Question
Describe what an instituation-based view comprises and give examples of at least two countries and specify the changes they have made to enable foreign firms to succeed within their borders.
Explanation / Answer
a business (or firm) that engages in international (cross- border) economic activities. It can also refer to the action of doing business abroad. A previous generation of IB textbooks almost always takes the foreign entrant’s perspective. Consequently, such books deal with issues such as how to enter foreign markets and how to select alliance part- ners. The most frequently discussed for- eign entrant is the multinational enterprise (MNE), defined as a firm that engages in foreign direct investment (FDI) by directly investing in, controlling, Part I: Laying Foundations and managing value-added activities in other countries.1 MNEs and their cross-border activities are important, but they cover only one side of IB, namely, the foreign side. Students educated by these books often come away with the impression that the other side of IB—namely, domes- tic firms—does not exist. But domestic firms do not just sit around in the face of foreign entrants such as MNEs. They actively com- pete and/or collaborate with foreign entrants. In other words, focusing on the foreign entrant side captures only one side of the coin at best.2 There are two key words in IB: international (I) and business (B). However, previous textbooks all focus on the international aspect (the foreign entrant) to the extent that the business part (which also includes domestic business) almost disappears. This is unfortunate because IB is fundamentally about B before being I. To put it differently, the IB course in the undergraduate and MBA curricula at numerous business schools is probably the only course with the word “busi- ness” in the course title. All other courses you take are labeled management, marketing, finance, and so on, repre- senting one functional area but not the overall picture of business. Does it matter? Of course! It means that your IB course is an integrative course that has the potential to pro- vide you with an overall business perspective (as opposed to a functional view) grounded in a global environment. Consequently, it makes sense that your textbook should give you both the I and B parts, not just the I part. Global business is defined in this book as business around the globe—thus the title of this book, GLOBAL. The activities include both international (cross-border) ac- tivities covered by traditional IB books and domestic (non- IB) business activities. Such deliberate blurring of the There are two key words in IB: international (I) and business (B). NOT FOR SALE traditional boundaries separating international and do- mestic business is increasingly important today, because many previously national (domestic) markets are now glo- balized. Not long ago, competition among college text- book publishers was primarily on a nation-by-nation basis. Before South-Western was acquired by Canada’s Thomson and more re- cently by Britain’s Apax partners and Canada’s OMERS Partners, and be- fore Prentice Hall was ac- quired by Britain’s Pearson, South-Western, Prentice Hall, and McGraw-Hill fought each other largely in the United States. A differ- ent set of publishers competed in other countries. Now Cengage (formerly Thomson), Pearson, and McGraw- Hill have significantly globalized their competition, thanks to rising demand for high-quality business textbooks in English. They are competing against each other in many markets around the globe. It becomes difficult to tell in this competition what is international and what is domes- tic. Thus “global” is a better word to capture the essence of this competition. This book also differs from other books on IB because most focus on competition in developed econo- mies. Here, by contrast, you’ll find extensive space devoted to competitive battles waged throughout emerging econ- omies , a term that has gradually replaced the term “developing countries” since the 1990s.3 Another com- monly used term is emerging markets (see the Closing Case). How important are emerging economies? Col- lectively, they now contrib- Global business ute approximately 50% of Business around the globe. the global gross domestic Emerging economy product (GDP), as shown (emerging market) mines the equivalent amount of goods and services that different currencies can purchase and that is used to cap- ture the differences in cost of living in different countries. Using official (nominal) exchange rates without adjusting for PPP, emerging economies contribute about 26% of the global GDP. Why is there such a huge difference be- tween the two measures? Because the cost of living (such as housing and haircuts) in emerging economies tends to be lower than that in developed economies. For example, one dollar spent in Mexico can buy a lot more than one dollar spent in the United States. Some emerging econo- mies are growing rapidy and commanding significant managerial attention.4 The global economy can be viewed as a pyramid, as shown in Exhibit 1.2. The top consists of about one billion people with per capita an- nual income of $20,000 or higher. These are mostly Purchasing power parity people who live in the de- (PPP) veloped economies of the A conversion that determines the equivalent amount of Triad , which consists of goods and services different North America, Western currencies can purchase. This Europe, and Japan. Another conversion is usually used to capture the differences in cost billion people making of living in different countries. $2,000 to $20,000 a year make up the second tier. Triad Three regions of developed The vast majority of hu- economies (North America, manity—about four billion Western Europe, and Japan). people—make less than Base of the pyramid $2,000 a year and comprise The vast majority of the base of the pyramid. humanity, about four billion Most MNEs (and most tra- people, who make less than $2,000 a year. ditional IB books) focus on NOT FOR SALE countries have shown increasingly more economic oppor- tunities as income levels have risen. Today’s students—and tomorrow’s business leaders—will ignore these opportuni- ties at the base of the pyramid at their own peril. This book will help ensure that you will not ignore these opportuni- ties (see the Closing Case). Global business (or IB) is one of the most exciting, challenging, and relevant subjects offered by business Exhibit 1.2 The Global Economic Pyramid Per capita GDP/GNI > $20,000 Approximately one billion people Per capita GDP/GNI $2,000–$20,000 Approximately one billion people Per capita GDP/GNI < $2,000 Approximately four billion people Source: C. K. Prahalad and S. Hart, “The fortune at the bottom of the pyramid,” Strategy+Business 26 (2002): 54–67 and S. Hart, Capitalism at the Crossroads (Philadelphia: Wharton School Publishing, 2005) 111. Part I: Laying Foundations schools. Your business school probably requires this course. But, beyond that, there are at least two compelling reasons why you should study it. First, expertise in global business is often a prerequisite to join the top ranks of large firms, something many ambitious students aspire to. It is now increasingly difficult, if not impossible, to find top managers at large firms who do not possess significant global competence. Eventually you will need hands-on global experience, not merely knowledge acquired from this course. However, in order to set your- self apart as an ideal candidate for an executive position, you’ll need to demonstrate that you are interested in global business and have mastered knowledge of it during your education. This is especially true if you expect to gain experience as an expatriate manager—a manager who works abroad, or “expat” for short (see Chap- ter 13 for details). Thanks to globalization, low-level jobs not only command lower salaries but are also more vulnerable. On the other hand, top-level jobs, especially those held by expats, are both financially rewarding and relatively secure. Expats often command a significant international premium in compensation—a significant pay raise when working overseas. In US firms, their total compensation package is approximately $250,000 to $300,000 (including benefits; not all is take-home pay). For example, if a 2,000-employee ball bearing factory in Lima, Ohio, is shut down and the MNE sets up a similar factory in Lima, Peru, only about 10 to 20 jobs would be saved. Those jobs would consist of a few top-level positions © iStockphoto.com/Shelly Perry NOT FOR SALE such as the CEO, CFO, CIO, factory director, and chief engineer who will be sent by the MNE as expats to Peru to start up operations there. Because it is regarded as a “hard- ship” assignment, the MNE has to give them many more perks in Peru than it did in Ohio. How about company- subsidized luxury housing plus maid services, free tuition for children in American or international schools in Peru, and all-expenses-paid vacations for the whole family to see their loved ones in Ohio? Moreover, these expats do not live in Peru forever. When they return to the United States after a tour of duty (usually 2 to 3 years), if their current employer does not provide attractive career opportunities, they are often hired away by competitor firms. This is be- cause competitor firms are also interested in globalizing their business by tapping into the expertise and experience of these former expats. And, yes, competitor firms will have to pay them even more to hire away these internationally experienced managers. This hypothetical example is designed to motivate you to study hard so that you might become one of these sought- after, globe-trotting managers. But, even if you don’t want to be an expat, we assume that you don’t want to join the ranks of the unemployed due to layoffs like those in Lima, Ohio. For an example of what happens in such cases, check out the 1998 movie The Full Monty. It portrays how laid-off steel workers in the UK, in order to make a living, pick up an alternative line of work that my editors do not allow me to mention here—psst . . . it’s male strip dancing. Second, even if you do not aspire to compete for the top job at a large firm or work overseas, and even if you work at a small firm or are self-employed, you may find yourself dealing with foreign-owned suppliers and buyers, competing with foreign-invested firms in your home mar- ket, and perhaps even selling and investing overseas. Alter- natively, you may find yourself working for a foreign-owned firm, your domestic employer may be acquired by a foreign player, or your unit may be ordered to shut down for global consolidation. Any of these is a very likely scenario, because approximately 80 million people worldwide, including 18 million Chinese, 6 million Americans, and 1 million Brit- ish, are employed by foreign-owned firms. Understanding how global business decisions are made may facilitate your own career in such firms. If there is a strategic rationale to downsize your unit, you would want to be able to figure this out and be the first one to post your resume on Monster.com. In other words, it is your career that is at stake. Don’t be the last to know! In short, in this age of global competition, how Expatriate manager do you keep from being (expat) Bangalored or Shanghaied A manager who works out- (that is, having your job side his or her native country. outsourced to India or International premium China)?6 A good place to A significant pay raise com- start is to study hard and do manded by expatriates when working overseas. well in your IB course. NOT FOR SALE Globalization, generally speaking, is the close integration of countries and peoples of the world. This abstract five- syllable word is now frequently heard and debated. Those who approve of globalization count its contributions to in- clude greater economic growth and standards of living, in- creased technology sharing, and more extensive cultural integration. Critics argue that globalization undermines wages in rich countries, exploits workers in poor countries, and gives MNEs too much power. Globalization is signifi- cantly more complex than our basic definition suggests. This section outlines three views on globalization, recom- mends the pendulum view, and introduces the idea of semiglobalization. Three Views on Globalization Depending on what sources you read, globalization could be • a new force sweeping through the world in recent times, • a long-run historical evolution since the dawn of human history, or • a from time to time. An understanding of these views helps put the debate about globalization in perspective. First, opponents of glo- balization suggest that it is a new phenomenon beginning in the late 20th century, driven by recent technological in- novations and a Western ideology focused on exploiting and dominating the world through MNEs. The arguments against globalization focus on an ideal world free of envi- ronmental stress, social injustice, and sweatshop labor but present few clear alternatives to the present economic order. Advocates and anti-globalization protesters often argue that globalization needs to be slowed down, if not stopped. A second view contends that globalization has always been part of human history. Historians debate whether globalization started 2,000 or 8,000 years with their earliest traces discovered in Phoenician, Assyrian, and Roman times.11 International com- petition from low-cost countries is nothing new. In the first century A.D., the Roman emperor Tibe- rius was so concerned about the massive quantity of low-cost Chinese silk imports that he imposed the world’s first known import quota of textiles.12 In a nutshell, glo- balization is nothing new and will probably always exist. A third view suggests that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.”13 Globalization is neither recent nor one- directional. It is, more accurately, a process similar to the swing of a pendulum. The Pendulum View on Globalization The third, pendulum view probably makes the most sense, because it can help us understand the ups and downs of globalization. The current era of globalization originated in the aftermath of World War II, when major Western na- tions committed to global trade and investment. However, from the 1950s into the 1970s, this view was not widely shared. Communist countries, such as China and the for- mer Soviet Union, sought to develop self-sufficiency. Many non-communist developing countries such as Argentina, Brazil, India, and Mexico focused on fostering and protect- ing domestic industries. But refusing to participate in global trade and investment ended up breeding uncompeti- tive industries. In contrast, four developing economies in Asia—namely, Hong Kong, Singapore, South Korea, and Taiwan—earned their stripes as the “Four Tigers” by par- ticipating in the global economy. They became the only economies once recognized as less developed (low-income) by the World Bank to have subsequently achieved devel- oped (high-income) status. Inspired by the Four Tigers, more and more countries and regions—such as China in the late 1970s, Latin Amer- ica in the mid 1980s, Central and Eastern Europe in the late 1980s, and India in the 1990s—realized that joining the NOT FOR SALE The Romans were the first to impose import quotas. As these countries started to Brazil emerge as new players in the world economy, they became collectively known as “emerging econo- mies.” As a result, globalization rapidly accelerated. For example, between 1990 and 2000, while world output grew by 23%, global trade expanded by 80% and the total flow of FDI increased Russia fivefold.14 The pen- dulum model suggests, how- ever, that global- ization is unable to keep going in one direction. Rapid globalization in the 1990s saw some significant backlash. First, the rapid growth of globalization led to the histori- cally inaccurate view that globalization is new. Second, it created fear among many people in developed economies that they would lose jobs. Emerging economies not only seem to attract many low-end manufacturing jobs away from developed economies, but they also increasingly ap- pear to threaten some high-end jobs. Finally, some factions in emerging economies complained against the onslaught of MNEs, alleging that they destroy not only local compa- nies but also local cultures, values, and the environment. While small-scale acts of vandalizing McDonald’s res- taurants are reported in a variety of countries, the Decem- ber 1999 anti-globalization protests in Seattle and the September 2001 terrorist attacks in New York and Washington are un- doubtedly the most visible and most extreme acts of anti-globalization forces at work. As a result, inter- India national travel was curtailed, and global trade and investment flows slowed in the early 2000s. In the mid 2000s, worldwide GDP, cross-border trade, and per capita GDP all soared to historically high lev- els. More than half of the world GDP China growth now comes from emerging econ- omies, whose per capita GDP grew 4.6% annually in the decade ending 2007. In partic- ular, BRIC, a newly BRIC A newly coined acronym coined acronym for for the emerging economies of Brazil, Russia, India, and China. Chapter 1: Globalizing Business the emerging economies of Brazil, Russia, India, and China, has become a new buzzword. Developed economies averaged 2% per capita GDP growth in the same period. More recently (since 2008), devastated by the skyrocket- ing oil prices and the subprime mess, the United States and many other countries have entered into a reces- sion. This recession has been characterized by a painful fi- nancial meltdown and numerous government bailout efforts. Rightly or wrongly, many people have blamed glo- balization for the most recent crisis (see the In Focus feature). The effort to understand glo- balization brings to mind the story of the six blind men try- ing to figure out the shape and form of an elephant based on what part of the animal they touched. One thinks it is a wall, another calls it a spear, a third argues it is a snake, and the others believe it to be a tree, a fan, and a rope. Much like the ele- phant, globalization is seen by everyone but rarely compre- hended in full. Our task is even more challenging, because we try to live with, avoid being crushed by, and even at- tempt to profit from a rapidly moving beast called global- ization. Relative to the other two views, the view of globalization as a pendulum is a more balanced and realis- tic perspective. In other words, globalization has both rosy and dark sides, and it changes over time. Semiglobalization Despite the debate over it, globalization is not com- plete. Most measures of market integration, such as trade and FDI, have recently scaled new heights but still fall far short of pointing to a single, globally integrated mar- ket. In other words, what we have may be labeled semiglo- balization, which is more complex than extremes of total isolation and total globalization. Semiglobalization sug- gests that barriers to market integration at borders are high, but not high enough to completely insulate countries from each other. 15 Semi- globalization calls for more than one way of doing bus- Semiglobalization iness around the globe. A perspective that suggests Total isolation on a nation- that barriers to market integration at borders are state basis would suggest high but not high enough localization, or a strategy of to completely insulate treating each country as a countries from each other. NOT FOR SALE unique market. Total globalization, on the other hand, would lead to standardization, or a strategy of treating the entire world as one market. But semiglobalization has no single right strategy, resulting in a wide variety of experi- mentations. Overall, (semi)globalization is neither to be opposed as a menace nor to be celebrated as a panacea; it is to be engaged. LO5 State the size of the global economy and its broad trends. GLOBAL BUSINESS AND GLOBALIZATION AT A CROSSROADS The challenge confronting a new generation of business leaders in the 21st century is enormous. At the dawn of the 21st century, globalization’s seemingly inevitable forward direction took a turn, revealing globalization to be more of a pendulum than a one-way march. This directly affects you as a future business leader, as a consumer, and as a citi- zen. At least two sets of sudden, high-profile events oc- curred that have had significant ramifications for business around the world: anti-globalization protests and terrorist attacks. First, large-scale anti-globalization protests began in December 1999, when over 50,000 protesters blocked downtown Seattle in an attempt to derail a ministerial meeting of the World Trade Organization (WTO). The demonstrators were protesting against a wide range of issues, including job losses resulting from foreign com- petition, downward pressure on wages for unskilled workers, and environmental destruction. Since Seattle, anti-globalization protesters have turned up at just about every major globalization meeting, and some protests have