped to stabilize Iceland‘s financial system with a $10 billion loan. Iceland also was able to benefit from the significant depreciation of its currency, the krona, which dropped to about half its former value, boosting exports and reducing imports. Export revenues helped boost Iceland‘s economy, which in turn, helped to reduce unemployment. d. This question is likely to generate some discussion among students. Some will probably point out that Iceland was in a different situation from many countries that require IMF assistance in that its economy fell into crisis virtually overnight. Moreover, Iceland‘s crisis was based on the over-extension of its major banks rather than a corrupt government as is the case in many countries that receive IMF assistance. Some students may also suggest that the country had a viable export industry in place prior to the crisis, an industry that benefited from the sudden drop in the value of the krona. Lecture Note: To learn more about Iceland‘s recovery from its crisis, consider https://www.bbc.com/news/business-35485876. 7. Reread the Country Focus ―China‘s Exchange Rate Regime,‖ and then answer the following questions: a. Why do you think that the Chinese historically pegged the value of the yuan to the U.S. dollar? b. Why did the Chinese move to a managed-float system in 2005? c. What are the benefits that China might gain by allowing the yuan to float freely against other major currencies such as the U.S. dollar and the euro? What are the risks? What do you think they should do? d. Is there any evidence that the Chinese kept the level of their currency artificially low in the past to boost exports? Is China keeping it artificially low today? e. What policy stance should the United States and the EU adopt toward China with regard to how it manages the value of its currency?

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Answer: a. Most students will probably suggest that the United States has been a central force in the global economy for much of the last century and a central figure in the international monetary system as well. Therefore, pegging the value of the yuan to the dollar probably made sense because it implied that the value of the yuan would follow lock-step with the value of the dollar, a more stable currency. b. China‘s export-led economy was booming in the 2000s, prompting calls for a revaluation of its exchange rate system. In 2005, China moved from its practice of pegging the yuan to the dollar to a managed-float system. Under the new regime, China fixed its exchange rate against a basket of currencies including the U.S. dollar, the euro, the Japanese yen, and the British pound. The yuan was permitted to float within a 0.3 percent band of parity. This band was gradually increased over time to 2 percent in 2014. c. Responses to this question will vary by student. Some students might argue that if China really wants to claim a position as a leader in the global economy, it needs to act like one and allow its currency to float freely against others. Other students might suggest that if the country allows its currency to float, it will avoid the criticism that it is deliberately trying to keep its currency undervalued. d. Donald Trump‘s assertions that China is keeping its currency artificially low to boost exports is not borne out by the facts. Instead, data show that China has actually been doing just the opposite. Since 2005, China has allowed its currency to rise against other currencies. Even during the 2015 economic slowdown in China, the country continued to try to maintain the value of its currency by buying yuan on the open market. e. Responses to this question will vary by students, but most will probably suggest that the EU and the United States should demand that China play fairly. Some students may suggest that playing fairly requires China to move from its managed-float system to let the yuan float freely against other currencies. Lecture Note: To extend the discussion on China‘s policy toward its currency, consider https://www.cnbc.com/2020/10/23/prepare-for-more-volatility-in-the-chinese-yuan-regulatorsays.html and https://www.npr.org/2019/08/11/749655951/a-u-s-china-currency-war-what-youneed-to-know.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 The Global Financial Stability Report is a semiannual report published by the International Capital Markets division of the International Monetary Fund. The report includes an assessment of the risks facing the global financial markets. Locate and download the latest report to get an overview of the most important issues currently under discussion. Also, download a report from five years ago. How do issues from five years ago compare with financial issues identified in the current report? Exercise 2 An important element to understanding the international monetary system is keeping updated on current growth trends worldwide. A German colleague told you yesterday that Deutsche Bank Research provides an effective way to stay informed on important topics in international finance from a European perspective. One area of focus for the site is emerging markets and economic and financial challenges

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faced by these markets. Find an emerging market research report for analysis. On which emerging market region did you choose to focus? What are the key takeaways from your chosen report?

Pakistan Takes Another IMF Loan closing case Summary The closing case explores the balance of payments crisis in Pakistan that forced the country to accept a $6 billion loan package from the IMF in 2019. Pakistan‘s rising trade deficit forced the country to use foreign exchange reserves to pay for imports, drawing down the reserves from $19 billion in 2018 to less than $7 billion in 2019. Pakistan‘s rupee was devalued by about 37 percent, but even with the significant depreciation of the rupee, export sales failed to increase, and inflation began rising. Without the IMF bailout, Pakistan would have been in serious economic crisis. Case Discussion Questions 1. Pakistan seems to have persistent economic problems. Why do you think this is the case? Most students will probably attribute Pakistan‘s continuing economic woes to mismanagement by its leaders and too much influence from the military. Misguided policies by Pakistan‘s leaders over the years has resulted in high levels of debt. Serving this debt, together with annual expenditures on the military, amounts to more than half the country‘s national budget. The budget crisis has been exacerbated by the country‘s commitments to China‘s Belt and Road Initiative. 2. What are the conditions attached to the current IMF bailout designed to achieve? If implemented correctly, do you think they will improve Pakistan‘s finances?

Pakistani Prime Minister Imran Khan was reluctant to go to the IMF for a bailout because he knew the conditions of an IMF would be unpopular in his country. While the situation in Pakistan made it necessary to accept the IMF‘s offer, along with the requirements to fix the country‘s tax system, reduce government spending especially on the military, raise interest rates, and privatize state run organizations, many students will probably suggest that there will be some opposition to actually achieving the reforms. Even so, students may note that while these conditions may be unpopular, they could be important for a successful economy in the long term. 3. The U.S. dollar exchange rate fell from $1 = 142 rupees to $1 = 163 rupees in the immediate aftermath of the IMF bailout deal being announced. What is the likely impact of this currency devaluation of the Pakistani economy? In theory, the devaluation of the rupee should decrease imports and increase Pakistan‘s exports bringing in much needed foreign currency. However, students may note that without reforms to other areas including cutting military spending and eliminating state subsides, Pakistan‘s economy will likely continue to struggle.

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4. Given that Pakistan has already had 12 prior IMF bailouts, what confidence do you have that this bailout will produce the desired results? Should the IMF continue to give funds to countries like Pakistan that seem unable to solve their structural economic problems? Many students will be skeptical about the likelihood that Pakistan will follow through on the reforms requested by the IMF as a condition of its most recent loan to the country. Students will certainly point out that the 2019 loan is just the latest in a series of loans from the IMF, and so far, Pakistan does not have a good track record on achieving economic reform. Some students may suggest that the decision by the IMF to continue to bail out the country even as it ignores the conditions attached to the loans it receives sends a message that the IMF is not serious about reforms it asks of loan recipients. Students may note however, that failing to provide assistance to a country on the verge of collapse would have implications for other countries as well, potentially destabilizing the international monetary system as a whole, leaving the IMF with little choice in the matter. 5. The Chinese Belt and Road initiative has resulted in Pakistan being heavily indebted to China. Does China have an obligation to help Pakistan here? Students may be divided on this question. China‘s Belt and Road Initiative is a massive undertaking designed to upgrade failing infrastructure across 65 countries in Asia and parts of Eastern Europe. When completed, the initiative should serve to facilitate greater trade and economic development. Pakistan‘s commitment to the effort included various road and power plant investments, financed to the tune of $60 billion by China. Some students may argue that the loans from China are no different than loans from any other country, even though they were taken as part of the country‘s commitment to the Belt and Road Initiative, and that therefore, China has no particular obligation to help the country. Other students, however, may contend that Pakistan may have been pressured into taking part in the initiative and in doing so, became indebted to China. Students sharing this view may conclude that while the infrastructure projects create jobs and economic development in Pakistan, the country was clearly not in a position to take on such large amounts of debt, and so China does have an obligation to work with the country to reduce its obligations. 6. Why do rescue packages of this nature matter to an international business doing business in the country, or considering doing so? Countries requesting bailout packages from the IMF are typically on the verge of complete collapse having exhausted all other options. For most companies, the uncertainty of doing business in that type of environment is to risky. A bailout from the IMF along with the reforms required for the loan, provide a path forward, lending clarity that might make it easier for companies to assess their risk levels in the country. However, it is important to keep in mind that just because a country has agreed to make reforms, there is no certainty that it will follow through. In Pakistan‘s case, for example, while it is too early to know whether the reforms required by the IMF will have their intended effect, there is some concern that public resentment over the austerity measures could prompt the government to reject some or all of them.

Lecture Note: To extend this discussion, consider https://www.imf.org/en/News/Articles/2019/07/03/pr19264-pakistan-imf-executive-boardapproves-39-month-eff-arrangement and https://www.forbes.com/sites/panosmourdoukoutas/2019/07/25/imf-will-either-make-or-breakkahns-pakistan/?sh=56dc36643703. Video Note: To extend the discussion of the IMF, consider Largarde Takes Lead of IMF at Key Moment for Global Economy. Find it in the International Business Library at

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http://bit.ly/MHEIBVideo.

Continuous Case Concept China is currently a hot market for automakers. Companies see the market as being one of the world‘s most significant markets in the next decade and are shifting production to China. Some companies are even developing cars specifically for the local market. However, pressure on China to revalue its currency could change the nature of the market. 

China has been under pressure to allow the yuan to appreciate relative to major trading currencies. Ask students to consider the strategic implications of a stronger Yuan for the auto companies. Do any of the companies benefit from a stronger Yuan? Do consumers?



Next, ask students to consider the effects a floating Yuan might have on the industry. Is it beneficial for companies producing in China? Why or why not?

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Finally, if China moves to a floating regime, should the auto companies move their production from other locations in the world to China? Why or why not?

This feature can be used at the beginning of the discussion of the international monetary system. The feature also works well as a conclusion to the material presented in the chapter and can help students understand the opportunities and threats for companies related to exchange rate movements.

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APPLICATION-BASED ACTIVITY

III. Scoring Dimensions The following theoretical concepts from the chapter are covered and scored in the simulation: Theoretical Concepts Percentage of Simulation Evolution of the Monetary System and Role of World Bank and IMF Difference Between Fixed and Floating Exchange Rate Systems Financial Crises and IMF Role in Resolution

25%

Understanding Foreign Exchange Data

25%

25% 25%

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could influence them. One option is https://www.imf.org/external/np/fin/ert/GUI/Pages/CountryDataBase.aspx. Following the role play, students should discuss the implications of fluctuating exchange rates for international companies. Students should recognize why understanding exchange rates, their evolution, and the international monetary system and its players is important in international business.

Additional Readings and Sources of Information China‘s Yuan Is Rallying Sharply Against the Dollar — And Analysts Say There‘s Room to Run https://www.cnbc.com/2020/09/18/yuan-rallies-against-dollar-analysts-say-it-could-strengthenfurther.html Turkey Faces Currency Crisis as Lira Nears Record Lows. https://www.nytimes.com/2020/07/28/business/turkey-faces-currency-crisis-as-lira-nears-recordlows.html The Strange Worry Over China Devaluing the Yuan https://www.adamsmith.org/blog/the-strange-worry-over-china-devaluing-the-yuan Risk of Chinese Currency Devaluation Rises with Latest Tariffs Threat https://www.wsj.com/articles/risk-of-chinese-currency-devaluation-rises-with-latest-tariffs-threat1529431116 Pakistani Rupee Becomes S. Asia‘s Best Performing Currency as Indian Rupee Continues to Fumble https://eurasiantimes.com/pakistani-rupee-becomes-s-asias-best-performing-currency-as-indian-rupeecontinues-to-fumble/ IMF: ‗Less Severe‘ But ‗Still Deep‘ Recession Predicted https://news.un.org/en/story/2020/10/1075282 Venezuela Central Bank Is Preparing Fresh Data for the IMF https://www.bloomberg.com/news/articles/2018-11-15/venezuela-central-bank-is-said-to-prepareupdated-data-for-imf IMF‘s Lagarde Says Central Banks Could Issue Digital Money https://www.bbc.com/news/business-46203869 Strengthening the International Monetary System https://www.imf.org/en/News/Articles/2017/03/08/SP030817-Strengthening-the-International-MonetarySystem Creation of the Bretton Woods System https://www.federalreservehistory.org/essays/bretton_woods_created Egypt VS Coronavirus: The Pound Faces A War of Attrition, Not Crisis https://www.theafricareport.com/29607/egypt-vs-coronavirus-the-pound-faces-a-war-of-attrition-notcrisis/

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Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Geely: China‘s First Global Car Company Introduction Strategy and the Firm Global Expansion, Profitability, and Profit Growth Cost Pressures and Pressures for Local Responsiveness Choosing a Strategy Did You Know? Video Clip: The Iconic Swedish Car Company Volvo Is Now Owned By A Chinese Automobile Maker Strategic Alliances 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Red Bull: A Leader in International Strategy Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 12-1 Explain the concept of international business strategy. 12-2 Recognize how firms can profit by expanding globally. 12-3 Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice. 12-4 Identify the different international strategies for competing and their pros and cons. 12-5 Explain the pros and cons of using strategic alliances to support international strategies.

Chapter Summary This chapter focuses on the strategies that firms use to compete in foreign markets. At the outset, the chapter reviews the reasons that firms engage in international commerce, which range from earning a greater return from distinctive skills to realizing location economies by dispersing particular value creation activities to locations where they can be performed most efficiently. A major portion of the chapter is dedicated to the pressures that international firm's face for cost reductions and local responsiveness. These pressures place conflicting demands on firms. On the one hand, cost reductions are best achieved through product standardization and economies of scale. On the other hand, pressures for local responsiveness require firms to modify their products to suit local demands. The chapter also discusses the four basic strategies that firms utilize to compete in international markets. These strategies include global standardization, localization, transnational, and international strategies. The advantages and disadvantages of each of these strategies are discussed. The chapter concludes with a discussion of international strategic alliances.

Chapter Opening Activity Ask students if they‘ve traveled internationally, and if they‘ve seen and used any products or services there that they recognize from their home country: in the U.S., that could mean McDonald‘s, Coca-Cola, Burger King, Starbucks, Midas Muffler, Hertz, or Avis.   

Ask if their experience with the product or the service was the same in the foreign country as it was at home. What differences did they experience? Why? Explain that this is part of a company‘s international strategy, and that companies have to make choices between global integration and local responsiveness. Ask them to research one or several of those companies and find out how they respond to local customers‘ wants and needs, while keeping the company globally integrated. A Google search for the companies‘ websites is a quick method.

Ask students about some other companies: Dannon, Michelin, Nestlé, and Bayer. Did they know that Dannon, the yogurt maker (actually Danone), and Michelin, are French; that Nestlé is Swiss, and that Bayer is a German chemical company that invented aspirin?

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

Explain that they may not have known because those companies do a very good job adapting to local customer needs such that consumers are often unaware that they are actually foreign companies.

Chapter Outline

Geely: China‘s First Global Car Company opening case Summary The opening case explores the acquisition of Sweden‘s Volvo by Chinese giant Geely, now the second largest private automobile manufacturer in China. Geely made the decision to acquire Volvo in an effort to gain the engineering and design skills it needed to successfully compete in the auto industry. So far, the acquisition has been a huge success. Geely has been able to combine Volvo‘s brand allure along with its engineering design skill with its own prowess as a manufacturer. Today, Volvos are designed, engineered, and tested in Sweden, and then manufactured in China or the United States. Discussion Questions 1. Why did Geely choose to acquire the design and engineering skills it needed to compete in the auto industry rather than develop those skills itself? When it initially ventured into the auto industry, Geely spent significant time and effort trying to develop its own cars, but with little success. By acquiring Volvo, Geely instantly acquired what it had been unable to develop itself and was able to rapidly move to market with a line of attractive, well-engineered vehicles with a well-recognized brand name. This allowed Geely to quickly become a significant player in China‘s car industry. Without the acquisition, it would have taken Geely much longer to bring a line of competitive vehicles to market, time that would have limited its ability to break into the market. 2. China is now the largest market for Volvo. How would you characterize Volvo today? Is it a Chinese company or a Swedish company? What are the implications of your response for sales of Volvos outside of China? Many students will conclude that because it is owned by a Chinese company, Volvo is also Chinese. Other students though may contend that while Geely acquired Volvo, it is still very much a Swedish company and with all design, engineering, and testing taking place in Sweden, it is Chinese only in terms of its manufacturing. Still other students may point out that with some manufacturing taking place in the United States, the brand can claim to be Made in America. Students may suggest that for people who view the company as being a Chinese, rather than a European company, the Volvo brand has diminished. Other students though will disagree, noting that every automaker manufactures at least some of their products in low-cost locations like Mexico, and that for Volvo, this is essentially what is happening.

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3. How does Geely‘s strategy of producing the Volvo brand in both China and the United States benefit the company? Geely‘s strategy to produce its vehicles in both China and the United States offers the company flexibility in manufacturing and distribution. By diversifying production, Geely is able to largely serve the market in North American from its South Carolina plant, and focus on its domestic market via its operations in China. This type of diversification could facilitate manufacturing and distribution during disruptive situations such a trade dispute or other unexpected events like the COVID-19 pandemic. Some students might also note that by serving the U.S. market from South Carolina, Geely can attract customers who might prefer domestically made products. Other students might point out that Geely‘s U.S. presence could be important in better understanding the U.S. consumer. Lecture Note: To extend this discussion and explore what makes the relationship between Geely and Volvo work so well, consider https://www.forbes.com/sites/pamelaambler/2018/01/23/volvo-geely-the-unlikely-marriage-ofswedish-tech-and-chinese-manufacturing-might-that-earned-record-profits/#59fd72dd4ecc. Lecture Note: To learn more about Geely‘s ambitions to become a global player in the auto industry, consider https://www.reuters.com/article/us-autos-geely-volvo-focus/fuelled-by-volvo-chinas-geelyseeks-launchpad-to-enter-auto-giant-orbit-idUSKCN256001. Teaching Tip: To learn more about the evolution of strategy at Volvo, consider Volvo Cars CEO: It’s Important to Build in the U.S in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Geely: China’s First Global Car Company Summary This activity focuses on strategy in the international firm, specifically on international strategy at Geely. Geely, as part of its strategy to become a player in the global auto industry, acquired the Volvo brand from Ford in 2010. Activity Students are asked to read a short case on Geely and then respond to a series of questions related to the case. Class Discussion

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It is important for international managers to understand the concept of value creation as the cornerstone of a successful international strategy. Discuss how Geely competes in the international marketplace. Why was it important for Geely to acquire a well-known brand like Volvo?

Introduction A) The primary concern so far in this book has been with aspects of the larger environment in which international businesses compete. Now, our focus shifts from the environment to the firm itself and to the actions managers can take to compete more effectively as an international business.

Strategy and the Firm A) A firm‘s strategy can be defined as the actions that managers take to attain the goals of the firm. Profitability can be defined as the rate of return the firm makes on its invested capital. Profit growth is the percentage increase in net profits over time. VALUE CREATION B) The way to increase profitability is to create more value. In general, the more value customers place on the firm‘s products, the higher the price the firm can charge for those products. C) The value created by a firm is measured by the difference between V (the price that the firm can charge for a product given competitive pressures) and C (the costs of producing the product). D) Firms can increase their profits in two ways: by adding value to a product so that customers are willing to pay more for it or by lowering the costs. Thus, there are two basic strategies for improving a firm‘s profitability: a differentiation strategy and a low-cost strategy.

CONNECT Video Case Raytheon CEO on Business Strategy, Opportunities, and International Growth Summary This activity focuses on international strategy at Raytheon. Managers need to understand the different strategies that can be used to compete, their advantages and drawbacks, and the factors that influence strategic choice. Activity Students are asked to watch a video on international strategy and then respond to a series of questions related to the video. Class Discussion Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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International managers need to understand how the actions they take influence how the company will compete in the international marketplace. Discuss international strategy, global expansion, profitability and profit growth, and the choice of strategy.

CONNECT Click and Drag Strategy and the Firm Summary This activity focuses on the choices managers make as they choose how their organization will compete. Managers must pursue strategies that increase the profitability of the organization and its growth over time. Activity Students are asked to match descriptions related to the choices a firm makes to the organization‘s strategy, operations, or organization. Class Discussion Expanding into foreign markets can boost a firm‘s profitability and growth. Making the choices of how to best execute an expansion requires the organization to understand the competing demands in the marketplace. Discuss the variables that might influence a firm‘s choice of strategy. STRATEGIC POSITIONING E) Michael Porter notes that it is important for a firm to be explicit about its choice of strategic emphasis on value creation and low cost, and to configure its internal operations to support that strategic emphasis. F) A central tenet of the basic strategy paradigm is that in order to maximize its long-run return on invested capital, a firm must do three things: (a) pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice; (b) configure its internal operations so that they support that position; and (c) make sure that the firm has the right organization structure in place to execute its strategy. Lecture Note: Today‘s fast-moving, hyper-competitive marketplace requires technology companies to continually reassess their position in the market and innovate to stay relevant. To extend this discussion, consider http://fortune.com/2018/09/24/business-strategy-technologymckinsey. Video Note: Why Tesla Is Betting Big With A Shanghai Gigafactory fits in well with this discussion. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

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management FOCUS: AB InBev, Beer Globally, and Creating Value Summary This management focus feature describes the global strategy and foundation of AB InBev. Originating in Belgium in 1366 and the United States in 1852, the company has operations in 25 countries and sales in over 100 countries. AB InBev has more than 200 brands with some holding the status of global brands, others are international brands, and still more brands are considered local champions. The overall perspective of AB InBev‘s global strategy is ―DreamPeople-Culture,‖ which indicates that the company aims to operate as one company with one dream and one organizational culture uniting them, despite operating worldwide in many different national cultures. Discussion Questions 1. AB InBev categorizes its brands into at least three categories: global brands, international brands, and local champions. Discuss the differences across these three different types of brands. The global brands of Budweiser, Corona, and Stella Artois have a strong presence worldwide and are considered leaders in the beer industry. The international brands of Beck‘s, Leffe, and Hoegaarden, for instance, do not take this stance and instead have a more focused, multi-country approach. Meanwhile, local champions such as Jupiler (Belgium), Quilmes (Argentina), and Harbin (China) have superior standing in local markets. 2. Discuss the domain of the six zone presidents. Why do you think AB InBev divided duties in this fashion? The six zone presidents have responsibility for Latin America South, Latin America North, Asia Pacific, North America, Mexico, and Europe. The division of North America, Europe, and Asia Pacific is to be expected, as these are three main regions of international commerce. Interestingly, Latin America is divided into multiple zones: Mexico, Latin America North, and Latin America South. Students may propose that there may be distinct differences between Latin American regions necessitating this division. Others may indicate that there may be specific brands that are resident and/or most popular in specific regions, as well. Teaching Tip: To learn more about AB InBev and its brands in foreign markets, go to https://www.ab-inbev.com/our-brands.html. Lecture Note: To learn more about AB InBev‘s strategy, https://www.marketingweek.com/2018/06/06/ab-inbev-making-the-company-famous.

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Video Note: Consider expanding this discussion by exploring AB InBev‘s strategy in China at https://www.cnbc.com/2017/12/07/anheuser-busch-inbev-ceo-on-growth-in-the-premium-beermarket-in-china.html.

OPERATIONS: THE FIRM AS A VALUE CHAIN G) It is useful to think of the firm as a value chain composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities as primary activities and support activities (see Figure 12.4 in the text). Video Note: Norsk Hydro CFO Sees Strong Demand in U.S., China fits in well with this discussion. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. Primary Activities H) The primary activities of a firm are creating the product, marketing and delivering the product to buyers, and providing support and after-sale service to the buyers of the product. Support Activities I) Support activities provide the inputs that allow the primary activities of production and marketing to occur. The logistics function controls the transmission of physical materials through the value chain—from procurement through production and into distribution. The efficiency with which this is carried out can significantly reduce the cost of creating value. Organization: The Implementation of Strategy J) The strategy of a firm is implemented through its organization. The term organization architecture can be used to refer to the totality of a firm‘s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people (see Figure 12.5 in the text). K) Organizational structure means three things. First, the formal division of the organization into subunits; second, the location of decision-making responsibilities within that structure; and third, the establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams and or pan-regional committees. L) Controls are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits. Incentives are the devices used to reward appropriate managerial behavior. Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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M) Processes are the way decisions are made and work is performed within the organization. Organizational culture is the norms and value systems that are shared among the employees of an organization. Finally, by people we mean not just the employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and their skills, values, and orientation. Strategic Fit N) In sum, for a firm to attain superior performance and earn a high return on capital, its strategy must make sense given market conditions (see Figure 12.6 in the text).

Global Expansion, Profitability, and Profit Growth A) Firms that operate internationally are able to:    

Expand the market for their domestic product offerings by selling those products in international markets Realize location economies by dispersing individual value creation activities to locations around the globe where they can be performed most efficiently and effectively Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm‘s global network of operations

Video Note: To explore whether U.S. company business partnerships with Chinese organizations add value, consider Are Chinese Business Partnerships A Good Deal for U.S. Companies? in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Click and Drag Global Expansion, Profitability, and Profit Growth Summary This activity focuses on global expansion, profitability, and profit growth. Firms can grow by entering new markets and capitalizing on opportunities not available to companies that only compete in the domestic marketplace. Activity Students are asked to match various descriptions to the correct category of expansion, profitability, or growth.

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Class Discussion Expanding globally allows firms to increase their profitability and rate of profit growth. Discuss the complex relationships between profitability and profit growth when making strategic decisions about international expansion. EXPANDING THE MARKET: LEVERAGING PRODUCTS AND COMPETENCIES B) A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The success of firms that expand in this manner is based not only on the goods or services they sell, but also on their core competencies, or skills within the firm that competitors cannot easily match or imitate. Core competencies enable the firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible. LOCATION ECONOMIES C) Trade barriers and transportation costs permitting, the firm will benefit by basing each value creation activity it performs at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity. Firms that pursue such as strategy can realize location economies, the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be. D) Locating a value creation activity in the optimal location for that activity can have one of two effects. It can lower the costs of value creation and help the firm to achieve a low-cost position, and/or it can enable a firm to differentiate its product offering from the offerings of competitors. Creating a Global Web E) Multinational firms that take advantage of different locational economies around the world create a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized. Some Caveats F) Introducing transportation costs and trade barriers complicates this picture. For example, due to favorable factor endowments, New Zealand may have a comparative advantage for automobile assembly operations, but high transportation costs would make it an uneconomical location for most firms. Another caveat concerns the importance of assessing political risks when making location decisions. EXPERIENCE EFFECTS G) The experience curve refers to the systematic reductions in production costs that occur over the life of a product. The experience curve relationship between production costs and cumulative output is illustrated in Figure 12.7 in the text.

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Learning Effects H) Learning effects refer to cost savings that come from learning by doing. In other words, labor productivity increases over time as individuals learn the most efficient ways to perform particular tasks and management typically learns how to manage the new operation more efficiently over time. Economies of Scale I) Economies of scale refers to the reductions in unit cost achieved by producing a large volume of a product. Economies of scale include the ability to spread fixed costs over a large volume, and the ability of large firms to employ increasingly specialized equipment or personnel. Strategic Significance J) The strategic significance of the experience curve is clear. Moving down the experience curve allows a firm to reduce its cost of creating value. Serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position. LEVERAGING SUBSIDIARY SKILLS K) Leveraging the skills created within subsidiaries and applying them to other operations within the firm‘s global network may create value. Managers must recognize that valuable skills can arise from anywhere within the firm‘s global network, not just at the corporate center. Managers must also establish an incentive system that encourages local employees to acquire new skills. Video Note: Audi Trains Mexican Auto Workers in Germany fits in well with this discussion. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. PROFITABILITY AND PROFIT GROWTH SUMMARY L) Managers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing.

Cost Pressures and Pressures for Local Responsiveness A) Firms that compete in the global marketplace typically face two types of competitive pressures. They face pressures for cost reductions and pressures to be locally responsive. These pressures place conflicting demands on a firm. PRESSURES FOR COST REDUCTIONS B) Responding to cost pressures requires that a firm try to lower the costs of value creation by mass-producing a standard product at the optimal locations worldwide. Pressures for cost reductions are greatest in industries producing commodity type products where price is the main competitive weapon. C) This tends to be the case for products that serve universal needs, or needs that exist when the tastes and preferences of consumers in different nations are similar if not identical. Pressures for cost reductions are also intense when major competitors are based in low-cost locations, where

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there is persistent excess capacity, and where consumers are powerful and face low switching costs. CONNECT Click and Drag Cost Reductions and Local Responsiveness Summary This activity focuses on the competing pressures of cost reduction and local responsiveness when choosing a strategy. Organizations must balance these pressures as they make their choices among the four main strategic postures. Activity Students are asked to match various descriptions to the correct category of pressures for cost reduction or pressure for local responsiveness. Class Discussion Finding a balance between pressure for cost reduction and pressure for local responsiveness can be challenging. Discuss different pressures for cost reduction and for local responsiveness and how a firm can respond. PRESSURES FOR LOCAL RESPONSIVENESS D) Pressures for local responsiveness arise from differences in consumer tastes and preferences, differences in traditional practices and infrastructure, differences in distribution channels, and from host government demands. Differences in Customer Tastes and Preferences E) Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries.

management FOCUS: IKEA‘s Global Strategy Summary This feature describes the international strategy of Swedish furniture and home goods maker, IKEA. IKEA, now the largest furniture retailer in the world, has successfully built its business around its flat-pack merchandise using a largely standardized approach to both its product line and its store displays. While its standardized approach to international markets has been a competitive advantage for the company, IKEA has also recognized that in some markets, it is important to tailor its product line and sales approach to local preferences. Discussion Questions 1. Why do you think IKEA uses a floorplan that ―forces‖ the customers to move along a certain path in the store?

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This set approach to displaying the merchandise IKEA has to offer allows customers to see the furnishings and other accessories available. By using this layout design, customers may be encouraged to purchase more products that may match previously selected offerings to make a set. 2. Is it appropriate for IKEA to customize their furniture to each geographic location, for example, differences between U.S. and European furniture? Some companies do not make these changes, but IKEA does; why? Given that there are distinct differences between the home environments of people in the U.S. and Europe, IKEA learned that taking the same approach to the two markets is inadvisable in the home furnishings sector. As noted in the feature, Americans prefer larger sofas and deeper wardrobe drawers, for instance. Some companies may not need to make adaptation decisions such as these because tastes across regions are very similar. 3. IKEA entered the United States in 1985 and China in the 2000s. But the company started in 1958; why did it take so long to move into the United States and China? Why do you think IKEA is not in more countries today (there are almost 200 countries in the world)? One reason that students may propose could deal with finding partners to supply the existing IKEA stores as well as to develop new locations internationally. Another reason could be that tastes for affordable (even ―disposable‖) furniture among younger, upwardly mobile households were not aligned with those in Sweden, Scandinavia, and Europe. Teaching Tip: To learn more about IKEA and its operations in foreign markets, go to http://www.ikea.com, and click on the individual locations. Lecture Note: To learn more about https://www.bbc.com/news/business-54442567.

IKEA‘s

growth

strategy,

Video Note: To learn more about how Ikea uses psychology to earn customer loyalty, go to https://www.cnbc.com/2019/10/05/psychology-behind-ikeas-huge-success.html. Video Note: Ikea has been under investigation by the European Union for its taxes. To learn more, see Eu Investigates IKEA Over Tax Affairs. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

Differences in Infrastructure and Traditional Practices F) Pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries.

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Differences in Distribution Channels G) A firm‘s marketing strategies may have to be responsive to differences in distribution channels between countries. Host-Government Demands H) Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness. Lecture Note: To extend this discussion, consider exploring Uniqlo‘s expansion efforts in the United States at https://www.cnbc.com/2017/03/29/as-retailers-close-stores-the-worlds-thirdlargest-apparel-player-takes-another-run-at-the-us.html. The Rise of Regionalism I) Demand for local responsiveness is frequently a result of national differences. In addition, a convergence of tastes, preferences, infrastructure, distribution channels, and host-government demands can arise from regional differences. The European Union and NAFTA are both examples of the rise of regionalism.

Choosing a Strategy A) Firms use four basic strategies to compete in the international environment: global standardization, localization, transnational, and international. The appropriateness of each strategy varies with the extent of pressures for cost reductions and local responsiveness. Figure 12.9 in the text illustrates when each of these strategies is most appropriate. CONNECT Decision Generator Choosing a Strategy Summary This activity focuses on strategy in the multinational firm. Choosing a strategy involves balancing the competing pressures in the marketplace. Companies generally choose among four main strategies: global standardization, international, transnational, and localization. Activity Students are asked to respond to a series of questions related to choosing a strategy. Class Discussion Understanding the competing pressures in the global marketplace along with its dynamic nature is important to choosing a strategy. Choose several companies and discuss the pressures they are facing and which type of strategy makes sense for each organization. GLOBAL STANDARDIZATION STRATEGY B) Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects,

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and location economies. Their strategic goal is to pursue a low-cost strategy on a global scale. This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal.

management FOCUS: Unilever‘s Global Organization Summary This feature examines the strategy of Unilever, the Dutch-British company with co-headquarters in London and Rotterdam. The company, the result of the merger of a Dutch margarine producer and a British soap maker, has a portfolio of 400 brands, 14 of which are responsible for more than €1 billion in sales annually. Discussion Questions 1. What types of pressures is Unilever facing? How do these pressures affect its choice of strategy? Students will probably suggest that Unilever is facing pressures for both cost reductions and local responsiveness. Students may note, for example, that while people all over the world use products like soap and detergent, their preferences are likely to be different. Also at the same time, the profit margin on these low-cost items makes it important for the company to keep costs low. 2. Unilever is divided into four divisions: Foods, Refreshments, Home Care, and Personal Care. Why might Unilever choose a different strategy for each division? Why might they be the same? Discuss. Choosing a strategy for competing involves assessing the pros and cons of each option. Students should recognize that the variables in each of the four divisions at Unilever will vary. Students might note, for example, that pressures for local responsiveness might be more intense in Foods and Refreshments as compared to Home Care and Personal Care, whereas pressures for cost reductions could be stronger in Home Care as compared to some of the other divisions. Students should recognize that the organization will need to be structured to allow for the different strategies/divisions to coordinate across markets as well. Teaching Tip: To learn more about Unilever, go to https://www.unilever.com/news/pressreleases.

Did You Know? Video Clip The video clip asks: ―Did you know that the iconic Swedish car company Volvo is now owned by a Chinese automobile maker?‖

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Discussion Questions 1. Why did Geely acquire Volvo? How does the acquisition help Geely achieve its goal of becoming a global automaker? Geely‘s decision to acquire Volvo helped the Chinese company gain brand recognition in a crowded global auto industry. Volvo‘s reputation for safety and excellence in engineering provided a boost to Geely, a company producing cars that, prior to the acquisition, were not known for their quality. 2. Geely will be producing its Volvo brand in both the United States and China. How would you characterize Volvo? Is it a Swedish brand, a Chinese brand, or an American brand? Does your response influence your buying decision? Like other players in the global auto industry, Geely has established a complicated web of production. The decision to produce the Volvo brand in both the United States and China reflects Geely‘s strategy of capitalizing on production efficiency while remaining close to important markets. Many students will probably agree that because the Volvo‘s design remains with Swedish engineers, the brand retains its Swedish identity. Students sharing this view are likely to point out that many auto companies rely on production in low-cost locations like China, and this situation is no different. 3. Discuss the challenges of bringing the Volvo brand under Chinese ownership. What challenges does this present? Students should recognize that bringing together companies can be a challenging process, particularly when their organizational cultures are very different from each other. Students may point out that because Volvo had already been acquired by Ford, its organizational culture had probably been changed from what it had been as a stand-alone brand. Students may suggest that for the Geely-Volvo relationship to be successful, both sides will need to focus on building strong interpersonal relationships, and because Geely‘s goal in acquiring Volvo was to buy its brand reputation, it will be important for Geely to allow Volvo to maintain its identity.

LOCALIZATION STRATEGY C) A localization strategy focuses on increasing profitability by customizing the firm‘s goods or services so that they provide a good match to tastes and preferences in different national markets. Localization is most appropriate when there are substantial differences across nations in consumer tastes and preferences, and where cost pressures are not too intense. TRANSNATIONAL STRATEGY D) Firms pursuing a transnational strategy are trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offerings across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm‘s global network of operations. A

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transnational strategy makes sense when cost pressures are intense, and simultaneously, so are pressures for local responsiveness. INTERNATIONAL STRATEGY E) When there are low-cost pressures and low pressures for local responsiveness, an international strategy is appropriate. An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization. THE EVOLUTION OF STRATEGY G) An international strategy may not be viable in the long term, and to survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors. Similarly, localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures, and the only way to do that may be to shift toward a transnational strategy.

management FOCUS: Evolution of Strategy at Procter & Gamble Summary This feature explores the evolution of Procter & Gamble‘s global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, P&G expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. P&G shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. In 1999, the company implemented ―Organization 2005,‖ a business unit approach whereby different units are entirely responsible for generating profits for a product group. Discussion of this feature can begin with the following questions. Discussion Questions 1. Discuss the evolution of Procter & Gamble‘s strategy. Do you think P&G was reactive or proactive in its approach to strategy in the late 1990s and early 2000s? Many students will probably suggest that Procter & Gamble took a reactive approach to its strategy in the early 1990s, but was more proactive in the late 1990s and 2000s. The company‘s initial reorganization was a reaction to a changing marketplace and sluggish profits; however, when it became apparent that the reorganization attempt was not really fixing the problems that existed, the company embarked on a new strategy. This time, rather than simply trying to adjust its existing strategy as the company had done in 1993, P&G completely dismantled the structure that had been in place for a quarter of a century and reorganized as a company ready to operate in a global marketplace.

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2. What factors have forced Procter & Gamble to change its strategy? As a competitor to P&G, what can you learn from the company‘s experiences? Numerous factors prompted Procter & Gamble to change its strategy. Because of its country-bycountry approach to the market, the company had extensive duplication of manufacturing, marketing, and administrative facilities that were driving up costs. In addition, the retailers that the company relied on were operating globally and demanding deeper discounts from P&G. With its new strategy, the company has eliminated these problems. Now, P&G‘s competitors are facing many of the same challenges. Some students will probably suggest that a key element that competitors can learn from P&G‘s experiences is that operating in a global market is significantly different from selling internationally to individual markets. 3. How would you characterize Procter & Gamble‘s current strategy? What challenges do you foresee with the new strategy? Students will probably suggest that Procter & Gamble is trying to take a transnational approach to markets. The company has reorganized into business units so that each unit is responsible for its own profits. Each unit has been directed to develop global brands where possible and keep costs low. While this new approach eliminates many of the problems facing the company under its old structure, it does introduce a new challenge in that there is little communication between business units which effectively minimizes the possibility of cross-unit learning and information sharing. So far, the new strategy seems to be working. Profits at P&G were up for the most of the 2000s. Interestingly, the company‘s competitors—Kimberly-Clark and Colgate-Palmolive— reported more mixed results for the same time period. Lecture Note: To extend this discussion, consider exploring P&G‘s new strategy to raise prices on its popular products in an effort to stem a downward profit trend. To learn more, go to https://www.wsj.com/articles/procter-gamble-reports-slightly-higher-sales-drop-in-prices1533040191.

Strategic Alliances A) Strategic alliances refer to cooperative agreements between potential or actual competitors. Here, we are concerned specifically with strategic alliances between firms from different countries. THE ADVANTAGES OF STRATEGIC ALLIANCES B) Strategic alliances may facilitate entry into a foreign market. Alliances allow firms to share the fixed costs (and associated risks) of developing new products or processes. An alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own. It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. Lecture Note: Some experts have suggested that strategic alliances are an integral part of a

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company‘s strategy in the 21st century. To learn more, go to https://www.forbes.com/sites/jimblasingame/2016/12/10/why-strategic-alliances-are-a-21stcentury-imperative/#23313f8d6864 and https://home.kpmg.com/xx/en/home/insights/2017/11/strategic-alliances-real-alternative-to-mand-a.html. THE DISADVANTAGES OF STRATEGIC ALLIANCES C) Strategic alliances can give competitors low-cost routes to new technology and markets. Unless a firm is careful, it can give away more than it receives. MAKING ALLIANCES WORK D) The failure rate for international strategic alliances seems to be high. The success of an alliance seems to be a function of three main factors: partner selection, alliance structure, and how the alliance is managed. Lecture Note: Managing the complexities of the relationship between alliance partners is essential to the success of strategic alliances. To expand the discussion of making alliances work, consider: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/ourinsights/improving-the-management-of-complex-business-partnerships. Lecture Note: The Association for Strategic Alliance Professionals maintains a website with information on how to make alliances more successful. The site is available at http://www.strategic-alliances.org. Partner Selection E) One of the keys to making strategic alliance work is to select the right kind of ally. A good ally or partner has three principal characteristics. First, a good partner helps the firm achieve its strategic goals, whether they are market access, sharing the costs and risks of new product development, or gaining access to critical core competencies. In other words, the partner must have capabilities that the firm lacks and that it values. Second, a good partner shares the firm‘s vision for the alliance. Third, a good partner is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firm‘s technological know-how while giving away little in return. Lecture Note: Failed alliance can be devasting to organizations. To expand the discussion on why some strategic alliances fail, consider https://www.forbes.com/sites/kimberlywhitler/2014/10/24/why-strategic-alliances-fail-new-cmocouncil-report/#6754e99a2789. Video Note: Strategic alliances are an important component in Cisco System‘s competitive strategy. However, not all of its alliances are successful. Cisco has identified why some of its alliances did not work out as planned. To learn more, go to http://www.bloomberg.com/news/videos/2015-08-31/how-cisco-alliance-will-help-apple-scorporate-sales-push.

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Alliance Structure F) The alliance should be structured so that the firm‘s risks of giving too much away to the partner are reduced to an acceptable level. Alliances can be designed to make it difficult (if not impossible) to transfer technology not meant to be transferred. Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. Both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain. Finally, the risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance. Managing the Alliance G) Once a partner has been selected and an appropriate alliance structure has been agreed upon, the task facing the firm is to maximize its benefits from the alliance. Part of the trick of managing an alliance successfully seems to be to build interpersonal relationships between the firms' managers.

360° VIEW: MANAGERIAL IMPLICATIONS Impact of The Macro Environment Cross Border Trade, Investment and Strategy A) Changes in the rules governing international trade and investment can affect the viability of certain strategies for companies. B) For the past half century, the move toward an environment in which barriers to trade and investment have been falling has created opportunities for companies to realize location economies and locate production activities in optimal locations, wherever in the world that may be. C) Within this environment, companies have shifted away from localization and international strategies toward global standardization and transnational strategies. More recently, there has been a greater focus on isolationist policies that may make these strategies less viable. D) If the trend toward increased barriers to trade and investment continues, it is possible that a situation will emerge in which companies use a regional variation of a transnational or global standardization strategy to operate within a trading bloc such as the European Union, United States-Mexico-Canada bloc, or the Regional Comprehensive Economic Partnership. Exogenous Shocks and Strategy E) The rapid spread of COVID-19 in 2020 was a shock to the global economy, causing significant disruptions to global supply chains, markets, and company strategies. The implications of this pandemic are expected to be felt for years to come. F) The potential for events like this is prompting some companies to rethink their reliance on globally dispersed production activities as compared to more regionally localized alternatives.

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Video Note: Companies have been faced by numerous unexpected challenges in recent years including the rapid decline of Venezuela‘s economy, the vote by the United Kingdom to leave the European Union, and the election of Donald Trump. There are number of video cases available in the International Business Library related to these events. A few to consider are Businesses Prepare for Prospect of a No-Deal Brexit, China’s Toy Factories Transformed by Tariffs That Didn’t Kick In, and Coca Cola Halts Its Production in Venezuela. Find them in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Red Bull: A Leader in International Strategy Summary This activity focuses on international strategy at Red Bull. Using its unique extreme sports promotional strategy, the energy drink maker has transformed the global beverage market. Activity Students are asked to read a short case on Red Bull‘s international strategy and then respond to a series of questions related to the case. Class Discussion Discuss international strategy, global expansion, profitability, and profit growth at Red Bull. How has the company successfully navigated the global beverage market? What are the implications of Red Bull‘s success for other companies in the global beverage industry?

CONNECT Video Case Did You Know? The Iconic Swedish Car Company Volvo Is Now Owned By A Chinese Automobile Maker Summary This activity focuses Chinese automaker Geely‘s acquisition of Volvo. Geely acquired the wellknown Volvo brand as part of its strategy to become a bigger player in the global auto industry. Activity Students are asked to watch a short video on Geely‘s international strategy and then respond to a series of questions related to the video. Class Discussion

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Discuss Geely‘s international strategy. How does its acquisition of Volvo help it become a more relevant player in the global auto industry? How will brand recognition related to Volvo help the company grow its other brands?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. In a world of zero transportation costs, no trade barriers, and nontrivial differences between nations with regard to factor endowments, firms must expand internationally if they are to survive. Discuss. Answer: Given differences in countries with respect to factor endowments, the theory of comparative advantage suggests that different activities should take place in the countries that can perform them most efficiently. If there are also no barriers or costs to trade, then it is likely that a lot of industries will be based out of the countries that provide the best set of factor endowments. Firms located in sub-optimal locations will either have to expand internationally or switch to a different industry where the factor endowments are in their favor. For firms already located in the countries with the most favorable factor endowments for their industry, however, there may not be a need to expand internationally. The firm may be content to simply focus on the domestic market. But if the firm does want to expand internationally, it may be able to do so via licensing or exporting and need not necessarily undertake foreign direct investment. Thus, not only in theory, but also in practice many firms are able to survive quite well without having to expand internationally. 2. Plot the position of the following firms on Figure 12.8: Procter & Gamble, IBM, Apple, CocaCola, Dow Chemical, U.S. Steel, and McDonald‘s. In each case, justify your answer. Answer: Procter & Gamble would be located in the middle right-hand portion of the graph. This is a position of high pressures for local responsiveness and moderate pressures for cost reductions. P&G sells personal and home care products, which do face pressures for local responsiveness. Although these products are not commodities, there are many competitors in the industry, which implies a moderate degree of cost pressures. IBM would be in the upper middle portion of the graph. This is a position of moderate pressure for local responsiveness and high pressure for cost reductions. There is a moderate amount of pressure for local responsiveness for IBM products due to language differences and differing voltage requirements for electronic products across countries. IBM is in a very competitive industry, and cost pressures are high. Apple manufactures computers and other electronic products. Apple, because it must customize its product offering according to the technical standards prevailing in a given country, would be in the lower right-hand side of the graph. Dow Chemical and U.S. Steel would both be located in the upper left-hand portion of the graph. They sell products that are commodity-like by nature. As a result, cost pressures would be high and local responsiveness pressures would be low for these products. Finally, McDonald‘s and Coca-Cola would be located in the middle left-hand portion of the graph. Pressures for local responsiveness would be low because a selling feature for both companies is the ―American experience,‖ and cost reduction pressures would be moderate.

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3. In what kind of industries does a localization strategy make sense? When does a global standardization strategy make the most sense? Answer: A localization strategy makes sense when pressures for local responsiveness are high. This situation is common when there are significant differences in consumer tastes and preferences between markets, when differences in infrastructure and traditional practices require customization, and when host government demands require local adaptation. Many students will probably suggest that the auto industry often faces pressure for local responsiveness, as does the fast food industry. In contrast, when pressures for cost reductions are strong and there is little pressure for local responsiveness, a global standardization strategy makes sense. Some examples of industries where the global standardization strategy is common are the semiconductor industry and the bulk chemical industry. 4. Reread the Management Focus: ―AB InBev, Beer Globally, and Creating Value,‖ and then answer the following questions: a. With more than 200 brands and strong coverage internationally of the different brands, strategically AB InBev is a unique and highly organized global company. Do they have too many brands? Why or why not? b. The company follows a focused brands strategy in which the majority of the resources are devoted to those brands that have the greatest long-term growth potential. What positives and negatives do you see with this approach? c. Strategically, AB InBev has 10 principles driving everything they do. At the core, AB InBev is focused on a shared dream that energizes everyone to work in the same direction to be the best beer company in the world, bring people together, and aspire for the betterment of the world. Additional principles cover people strengths, quality of teams, striving for increased satisfaction, consumer focus, ownership, common sense and simplicity, cost management, leadership, and hard work and responsibility. Should large multinational corporations really be built on strong principles or do they need a more flexible structure? Answer: a. Responses to this question will vary by student. Some will likely argue that AB InBev‘s wide brand portfolio allows it to cater to many different types of beer drinkers, providing options that are global in nature, but also smaller, more local brands. Others may wonder though, whether the wide portfolio creates a situation in which the smaller brands do not get the support they need with the end result being mediocrity. b. Again, students will have their own opinions on this question. Some of the positives students may cite include the ability to reach many different types of beer drinkers, the opportunity to diversify across the various brands and markets, and the ability to support less profitable brands with more profitable ones. Negatives students may consider include limited focus and funding for less profitable brands, the complexity involved with carrying such a wide portfolio, and the lack of a clear over-riding brand name. c. Many students will probably see the strong principles that guide AB InBev as the glue that keeps the organization running smoothly. Students taking this perspective will probably suggest that the principles work to keep the large, complex multinational organization on the same page.

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5. What do you see as the main organizational problems that are likely to be associated with the implementation of a transnational strategy? Answer: Simultaneously trying to achieve cost efficiencies, global learning, and local responsiveness places difficult and contradictory demands on an organization. Managing these conflicting demands requires the setting of control and motivational policies for people and organizations that force balancing of these demands at multiple levels within firms. The organizational challenges involve managing these inherent conflicts to resolutions that serve the best interests of the firm overall. 6. How might the rise of trade barriers, or a serious dislocating event such as war or the emergence of a multiyear global pandemic, change the strategy of companies like Apple or Intel, which have historically pursued a global standardization strategy? Answer: The sudden disruptions caused to the global economy by the rapid spread of COVID-19 in 2020 sent shock waves through companies across the globe. As distribution systems and justin-time manufacturing operations ground to a halt, some companies questioned the future viability of their globally dispersed supply chains. Many students will suggest that the basic rationale for companies like Apple and Intel to pursue global standardization strategies remain largely in place. However, they may argue, that some companies may move to a more diversified approach in which regional operations are established rather than global ones. Students may note that operating on a multi-regional level rather than a global level may be an important means of hedging against future shocks to the global economy or trade wars that could affect the free flow of products across borders.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 Several classifications and rankings of the world’s largest companies are prepared by a variety of sources. Find one such composite ranking system, and identify the criteria that are used to rank the top global companies. Extract the list of the top 20 ranked companies, paying particular attention to their home countries. Exercise 2 The top management of your company, a manufacturer and marketer of smartphones, has decided to pursue international expansion opportunities in eastern Europe. To ensure success, management’s goal is to enter into countries with a high level of global connectedness. Identify the top three eastern European countries in which your company can market its current product line. Prepare an executive summary to support your recommendations.

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Red Bull: A Leader in International Strategy closing case Summary The closing describes international strategy at Red Bull GmbH. The company, founded in Austria by Austrian Dietrich Mateschitz and Chaleo Yoovidhya of Thailand, owns the bestselling energy drink, Red Bull, on the market. Moreover, the company has created a product that is standardized globally, yet most people think it is a local product. Red Bull‘s image and message focuses on having amazing energy, being a go-getter attitude, and enjoying fun risk. To that end, the company markets its products at various extreme sporting events around the world. Case Discussion Questions 1. As an Austrian–Thai company, Red Bull has done a remarkable job of positioning itself internationally by coming across as a local company in every country where Red Bull is sold. Would you be more or less likely to buy Red Bull knowing the brand is Austrian but with a strong Thai influence? Does it generally matter to consumers where a product originates from? Responses to this question will vary by student. Red Bull has focused on developing a universal global brand that appeals to customers around the world with little or no need for adaptation. The brand appeals to the same type of customer in markets around the world, using its extremeevents marketing strategy and its global packaging that allows buyers to form a local connection to the product. All communications regarding the product are carefully developed via the inhouse Red Bull Media House. Students may be divided on the importance of country of origin. Some might suggest, for example, that country of origin is more important for food products than non-food products, while others may contend that country of origin can make a product more, or less attractive, to buyers. Students might suggest for example, that sparkling wine from the Champagne region of France holds an allure that a sparkling wine from a winery in Virginia might not carry. Still other students may claim that in a global economy, country of origin is a less important issue for more consumers. 2. Worldwide, Red Bull has the highest market share of all energy drinks, with more than 6 billion cans sold annually (that‘s almost one can for every person worldwide). So, either you drink Red Bull, or your friend does! Does the sheer number of Red Bull cans sold—basically its popularity—make you more or less interested in supporting the product with your purchase? Students responses to this question will vary based on personal opinion. Many students might claim that the number of cans of Red Bull sold will have little bearing on their decision to buy the product. Other students, though, might suggest that the popularity of the product might convince them to give it a try or have it available for their friends to drink. 3. Red Bull mass markets its products in a unique way. To support the company‘s international business strategy, Red Bull hosts a number of extreme sporting events. Personally, how reachable are you as a customer via these extreme sporting events, or does it even matter? Some

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marketers believe that just knowing the ―brand myth‖ and Red Bull ―legend‖ is enough to make people buy the product. Do you agree or no, and why? Responses to this question will vary by student. Red Bull has chosen to market its product at various extreme sports events held around the world. While the events range from car racing to space diving to hot air balloon racing, the common theme among all of the events, wherever they are held in the world, is that they all carry an element of risk and skill. The events attract a range of spectators—spectators who appreciate the challenges of the events they are watching. Students familiar with marketing strategy will likely note that consuming the beverage sold at these events allows spectators to be a part of the event as well. Buying Red Bull in a more traditional outlet allows consumers to buy the energy, risk, and attitude the beverage symbolizes. Because Red Bull is attracting a similar buyer in every country, it is easier for it to standardize its marketing strategy. Teaching Tip: To learn more about Red Bull, go to https://www.redbull.com/us-en. Lecture Note: Red Bull was named one of the world‘s most valuable brands by Forbes. To learn more, go to https://www.forbes.com/companies/red-bull/#47d3ac7561ce. Video Note: To extend this discussion, consider exploring Red Bull‘s global marketing strategy at https://www.bloomberg.com/news/videos/2019-06-12/how-red-bull-got-the-world-hooked-onenergy-drinks-video-jwt77wh6.

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Continuous Case Concept When the big three Japanese auto companies initially expanded into the U.S., they changed their strategies to meet the needs of the new market. Similarly, BMW and Mercedes changed their strategies when they began to manufacture in the U.S. Now, as China and India become growth markets, the world‘s automakers are responding with new strategic changes. Already, Ford has expanded its operations in China. Similarly, Daimler AG is ramping up production in China, while Nissan is expanding its lineup and increasing production capacity to meet new demand. Toyota has also reported a strong increase in its sales in China. Perhaps one of the biggest changes for automakers going forward will be the move to electric vehicles. Battery start-up Britishvolt recently announced that it will be building a gigafactory in Great Britain to produce batteries for electric vehicles. The new factory is slated to open in 2023 and is expected to factor into the long-term strategic plans of global automakers producing in the United Kingdom. 

Ask students to reflect on the strategic changes made by the auto companies. What factors have contributed to the changes the companies have made?



Next, ask students, to discuss, based on what they already know about Toyota, Nissan, and Honda, the notion of creating a global web of value creation activities. How does this concept play out with the Japanese auto companies? Does the response to this question differ if the American auto companies are considered?

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Then, ask students to consider whether, given that consumer preferences in America appear to be quite different from those of Japanese consumers, there any way for automakers to realize the traditional benefits of selling in multiple markets?

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Finally, ask students of the four basic international strategies described in the textbook, which strategy is the most appropriate for most global automobile companies? Why?

Lecture Note: To learn more about Britishvolt‘s new battery factory, go to https://www.telegraph.co.uk/technology/2020/12/11/britishvolt-build-uks-first-electric-car-battery-gigafactory/ and https://www.ft.com/content/010aabf1-9728-4171-8f39-f2cb4b2d6193.

Additional Readings and Sources of Information Coronavirus Kicks Volvo‘s Geely Merger to the Side of the Road https://www.forbes.com/sites/michaeltaylor/2020/07/21/coronavirus-kicks-volvos-geely-mergerto-the-side-of-the-road/?sh=1ea59dfa74e9 GM Accelerates Transformation of International Markets https://plants.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2020/feb/0216 -international-markets.html Volvo Says Negotiations to Combine with Geely to Resume in First Quarter https://europe.autonews.com/automakers/volvo-says-negotiations-combine-geely-resume-first-

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quarter A Look Inside the Global Beer Market https://www.nbwa.org/resources/look-inside-global-beer-market Starbucks: Aggressive Global Expansion Means Growth Percolating https://www.newsmax.com/finance/benreynolds/starbucks-global-expansionpercolating/2018/10/01/id/884301 Can P&G Find Its Aim Again? http://fortune.com/procter-and-gamble-david-taylor-fortune-500 Brexit: Toyota Says No-Deal Outcome Will Be 'Very Negative' https://www.bbc.com/news/business-55220840 Procter & Gamble Shows That Increasing Spending During A Recession Is Worth It https://fortune.com/2020/10/20/procter-gamble-earnings-marketing-recession-covid/ UK Car Industry Warns Of £55bn No-Deal Brexit Hit https://www.bbc.com/news/55058874 ‗Coronavirus Is Not Good News for Unilever‘ — CEO Says ‗Pantry Loading‘ Is Largely A Us Phenomenon https://www.cnbc.com/2020/04/14/coronavirus-is-not-good-news-for-unilever-says-ceo-alanjope.html Wings of Change: Red Bull Looks to Product Localisation and Premiumisation for APAC Energy Drink Expansion https://www.foodnavigator-asia.com/Article/2020/07/14/Wings-of-change-Red-Bull-looks-toproduct-localisation-and-premiumisation-for-APAC-energy-drink-expansion How to Navigate the Complex Business Landscape Now and Post Pandemic https://www.forbes.com/sites/benjaminlaker/2020/10/14/how-to-navigate-the-complex-globalbusiness-landscape-now-and-post-pandemic/?sh=43df0bb62dde

Entering Developed and Emerging Markets Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Uber‘s Foreign Market Entry Strategy Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Introduction Basic Entry Decisions Entry Modes Did You Know? Video Clip: Starbucks Often Enters A Foreign Nation by Establishing A Joint Venture with A Local Company

Selecting an Entry Mode Greenfield Venture or Acquisition? 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: IKEA Entering India, Finally! APPLICATION-BASED

ACTIVITY: ENTERING INTERNATIONAL MANAGEMENT DECISIONS

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MARKETS:

MAKING

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Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 13-1 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. 13-2 Compare and contrast the different modes that firms use to enter foreign markets. 13-3 Identify the factors that influence a firm‘s choice of entry mode. 13-4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

Chapter Summary This chapter focuses on the basic market entry decisions for firms. The six most common foreign entry strategies are discussed. These are: exporting, turnkey projects, licensing, franchising, establishing a joint venture with a host country firm, and setting up a wholly owned subsidiary in the host country. The advantages and disadvantages of each of these strategies are discussed.

Chapter Opening Activity Ask students how they might sell mobile or cellular phones (the hardware, not the contractual service) in Costa Rica. Tell them that Costa Rica has a population of almost 5 million, a sprawling urban area around the capital San José, and several secondary but much smaller cities in the mostly rural provinces. The Costa Rican government owns and operates the landed telephone system, and as a result of constraints and inefficiencies, demand for landlines has always exceeded supply. Cell phones have ―leap-frogged‖ landlines in countries like Costa Rica, and although consumers‘ willingness to pay may be lower than in more developed countries, people have enthusiastically embraced cell phone usage as substitutes for land lines. Using the Costa Rican example, ask the students to list the kinds of information (variables) they need to know before they could make a sensible decision about selling cell phones designed in the U.S. in that country. Keep in mind the criteria discussed in the chapter (i.e., product suitability for international markets, distribution issues, managerial issues, market share issues, country screening criteria, etc.). As students identify information, or variables, write them on the board in categories (without titles). After they have given you everything that they can, add ―other‖ criteria by completing the lists with the items discussed in the chapter. Then ask students to label or title each group using the criteria. If they‘ve paid attention and read the chapter, they may come close to identifying the process and criteria.

Chapter Outline

Uber‘s Foreign Market Entry Strategy opening case Summary

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The opening case explores Uber‘s expansion into foreign markets. The ride-for-hire company has built a presence in some 80 countries around the world, but the process has not always been easy. Uber‘s policy has been to quickly establish its service and then deal with any local fallout from doing so. While this strategy has worked well in some countries, in others, Uber has found it more difficult. Some countries including Canada and Belgium have banned the company outright, while others like Paris, have implemented restrictions limiting the company‘s operations. Even so, competitors using similar innovative technology are springing up in countries like China and India indicating that the ride-for-hire product is here to stay, at least for now. Discussion Questions 1. What drove Uber‘s decision to quickly become a global player rather than establishing itself in the United States prior to moving to foreign markets? All companies, regardless of how long they have been in business, must make three basic decisions about foreign expansion: which markets to enter, when to enter them, and on what scale. Uber felt that the basic conditions that resulted in the founding of the company – a need for better taxi service – existed in many countries, and that waiting until its U.S. business was better established before entering foreign markets, would ultimately put the company at risk for copycat competition. To ensure that it capitalized on its first mover advantages, Uber decided to quickly expand its foreign presence into markets with similar conditions as those in the United States. Students should recognize that Uber looks at the potential of individual cities as markets rather than the entire country when it considers foreign expansion. 2. Uber has a reputation for ignoring local regulations when it expands into a new market. Discuss this strategy. Do you agree with Uber? When it comes to international expansion, Uber‘s strategy is to ignore local regulations and move forward with the same strategy it uses in other markets. The company has had mixed results with this approach. Students may note that in some cases, the strategy of rapidly gaining market share has been effective, while in other situations, just the opposite is true. Some students may agree with Uber‘s approach arguing that because the concept is new, existing regulations are often murky. By moving quickly, Uber gains loyalty and brand recognition, while waiting to ensure that it is compliant with all regulations not only could put the company at a disadvantage versus other competitors, it could also limit its ability to provide the service in the format it prefers. Teaching Tip: Uber‘s strategy of expanding into countries without meeting local regulations has caused it to be banned in some locations. To extend this discussion, consider https://www.telegraph.co.uk/travel/news/where-is-uber-banned/ and https://medellinliving.com/uber-banned-colombia-alternative-rideshare-apps/.

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CONNECT Case Analysis Uber’s Foreign Market Entry Strategy Summary This activity focuses on Uber‘s strategy for expanding into new markets. Like other international companies, Uber‘s foreign expansion requires the company to make decisions on which markets to enter, when to enter, and on what scale. Activity Students are asked to read a short case on Uber‘s foreign expansion and then respond to a series of questions related to the case. Class Discussion Understanding the decisions regarding market entry is important for international managers. Discuss Uber‘s strategy and why there are no ―right‖ or ―wrong‖ answers to the decisions.

Introduction A) This chapter is concerned with two closely related topics: the decision of which foreign markets to enter, when to enter them, and on what scale; and the choice of entry mode. B) There are several different options open to a firm that wishes to enter a foreign market, including exporting, licensing or franchising to host country firms, setting up a joint venture with a host country firm, or setting up a wholly owned subsidiary in the host country to serve that market. Each of these options has advantages and disadvantages.

CONNECT Decision Generator Deciding How to Enter a Foreign Market Summary This activity focuses on the decisions firms make when they enter a foreign market. Firms must decide which markets to enter, when to enter those markets, and on what scale. Activity Students are asked to respond to a series of questions related to market entry. Class Discussion International managers must understand and balance the tradeoffs involved in choosing which markets to enter, when to enter them, and on what scale. Discuss factors that could impact these tradeoffs.

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Basic Entry Decisions A) There are three basic decisions that a firm contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. WHICH FOREIGN MARKETS? B) The choice between different foreign markets must be made on an assessment of their longrun profit potential. This is a function of a large number of factors, many of which we have already considered in depth in earlier chapters. C) Other things being equal, the benefit-cost-risk tradeoff is likely to be most favorable in the case of politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates or private sector debt. It is likely to be least favorable in the case of politically unstable developing nations that operate with a mixed or command economy or developing nations where speculative financial bubbles have led to excess borrowing. D) If an international business can offer a product that has not been widely available in a market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if the international business simply offers the same type of product that indigenous competitors and other foreign entrants are already offering. Video Note: To explore the possible strategies for entering into a foreign market, consider International Market Entry Strategies in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. TIMING OF ENTRY E) Once a set of attractive markets has been identified, it is important to consider the timing of entry. With regard to the timing of entry, we say that entry is early when an international business enters a foreign market before other foreign firms, and late when it enters after other international businesses have already established themselves in the market. F) There are several advantages frequently associated with entering a market early. These are commonly known as first-mover advantages. One first mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second advantage is the ability to build up sales volume in that country and ride down the experience curve ahead of rivals. To the extent that this is possible, it gives the early entrant a cost advantage over later entrants. This cost advantage may enable the early entrant to respond to later entry by cutting prices below the (higher) cost structure of later entrants, thereby driving them out of the market.

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A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business. G) It is important to realize that there can also be disadvantages associated with entering a foreign market before other international businesses (these are often referred to as first-mover disadvantages). H) Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when a business system in a foreign country is so different from that in a firm‘s home market that the enterprise has to devote considerable time, effort and expense to learning the rules of the game. Pioneering costs include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes. Pioneering costs also include the costs of promoting and establishing a product offering, including the cost of educating customers.

management FOCUS: Tesco‘s International Growth Strategy Summary This feature describes Tesco‘s international expansion strategy. Tesco, the British grocer, has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise. Discussion Questions 1. Reflect on Tesco‘s decision to expand internationally primarily through establishing operations in developing countries. What makes these countries attractive to Tesco? When companies make the decision to expand into new markets, they must balance the benefits, costs, and risks of doing business in each market. In Tesco‘s case, the best opportunities were not in established markets, such as those in North America and western Europe, where strong local competitors already existed, but in the emerging markets of eastern Europe and Asia, where there were few capable competitors but strong underlying growth trends. Tesco‘s strategy appears to be working. In 2019, the company had sales of $25 billion outside the United Kingdom. 2. Why does Tesco believe it is important to transfer its core capabilities to new ventures? How have the company‘s partners helped it find success in foreign locations? Tesco‘s success in international markets is remarkable. The company attributes its success to the transfer of its core competencies to each location. At the same time, the company believes that local management is important, and so it hires locally, but provides oversight from the United Kingdom. Teaching

Tip:

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http://www.tescoplc.com. Lecture Note: Since the scandal over its accounting practices, Tesco has worked hard to reinvent itself. To learn more, consider https://www.bbc.com/news/business-54445399, https://www.smartinsights.com/online-pr/reputation-management-online-pr/tesco-turnedmarketing-strategy-around and https://www.forbes.com/sites/brittainladd/2018/07/02/tesco-andcarrefour-how-their-strategic-partnership-can-grow/#44d544dc28ba.

SCALE OF ENTRY AND STRATEGIC COMMITMENTS I) Another issue that an international business needs to consider when contemplating market entry is the scale of entry. Entering a market on a large scale involves the commitment of resources to that venture. The consequences of entering on a significant scale are associated with the value of the resulting strategic commitments. A strategic commitment is a decision that has a long-term impact and is difficult to reverse. Deciding to enter a foreign market on a significant scale is a major strategic commitment. Significant strategic commitments are neither unambiguously good nor bad. Rather, they tend to change the competitive playing field and unleash a number of changes, some of which may be desirable and some of which will not be. J) Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm‘s exposure to that market. MARKET ENTRY SUMMARY K) It is important to realize that there are no ―right‖ decisions here, just decisions that are associated with different levels of risk and reward.

management FOCUS: The Jollibee Phenomenon Summary This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald‘s invaded its market in 1981, but it also managed to find the weaknesses in the larger company‘s global strategy and capitalize on them. Jollibee, unlike McDonald‘s, tailored its menu to the local market. The company built on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has managed to find success in the United States, where it is being hailed as a strong niche player and has begun to focus on options in mainland China and India. Discussion Questions 1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee‘s performance to date? Many students will probably suggest that Bartlett and Ghoshal would have a positive view of Jollibee‘s performance so far. Jollibee has managed to survive McDonald‘s push into the Philippines, learn from the company, and even capitalize on gaps in McDonald‘s strategy of

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having an essentially standardized marketing approach. Now, Jollibee has successfully entered McDonald‘s home market, become a niche player in the fast food industry, and is making plans to expand into India. 2. A key difference between McDonald‘s global strategy and that of Jollibee is that McDonald‘s sees its path to success as offering a fairly standardized menu everywhere, whereas Jollibee views localization as its ticket to success. In your opinion, would Jollibee have achieved its current position in the market if the company had standardized its menu like McDonald‘s? Most students will probably argue that Jollibee‘s competitive advantage is that it offers fast food tailored to local tastes, and that if the company pursued a standardized approach, it would have failed. Students might note that McDonald‘s global success with this strategy is due in part to the fact that it is a symbol of America, and as such, offers an American experience in other markets. Because Jollibee does not have this type of global reputation, it must look for alternative ways to compete. Teaching Tip: It is worth visiting Jollibee‘s web page to see the American influence on the company. Go to https://www.jollibee.com.ph/international to explore some of the company‘s foreign locations. Lecture Note: To extend this discussion, consider exploring Jollibee‘s recent international expansion efforts at https://www.bworldonline.com/jollibee-ramping-up-global-store-expansion and https://www.ft.com/content/1cdfd818-a9ca-11e8-89a1-e5de165fa619. Lecture Note: The COVID-19 pandemic has resulted in significant losses for Jollibee and the company is now planning to close a number of stores. To learn more, consider https://www.asianjournal.com/business/business-news/jollibee-to-close-255-stores-aftersuffering-over-200-million-loss-in-first-half-of-2020/. Jollibee has also announced restructuring plans in the wake of its pandemic-related losses along with a new strategic direction. To learn more, go to https://asia.nikkei.com/Business/Business-trends/Jollibee-to-build-cloud-kitchens-tooffset-coronavirus-pain.

Entry Modes A) These are six different ways to enter a foreign market: exporting, turnkey projects, licensing, franchising, establishing joint ventures with host country firms, or setting up a new wholly owned subsidiary in the host country. Each method has its advantages and disadvantages. EXPORTING B) Most manufacturing firms begin their global expansion as exporters and only later switch to another mode for servicing a foreign market. Teaching Tip: The U.S. government maintains a website providing U.S. companies with

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detailed information on exporting. The site is available at https://www.usa.gov/import-export. Students can click on the various topics to learn more about export financing, export plans, dealing with risk, and so on. Teaching Tip: Students may wonder how firms U.S. firms find buyers in foreign countries. To find foreign customers, exporters often use ‗―trade leads‖ that are provided by organizations dedicated towards the activity of matching ―buyers‖ and ―sellers‖ in an international context. An example of a site that provides trade leads is the National Trade Data Bank at https://www.wand.com/ntdb. Advantages C) Exporting avoids the often substantial cost of establishing manufacturing operations in the host country. Exporting may also help a firm achieve experience curve and location economies. Teaching Tip: The SBA Office of International Trade offers export assistance to small businesses. Students can learn more about the programs at the Small Business Association at http://www.sba.gov. Disadvantages D) Exporting from the firm‘s home base may not be appropriate if there are lower-cost locations for manufacturing the product abroad. High transport costs can also make exporting uneconomical, as can tariff barriers. Agents in a foreign country may not act in exporter‘s best interest. TURNKEY PROJECTS E) In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the ―key‖ to a plant that is ready for full operation, hence the term turnkey. This is actually a means of exporting process technology to another country. Lecture Note: Students might enjoy learning more about companies that identify themselves as firms that engage in ―turnkey projects.‖ One such company, Frigmaires Engineers, http://www.feprojects.com, offers turnkey deals in India. A list of projects the company is currently involved in is available, and you can click on various types of factories and get visuals on each factory. Advantages F) The main advantage of turnkey projects is that they are a way of earning great economic returns from the know-how required to assemble and run a technologically complex process. Turnkey projects may also make sense in a country where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk.

Disadvantages

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G) First, the firm that enters into a turnkey deal will have no long-term interest in the foreign country. Second, the firm that enters into a turnkey project may create a competitor. Third, if the firm‘s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors. LICENSING H) A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks. Advantages I) In the typical international licensing deal, the licensee puts up most of the capital necessary to get the overseas operations going. Thus, a primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market. Licensing is often used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment. Licensing is frequently used when a firm possesses some intangible property that might have business applications, but the firm does not want to develop those applications itself. Disadvantages J) Licensing does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies. Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. Licensing severely limits a firm‘s ability to do this. A third problem involves the potential loss of proprietary (or intangible) technology or property. One way of reducing the risk of losing proprietary trade secrets is through the use of cross-licensing agreements. Under a cross-licensing agreement, a firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable knowhow to the firm. FRANCHISING K) Franchising is basically a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. Advantages L) The advantages of franchising as an entry mode are very similar to those of licensing. Specifically, the firm is relieved of many costs and risks of opening up a foreign market and can quickly build a foreign market presence.

Disadvantages

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M) Franchising may inhibit the firm‘s ability to take profits out of one country to support competitive attacks in another. A more significant disadvantage of franchising is quality control. The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect. JOINT VENTURES N) A joint venture entails the establishment of a firm that is jointly owned by two or more otherwise independent firms. Teaching Tip: 1000ventures, available at http://www.1000ventures.com/business_guide/jv_main.html, offers a wealth of information about joint ventures. Advantages O) Joint ventures offer several advantages. A firm can benefit from a local partner‘s knowledge of the host country‘s competitive conditions, culture, language, political systems, and business systems. When the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and/or risks with a local partner. In many countries, political considerations make joint ventures the only feasible entry mode. Disadvantages P) Joint ventures also have some significant disadvantages. As with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner. A joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Shared ownership arrangements can lead to conflicts and battles for control between the investing firms if their goals and objectives change over time or if they take different views as to what the venture‘s strategy should be. Lecture Note: To extend the discussion on joint ventures, consider exploring how to make them more successful at https://www.forbes.com/sites/baininsights/2017/04/11/the-secrets-tosuccessful-joint-ventures/#292564e938d1. Lecture Note: To explore recent joint ventures in the news, consider https://www.cnbc.com/joint-ventures. Video Note: To explore Caterpillar‘s example of a joint venture in China, consider Caterpillar Joint Venture – China in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

Did You Know? Video Clip The video clip asks: ―Did you know that Starbucks often enters a foreign nation by establishing a joint venture with a local company?‖ Discussion Questions

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1. Starbucks has used joint ventures for its initial expansion into markets like China and Japan. What are the advantages of a joint venture for Starbucks? Most students will probably suggest that for Starbucks, a joint venture strategy with a local company is advantageous because the local company brings knowledge of the local market to the arrangement. Some students may point out though, that as the company gains more international experience, the benefit of a joint venture with a local partner may not be as important as it once was. Students may also wonder whether the shared costs and risks involved with joint ventures, usually considered a benefit of the strategy, are as important to Starbucks as they might have been earlier in its international expansion. 2. Do you see any disadvantages to Starbucks‘ strategy of expanding into some markets via joint ventures? Starbucks‘ strategy to provide a similar coffee experience in any of its locations around the world is critical to its international strategy. Students may contend then, that the limited control involved with entry modes other than wholly owned subsidiaries puts Starbucks at a disadvantage. Some students may also point out that a joint venture format not only means sharing control, it also means sharing profits. Lecture Note: To extend this discussion, consider https://www.bbc.com/news/business40749055 to learn more about Starbucks‘ acquisition of its joint venture partner in China, and https://www.comunicaffe.com/starbucks-retail-business-in-thailand-transitions-to-new-jointventure/ to learn about Starbucks‘ expansion strategy in Thailand.

WHOLLY OWNED SUBSIDIARIES Q) In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways. The firm can set up a new operation in that country, or it can acquire an established firm and use that firm to promote its products in the country‘s market. Advantages R) Wholly owned subsidiaries offer three key advantages. First, when a firm‘s competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode, since it reduces the risk of losing control over that competence. A wholly owned subsidiary gives a firm the tight control over operations in different countries necessary for engaging in global strategic coordination (i.e., using profits from one country to support competitive attacks in another). A wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies. Disadvantages S) Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market. Firms doing this must bear full costs and risks of setting up overseas operations.

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CONNECT Click and Drag Entry Mode Options Summary This activity focuses on the choice of how to enter a foreign market. Companies looking to enter foreign markets can choose between exporting, turnkey projects, licensing, joint ventures, wholly owned subsidiaries, and franchising. Activity Students are asked to match advantages and disadvantages associated with the different entry modes to the correct entry mode. Class Discussion International managers need to understand the advantages and disadvantages associated with the six different entry modes. Discuss when each mode should be selected.

Selecting an Entry Mode A) Trade-offs are inevitable when selecting an entry mode. However, it is possible to generalize about the optimal choice of entry mode. CORE COMPETENCIES AND ENTRY MODE B) The optimal entry mode for these firms depends to some degree on the nature of their core competencies. In particular, a distinction can be drawn between firms whose core competency is in technological know-how and firms whose core competency is in management know-how. Technological Know-How C) If a firm‘s competitive advantage (its core competence) is based upon control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible to minimize the risk of losing control over that technology, unless the arrangement can be structured in such a way that these risks can be reduced significantly. D) When a firm perceives its technological advantage as being only transitory, or the firm may be able to establish its technology as the dominant design in the industry, then licensing may be appropriate even if it does involve the loss of know-how. By licensing its technology to competitors, a firm may also deter them from developing their own, possibly superior, technology. Management Know-How E) The competitive advantage of many service firms is based upon management know-how. For such firms, the risk of losing control over their management skills to franchisees or joint venture partners is not that great, and the benefits from getting greater use of their brand names can be significant.

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PRESSURES FOR COST REDUCTIONS AND ENTRY MODE F) The greater the pressures for cost reductions, the more likely it is that a firm will want to pursue some combination of exporting and wholly owned subsidiaries. This will allow it to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution.

management FOCUS: General Motors on the Upswing Summary This feature focuses on the presence of General Motors (GM) in the China market. Beginning with a joint venture with Shanghai Automotive Industry Corporation (SAIC) in 1997 with a $1.6 billion investment, this presence matched only Volkswagen among the major automobile manufacturers in China. The relationship GM developed with SAIC has been very fruitful as the Chinese market is continuing to expand, and the joint venture established provides GM a critical position. As there is a low vehicle penetration rate to date in China, continued success is expected. Discussion Questions 1. Why did GM enter into a joint venture with SAIC when the company decided to begin operations in China? Do you think GM could have been successful on its own? The main reasons that GM entered into a joint venture with SAIC are that the company lacked an understanding of the market and did not have connections with key people. In addition, government regulations made it very difficult for a foreign company to begin operations on its own. GM would have likely failed had it attempted to enter on its own. 2. How has the relationship between GM and SAIC developed over time? Would you say this is a successful joint venture? Originally, the relationship between GM and SAIC was based on simply manufacturing for the Chinese market. However, this led to the development of products specifically adapted to the demands of the Chinese market such as the wildly successful Wuling Sunshine. In addition, the joint venture has produced the Pan-Asian Technical Automotive Center, which is aimed to design cars and components for not only the Chinese market, but other markets in Asia as well. In general, it would appear that the relationship is a success. There appear to be clear benefits to both sides of the joint venture. In addition, the development of deeper initiatives indicate that the two companies trust each other and are willing to continue the relationship for an indefinite time period. Teaching Tip: It is worth visiting the web page of General Motors to see the scope of the company. Go to https://www.gm.com/other-gm-sites.html to see GM‘s foreign operations. Lecture Note: The success of the GM-SAIC partnership was on display in 2020 as the joint venture celebrated the production of its 20 millionth vehicle. To learn more, go to

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https://gmauthority.com/blog/2020/08/saic-gm-joint-venture-manufactures-its-20-millionthvehicle/. Lecture Note: To extend this discussion, explore General Motors‘ recent plant closures and workforce cuts. To learn more, go to https://www.bloomberg.com/news/articles/2018-11-26/gmis-said-to-plan-closure-of-canada-plant-with-2-200-workers and https://www.theguardian.com/business/2018/nov/26/general-motors-set-to-cut-workforce-asslowing-sales-and-steel-tariffs-bite.

CONNECT Click and Drag Selecting an Entry Mode Summary This activity focuses on market entry decisions for international companies. Firms can chose from six possible entry modes, each of which has advantages and disadvantages. Activity Students are asked to match the advantages and disadvantages of each entry mode to the correct entry mode. Class Discussion Choosing an entry mode involves weighing the advantages and disadvantages of each mode and choosing the mode that makes the most sense. Discuss the advantages and disadvantages of each entry mode and how firms can assess each mode.

Greenfield Venture or Acquisition? A) A firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy), or by acquiring an established enterprise in the target market (acquisition strategy). PROS AND CONS OF ACQUISITIONS B) Acquisitions have three major points in their favor. First, they are quick to execute. Second, in many cases firms make acquisitions to preempt their competitors. Third, managers may believe acquisitions to be less risky than greenfield ventures. Why Do Acquisitions Fail? C) Acquisitions fail for several reasons. First, the acquiring firms often overpay for the assets of the acquired firm. Second, many acquisitions fail because there is a clash between the cultures of the acquiring and acquired firm. Third, many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into

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roadblocks and take much longer than expected. Finally, many acquisitions fail because of inadequate pre-acquisition screening. Reducing the Risks of Failure D) These problems can all be overcome through careful screening of the firm to be acquired, and moving rapidly once the firm is acquired to implement an integration plan. PROS AND CONS OF GREENFIELD VENTURES E) The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. However, greenfield ventures are slower to establish. They are also risky. WHICH CHOICE? F) In general, the choice between acquisitions and greenfield ventures will depend on the circumstances confronting the firm. CONNECT Decision Generator Choosing Between Greenfield Ventures and Acquisitions Summary This activity focuses on the choice between greenfield ventures and acquisitions as an foreign market entry mode. Each mode offers advantages and disadvantages. Activity Students are asked to respond to a series of questions exploring greenfield ventures and acquisitions as an entry mode. Class Discussion Choosing an entry mode involves weighing the advantages and disadvantages of each mode and choosing the mode that makes the most sense. Discuss the advantages and disadvantages of each entry mode and how firms can assess each mode.

360° VIEW: MANAGERIAL IMPLICATIONS Impact of The Macro Environment Political Economy and Entry Choices A) Changes in the macro environment can have implications for a company‘s choice of entry mode. In Kenya, for example, a move toward a more democratic political system together with market-based reforms has help the country become an emerging regional entrepreneurial hub. In contrast, systemic economic mismanagement together with a move toward socialist policies have moved Venezuela to the bottom of the list for ease of doing business.

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B) Two important trends impacting entry mode choice are the decline of trade barriers over the last few decades and the more welcoming attitude of many countries to foreign investments including wholly owned subsidiaries. Video Note: Changes in the macro environment can both create and eliminate opportunities for companies. President Obama‘s announcement that restrictions on business in Cuba were being relaxed drew considerable interest from companies that saw opportunity in the market. Similarly, changes in the business environment in China offered some companies as chance to invest in what had been a more restricted market. At the same time, changes in Venezuela related to economic mismanagement and a move toward socialism quickly resulted in an environment that was no longer welcoming to business. To learn more about these cases, consider American Businesses Eye Cuban Opportunities, Marriott Plans Asian Hotel Experience, and Coca Cola Halts Its Production in Venezuela. Find them in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. CONNECT Case Analysis IKEA Entering India, Finally! Summary This activity focuses on international market entry and specifically on IKEA‘ foreign entry strategy. Activity Students are asked to read a short case on IKEA‘s foreign entry strategy and then respond to a series of questions related to the case. Class Discussion Understanding the tradeoffs between the different international market entry modes is important for international managers. Discuss why IKEA s chose to enter India via a wholly owned subsidiary. What are the benefits of this strategy? Are there any drawbacks?

CONNECT Video Case Did You Know: Starbucks Enters a Foreign Nation by Joint Venture Summary This activity focuses on international market entry and specifically on Starbucks‘ strategy to use joint ventures when initially expanding into new foreign markets. Activity Students are asked to watch a video on market entry decisions and then respond to a series of questions related to the video.

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Class Discussion Understanding the trade-offs between the different international market entry modes is important for international managers. Discuss why Starbucks uses joint ventures in some markets and wy it may later buy out its partners.

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Review the Management Focus ―Tesco's International Growth Strategy,‖ and then answer the following questions. a. Why did Tesco‘s initial international expansion strategy focus on developing nations? b. How does Tesco create value in its international operations? c. In Asia, Tesco has a long history of entering into joint-venture agreements with local partners. What are the benefits of doing this for Tesco? What are the risks? How are those risks mitigated? d. When Tesco decided to enter the United States, this represented a departure form its historic strategy of focusing on developing nations. Why do you think Tesco made this decision? How is the U.S. market different from other markets that Tesco has entered? Answer: a. Tesco‘s global expansion strategy has been rather unique in the grocery industry. Rather than competing head-to-head with established retailers in developed markets like the United States and Western Europe, Tesco chose to pursue markets with strong growth potential, but little current competition. The strategy allows the company to use its expertise to grow international market share, without incurring the costs of establishing itself in already crowded markets. b. The key to Tesco‘s success in its international operations is its ability to spot markets with strong underlying growth trends, identify existing companies in those locations that have a deep understanding of the local market, form a joint venture with those companies and transfer its expertise in the industry to the venture, and later buy the partner out. The strategy is highly successful, supplementing the company‘s United Kingdom earnings with an additional $25 billion in sales in 2015. c. Tesco‘s strategy of entering foreign markets via joint ventures has proven to be highly successful. The company is able to bring its expertise in retailing as well as its financial strength to the venture where it is paired with the partner‘s knowledge of the local market. Local managers are hired to run the operations, with only support coming from expatriate managers. This format allows Tesco to use its core strengths to get into the market, and then later, after the ventures have become established, increase its ownership stake. d. Responses to this question will vary by student. Many will point out that the decision to enter the U.S. market and compete against well-established retailers runs counter to Tesco‘s traditional strategy of entering markets with strong potential but minimal competition. Some students will likely suggest that Tesco felt that the size of the U.S. market was too big to ignore. Others may wonder whether Tesco‘s success in other foreign markets emboldened the company to continue its international expansion.

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2. Licensing propriety technology to foreign competitors is the best way to give up a firm‘s competitive advantage. Discuss. Answer: The statement is basically correct; licensing proprietary technology to foreign competitors does significantly increase the risk of losing the technology. Therefore, licensing should generally be avoided in these situations. Yet licensing still may be a good choice in some instances. When a licensing arrangement can be structured in such a way as to reduce the risks of a firm‘s technological know-how being expropriated by licensees, then licensing may be appropriate. A further example is when a firm perceives its technological advantage as being only transitory, and it considers rapid imitation of its core technology by competitors to be likely. In such a case, the firm might want to license its technology as rapidly as possible to foreign firms in order to gain global acceptance for its technology before imitation occurs. Such a strategy has some advantages. By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology. And firm may be able to establish its technology as the dominant design in the industry. In turn, this may ensure a steady stream of royalty payments. However, the attractions of licensing are probably outweighed by the risks of losing control over technology, and licensing should be avoided. 3. Discuss how the need for control over foreign operations varies with firms‘ strategies and core competencies. What are the implications for the choice of entry mode? Answer: If a firm‘s competitive advantage (its core competence) is based on control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible so that the risk of losing control over that technology is minimized. For firms with a competitive advantage based on management know-how, the risk of losing control over the management skills to franchisees or joint venture partners is not that great. Consequently, many service firms favor a combination of franchising and subsidiaries to control the franchises within particular countries or regions. The subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for controlling subsidiaries. 4. A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Union market. Its choices are given below. The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If these are the firm‘s only options, which one would you advise it to choose? Why? a. Manufacture the product at home, and let foreign sales agents handle marketing. b. Manufacture the products at home, and set up a wholly owned subsidiary in Europe to handle marketing. c. Enter into an alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by a 50–50 joint venture and marketed by the European firm. Answer: If there were no significant barriers to exporting, then option (c) would seem unnecessarily risky and expensive. After all, the transportation costs required to ship drugs are small relative to the value of the product. Both options (a) and (b) would expose the firm to less risk of technological loss and would allow the firm to maintain much tighter control over the

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quality and costs of the drug. The only other reason to consider option (c) would be if an existing pharmaceutical firm could also give it much better access to the market and potentially access to its products and technology, and that this same firm would insist on the 50–50 manufacturing joint venture rather than agreeing to be a foreign sales agent. The choice between (a) and (b) boils down to a question of which way will be the most effective in attacking the market. If a foreign sales agent can be found that is already quite familiar with the market and who will agree to aggressively market the product, the agent may be able to increase market share more quickly than a wholly owned marketing subsidiary that will take some time to get going. On the other hand, in the long run the firm will learn a great deal more about the market and will likely earn greater profits if sets up its own sales force.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 Entrepreneur magazine annually publishes a ranking of the top global franchises. Provide a list of the top 25 companies that pursue franchising as their preferred mode of international expansion. Study one of these companies in detail, and describe its business model, its international expansion pattern, desirable qualifications in possible franchisees, and the support and training the company typically provides. Exercise 2 The U.S. Commercial Service prepares reports known as the Country Commercial Guide for countries of interest to U.S. investors. Utilize the Country Commercial Guide for Russia to gather information on this country’s energy and mining industry. Considering that your company has plans to enter Russia in the foreseeable future, select the most appropriate entry method. Be sure to support your decision with the information collected.

IKEA Entering India, Finally! closing case Summary The closing case explores IKEA‘s expansion into India. The Swedish retailer, renowned for its ability to maintain its entire concept in multiple foreign markets, decided that India required a different strategy. Despite its considerable experience operating in foreign markets, IKEA, aware that India is one of the largest markets in the world, wanted to avoid missteps and so carefully planned its expansion over five years, visiting some 200 homes in India and learning about the Indian lifestyle. Today, the company has about 400 employees in India, a number it expects to grow to 15,000 by 2025 as the company continues to expand its presence. Case Discussion Questions 1. What do you think are the attractions of India to IKEA?

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With its enormous market, India represents a tremendous opportunity for growth. Yet, it is also a market where there is little competition in the flat-packaging furniture industry. Most students will likely point out that IKEA stands to gain a considerable advantage if it can quickly build loyalty in India, but to do that, IKEA needs to understand the Indian consumer and retail sector and introduce the Indian consumer to IKEA. The company was particularly concerned that, in the era of social media and instant dissemination of information, that it got everything right. 2. Why did the company chose Hyderabad as the location for its first store opening? Responses to this question will vary by student, but many will likely conclude that Hyderabad was chosen as the first location for an IKEA store because other large western companies such as Microsoft had already successfully established operations in the city suggesting that the business environment in Hyderabad is welcoming of foreign companies. Students may also suggest that some employees at companies like Microsoft may have already experienced the IKEA concept in other countries where they have worked and could be important to IKEA‘s initial success in India. 3. What are the biggest challenges IKEA faces in growing its Indian operation? Since its inception, IKEA has sold its products in more or less the same way across all of its markets. The store looks essentially the same, the products sold within the store are essentially the same, and the message of good value is more or less the same, whether visiting a store in Columbus, Ohio, or a store in Chengdu, China. Most students will likely suggest that IKEA needs to capitalize on its identity and bring that identity to India. Students may agree that some changes may be necessary to better meet the needs of local customers, but that any changes to the basic concept should be minimal. Students may note, for example, that the popular meatballs sold in IKEA stores in most countries will need to be adapted for India. Already the company is introducing more color in its product line in India to appeal to the love of color in the country. 4. IKEA entered India by establishing a wholly owned subsidiary. Why do you think the company chose this entry mode over other entry modes, such as franchising the IKEA concept or a joint venture? Many students will probably suggest that IKEA chose to enter the market in India via a wholly owned subsidiary because the store experience is an essential part of the IKEA concept. Maintaining complete control over the look of the store, training of staff, and so on are essential to ensuring that customers get a real IKEA shopping experience. Choosing a joint venture or alternative form of market entry would not have provided IKEA with the control it needed to ensure that its concept was delivered correctly. Teaching Tip: Students can go to https://www.ikea.com/us/en for additional information on the company and https://www.ikea.com/in/en/this-is-ikea/ikea-india-pubb0de1ef1 for IKEA India. Video Note: To expand this discussion, consider viewing the actual IKEA store in Hyderabad, India. Go to https://www.youtube.com/watch?v=UF1gRBK15u4.

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Video Note: To expand the discussion consider how Amazon is approaching the market in India at Amazon India Launches Hindi App, Website to Address Additional 100 million Customers in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

Continuous Case Concept Since the 1970s, the world has been witness to a transformation of the auto industry from one in which domestic markets were primarily served by local companies, to one in which a few large companies serve the world. However, how the transformation took place, and indeed how it continues to change today, provides an excellent opportunity to study the process of entering foreign markets. 

Ask students to consider one of the earliest international expansion strategies by a major company, that of Toyota entering the U.S. market. Recall that Toyota chose to enter the U.S. market through a joint venture. Ask students why Toyota chose this entry method over other alternatives such as exporting or a wholly owned subsidiary. In order for Toyota to be successful in the U.S. market, what core competencies had to be transferred to the joint venture?



Next, ask students to compare Toyota‘s strategy to those of BMW, Mercedes, and Nissan, all of which expanded into the U.S. market through wholly owned subsidiaries. Did the timing of market entry have an effect on the choice of entry mode (all of these

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firms entered the U.S. later)? What advantages did BMW, Nissan, and Mercedes gain over Toyota? Were there any disadvantages? Why did all of these companies choose to locate in the Southern part of the country? 

Finally, ask students to consider the decision by Italian automaker Fiat to take control of troubled Chrysler. Rather than expanding on its own, the company decided to acquire Chrysler. What were the benefits of this decision? Were there any risks involved? How does Fiat‘s decision to acquire rather than establish a new venture help the company? Are there any drawbacks to this approach? In 2016, Fiat Chrysler spun off its exclusive Ferrari brand. What are the implications of this decision?

Students who are familiar with the auto industry will probably be able to answer these questions with some prompting at the start of the discussion on entry modes. Students who are less familiar with the industry may need some basic background information before they can contribute to the discussion in a meaningful way. In either case, this feature can be used as an introduction to the material presented in the chapter—keep the discussion very general at this point—then, after discussing the chapter material, go back and flesh out the answers a bit more. At this point, other information such as entry into the European or BRIC markets can also be incorporated.

APPLICATION-BASED ACTIVITY

ENTERING NEW MARKETS: MAKING THE RIGHT INTERNATIONAL MANAGEMENT DECISIONS

I. Introduction

Sales are soaring at Italy‘s Gelato Pergola and the homemade gelato store is gaining brand popularity by the day. Maria, the owner, thinks it is time to expand outside Italy. She wants you to help her explore some possible markets and identify the best option to enter the markets. II. Learning Objectives 1. Understand the decisions firms considering foreign market expansion should address: which markets to enter; when to enter those markets; and on what scale. 2. Evaluate the pros and cons of the various modes of entering a foreign market for a firm in a given situation. 3. Analyze market potential using market screening techniques. 4. Evaluate data to make market entry decisions. III. Scoring Dimensions

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The following theoretical concepts from the chapter are covered and scored in the simulation:

Theoretical Concepts

Percentage of Simulation

Market Entry Decisions

25%

Pros and Cons of Different Entry Modes

25%

Market Screening

25%

Evaluate Data Influencing Choice of Market and Entry Mode

25%

IV. Follow-up Activity Two students can be assigned to take on the roles of Maria and Luca as they make decisions about further international expansion. Other students can be assigned to act as country market researchers who will then make presentations to Maria and Luca about why their countries are attractive options for future expansion. These students should review information on market potential, possible competition, and entry mode choices. Students can use a variety of sources to learn about their assigned countries. One option is https://www.cia.gov/library/publications/the-world-factbook/docs/profileguide.html. Following the role play, students should return to the three basic decisions firms expanding internationally must make: which markets to enter, when to enter them, and on what scale. Students should reflect on the information they have complied and discuss the appropriate choice of entry mode. Students should understand how different factors influence which markets to enter, the choice of entry mode, as well as timing and scale decisions.

Additional Readings and Sources of Information Thailand's CP Group Buying Tesco's Thai, Malaysian Stores https://www.usnews.com/news/business/articles/2020-03-09/thailands-cp-group-buying-tescosthai-malaysian-stores Jollibee, Home of the World Famous Chickenjoy, Aims to Bring Joy During Challenging Times with New Store Opening in West Plano, Texas https://apnews.com/press-release/pr-newswire/virus-outbreak-qatar-united-arab-emirates-20192020-coronavirus-pandemic-asia-223ab8b65fb5a5cbf361372cef5873b8 The road to 2020 and beyond: What‘s driving the global auto industry? https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/%20Automotive%20and% 20Assembly/PDFs/McK_The_road_to_2020_and_beyond.%20ashx UPDATE 1-Ford to exit Russian passenger car market, cede control in JV https://www.cnbc.com/2019/03/27/reuters-america-update-1-ford-to-exit-russian-passenger-carmarket-cede-control-in-jv.html

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China‘s electric car strategy is starting to go global – and the U.S. is lagging behind https://www.cnbc.com/2020/10/23/chinas-electric-car-strategys-implications-for-us-energysecurity.html Carrefour and Google Sign Strategic Partnership to Innovate on New Distribution Models and Commerce Experiences for Shoppers in France https://www.businesswire.com/news/home/20180611005885/en/Carrefour-Google-SignStrategic-Partnership-Innovate-New Where will Starbucks be in 5 years? https://www.usatoday.com/story/money/2019/08/08/starbucks-in-5-years-china-locations-digitalexpansion/39897329/ Where Uber Is Winning the World and Where It Has Lost https://www.forbes.com/sites/bizcarson/2018/09/19/where-uber-is-winning-the-world-andwhere-it-has-lost/?sh=ab1a6b14d6ed Europe‘s ‗Luxury‘ Competitor to Uber Plans on Raising $30 Million to Fuel Global Expansion https://www.cnbc.com/2020/02/27/luxury-uber-rival-wheely-to-raise-30-million-for-globalexpansion.html Ikea Seeks to Build a New Version of Itself https://www.irishtimes.com/business/retail-and-services/ikea-seeks-to-build-a-new-version-ofitself-1.4388182 Export-Import Bank of the United States http://www.exim.gov

Exporting, Importing, and Countertrade Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Maine Coast Company Introduction The Promise and Pitfalls of Exporting Did You Know? Video Clip: Universities Are In The Export Business Improving Export Performance

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Export and Import Financing Export Assistance Countertrade 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Higher Education Exporting and International Competitiveness Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 14-1 Explain the promises and risks associated with exporting. 14-2 Identify the steps managers can take to improve their firm‘s export performance. 14-3 Recognize the basic steps involved in export financing. 14-4 Identify information sources and government programs that exist to help exporters. 14-5 Describe how countertrade can be used to facilitate exports.

Chapter Summary This chapter focuses on the ―nuts and bolts‖ of exporting and importing. The promise and pitfalls of exporting are discussed, along with a discussion of the role of export management companies in the internationalization process. The chapter also provides a nice discussion of export financing. In this section, the author discusses the financial devices that have evolved to facilitate exporting including: the letter of credit, the draft (or bill of exchange), and the bill of lading. The section ends by providing an example of a typical international trade transaction. This example illustrates the complex nature of international trade transactions. Finally, the chapter explores countertrade, its growth and the pros and cons of this type of transaction.

Chapter Opening Activity Find information about China at globalEDGE™ (globaledge.msu.edu). Find the China country profile, click on the U.S. Department of Commerce Country Commercial Guide for China, and review the chapter on Leading Sectors for U.S. Export and Investment, to discover guidance on this topic. Ask students to search local, regional, or national newspapers or magazines for stories about companies that have outsourced some piece of their value chain to another country. You might need to help them by suggesting that they look for companies in such industries as textiles, clothing, shoes, furniture, automotive parts, machine tools, or consumer electronics, as well as back-office business processes, such as accounting and call-center customer support. New sources such as the Financial Times, Wall Street Journal, and Bloomberg Businessweek carry stories about companies that have used global sourcing. Students can also research companies using Hoovers.com, Standard & Poor‘s, Mergent Online, and company websites to find out about their experiences with global sourcing.

Chapter Outline

Maine Coast Company opening case Summary The opening case explores the challenges faced by Maine Coast Company following China‘s decision to impose hefty tariffs on imported lobster. China‘s actions were in retaliation for U.S.

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tariffs assessed on Chinese imports, all part of the ongoing trade dispute with China during the Trump administration. The tariffs were devastating to Maine Coast Company, effectively pricing its product out of the Chinese market. At that time, Maine Coast Company relied on China for a significant share of its lobster sales. Today, the company has worked to develop new markets in other parts of Asia, and while overall sales are stronger, the company wonders whether it will ever be able to get its sales to China back to their pre-trade war levels. Discussion Questions 1. Why is it essential for Maine Coast Company to export its product? Could the company survive without international expansion? Maine Coast Company, like many other companies in the lobster industry, rely on international sales for much of their revenue. For Maine Coast Company, China was an especially important market, accounting for more than one-third of its total sales. Indeed, the market in China was so important that the company hired Mandarin and Cantonese speaking salespeople to help grow the business. Students should recognize that while Maine Coast Company does sell some of its product within the United States, foreign markets are critical to its success and future growth. Students should understand that, because demand for lobster in the United States is much lower than in China, it would be very difficult, if not impossible, to match its domestic sales rates to its combined domestic and international levels. Students may point out that because of perishability issues, Maine Coast Lobster does not have the flexibility to store lobster in anticipation of higher domestic demand in the future. 2. What were the implications of the Donald Trump‘s trade war with China? How did tariffs imposed by China force Maine Coast Company to choose a new strategic direction? Like many other small companies, Maine Coast Company was a victim of a much larger trade dispute. As part of a package of tariffs imposed in retaliation for U.S. tariffs on Chinese goods, China targeted U.S. lobster exports. The tariffs were devastating for Maine Coast Company, effectively pricing its product out of the lucrative Chinese market as Chinese importers turned to Canadian exporters for tariff-free lobster. To survive without its sales to China, Maine Coast Company was forced to reduce its staff and take other budget cutting actions. In addition, the company had to quickly develop new markets in other parts of Asia including Malaysia and Hong Kong. Many students are likely to suggest that the quick response by Maine Coast Company to seek out new markets was critical to its success in mitigating the damage caused by China‘s tariffs. Students may note that the company anticipates that while it will see an increase in demand from China at some point in the future, by reassigning its Mandarin and Cantonese speaking staff to develop markets in other parts of Asia, Maine Coast Lobster recognizes that the tariffs imposed by China will have long term implications for the industry. 3. Discuss the implications for Canada‘s lobster industry from China‘s tariffs on U.S. lobster imports. What does your response tell you about the nature of the lobster industry? China‘s decision to punish U.S. lobstermen for tariffs imposed on imported steel among other products was a boon for Canada‘s lobster companies and an example of the global nature of the industry. A sudden surge in demand from China for tariff-free, and therefore less costly, lobster,

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created a huge and unexpected opportunity for Canada‘s lobstermen. Students should recognize that those Canadian companies that proactively seek out new opportunities in China have a chance to develop long term business relationships with Chinese importers. Students may point out though, that Canada‘s good fortune could disappear as quickly as it arrived should Canada engage in a trade war with China. Video Note: To extend this discussion, consider How U.S.-China Trade War Is Pinching Maine’s Lobster Industry. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Maine Coast Company Summary This activity explores the implications of tariffs on U.S. lobster exports to China. Once levied, the tariffs had a direct and immediate impact on U.S. lobster companies, illustrating how trade policy can force companies to change their export strategies. Activity Students are asked to read a short case exploring the implications of tariffs on U.S. lobster exports and then respond to questions about the case. Class Discussion The tariffs imposed by Donald Trump on imported steel helped some companies and hurt others, like Maine Coast Company. Discuss how steel tariffs impacted lobster exports and how companies should respond to unexpected trade scenarios like this.

Introduction A) This chapter is concerned with the nuts and bolts of exporting (and importing). Exporting is not just for large enterprises; many small firms have benefited significantly from the moneymaking opportunities of exporting too. B) Despite the opportunities for exporting, it remains a challenge for many firms. The firm wishing to export must identify export opportunities, avoid a host of unanticipated problems that are often associated with doing business in a foreign market, familiarize itself with the mechanics of export and import financing, learn where it can get financing and export credit insurance, and learn how it should deal with foreign exchange risk. Video Note: Tariffs can present both opportunities and challenges for importers and exporters. To extend this discussion, consider How Trump’s Tariffs Changed the Fates of These Two

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Factories. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Teaching Tip: The UK Trade and Investment office provides export assistance to companies. See https://www.gov.uk/starting-to-export. Teaching Tip: Export.gov http://www.export.gov/index.asp covers the basics of exporting. You can click on various topics related to getting ready to export, developing an export plan, finding leads, and so on. The site is well worth a visit and could be used as the basis for an in-class export project. Teaching Tip: Your students may wonder how firms U.S. firms find buyers in foreign countries. To find foreign customers, exporters often use ―trade leads‖ that are provided by organizations dedicated towards the activity of matching ―buyers‖ and ―sellers‖ in an international context. An example of a site that provides trade leads is the Export.gov http://www.export.gov/index.asp.

Did You Know? Video Clip The video clip asks: ―Did you know that universities are in the export business?‖ Discussion Questions 1. Why are exports of education important to universities? While U.S. universities rely on domestic students for much of their revenue, attracting foreign students – and exporting the education service they provide – is a lucrative source of revenue. As compared to domestic students, many foreign students are willing to pay higher prices for the service they receive, a U.S. university diploma, making foreign students an important factor in budgeting decisions. By attracting higher paying foreign students, universities can fund scholarships and infrastructure improvements that influence their ability to attract promising domestic students. Students may also point out that foreign students bring an interesting dynamic to a campus setting, creating a richer experience for all students. 2. Why are exports of education important to the United States? U.S. exports of education are valued at about twice that of U.S. soybean exports making the sector an important element of the country‘s balance of payments. Students should recognize that the revenues received for tuition together with monies spent by foreign students in the United States on housing, food, tourism, and so on are important to the growth of the local economy. Indeed, many students may suggest that policymakers commit to growing this important sector of the U.S. economy. 3. Should American universities actively seek foreign students? Do you see any drawbacks to exporting U.S. education?

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Responses to this question will vary among student. Many students will probably conclude that for universities, proactively working to attract foreign students is a relatively low cost, low risk means of expanding revenues and providing a richer experience for the student body. Some students, however, may wonder whether domestic students are put at a disadvantage by the practice. Students sharing this view may note that foreign students who may be willing to pay higher tuition prices could have an advantage over domestic students. Other students may argue that even without cost considerations, filling a seat with a foreign student means one less seat for an equally qualified domestic student. Lecture Note: To learn more about exporting education, consider https://www.nytimes.com/2019/01/03/magazine/one-of-americas-most-vital-exports-educationnever-goes-abroad-but-it-still-faces-threats.html and https://www.brookings.edu/blog/browncenter-chalkboard/2017/01/31/sealing-the-border-could-block-one-of-americas-crucial-exportseducation/.

The Promise and Pitfalls of Exporting A) The potential benefits from exporting can be great. Regardless of what country a firm is based in, the rest of the world is a much larger market than the domestic market. While larger firms may be proactive in seeking out new export opportunities, many smaller firms are reactive and only pursue international opportunities when the customer calls or knocks on the door. B) Many novice exporters have run into significant problems when first trying to do business abroad, souring them on following up on subsequent opportunities. Common pitfalls include poor market analysis, poor understanding of competitive conditions, lack of customization for local markets, poor distribution arrangements, bad promotional campaigns, and a general underestimation of the differences and expertise required for foreign market penetration. Teaching Tip: A great website to visit to determine whether a company is ready to export is the International Trade Centre, run by UNCTAD/WTO. Visit http://www.intracen.org.

CONNECT Click and Drag Promise and Pitfalls of Exporting Summary This activity focuses on exporting. Despite the growth of exporting, many firms, especially smaller ones, find the process daunting. Activity Students are asked to match elements of exporting to the correct category of whether they are true statements or false statements.

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Class Discussion Exporting firms, especially those that are new to exporting, must be aware of both the promises and the pitfalls of exporting. Discuss the opportunities associated with exporting as well as the pitfalls.

CONNECT Case Analysis Improving Export Strategies and Operations Summary This activity explores how firms can improve export strategies and operations. Firms choose to export to capitalize on profit opportunities; however, without careful preparation, firms can make costly missteps. Activity Students are asked to read a short case on improving export strategies and then respond to questions about the case. Class Discussion Understanding the opportunities exporting can bring to a firm, as well as the potential pitfalls associated with exporting is important for international managers. Discuss how exporting can be beneficial to a firm and what firms need to be aware of as they enter the export market.

management FOCUS: Embraer and Brazilian Importing Summary This management focus explores aircraft maker Embraer‘s import strategy. The Brazilian-based company relies on imports for most of its raw materials and components. Brazil imposes high trade barriers, however, making it difficult to export. Moreover, it is common to bribe government officials to facilitate the import process. Discussion Questions 1. Do you expect a company like Embraer to be able to compete long term with the top aircraft manufacturers in the world today (Airbus, Boeing) by staying heavily oriented toward producing its products in Brazil? Most students will probably agree that Embraer is unlikely to be successful if it tries to produce its products entirely in Brazil. Currently, the company takes advantage of expertise in foreign countries including the United States, headquarters of Boeing, and Europe where Airbus is headquartered. Most students will probably suggest that the knowledge base that is important to the production of parts used in aircraft is much higher in these locations than in Brazil.

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2. Similar to automobile companies, aircraft manufacturers have a staggering number of suppliers that supply a staggering number of component parts that go into the production of an aircraft. While plane producers will likely need a large number of parts in the future as well, do you think they should try to consolidate those parts into a much smaller set of suppliers? Students may be divided on this question. Some are likely to suggest that a smaller number of suppliers would allow for an easier managerial process and a closer relationship between the different players. Other students, however, may note that the sheer number of parts in a plane requires different types of expertise and so different suppliers are needed. Students taking this perspective may argue that having many suppliers allows for greater agility and flexibility in production. 3. Embraer imports a lot of these parts into Brazil—a country almost notorious for being difficult to clear its customs. Should Embraer consider developing more of their own parts, either by starting companies or subsidiaries in Brazil that can make these parts or help develop companies that can? Responses to this question will probably depend on responses to the previous two questions. Many students will probably point out that Brazil does not really have the knowledge base or manufacturing capabilities to really produce its products domestically. Students sharing this point of view will probably contend that because it makes more sense to import components, Embraer would be better served to lobby the Brazilian government to work toward reducing the challenges related to importing. Other students may wonder whether Embraer could form strategic alliances with some of its suppliers to produce products in Brazil and, at the same time, encourage the government to relax regulations on importing other parts. Teaching Tip: For more information on Embraer, go to https://embraer.com/global, https://www.ft.com/content/c3d4a61f-f8da-4794-932e-92dac87017e7, and https://www.forbes.com/sites/ericrosen/2018/07/05/airplane-manufacturers-boeing-and-embraerannounce-new-partnership/#46c0cea6a6e8.

Improving Export Performance A) There are a number of ways in which inexperienced exporters can gain information about foreign market opportunities and avoid some of the common pitfalls that tend to discourage and frustrate novice exporters. INTERNATIONAL COMPARISONS B) One big impediment to exporting is the simple lack of knowledge of the opportunities available. The way to overcome ignorance is to collect information. Both Germany and Japan [Japanese Ministry of International Trade and Industry (MITI)] have developed extensive institutional structures for promoting exports. In addition, Japanese exporters can take advantage of the knowledge and contacts of sogo shosha, the country‘s great trading houses.

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INFORMATION SOURCES C) Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The most comprehensive source of information is the U.S. Department of Commerce. Teaching Tip: Students may want to visit the U.S. Department of Commerce at http://www.commerce.gov. The Small Business Administration (SBA) also has an extensive website (http://www.sba.gov) with information about exporting to different countries, contacts and leads, and so on.

management FOCUS: Exporting Desserts by a Hispanic Entrepreneur Summary This feature explores the international expansion of Lulu‘s Desserts, a company based in Torrance, California, that manufactures and distributes ready-to-eat flavored gelatin desserts inspired by its owner‘s Mexican heritage. After a decade of building brand recognition in the United States, LuLu‘s Desserts began exporting to countries throughout North America and around the world. Discussion Questions 1. Desserts are often localized in taste. Beyond the United States and Mexico, where do you think Lulu‘s Dessert products would be favorably received by customers? Responses to this question will vary by student, but many will probably suggest that Lulu‘s Dessert products would be well received in markets similar to Mexico. The company has achieved great success in exporting its product to Mexico, suggesting that it suits the tastes and preferences of Mexican consumers. Other students may wonder whether the company should explore market opportunities in fast-growing markets like China. 2. Lulu‘s Dessert used services of the U.S. Export-Import Bank to help with knowledge and market segmentation for her desserts as a part of exporting the company products. The Ex-Im Bank receives lots of positive and negative reviews in the United States; do you think it is helpful that the United States has an export-import bank to assist U.S. companies? Most students will probably agree that the prospect of expanding a business to foreign markets can be daunting. Having an organization ready to provide information and expertise on the ins and outs of exporting probably helps drive success. Students may recommend, however, that rather than relying on the advice of a single organization, it is important for companies to do their homework and get recommendations from multiple sources.

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SERVICE PROVIDERS D) Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms. E) EMCs normally accept two types of export assignments. They start exporting operations for a firm with the understanding that the firm will take over operations after they are well established, and EMCs start services with the understanding that the EMC will have continuing responsibility for selling the firm‘s products. F) In theory, the advantage of EMCs is that they are experienced specialists who can help the neophyte exporter identify opportunities and avoid common pitfalls. However, studies have revealed a large variation in the quality of EMCs. Therefore, an exporter should carefully review a number of EMCs, and check references from an EMC's past client, before deciding on a particular EMC. Teaching Tip: The FITA Directory of Export Management Companies (http://fita.org/index.html) provides information on export management companies, trade leads and international market research. CONNECT Click and Drag Business and Government Responses to Exporting Summary This activity focuses on exporting and the tools that companies can use to facilitate it. Activity Students are asked to match business issues with the correct challenge and response. Class Discussion Companies that export must deal with numerous challenges. Understanding the challenges and the tools that can be used to overcome them is important for international managers. Discuss the challenges of exporting and what companies can do to respond to those challenges. EXPORT STRATEGY G) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it is careful about its choice of exporting strategy. H) Firms can take several steps to help improve their export success. 1. Particularly for the novice exporter, it does help to hire an EMC, or at least an experienced export consultant, to help with the identification of opportunities and navigate through the tangled web of paperwork and regulations so often involved in exporting.

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2. It often makes sense to initially focus on one, or a handful, of markets. 3. It may make sense to enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failure. 4. The exporter needs to recognize the time and managerial commitment involved in building export sales and should hire additional personnel to oversee this activity. 5. In many countries, it is important to devote a lot of attention to building strong and enduring relationships with local distributors and/or customers. 6. It is important to hire local personnel to help the firm establish itself in a foreign market. 7. It is important for the exporter to keep the option of local production in mind.

management FOCUS: Two Men and a Truck Summary This feature explores focuses on the development and international expansion of Two Men and a Truck. Founded in 1985, the company now has 320 locations worldwide and has more than $300 million in sales, 2,100 moving trucks, and about 6,000 workers. Under the Two Men and a Truck name, the company operates in such countries as Canada, Ireland, and the United Kingdom. Taken together, the typical customer looks for a local franchise for service while the franchisee benefits from the U.S. brand power of the company. Discussion Questions 1. What are some of the factors that Two Men and a Truck focus on prior to entering a market? Are there other market attributes you could suggest? The factors that the company focuses on mainly relate to the middle-class size and population mobility within a specific country. Other factors that are considered include the possibility of gathering accurate market research and identifying potential master franchisees. One attribute that students may suggest could relate to growth. More exactly, the growth of mobility or middle class in a particular country may lead Two Men and a Truck to consider other markets. 2. Why is it that localized names such as ―Two Blokes and a Lorry‖ did not appeal to the decision makers at Two Men and a Truck? Adapting the Two Men and a Truck brand to local terms is not something that appealed to investors in specific countries. They were looking for the U.S. brand and its power and mystique. Though something like ―Two Blokes and a Lorry‖ might relate locally, the quality related to the Two Men and a Truck brand is much more substantial and appealing. Teaching Tip: To learn more about Two Men and a Truck, go to https://twomenandatruck.com.

THE GLOBALEDGE™ EXPORTING TOOL I) Four diagnostic tools are available at the globalEDGE™ website. The tools are CORE,

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PARTNER, DISTRIBUTOR, and FREIGHT. The CORE tool represents a self-assessment tool of a company‘s exporting proficiency based on its strengths and weaknesses. THE PARTNER tool assists in the analysis and evaluation of potential international partners. The DISTRIBUTOR tool helps exporting firms evaluate and compare foreign distributor or agent candidates. The FREIGHT tool assists companies in selecting their most appropriate international freight forwarder.

Export and Import Financing A) Mechanisms for financing exports and imports have evolved over the centuries in response to a problem that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger. LACK OF TRUST B) Firms engaged in international trade face a problem. They have to trust someone who may be very difficult to track down if they default on an obligation. C) The problems arising from a lack of trust between exporters and importers can be solved by using a third party who is trusted by both, normally a reputable bank. Teaching Tip: Trade Port provides a global trade tutorial on export financing. The tutorial is available at http://www.tradeport.org. The site provides excellent details on the exporting and is well worth a visit. LETTER OF CREDIT D) A letter of credit stands at the center of international commercial transactions. Issued by a bank at the request of an importer, the letter of credit states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. Draft E) A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce for payment. A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time. A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment, normally 30, 60, 90, or 120 days. BILL OF LADING F) The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three purposes: it is a receipt, a contract, and a document of title. A TYPICAL INTERNATIONAL TRANSACTION G) The entire process for conducting a trade transaction is summarized in Figure 14.7.

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CONNECT Click and Drag Financing Exports and Imports Summary This activity focuses on export financing. Various mechanisms such as letters of credit have evolved over time to help exporters deal with issues related to trust, currencies, differing legal systems, and the like. Activity Students are asked to put the steps involved in an international transaction using a letter of credit into the correct order. Class Discussion Exporters must deal with issues related to trust, foreign currencies, differing legal systems, and so forth. Discuss the mechanisms that have evolved over time to deal with these issues.

Export Assistance A) Prospective U.S. exporters can draw on two forms of government-backed assistance to help their export programs. They can get financing aid from the Export-Import Bank and export credit insurance from the Foreign Credit Insurance Association. Video Note: To explore an international example of export assistance from the World Bank, consider World Bank: Helping Moldovan Wine Exports in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. EXPORT-IMPORT BANK B) The Export-Import Bank (Ex-Im Bank) is an independent agency of the U.S. government. Its mission is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries. Teaching Tip: Students can explore the Export-Import Bank in more depth at http://www.exim.gov. Lecture Note: Ex-Im Bank‘s position can be a contentious one in the political realm. To learn more go to https://www.forbes.com/sites/adammillsap/2019/09/18/the-united-states-doesnt-needthe-export-import-bank-to-thrive/?sh=259339c41ec3.

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EXPORT CREDIT INSURANCE C) In the U.S., export credit insurance is provided by the Foreign Credit Insurance Association (FCIA). FCIA provides coverage against commercial risks and political risks.

Countertrade A) Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. Countertrade denotes a whole range of barter like agreements; its principle is to trade goods and service for other goods and services when they cannot be traded for money. The text provides several examples of countertrade. THE POPULARITY OF COUNTERTRADE B) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the 1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports. There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997. TYPES OF COUNTERTRADE C) Countertrade can be categorized into five distinct types of trading arrangements: barter, counterpurchase, offset, switch trading, and compensation or buyback. Barter D) Barter is a direct exchange of goods and/or services between two parties without a cash transaction. Barter is viewed as the most restrictive countertrade arrangement. It is used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy. Counterpurchase E) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. Offset F) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made. Switch Trading G) Switch trading refers to the use of a specialized third-party trading house in a countertrade arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country. Switch trading occurs when a third-party trading house buys the firm‘s counterpurchase credits and sells them to another firm that can better use them. Compensation or Buybacks

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H) A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant‘s output as a partial payment for the contract. PROS AND CONS OF COUNTERTRADE I) Countertrade‘s main attraction is that it can give a firm a way to finance an export deal when other means are not available. If a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement. J) In some cases, a countertrade arrangement may be required by the government of a country to which a firm is exporting goods or services. K) The drawbacks of countertrade are substantial. Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably. L) Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading. CONNECT Case Analysis Wanna Trade? Summary This activity explores countertrade. As Venezuela continues to deal with its economic crisis, multinational companies have been forced to withdraw from the country. Those that are still trying to be paid for products they have sold are finding that they may get paid in other products. Activity Students are asked to read a short case on countertrade and then respond to questions about the case. Class Discussion Receiving goods for goods may not be a preferred method of exchange for many companies, but in some cases, it may be the only choice. Discuss the situation in Venezuela and how companies should respond.

360° VIEW: MANAGERIAL IMPLICATIONS Impact of The Macro Environment

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A) The trade environment is not static. Exporters need to be aware of developments and the implications of those developments for their business. B) Changes in tariffs, such as the ones imposed by China in 2018 in retaliation for tariffs imposed by the United States, can create both opportunities and threats for exporters. B) Changes in the trade environment could also mean that the calculus leading to the choice of exporting over establishing production facilities in the target country could change. C) Hedging strategies can limit exposure to risk resulting from unexpected changes in foreign exchange rates. D) It is also important to consider the long-term potential of a market before investing in developing an export market. This type of analysis is especially important for exporters with limited resources. Video Note: Importers and exporters need to be aware of changes in the macro environment and how those changes might impact their export or import strategies. There are a number of video cases available to extend the discussion of the impact of the macro environment for importers and exporters. A few to consider are China’s Zealous Coronavirus Tests on Frozen Foods Vex Partners, California Winemakers Squeezed by U.S.-China Trade War, and China Targets U.S. Farmbelt with Latest Tariffs. Find them, and others, in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. CONNECT Case Analysis Higher Education Exporting and International Competitiveness Summary This activity focuses U.S. exports of higher education and why they are important to the U.S. economy and the competitiveness of the U.S. workforce. Activity Students are asked to read a short case on U.S. exports of higher education and then respond to a series of questions related to the case. Class Discussion Discuss the value of U.S. exports to the U.S. economy and to the competitiveness of the U.S. workforce. Should the United States be doing more to promote education exports?

CONNECT Video Case Did You Know: Universities Are in The Export Business

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Summary This activity focuses on exporting higher education. Universities across the United States have worked to attract foreign students, effectively exporting education. Indeed, the value of higher education exports from the United States is now larger than the exports of U.S. soybeans, the country‘s biggest agricultural export. Activity Students are asked to watch a video on higher education exports and then respond to a series of questions related to the video. Class Discussion Discuss why universities are exporting education. How does it benefit universities? What are the implications of the practice for U.S. economic growth?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. A firm based in California wants to export a shipload of finished lumber to the Philippines. The would-be importer cannot get sufficient credit from domestic sources to pay for the shipment but insists that the finished lumber can be quickly resold in the Philippines for a profit. Outline the steps the exporter should take to effect this export to the Philippines. Answer: The exporter should recommend that the importer apply to Ex-Im Bank for a loan. ExIm Bank has a direct lending operation under which it lends dollars to foreign borrowers for use in purchasing U.S. exports. The foreign borrowers use the loans to pay U.S. suppliers and repay the loan to Ex-Im Bank with interest. 2. You are the assistant to the CEO of a small technology firm that manufactures quality, premium-priced, stylish clothing. The CEO has decided to see what the opportunities are for exporting and has asked you for advice as to the steps the company should take. What advice would you give the CEO? Answer: This question is designed to stimulate classroom discussion and/or to encourage your students to ―think‖ about the export process in completing a written answer for this question. There are a number of approaches that can be pursued in answering this question. The first step might be to tap into some of the government information sources that are available, free of charge, to see if international markets are available for the company‘s product. There are also resources on the Internet, mentioned throughout the text, that can assist companies in learning about the foreign market potential of their products. Another approach would be to contact an export management company for assistance. While this approach may involve some cost, it may be the fastest way to get ―up and running‖ in regard to initiating an export program. 3. An alternative to using a letter of credit is export credit insurance. What are the advantages and disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a

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luxury yacht from California to Canada and (b) machine tools from New York to Ukraine? Answer: Exporters prefer to get letters of credit from importers. However, when the importer is in a strong bargaining position and able to play competing suppliers off against each other, an exporter may have to forgo a letter of credit. The lack of a letter of credit exposes the exporter to the risk that the foreign importer will default on payment. The exporter can insure against this possibility by buying export credit insurance. Students may suggest that in the case of the luxury yacht, should the importer fail to make payment, the clearly defined laws of Canada would make it easier to go after the importer than would be the case with the machine tools in the Ukraine, and that therefore a letter of credit is less important for the yacht exporter. On the other hand, students may note that there is probably more competition in machine tools as compared to luxury yachts and that the exporter of machine tools may lose the sale if the exporter insists on a letter of credit. 4. How do you explain the use of countertrade? Under what scenarios might its use increase further by the year 2025? Under what scenarios might its use decline? Answer: This question requires students to speculate on the future state of global trade. As trade between developing and developed countries and trade among developing countries continues to grow, many students will predict that the popularity of countertrade will increase by the year 2025. Some students may predict a decline in the popularity of countertrade by 2025 as countries from the former Soviet Union and Eastern European Communist bloc either become members of the EU and adopt the fully convertible euro as their currency or develop their own fully convertible currency. 5. How might a company make strategic use of countertrade schemes as a marketing weapon to generate export revenues? What are the risks associated with pursuing such a strategy? Answer: Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. The governments of developing countries sometimes insist on a certain amount of countertrade. Thus, if a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement. Companies that are willing to entertain countertrade as a means of financing, will have an advantage over those firms that prefer traditional forms of financing. Firms engaging in countertrade must be willing to invest in an inhouse trading department dedicated to arranging and managing countertrade deals and must be aware of the quality of the products received in countertrade deals.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 One way that exporters analyze conditions in emerging markets is through the use of macroeconomic indicators. The Market Potential Index (MPI) is a yearly study conducted by Michigan State University’s International Business Center to compare the market potential of

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country markets for U.S. exporters. Provide a description of the products. The Brazilian company requested an FOB price quote. One of your colleagues mentioned to you that FOB is part of a collection of international shipping terms called ―Incoterms,‖ but that was all he knew. Find the Export Tutorials on the globalEDGE™ site, and find a more detailed explanation of dimensions used in the index. Which of the dimensions would have greater importance for a company that markets wireless devices? What about a company that sells clothing? Exercise 2 You work in the sales department of a company that manufactures and sells medical implants. A Brazilian company contacted your department and expressed interest in purchasing a large quantity of your Incoterms. For an FOB quote, what line items will you need to include in your price quote, in addition to the price your company will charge for the products?

Higher-Education Exporting and International Competitveness closing case Summary The closing case explores U.S. exports of higher education. In 2018, some 1.1 billion foreign students, many from China and India, contributed $42 billion in revenues to U.S. colleges and universities, an amount almost double that of America‘s top agricultural export, soybeans. Yet, despite the value of higher education exports, there is a growing trend to limit its potential. The nationalistic agenda espoused by some policymakers threatens the future of U.S. exports of higher education and the competitiveness of the U.S. workforce. Case Discussion Questions 1. How does higher education affect the balance of trade? When an American university or college admits a foreign student, the institution effectively exports the education. The tuition, fees, room and board, and so on paid by the foreign student counts as export revenue. Similarly, when an American student studies at a foreign institution, that student‘s fees are counted as an import. In 2018, the United States had an education trade surplus of more than $34 billion. Foreign students effectively fund 455,000 U.S. jobs. 2. Why do you think policymakers have little awareness that U.S. higher educational institutions are major exporters? Responses to this question will vary by student. Many will probably suggest that the nationalistic actions of some U.S. policymakers are misguided and ignorant when it comes to establishing policies that limit the ability of foreign students to pursue an education in the United States. Students sharing this view may contend that these policymakers are trying to appeal to the segment of the U.S. population that believe that the presence of foreign people in the United States is a threat to their own opportunities. Other students may argue that some politicians

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simply have not recognized the sheer value of higher education exports and what it means for the economy of the United States and the competitiveness of the U.S. workforce. Students taking this perspective may suggest that it is important for colleges and universities to highlight the value they bring to the country when they attract foreign students. 3. Given the importance of higher education in driving export earnings, what policies should states and the federal government adopt to help educational institutions grow their exports? Responses to this question will vary. Many students may suggest that policymakers work to ensure that students do not face unnecessary entry requirements in order to study in the United States. Other students may suggest expanding the role of the U.S. Department of Commerce and its existing efforts to provide assistance to colleges and universities that would like to recruit foreign students, but have little experience in doing so. Still other students may recommend that higher education receive greater attention as part of the country‘s trade policy, making it eligible to receive incentives in a manner similar to U.S. exports like agricultural products. 4. Should higher educational institutions seek out more foreign students? What are the benefits of doing this for the institutions and for the nation in which they are based? What are the costs? Students will have differing opinions as to whether the colleges and universities should recruit more foreign students. Many will appreciate the diversity and resources that foreign students bring to a college campus and suggest that colleges continue in their recruitment efforts, while still maintaining a balance in favor of domestic students. Some students may point out that colleges must be careful to ensure that foreign students come from a wide variety of countries, rather than just a few, and that the interests of those students are also broad, so that their presence is reflected across various courses of study. Lecture Note: To extend this discussion consider exploring the U.S. Department of Commerce site where various efforts to promote education exports are presented. To learn more, go to https://www.trade.gov/education-serviceexports#:~:text=U.S.%20Education%20Service%20Exports&text=During%20the%202018%2F2 019%20academic,supported%20over%20458%2C000%20U.S.%20jobs.

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Students are asked to respond to a series of question related to the geographic location of several countries. Class Discussion Understanding the geographic location of countries is essential to the understanding of international business. Ask students to discuss the implications of the geographic locations of the countries in this exercise on the subject matter.

Continuous Case Concept One of the issues that the world‘s automakers must contend with as they search the world for the most efficient suppliers and locate production in the most optimal location is importing and exporting, and the costs involved in the process. China and India have attracted significant attention recently as both production locations and as growth markets. For suppliers, the globalization of the industry implies that supplier operations become international too, and consequently introduces new risks and concerns. 

Ask students to consider production in China and India. Costs have been rising for imports, and shipping finished cars out is also becoming more expensive. Hyundai India for example, shifted production of its premium hatchback to Europe to save on import duties and transportation costs. Is there still any benefit to locating production in China or India given these rising costs?

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Autos are an important source of exports for Central and Eastern European countries. Numerous automakers including VW, Toyota, Peugeot, and Skoda have production facilities in Central and Eastern European countries. What makes these countries attractive export bases?

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As a supplier, how can you protect yourself when dealing with companies from foreign countries? Does the fact that you are dealing with Toyota or BMW mitigate the need for letters of credit? Why or why not?

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The U.S. Small Business Administration offers assistance to individuals wishing to become registered vehicle importers. What types of assistance are available to suppliers seeking to sell their products to automakers located in foreign markets?

This exercise works well as a summary for the material discussed in the chapter. The first question can also be used as an introductory discussion. To extend the material and incorporate the discussion of previous chapters, ask students to develop a plan using the various websites given within this chapter, or ones they have found on their own, to market their products internationally. The plan should include a description of their product, the identification of prospective customers and their locations, a discussion of issues that could affect exporting to those destinations, and the ways the supplier can protect itself financially.

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Additional Readings and Sources of Information Boeing Terminates Agreement to Establish Joint Ventures with Embraer https://boeing.mediaroom.com/2020-04-25-Boeing-Terminates-Agreement-to-Establish-JointVentures-with-Embraer How Maine's Lobster Industry Got Trapped in Trump's Trade Wars https://time.com/5873903/maine-lobster-trump-trade-wars/ One of America‘s Most Vital Exports, Education, Never Goes Abroad, but It Still Faces Threats https://www.nytimes.com/2019/01/03/magazine/one-of-americas-most-vital-exports-educationnever-goes-abroad-but-it-still-faces-threats.html Near-Record U.S. Ag Exports Seen with China Back as Top Customer https://www.agriculture.com/news/business/near-record-us-ag-exports-seen-with-china-back-astop-customer Why Your Business Should Get iInto The Export Market https://www.forbes.com/sites/forbescommunicationscouncil/2017/07/06/why-your-businessshould-get-into-the-export-market/#397c4ade4aea The U.S.–China trade war has begun. Here‘s how things ot to this point. Video: https://www.washingtonpost.com/news/worldviews/wp/2018/07/05/a-timeline-of-howthe-u-s-china-trade-war-led-us-to-this-code-red-situation/?utm_term=.ef9bb94573a4 How the NBA went global https://www.washingtonpost.com/news/made-by-history/wp/2017/12/26/how-the-nba-wentglobal/?utm_term=.bdebeb3782b1 6 of Top 10 U.S. Imports Are Also Top 10 Exports https://www.forbes.com/sites/kenroberts/2018/02/28/six-of-top-10-u-s-imports-are-also-top-10exports/#31535d032edb Apple, Nike and Starbucks Will Be the Biggest Victims of Trump‘s China Tariffs https://www.forbes.com/sites/johntamny/2018/04/22/apple-nike-and-starbucks-will-be-thebiggest-victims-of-trumps-china-tariffs/#3c0863b11b48 92 Percent of Trump‘s China Tariff Proceeds Has Gone to Bail Out Angry Farmers https://www.cfr.org/blog/92-percent-trumps-china-tariff-proceeds-has-gone-bail-out-angryfarmers Did Trump‘s Tariffs Benefit American Workers and National Security? https://www.brookings.edu/policy2020/votervital/did-trumps-tariffs-benefit-american-workersand-national-security/

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Global Production and Supply Chain Management Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: China: The World‘s Manufacturing Hub in the Wake Of Trade Wars and Covid-19 Introduction Strategy, Production, and Supply Chain Management Did You Know? Video Clip: COVID-19 Has Disrupted Global Supply Chains Where to Produce Make-or-Buy Decisions Global Supply Chain Functions Managing a Global Supply Chain 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Blockchain Technology and Global Supply Chains Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 15-1 Explain why production and supply chain management decisions are of central importance to many global companies. 15-2 Explain how country differences, production technology, and production factors all affect the choice of where to locate production activities. 15-3 Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge. 15-4 Identify the factors that influence a firm‘s decision of whether to source supplies from within the company or from foreign suppliers. 15-5 Understand the functions of logistics and purchasing (sourcing) within global supply chains. 15-6 Describe what is required to efficiently manage a global supply chain.

Chapter Summary This chapter explores the issues associated with global operations management. At the outset, the terms operations, production, and material management are defined, and then it goes on to discuss the importance of total quality management (TQM) and ISO 9000. Particular emphasis is placed on the topics of where international firms should locate their manufacturing operations and how international firms decide whether to make or buy component parts. With regard to the former, the chapter discusses how country factors, technological factors, and production factors influence a manufacturer‘s location decision. The chapter provides a balanced discussion of the advantages and disadvantages of buying components parts (in the world marketplace) opposed to making them in-house. The chapter concludes with a discussion of what is required to efficiently manage a global supply chain.

Chapter Opening Activity Form small groups, and ask students to research a few large, public manufacturing companies in that have expanded internationally by putting production facilities in other countries in Southeast Asia, Latin America, Europe, or Africa. Ask them to find out if these manufacturing facilities produce there to export back to the firm‘s home country, for export to third countries, or for sale in local markets. Students can research companies using Standard & Poor‘s, Merchant Online, company websites, the Financial Times, Wall Street Journal, and Bloomberg Businessweek to learn about the manufacturing configurations. The examples will help illustrate a later discussion about motives for doing business internationally, and centralized and decentralized production location decisions.

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Chapter Outline

China: The World‘s Manufacturing Hub in the Wake of Trade Wars and COVID-19 opening case Summary The opening case explores how China came to be the factory floor for the world and the implications of relying on a single country in times of global crises like the COVID-19 pandemic and long-term trade disputes. Many companies were already rethinking their reliance on China as a manufacturing location as Donald Trump waged war with Beijing over the trade imbalance between the two countries. The global pandemic only served to heighten concerns that a diversification strategy, while potentially more costly from a production standpoint, could be a better long-term strategy. Discussion Questions 1. How did China emerge as the manufacturing hub for the world? Why makes it attractive as a manufacturing location or location from which to source products? Do you see other countries in the region that could benefit from China‘s success? Many students will suggest that China‘s low-cost labor force was instrumental in its development as a global manufacturing hub, however students should recognize that many other countries also have low-cost labor yet did not achieve China‘s status. Students should point out that in addition to being low cost, China‘s large labor force is also relatively well educated. In recent years, China, with its world class logistics network, decades of experience, and strong group of supporting industries, has cemented its position as a leader in manufacturing. Some students may point out that China‘s success as a manufacturing hub has put upward pressure on wages in the country. Indeed, other countries in the region like Vietnam and Malaysia are now emerging as important locations for companies looking for a low-cost labor force. These countries however, at least for now, are unable to match China‘s prowess as a manufacturing hub. 2. Why have the past few years challenged China‘s position as a go-to location for production? Should companies move at least some of their production out of China? Donald Trump entered the White House ready to challenge China over the trade imbalance between the two nations. Trump quickly moved to enact a series of tariffs on Chinese imports, to which China responded in kind. The relationship between the two countries quickly spiraled into a length dispute making it difficult for companies relying on China for products. Indeed, the uncertainty prompted many companies to move part, or all, of their manufacturing or outsourcing to other Asian countries including Malaysia and Vietnam. The COVID-19 pandemic was a further wakeup call to many international companies that had perhaps become complacent in their over reliance on China. The pandemic served to disrupt supply chains, forcing companies

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to scramble for inventory to meet just-in-time manufacturing, and leaving some companies with limited supplies of products. Now, many companies are rethinking their global supply chains and strategies of relying on China and instead are considering developing regional manufacturing locations or suppliers. Students should recognize that while there may be additional costs associated with a regional strategy, the strategy would also act as a buffer in times of uncertainty. Lecture Note: To extend this discussion, consider a podcast from McKinsey & Company. Find it at https://www.mckinsey.com/business-functions/operations/our-insights/covid-19-and-supplychain-recovery-planning-for-the-future. Video Note: To extend this case, consider https://www.defense.gov/Explore/News/Article/Article/2276540/covid-19-pandemic-revealssupply-chain-vulnerability/.

CONNECT Case Analysis China: The World’s Manufacturing Hub in the Wake of Trade Wars and COVID-19 Summary This activity focuses on global supply chains and the role of China as a global manufacturing hub. China‘s emergence as the world‘s factory has been remarkable. In 2018, China accounted for more than 28 percent of global manufacturing output. The country was also responsible for more than 13 percent of global exports in 2019. Activity Students are asked to read a short case on China‘s position as the manufacturing hub for the world and then respond to a series of questions related to the video. Class Discussion Understanding global production and supply chain management is important for international managers. Discuss why China became the world‘s factory floor and why many companies are now wondering if it is time to diversify their global supply chains.

Introduction A) In this chapter, we look at five questions:   

Where in the world should productive activities be located? What should be the long-term strategic role of foreign production sites? Should the firm own foreign production activities, or is it better to outsource those activities to independent vendors?

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 

How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?

Strategy, Production, and Supply Chain Management A) This chapter focuses on two activities—production and supply chain management, and attempts to clarify how these activities might be performed internationally to (1) lower the costs of value creation and (2) add value by better serving customer needs. B) Production refers to activities involved in creating a product. Supply Chain management refers to the integration and coordination of logistics, purchasing, operations, and market channels from raw material to the end-customer. These two activities are closely linked because a firm‘s ability to perform its production activities efficiently depends on a timely supply of high-quality material and information inputs, for which purchasing and logistics are critical functions. Did You Know? Video Clip The video clip asks: ―Did You Know COVID-19 Has Disrupted Global Supply Chains ?‖ Discussion Questions 1. What is a global supply chain, and what does global supply chain management mean? Global supply chain management means breaking down an international or global business project, from incoming raw materials to delivery to final customers, into discrete, simple, and sequential steps to help produce, move, and deliver products to customers. 2. How has COVID-19 disrupted global supply chains? Global supply chains around the world were thrown into chaos early in the global COVID-19 pandemic. As countries moved to close borders and issued stay-at-home orders, the shipping industry ground to a half and factories shuttered their doors. For companies relying on complex, timed deliveries of raw materials, component parts, or finished goods, the situation was dire. Many were forced to delay production or halt it entirely until things reopened. Even months into the pandemic, global supply chains are still being disrupted. 3. How might companies reevaluate their supply chain strategies following the disruptions caused by COVID-19 shutdowns? Following the chaos of 2020, many companies will likely reevaluate their supply chain strategies. Some may move to diversify their suppliers, perhaps moving to a system where parts and raw materials are sourced regionally rather than from a single country. Others may invest in multiple production locations, again on a regional basis, to have more flexibility to change

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production in the event of another crisis. Still others, may reconsider domestic production and sourcing to ensure they have within-border access to vital parts of their supply cahins. Lecture Note: To extend the discussion of supply chains in a post-COVID world, consider

https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world..

C) The objectives of the production and supply chain management functions (purchasing and logistics) are to lower the costs and increase product quality by eliminating defective products from both the supply chain (both upstream and downstream) and the manufacturing process. These two objectives are interrelated (see Figure 15.1 in the text). D) There are three ways in which improved quality control reduces costs. First, productivity increases because time is not wasted manufacturing poor quality products that cannot be sold. This savings leads to a direct reduction in unit costs. Second, increased product quality means lower re-work and scrap costs associated with defective products. Third, greater product quality means lower warranty costs and less time fixing defective products. The net effect is to lower the costs of value creation by reducing both manufacturing and service costs. E) The main management technique that companies are utilizing to boost their product quality is Six Sigma quality improvement methodology, a direct descendant of total quality management (TQM). TQM is a management philosophy that takes as its central focus the need to improve the quality of a company‘s products and services. F) Many companies have adopted a successor to TQM programs known as a Six Sigma program (a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company.) The growth of international standards in some cases focused greater attention on the importance of product quality. The European Union, for example, requires that the quality of a firm‘s manufacturing processes and products be certified under a quality standard known as ISO 9000 before the firm is allowed access to the European marketplace. G) In addition to lowering costs and improving quality, international businesses have two further objectives. First, the production and supply chain functions must be able to accommodate demands for local responsiveness. Second, production and the supply chain must be able to respond quickly to shifts in customer demand. Lecture Note: To extend the discussion on TQM and Six https://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-sigma.

Sigma

Where to Produce A) Companies contemplating international production need to consider three broadly defined factors when making a location decision: country factors, technological factors, and product factors.

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CONNECT Video Case Volkswagen’s Jurgen Stackmann on the New Jetta, Atlas, and Electric Cars Summary This activity focuses on global production and global supply chain decisions. Managers making decisions in this area must be cognizant of the country factors that have implications for these decisions. Activity Students are asked to watch a video on global supply chain management and then respond to a series of questions related to the video. Class Discussion International businesses make complex decisions about where to locate production activities and how to manage the global supply chain. Discuss why these decisions are so complex. COUNTRY FACTORS B) As discussed earlier, country factors suggest that a firm should locate its various manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity. However, regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes. Video Note: The United Kingdom‘s departure from the European Union created supply chain uncertainty for companies within the country, within the European Union, and for those doing business with the United Kingdom and the European Union. To extend this discussion, consider Why Brexit Uncertainty Means Companies Plan for The Worst. Find it, in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

Teaching Tip: The United States Central Intelligence Agency has compiled an informative ―country profile‖ on each country in the world. The country profiles can be downloaded at https://www.cia.gov/library/publications/the-world-factbook. Students can use the reports as a basis for comparing different production locations.

management FOCUS: IKEA Production in China Summary This feature describes IKEA‘s production in China. IKEA, founded in 1943, is a global leader in the low-cost, high-style home furnishings market. The company prides itself on its design and maintains that part of its business at its headquarters in Sweden. To keep its prices low, the company relies on suppliers in China and other Asian countries. Today, IKEA relies on China

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for more than 20 percent of its global procurement, using some 300 Chinese suppliers. Discussion Questions 1. What makes China such an attractive production location for IKEA? Are there other locations that share the same characteristics? Several factors make China an attractive production location for IKEA. Perhaps the most important factor is the country‘s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company‘s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low-cost workforces, they do not have the industrial base that is present in China. Most students will probably note that the growing importance of China as a production location is shown in the fact that IKEA's two biggest warehouses are located in Shanghai. 2. Would it make sense for IKEA to make China into a global supply base from which its products will be exported around the world? Consider the advantages and disadvantages of this strategy. Cost is an important element in IKEA‘s strategy and for the company‘s goal of being a market leader. In order to offer its low prices, IKEA must ensure that its manufacturing costs are also low. Currently, IKEA designs its 12,000 products in Sweden and then manufactures many of them in China. Students should recognize that using China as a global supply base from which to serve the world would offer several advantages to IKEA. By having a single production location, the company could capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, IKEA could be in serious trouble if it has no alternate locations to fill production gaps. Teaching Tip: Students can explore the company in more depth by going to https://www.ikea.com/us/en. Video Note: To extend the discussion of this feature, consider IKEA‘s recent efforts in the United States. Go to https://www.cnbc.com/2017/01/15/ikeas-strategy-stick-to-the-retail-basicsand-expand-in-the-us.html.

TECHNOLOGICAL FACTORS C) The type of technology a firm uses in its manufacturing can be pivotal in location decisions. Three characteristics of a manufacturing technology are of interest here: the level of fixed costs, its minimum efficient scale, and its flexibility.

Fixed Costs

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D) In some cases, the fixed costs of setting up a manufacturing plant are so high that a firm must serve the world market from a single location or from very few locations. Minimum Efficient Scale E) The larger the minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) of a plant, the greater the argument for centralizing production in a single location or a limited number of locations. Flexible Manufacturing and Mass Customization F) The term flexible manufacturing technology—or lean production as it is often called— covers a range of manufacturing technologies that are designed to (1) reduce set up times for complex equipment, (2) increase the utilization of individual machines through better scheduling, and (3) improve quality control at all stages of the manufacturing process. G) Flexible manufacturing technologies allow a company to produce a wider variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output. The term mass customization has been coined to describe this ability. Mass customization implies that a firm may be able to customize its product range to suit the needs of different customer groups without bearing a cost penalty. H) Flexible machine cells are another common flexible manufacturing technology. A flexible machine cell is a grouping of various types of machinery, a common materials handler, and a centralized cell controller (computer). I) The adoption of flexible manufacturing technologies can help improve the competitive position of firms. Most importantly, from the perspective of an international business, flexible manufacturing technologies can assist in the process of customizing products to different national markets in accordance with demands for local responsiveness. PRODUCTION FACTORS J) Several production factors feature prominently into the reasons why production facilities are located and used in a certain way worldwide. They include (1) product features, (2) locating production facilities, and (3) strategic roles for production facilities. Product Features K) Two product factors impact location decisions. The first is the product‘s value-to-weight ratio because of its influence on transportation costs. If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it to other parts of the world. If the valueto-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world. L) The other product feature that can influence location decisions is whether the product serves universal needs—needs that are the same all over the world. Since there are few national differences in consumer taste and preference for such products, the need for local responsiveness is reduced. This increases the attractiveness of concentrating manufacturing in a central location.

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Locating Production Facilities M) There are two basic strategies for locating manufacturing facilities: concentrating them in the optimal location and serving the world market from there, and decentralizing them in various regional or national locations that are close to major markets. The appropriate strategic choice is determined by the various country, technological, and product factors discussed in this section. A summary of this material is provided in Table 15.1 in the text. Video Note: Volvo is committed to producing vehicles in the United States. To learn more, consider Volvo Cars - CEO - It's Important to Build in the US. Find it, in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Whether to Concentrate or Decentralize Production Summary This activity explores the decision faced by international firms about where to locate their production facilities. In making the decision, firms must consider country factors, technological factors, and product factors. Activity Students are asked to read a short case about locating production facilities and then respond to questions about the case. Class Discussion The decision of where to locate production facilities involves a consideration of country factors, technological factors, and product factors. Discuss how these factors might influence a firm‘s location decision. Strategic Roles for Production Facilities N) Since the early 1990s, multinationals have opted to set up production facilities outside their home countries 10 times for every 1 time they have opted to create such facilities at home. In doing so, they hope to capture the gains associated with a globally dispersed global production system. O) This trend is expected to continue, so managers need to consider the strategic role assigned to a foreign factory. A major consideration is the importance of global learning, or the idea that valuable knowledge does not reside just in a firm‘s domestic operations, it may also be found in its foreign subsidiaries. Foreign factories that upgrade their capabilities over time are creating valuable knowledge that could benefit the whole organization. P) Foreign factories can have one of a number of strategic roles or designations: offshore factory, source factory, server factory, contributor factory, outpost factory, or lead factory.

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Q) An offshore factory is a factory that is developed and set up mainly for producing component parts or finished goods at a lower cost than producing them at home or in any other market. The primary purpose of a source factory is to drive down costs in the global supply chain. A server factory is linked into the global supply chain for a global firm to supply specific country or regional markets around the world. A contributor factory also serves a specific country or world region, and it also has responsibilities for product and process engineering and development. An outpost factory can be viewed as an intelligence–gathering unit. It is often placed near a competitor‘s headquarters or main operations, near the most-demanding customers, or near key suppliers of unique and critically important parts. A lead factory is intended to create new processes, products, and technologies that can be used throughout the global firm in all parts of the world. Video Note: To explore the McDonald‘s supply chain in Russia, consider McDonald’s: Russia Watchdog Widens Probe into Food Chain in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. THE HIDDEN COSTS OF FOREIGN LOCATIONS R) Producing in low-cost countries does not always make sense. Hidden costs of foreign locations include high employee turnover, shoddy workmanship, poor product quality, and low productivity among others. Teaching Note: Some companies are moving production back to their home country because foreign production no longer offered the advantages it once had. To learn more, go to https://www.bloomberg.com/opinion/articles/2020-06-12/don-t-give-up-on-bringingmanufacturing-back-to-the-u-s and https://www.usatoday.com/story/money/business/2018/06/28/manufacturers-bringing-most-jobsback-to-america/36438051.

management FOCUS: Amazon‘s Global Supply Chains Summary This feature explores the breadth of activities Amazon has developed over the years. Established in 1994 as an online bookstore, the company has become known as the largest online retailer and provides access to an assortment of products for customers. In addition to its retail storefront, Amazon has developed strong capabilities in inventory management, global supply chains, and technology to link to customers. Discussion Questions

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1. How difficult has it been for Amazon to keep pace with customer expectations? Based on how the company originated, do you think Amazon was positioned well for its development into the variety of offerings it presents today to customers? Some students may think that it was a fairly easy transition from its original role as an online bookstore to global online retailer. In fact, they could state that the core skills required in terms of supply chain management were established early as the company gained traction. Other students may believe that it was not as easy as it seems. Given the scope of product offerings now, Amazon had to develop beyond its original capabilities. In fact, they may indicate that different types of products require different forms of packaging, labeling, and shipment. In fact, the expectation that Amazon will deliver within two days (especially with the Amazon Prime option) is something the company must maintain, otherwise customers will begin to think that the company is losing its competitiveness. As such, maintaining this level of service amid the increasingly complex array of products available makes it a considerable feat. 2. How has Amazon utilized its online retail capabilities to benefit other companies? Do you think this is a good thing for the companies Amazon is assisting? The company operates retail websites for a variety of international brands. Amazon capitalizes on one of its core competencies of a strong online presence to the benefit of other companies. This is usually done in cases where the company seeking assistance does not have the internal capabilities to do so. Teaching Tip: To learn more about Amazon, go to https://www.amazon.com. Lecture Note: The COVID-19 pandemic sent shockwaves through global supply chains across the world. Like many companies, Amazon experienced significant disruptions. To learn more, consider https://www.cnbc.com/2020/09/29/how-amazon-managed-the-coronavirus-crisis-andcame-out-stronger.html.

Make-or-Buy Decisions A) International businesses face sourcing decisions, and decisions about whether they should make or buy the component parts to go into their final product. Make-or-buy decisions are important factors in many firms‘ manufacturing strategies and are often based on two critical factors: cost and production capacity. B) Elements that favor a make decision, beyond the core elements of cost and production capacity, include quality control, proprietary technology, having control, excess capacity, limited suppliers, assurance of continual supply, and industry drivers (see Figure 15.3). C) Elements that favor a make decision, beyond the core elements of cost and production capacity, include inventory planning, brand preference, multisource policies, small volumes, nonessential items, lack of expertise, and supplier competencies (see Figure 15.4).

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CONNECT Case Analysis Deciding Whether to Make or Buy Summary This activity explores the make-or-buy decision in international firms. International businesses need to decide whether to make their products in-house or whether to outsource the activity to a company. The decision to make or buy is influenced by a number of factors including the volatility of a country‘s political economy, exchange rate fluctuations, factor costs, and so on. Activity Students are asked to read a short case on the make-or-buy decision and then respond to questions about the case. Class Discussion Deciding whether to make or buy is a complex decision involving numerous factors. Discuss what a firm should consider when making this decision.

Global Supply Chain Functions A) Logistics and purchasing are critical functions in ensuring that materials are ordered and delivered and that an appropriate level of inventory is managed. GLOBAL LOGISTICS B) The core activities performed in logistics are global distribution center management, inventory management, packaging and materials handling, transportation, and reverse logistics. C) A global distribution center is a facility that positions and allows customization of products for delivery to worldwide wholesalers or retailers or directly to consumers anywhere in the world. These centers are the foundation of a global supply network because they allow either a single location or satellite warehouses to store quantities and assortments of products and allow for value-added customization. D) Global inventory management is the decision-making process regarding the raw materials, work-in-process, and finished goods inventory for an MNC. The decisions include how much inventory to hold, in what form to hold it, and where to locate it in the supply chain. E) Packaging refers to the container that holds the product itself. Primary packaging holds the product itself. Secondary packaging is designed to contain several primary packages. Transit packaging is used when primary and secondary packages are assembled for transportation. Regardless of where the product is in the global supply chain, packaging is intended to perform, protect, and inform. F) Transportation refers to the movement of raw material, component parts, and finished goods

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throughout the global supply chain. Transportation is the largest percentage of any logistics budget, and an even greater percentage for global companies because of the distances involved. The primary drivers of transportation rates and the resulting aggregate cost are distance, transport mode (ocean is the least expensive and air is the most expensive), size of load, load characteristics, and oil prices. G) Reverse logistics is the process of moving inventory from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. The ultimate goal is to optimize the after-market activity or make it more efficient. GLOBAL PURCHASING H) The core activities performed in purchasing include development of an appropriate strategy for global purchasing and selecting the type of purchasing strategy best suited for the company. There are five strategic levels of purchasing: Level I domestic purchasing activities only; level II international purchasing only as needed; level III international purchasing as part of firm‘s overall supply chain management strategy; level IV global purchasing activities that are integrated across the firm‘s locations worldwide; and level V global purchasing activities that are integrated across worldwide locations and functional groups. I) Roughly 35 percent of the purchasing in global companies today is internal and 65 percent external. The next decision, in both internal and external purchasing, is to figure out the outsourcing options available domestically or globally (see Table 15.2).

Managing a Global Supply Chain A) Four important areas are of concern in managing a global supply chain including the role of just-in-time inventory, the role of information technology, coordination, and interorganizational relationships. Efficient logistics can have a major impact upon a firm‘s bottom line.

CONNECT Click and Drag Managing the Global Supply Chain Summary This activity focuses on managing the global supply chain. International businesses that are effective at managing their global supply chain can expect to reduce costs through greater efficiency. Activity Students are asked to match aspects of managing a global supply chain to the correct descriptive category. Class Discussion

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Managing the global supply chain is a complex task, but when it is done effectively, it can reduce costs through gains in efficiency. Identify companies like Alibaba and FedEx that are successful at managing the global supply chain and discuss what makes them successful. ROLE OF JUST-IN-TIME INVENTORY B) The basic philosophy behind just-in-time (JIT) inventory systems is to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before. C) Just-in-time systems generate major cost savings from reduced warehousing and inventory holding costs. In addition, JIT systems help the firm spot defective parts and take them out of the manufacturing process, thereby boosting product quality. D) The drawback of a JIT system is that it leaves a firm with little inventory to respond to changes in demand or disruptions among suppliers. Lecture Note: JIT systems in many companies were hit hard following the global shutdowns early in the COVID-19 pandemic. To extend this discussion, consider https://www.marketplace.org/2020/02/27/justintime-manufacturing-model-challengedcoronavirus/ and https://www.reutersevents.com/supplychain/supply-chain/end-just-time. Lecture Note: Some are questioning whether JIT systems still make sense. To learn more, consider https://www.abc.net.au/news/2020-08-11/supply-chain-just-in-time-theory-coronavirusmay-prompt-rethink/12529506. ROLE OF INFORMATION TECHNOLOGY E) Web-based information systems play a crucial role in materials management. Electronic data interchange (EDI) facilitates the tracking of inputs, allows the firm to optimize its production schedule, allows the firm and its suppliers to communicate in real time, and eliminates the flow of paperwork between a firm and its suppliers. COORDINATION IN GLOBAL SUPPLY CHAINS F) Global supply chain coordination refers to shared decision-making opportunities and operational collaboration of key global supply chain activities. Shared decision making creates a more integrated, coherent, efficient, and effective global supply chain. G) To achieve operational integration and collaboration within a global supply chain, six operational objectives should be addressed: responsiveness, variance reduction, inventory reduction, shipment consolidation, quality, and life-cycle support. INTERORGANIZATIONAL RELATIONSHIPS H) Trust and commitment between interacting organizations is important to an efficient and

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effective global supply chain. If we always had 100 percent trust within relationships and 100 percent commitment to them, most global supply chains would ultimately be efficient and effective. By looking at the building blocks for global supply chains, we would also assume that not all relationships are equally valuable and that they should not be treated as if they were (see Figures 15.5 and 15.6).

360° VIEW: MANAGERIAL IMPLICATIONS Impact of The Macro Environment A) A number of changes in the macro environment over the past few years including Britain departure from the European Union, the ongoing trade tensions between the United States and China, and the COVID-19 pandemic have called into question the attractiveness of relying too heavily on a single production location or source country. B) Some companies are shifting strategies to provide a hedge against macro changes, and are now sourcing products from multiple locations and diversifying production across several nations. C) Supply chain decisions can also be affected by changes in the political and economic trajectory of nations. International managers should be aware of changes that could affect supply chain choice. Video Note: One of the biggest stories of the early days of the global shutdown caused by the COVID-19 pandemic was the disruption caused to global supply chains. There are a number of video cases available to extend the discussion of the impact of the macro environment for companies. A few to consider are How China's Novel Coronavirus Outbreak Is Disrupting The Global Supply Chains, In Nicaragua - Supplying Beef To The U.S. Comes At A High Human Cost, and Coronavirus Hits Companies in China But They Still Have A Reason To Stay. Find them, and others, in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Blockchain Technology and Global Supply Chains Summary This activity focuses blockchain technology and how it is used in global supply chains. The transparency and traceability offered by blockchain technology has the potential to transform global supply chains. Activity

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Students are asked to read a short case on blockchain technology and then respond to a series of questions related to the case. Class Discussion Discuss blockchain technology. How are international companies using it? What are the benefits of blockchain technology? Are there any drawbacks?

CONNECT Video Case Did You Know: COVID-19 Has Disrupted Global Supply Chains Summary This activity focuses on the disruptions to global supply chains caused by COVID-19. While many companies were negatively affected by the disruptions, those that relied on JIT systems were especially hard hit. Activity Students are asked to watch a video on the disruptions to global supply chains caused by COVID-19 and then respond to a series of questions related to the video. Class Discussion Discuss the vulnerabilities related to global supply chains. How can companies hedge their risk? How, if it all, has COVID -19 changed traditional thinking on the value of global supply chains?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. An electronics firm is considering how best to supply the world market for microprocessors used in consumer and industrial electronic products. A manufacturing plant costs approximately $500 million to construct and requires a highly skilled workforce. The total value of the world market for this product over the next 10 years is estimated to be between $10 and $15 billion. The tariffs prevailing in this industry are currently low. Should the firm adopt a concentrated or decentralized manufacturing strategy? What kind of location(s) should the firm favor for its plant(s)? Answer: The firm should pursue a concentrated manufacturing because (1) the tariffs prevailing in the industry are low, (2) the cost of building a plant to produce the microprocessors is high, and (3) the product‘s value-to-weight ratio is high. All of these factors favor a concentrated versus a decentralized manufacturing strategy. In terms of location, the company should consider three factors: country factors, technology factors, and product factors. First, in terms of country factors, the firm should locate its plant in a country that has a highly skilled pool of workers available. That criterion could limit the firm to developed nations. Second, in terms of

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technology factors, the firm is compelled to limit the number of its manufacturing facilities because of the high cost of constructing a plant. Third, in terms of product factors, the firm can manufacture its product in a central location due to the relatively high value-weight ratio and the universal appeal of the product. 2. A chemical firm is considering how best to supply the world market for sulfuric acid. A manufacturing plant costs about $20 million to construct and requires a moderately skilled workforce. The total value of the world market for this product over the new 10 years is estimated to be between $20 and $30 billion. The tariffs prevailing in this industry are moderate. What kind of location(s) should the firm seek for its plant(s)? Answer: This question is a tougher call than the scenario depicted in Question #1. The firm should probably pursue a limited decentralized manufacturing strategy (meaning that the firm should not set up a plant in every country that it sells to, but should set up plants in several ―regions‖ of the world). This strategy makes sense because (1) the tariffs prevailing in the industry are moderate (rather than low), (2) the cost of constructing a facility is relatively modest ($20 million), and (3) only a moderately skilled workforce is needed (which is probably available in many low-cost regions of the world). The firm should select its location based on country factors, technology factors and product factors. In terms of country factors, the firm should find locations where semi-skilled labor is inexpensive. In terms of technology factors, the firm is not constrained by high fixed costs associated with its product, so technology is not a pervasive issue. Finally, product factors favor the firm locating in several locations throughout the world. The company‘s product has a low value-weight ratio, making it unattractive to produce the product in a central location and export it across the world. 3. A firm must decide whether to make a component part in-house or to contract it out to an independent supplier. Manufacturing the part requires a nonrecoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house and (b) outsourcing manufacturing to an independent supplier? Which option would you recommend? Why? Answer: Manufacturing in-house would reduce the risk of currency appreciation and rising costs from independent suppliers. Specialized asset investment would make a firm dependent on specific suppliers; however, technological know-how would be protected, and improved scheduling would be available. Outsourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational and coordination costs. Based on what we know, manufacturing in-house may be slightly preferred, but other information could tip the decision the other way. 4. Reread the Management Focus ―IKEA Production in China,‖ and then answer the following questions: a. What are the benefits to IKEA of shifting so much of its global production to China?

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b. What are the risks associated with a heavy concentration of manufacturing assets in China? c. What strategies might IKEA adopt to maximize the benefits and mitigate the risks associated with moving so much product? Answer: a. China is an attractive production location for IKEA for several reasons. The country has low wage rates, an educated workforce, a strong economy, is a member of the World Trade Organization, and has a stable exchange rate that is pegged to the U.S. dollar. In addition, China‘s rapidly expanding industrial base is home to many companies that IKEA uses as suppliers. At the moment, IKEA works with about 300 suppliers located in China, and the country accounts for about 20 percent of its global procurement. b. IKEA‘s reliance on China as a major location for production could be risky if political, economic, or other problems disrupt production and therefore, the company‘s ability to supply global markets. Students might note, for example, that trade tensions between the United States and China have been high under the Trump Administration, and this could ultimately impact the attractiveness of China as a manufacturing location, at least for products going to the United States. c. Some students may suggest that IKEA, by locating so much production in China, has essentially put all of its eggs in one basket and that a strategy that disperses some production to other locations might be better. China is currently the largest sourcing country for IKEA. By hedging its risk, the company could avoid potential disruptions in its supply chain. 5. Explain how the global supply chain functions of (a) logistics and (b) purchasing can be used to strategically leverage the global supply chains for a manufacturing company producing mobile phones. Answer: Margins in the mobile phone industry tend to be very small, making it especially important for firms to be cognizant of efficiencies in logistics and purchasing. Students will probably suggest that because mobile phones are relatively small and lightweight centralized distribution centers could be appropriate for the company. In addition, students will probably recommend at least level III purchasing in order to capitalize on low-cost inputs for parts that are generic. Some students may also point out that since most elements of mobile phones including packaging can be standardized, the need for customization to local markets is probably relatively small making a globally integrated supply chain a viable option for the company. 6. What type of interorganizational relationship should a global company consider in the (a) inbound portion of its supply chains if the goal is to buy commodity-oriented component parts for its own production and (b) outbound portion of its supply chains if the goal is to establish a strong partnership in reaching end-customers? Answer: The company will probably opt for a loosely coordinated relationship for the inbound products. Since the firm is purchasing commodity oriented inputs, a transactional focus is appropriate because it gives the firm the ability to readily change suppliers based on prices, and so on as needed. Building a more coordinated and integrated relationship would be important however, for the outbound products. The company needs to ensure that it is able to work closely with partners that will be involved in reaching the final customer.

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globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 The globalization of production makes many people aware of the differences in manufacturing costs worldwide. The U.S. Department of Labor‘s Bureau of International Labor Affairs publishes the Chartbook of International Labor Comparisons. Locate the latest edition of this report, and identify the hourly compensation costs for manufacturing workers in China, Brazil, Mexico, Turkey, Germany, and the United States. Exercise 2 The World Bank‘s Logistics Performance Index (LPI) assesses the trade logistics environment and performance of countries. Locate the most recent LPI ranking. What components for each country are examined to construct the index? Identify the top 10 logistics performers. Prepare an executive summary highlighting the key findings from the LPI. How are these findings helpful for companies trying to build a competitive supply chain network?

Blockchain Technology and Global Supply Chains closing case Summary The opening case explores the development of blockchain technology and how it has the potential to transform global supply chains. The real-time access of data associated with blockchain technology allows for greater transparency and efficiency enabling companies to optimize their global supply chains. Case Discussion Questions 1. Why might lack of transparency in a supply chain might be a problem for as company? Transparency is probably one of the most important benefits of blockchain technology for the global supply chain. One of the biggest challenges facing firms as they invest in building their global supply chains is trusting that the various players in the chain will act as they have promised. The transparency associated with blockchain technology minimizes issues related to trust because all parties involved have real-time access to relevant information. 2. What are the potential benefits associated with using blockchain technology to account for the flow of goods through a globally dispersed supply chain? Blockchain technology offers real-time data on the movement of goods. Companies can use this information to optimize their manufacturing and distribution. Students may point out that this feature of blockchain technology can be especially important to companies that rely on just-intime deliveries. Companies can track the movement of raw materials and parts to their factories,

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take steps to resolve situations that may emerge that could change the timing of a delivery, and in doing so, better predict workflows and make scheduling decisions. 3. How might blockchain technology be used to increase the ―ethical sourcing‖ of products in a globally dispersed supply chain? Many students will focus on the increased transparency and traceability blockchain technology offers and suggest that this transparency provides a shield against rogue products entering the supply chain of a company committed to ethical sourcing. Students might note for example that globalization has changed the global food supply especially for agricultural products allowing out of season products to be imported and consumed anywhere at any time of the year. Because products may now be sourced from around the world, the traceability feature of blockchain technology can be especially important for companies engaged in ethical sourcing. Students might point out that a company committed to buying only fair trade coffee beans could use blockchain technology to identify the exact provenance of the beans they are buying. Similarly, a company selling T-shirts made from ethically sourced cotton, could rely on the transparency of blockchain technology to ensure that the cotton it uses is ethically sourced. Teaching Tip: To learn more about blockchain technology, go to https://www.computerworld.com/article/3191077/what-is-blockchain-the-complete-guide.html. Lecture Note: To extend this case, consider how Volvo is using blockchain technology to ensure that the cobalt used in its lithium-ion batteries is ethically sourced. To learn more, go to https://www.forbes.com/sites/oracle/2020/01/27/volvo-mines-blockchain-to-keep-ethicalsourcing-promise/?sh=10a648547eb6.

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Understanding the geographic location of countries is essential to the understanding of international business. Ask students to discuss the implications of the geographic locations of the countries in this exercise on the subject matter.

Continuous Case Concept Several of the world‘s automakers are in the process of revamping how they build their cars. Toyota for example, has established a global supply chain in Thailand. The goal was to develop a global operating platform allowing the company to build cars and supply components entirely from outside Japan. Similarly, South Korea‘s Hyundai is hoping to improve its cost structure by acquiring steel and parts suppliers. All of the Japanese and Korean companies are shifting production offshore to minimize their exposure to exchange rate fluctuations. Toyota signed an agreement with Mazda for the production of cars destined for the U.S. market. Production will take place in Mazda‘s factories in Mexico. French automaker Renault bought Romania‘s Dacia plant in 1999. Today, with the plant running a nearly full capacity, the overhauled facilities produce Europe‘s cheapest car. Ford is following a strategy in which the company has only a few models that it sells across multiple markets. The company is hoping that its One Ford approach will generate significant scale economies and other cost savings. One model developed under this strategy, the Fiesta, was designed in Europe, is selling in China and the United States. Ford sees the strategy as a means of cutting design and production costs, and also the time it takes to get a car to market. As the move toward electric vehicles continues, most automakers are working to ensure they have a reliable source of batteries. Daimler recently invested in Farasis, a Chinese-American battery maker, while Volkswagen to a stake in Sweden‘s Northvolt. 

Ask students to consider Hyundai‘s strategy. What advantages does it gain by acquiring steel and part suppliers? What are the risks involved in this strategy? How will this allow Hyundai to better manage its supply chain?

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Next, consider the move by the Asian automakers to shift production offshore. Does this strategy make sense? What are the long-term implications of this strategy? Discuss the benefits of Toyota‘s move to build a global platform to build cars using components from outside Japan.

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Then, reflect on the strategy by Renault to expand its production of its popular Dacia brand in Morocco. Renault had been producing the Dacia line in both Romania and Morocco, but in 2020, announced plans to move the budget line entirely to Morocco and build higher end vehicles in its Romanian plant. What are the benefits of this strategy?

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After that, discuss the decision by the Japanese and Koreans to ramp up production in Eastern Europe. What are the advantages of Eastern European production as compared to production in Western Europe? Are there any disadvantages? Consider Ford‘s world car approach. What are the advantages of this strategy? Are there any drawbacks?

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Finally, ask students to forecast what the global auto industry might look like in the next 3-5 years as companies invest in electric vehicles to meet new emissions requirements. Will companies invest in their own battery development or form alliances with other companies?

This exercise works well as an introduction to the material in this chapter, or as an introduction to individual segments within the chapter. For example, the first question ties in well with the discussion of the make-or-buy decision, and the last question works well with the material on where to locate foreign production.

Additional Readings and Sources of Information Bringing Manufacturing Back to the U.S. Is Easier Said Than Done https://hbr.org/2020/04/bringing-manufacturing-back-to-the-u-s-is-easier-said-than-done The American Dream: Bringing Factories Back to the U.S. https://www.barrons.com/articles/the-american-dream-reshoring-manufacturing-51602270001 The Global Impact Of COVID-19 Lockdowns to Supply Chains in 2020 Yet to Be Measured https://www.scmr.com/article/the_global_impact_of_covid_19_lockdowns_to_supply_chains_in _2020_yet_to_be IKEA Is the Latest Big Brand to Feel the Heat in China Over Taiwan https://money.cnn.com/2018/08/29/news/companies/ikea-china-taiwan/index.html COVID-19 Has Driven Home the Need to Reduce Global Supply Chain Vulnerabilities Through Intelligent Workflows. https://www.ibm.com/thought-leadership/institute-business-value/report/covid-19-supply-chains How Amazon is Making its Supply Chain ―COVID-proof‖ https://www.suuchi.com/how-amazon-is-making-its-supply-chain-covid-proof/ Alibaba vs. Amazon: The Battle Of Disruptive Innovation Beyond Traditional E-Commerce https://www.forbes.com/sites/danielnewman/2018/10/24/alibaba-vs-amazon-the-battle-ofdisruptive-innovation-beyond-traditional-e-commerce/#1b26a1971759 Brexit: The Bigger Picture—Rethinking Supply Chains in A Time of Uncertainty https://www.mckinsey.com/featured-insights/europe/brexit-the-bigger-picture-rethinking-supplychains-in-a-time-of-uncertainty Toyota North America: Breaking Down Supply Chain Barriers https://www.automotivelogistics.media/materials-handling/toyota-north-america-breaking-downsupply-chain-barriers/37962.article Apple‘s Supply Chain Woes Linger Even as China Recovers

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https://www.bloomberg.com/news/articles/2020-03-19/apple-s-supply-chain-woes-linger-evenas-china-recovers Why the U.S. Still Has a Severe Shortage of Medical Supplies https://hbr.org/2020/09/why-the-u-s-still-has-a-severe-shortage-of-medical-supplies The PPE Supply Chain Is A Black Box That Needs to Change https://fortune.com/2020/07/25/ppe-supply-chain-national-security/

Global Marketing and Business Analytics Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: Share a Coke Introduction Globalization of Markets and Brands Market Segmentation Business Analytics Product Attributes Distribution Strategy Communication Strategy Pricing Strategy Configuring the Marketing Mix Did You Know? Video Clip: Kit Kat Bar Is Marketed Very Differently in Different Countries Product Development and R&D 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Marketing Sneakers

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Continuous Case Concept Additional Readings and Sources of Information

Learning Objectives 16-1 Understand the importance of business analytics and international market research. 16-2 Explain why it might make sense to vary the attributes of a product from country to country. 16-3 Recognize why and how a firm‘s distribution system might vary among countries. 16-4 Identify why and how advertising and promotional strategies might vary among countries. 16-5 Explain why and how a firm‘s pricing strategy might vary among countries. 16-6 Understand how to configure the marketing mix globally. 16-7 Describe how globalization is affecting product development.

Chapter Summary This chapter focuses on the marketing and R&D activities of global firms. The chapter begins with a review of the four elements that constitute a firm‘s marketing mix: product attributes, distribution strategy, communication strategy, and pricing strategy. The chapter continues with a discussion of the importance of business analytics and international marketing research. Many firms vary their marketing mix from country to country depending on differences in cultures, levels of economic development, product and technical standards, the availability of distribution channels, and so forth. The chapter discusses the strategic implications of each element of the marketing mix for an international firm. The link between marketing and R&D is also discussed. This chapter stresses that selling a product on a global scale may require that a firm vary its products from country to country to satisfy local preferences. This may require a firm to establish R&D centers in different parts of the world and closely link R&D and marketing in each region to ensure that the company is producing products that its overseas customers will buy.

Chapter Opening Activity A good way to learn about distribution channels in other countries without traveling there is to read the U.S. Commercial Service‘s Country Commercial Guides. Visit globaledge.msu.edu, search for a country, and find the quick links to these documents. Each Country Commercial Guide has a section about distribution that serves as a starting point for any vendor wanting to sell in another country. What‘s more, local experts at the U.S. Commercial Service in the U.S. Consulate Office in each country are there to help U.S. vendors who are truly serious about selling internationally find distributors and customers. At the end of many Country Commercial Guides, the names and emails of these local experts are listed. Students might try contacting them to ask specific questions about their projects for this class.

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Chapter Outline

Share a Coke opening case Summary The opening case explores the international marketing campaign used by Coca Cola. Coca Cola, with its familiar red and white packaging, is arguably one of the world‘s best-known products and is largely sold the same way from country to country. One of the most recent campaigns to have global appeal was the Share a Coke promotion involving packaging printed with people‘s names. The idea behind the campaign was to better connect with consumers by personalizing the product. Discussion Questions 1. Discuss Coca Cola‘s marketing mix. How has Coca Cola been so successful in selling its product across the world? What does your response tell you about the globalization of markets? Coca Cola‘s iconic logo is instantly recognizable across the world. Indeed, Coca Cola‘s ability to create a product and market it essentially unchanged the world over demonstrates the globalization of markets and, that ultimately consumers across some segments are not all that different from each other. Students may point out though, that Coca Cola is marketing an image or lifestyle more than the cola product itself. Indeed, the company sells a range of products in different countries tailored to local preferences. In Thailand for example, consumers can buy Fanta J-Melon, while consumers in Brazil purchase the energy drink, Gladiator. Honest Tea is popular in the United States, but in Japan, the choice may be Kochakanden Royal Milk Tea. Students may conclude that Coca Cola‘s success lies not in the products it sells, but rather in the image it sells and that most people, regardless of their nationality, aspire to find the happiness that Coca Cola markets. 2. How would you characterize Coca Cola‘s Share a Coke campaign? Why has the campaign been successful at jumpstarting Coca Cola‘s ability to connect with millennials? Coca Cola‘s claim that it sells happiness in a bottle rather than just a beverage would suggest that everyone would want to buy the product. However, Coca Cola‘s market share among younger adults has fallen in recent years, prompting Coca Cola to challenge its marketing team with disrupting the status quo. The result was the launch of the Share a Coke campaign which involved selling the iconic Coca Cola product in newly designed packaging that included people‘s names along with the familiar red background and white lettering. The idea behind the campaign was that people would be inspired to give friends and family personalized cans and buy them for themselves. The campaign, which started in Australia, proved to be successful and was quickly rolled out across the world. Students will likely point out that the success of this campaign reflects the globalization of markets and the ability of the company to resonate with consumers on a more personal level. Students should recognize that while the Share a Coke

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concept was rolled out unchanged across many countries, at the local level, it was also tailored to suit individual market differences. The names printed on the cans, for example, reflected names that would be popular in certain parts of the world, and distribution events allowing people to purchase personalized cans or bottles were market specific. Students should note therefore, that even in a situation where the marketing mix is standardized across countries, there can still be a need for some customization. Lecture Note: To extend the discussion, consider https://www.forbes.com/sites/paultalbot/2019/04/26/inside-coca-colas-marketingstrategy/?sh=1575434d1280 and https://www.coca-colacompany.com/news/coca-cola-reshapesbeverage-portfolio-for-growth-and-scale.

CONNECT Case Analysis Share a Coke Summary This activity focuses on Coca Cola‘s Share a Coke marketing campaign. The promotion, involving personalized containers of Coke, began in Australia, but was quickly rolled out across the world. Activity Students are asked to read a short case about the Share a Coke campaign and then respond to a series of questions related to the case. Class Discussion Discuss Coca Cola‘s marketing mix. How has the company successfully configured product, price, promotion, and distribution across countries?

Introduction A) This chapter explores how an international business can perform marketing and R&D activities to reduce the costs of value creation and add value by better serving customer needs. B) The tension that exists in most international businesses between the need to reduce costs and the need to be responsive to local conditions is particularly predominant in this chapter as we look at the development and marketing of products C) The four elements that constitute a firm‘s marketing mix—the set of choices the firm offers to its targeted markets—are product attributes, distribution strategy, communication strategy, and pricing strategy.

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Globalization of Markets and Brands A) Theodore Levitt wrote lyrically about the globalization of world markets. Levitt‘s arguments are worth quoting at some length since they have become something of a lightning rod for the debate about the extent of globalization. B) The current consensus among academics is that although the world is moving towards global markets, the continuing persistence of cultural and economic differences among nations acts as a major brake on any trend toward global consumer tastes and preferences. In addition, trade barriers and differences in product and technical standards also constrain a firm‘s ability to sell a standardized product to a global market. Teaching Tip: Some firms are in the business of helping firms ―go global.‖ One example is GeoTrade Global Marketing http://www.geotradeglobalmarketing.com, which focuses on international Internet marketing. Video Note: Netflix has made global domination a strategic goal. To learn more, consider Netflix's Plans for Global Domination. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Video Case Starbucks Opens First Café in Sub Saharan Africa Summary This activity focuses on international marketing and how international businesses choose which elements of the marketing mix to standardize and which elements to customize to better fit the local market. The trade-off between standardization and customization has significant implications for other parts of the organization. Activity Students are asked to watch a video on international marketing and then respond to a series of questions related to the video. Class Discussion Understanding the elements of the marketing mix and whether they can be standardized or whether they should be localized is important for international managers. Discuss experiences at Starbucks around the world. Which elements of the marketing mix have been standardized and which have been customized. Does this differ by country?

Market Segmentation A) Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Firms must adjust their marketing mix from segment to segment. The goal is to optimize the fit between the purchasing behavior of Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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consumers in a given segment and the marketing mix. B) International managers need to consider the existence of intermarket segments that transcend national borders and understand differences across countries in the structure of segments. C) For a segment to transcend national borders, consumers in that segment must have some compelling similarities that lead to similarities in purchasing behavior. Where such similarities do not exist, there must be some customization if the firm is to maximize performance in the market. This customization may be in the product, the packaging, or simply the way in which the product is marketed. D) Global market segments are much more likely to exist in industrial products (e.g., memory chips, chemical products, and corporate bonds) than in consumer products. An emerging segment that is attracting the attention of international consumer product marketers is the global youth segment. Video Note: Amazon believes that there is great potential in the market in India. To learn more, consider Amazon India Launches Hindi App, Website to Address Additional 100 Million Customers. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

management FOCUS: Global Branding, Marvel Studios, and Walt Disney Company Summary This feature explores how Marvel Studios has successfully created global brands with its Avengers series and the Iron Man movies. Iron Man debuted in international markets a few days before it was premiered in the United States. Marvel Studios was able to capitalize on the global marketing power of its parent company. The Walt Disney Company continued the strategies implemented by Bravo and in addition, worked to reacquire licensing rights and bring greater unity to the brand. Discussion Questions 1. Comment on Marvel Studios‘ success at global branding. In your opinion, is its success related to the superhero theme of its movies, or could it have had the same level of success with other storylines? Many students will probably agree that much of Marvel Studios‘ success is related to the superhero theme of the Avengers series and the Iron Man series. Students may suggest that superheroes are common in all cultures, making it easier for movie-goers to relate to the characters. In addition, the general plot lines of most superhero movies are similar and not particularly culture-bound. Students may suggest that a drama or comedy could have been more difficult to develop for multiple markets. Some students may also wonder whether the fact that

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some of the superhero characters have been around for decades made the movies more familiar and accessible to movie-goers. 2. Reflect on the role of Marvel Studios parent company, the Walt Disney Company, as a factor in the success of Marvel Studios. Do you think Marvel Studios would have had the same level of success without Disney? Responses to this question will vary by student. Many will agree that while Disney probably opened some doors for Marvel Studios, the success of its superhero movies has to do with the actors and others directly involved in the movies themselves. Indeed, some students may suggest that Robert Downey, Jr. must have a film presence that is likable across multiple cultures. Other students may suggest that Disney‘s knowledge of international markets was important to the overall marketing of the Iron Man and Avengers brands. Students taking this perspective may suggest that without all of the excitement that is created through the sales of apparel, lunch boxes, backpacks, and so on, the movies may not have been as successful regardless of the people involved in their creation. Teaching Tip: To learn more about Marvel Studios and The Walt Disney Company go to https://www.marvel.com/movies and https://www.disney.com. Lecture Note: To extend this discussion, consider https://www.entrepreneur.com/article/312635 and https://www.forbes.com/sites/scottmendelson/2018/05/02/marvels-avengers-4-marketingstrategy-should-be-denial-distraction-deception/#18805b49310e. Lecture Note: The COVID-19 pandemic has forced movie companies to find new ways to reach their audiences. To learn more, go to https://www.nbcnews.com/news/us-news/independentfilmmakers-have-found-ways-navigate-pandemic-get-audiences-films-n1247218.

Business Analytics A) Business analytics is defined as the knowledge, skills, and technology that allow for the exploration, as well as deeper investigation, of a company‘s international business strategies and activities to gain insight and drive future strategy development and implementation. B) The process of using business analytics starts with a data set that has been collected to address a specific issue. Big data refers to massive volume of both structured and unstructured data that are so large they may be difficult to process using traditional database and software techniques. C) Business analytics can be focused on one of three core applications: descriptive, predictive, and prescriptive. Descriptive analytics refers to the use of relatively simple statistical techniques to describe what is contained in a dataset. Predictive analytics can be defined as the use of advanced statistical techniques (and software) to identify and build predictive models that can help to identify trends and relationships not readily observed in descriptive analyses. Prescriptive

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analytics can be defined as the use of management science methodologies to guide a company in its endeavors to best use allocable resources. INTERNATIONAL MARKET RESEARCH A) To effectively configure the marketing mix, global companies conduct marketing research. International marketing research is defined as the systematic collection, recording, analysis, and interpretation of data to provide knowledge that is useful for decision making in a global company. B) Compared with market research that is focused on the domestic market, international market research involves additional issues such as translation of questionnaires into appropriate foreign languages and accounting for cultural and environmental differences in data collection. C) The basic data that companies want collected include (1) data on the country and potential market segments; (2) data to forecast customer demands within a specific country or world region; and (3) data to make marketing mix decisions. D) The process for conducting international market research involves six steps (Figure 16.1). (1) Defining the research objectives. (2) Determining the data sources that will address specific research problems: primary and secondary. (3) Assessing the costs and benefits of the research. (4) Collecting the data. (5) Analyzing and interpreting the research. (6) Reporting the research findings.

Product Attributes A) Products sell well when their attributes match consumer needs. If consumer needs were the same the world over, a firm could simply sell the same product worldwide. But consumer needs vary from country to country depending on culture and the level of economic development. In addition, firms are limited by countries differing product standards. CULTURAL DIFFERENCES B) Countries differ along a whole range of cultural dimensions, including tradition, social structure, language, religion, and education. At the same time, there is some evidence of the trends Levitt talked about. Tastes and preferences are becoming more cosmopolitan. Lecture Note: To see how some companies have adapted their product to better suit local markets, go to https://news.samsung.com/global/thinking-local-how-products-are-tailored-tomarkets-2, https://www.forbes.com/sites/stephanieburns/2020/01/10/why-product-customizationwill-position-your-brand-to-win-in-2020/?sh=1c52aaca2911, https://www.forbes.com/sites/sylviavorhausersmith/2012/06/22/cultural-homogeneity-is-not-anautomatic-by-product-of-globalization/#55d0d3925034 and http://www.cnn.com/2010/LIVING/homestyle/04/08/fast.food/index.html. Video Note: Black Friday is an annual shopping experience for many Americans. Now some retailers believe that the tradition can be extended to Europe. To learn more, consider Black

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Friday - Europe's Stores Educate Shoppers. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. ECONOMIC DEVELOPMENT C) Just as important as differences in culture are differences in the level of economic development. Firms based in highly developed countries tend to build a lot of extra performance attributes into their products. Consumers in less developed nations do not usually demand these extra attributes, instead the preference is for more basic products. Video Note: Cuba has long been off limit for American companies. Now, though, as relations between the two countries thaw, some companies see it as a growth opportunity. To learn more, consider American Businesses Eye Cuban Opportunities. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. PRODUCT AND TECHNICAL STANDARDS D) Notwithstanding the forces that are creating some convergence of consumer tastes and preferences, Levitt‘s vision of global markets may still be a long way off due to national differences in product and technological standards.

Distribution Strategy A) A critical element of a firm‘s marketing mix is its distribution strategy, the means it chooses for delivering the product to the consumer. B) Figure 16.2 in the text illustrates a typical distribution system consisting of a channel that includes a wholesale distributor and a retailer. If the firm manufactures its product in that country, it can sell directly to the consumer, to the retailer, or to the wholesaler. The same options are available to a firm that manufactures outside the country. DIFFERENCES BETWEEN COUNTRIES C) The four main differences between distribution systems are retail concentration, channel length, channel exclusivity, and channel quality. Retail Concentration D) In some countries, the retail system is very concentrated, whereas in other countries it is fragmented. In a concentrated retail system, a few retailers supply most of the market. A fragmented retail system is one in which there are many retailers, no one of which has a major share of the market. Channel Length E) Channel length refers to the number of intermediaries between the producer and the consumer. If the producer sells directly to the consumer, the channel is very short. If the producer sells through an import agent, a wholesaler, and a retailer, a longer channel exists.

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Channel Exclusivity F) An exclusive distribution channel is one that is difficult for outsiders to access. Japan‘s system is often held up as an example of a very exclusive system. Channel Quality G) Channel quality refers to the expertise, competencies, and skills of established retailers in a nation, and their ability to sell and support the products of international businesses. The quality of retailers is good in most developed countries but is variable at best in emerging markets and less developed countries. CHOOSING A DISTRIBUTION STRATEGY H) The choice of distribution strategy determines which channel the firm will use to reach potential consumers. Since each intermediary in a channel adds its own markup to the product, there is generally a critical link between channel length and the firm‘s profit margin.

Communication Strategy A) Another critical element in the marketing mix is communicating the attributes of the product to prospective customers. Several communication channels are available to a firm, including direct selling, sales promotion, direct marketing, and advertising. B) A firm‘s communications strategy is partly defined by its choice of channel.

management FOCUS: Burberry‘s Social Media Marketing Summary This feature discusses the recent reinvigoration of Burberry‘s brand from the late 1990s to 2018. Initially begun by Rose Marie Bravo, she saw tremendous hidden value in the Burberry brand that was not being leveraged when she joined the company in 1997. Through her work, as well as that of Angela Ahrendts, Burberry was able to appeal to younger, well-heeled, fashionconscious consumers internationally and pursue a retail strategy that did not include licensing as had been done previously. Instead, the company gained control of its brand and developed a strategy both with brick-and-mortar stores and a considerable online presence. Discussion Questions 1. The centralized brand management that happened under the watch of Angela Ahrendts was a strategic move that resulted in a better brand equity. Is this a move that should remain a staple of the company‘s brand strategy, or what decisions/strategies should Burberry be making moving forward? Students may support the advancement of the current brand strategy. As it has been successful, and Burberry‘s serves a niche market, these students will support maintaining the status quo. However, some students may believe that changes need to be made. For instance, the case may be made that modifying the brand strategy to be less centralized could provide opportunities to

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reach more consumers. This could lead to a discussion between both groups of students concerning the core customers of the company. 2. With the leadership of Angela Ahrendts and Christopher Bailey, Burberry brand‘s iconic check pattern has become less of a marketing focus than before. What role in design and marketing should the Burberry check pattern play in the future? Does the target market matter in this decision? Students may either support or reject the use of the check pattern. Those that support its use will indicate that it is a mainstay of the company and should not be excluded from all possible operations. Students against keeping the check pattern could state that it is old and stuffy, reminiscent of the 1990s. In fact, a resolution could be established between the two student groups based on the target market. There may be some consumers who like a more nostalgic approach to their fashion. Even though it may clash with the updated Burberry brand, the check could still be used for special occasions or a very specific group of consumers. 3. Should Burberry be focused on new brick-and-mortar stores, as new CEO Christopher Bailey did with the opening of Burberry‘s largest store, 121 Regent Street in London, or should they focus on more online sales worldwide? Are high-end products (clothing such as Burberry's) better sold in stores or online, or both? In today‘s environment, it is very difficult for a company to make the binary choice between brick-and-mortar and online. In fact, the two go hand-in-hand when developing a marketplace presence. There will be different consumers who prefer an online interaction first, whereas others may want their experience in the store. The combination of the two, as indicated in the case, can make for a seamless presentation of Burberry‘s brand. Concerning whether high-end products such as clothing at Burberry‘s is better sold online or in stores, the same issue would apply. There are going to be differences in taste. It may be more initially satisfying to purchase in the store, but it may take longer to get the retail location. The speed of purchase is very convenient for purchase online, but, if a different size is required, then the consumer must wait longer for satisfaction. As such, both are required due to specific consumer traits and tendencies. Teaching Tip: To learn more about Burberry, go to https://www.burberry.com. Lecture Note: To extend the discussion of Burberry, its strategy, and its social media presence, consider https://www.mediapost.com/publications/article/330986/burberry-says-social-mediapowering-new-branding-s.html, https://www.theguardian.com/business/2017/nov/09/burberryto-reinvent-itself-as-a-super-luxury-british-brand and https://www.forbes.com/sites/bernardmarr/2017/09/25/the-amazing-ways-burberry-is-usingartificial-intelligence-and-big-data-to-drive-success/#7c0e5fc64f63.

BARRIERS TO INTERNATIONAL COMMUNICATION C) International communication occurs whenever a firm uses a marketing message to sell its products in another country. The effectiveness of a firm‘s international communication can be

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jeopardized by three potentially critical variables: cultural barriers, source effects, and noise levels. Cultural Barriers D) Cultural barriers can make it difficult to communicate messages across cultures. The best way for a firm to overcome cultural barriers is to develop cross-cultural literacy. Source and Country of Origin Effects E) Source effects occur when the receiver of the message (the potential consumer) evaluates the message based upon the status or image of the sender. Source effects can be either positive or negative. A subset of source effects is referred to as country of origin effects (the extent to which the place of manufacturing influences product evaluations). Lecture Note: The class can be stimulated to think of some positive and negative source effects (German autos vs. German wine, Italian cuisine vs. British cuisine). Noise Levels F) Noise tends to reduce the chance of effective communication. In this context, noise refers to the number of other messages that are competing for a potential consumer‘s attention. PUSH VERSUS PULL STRATEGIES G) The main choice with regard to communication strategy is between a push strategy and a pull strategy. A push strategy emphasizes personnel selling whereas a pull strategy emphasizes mass media advertising. The choice between push and pull strategies depends upon product type and consumer sophistication, channel length, and media availability. Product Type and Consumer Sophistication H) A pull strategy is generally favored by firms in consumer goods industries that are trying to sell to a large segment of the market. In contrast, firms that sell industrial products or other complex products favor a push strategy. Channel Length I) Using direct selling to push a product through many layers of a distribution channel can be very expensive. In such circumstances, a firm may try to pull its product through the channels by using mass advertising to create consumer demand. Media Availability J) A pull strategy relies on access to advertising media. A push strategy is more attractive when access to mass media is limited.

The Push-Pull Mix K) Push strategies tend to be emphasized more in the following circumstances:  For industrial products and/or complex new products  When distribution channels are short

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 When few print or electronic media are available L) Pull strategies tend to be emphasized more in the following circumstances:  For consumer goods products  When distribution channels are long  When sufficient print and electronic media are available to carry the marketing message CONNECT Case Analysis Push or Pull Promotional Strategy Summary This activity focuses on international marketing and specifically on push or pull promotional strategies. The choice of communication strategy includes direct selling, sales promotion, direct marketing, and advertising. That choice may be influenced by the channel choice. Activity Students are asked to read a short case on push or pull promotional strategies and then respond to a series of questions related to the case. Class Discussion International marketing managers have a variety of choices when it comes to international marketing. Discuss the difference between a push promotional strategy and a pull promotional strategy and when each is most appropriate.

CONNECT Case Analysis Overcoming Cultural Barriers to Selling Tampons Summary This activity focuses on international marketing and specifically on cross-cultural challenges in international marketing. Cultural barriers can make it difficult to use a standardized message for a product or service. What works well in one market may not work well in another. Activity Students are asked to read a short case on the cross-cultural challenges of international marketing and then respond to a series of questions related to the case. Class Discussion International marketing managers need to develop cross-cultural literacy in order to better understand customers in different parts of the world. Discuss how managers can develop this essential ability.

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GLOBAL ADVERTISING M) In recent years there has been much discussion about the pros and cons of standardized advertising worldwide. For Standardized Advertising N) The support for global advertising is threefold. 1) It has significant economic advantages. 2) There is the concern that creative talent is scarce and that one large effort to develop a campaign will produce better results than 40 or 50 smaller efforts. 3) Brand names are global. Against Standardized Advertising O) There are two main arguments against globally standardized advertising. 1) Cultural differences among nations are such that a message that works in one nation can fail miserably in another. 2) Country differences in advertising regulations may block implementation of standardized advertising. Dealing with Country Differences P) Some firms have been experimenting with tactics that allow them to capture some of the benefits of global standardization while recognizing differences in countries‘ cultural and legal environments.

Pricing Strategy A) International pricing strategy is an important component of the overall international marketing mix. Issues to consider include the case for pursuing price discrimination, strategic pricing, and how regulatory factors influence prices. PRICE DISCRIMINATION B) Price discrimination exists whenever consumers in different countries are charged different prices for the same product. Price discrimination can help a firm to maximize its profits. C) For price discrimination to work, the firm must be able to keep national markets separate and different price elasticities of demand must exist in different countries. The price elasticity of demand is a measure of the responsiveness of demand for a product to changes in price. Demand is said to be elastic when a small change in price produces a large change in demand. Demand is inelastic when a large change in price produces only a small change in demand. D) The elasticity of demand is determined by a number of factors, of which income level and competitive conditions are probably the most important. In general, price elasticity tends to be greater in countries with lower income levels and greater numbers of competitors. STRATEGIC PRICING E) The concept of strategic pricing has three aspects, which we will refer to as predatory pricing, multi-point pricing, and experience curve pricing.

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Predatory Pricing F) Predatory pricing involves using the profit gained in one market to support aggressive pricing in another market. The objective is to drive competitors out of the market. Multipoint Pricing Strategy G) Multipoint pricing strategy becomes an issue in those situations where two or more international businesses compete against in two or more distinct (national) markets. H) The concept of multipoint pricing refers to the fact a firm‘s pricing strategy in one market may have an impact on its rival‘s pricing strategy in another market. In particular, aggressive pricing in one market may elicit a competitive response from a rival in another market that is important to the firm. I) The managerial message in all of this is that pricing decisions around the world need to be centrally monitored. Experience Curve Pricing J) Many firms pursuing an experience curve pricing strategy on an international scale price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially. Firms using experience curve pricing believe that several years in the future, when they have moved down the experience curve, they will be making substantial profits and, moreover, have a cost advantage over less aggressive competitors. REGULATORY INFLUENCES ON PRICES K) Firms‘ abilities to engage in either price discrimination or strategic pricing may be limited by national or international regulations. Antidumping Regulations L) Dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it. From the perspective of an international business, the important point is that antidumping rules set a floor under export prices and limit firms‘ ability to pursue strategic pricing. Competition Policy M) Most industrialized nations have regulations designed to promote competition and to restrict monopoly practices. These regulations can be used to limit the prices that a firm can charge in a given country.

CONNECT Click and Drag Pricing Strategy

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Summary This activity focuses on the pricing strategy in the international business. Pricing is an important part of the marketing mix. Pricing can be influenced not only by the competition but also by a range of other variables including regulatory factors, demand, and more. Activity Students are asked to match various description to the correct category of price discrimination, strategic pricing, and regulatory influence. Class Discussion Pricing is a critical element in the marketing mix. Discuss the different issues firms face when choosing price.

Configuring the Marketing Mix A) Standardization versus customization is not an all or nothing concept. In reality, most firms standardize some things and customize others. When looking at the overall marketing mix and message, one often finds some aspects of standardization and some aspects of customization in all products depending on local requirements and overall cost structures. Table 16.1 illustrates issues that should be evaluated to determine the marketing mix. Video Note: Japanese cars can be seen on most American roads, but the reverse is not true. To learn more about the challenges of selling American cars in Japan, consider Why Ford and Other American Cars Don’t Sell In Japan. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

Did You Know? Video Clip The video clip asks: ―Did You Know that a Kit Kat bar is marketed very differently in different countries?‖ Discussion Questions 1. How would you characterize Nestlé‘s marketing strategy for Kit Kat in Japan? The standard milk chocolate Kit Kat bar in its red wrapper has been a staple in British diets for decades. While the packaging itself has shifted from thin silver foil and a red paper outer layer to a red waxed paper package, its look has not changed substantially over time. Now though, new versions of the Kit Kat are exploding. Shoppers in Japan can go to Kit Kat boutiques where they can choose from an array of brightly covered packages and flavors ranging from traditional chocolate to mint to gin and tonic. Students should recognize that Nestle has identified a market segment in Japan where customized versions of its classic bar are appealing even with a significantly higher price tag. Students should recognize that while the Kit Kat bar had been sold virtually unchanged from market to market, its new strategy, while initially focused on the market in Japan, seems to have global appeal. Already, Nestlé is marketing flavors available in

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Japan, like mint, in the United States and Britain. In addition to mainstream marketing efforts like the mint Kit Kat, Nestlé is also taking its customized boutique strategy to other countries. Shoppers in London‘s John Lewis department stores, for example, can now visit a Kit Kat boutique similar to those found in Japan. 2. Kit Kat bars are available in many countries around the world. How is the buying experience in Japan different from the buying experience in many other countries where Kit Kat is sold? What does this tell you about culture‘s influence in marketing strategy? Many students will probably suggest that in Britain, the Kit Kat bar is akin to the Hershey bar in the United States, readily available and generally consumed with little thought. In Japan however, buying Kit Kats is a shopping experience. Buyers are treated to sensory overload as they enter Kit Kat boutiques filled with beautiful displays of brightly covered bars. Underneath the wrappings are flavor explosions designed to appeal to a wide range of preferences. Students should recognize that Nestle‘s success in Japan is directly related to its ability to capitalize on Japan‘s distinct cultural preference for unique flavors and visually appealing packaging. 3. How important is the boutique in the distribution of Kit Kat in Japan? Would Kit Kat have been as successful if it were sold in more traditional outlets such as grocery stores? Would a Kit Kat boutique appeal to American buyers? Most students will probably suggest that the Kit Kat boutique is an important element in the Kit Kat buying experience in Japan. Indeed, some students may suggest that creating the luxury buying experience is essential to selling the product at significantly higher prices. Nestle has already tried the highly customized buying experience in London and some students will probably agree that it will work in certain locations in the United States that attract large numbers of foreign tourists like New York or Los Angeles. Most students, however, will probably suggest that it is unlikely that shoppers in other U.S. locations will find uniquely flavored, high priced chocolate as appealing. Lecture Note: To learn more about Kit Kat boutiques at John Lewis consider https://www.standard.co.uk/shopping/esbest/food-drink/all-food/luxury-handmade-kitkats-1500flavours-gin-and-tonic-a4243936.html and https://www.theguardian.com/business/2019/sep/23/nestle-kitkat-christmas. Lecture Note: To learn more about Kit Kat boutiques in Japan, consider https://www.nytimes.com/interactive/2018/10/24/magazine/candy-kit-kat-japan.html.

Product Development and R&D A) Firms that successfully develop and market new products can earn enormous returns. Firms need to build close links between R&D, marketing, and manufacturing because in today‘s world,

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competition is as much about technological innovation as anything else. THE LOCATION OF R&D B) Ideas for new products are simulated by the interactions of scientific research, demand conditions, and competitive conditions. Other things being equal, the rate of new-product development seems to be greater in countries where:    

More money is spent on basic and applied research and development. Demand is strong. Consumers are affluent. Competition is intense.

INTEGRATING R&D, MARKETING, AND PRODUCTION C) The need to adequately commercialize new technologies poses special problems in the international business, since commercialization may require different versions of a new product to be produced for different countries. D) A firm‘s new product development efforts need to be closely coordinated with the marketing, production, and materials management functions. This integration is critical to making certain that:    

Product development projects are driven by customer needs. New products are designed for ease of manufacture. Development costs are kept in check. Time to market is minimized.

CROSS-FUNCTIONAL TEAMS E) One means of achieving cross-functional integration is to have cross-functional product development teams. Effective cross-functional teams should be led by a heavyweight project manager with status in the organization, include members from all the critical functional areas, have members located together, have clear goals, and have an effective conflict resolution process. BUILDING GLOBAL R&D CAPABILITIES F) The need to integrate R&D and marketing to adequately commercialize new technologies poses special problems in international business because commercialization may require different versions of a new product to be produced for various countries. G) Integrating R&D, marketing, and production in an international business may require R&D centers in North America, Asia, and Europe that are closely linked by formal and informal integrating mechanisms with marketing operations in each country in their regions, and with the various manufacturing facilities. H) Some companies allocate product development responsibilities using a global network of

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R&D centers that develop the basic technologies for new products which are then picked up by R&D units attached to global product divisions and used to generate new products to serve the global marketplace.

360° VIEW: MANAGERIAL IMPLICATIONS Impact of The Macro Environment Environment A) Three trends in the macro environment stand out for their impact on international marketing. B) First, global markets and transnational intermarket segments have been steadily rising over the past 30 years. This trend has been facilitated by lower trade and investment barriers, growth of global media, and increased cross-border travel. C) Second, there has been a move toward economic nationalism like Donald Trump‘s vision of America First. This trend, which runs counter to the previous one, has brought about an increase in trade barriers and the notion that globalization is not desirable. D) Third, the rise of bid data analytics allows companies to better target markets and personalize their product offerings. Companies have more information than ever before about individual tastes and preferences. Video Note: Two of the biggest changes in the macro environment – the continued movement toward lower trade and investment barriers – and the counter movement toward a more isolationist policy – create both opportunities and challenges for international companies. These trends, together with the emergence of big data analytics and the insight it provides are prompting companies to take different approaches to how they do business. There are a number of video cases that can extend discussion of these trends. A few to consider are California Winemakers Squeezed by U.S. - China Trade War, Changing Tides of U.S. Policy May Sink Cuban Tourism Hopes, and How a Welsh Jeans Firm Became a Cult Global Brand. Find them, and others, in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Marketing Sneakers Summary This activity focuses how sporting goods companies like Nike, and adidas use superstar athletes as global ambassadors for their brands. Athletes that transcend national borders and indeed the sports they play have become common spokespeople for the brands.

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Activity Students are asked to read a short case on superstar athletes as global brand ambassadors and then respond to a series of questions related to the case. Class Discussion Discuss the value of a superstar athlete like LeBron James to a company like Nike. Why do athletes like LeBron James and David Beckham appeal to so many people across so many cultures? What does you response tell you about the globalization of sports?

CONNECT Video Case Did You Know: Kit Kat Bars Is Marketed Very Differently in Different Countries Summary This activity focuses on international marketing strategy. The iconic Kit Kat chocolate bar has been a staple of British confectionary for decades. Now, with new flavor choices and packaging, it is becoming a popular choice in other countries as well. Activity Students are asked to watch a video how the Kit Kat bar is being marketing internationally and then respond to a series of questions related to the video. Class Discussion Discuss how to configure the marketing mix for foreign markets. How is Kit Kat being marketed in other countries like Japan? What does this tell you about the globalization of markets?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. Imagine you are the marketing manager for a U.S. manufacturer of disposable diapers. Your firm is considering entering the Brazilian market. Your CEO believes the advertising message that has been effective in the United States will suffice in Brazil. Outline some possible objections to this. Your CEO also believes that the pricing decisions in Brazil can be delegated to local managers. Why might she be wrong? Answer: While babies‘ behinds serve the same function in all cultures, and the product‘s technical standards may be similar, sensitivity to bodily functions does vary across cultures. Thus, the advertising message may need to be changed for different attitudes towards what is appropriate advertising. Likewise, where it might be progressive to show an ad with a male changing a diaper in some countries, in other countries this message could be lost or misinterpreted. Another consideration would be the noise level created by the advertising message of competitor‘s products, which may well be different in Brazil. While local demand

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and price elasticity decisions should play an important role in Brazil, pricing should not be left solely to the discretion of the local managers. Since this is a global business, your firm will likely be competing in Brazil with some of the same competitors as elsewhere. Thus, pricing decisions in one country can have an impact on pricing and competition in other markets. Similarly, your firm may want to position and price the brand similarly across different South American countries. 2. Within 20 years, we will have seen the emergence of enormous global markets for standardized consumer products. Do you agree with this statement? Justify your answer. Answer: One could either choose to agree or disagree, while the best answer would likely hedge it somewhere in the middle. There are already enormous global markets already for products like Coke and Levis, but it is questionable whether there will ever be a global consumer market for Norwegian lutefisk. More global consumer markets will likely emerge, but there will continue to be national distinctions for many products. 3. You are the marketing manager for a food products company that is considering entering the Indian market. The retail system in India tends to be very fragmented. Also, retailers and wholesalers tend to have long-term ties with Indian food companies, these ties make access to distribution channels difficult. What distribution strategy would you advise the company to pursue? Why? Answer: Because the retail system in India is very fragmented, it would be very expensive for the firm to make contact with each individual retailer. As a result, it would be more economical for the firm to sell to wholesalers or import agents. Import agents may have long-term relationships with wholesalers, retailers, and/or other import agents. Similarly, wholesalers may have long-standing relationships with retailers and, therefore, be better able to persuade them to carry the firm‘s product than the firm itself would. 4. Price discrimination is indistinguishable from dumping. Discuss the accuracy of this statement. Answer: In some specific instances this statement is correct, but as a general rule it is not. When a firm is pricing lower in a foreign country than it is in its domestic market, it can be difficult to distinguish dumping from price discrimination unless it is clear that the firm is selling at below cost in the foreign market. Yet when costs are reasonably well known and all prices are above these, or if the firm is pricing lower in its domestic market than in foreign markets, it can be reasonably concluded that price discrimination rather than dumping is occurring. 5. You work for a company that designs and manufactures personal computers. Your company‘s R&D center is in Michigan. The computers are manufactured under contract in Taiwan. Marketing strategy is delegated to the heads of three regional groups: a North American group (based in Chicago), a European group (based in Paris), and an Asian group (based in Singapore). Each regional group develops the marketing approach within its region. In order of importance, the largest markets for your products are North America, Germany, Great Britain, China, and Australia. Your company is experiencing problems in its product development and

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commercialization process. Products are late to market, the manufacturing quality is poor, costs are higher than projected, and market acceptance of new products is less than hoped for. What might be the source of these problems? How would you fix them? Answer: The dispersion of activities makes sense―products are produced in the lowest cost location and marketed by people familiar with local conditions. (The R&D in Michigan must be a historical fluke.) Yet this makes the coordination task extremely complex, and information required for successful commercialization is likely not being effectively communicated among all the appropriate people. Greater cross-functional integration in the new product development process should help to improve product development and commercialization.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 The consumer purchase of specific brands is an indication of the relationship that develops over time between a company and its customers. Locate and retrieve the most current ranking of best global brands. Identify the criteria used. Which countries appear to dominate the top 100 global brands list? Why do you think this is the case? Now, look at which sectors appear to dominate the list, and try to identify the reasons. Prepare a short report identifying the countries that possess global brands and the potential reasons for success. Exercise 2 Part of developing a long-term R&D strategy is to locate facilities in countries that are widely known to be competitive. Your company seeks to develop R&D facilities in Asia to counter recent competitor responses. A publication that evaluates economies based on their competitiveness is the Global Competitiveness Report. Locate this report, and develop a presentation for the top management team that presents the benefits and drawbacks for the top five Asian economies listed.

Marketing Sneakers closing case Summary The closing case explores the use of celebrity athletes as a marketing tool to reach sneaker buyers around the world. Having a contract with a sports superstar like Michael Jordan or LeBron James, athletes that appeal to people around the world, can take the company to a new level of notoriety. While contracts with athletes that play sports that are globally enjoyed are perhaps more sought after, even contracts with athletes that play in sports with less appeal can be quite lucrative. Case Discussion Questions

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1. Why do superstar athletes have so much brand selling power? Watching LeBron James leaping impossibly high to dunk a ball is a thing of beauty, and ―free‖ advertising if you‘re Nike. Nike, which has teamed up with LeBron James since he joined the NBA, knows that while it may pay James significant sums of money, he will make the highlight reel for every game, highlights that are then shared over and over on various types of media around the world. The bang for the buck payoff of having the famous swoosh flash by in all of those highlights is strong. Students will likely agree that no amount of advertising showing the innovative construction of the shoes or their design can surpass the publicity that comes from LeBron‘s endorsement that the shoes are important to him as an athlete. Similarly, budding snowboarders look at Shaun White‘s board as he contorts his body into a twisting, somersaulting mix high above the half pipe and somehow skims smoothly to the bottom and go buy his board, hoping that they too might be able to soar above the crowds like White. 2. Why does the selling power of athletic superstars often transcend sports equipment and apparel? Companies like Nike and Adidas are attracted to celebrity athletes like LeBron James because they recognize that the star power of these athletes is something that people around the globe can relate to. Moreover, the characteristics that are attractive to buyers are similar no matter where the customer is located making it easier to standardize the product and the message. Students may point out though, that there is some risk to betting the shop on the actions of one individual as Nike‘s experience with Tiger Wood demonstrated. 3. What major sports have the greatest global appeal? Which major sports are more local in appeal? How does this influence a company‘s choice of brand ambassador? Thanks to television, excellence in athletics is readily accessible around the world every weekend and many weekdays as well as professional athletes display their abilities in their chosen sport. Yet despite the numbers of athletes at the top of their games, only a few are chosen to represent companies like Nike and Adidas. Students will probably agree that to be in this select group, not only must the athlete display superior athletic talent, but the athlete must also be relatable to people of various backgrounds, be charismatic and a leader, and demonstrate good values. Some students will probably note that as sports like the NBA and the NFL expand their reach into other markets like China and Mexico, companies like Nike will benefit from the wider audience. 4. What explains Michael Jordan‘s longevity as a brand ambassador for Nike? Responses to this question will vary by student. Many may suggest that Michael Jordan‘s longevity as a Nike brand ambassador may have something to do with being in the right place at the right time. Students sharing this view may point out that Michael Jordan‘s rise to superstar athlete came at about the same time that Nike was emerging as a global company and technology was facilitating a global audience for NBA games. Some students may wonder whether Michael Jackson‘s longevity is, in part, related to the mystic of America, a country where anything is possible. Other students may point out that Michael Jackson‘s career as a basketball player was

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remarkable and lengthy allowing his fans to grow up with him, and his shoes. Students may note that LeBron James, who many believe has surpassed Michael Jordan as the greatest NBA player ever, has a similar multigenerational appeal. 5. Do you think that a superstar such as soccer player Lionel Messi would be a good brand ambassador in the United States? From the very beginning of what was then Blue Ribbon Sports, Nike as focused on athletes as brand ambassadors. From distance runner Steve Prefontaine to golfing great Tiger Woods to basketball superstar LeBron James, the list of elite athletes representing the Nike brand is long. Nike‘s strategy of signing elite athletes across a range of sports allows individuals to identify with the brand via their own hero. Some students, however, may wonder whether a soccer player as a brand ambassador can achieve the same level of success in the United States as in other parts of the world where soccer is more popular. Students sharing this view may point out that as compared to other sports like football, soccer has a much smaller audience in the United States, and that many people might not be familiar with Lionel Messi. Other students may disagree though, noting that soccer superstar David Beckham, who represents the adidas brand rather than Nike, achieved a huge following in the United States, suggesting that there are plenty of American soccer fans. Indeed, students may argue that Lionel Messi could, if he has not done so already, surpass David Beckham as the world‘s greatest soccer player, making him a strong bet as a brand ambassador. Lecture Note: To extend this discussion, consider https://www.forbes.com/sites/michaelcannivet/2018/07/07/lebron-james-mega-deal-shows-whyglobalization-is-here-to-stay/#5a0d8aa15c1e.

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Continuous Case Concept As automakers seek to expand their market share in foreign countries, they are challenged by the age-old question of whether they can sell the same model everywhere or whether a new model must be developed to meet the needs of each individual market. Some companies like BMW and Mercedes believed, when they made North American expansion a priority, that they needed to be closer to the market in order to get a real feel for local design preferences, and so consequently moved their production to the United States. Other companies, like Hyundai and Kia, have established design centers in Germany to take advantage of like minds and knowledge of the local market. VW hired 200 engineers in the United States for its location in Tennessee. The company believed that it had been too slow in the past to recognize and respond to changes in demand in the United States. Yet at the same time, Ford found success with its One Ford platform. Even so, vast differences remain between markets. Americans still prefer oversized SUVs and trucks, while Europeans, who drive narrower streets and have fewer parking options, are content with smaller vehicles. Manual transmissions are seen as a novelty in the United States, where many drivers have never operated one, yet they are common place in much of the rest of the world. 

Ask students to discuss how Ted Levitt would view the world‘s auto markets. Would he believe that standardization of the marketing mix is possible, why or why not? Did Henry Ford have the right idea (you can buy the car in any color as long as it is black)? Who is right? VW or Ford?



Next, develop a list of attributes that might be important in a car. What do Europeans consumers want in a car? How does this compare to the average American or Japanese consumer? For example, does the rugged pick-up truck driver image work in Japan? Does the sleek, powerful European car work in China? Then, consider the notion of a world car—a car that could be successful in any market. What factors could prevent the development of such a product? Consider issues related to culture, distribution, a country‘s level of economic development, and so on.



Then, ask students to consider how long-term changes in the macro environment will be reflected in the auto industry of the future. How have oil prices influenced the choice of what to drive? What will new requirements related to global warming mean for automakers and their customers?



Finally, consider mistakes foreign automakers could make when designing their cars for foreign customers. How could the presence of a joint venture partner help the company avoid these mistakes?

This exercise can be used as a summary discussion for this chapter, or it can be broken down into segments. For example, the second question of this exercise works well as an introduction to international marketing. The first question can be addressed after discussing the notion of standardization of the marketing mix, and at this point, you might also revisit the second

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question. Finally, the third question allows you to incorporate previous discussion of the benefits of a joint venture to international marketing.

Additional Readings and Sources of Information Europe and the U.S. Share a Lot, Except When It Comes to Cars https://www.nytimes.com/2020/03/04/automobiles/european-us-cars-automakers.html Zara Looks to Technology to Keep up With Faster Fashion https://www.businessoffashion.com/articles/news-analysis/zara-looks-to-technology-to-keep-upwith-faster-fashion In KFC‘s China Ads, Nuggets Are Served with Patriotism https://www.nytimes.com/2018/09/27/business/china-kfc-economic-reform.html International Starbucks Now Outnumber U.S. Units https://www.restaurantbusinessonline.com/operations/international-starbucks-now-outnumberus-units What Apple Is Getting Wrong in India https://www.washingtonpost.com/news/innovations/wp/2017/03/16/what-apple-is-gettingwrong-in-india Burberry‘s Sales Plunge 80% As Coronavirus Halts Luxury Shopping https://www.cnbc.com/2020/03/19/burberrys-sales-plunge-80percent-as-coronavirus-haltsluxury-shopping.html McDonald's Is Trying Out a Brilliant New Marketing Campaign Today That Just Might Be One of Its Best Yet https://www.inc.com/peter-economy/mcdonalds-is-trying-out-a-brilliant-new-marketingcampaign-today-that-just-might-be-its-best-one-yet.html Under Armour Launches Brand with NBA Star Steph Curry to Rival Nike‘s Jordan https://www.nbcnews.com/business/business-news/under-armour-launches-brand-nba-star-stephcurry-rival-nike-n1249361 KitKat Launches Facebook Live Shopping Experience https://www.rli.uk.com/kitkat-launches-facebook-live-shopping-experience/ Nestlé UK to source Rainforest Alliance cocoa for KitKat brand https://www.candyindustry.com/articles/89191-nestl%C3%A9-uk-to-source-rainforest-alliancecocoa-for-kitkat-brand Reimagining The Auto Industry‘s Future: It‘s Now Or Never https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/reimagining-theauto-industrys-future-its-now-or-never

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Disney Says Its ‗Primary Focus‘ For Entertainment Is Streaming — Announces A Major Reorg https://www.cnbc.com/2020/10/12/disney-reorganizes-to-focus-on-streaming-direct-toconsumer.html

Global Human Resource Management Table of Contents Learning Objectives Chapter Summary Chapter Opening Activity Chapter Outline Opening Case: The Evolution of HR Strategy at IBM Introduction Strategic Role of Global HRM: Managing a Global Workforce Staffing Policy Did You Know? Video Clip: Walmart‘s Failure in the German Market Was Partly Due to Poor Management Practices Training and Management Development Performance Appraisal Compensation Building a Diverse Global Workforce International Labor Relations 360° View: Managerial Implications End-of-Chapter Resources Critical Thinking and Discussion Questions globalEDGE™ Research Task Closing Case: Global Mobility at Shell Continuous Case Concept Additional Readings and Sources of Information

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Learning Objectives 17-1 Summarize the strategic role of human resource management in international business. 17-2 Identify the pros and cons of different approaches to staffing policy in international business. 17-3 Explain why management may fail to thrive in foreign postings. 17-4 Recognize how management development and training programs can increase the value of global human capital in the international business firm. 17-5 Explain how and why performance appraisal systems might vary across nations. 17-6 Understand how and why compensation systems might vary across nations. 17-1 Understand how organized labor can influence strategic choices in international business.

Chapter Summary This chapter focuses on the challenging topic of global human resource management (HRM). The term ―expatriate manager‖ is introduced and the task of staffing foreign subsidiaries is discussed. In this area, firms typically pursue either an ethnocentric, polycentric, or geocentric approach. This section is followed with an explanation of the challenges involved in selecting expatriate managers. Expatriate managers often fail in their overseas assignments for a variety of reasons, ranging from the inability of their spouses to adjust to living overseas to a manager‘s personal or emotional maturity. Techniques that can be used to reduce expatriate failure are presented and discussed. The chapter also discusses other HRM topics in the context of global management, including training and management development and performance appraisal and compensation. The chapter concludes with a discussion of labor issues in international business.

Chapter Opening Activity The cornerstone of Johnson & Johnson‘s six-decade-old Credo is its high regard for its people. It is a good example of the importance of worldclass human resource (HR) management for international firms. Johnson & Johnson is a leading global manufacturer of consumer products, medical devices, and pharmaceuticals, with well-known brands such as Band-Aid, Tylenol, Neutrogena, Listerine, and Rolaids. Worldwide sales in 2019 exceeded $82 billion, about half of which came from North America, one quarter from Europe, fifteen percent from Asia-Pacific and Africa, and the rest from Latin America and other regions. Johnson & Johnson‘s 134,000 employees work in over 250 business units worldwide. Johnson & Johnson is proud of its ―best and the brightest‖ employees who have served long tenures, benefit from a ―total rewards‖ compensation system, and receive educational opportunities. Johnson & Johnson emphasizes diversity by hiring minorities, women, and people from varied cultural backgrounds to build leadership initiatives among staff in foreign and emerging markets.

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In class, emphasize that Johnson & Johnson‘s HR strategy matches its corporate international strategy. It uses a decentralized decision-making approach in its international business units and in its hiring and retention strategies. The Johnson & Johnson Credo sets policy for delegating decision making to HR directors worldwide. For example, in India, HR managers may approve employee expenses and many other local employee decisions, without soliciting authorization from headquarters. The COVID-19 pandemic brought new challenges to Johnson & Johnson. Because the company has a significant number of employees in China, it was aware of the threat of the virus by early 2020 and moved quickly to develop strategies to respond to the disruptions that would ensue. Ask students to consider the cultural issues that might arise as a result of such a progressive HR strategy. For example: 

 

How might Johnson & Johnson‘s decentralized approach be perceived in a culture that values centralized authority (i.e., Hofstede‘s high power distance)? How might the active promotion of women and minorities be perceived in a culture that values traditional gender roles (i.e., Hofstede‘s high masculinity)? How might MNCs such as Johnson & Johnson mitigate any conflict or misunderstandings that might arise as a result of these perceptions? Discuss Johnson & Johnson‘s reaction to the COVID-19 pandemic and its implications for its workforce. Why was it important for the company to develop strategies to respond at the global level, the national level, and at the regional level? What does your response tell you about Johnson & Johnson‘s approach to HR and about the need for a fit between strategy and HR?

Teaching Tip: To learn more about Johnson & Johnson‘s response to COVID-19, go to https://www.hrdive.com/news/how-employee-feedback-drove-johnson-johnsons-response-touncertainty/584273/. Teaching Tip: For more on Hofstede‘s https://geerthofstede.com/landing-page.

national

cultural

dimensions,

visit

Chapter Outline

The Evolution of HR Strategy at IBM opening case Summary The opening case examines the evolution of HR strategy at IBM. As one of the world‘s most recognized tech giants, IBM‘s business strategy has evolved as technology has changed. Part of that evolution has been a changing HR strategy, moving from a traditional ―international‖ model to its current approach that it refers to as reflecting a ―globally integrated enterprise.‖

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Discussion Questions 1. IBM‘s corporate strategy has shifted over the years, keeping pace with technological change. As part of that strategic evolution, IBM has also changed its HR strategy. Discuss the evolution of the company‘s HR strategy and why it was important to change as the business changed. IBM‘s storied history reflects a company that has moved with its market, continually changing its strategy to keep up with technological shifts. In its early years, IBM, like many other companies at the time, kept most activities at home, selling to foreign customers through overseas sales offices. By the 1970s, the company had moved to a multinational strategy with operations in multiple locations, kept relatively separate because of cross-border trade barriers and national differences in business practices. By the 1990s and 2000s, IBM had become a more globally integrated company serving other companies that were also globally integrated. This change demanded a geocentric staffing strategy focused on finding the best person for the job regardless of nationality. 2. In 2020, IBM named Arvind Krishna CEO. Discuss the significance of this event for the company and its HR strategy. The appointment of Arvind Krishna as CEO of IBM was a major milestone for the company and a recognition of its move toward being a fully globally integrated company. Arvind Krishna, a native of India, is the first non-American to hold the position of CEO at IBM. Students should recognize that his appointment reflects the company‘s geocentric approach to staffing and the idea of hiring people best suited to their position regardless of their location or nationality. Teaching Tip: To learn https://www.ibm.com/us-en/.

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Lecture Note: To extend the discussion, consider https://www.itpro.com/cloud/hybridcloud/358167/ibm-appoints-krishna-as-chairman-of-the-board. Lecture Note: Like many other companies, IBM put new HR protocols into place during the COVID-19 pandemic. To learn more, consider https://hrexecutive.com/ibm-offers-bestpractices-for-managers-during-the-covid-19-crisis/.

CONNECT Case Analysis The Evolution of HR Strategy at IBM Summary This activity focuses on human resources strategy at IBM. The company‘s approach to its international HR has evolved as the company has evolved, moving from an international strategy to a more globally integrated one.

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Activity Students are asked to read a short case on the evolution of HR strategy at IBM and then respond to a series of questions related to the case. Class Discussion Discuss why companies must change their approach to HR staffing as they change their overall business strategy. How has IBM‘s approach to HR changed over the years? Why was changing HR strategy important to the success of its overall strategy?

Introduction A) Human resource management (HRM) refers to the activities an organization carries out to utilize its human resources effectively. These activities include determining the firm‘s human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. B) The role of HRM is complex enough in a purely domestic firm, but it is more complex in an international business, where staffing, management development, performance evaluation, and compensation activities are complicated by the profound differences between countries in labor markets, culture, legal systems, economic systems, and the like. C) The HRM function must also deal with a host of issues related to expatriate managers (citizens of one country working abroad).

Strategic Role of Global HRM: Managing a Global Workforce A) Success in international business requires that HRM policies be congruent with the firm‘s strategy (see Figure 17.1 in the text).

Staffing Policy A) Staffing policy is concerned with the selection of employees who have the skills required to perform a particular job. Staffing policy can be viewed as a major tool for developing and promoting a corporate culture (the organization‘s norms and value systems). TYPES OF STAFFING POLICES B) Research has identified three main approaches to staffing policy within international businesses. These have been characterized as an ethnocentric approach, a polycentric approach and a geocentric approach. The Ethnocentric Approach C) An ethnocentric staffing policy is one in which key management positions in an international business are filled by parent-country nationals. The policy makes most sense for firms pursuing an international strategy.

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D) Firms pursue an ethnocentric staffing policy for three reasons: First, the firm may believe there is a lack of qualified individuals in the host country to fill senior management positions. Second, the firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. Third, if the firm is trying to create value by transferring core competencies to a foreign operation, as firms pursuing an international strategy are, it may believe that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation. Video Note: Training employees can be multifaceted in an international marketplace. To learn more about this, consider Audi Trains Mexican Auto Workers in Germany. Find it in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. Additionally, our McGraw-Hill Education International Business Video Library at http://bit.ly/MHEIBVideo provides an ongoing stream of updated video suggestions correlated by key concept and major topic. Every new clip posted is supported by teaching notes and discussion questions. Please feel free to leave comments in the library that you feel might be helpful to your colleagues. E) Despite the rationale for pursuing an ethnocentric staffing policy, the policy is now on the wane in most international businesses. There are two reasons for this. First, an ethnocentric staffing policy limits advancement opportunities for host-country nationals. Second, an ethnocentric policy can lead to cultural myopia (a failure to understand host-country cultural differences that require different approaches to marketing and management). The Polycentric Approach F) A polycentric staffing policy is one in which host-country nationals are recruited to manage subsidiaries in their own country, while parent-country nationals occupy the key positions at corporate headquarters. While this approach may minimize the dangers of cultural myopia, it may also help create a gap between home- and host-country operations. The policy is best suited to firms pursuing a localization strategy. G) There are two advantages of the polycentric approach. First, the firm is less likely to suffer from cultural myopia, and second, this staffing approach may be less expensive to implement than an ethnocentric policy. There are two important disadvantages to the polycentric staffing approach, however. Host-country nationals have limited opportunities to gain experience outside their own country and thus cannot progress beyond senior positions in their own subsidiaries. A gap can form between host-country managers and parent-country managers.

Did You Know? Video Clip The video clip asks: ―Did You Know that Walmart‘s failure in the German market was partly due to poor management practices?‖

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Discussion Questions 1. What does Walmart‘s decision to head its German operation with a manager from Bentonville tell you about the company‘s approach to staffing in Germany? Would a German manager have been more successful? Walmart‘s decision to assign a manager from Bentonville to lead its operation in Germany suggests that the company took an ethnocentric approach to staffing. Students will probably agree that it is impossible to know whether a manager from Germany would have been more successful in the position, but many will point out that knowledge of the local market is important in retail. A better understanding how people shop and their preferences may have helped the company have a more successful experience in Germany. 2. Why was it important to Walmart to establish practices like the Walmart cheer at its German location? Bringing the Walmart cheer and way of doing things indicates that Walmart believes its corporate culture is important to the success of the company. Some students might point out however, that the company should have recognized the vast gap between the Bentonville way of doing things and the German approach. Students may suggest that hiring a local to lead the company could have prevented some missteps like this one. 3. Reflect on the American manager‘s demands that all meeting in Germany be conducted in English. What does this tell you about the manager? Students will probably agree that the manager lacked cross-cultural literacy. While many students may suggest that the manager did not need to become fluent in German, the manager did need to make a bigger effort to respect the local culture. Lecture Note: To extend this discussion, consider https://www.huffpost.com/entry/why-didwalmart-leaveger_b_940542#:~:text=Still%2C%20for%20all%20of%20Walmart's,the%20German%20debacle %20still%20reverberates.

The Geocentric Approach H) A geocentric staffing policy is one in which the best people are sought for key jobs throughout the organization, regardless of nationality. This approach is consistent with building a strong unifying culture and informal management network. It is well suited to firms pursuing either a global or transnational strategy. The immigration policies of national governments may limit the ability of a firm to pursue this policy. I) The advantages of a geocentric approach to staffing include enabling the firm to make the best use of its human resources and build a cadre of international executives who feel at home working in different cultures. The disadvantages of geocentric approach include difficulties with immigration laws and costs associated with implementing the strategy.

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Types of Staffing Policies Summary J) The advantages and disadvantages of each of the three main approaches to staffing policy are summarized in Table 17.1 in the text. CONNECT Click and Drag Global Staffing Policies Summary This activity explores international human resource management and specifically the staffing policies used by international businesses. Firms doing business internationally generally choose from one of three staffing policies: ethnocentric; polycentric, or geocentric. Activity Students are asked to match aspects of staffing policies with the correct type of staffing policy. Class Discussion Managers working in international human resources need to consider the type of global staffing policy that makes the most sense for their organization. Discuss the three types of staffing policies and the advantages and disadvantages of each policy.

CONNECT Video Case Living in Different Countries is Invaluable Summary This activity focuses on international human resource management and the value that an international assignment can bring to a manager. Living and working in a foreign country contributes to the development of a global mindset, allowing managers to better understand their customers, their colleagues, and the global business environment. Activity Students are asked to watch a video on working in a foreign country and then respond to a series of questions related to the video. Class Discussion Living and working in a foreign country contributes to the development of managers. Discuss the benefits that this type of experience can provide to a manager. EXPATRIATE MANAGERS

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K) A prominent issue in the international staffing literature is expatriate failure—the premature return of an expatriate manager to his or her home country. Lecture Note: The Mercer Human Resource Consulting group conducts studies and webcasts on a variety of issues related to expatriate managers. To learn more, go to http://www.mercer.com/events/webcasts.html. Lecture Note: Vienna recently topped the list of the most attractive destinations for expatriate managers. To see more about the study, go to https://www.relocatemagazine.com/internationalassignments-vienna-still-best-city-for-international-assignments-dsapsted and https://www.global-benefits-vision.com/mercer-releases-2019-quality-of-living-rankings/. Expatriate Failure Rates L) The costs of expatriate failure can be substantial. According to a study by Rosalie Tung, the main reasons for expatriate failure among U.S. firms seem to be an inability of an expatriate‘s spouse to adapt to a foreign culture, an inability of the employee to adjust, other family-related reasons, the manager‘s personal or emotional maturity, and an inability to cope with larger overseas responsibilities (see Table 17.2 in the text for expatriate failure rates). M) Managers of European firms gave only one reason consistently to explain expatriate failure: the inability of the manager‘s spouse to adjust to a new environment. For Japanese firms, the reasons for failure, in descending order of importance, were an inability to cope with larger overseas responsibility, difficulties with new environment, personal or emotional problems, a lack of technical competence, and the inability of a spouse to adjust.

management FOCUS: AstraZeneca and Global Staffing Policy Summary This feature explores human resource management at pharmaceutical giant, AstraZeneca. With a presence in more than 100 countries, developing a global workforce that is comfortable interacting with people from other cultures and doing business in different nations is critical. When making selections for foreign postings, AstraZeneca selects only those employees who show high potential for success. The company also invests in providing assistance to employees, spouses, and families as they transition to another country. Assistance can range from locating schools for children to providing language training. AstraZeneca believes investments like these will pay off in the form of a diverse workforce comprised of people who don‘t all think the same, and who approach challenges differently. Discussion Questions 1. Describe AstraZeneca‘s staffing strategy for employees it sees as being high potential. Do you see any drawbacks to the company‘s focus on high potential employees? AstraZeneca‘s strategy for foreign assignments involves selecting only those individuals who have demonstrated their ability to work in international teams and manage across borders. Most students will probably suggest that AstraZeneca is using a geocentric approach to staffing.

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AstraZeneca sends only ―high potential‖ employees on foreign assignments because of the high cost involved with expatriates. AstraZeneca believes that it is critical to not only carefully screen employees assigned to foreign locations, but also to provide expatriates with the support they need in making the transition. This often involves assistance with housing, language training, taxation, and school tuition. Some students may wonder whether AstraZeneca‘s focus on only promoting individuals who are successful internationally to senior levels could mean that some individuals who could be quite effective in a more home-based assignment are overlooked. 2. Discuss AstraZeneca‘s approach to limiting the risks for expatriate failure. Is the company doing everything it should to ensure success for its expatriate employees? Beginning with its selection process, AstraZeneca devotes considerable resources to ensuring that its managers are in the best position possible to be successful in their foreign assignments. AstraZeneca chooses only those managers with proven track records to be considered for foreign assignments and also requires that they have the ability to work in international teams and manage across borders. Once an employee has been selected, AstraZeneca provides language and culture training, offers housing and tax assistance, and help with school tuition where needed. AstraZeneca also works hard to ensure that an employee‘s transition back to the home country is smooth. Most students will probably applaud the company‘s efforts to ensure that its expatriates are successful. Teaching Tip: To learn more about AstraZeneca, go to https://www.astrazeneca-us.com/.

CONNECT Click and Drag Preventing Expatriate Failure Summary This activity explores international human resources management and specifically how to prevent expatriate failure. The failure of an expatriate to successfully complete a foreign assignment can be very costly to an international business. Activity Students are asked to match factors related to expatriate experiences to whether they contribute to expatriate failure or expatriate success. Class Discussion Understanding the factors that can contribute to the success or failure of a manager on a foreign assignment is an important part of international human resource management. Discuss how expatriate failure can be prevented. Expatriate Selection

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N) One way of reducing expatriate failure rates is through improved selection procedures. Mendenhall and Oddou identified four dimensions that seem to predict success in a foreign posting: self-orientation, others-orientation, perceptual ability, and cultural toughness. O) Self-orientation attributes strengthen the expatriate‘s self-esteem, self-confidence, and mental well-being. Others-orientation refers to how the attributes of this dimension enhance the expatriate‘s ability to interact effectively with host-country nationals. Perceptual ability refers to the ability to understand why people of other countries behave the way they do. Cultural toughness refers to how well an expatriate adjusts to a particular posting in the country of assignment. GLOBAL MINDSET P) A global mindset, one that is characterized by cognitive complexity and a cosmopolitan outlook, may be the fundamental attribute of a global manager. Managers with a global mindset can deal with high levels of complexity and ambiguity and are open to the world. Q) Most firms fail to test employees for the attributes that have been shown to improve expatriate success, and instead select expatriate managers primarily on the basis of technical expertise.

Training and Management Development A) Selection is just the first step in matching a manager with a job. Training begins where selection ends and it focuses upon preparing the manager for a specific job. B) Management development is a broader concept. Management development is concerned with developing the skills of the manager, reinforcing the firm‘s culture, and facilitating the creation of an informal network for knowledge sharing within the organization. TRAINING FOR EXPATRIATE MANAGERS C) Cultural training, language training, and practical training all seem to reduce expatriate failure. However, according to one study, only about 30 percent of managers sent on one- to five-year expatriate assignments received training before their departure. Cultural Training D) Cultural training seeks to foster an appreciation for the host country‘s culture. Lecture Note: To extend this discussion, consider https://hbr.org/2020/01/how-corporatecultures-differ-around-the-world, https://www.shrm.org/hr-today/news/hrmagazine/pages/010215-cross-cultural-training.aspx, and http://www.bloomberg.com/news/articles/2014-03-19/gate-b22-in-the-frankfurt-airport-offers-alesson-in-cultural-differences. Language Training

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E) Despite the prevalence of English, an exclusive reliance on English diminishes an expatriate manager‘s ability to interact with host-country nationals.

Practical Training F) Practical training is aimed at helping the expatriate manager and his or her family ease themselves into day-to-day life in the host country. Lecture Note: Numerous sites exist where expatriates can communicate with each other and share their experiences. One example of this type of site is http://www.expat.or.id. Students can explore the site, or it can be an in-class activity to see some of the issues facing expatriates. CONNECT Click and Drag Training for Expatriate Managers Summary This activity explores international human resource management as it pertains to expatriate training. Training programs to help expatriates prepare for their international assignments can have a significant effect on the success of the assignment. Activity Students are asked to match descriptions of expatriate training to the type of training it represents. Class Discussion Understanding the value of expatriate training is important for managers. REPATRIATION OF EXPATRIATES G) A largely overlooked but critically important issue in the training and development of expatriate managers is to prepare them for reentry into their home-country organization. H) The HRM function needs to develop a good program for re-integrating expatriates back into work life within their home-country organization once their foreign assignment is over, and for utilizing the knowledge they acquired while abroad. Lecture Note: Some companies have expressed anger over expatriates returning home and then leaving the organization. To learn more, go to http://www.bloomberg.com/news/articles/201404-23/we-gave-you-a-sweet-job-overseas-dot-then-we-brought-you-home-dot-now-you-requitting and http://www.bbc.com/capital/story/20140115-returning-expat-discontent.

management FOCUS: Monsanto‘s Repatriation Program

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Summary This feature describes Monsanto‘s repatriation program for its expatriate managers. The program is very sophisticated and is designed to provide a supportive environment for the company‘s managers who are returning from overseas assignments. The feature describes the details of the repatriation program, which is a model program for the repatriation of expatriate managers. Discussion Questions 1. How does Monsanto‘s repatriation program provide an incentive for high-potential managers to accept overseas assignments? One question that managers often have when accepting a foreign assignment is how the assignment will help their career. At Monsanto, foreign assignments are clearly linked to business objectives, enabling managers to understand what the assignment means to their future. In addition, managers are explicitly told about their position in the firm once the assignment is over, eliminating questions over how the manager might fit in when the foreign assignment ends. Students will note that these steps will help alleviate some of the stress that may come with accepting a foreign assignment. 2. After they return home, Monsanto‘s expatriate managers are given the opportunity to showcase their experience to their peers, subordinates, and superiors, in a special information exchange. Why is this important? What function does this serve in the repatriation process? Students will probably recognize that Monsanto‘s program allows expatriates to ―show their stuff‖ to the home-country staff. This can help avoid the problem of ―out of sight, out of mind‖ that can make it difficult for expatriates to fit back into the headquarters. The program also allows home-country staff to identify new ways the expatriate might be able to fit into the homecountry structure. Students will probably also note the program offers home-country staff the opportunity to learn from the expatriate‘s experiences. 3. How does Monsanto‘s repatriation program help an expatriate manager adjust his personal life to returning home? Is this an important component of a firm‘s repatriation program? Studies show that expatriates go through reverse culture shock when they return home. By ensuring that expatriates have a clearly defined role at their jobs, the adjustment to being home can be easier. Monsanto believes that because personal matters can affect job performance, making an investment in this area benefits the firm. Teaching Tip: To learn more about Monsanto and its international operations, go to https://monsanto.com/company/locations.

MANAGEMENT DEVELOPMENT AND STRATEGY

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I) Management development programs are designed to increase the overall skill levels of managers through a mix of ongoing management education and rotations of managers through a number of jobs within the firm to give them varied experiences. J) Management development is often used as a strategic tool to build a strong unifying culture and informal management network, both of which are supportive of a transnational and global strategy.

Performance Appraisal A) Performance appraisal systems are used to evaluate manager performance. It can be particularly difficult to evaluate the performance of expatriate managers. PERFORMANCE APPRAISAL PROBLEMS B) Unintentional bias makes it difficult to evaluate the performance of expatriate managers objectively. In most cases, two groups evaluate the performance of expatriate managers―hostnation managers and home-office managers―and both are subject to bias. C) Frequently home-country managers must rely more on hard data when evaluating expatriates, and host-country managers can be biased towards their own frame of reference. GUIDELINES FOR PERFORMANCE APPRAISAL D) There are several ways to reduce bias in performance appraisals. First, most expatriates appear to believe more weight should be given to an onsite manager‘s appraisal than to an offsite manager‘s appraisal. Second, a former expatriate who served in the same location should be involved in the appraisal process to help reduce bias. Finally, when the policy is for foreign onsite managers to write performance evaluations, home-office managers should probably be consulted before an onsite manager completes a formal termination evaluation.

Compensation A) There are two key issues to consider regarding compensation in an international business. First, how compensation should be adjusted to reflect national differences in economic and compensation practices. The second issue refers to how expatriate managers should be paid. NATIONAL DIFFERENCES IN COMPENSATION B) Substantial differences exist in the compensation of executives at the same level in various countries. These differences in compensation practices raise a perplexing question for an international business: should the firm pay executives in different countries according to the prevailing standards in each country, or should it equalize pay on a global basis? C) Over the last decade, many firms have moved toward a compensation structure that is based upon consistent global standards, with employees being evaluated by the same grading system and having access to the same bonus pay and benefits structure irrespective of where they work.

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management FOCUS: McDonald‘s Global Compensation Practices Summary This feature explores McDonald‘s efforts to develop a global compensation and performance appraisal strategy. McDonald‘s, which has over 400,000 managers and senior employees working in 118 different countries, wants its new program to provide some standardization of compensation and performance appraisal for the firm, but at the same time, allow subsidiaries to tailor the program to local market conditions. Discussion Questions 1. What does McDonald‘s hope to gain from having a global compensation and performance appraisal system in place? With hundreds of thousands of managers and senior employees working in more than 118 countries around the world, compensation and performance appraisal at McDonald‘s has the potential to become a nightmare of inconsistencies and complexities. To try to reduce the potential for such a situation, McDonald‘s began to implement a global compensation and performance appraisal system in the early 2000s. The new system was developed after extensive consultation with managers all over the world, and thus reflects differing perspectives on the process. McDonald‘s hopes that its new program will give the firm greater control, and at the same time, provide subsidiaries with the tools necessary to develop fair policies. Under the new program, performance and compensation for an individual is based in part on how well local units meet their self-selected goals as well as their individual performance. 2. How does the compensation and performance appraisal system introduced at McDonald‘s allow managers to take local market differences into account? Why is this type of approach important to employees? The compensation and performance appraisal system introduced recently at McDonald‘s was specifically designed to allow local market conditions to be considered. So, for example, rather than simply setting a specific performance appraisal scale, the company has issued general guidelines that allow local managers some flexibility. Similarly, McDonald‘s issues a set of business principles to focus on that each local subsidiary then tailors to the conditions in its market. Employees seem to like the new approach. Turnover is down, and surveys show that employees feel the new program is fair and reflects local market conditions. Teaching Tip: To learn http://www.mcdonalds.com.

about

McDonald‘s

global

operations,

Lecture Note: To extend the discussion of this feature, consider https://www.washingtonpost.com/posteverything/wp/2014/10/29/were-not-denmark-but-we-can-

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learn-something-from-that-nation-about-how-wages-are-set/, https://www.theatlantic.com/business/archive/2013/08/the-magical-world-where-mcdonaldspays-15-an-hour-its-australia/278313 and https://www.huffpost.com/entry/global-mcdonaldsprotests_n_5324938.

EXPATRIATE PAY D) The most common approach to expatriate pay is the balance sheet approach (Figure 17.3). This approach equalizes purchasing power across countries so employees can enjoy the same standard in their foreign posting that they enjoyed at home. E) A further component of the balance sheet approach is to provide financial incentives and allowances to offset qualitative differences between assignment locations. F) The components of the typical expatriate compensation package are base salary, a foreign service premium, allowances of various types, tax differentials, and benefits. Base Salary G) An expatriate‘s base salary is normally in the same range as the base salary for a similar position in the home country. Foreign Service Premium H) A foreign service premium is extra pay the expatriate receives for working outside his or her country of origin. It is offered as an inducement to accept foreign postings. Allowances I) Four types of allowances are often included in an expatriate‘s compensation package: hardship allowances, housing allowances, cost-of-living allowances, and education allowances. Lecture Note: Negotiating an expatriate compensation package can be challenging. To learn more, consider https://www.forbes.com/sites/ericagellerman/2017/02/02/the-salary-chronicleshow-i-negotiated-a-100k-expat-package/#6f010e2124bf. Taxation J) Unless a host country has a reciprocal tax treaty with the expatriate‘s home country, the expatriate may have to pay income tax to both the home country and the host country governments. When a reciprocal tax treaty is not in force, the firm typically pays the expatriate‘s income tax in the host country. Lecture Note: Recent changes in U.S. tax laws have big implications for U.S. expatriates. To learn more, consider https://www.bloomberg.com/news/articles/2018-07-31/living-abroad-isn-tso-idyllic-for-u-s-expats-facing-new-taxes. Benefits

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K) Many firms also ensure that their expatriates receive the same level of medical and pension benefits abroad that they received at home. Lecture Note: Some countries rank higher for expatriate assignments than others. To see a list of the top locations, consider https://forthcapital.com/is-asia-the-place-to-be-expat-packages-arehighest-in-japan-while-pay-levels-in-china-keep-rising/ and https://www.businessinsider.com/hsbc-countries-expats-best-careers-work-2016-12.

Building a Diverse Global Workforce A) A diverse global workforce, one that has a significant mix of both genders and in which cultural and ethnic minorities are well represented, can be a source of competitive advantage. B) A diverse workforce can improve performance in several ways. First, diverse talents bring insights into the needs of a diverse customer base that (for example) a homogenous management group composed exclusively of white males cannot. Second, an enterprise with a homogenous employee base is underutilizing the talent to be found among women and minorities. Third, when the customer set is diverse (as is often the case for many global businesses), those customers may appreciate interacting with an enterprise whose employees look like them, and therefore, have a better understanding of their needs, tastes, and preference. Fourth, a diverse workforce may improve the brand image of an enterprise, setting up a virtuous circle where it does better among its customer set and is more able to attract top talent from among women and minorities. Finally, there is evidence that diversity increases employee satisfaction, which results in higher productivity, so long as the workforce is diverse enough. C) Building a diverse workforce is not easy especially in an international business where crosscultural differences can create additional challenges; however, companies can take a number of steps to promote workforce diversity. D) Efforts to promote diversity must come from the top with a clear vision and goals of what is to be achieved. Managers must also be held accountable for attaining diversity goals. Diversity workshops can help employees understand the value of a diverse workforce. Outreach programs can be used to help in the recruitment process. Lecture Note: To extend this discussion, consider exploring the link between innovation and workforce diversity. To learn more, see https://images.forbes.com/forbesinsights/StudyPDFs/Innovation_Through_Diversity.pdf.

management FOCUS: Sodexo: Building a Diverse Workforce Summary This feature explores diversity at Sodexo, the worldwide leader in providing quality of life services. Sodexo believes that a diverse workforce contributes to higher company profits, and so the company, headquartered in France, is committed to building a globally diverse workforce.

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With 425,000 employees spread across 80 countries, Sodexo, seems to be achieving its goal. It was recently ranked number 6 in the world by Diversity Inc. Discussion Questions Please see Critical Thinking Question #7 for discussion of this feature. Lecture Note: To learn more about Sodexo, visit the company website at https://www.sodexousa.com. Also consider https://www.prnewswire.com/news-releases/sodexoearns-high-score-on-annual-diversity-best-practices-inclusion-index-300553026.html. Lecture Note: To extend this discussion, consider exploring Sodexo‘s new partnership with Microsoft to improve facility management intelligence. To learn more, go to https://news.microsoft.com/europe/2018/09/25/sodexo-and-microsoft-announce-globalpartnership-to-improve-facility-management-intelligence.

International Labor Relations A) A key issue in international labor relations is the degree to which organized labor is able to limit the choices available to an international business. A firm‘s ability to pursue a transnational or global strategy can be significantly constrained by the actions of labor unions. Lecture Note: The International Labor Organization (ILO) supports worker issues throughout the world. To see some of the issues the ILO is currently involved in, go to http://www.ilo.org.

CONNECT Click and Drag International Labor Relations Summary This activity explores international human resource management with a focus on labor relations. Managing the potential conflicts between labor and management has significant implications for the effectiveness of an international business strategy. Activity Students are asked to match issues related to international labor relations to whether they reflect the perspective of the union or management. Class Discussion Managing the relationship between labor and management requires an understanding of the perspectives of both sides. Discuss the relationship between management and labor and the concerns of each side.

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THE CONCERNS OF ORGANIZED LABOR B) A principal concern of organized labor is that the multinational can counter union bargaining power by threatening to move production to another country. Another concern is that an international business will keep highly skilled tasks in its home country and farm out only lowskilled tasks to foreign plants. A third concern is that multinationals will try to import and impose unfamiliar labor practices from other countries. Video Note: To explore the potential labor ramifications of moving lower-skilled tasks internationally, consider In China, Factory Workers Allege poisoning from iPhone Production in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title. THE STRATEGY OF ORGANIZED LABOR C) Organized labor has responded to the increased bargaining power of multinational corporations by taking three actions: trying to set-up their own international organizations, lobbying for national legislation to restrict multinationals, and trying to achieve regulations of multinationals through international organization such as the United Nations. However, none of these efforts have been very successful. Lecture Note: Canada‘s labor union recently expressed dismay over GM‘s decision to close its operations in Ontario. To learn more, go to https://ca.reuters.com/article/topNews/idCAKCN1NV21H-OCATP. Lecture Note: Amazon employees across the world are frustrated by their working conditions and pay. To learn more, consider https://www.cnn.com/2020/11/27/tech/amazon-global-bonusgermany-strike/index.html and https://theintercept.com/2020/12/03/amazon-workers-unioninternational-strike/. Video Note: Workers in South Korea recently marched in protest of a GM plant closure. To learn more, consider https://www.youtube.com/watch?v=kkQnUzIfo6I. APPROACHES TO LABOR RELATIONS D) Traditionally, labor relations have been decentralized to individual subsidiaries within multinationals. Now there is a trend towards greater centralization. This enhances the bargaining power of the multinational vis-à-vis organized labor. E) There is a growing realization that the way in which work is organized within a plant can be a major source of competitive advantage.

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360° VIEW: MANAGERIAL IMPLICATIONS Impact of The Macro Environment Environment A) Several trends in the macro environment stand out for their impact on international human resource management. B) The shift toward globalization has forced companies to take a more geocentric approach toward staffing policy. Many companies now employee global workforces of managers, scientists, and engineers that can seamlessly move between nations. C) Yet at the same time, the push toward greater economic nationalism, evidenced by Britain‘s departure from the European Union and Donald Trump‘s push for America First, is prompting some companies to rethink their HR strategy. Since a central point in the move toward isolationism is a rejection of immigration, many companies are recognizing that it could become difficult to move talent around the world making the idea of a geocentric workforce difficult. The risk of restrictions on work visas could encourage companies to grow their operations in other countries or move operations to countries that have fewer restrictions. D) Finally, the global trend toward greater inclusion and ethnic diversity is reshaping the look of many companies‘ workforces. Video Note: While globalization continues to encourage companies to adopt a geocentric HR strategy, this approach runs counter to the move toward greater isolationism. Companies and their employees are facing new challenges as they try to adapt to this changing environment. Further, while many companies are taking a more concerted effort to be inclusive and diverse in their hiring practices, many workers, especially those in poor countries, are still underpaid or forced to work in poor conditions. There are several video cases that can extend discussion of these trends. A few to consider are In Gibraltar British Citizens Worry About the Effects of Brexit, India's Economy to Overtake China, but Many Still in Poverty, and Shocking Conditions in PPE Factories Supplying UK. Find them, and others, in the International Business Library at http://bit.ly/MHEIBVideo. Click ―Ctrl+F‖ on your keyboard to search for the video title.

CONNECT Case Analysis Global Mobility at Shell Summary This activity focuses human resources at oil giant, Royal Dutch Shell. With operation in 70 countries and more than 80,000 employees, the company recognizes the value of ensuring that its workforce is as strong as possible.

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Activity Students are asked to read a short case on international human resources at Royal Dutch Shell and then respond to a series of questions related to the case. Class Discussion Discuss the importance of international human resource strategy to companies like Royal Dutch Shell. Why does the company place such a high priority on its expatriate workforce? What HR challenges does Shell face as a result of operating in 70 countries?

CONNECT Video Case Did You Know: Walmart’s Failure in the German Market Was Partly Due to Poor Management Practices Summary This activity focuses on Walmart‘s failure to be successful in Germany. While the market in Germany showed potential for the retail giant, missteps by Walmart management set the stage for failure. Activity Students are asked to watch a video on Walmart‘s missteps in Germany that led to the company‘s failure in the market and then respond to a series of questions related to the video. Class Discussion How did Walmart get thing so wrong in Germany? Walmart has found success in other international markets, what made its experience in Germany different?

End-of-Chapter Resources Critical Thinking and Discussion Questions 1. What are the main advantages and disadvantages of the ethnocentric, polycentric, and geocentric approaches to staffing policy? When is each approach appropriate? Answer: The answer to this question is contained in Table 17.1 in the text. An ethnocentric staffing policy is one in which key management positions are filled by parent-country nationals. The advantages of the ethnocentric approach are that it overcomes lack of qualified managers in host country, provides a unified culture, and helps transfer core competencies. The disadvantages of the ethnocentric approach are that it produces resentment in host country, and it can lead to cultural myopia. An ethnocentric approach is typically appropriate for firms utilizing an international strategy. A polycentric staffing policy requires host-country nationals to be

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recruited to manage subsidiaries, while parent-country nationals occupy key positions at corporate headquarters. The advantages of the polycentric approach are that it alleviates cultural myopia, and it is inexpensive to implement. The disadvantages of the polycentric approach are that it limits career mobility, and isolates headquarters from foreign subsidiaries. A polycentric approach is typically appropriate for firms utilizing a localization strategy. A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. The advantages of a geocentric approach are that is uses human resources efficiently, and helps build strong culture and informal management network. The disadvantages of the geocentric staffing policy are that national immigration policies may limit implementation, and it is expensive to implement. A geocentric approach is typically appropriate for firms utilizing a global or transnational strategy. 2. Research suggests that many expatriate employees encounter problems that limit both their effectiveness in a foreign posting and their contribution to the company when they return home. What are the main causes and consequences of these problems, and how might a firm reduce the occurrence of such problems? Answer: The primary causes of expatriate problems are the inability of the spouse to adjust, inability of the employee to adjust, other family problems, personal/emotional maturity, and an inability to cope with the larger overseas responsibilities. The consequences of such problems are that an employee can be ineffective or detrimental overseas, and/or may return prematurely before the assigned job tasks are completed. A firm can reduce the occurrence of expatiate problems by developing an effective selection process, training, and repatriation program. The most successful expatriates seem to be those who have high self-esteem and self-confidence, get along well with others, are willing to attempt to communicate in a foreign language, and can empathize with people of other cultures. An expatriate training program should include cultural, language, and practical training. Cultural training seeks to foster an appreciation of the host country‘s culture so that the expatriate behaves accordingly. Language training involves training in local language both from a business and personal perspective. Practical training is aimed at assisting the expatriate manager and her family to ease into day-to-day life in the host country. The sooner a day-to-day routine is established, the better the prospects are that the expatriate and family will adapt successfully. Before leaving, however, specific plans and procedures should be in place for the repatriation of the employee. 3. What is the link between an international business‘s strategy and its human resource management policies, particularly with regard to the use of expatriate employees and their pay scale? Answer: In firms pursuing a localization strategy, a polycentric staffing approach is most common and there are relatively few expatriates or the associated pay issues. Expatriates are more common in firms with international strategies, and when an ethnocentric staffing approach is utilized. In this situation, the pay is often based on home-country levels, with adjustments as required for differing living costs and taxes as outlined by the balance sheet approach. Firms pursuing global or transnational strategies most often use a geocentric approach to staffing, where the best individuals (regardless of nationality) are chosen fill positions in any country. Here the pay issues for expatiates can become particularly complex, as allowances must be made

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for home-country norms, host-country costs and expectations, and global norms across the company. 4. In what ways can organized labor constrain the strategic choices of an international business? How can an international business limit these constraints? Answer: Organized labor can significantly constrain the choices firms make with respect to location. International firms (or domestic ones for that matter) often choose to locate new facilities in places where labor is relatively peaceful and working relations are harmonious. Labor can raise objections and threaten disruptive behavior if a firm decides to move some activities to other locations, which, in some cases, only reinforces the need for relocating the activities. Organized labor has also attempted to set up its own international organizations, lobby for national legislation to restrict multinationals, and achieve regulation of multinationals through international organization such as the United Nations. However, none of these broader efforts have been very successful. International businesses have the advantage of being able to provide or take away jobs, and in today‘s labor market that gives them considerable power. As a condition of opening or expanding a facility, firms can negotiate favorable conditions with local unions and force unions to compete against each other for the gains in membership. 5. Reread the Management Focus, ―McDonald‘s Global Compensation Practices.‖ How does McDonald‘s approach help the company to consider local differences when reviewing the performance of different country managers and awarding bonus pay? Answer: Compensation at McDonald‘s is based not only on individual performance but also on how well local units meet their goals. Each country manager selects certain goals from a menu of business principles identified by headquarters, and then works toward achieving those goals. By allowing country managers to choose the principles to focus on, the company allows for local differences to enter into the mix. There is also an opportunity to consider local market differences when conducting performance appraisals. McDonald‘s issues guidelines on performance rather than specific rating systems. The guidelines give individual units the ability to consider local market differences. 6. Why is diversity good for an international business? What actions can a company take to foster greater diversity? Answer: There are several reasons why diversity is good for an international business. Diversity allows for greater insight into the needs of a diverse customer base; diversity allows organizations to capitalize on the talent to be found among women and minorities; customers may appreciate interacting with an enterprise whose employees look like them, and therefore, have a better understanding of their needs, tastes, and preferences; diversity can improve the brand image of an enterprise, setting up a virtuous circle where it does better among its customer set and is more able to attract top talent from among women and minorities; and research shows that diversity is linked with higher employee satisfaction. Companies can do a number of things to foster greater diversity including having a clear vision and plan for increasing diversity that is supported with strong leadership from the top and complemented with an accountability and

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reward system for managers. Companies can also sponsor workshops and outreach programs designed to educate employees and attract new diverse talent. 7. Reread the Management Focus, ―Sodexo: Building a Diverse Global Workforce,‖ then answer the following questions: a. How might building a more diverse global workforce help Sodexo to achieve high performance? Answer: A study by McKinsey and Company shows that a diverse workforce can have a positive effect on profits. Sodexo agrees with this. Sodexo believes that diversity can be a market differentiator, allowing it to attract top talent and diverse clients. The company also feels that looking at problems through a diverse lens improves decision making and results in innovative solutions for clients and customers. b. What barriers do companies like Sodexo face when trying to increase workforce diversity in their global operations? Answer: Many students will likely respond to this question by noting that old habits are hard to break. For decades, women and minorities have been underrepresented in the workforce, and changing that is a slow process. Students may also point out that women often take several years off to raise children and can find it difficult to return to the workforce, especially in the upper levels of management. Students may also suggest that cultural differences in countries impacts the acceptance of women in senior level positions, again making the development of a diverse workforce a challenging endeavor. c. How does Sodexo implement its policy of increasing the diversity of its global workforce? Answer: Sodexo has introduced accountability measures to encourage its goal of creating a more diverse workforce. The performances of managers are measured against a diversity scorecard that includes both quantitative and qualitative metrics. These metrics can be varied by country to account for different cultural contexts. Managers earn bonuses based on their performance scores. d. Evaluate Sodexo‘s diversity policy. Is the company doing the right thing? Are the right policies in place? Are there other things the company might do? Answer: Responses to this question will vary by student. Many will probably agree that Sodexo is doing many things right in its goal to build a diverse workforce. Students will probably point to the fact that the company has been recognized as being a global leader in workforce diversity, that the effort to create workforce diversity is coming from the top of the company, that mechanisms to measure whether goals have been achieved are in place, and that the company recognizes that individual countries need to be able to implement goals in their own ways.

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e. Sodexo‘s strategy is to decentralize authority to develop and fine-tune programs and implement them to managers in each country. What are the benefits of this approach? What are the potential drawbacks? Answer: Many students will suggest that Sodexo‘s decentralized approach is beneficial because it allows for cultural adaptations as necessary. Each country develops its own diversity initiatives that work well in each location. Students will likely point out, though, that while this approach gives each country ownership and buy-in to the process, it could lead to differences and misunderstanding between countries. 8. What are the possible implications of tighter national immigration policies for an international business? Answer: After decades of movement toward fewer restrictions on the movement of human capital, the last few years have seen a push for more limits on immigration. The new trend has been especially prevalent in the United States during the Trump presidency and within the European Union and Great Britain. Many students will probably suggest that for American companies accustomed to relatively few limits on those who are permitted to enter the country, the new restrictions have been problematic. Students might note for example, that crops in California have been left unpicked as the migrant workers who have traditionally been employed are banned from entering the country. In Silicon Valley, companies have found it more difficult to hire for the jobs often filled by programmers and engineers from India. Within the United Kingdom, farmers are experiencing a similar shortage of labor and the hospitality industry is also finding it difficult to find people to work in positions such hotel cleaners or restaurant servers. The United Kingdom had previously relied on labor from Eastern Europe to fill many of these positions. Students will probably point out that filling positions like these with American or British workers will probably mean higher wages, increasing costs for companies and in turn, for consumers.

globalEDGE™ Research Task Use the globalEDGE™ site (globaledge.msu.edu) to complete the exercises in the text. Exercise 1 You work in the human resource department at the headquarters of a multinational corporation. Your company is about to send a number of managers overseas as expatriates to France and New Zealand. You need to create an executive summary evaluating, comparing, and contrasting the possible issues expats may encounter in these two countries. Your manager tells you that a tool called Expat Explorer created by HSBC can assist you in your task.

Global Mobility at Shell closing case Summary

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The closing case examines how Royal Dutch Shell, a global petroleum company employing about 90,000 people, of which are some 6,000–7,000 expatriates. Managing this workforce is a complex task. Shell wants to meet its commercial goals and also transfer valuable knowledge across its operations. Given that the company operates in more than 70 countries, this is not easy. The company often finds it difficult to recruit skilled managers to work in different locations and is working to better understand employee concerns and develop ways to respond to them.

Case Discussion Questions 1. Royal Dutch Shell is one of the largest companies in the world and has been for years. With sales approaching $400 billion and 82,000 employees worldwide, including some 7,000 employees on expatriate assignments, the company is large, complex, and powerful. Compared with retail or consumer companies, Shell is much more narrowly focused and much more technical in orientation. How do you think this narrower focus and technical orientation affects global human resource management at Shell? Many students will probably suggest that the relatively narrow focus and technical orientation at Shell makes hiring and management development easier. Students may also contend that compared to companies requiring broader skill sets and expertise, Shell‘s more narrow orientation could make it easier for the company to move employees around the company as needed. 2. Shell‘s long-term goal is to develop local talent wherever possible, thereby leveraging local employees‘ networks, market knowledge, and language skills, while also minimizing costs. Moving Shell employees from other countries to work with partners and transfer expertise is often a key part of the company‘s strategy. Can this be done effectively in all world regions (e.g., Middle East and North Africa), where potential local employees do not have the educational background in many cases? How would you solve the education, skill, and knowledge gaps if you were a Shell C-suite leader? Responses to this question will vary by student. Many will agree that knowledge gaps could indeed be problematic for the company as it moves employees from country to country. Some students may suggest that the company try to narrow those gaps by offering employees additional education and training opportunities. Other students may wonder whether these opportunities could be augmented with mentoring programs or internships. Students may note that having local employees in managerial positions could be important to the company‘s relationship with the local community so ensuring that local employees have opportunities to become effective managers should be part of the company‘s overall HR strategy. 3. Spending significant time (e.g., three years) on an expatriate assignment has significant family and professional implications, as can be seen in the Shell survey that was mentioned in the case. How would you feel if you were given an expatriate assignment today? How would you feel about it if you were 25 years old? 35? 50? Shell discovered that there were five key issues that were important to its expatriates. First, the division of families that occurred when children were sent to boarding schools while their

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parents were on foreign assignments; second, the harm done to a spouse‘s career during the foreign assignment; third, the lack of consideration for a spouse during the expatriate assignment process; fourth, the failure to provide adequate relocation assistance; and fifth, health issues. Students should recognize the similarities between the results of this study and the results of other studies that have found difficulties with the spouse and family‘s ability to adapt to be a central reason for expatriate failure. Many students will probably conclude that issues related to spouses could be of concern at any age while issues related to children may be more relevant for those in their 30s and issues related to health could be more important for expatriates in their 50s. Teaching Tip: To learn more about Shell, go to the company‘s website at http://www.shell.com. Lecture Note: To extend the discussion, consider exploring Shell‘s efforts to help expatriates following their foreign assignments. To learn more, go to https://royaldutchshellplc.com/2014/01/17/when-expats-return-home-whats-next.

Continuous Case Concept Chasing low-cost labor has prompted many European automakers to shift production initially from Western Europe to Eastern Europe and now to North Africa, where wages are just 25 percent of Western European wages and significantly lower than wages in Eastern Europe. French automaker Renault, for example, produces Europe‘s cheapest car and fastest growing brand, Dacia. Renault had been building the Dacia in Romania, running its plant there at near capacity. Even though workers at the Romanian plant make just one-third of their counterparts at Renault‘s plant in France, they are among the highest paid workers in their country. Renault

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used this situation as a bargaining chip recently when it threatened to cut wages at the Romanian plant or shift production to Morocco. 

Discuss negotiations between Renault and the workers at the Dacia plant. What are the strengths and weakness of both sides? Who has the upper hand? Why? Is it fair to ask the Dacia workers to accept lower compensation? 

Next, ask students to consider what new challenges come from producing in foreign locations. How should wage rates be determined? What about other parts of a compensation plan, such as vacation days and health care packages? Should companies participate in labor unions?



Finally, ask students to consider whether expatriates who manage the foreign operations should be paid according to their home-country levels, or according to host-country rates. Suppose a plant has two vice presidents, one hired locally, and one sent from headquarters. How should their compensation packages be determined?

The second two questions of this exercise can be an interesting introduction to international human resource management. Most students have probably not thought of many of the issues before, and they can provide the basis for an interesting discussion. The questions can be revisited after the material in the chapter has been presented.

Additional Readings and Sources of Information Expats Would Rather Live in Bahrain Than in the U.S. https://www.bloomberg.com/news/articles/2018-09-06/expats-would-rather-live-in-bahrain-thanthe-u-s Expatriate Workers Are Leaving Saudi Arabia in Droves https://www.bloomberg.com/news/articles/2018-07-09/expatriate-workers-are-leaving-saudiarabia-in-droves Renault, PSA, Daimler tap N. Africa for low-cost exports, rising local demand https://europe.autonews.com/automakers/renault-psa-daimler-tap-n-africa-low-cost-exportsrising-local-demand Chinese Airlines Wave Wads of Cash to Lure Foreign Pilots http://www.bloomberg.com/news/articles/2016-08-17/chinese-airlines-lure-expat-pilots-withlucrative-pay-perks Expat Exodus After Islamist Cafe Carnage Imperils Bangladesh http://www.bloomberg.com/news/articles/2016-07-31/expat-exodus-after-islamist-carnagethreatens-bangladesh-economy 5 Things We Learned About Creating a Successful Workplace Diversity Program

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https://hbr.org/2018/03/5-things-we-learned-about-creating-a-successful-workplace-diversityprogram How Does Your Expat Package Stack Up? http://www.bbc.com/capital/story/20140507-expat-smarts-get-a-good-package Repatriation Blues: Expats Struggle with the Dark Side of Coming Home https://blogs.wsj.com/expat/2015/04/15/repatriation-blues-expats-struggle-with-the-dark-side-ofcoming-home These Are the Places in Asia With the Best Expat Pay Packages https://www.bloomberg.com/news/articles/2019-05-21/expat-pay-packages-are-bigger-andbetter-in-japan-eca-survey Managing Cross-Cultural Diversity in Finance https://www.fm-magazine.com/issues/2020/aug/managing-cross-cultural-diversity-infinance.html Research: How to Build Trust with Business Partners from Other Cultures https://hbr.org/2020/01/research-how-to-build-trust-with-business-partners-from-other-cultures 10 Steps to Get the Most Out of Your Multicultural Team https://www.forbes.com/sites/mursalhedayat/2020/06/30/10-steps-to-get-the-most-out-of-yourmulticultural-team/?sh=38fc51f33d0c