challenges and opportunities in international business

Challenges and
Opportunities in
International Business
v. 1.0


This is the book Challenges and Opportunities in International Business (v. 1.0).
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ii


Table of Contents
About the Authors................................................................................................................. 1
Acknowledgements............................................................................................................... 3
Dedications ............................................................................................................................. 4
Preface..................................................................................................................................... 5
Chapter 1: Introduction....................................................................................................... 9
What Is International Business?................................................................................................................. 18
Who Is Interested in International Business? ........................................................................................... 23
What Forms Do International Businesses Take?....................................................................................... 28
The Globalization Debate ............................................................................................................................ 32

Ethics and International Business.............................................................................................................. 42
End-of-Chapter Questions and Exercises................................................................................................... 47

Chapter 2: International Trade and Foreign Direct Investment .............................. 50
What Is International Trade Theory? ........................................................................................................ 56
Political and Legal Factors That Impact International Trade ................................................................. 67
Foreign Direct Investment .......................................................................................................................... 82
Tips in Your Entrepreneurial Walkabout Toolkit..................................................................................... 92
End-of-Chapter Questions and Exercises................................................................................................... 94

Chapter 3: Culture and Business...................................................................................... 96
What Is Culture, Anyhow? Values, Customs, and Language.................................................................. 103
What Are the Key Methods Used to Describe Cultures? ........................................................................ 110
Understanding How Culture Impacts Local Business Practices ............................................................ 124
Global Business Ethics ............................................................................................................................... 132
Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 146
End-of-Chapter Questions and Exercises................................................................................................. 150
Additional References ............................................................................................................................... 154

Chapter 4: World Economies........................................................................................... 155
Classifying World Economies.................................................................................................................... 167
Understanding the Developed World ...................................................................................................... 181
Developing World ...................................................................................................................................... 191
Emerging Markets...................................................................................................................................... 207
Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 230
End-of-Chapter Questions and Exercises................................................................................................. 235

iii

Chapter 5: Global and Regional Economic Cooperation and Integration ............. 237
International Economic Cooperation among Nations............................................................................ 248
Regional Economic Integration ................................................................................................................ 257
The United Nations and the Impact on Trade......................................................................................... 280
End-of-Chapter Questions and Exercises................................................................................................. 293

Chapter 6: International Monetary System................................................................. 295
What Is the International Monetary System?......................................................................................... 301
What Is the Role of the IMF and the World Bank?.................................................................................. 321
Understanding How International Monetary Policy, the IMF, and the World Bank Impact Business
Practices...................................................................................................................................................... 340
Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 345
End-of-Chapter Questions and Exercises................................................................................................. 346

Chapter 7: Foreign Exchange and the Global Capital Markets................................ 348
What Do We Mean by Currency and Foreign Exchange? ....................................................................... 353
Understanding International Capital Markets ....................................................................................... 364
Venture Capital and the Global Capital Markets .................................................................................... 380
Tips in Your Entrepreneurial Walkabout Toolkit................................................................................... 386
End-of-Chapter Questions and Exercises................................................................................................. 391

Chapter 8: International Expansion and Global Market Opportunity
Assessment ......................................................................................................................... 393
Global Strategic Choices ............................................................................................................................ 400
PESTEL, Globalization, and Importing ..................................................................................................... 410
International-Expansion Entry Modes .................................................................................................... 423
CAGE Analysis ............................................................................................................................................. 433
Scenario Planning and Analysis ............................................................................................................... 442
End-of-Chapter Questions and Exercises................................................................................................. 449

Chapter 9: Exporting, Importing, and Global Sourcing ............................................ 451
What is Importing and Exporting?........................................................................................................... 456
Countertrade .............................................................................................................................................. 471
Global Sourcing and Its Role in Business................................................................................................. 475
Managing Export and Import ................................................................................................................... 483
What Options Do Companies Have for Export and Import Financing? ................................................ 491
Tips in Your Walkabout Toolkit ............................................................................................................... 498
End-of-Chapter Questions and Exercises................................................................................................. 502

iv


Chapter 10: Strategy and International Business ...................................................... 506
Business and Corporate Strategy ............................................................................................................. 512
Generic Strategies ...................................................................................................................................... 519
International Strategy ............................................................................................................................... 530
The Five Elements of Strategy .................................................................................................................. 539
Managing the International Business with the P-O-L-C Framework.................................................... 546
End-of-Chapter Questions and Exercises................................................................................................. 552

Chapter 11: Global Entrepreneurship and Intrapreneurship ................................. 554
Entrepreneurship....................................................................................................................................... 562
What Do Entrepreneurs Do? ..................................................................................................................... 571
Business Entrepreneurship across Borders............................................................................................. 585
From Entrepreneurship to Born-Global Firms........................................................................................ 595
From Entrepreneurship to Intrapreneurship ......................................................................................... 601
End-of-Chapter Questions and Exercises................................................................................................. 609

Chapter 12: Winning through Effective, Global Talent Management .................... 612
The Changing Role of Strategic Human Resources Management in International Business.............620

The Global War for Talent ......................................................................................................................... 631
Effective Selection and Placement Strategies ......................................................................................... 639
The Roles of Pay Structure and Pay for Performance ............................................................................ 649
Tying It All Together—Using the HRM Balanced Scorecard to Gauge and Manage Human Capital,
Including Your Own ................................................................................................................................... 659
Tips in Your Walkabout Toolkit ............................................................................................................... 667
End-of-Chapter Questions and Exercises................................................................................................. 668

Chapter 13: Harnessing the Engine of Global Innovation ........................................ 671
An Introduction to Research and Development (R&D) .......................................................................... 676
Intellectual Property Rights around the Globe....................................................................................... 684
How to Organize and Where to Locate Research and Development Activities ................................... 691
Increasing Speed and Effectiveness of International Innovation ......................................................... 699
Innovation for the Bottom of the Pyramid ............................................................................................. 706
End-of-Chapter Questions and Exercises................................................................................................. 711

v


Chapter 14: Competing Effectively through Global Marketing, Distribution, and
Supply-Chain Management............................................................................................. 714
Fundamentals of Global Marketing.......................................................................................................... 720
Critical Decision Points in Global Marketing .......................................................................................... 734
Standardized or Customized Products .................................................................................................... 739
Global Sourcing and Distribution ............................................................................................................. 746
Global Production and Supply-Chain Management ............................................................................... 753
End-of-Chapter Questions and Exercises................................................................................................. 762

Chapter 15: Understanding the Roles of Finance and Accounting in Global
Competitive Advantage.................................................................................................... 764

International Accounting Standards ....................................................................................................... 773
Accounting in International Business...................................................................................................... 778
Fundamentals of Finance .......................................................................................................................... 783
Financial Management in International Business .................................................................................. 794
Global Money Management: Moving Money across Borders ................................................................ 803
End-of-Chapter Questions and Exercises................................................................................................. 810

vi


About the Authors
Mason A. Carpenter
Mason (PhD, 1997, University of Texas at Austin) is the
M. Keith Weikel professor of leadership at the
Univeristy of Wisconsin Madison’s Wisconsin School of
Business. His research in strategic management
concerns corporate governance, top management
teams, social networks, and the strategic management
of global startups and is published widely in leading
management and strategy journals. He is also author of
numerous books used in leading undergraduate, MBA,
and educutive education courses around the world,
including Principles of Management published by
Unnamed Publisher. He is associate editor of the
Academy of Management Review and serves on the
editorial board of the Strategic Management Journal. At
the University of Wisconsin, he is responsible for the undergraduate, MBA, and
ExecMBA courses in business, corporate, and global strategy. With others, he has
also advised the top management teams and business unit leaders of Fiskars,
SABMiller, GE, Harley Davidson, Rockwell International, Vivendi, Kerry Ingredients,

Covance, Danisco, Badger Meter, and Banta in the areas of strategy formulation,
strategy implementation, and strategic change. His teaching accomplishments
include MBA Professor of the Year, notoriety as one of the two most popular
professors in several BusinessWeek MBA program polls, the Larson Excellence in
Teaching award from the Wisconsin School of Business, and, most recently, a
Distinguished Teaching award from the University of Wisconsin-Madison. He also
works to integrate experiential and behavioral perspectives of strategic
management into the classroom through positions on the BPS and SMS Executive
Committees, Doctoral and New Faculty BPS consortia, and the widely-used BPS
Strategy Teaching Toolkit.

1


About the Authors

Sanjyot P. Dunung
Sanjyot is president of Atma Global
(www.atmaglobal.com), a publisher of innovative
learning products and solutions for the corporate,
higher education, and K-12 markets. The company’s
mission is to create engaging, best-of-class, global
learning products and solutions focusing on countries,
cultures, and global business issues. Sanjyot is a
recognized leader in the field of cross-cultural learning
and has more than fifteen years of extensive experience
in developing leading-edge, multimedia learning
solutions. Notably, she is the author of Doing Business in
Asia: The Complete Guide, focusing on the cultural issues
of conducting business in twenty Asian countries (1995

and 1998 by Simon & Schuster). Sanjyot periodically
authors articles on doing business internationally. Further, she has appeared on
CNBC-TV, CNN International, Bloomberg TV, and various radio programs and is
often a guest speaker at conferences and seminars addressing international
business and entrepreneurship. Her book, Straight Talk About Starting and Growing
Your Own Business, was released in November 2005 by McGraw Hill; she has two
entrepreneurship books, Starting Your Business and Growing Your Business with
Business Expert Press. Sanjyot also worked as a banker in New York with American
and Japanese banks. Sanjyot was selected as a protégé member of the Committee of
200. She’s cofounder and president of the Dunung-Singh Foundation, committed to
providing educational opportunities and hope to underprivileged children. She also
served as a member of the board of directors of the US Committee for UNICEF
(United Nations Children’s Fund). Sanjyot mentors Afghan women entrepreneurs
through Project Artemis. Sanjyot’s academic history includes a BA from
Northwestern University and an MBA, with an emphasis in international finance,
from Thunderbird, School of Global Management. She is the school’s 1997 recipient
of the Distinguished Alumni award. Sanjyot was born in India; was raised in
Liverpool, England and Chicago, and now lives in New York with her three sons.

2


Acknowledgements
This book would not have been possible without our combined eagerness to be
innovative and creative inspired by our publisher and friend Jeff Shelstad, the
gentle but persistent chiding of Jenn Yee, and the helpful gap filling of Melissa Yu,
Andrea Meyer, Claire Hunter, and Sailaja Kattubadi. We also thank Margaret
Lannamann for doing such a great job keeping all the balls in the air.
We also like to thank the following colleagues whose comprehensive feedback and
suggestions for improving the material helped us make a better text:

W. Todd Brotherson, Southern Virginia University
Rezaul Karim, Des Moines Area Community College
James Laurie, Penn State Berks
Phyllis Shafer, Brookdale Community College
C. Warren Ferguson, Schreiner University
Thomas Voigt, Judson University
John Capela, St. Joseph’s College
Jeff Bruns, Bacone College
B. Barbara Boerner, Brevard College
Helena Hannonen, Brigham Young University Hawaii
Katherine Whitman, Mt. Saint Mary’s College
Verl Anderson, Dixie State College

3


Dedications
Mason
I dedicate my work on our book to my wife, Lisa, and my kinetically active boys,
Zachary and Wesley.

Sanjyot
To my boys—Yash, Anand, and Shanth—for making sure the sun always rises in my
world.

4


Preface
Thank you for using Carpenter and Dunung’s International Business! If you are an

instructor or a student, by using this book, you are part of an exciting revolution in
the college textbook industry spurred by Unnamed Publisher. Why is that? Well,
international business is concerned with business transactions and relationships
that cross borders. And due to the fact that technology and institutions make it
easier to make business happen across borders more quickly and effectively than
ever before, your Flat World textbook is published by a company leading the wave
of new global business start-ups in the publishing industry.
But is the world really flat? Well, no, not in a geographic sense. We learned that
many years ago (right?). And despite some business prognostications about the
business world being flat, it still takes quite a bit of planning and care to conduct
international business as optimally as possible, which is why you have this book and
why you are in an international business course.
Traditionally, international business textbooks have relied on academic theory to
educate students. We’re offering a new novel approach—a blend of the academic
and the practitioner.
Most international business books are like global maps in a book, coupled with
encyclopedias of international business terms and concepts. That is to say, they
provide information but don’t help you understand what is really relevant in
today’s constantly changing global business arena or how to apply concepts to reallife business scenarios and decisions. Moreover, many aspects of doing business
globally are evolving and don’t remain static. By teaming Carpenter, the academic,
and Dunung, the practitioner, our international business textbook is different. We
not only provide access to maps and essential concepts and information but also
focus on the tips and tools that allow you to best exploit such information (and
knowledge + information = power) in an ever-chpranging global business arena.
Strategy and entrepreneurship form the cornerstones of our approach—offering
students Tips in the Walkabout Toolkit to enable tangible application of complex
concepts. Our orientation is both strategic and entrepreneurial where we speak to
technologically savvy students who see national borders as bridges and not
barriers. Moreover, while we use the lexicon of international business, through our
strategic and entrepreneurial orientation, we develop students’ knowledge of

international contexts with the aim that they may launch, run, and work in any

5


Preface

organization that is global in scope (or is wrestling with global competition or other
global threats).
Strategy is concerned with competition and competitive advantage, while
entrepreneurship is concerned with creating new opportunities where none
previously existed. These areas are important to you in an international business
course because more and more organizations conduct at least some of their
business across borders. If you are a budding entrepreneur then international
business increases your entrepreneurial playground.
As revolutionary as the technology delivery behind this book and our unique
academic-practitioner authorship approach is—we’ve made sure to cover all of the
fundamental basics required in a high-quality, solid international business
textbook.

Organization
The overarching logic of the book is intuitive—organized around answers to the
what, where, why, and how of international business.
WHAT? Section one introduces what is international business and who has an
interest in it. Students will sift through the globalization debate and understanding
the impact of ethics on global businesses. Additionally, students will explore the
evolution of international trade from past to present, with a focus on how firms and
professionals can better understand today’s complex global business arena by
understanding the impact of political and legal factors. The section concludes with
a chapter on understanding how cultures are defined and the impact on business

interactions and practices with tangible tips for negotiating across cultures.
WHERE? Section two develops student knowledge about key facets of the global
business environment and the key elements of trade and cooperation between
nations and global organizations. Today, with increasing numbers of companies of
all sizes operating internationally, no business or country can remain an island.
Rather, the interconnections between countries, businesses, and institutions are
inextricable. Even how we define the world is changing. No longer classified into
simple and neat categories, the rapid changes within countries are redefining how
global businesses think about developed, developing, and emerging markets. This
section addresses the evolving nature of country classifications and helps develop a
student’s ability to comprehend the rationale of how to analyze a specific country’s
stage of development—rather than just memorize which countries are emerging.
Further, this section provides a unique approach and takes country-related “deep

6


Preface

dives” that give greater detail about specific key countries. This section ends with
chapters devoted to providing accessible discussions of complex financial concepts
within the global monetary system and the global capital markets, including
currency and global venture capital.
WHY? Section three develops knowledge about how a student or organization can
exploit opportunities in that global environment. Students will learn about the
fundamental choices they have in terms of international expansion and why such
choices matter. Using different models of internationalization and global market
assessment, they will also learn why international business opportunities vary in
their promise and complexity. In this section, students also do a deeper dive into
the topics of exporting, importing, and global sourcing since these are likely to be

the first forms of international business a student will encounter.
HOW? Section four is devoted to strategy and entrepreneurship in a flattening world
and how key organizational activities can be managed for global effectiveness. This
part of the book shifts gears from the perspective of existing businesses to that of
new business possibilities. Our objective is to highlight strategy, entrepreneurship,
and strategic and entrepreneurial opportunities in a flat and flattening world.
Beyond the basics of international strategy and entrepreneurship, students will be
exposed to international human resource management so that they can better
understand the global war for talent. They will also develop good fundamental
knowledge of international research and development, marketing, distribution,
finance, and accounting.

Features
Each chapter contains several staple and innovative features as follows:
• opening cases—cases that are relatively timeless from an international
business perspective and current and topical
• sidebars titled “Did You Know”—factoids about international business
• sidebars titled “Amusing Anecdote”—factoids about global marketing
snafus and other mistakes coupled with related key international
business facts
• sidebars titled “An Eye on Ethics,” which provide examples of the
ethical issues that arise in international business
• chapter summaries
• end of chapter exercises based on AACSB learning standards—these
exercises include review questions, experiential exercises, ethical
dilemmas, and exercises related to the opening chapter case

7

Preface

• a closing section titled “Tools in Your Walkabout Kit” with specific and
practical tools related to international business
• supplemental support materials by chapter
As you’d expect, our textbook also provides a set of end-of-chprapter questions that
are mapped to AACSB learning standards, such that the instructor will be able to
measure how well students are grasping course content while ensuring alignment
with the AACSB guidelines.
We recognize that you have choices on textbooks for your course, but hope that our
innovative approach to both essential global business content and technology
delivery options will encourage you to join our revolution.
With thanks,
Mason and Sanjyot

8


Chapter 1
Introduction

WHAT’S IN IT FOR ME?
1.
2.
3.
4.
5.

What is international business?
Who has an interest in international business?

What forms do international businesses take?
What is the globalization debate?
What is the relationship between international business and ethics?

This chapter introduces you to the study of international business. After reading a
short case study on Google Inc., the Internet search-engine company, you’ll begin to
learn what makes international business such an essential subject for students
around the world. Because international business is a vital ingredient in strategic
management and entrepreneurship, this book uses these complementary
perspectives to help you understand international business. Managers,
entrepreneurs, workers, for-profit and nonprofit organizations, and governments
all have a vested interest in understanding and shaping global business practices
and trends. Section 1.1 "What Is International Business?" gives you a working
definition of international business; Section 1.2 "Who Is Interested in International
Business?" helps you see which actors are likely to have a direct and indirect
interest in it. You’ll then learn about some of the different forms international
businesses take; you’ll also gain a general understanding of the globalization
debate. This debate centers on (1) whether the world is flat, in the sense that all

9


Chapter 1 Introduction

markets are interconnected and competing unfettered with each other, or (2)
whether differences across countries and markets are more significant than the
commonalities. In fact, some critics negatively describe the “world is flat”
perspective as globaloney! What you’ll discover from the discussion of this debate is
that the world may not be flat in the purest sense, but there are powerful forces,
also called flatteners, at work in the world’s economies. Section 1.5 "Ethics and

International Business" concludes with an introductory discussion of the
relationship between international business and ethics.

10


Chapter 1 Introduction

Opening Case: Google’s Steep Learning Curve in China

Image courtesy of Kit Eaton.

Of all the changes going on in the world, the Internet is the one development
that many people believe makes our world a smaller place—a flat or flattening
world, according to Thomas Friedman, Pulitzer Prize–winning author of The
World Is Flat: A Brief History of the Twenty-First Century and The Lexus and the Olive
Tree: Understanding Globalization. Because of this flattening effect, Internet
businesses should be able to cross borders easily and profitably with little
constraint. However, with few exceptions, cross-border business ventures
always seem to challenge even the most able of competitors, Internet-based or
not. Some new international ventures succeed, while many others fail. But in
every venture the managers involved can and do learn something new. Google
Inc.’s learning curve in China is a case in point.
In 2006, Google announced the opening of its Chinese-language website amid
great fanfare. While Google had access to the Chinese market through
Google.com at the time, the new site, Google.cn, gave the company a more
powerful, direct vehicle to further penetrate the approximately 94 million
households with Internet access in China. As company founders Larry Page and
Sergey Brin said at the time, “Unfortunately, access for Chinese users to the
Google service outside of China was slow and unreliable, and some content was

restricted by complex filtering within each Chinese ISP. Ironically, we were
unable to get much public or governmental attention paid to the issue.
Although we dislike altering our search results in any way, we ultimately
decided that staying out of China simply meant diminishing service and
influence there. Building a real operation in China should increase our
influence on market practices and certainly will enhance our service to the
Chinese people.”Larry Page and Sergey Brin, “2005 Founders’ Letter,” Google

11


Chapter 1 Introduction

Investor Relations, December 31, 2005, accessed October 25, 2010,
/>A Big Market, Bigger Concerns

Fast-growing China represents a large market.
© 2003–2011, Atma Global Inc.

Google’s move into China gave it access to a very large market, but it also raised
some ethical issues. Chinese authorities are notorious for their hardline
censorship rules regarding the Internet. They take a firm stance against risqué
content and have objected to The Sims computer game, fearing it would
corrupt their nation’s youth. Any content that was judged as possibly
threatening “state security, damaging the nation’s glory, disturbing social
order, and infringing on other’s legitimate rights” was also banned.John Oates,
“Chinese Government Censors Online Games,” Register, June 1, 2004, accessed
November 12, 2010, />china_bans_games. When asked how working in this kind of environment fit
with Google’s informal motto of “Don’t be evil” and its code-of-conduct
aspiration of striving toward the “highest possible standard of ethical

business,” Google’s executives stressed that the license was just to set up a
representative office in Beijing and no more than that—although they did
concede that Google was keenly interested in the market. As reported to the

12


Chapter 1 Introduction

business press, “For the time being, [we] will be using the [China] office as a
base from which to conduct market research and learn more about the
market.”Lucy Sherriff, “Google Goes to China,” Register, May 11, 2005, accessed
January 25, 2010, />Google likewise sidestepped the ethical questions by stating it couldn’t address
the issues until it was fully operational in China and knew exactly what the
situation was.
One Year Later

© Google, Inc.

Google appointed Dr. Kai-Fu Lee to lead the company’s new China effort. He had
grown up in Taiwan, earned BS and PhD degrees from Columbia and Carnegie
Mellon, respectively, and was fluent in both English and Mandarin. Before
joining Google in 2005, he worked for Apple in California and then for Microsoft
in China; he set up Microsoft Research Asia, the company’s research-anddevelopment lab in Beijing. When asked by a New York Times reporter about the
cultural challenges of doing business in China, Lee responded, “The ideals that
we uphold here are really just so important and noble. How to build stuff that
users like, and figure out how to make money later. And ‘Don’t Do Evil’
[referring to the motto ‘Don’t be evil’]. All of those things. I think I’ve always
been an idealist in my heart.”Clive Thompson, “Google’s China Problem (and

13


Chapter 1 Introduction

China’s Google Problem),” New York Times, April 23, 2006, accessed January 25,
2010, />Despite Lee’s support of Google’s utopian motto, the company’s conduct in
China during its first year seemed less than idealistic. In January, a few months
after Lee opened the Beijing office, the company announced it would be
introducing a new version of its search engine for the Chinese market. Google’s
representatives explained that in order to obey China’s censorship laws, the
company had agreed to remove any websites disapproved of by the Chinese
government from the search results it would display. For example, any site that
promoted the Falun Gong, a government-banned spiritual movement, would
not be displayed. Similarly (and ironically) sites promoting free speech in China
would not be displayed, and there would be no mention of the 1989 Tiananmen
Square massacre. As one Western reporter noted, “If you search for ‘Tibet’ or
‘Falun Gong’ most anywhere in the world on google.com, you’ll find thousands
of blog entries, news items, and chat rooms on Chinese repression. Do the same
search inside China on google.cn, and most, if not all, of these links will be
gone. Google will have erased them completely.”Clive Thompson, “Google’s
China Problem (and China’s Google Problem),” New York Times, April 23, 2006,
accessed January 25, 2010, />23google.html.
Google’s decision didn’t go over well in the United States. In February 2006,
company executives were called into congressional hearings and compared to
Nazi collaborators. The company’s stock fell, and protesters waved placards
outside the company’s headquarters in Mountain View, California. Google
wasn’t the only American technology company to run aground in China during
those months, nor was it the worst offender. However, Google’s executives were
supposed to be different; given their lofty motto, they were supposed to be a

cut above the rest. When the company went public in 2004, its founders wrote
in the company’s official filing for the US Securities and Exchange Commission
that Google is “a company that is trustworthy and interested in the public
good.” Now, politicians and the public were asking how Google could balance
that with making nice with a repressive Chinese regime and the Communist
Party behind it.Larry Page and Sergey Brin, “2004 Founders’ IPO Letter,” Google
Investor Relations, August 18, 2004, accessed October 25, 2010,
One
exchange between Rep. Tom Lantos (D-CA) and Google Vice President Elliot
Schrage went like this:

14


Chapter 1 Introduction

Lantos:

You have nothing to be ashamed of?

I am not ashamed of it, and I am not proud of it…We have
taken a path, we have begun on a path, we have done a path
that…will ultimately benefit all the users in China. If we
determined, congressman, as a result of changing
circumstances or as a result of the implementation of the
Google.cn program that we are not achieving those results
Schrage:
then we will assess our performance, our ability to achieve
those goals, and whether to remain in the market.Declan
McCullagh, “Congressman Quizzes Net Companies on

Shame,” CNET, February 15, 2006, accessed January 25, 2010,
/>
See the video “Google on Operating inside China” at />1606-2-6040114.html. In the video, Schrage, the vice president for corporate
communications and public affairs, discusses Google’s competitive situation in
China. Rep. James Leach (R-IA) subsequently accuses Google of becoming a
servant of the Chinese government.

Google Ends Censorship in China
In 2010, Google announced that it was no longer willing to censor search results
on its Chinese service. The world’s leading search engine said the decision
followed a cyberattack that it believes was aimed at gathering information on
Chinese human rights activists.Jessica E. Vascellaro, Jason Dean, and Siobhan
Gorman, “Google Warns of China Exit over Hacking,” January 13, 2010, accessed
November 12, 2010, />SB126333757451026659.html#ixzz157TXi4FV. Google also cited the Chinese
government’s restrictions on the Internet in China during 2009.Tania Branigan,
“Google to End Censorship in China over Cyber Attacks,” Guardian, January 13,
2010, accessed November 12, 2010, />2010/jan/12/google-china-ends-censorship. Google’s announcement led to
speculation whether Google would close its offices in China or would close
Google.cn. Human rights activists cheered Google’s move, while business
pundits speculated on the possibly huge financial costs that would result from
losing access to one of the world’s largest and fastest-growing consumer
markets.

15


Chapter 1 Introduction

In an announcement provided to the US Securities and Exchange Commission,
Google’s founders summarized their stance and the motivation for it. Below are

excerpts from Google Chief Legal Officer David Drummond’s announcement on
January 12, 2010.David Drummond, “A New Approach to China,” Official Google
Blog, January 12, 2010, accessed January 25, 2010,
/>Like many other well-known organizations, we face cyberattacks of varying
degrees on a regular basis. In mid-December, we detected a highly sophisticated
and targeted attack on our corporate infrastructure originating from China,
resulting in the theft of intellectual property from Google. However, it soon
became clear that what at first appeared to be solely a security incident—albeit
a significant one—was something quite different.
First, this attack was not just on Google. As part of our investigation, we have
discovered that at least twenty other large companies from a wide range of
businesses—including the Internet, finance, technology, media, and chemical
sectors—have been similarly targeted. We are currently in the process of
notifying those companies, and we are also working with the relevant US
authorities.
Second, we have evidence to suggest that a primary goal of the attackers was
accessing the Gmail accounts of Chinese human rights activists. Based on our
investigation to date, we believe their attack did not achieve that objective.
Only two Gmail accounts appear to have been accessed, and that activity was
limited to account information (such as the date the account was created) and
subject line, rather than the content of emails themselves.
Third, as part of this investigation but independent of the attack on Google, we
have discovered that the accounts of dozens of US-, China- and Europe-based
Gmail users who are advocates of human rights in China appear to have been
routinely accessed by third parties. These accounts have not been accessed
through any security breach at Google, but most likely via phishing scams or
malware placed on the users’ computers.
We have taken the unusual step of sharing information about these attacks
with a broad audience, not just because of the security and human rights
implications of what we have unearthed, but also because this information goes

to the heart of a much bigger global debate about freedom of speech. In the last

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Chapter 1 Introduction

two decades, China’s economic reform programs and its citizens’
entrepreneurial flair have lifted hundreds of millions of Chinese people out of
poverty. Indeed, this great nation is at the heart of much economic progress
and development in the world today.
The decision to review our business operations in China has been incredibly
hard, and we know that it will have potentially far-reaching consequences. We
want to make clear that this move was driven by our executives in the United
States, without the knowledge or involvement of our employees in China who
have worked incredibly hard to make Google.cn the success it is today. We are
committed to working responsibly to resolve the very difficult issues raised.
The Chinese government’s first response to Google’s announcement was simply
that it was “seeking more information.”Tania Branigan, “Google Challenge to
China over Censorship,” Guardian, January 13, 2010, accessed January 25, 2010,
In the interim, Google “shut down its censored Chinese version and gave
mainlanders an uncensored search engine in simplified Chinese, delivered from
its servers in Hong Kong.”Harry McCracken, “Google’s Bold China Move,”
PCWorld, March 23, 2010, accessed November 12, 2010,
Like
most firms that venture out of their home markets, Google’s experiences in
China and other foreign markets have driven the company to reassess how it
does business in countries with distinctly different laws.

Opening Case Exercises

(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical
Skills)
1. Can Google afford not to do business in China?
2. Which stakeholders would be affected by Google’s managers’
possible decision to shut down its China operations? How would
they be affected? What trade-offs would Google be making?
3. Should Google’s managers be surprised by the China predicament?

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Chapter 1 Introduction

1.1 What Is International Business?
LEARNING OBJECTIVES
1. Know the definition of international business.
2. Comprehend how strategic management is related to international
business.
3. Understand how entrepreneurship is related to international business.

The Definition of International Business

1. The shift toward a more
interdependent and integrated
global economy.
2. All cross-border exchanges of
goods, services, or resources
between two or more nations.
These exchanges can go
beyond the exchange of money

for physical goods to include
international transfers of other
resources, such as people,
intellectual property, and
contractual assets or liabilities.
3. The body of knowledge that
answers questions about the
development and
implementation of good
strategies; mainly concerned
with the determinants of firm
performance.

As the opening case study on Google suggests, international business relates to any
situation where the production or distribution of goods or services crosses country
borders. Globalization1—the shift toward a more interdependent and integrated
global economy—creates greater opportunities for international business. Such
globalization can take place in terms of markets, where trade barriers are falling
and buyer preferences are changing. It can also be seen in terms of production,
where a company can source goods and services easily from other countries. Some
managers consider the definition of international business to relate purely to
“business,” as suggested in the Google case. However, a broader definition of
international business may serve you better both personally and professionally in a
world that has moved beyond simple industrial production. International
business2 encompasses a full range of cross-border exchanges of goods, services, or
resources between two or more nations. These exchanges can go beyond the
exchange of money for physical goods to include international transfers of other
resources, such as people, intellectual property (e.g., patents, copyrights, brand
trademarks, and data), and contractual assets or liabilities (e.g., the right to use
some foreign asset, provide some future service to foreign customers, or execute a

complex financial instrument). The entities involved in international business
range from large multinational firms with thousands of employees doing business
in many countries around the world to a small one-person company acting as an
importer or exporter. This broader definition of international business also
encompasses for-profit border-crossing transactions as well as transactions
motivated by nonfinancial gains (e.g., triple bottom line, corporate social
responsibility, and political favor) that affect a business’s future.

Strategic Management and Entrepreneurship
A knowledge of both strategic management and entrepreneurship will enhance
your understanding of international business. Strategic management3 is the body

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Chapter 1 Introduction

of knowledge that answers questions about the development and implementation of
good strategies and is mainly concerned with the determinants of firm
performance. A strategy4, in turn, is the central, integrated, and externally
oriented concept of how an organization will achieve its performance
objectives.Mason Carpenter and William G. Sanders, Strategic Management: A Dynamic
Perspective, Concepts and Cases (Upper Saddle River, NJ: Pearson Education, 2007). One
of the basic tools of strategy is a SWOT (strengths, weaknesses, opportunities,
threats)5 assessment. The SWOT tool helps you take stock of an organization’s
internal characteristics—its strengths and weaknesses—to formulate an action plan
that builds on what it does well while overcoming or working around weaknesses.
Similarly, the external part of SWOT—the opportunities and threats—helps you
assess those environmental conditions that favor or threaten the organization’s
strategy. Because strategic management is concerned with organizational

performance—be that social, environmental, or economic—your understanding of a
company’s SWOT will help you better assess how international business factors
should be accounted for in the firm’s strategy.

4. The central, integrated, and
externally oriented concept of
how an organization will
achieve its performance
objectives.
5. A strategic management tool
that helps an organization take
stock of its internal
characteristics (strengths and
weaknesses) to formulate an
action plan that builds on what
it does well while overcoming
or working around weaknesses
and also assess external
environmental conditions
(opportunities and threats)
that favor or threaten the
organization’s strategy.

Entrepreneurship6, in contrast, is defined as the recognition of opportunities (i.e.,
needs, wants, problems, and challenges) and the use or creation of resources to
implement innovative ideas for new, thoughtfully planned ventures. An
entrepreneur7 is a person who engages in entrepreneurship. Entrepreneurship,
like strategic management, will help you to think about the opportunities available
when you connect new ideas with new markets. For instance, given Google’s
current global presence, it’s difficult to imagine that the company started out

slightly more than a decade ago as the entrepreneurial venture of two college
students. Google was founded by Larry Page and Sergey Brin, students at Stanford
University. It was first incorporated as a privately held company on September 4,
1998. Increasingly, as the Google case study demonstrates, international businesses
have an opportunity to create positive social, environmental, and economic values
across borders. An entrepreneurial perspective will serve you well in this regard.

6. The recognition of
opportunities (needs, wants,
problems, and challenges) and
the use or creation of resources
to implement innovative ideas
for new, thoughtfully planned
ventures.
7. A person who engages in
entrepreneurship.

1.1 What Is International Business?

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